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Operator: Good afternoon. Thank you for attending Hallador Energy's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call will be recorded. I'd now like to turn the conference over to Sean Mansouri, the company's Investor Relations Adviser with Elevate IR. Please go ahead, Sean. Sean Mansouri: Thank you, and good afternoon, everyone. We appreciate you joining us to discuss our first quarter 2026 results. With me today are President and CEO, Brent Bilsland; and CFO, Todd Telesz. This afternoon, we released our first quarter 2026 financial and operating results and a press release that is now on the Hallador Investor Relations website. Today, we will discuss those results as well as our perspective on current market conditions and our outlook. Following prepared remarks, we will open the call to answer your questions. Before we begin, a reminder that some of our remarks today may include forward-looking statements subject to a variety of risks, uncertainties and assumptions contained in our filings from time to time with the SEC and are also reflected in today's press release. While these forward-looking statements are based on information currently available to us, if one or more of these risks or uncertainties materialize or if our underlying assumptions prove incorrect, actual results may vary materially from those we projected or expected. In providing these remarks, Hallador has no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law to do so. And with the preliminaries out of the way, I'll turn the call over to President and CEO, Brent Bilsland. Brent Bilsland: Thank you, Sean, and thank you, everyone, for joining us this afternoon. Before diving into our first quarter results, I want to begin with what we believe is an important milestone in a multiyear transformation of Hallador, one that has been in the works for a long time now and reflects the steady, deliberate execution of a strategy our long-term shareholders have been patient with. Subsequent to quarter end, we executed a 12-year capacity agreement with a subsidiary of utility, that is expected to generate more than $1 billion of contracted revenue from 2028 through 2040 at pricing levels more than 2x our historical contracted capacity pricing. This agreement is subject to approval by the Indiana Utility Regulatory Commission, which we anticipate will occur in the second half of 2026. The agreement represents one of the most significant commercial achievements in our company's history. It may be helpful to put today's announcement in the context of the path that brought us here. Six years ago, Hallador was originally an underground coal mining company. In 2021, we began acquiring a 1 gigawatt interconnection. In '22, we acquired the 1 gigawatt power plant that utilizes the interconnection. In 2024, we began marketing long-term output of the plant. And in '25, those discussions broadened from data center developers to utilities. In March of this year, we executed a 3-year capacity agreement at approximately twice our historical pricing. And today, we are announcing a 12-year $1 billion-plus capacity agreement that follows directly behind it. Each of those steps was deliberate, each built on the one before. And we believe the same pattern of disciplined sequential execution will continue to define how we create shareholder value from here. Combined with the 3-year capacity agreement we announced in March that contracted our accredited capacity for planning years '26, '27 and '28, the agreement we are announcing today contracts the back portion of planning year 2028 and each year thereafter through mid-2040. Together, these 2 capacity-only sales total approximately $1.1 billion and place Hallador in a substantially sold-forward position on accredited capacity for approximately the next 14 consecutive years. We believe this represents a meaningful structural improvement in the durability of our earnings power and our balance sheet. And importantly, it provides the capital raising foundation from which to pursue the next set of opportunities in front of us. The agreement initially covers a smaller volume of accredited capacity in planning year 2028, increasing to approximately 2/3 of our accredited capacity beginning in planning year 2029 and continuing through 2040. This structure provides the kind of long-duration revenue visibility that is increasingly rare for dispatchable generation in MISO and validates the durable economic value of our dispatchable generation platform. It is worth noting that this agreement is only for our capacity. We are not committing energy under this contract, which enables us to secure durable contracted revenue, while preserving full exposure to future upside in energy markets as demand for power continues to rise across MISO. Preserving that energy side optionality is intentional. As we will discuss in a moment, we believe the energy market is on a different time line than the capacity market, and we are positioning the portfolio to participate in both as they develop. To us, that is the bigger story. While our first quarter results were generally in line with our expectations due to previously mentioned availability constraints at Merom, the underlying value of Hallador is increasingly tied to the growing scarcity of reliable, dispatchable generation. The agreement we announced today is one clear data point of that dynamic. And we believe it is one of several you should expect to see emerge from the role our assets can play in meeting this demand. When we look at the market, we view capacity as the critical first step. For large load customers, particularly data centers, access to accredited capacity is often the gating factor. Without it, projects cannot move forward. As a result, we are seeing capacity markets tighten and reprice ahead of the physical demand that these developments will ultimately bring. Energy demand follows on a different time line. These projects require several years to build. And as they come online and begin to draw power from the grid 24/7, 365, that is when we expect to see more meaningful response in energy pricing. Our portfolio is constructed to participate in both phases. The capacity contracts we have announced this year address the first. The merchant energy position we have intentionally retained is positioned to address the second when it arrives. This dynamic is central to how we are positioning the business. Our strategy is to monetize capacity where we can secure attractive, long-term value today, while maintaining flexibility to participate in future upside in energy markets. We are being deliberate in how we contract our portfolio, locking in value where scarcity is already evident and preserving exposure where we believe demand has yet to be fully reflected. Capacity remains a critical requirement for large load development, and we continue to see strong interest from counterparties seeking reliable supply over longer periods. The agreement we signed is an important anchor in our forward sales book, but it is by design, not the last commercial step we expect to take. We continue to evaluate additional ways to monetize our remaining capacity and optimize our forward energy position. We will maintain a disciplined approach, and we will be deliberate about the timing and structure of any future commercial agreements. That said, the level of inbound interest we are seeing today is meaningfully higher than it was even 6 months ago across multiple counterparty types and contract structures. The contracted high conversion cash flows from these agreements also support a broader transformation we are pushing, building in Hallador over time into a multi-fuel independent power producer with a more diversified generating fleet. We have spoken previously about the proposed 515-megawatt combustion turbine project at our Merom Generating Station site under the MISO ERAS program. Additionally, we are continuing to evaluate dual fuel initiatives for our existing generation. We will work towards making progress on these work streams in the same disciplined sequential way as the contracting strategy has unfolded into the past year. Now turning to our first quarter 2026 results. As we discussed on our last call, we experienced availability constraints at Merom in Q4, that continued into the first quarter and reduced generation from the plant. First quarter results reflected those constraints as lower generation at Merom pressured electric sales and intercompany coal sales, which ultimately impacted our profitability for the quarter. We also incurred outage-related replacement power costs during Q1, which created an additional headwind. While these results were generally in line with the expectations we provided in March, they are below the level of performance that we expect from our Merom power plant over time. Maintaining high levels of reliability remains a top priority for our team, particularly as MISO increasingly depends on dispatchable resources during periods of peak demand. As such, the generating unit in question is currently in a planned maintenance outage, and we are using this period to make reliability-related investments that we believe should improve performance as we move through the balance of the year. As we have discussed previously, Hallador operates as a vertically integrated platform, and Merom sits at the center of that system. When the plant is running efficiently, it drives performance across the business, supporting electric sales, creating consistent internal demand for coal, improving mine productivity and enhancing overall operating efficiency. When performance at Merom falls below planned levels, those impacts extend throughout the platform. Coal inventories increase, production at Sunrise becomes less efficient, and it becomes more difficult to optimize our cost structure. That is why our focus on improving reliability at Merom is so important. The outage currently underway is a key part of that effort. We are making targeted capital investments in the unit, and we believe that, that is the right decision given both the value of Merom today and the increasing importance of reliable, dispatchable generation going forward. Historically, similar investments have led to meaningful improvement in operating performance, and we expect the work being completed now to position the plant for higher availability as we move into the summer and upcoming peak demand periods. We are also in a much stronger financial position to support these investments. At quarter end, we had no outstanding bank debt and meaningfully improved liquidity compared to year-end. That improved capital position gives us greater financial flexibility to invest in the assets, support our ongoing operation and pursue the strategic opportunities we are seeing across the power market. Looking ahead, our second quarter results will reflect the planned outage currently underway, which we expect will temporarily reduce generation as we complete the necessary maintenance. As we move into the second half of the year, the underlying setup begins to shift with the plant returning from outage and availability improving. We expect to be better positioned heading into the peak summer demand period. As I mentioned earlier, more consistent performance at Merom supports not only electric sales, but also internal coal demand, mine productivity and overall operating efficiency across the platform. This is important because the opportunity in front of us ultimately depends on execution. While the agreement we discussed earlier reinforces the value of accredited capacity and dispatchable generation, realizing that value over time requires consistent performance at Merom. We're focused on improving reliability, driving efficiency across our coal operations and translating the market opportunity we see into durable cash flow. Although the first quarter was operationally challenging, it does not change our view of the long-term earnings potential of the platform. The fundamental signals across our markets remain constructive, and we believe Hallador is well positioned to compound shareholder value over a multiyear horizon as the strategy we have been describing continues to unfold milestone by milestone. With that, I'll turn the call over to Todd to take you through our financial results. Todd Telesz: Thank you, Brent, and good afternoon, everyone. Jumping into our first quarter results. Electric sales for the first quarter were $65.1 million compared to $85.9 million in the prior year period, while third-party coal sales increased to $35.1 million compared to $30.2 million in the prior year period. Electric sales in the first quarter reflected the availability constraints at Merom, that Brent discussed earlier, which reduced generation during the period and resulted in lower electric sales compared to the prior year. These impacts were partially offset by stronger credit capacity revenue during the quarter. The increase in third-party coal sales during the first quarter was driven primarily by improved pricing on shipments to customers, reflecting continued execution across our external customer book and Sunrise Coal's ability to supply both internal fuel requirements at Merom and external market demand. On a consolidated basis, total operating revenue was $101.8 million for the first quarter compared to $117.7 million in the prior year period. Net loss for the first quarter was $9.3 million compared to net income of $10 million in the prior year period. Operating cash flow for the first quarter was $20.5 million compared to $38.4 million in the prior year period, with the decrease primarily reflecting lower generation of Merom, higher purchase power costs during the quarter and an increase in coal inventory of approximately $4.6 million. Adjusted EBITDA, a non-GAAP measure, which is reconciled in our earnings press release issued earlier today, was $5.5 million for the first quarter compared to $19.3 million in the prior year period. We invested $7.7 million in capital expenditures during the first quarter of 2026 compared to $11.7 million in the year ago period. As Brent mentioned earlier, we are currently in a planned major maintenance outage at Merom and expect capital spending to remain focused on planned maintenance, reliability and operational improvements across the platform. For the full year, we continue to expect capital expenditures to increase modestly compared to 2025 levels, excluding potential ERAS-related development investments. As of March 31, 2026, our forward energy capacity sales position was $571.2 million compared to $543.5 million at December 31, 2025, and $630.4 million at March 31, 2025. When combined with our third-party forward coal sales of $288.4 million as well as intercompany sales to Merom, our total forward sales book as of March 31, 2026, was approximately $1.2 billion. Importantly, these figures do not include the 12-year capacity agreement signed last week. Hallador had no outstanding bank debt at March 31, 2026, compared to $29.7 million at December 31, 2025, and $21 million at March 31, 2025. Total liquidity at March 31, 2026, was $97.5 million compared to $38.8 million at December 31, 2025, and $69 million at March 31, 2025. The increase reflects both the capital raised during the quarter, capacity payments received and the addition of borrowing capacity under our new credit facility. As Brent mentioned earlier, we took several steps during the quarter to strengthen our capital structure. In early March, we entered into a new credit agreement with Texas Capital Bank, Old National Bank and other long-term relationship lenders, replacing our prior facility. The new agreement includes a $75 million revolving credit facility and a $45 million delayed draw term loan, with maturity in March 2029 and includes an accordion feature that provides additional flexibility. We believe this new facility, combined with our improved liquidity position and the absence of outstanding bank debt at quarter end, provides a more flexible capital structure than we had entering the year. It allows us to fund the planned outage and reliability investments at Merom, manage working capital across both segments and support the commercial strategy Brent outlined, while maintaining a disciplined approach to leverage and preserving the financial flexibility to support the disciplined multiyear transformation Brent described. With that, operator, we can now open the line for questions. Operator: [Operator Instructions] Your first question comes from the line of Julien Dumoulin-Smith with Jefferies. Unknown Analyst: This is [indiscernible] on for Julien. Congrats on the big contract. It's been a long time coming, so nicely done there. Just wanted to ask you, now looking forward towards the gas extension, can you talk about what would get you more confident here in pursuing that moving forward with the gas extension and what your strategy there is both with regards to securing the turbine and towards the EPC? I think you've talked about partnerships on the turbine side, but we're also hearing constraints on the EPC side. So curious if you can add more color on how you move forward with the gas reset? Brent Bilsland: Yes. Thank you. Look, I mean, certainly, selling a big block of capacity puts us in better financial footing. It increases our confidence. As far as equipment, yes, equipment is hard to get. EPCs are hard to get, but we're in conversations with those parties, and we're moving those discussions forward. When we secure equipment in an EPC, we will announce such a transaction if we decide to go forward with that. But yes, it's -- what we're seeing in the market is the value of PPAs go up, but equipment prices also go up. And so we're trying to align those economics and see if we can get a development build. Operator: Your next question comes from the line of Nick Giles with B. Riley Securities. Nick Giles: Congrats on the capacity deal. That's really great to see. Brent, in your prepared remarks, you noted that capacity is the bottleneck between data center deals being finalized. And I know you've signed this deal with the utility, but should we assume that this deal is ultimately linked to a hyperscaler end user? And how should we think about how end users have shifted on the energy front? Brent Bilsland: Well, we're a little limited on what we can say just based on some of the confidentiality requirements in the agreement. That said, this is a material agreement, and so it will be filed as an exhibit in our -- with our 10-Q. So there'll be a little more information there. But I would say, overall, data centers are the big demand that we're seeing everywhere. It's not the only demand. I mean we're seeing potential steel plant expansions in Indiana. We're seeing announcements of new aluminum smelters, I think, in Oklahoma. I mean you're seeing manufacturing show up as well, particularly as you look at energy disruption around the world, the United States truly is energy independent. We truly do have some of the cheapest energy and most secure energy in the world. And so if you're going to build anything, it's going to be built upon that foundation. Now AI, I think it's revolutionary technology. I think people are just starting to get the first taste of some of these new products. I mean, Anthropic's new offering is amazing. And once your teams start to experience that, you see the productivity gains. And that's just -- I don't know that any of this is new information. It's just we're seeing it. And why are we seeing in Indiana? Specifically, we've talked about Indiana is welcoming data centers to the state, whereas there's something like 30 different states across the country who have some form of pause or moratorium on new data centers. And so where can you go that has population or is near population, has a great business climate, has favorable tax policy to attract data centers, Indiana is checking that box. And that's why we're just seeing such an intensified interest level in the state. And so that's the wind behind our sails. We executed on it in March. We've executed again here in May. And we hope to announce -- hopefully, we can execute on further deals later this year. Nick Giles: Appreciate that perspective, Brent. Maybe just back on the energy side. In the past, you've talked about kind of where you saw pricing at any given time, and you've made references to the forward curve. And -- so I was hoping just to get an updated view on that? It's been a while. There were some other deals across the space, some on the nuclear side, that we could use as precedent, but I don't think we've seen any of that nature here more recently. So just was hoping for an updated view on kind of where you see energy pricing today? Brent Bilsland: Yes. So there's a lot of different curves out there, a lot of different companies put them out. We generally think capacity is a lead indicator for energy, right? I mean, first, if you're going to build a data center or even a factory for that matter, you really need to secure your credit capacity first. And then once you've secured that, now you can start building your factory or data center. And then once that -- let's just use data center because that is the biggest portion of the demand we're seeing. Once you see that being built, once it gets turned on, now we're using energy, right? And so there's typically a couple of year lag between what we're seeing in the capacity markets to kind of the response we're seeing in the energy markets. And I think the curves are just starting to reflect that. We've seen a little price movement up, which is encouraging. We'll see if that holds. And -- but by and large, I mean, everything we're seeing is encouraging. Nick Giles: And maybe just one more, if I could. Given that some of the juice on the energy side, if you will, could come with a lag, would you be willing to kind of wait it out given you have the stability of the capacity revenue secured now? Or would you rather send something sooner? Brent Bilsland: Well, I think -- look, first of all, we're well hedged for 2026, right? And so that's -- this year's book is in great shape. These capacity deals sets a great foundation for the company through 2040. That's 14 years of forward visibility, a large portion of the book. And again, if you kind of look back to our March release, we talked about if we could continue to sell capacity at the prices we sold out in March, and we could sell everything at that price. That would be $130 million of revenue before we turn the plan on, right? We have a fixed cost of roughly $60 million. This deal was priced higher than that. So we have -- we think we've locked in -- now we've only sold 2/3 of the forward capacity that we have to sell, but we've locked in a profit for 14 years before we even turn the plan. I think that's a great position for us to be in. It definitely -- we feel no pressure. And I think as far as selling energy goes, I think we just have to take the deals as they come. Different customers have different needs, different opportunities. And so if we see opportunities to lock in energy tomorrow at prices that we deem appropriate for the future, we will do so. But where we've seen the biggest response, again, more than doubling the price of what we were doing 2 years ago is in the capacity markets. And so that's where we've been most aggressive. Operator: Your next question comes from the line of Jeff Grampp with Northland Capital Markets. Jeffrey Grampp: Congrats on the announcement. I wanted to talk on -- you're a little more vocal it seems in this release regarding the dual fuel ambitions at Merom. Is there any more detail you can share regarding potential timing, next steps? And as I recall, it was a little bit more of a potential bargaining chip, I suppose, for prospective customers. With that seemingly not really a constraint or consideration, can you talk about what the, I guess, benefits for Hallador would be should you pursue a project like that? Brent Bilsland: Yes, great question. Look, if we bring a gas line in for the gas plant, right, that has a dual use. It can be used for the gas plant, but it also could be used if we decide to dual fuel the coal-fired units. And again, it wouldn't be a replacement of coal. It would be a -- we would have the ability to burn both, right? We could burn coal, we could burn gas. And there's a lot of reasons to do that, right? Some of it is there's times the gas is cheaper than coal. It could be -- it helps our investors, bankers, insurance companies kind of protect the company. And well, if we have a different administration with a different viewpoint, then all of a sudden, Hallador is a multi-fuel company that isn't just a coal company. We think as you progress through this, right, we're locking in the economics of the existing generation. We're trying to step towards building of a gas unit to both expand our capacity, but also add a separate fuel source. If we could then upon that dual fuel the existing plant -- now Hallador has really transitioned from a coal company to a multi-fuel company. And I think there could potentially be a multiple uplift in being able to pull all that off. Now that doesn't mean -- I don't want to sit here today and say we're going to do that. I'm trying to say that because of the contracts we've signed, we've derisked our balance sheet. We've increased the ability to access capital, and these are the type of projects that we are reviewing and trying to work towards. So I just want to kind of give the investor a little bit of insight into how we're thinking. We'll have to see if those investments make economic sense and it's ultimately what we decide is the best use of our capital. Jeffrey Grampp: Understood. I appreciate that thorough answer. For my follow-up, I know in the past, you talked about M&A ambitions and some opportunities there. It's obviously a big derisking event for the Hallador story at large. Does this help further or serve M&A ambitions? Are these independent? And can you just give us a broad update on the opportunity set in that world? Brent Bilsland: Yes. Look, I think there's a lot of opportunity. If you look at -- there's a lot of people that own assets that are funds. And what is unique about Hallador is we have a public vehicle. We have a sales team that can help lock in long-term contracts to add value to those existing assets. And we have a team that is working on developing the interconnect and expanding upon that to meet market demand. So I think Hallador is unique in that -- and we can touch coal assets. So those 4 attributes, I think, really set us apart and make us a more interesting vehicle for potential M&A possibilities down the road. We'll see if those come to pass. We're only going to do deals that we think are smart, and we're going to do the deals that we think bring the most value to the shareholder at the time that they're in front of us. So hopefully, we can have some success on that. Operator: Your next question comes from the line of Matthew Key with Texas Capital. Matthew Key: Congrats on the new agreement. I was wondering if you could help quantify the pricing a little more on the new capacity agreement? I think you mentioned that it was done above the previous 3-year deal that was announced. Could you provide a rough ballpark on that improvement on pricing? Brent Bilsland: Yes, Matt, I apologize, we're somewhat limited on what we can say just due to the confidentiality that is in the agreements. But I think that if you look at the tenor and the volume that we've talked about, and we've given roughly the total dollar amount, I think everybody can kind of get in the ZIP Code. There were a lot of reports out on what our last deal was at. And some of that will show up now. So what we announced in March, some of that does show up in our forward sales book in this 10-Q. So if you compare the previous 10-Q to this 10-Q, I think you can get a feel for what that pricing is. On this particular $1 billion deal, once it's approved by the IURC, that -- then that deal is firmly bound, right? That's the last approval that we're waiting for. I mean we're bound, the counterparty is bound. We just have to have IURC approval. Once that happens in our -- whatever Q follows that time period, then we'll start to report what the volumes and the pricing is on the deal we just announced. Matthew Key: Got it. No, that's helpful color. And for my follow-up, I wanted to talk a little bit about the natural gas expansion. I believe in the previous earnings call, you mentioned that you would expect MISO to complete kind of the ERAS application in 3Q '26. Have there been any changes to that time line? And have they picked up the application as we stand today? Brent Bilsland: They've not picked up the application yet, but we still anticipate them doing that in June, and then that will require us to make the decision sometime in September. Matthew Key: Got it. Yes. So about 90 days, right, after they pick it up to kind of work through the details of that? Brent Bilsland: Yes, that's how the ERAS program is supposed to work. Once they pick it up [indiscernible] the 90-day on. Matthew Key: Got it. Brent Bilsland: We do not control when they pick it up. Operator: I'll now turn the call back over to Brent Bilsland for closing remarks. Brent Bilsland: Yes. I want to thank everybody for their patience in us getting this capacity deal done. We're very excited about the future of the company, and we think we've got just great things in store. So thank you for your time today. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to TKO's First Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the call over to Seth Zaslow, Head of Investor Relations. Seth Zaslow: Good afternoon, and welcome to TKO's First Quarter 2026 Earnings Call. A short while ago, we issued a press release, which you can view on our Investor Relations website. A recording of this call will also be available via our website for at least 30 days. After prepared remarks from Ari Emanuel, TKO's Executive Chair and Chief Executive Officer; Mark Shapiro, TKO's President and Chief Operating Officer; and Andrew Schleimer, TKO's Chief Financial Officer, will open the call for questions. Mark and Andrew will be handling the Q&A. The purpose of this call is to provide you with information regarding our first quarter 2026 performance. I want to remind everyone that the information discussed will include forward-looking statements and/or projections that involve risks, uncertainties and assumptions. Please see our filings with the Securities and Exchange Commission for further detail. If these risks or uncertainties were to materialize or any assumptions prove incorrect, our results may differ materially from those expressed or implied on this call. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events, except as legally required. Our commentary today will also include non-GAAP financial measures, which we believe provide an additional tool for investors to use in evaluating ongoing operating results and trends. These measures should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. Reconciliations between GAAP and non-GAAP metrics can be found in our press release issued today as well as the information posted on our IR website. With that, I'll now turn the call over to Ari. Ariel Emanuel: Thanks, Seth. 2026 is off to a formidable start, especially considering the macro environment. The key growth drivers we outlined in February, media rights, live events and experiences, global partnerships and financial incentive packages, all delivered as planned in the first quarter, in line with our guidance. We are introducing our live events and experiences to new markets around the world while capitalizing on all the revenue generators inside our machine. And our newer properties, most notably Zuffa Boxing, are on accelerated growth tracks. TKO sits squarely at the center of a growing sports and entertainment ecosystem. As AI transforms how content is created and consumed, the value of our IP and properties increases. Our content is live, it's communal, it's scarce, and no algorithm can replicate it. Reflecting our conviction in TKO and its long-term value, we've announced an incremental $1 billion share repurchase authorization, complementing the existing program, which we expect will be largely complete in the near term. We firmly believe TKO is built for what's ahead. Mark will take you through the quarter in greater detail. Mark Shapiro: Thanks, Ari. As we said on our last earnings call, 2026 is a year of execution. Q1 performance has now validated that focus. We're activating our new media rights deals. Our live events box office business has continued momentum and as such, our financial incentive packages pipeline is growing. Q1 results reflect the uplift from new rights deals, demand in the experienced economy and progress toward year-over-year EBITDA growth in excess of 40%. Before I get into highlights from the first quarter, I want to address activity in the Middle East and neighboring markets. First and foremost, we are firmly moving ahead with our scheduled events. Building on a successful debut in 2025, UFC returns to Azerbaijan with UFC FIGHT NIGHT BAKU on June 27. That same night, WWE host Night of Champions from Riyadh, Saudi Arabia. This historic TKO doubleheader reflects a commitment by us and our respective partners to bring world-class events to fans across the region, even and despite a challenging environment. I would add that following the news of PIF withdrawing its funding in LIV Golf, our partners in Saudi Arabia have confirmed that will not be the case with TKO. Their commitment to our properties in 2026 and beyond is unwavering. As such, after these two events, we expect the remainder of our 2026 slate in the Middle East comprised of six events inclusive of UFC, WWE and Zuffa Boxing to take place as planned. The demand is real, our partners are committed and we are leaning in. TKO benefits from having defensive model business characteristics. Now an update on our growth drivers, beginning with media rights. UFC's Paramount+ debut on January 24 set the bar, reaching more homes than any UFC events in nearly a decade, but it was our number of events in March that showed the real power and potential of this partnership. Our first CBS simulcast, UFC 326 was the most watched live UFC event since 2016. The CBS audience alone was more than 270% above last year's UFC average on linear before accounting Paramount+ streaming. That's the sampling engine at work. New fans are discovering UFC on CBS and Paramount+, and they are staying. Equally important, our content is now more accessible than ever for our fans. Both dynamics are real, and both are showing up in the numbers. At WWE, our ESPN partnership is gaining traction. Elimination Chamber at the end of February drew a meaningful year-over-year viewership increase on ESPN Unlimited, which is still building its sub count and distribution. Just a few weeks ago, WrestleMania 42 had strong ratings across both ESPN and ESPN2, including Day 1, Saturday's broadcast, marking ESPN2's most viewed telecast of the year. Our existing media rights partnerships continue to expand in scope as well. When we announced the ESPN deal last August, we noted that we had retained several content categories for further monetization, including the WWE Archive and NXT PLEs. We've now turned both into incremental revenue gains. Early in Q1, Netflix became the official U.S. home of WWE's archive, which comprises decades of WrestleMania, SummerSlam and Royal Rumble content. Netflix confirmed this deal actually in direct response to early success they've had with WWE's premium content, not to mention the traction they are witnessing with the second season of Unreal, our WWE docuseries. Just last week, we announced the CW, already the home of NXT's weekly Tuesday night programming, will become the exclusive home of all NXT PLEs, adding some 20 live broadcasts to a partnership that has made NXT the network's top-rated program among key demos. Suffice to say, strong secular tailwinds persist in the sports media ecosystem. Now turning to live events, where demand across our portfolio continues to build. At UFC, live events sold out in the first quarter from Las Vegas to London and Sydney to Seattle, where we recorded our highest ever Fight Night gate in North America. We anticipate that momentum will carry into the second quarter with all eyes on UFC Freedom 250 at the White House, a once-in-a-lifetime spectacle on June 14. Ram Trucks and Crypto.com are signed as co-presenting partners of Freedom 250 and the limited marketing inventory available for this singular event is now sold out. I mentioned on our last call that we anticipated losing $30 million on UFC Freedom 250, and that's still the case despite meaningfully increased costs associated with an expanded Fight Card and the 2-day festivalization of this event on the Ellipse, which is adjacent to the White House. The UFC calendar keeps building beyond that with financial incentive package-backed events taking place in Philadelphia and Serbia later this summer, further expanding our footprint into new markets with growing fan bases. On that note, at WWE, we successfully staged our first ever Royal Rumble outside North America and Elimination Chamber in Chicago became the second highest arena gate in company history. Meanwhile, across our WWE main roster touring schedule, live events from Lubbock, which was on Valentine's Day to Laredo, which took place just over a week ago, sold out. Two months and just a 500-mile distance between the two cities, both sellouts. The underlying demand for our live events is indeed resilient and durable. Last month's WrestleMania 42 was a highly successful and profitable event. In fact, more than 106,000 fans showed up over two nights in Las Vegas. And financial incentive package economics were meaningfully ahead of last year. Now separately, we fielded some investor questions on WWE demand and the state of Creative, driven by online commentary and the year-over-year WrestleMania ticket sales performance. Let me say that we are not concerned about the ticket performance whatsoever as it was unrealistic to expect year 2 growth in Las Vegas. And even with that, WrestleMania 42 was still one of the highest gates in WWE history and easily outperformed anywhere else we could have staged it. As it relates to the Creative, there will always be periodic fan dissatisfaction around creative execution, commercial load and celebrity usage. We listen to all the feedback. We do not turn a deaf ear, but these are not new criticisms. Lastly, both our global partnerships and financial incentive package targets are tracking as planned. Our pipeline is vibrant for our multiyear calendar of events and inventory, putting us in line with the guidance we have previously communicated. Pivoting to the balance of our portfolio, On Location successfully delivered the Milano Cortina Olympic Experiential Hospitality program for more than 100,000 guests and closed the first quarter with meaningful LA28 Olympic sales. For FIFA World Cup 2026, experiential hospitality sales ended the quarter at over 2x any previous World Cup program in history and are firmly on track to meet or even exceed expectations. At IMG, we are powering Apple's debut season as the U.S. broadcaster of Formula 1, integrating every feed to their platform and producing content from our Stockley Park headquarters in the U.K. We have also agreed to a long-term strategic partnership with World Rugby ahead of the 2031 and 2033 Rugby World Cups in North America. I would also underscore IMG's success in the global distribution of our boxing superfights, right on strategy. These signature developments are illustrative of IMG's industry-leading expertise across advisory appointments on media rights negotiations, production, brand partnerships and event management. IMG is truly one of one. Next up, PBR. Professional Bull Riders opened the year with record performance in seven markets, including its debut at Boston's TD Garden and its largest ever attendance at Madison Square Garden in January. PBR's Team Series has also approved a two franchise expansion, expected to grow from 10 teams to 12 teams for the 2027 season. Now when we launched the league 5 years ago, teams sold for roughly $3 million each, increasing to just over $22 million in the first expansion round in 2024. Now just 2 years later, we expect new ownership groups to pay multiples of that. Finally, turning to Zuffa Boxing, where our progress is exceeding our internal growth plan and time line. We've already signed more than 100 fighters. We've staged five events with solid viewership on Paramount+, and we've secured a multiyear deal with Sky Sports for the U.K. and Ireland, two of the most pivotal and important boxing markets in the world. We've also signed media rights deals in more than 15 additional territories spanning EMEA and APAC. This is the IMG thesis and strategy at work. IMG responsible for all the deals across all the territories. And now with events about to depart the Meta APEX in Las Vegas and go out on the road, the next phase of our growth plan is underway. In summary, Q1 at TKO was as we anticipated. And the growth drivers I just walked you through are not just performing, they're compounding. And engagement metrics across viewership and ratings, social media clicks and views, global brand partnership demand and the aforementioned live attendance remain rock solid. Andrew will now take you through the financial results and outlook. Andrew Schleimer: Good afternoon. As Ari and Mark highlighted, 2026 is off to a strong start. We delivered positive operating and financial performance across our businesses and as such, are reaffirming our full year outlook. Before I get into more detail on our financial results, I want to comment on our events calendar as well as trends we're seeing in consumer demand as we know these are topics on investors' minds. We're closely monitoring the developments in the Middle East and the potential implications on our business. We're in close contact with our partners in and around the region, and we're actively tracking government advisories and security assessments. For the avoidance of doubt and as previously announced, we're planning for and moving forward with the events that we have scheduled in the region on the same dates we anticipated when we set our plan for the start of the year. We have two events scheduled for the last Saturday in June, a WWE PLE Night of Champions in Riyadh and a UFC Fight Night in Baku, Azerbaijan. The balance of our planned activity includes an event in Abu Dhabi in late July and several events in the fourth quarter. With respect to consumer behavior, as Mark discussed, we continue to see healthy demand for premium live events across our portfolio as TKO is firmly situated in the center of this ecosystem. Our business benefits from a high percentage of contracted revenue, including media rights, global partnerships, FIPs and consumer products licensing anchored by multiyear high-margin fixed fee agreements with annual escalators that provide attractive visibility, predictability and cash flow generation. This provides us with a unique durable platform to drive monetization. Moving to our consolidated results for the first quarter. We generated revenue of $1.597 billion. Adjusted EBITDA was $550 million. Our adjusted EBITDA margin was 34%. Revenue increased 26%, adjusted EBITDA increased 32% and adjusted EBITDA margin increased approximately 150 basis points as compared to the prior year. UFC generated revenue of $401 million in the quarter, an increase of 12% or $41 million. Adjusted EBITDA was $255 million, an increase of 12% or $27 million. UFC's adjusted EBITDA margin was 63%, on par with the prior year period. UFC had nine total events in the first quarter of '26 compared to 11 total events in the first quarter of 2025. Event mix shifted slightly with both the first quarter of this year and last having three numbered events. However, as we previewed on our last call, Q1 '26 included only six Fight Nights compared to eight in the prior year period. Q1 2025 also benefited from the Fight Night in Saudi Arabia that carried a meaningful financial incentive package. Later this year, we anticipate hosting a similar event that will also carry a significant FIP. Media rights production and content revenue increased 23% to $275 million. The increase was driven by a step-up in media rights fees related to the Paramount deal that began in January, partially offset by lower media rights revenue recognition as there were two fewer Fight Nights in the quarter. Partnerships and marketing revenue increased 4% to $67 million. Despite two fewer events, we still managed to deliver an increase driven by the addition of new partners and renewals of existing partners at higher rates. We continue to make significant progress, adding new categories and growing existing ones, including the recently announced deals with bet365 as well as FRE Nicotine and Supersure, which span multiple TKO properties. As expected, live events and hospitality revenue decreased 17% to $49 million. The decrease was due to lower revenue from financial incentive packages, driven by the aforementioned Saudi Arabia event, partially offset by an increase in ticket sales. As Mark highlighted, in Q1, we continue to see strong demand for our events, including sellouts for all three numbered events and several arena records. Adjusted EBITDA reflected the increase in revenue, partially offset by an increase in expenses. Direct operating expenses primarily reflected an increase in athlete production and other event-related costs driven by UFC 324, our first event under the Paramount rights deal. SG&A increased primarily due to higher personnel and travel costs compared to the prior period. While normally, we don't focus on the timing of revenue and expense recognition, both were important to note this quarter because adjusted EBITDA margins were on par with the prior year despite the step-up from the Paramount rights deal. There are three items worth mentioning. First, we held two fewer Fight Nights, which carry sizable revenue allocations from our various media rights and partnership agreements. These are high flow-through revenue streams that will lead to incremental margin when those events occur in future quarters. Second, prior year margins benefited from the FIP related to the Fight Night in Riyadh, which we anticipate to be held later this year. And finally, we incurred higher-than-normal costs related to UFC 324 to ensure a strong start to our Paramount relationship. For the full year, we expect UFC margins will meaningfully outpace 2025, exactly as our guidance suggests. Our WWE segment generated revenue of $476 million in the quarter, an increase of 22% or $84 million. Adjusted EBITDA was $256 million, an increase of 32% or $62 million. Adjusted EBITDA margin was 54%, up from 50% in the prior year period. Live events and hospitality revenue increased 62% to $123 million. Results reflected an increase in revenue from financial incentive packages related to the favorable impact of Royal Rumble in Saudi Arabia in Q1. Media rights production and content revenue increased 12% to $282 million, primarily reflecting higher media rights fees related to the agreements with ESPN and Netflix. Partnerships and marketing revenue increased 2% to $26 million, driven by new partnerships and renewals across multiple categories. This growth came even with additional international events, including a 12-day European tour in January as well as Royal Rumble, which catered to and served to grow our global fan base. Though it occurred in April, WrestleMania 42 was emblematic of the momentum we're seeing in this area. The event featured a record 32 total partners, including Snickers, 2K, Riyadh Season, Ram Trucks, DoorDash and Minute Maid, among many others. Adjusted EBITDA reflected the increase in revenue, partially offset by an increase in expenses. Direct operating expenses increased primarily due to higher talent and production costs, most notably related to holding Royal Rumble in Saudi, which, of course, carries a higher cost structure versus other PLEs. SG&A increased primarily due to higher travel costs, driven by an increase in the number of international events in the quarter. Adjusted EBITDA margin improved by 4 percentage points. The increase would have been even higher except for several timing-related items. We made a strategic decision to increase the number of NXT nontelevised events. The goal of this strategy is based on a desire to get younger talent, more experienced in front of live audiences. We believe this will accelerate their development and readiness to join our main roster. The aforementioned European tour also resulted in an increase in international events compared to the prior year. While our international shows tend to have lower margin profiles due to increased travel and logistical costs, we believe they serve to increase fan engagement and overall monetization. As with UFC, for the full year, we expect WWE margins will meaningfully increase compared to 2025. Shifting now to our IMG segment. We generated revenue of $655 million, an increase of 38% or $179 million. Adjusted EBITDA was $97 million, an increase of 32% or $24 million. Adjusted EBITDA margin was 15%, on par with the prior year period. As we previewed on our last call, the increase in revenue primarily related to the favorable impact of the Milano Cortina Winter Olympics at On Location, which was on plan and in line with our guidance. Revenue at the IMG business increased slightly over the prior year period as new production agreements and boxing commissions were offset by the absence of the Arabian Gulf Cup, which is a biannual event. Adjusted EBITDA primarily reflected the increase in revenue, partially offset by an increase in expenses. Expenses reflected costs related to the Milano Cortina Olympics as well as continued meaningful planned pre-spend for LA28, namely to support increased sales efforts, which Mark highlighted are off to a strong start. Corporate and other generated revenue of $74 million, an increase of 36%. Adjusted EBITDA was negative $58 million, an improvement of $19 million compared to the prior year period. The increase in revenue was primarily driven by higher media rights and partnerships revenue at PBR as well as higher management fees for services related to our boxing initiatives. Adjusted EBITDA primarily reflected the increase in revenue and a $22 million decrease in costs related to the absence of allocations of Endeavor corporate expenses under its ownership of IMG, On Location and PBR. As we discussed on prior calls, from the close of the acquisition on February 28, 2025 forward, there are no Endeavor corporate expense allocations included in our financial results. These improvements were offset by costs incurred to replicate the services previously provided by Endeavor as well as an increase in personnel and other operational expenses. Now moving on to our capital structure. In the first 3 months of the year, we generated $675 million of free cash flow. Our free cash flow conversion of adjusted EBITDA was 123%. Free cash flow included the favorable impact of $582 million of net collections related to On Location for the FIFA World Cup. Free cash flow also included the unfavorable working capital impact of UFC's new media rights deal with Paramount. As with prior years, first quarter cash flow was also impacted by annual bonus payments as well as negative working capital related to the seasonality of our businesses. As Ari conveyed, maintaining a robust and sustained capital return program remains a top priority for us. In the first quarter alone, we returned approximately $1 billion of capital to equity holders through our dividend and share repurchases. On March 31, we made our quarterly cash dividend payment from TKO OpCo of approximately $150 million or $0.78 per share. We intend to continue to fund quarterly cash dividends with cash flow from operations or cash on hand. Regarding share repurchases, as we disclosed in our earnings release, our Board of Directors has approved up to an additional $1 billion of share repurchases in addition to our previous authorization of $2 billion. Given the strength of our balance sheet and what we believe to be a dislocation in our stock price relative to its intrinsic value, we are positioned to continue deploying capital toward what we view as a highly value-accretive opportunity. In the quarter, we repurchased $38 million of shares under a 10b5-1 trading plan that we entered into in September 2025, which expired on February 26. In March, we entered into an ASR agreement to repurchase $800 million of our Class A common stock. We received an initial delivery of approximately 3.1 million shares and expect to complete the ASR in short order. We also entered into a 10b5-1 trading plan for the repurchase of up to $200 million of Class A common stock. Repurchases contemplated under this 10b5-1 plan are to commence immediately once the ASR agreement is completed. Share repurchases under the ASR and 10b5-1 plan are being funded with proceeds from the $900 million term loan add-on that we closed on March 10 as well as from cash on hand. We ended the quarter with $4.671 billion in debt and $789 million in cash and cash equivalents in addition to $937 million of restricted cash. As of Q1 2026, net leverage was 2.3x based on net debt of $3.882 billion and LTM adjusted EBITDA of $1.718 billion. Now turning to our outlook. As we say consistently, we manage the business with a focus on full year performance. Therefore, we believe results are best evaluated on a full year basis, given the quarterly fluctuations that are inherent in our operations, most notably related to the timing of our live events and the mix of locations, venues and cards. As noted in our press release, based on our performance through the first 3 months of the year and our anticipated performance for the remainder of the year, we are reaffirming our expectations. For full year 2026, we continue to target revenue of $5.675 billion to $5.775 billion and adjusted EBITDA of $2.24 billion to $2.29 billion. As articulated on our Q4 earnings call, this outlook reflects anticipated revenue growth of 21%, adjusted EBITDA growth of 43% and margin expansion of approximately 600 basis points to 39.6% at the midpoint of our guidance. This performance is expected to be driven by robust growth across media rights, live events, including FIPs and partnership revenue. Consistent with our prior calls, while we're not providing quarterly guidance, we want to highlight a few notable items as we look to the second quarter. At UFC, media rights revenue will continue to reflect the step-up from the Paramount rights deal. The mix of live events in the quarter will also impact results. We expect to stage 11 events in Q2, UFC Freedom 250 at the White House in June as well as two numbered events and eight Fight Nights. This compares to 11 events in Q2 '25, which included four numbered events and seven Fight Nights. As Mark discussed, UFC Freedom 250 is a once-in-a-lifetime event that will highlight the brand on the biggest stage possible. That comes with a unique financial profile, where our expenses will meaningfully exceed the limited partnership inventory we have sold, and we expect to lose approximately $30 million on this event. With respect to live events revenue, the Fight Night scheduled to take place in Baku, Azerbaijan carries a meaningful financial incentive package, part of a multiyear renewal at a higher per event fee than we realized in the same market in Q2 of last year. At WWE, given the timing and mix of our event calendar, including WrestleMania as well as a premium live event in Saudi Arabia, we expect the second quarter to be by far the highest revenue and adjusted EBITDA quarter of the year in terms of absolute dollars. Media rights will continue to benefit from the step-up of our agreement with ESPN. With respect to live events revenue, the Saudi PLE carries a meaningful FIP. But as a reminder, we held a similar event in the second quarter of 2025. At the IMG segment, we expect results will be driven by On Location with the World Cup starting on June 11 as well as notable events in the quarter like the Final 4 and NFL Draft. It's also a big quarter for our IMG business with many of the largest soccer leagues in the final months of their season, the start of Wimbledon and the first full quarter of the MLS season. While the World Cup is anticipated to have a positive impact on adjusted EBITDA, our sales efforts, as mentioned, for LA28 will have ongoing costs that are expected to partially offset such impact. In terms of free cash flow, while we have not given formal guidance, we continue to target a free cash flow conversion rate in excess of 60%, normalizing for two notable items, the impact of net payments related to the World Cup and UFC's rights deal with Paramount. We generated strong first quarter results that reflect continued momentum across our businesses. As we look ahead, we remain focused on operational execution as well as maintaining our robust capital return program. Anchored by our premium content, live, experiential and insulated from AI disruption, we remain extremely well positioned within the sports and entertainment ecosystem to deliver incremental value for shareholders. With that, I'll turn it back to Seth. Seth Zaslow: Thanks, Andrew. Operator, we're ready to open the call for questions. Operator: [Operator Instructions] Your first question comes from the line of Brandon Ross with LightShed Partners. Brandon Ross: You guys have unlocked a ton of monetization at both UFC and WWE over the last several years. But as you noted in your prepared, there's been some vocal fan criticism, calling out things like sponsorship and ticket pricing as being excessive. How do you think about balancing fan-facing monetization and the fan experience going forward? And do you think those vocal critics are reflective of the larger overall fan base? Mark Shapiro: Thanks, Brandon. The second part, I can't speculate on what percentage of that social chatter reflects our entire global fan base. But I'll take the first part of it because it is a priority topic for us, and that's why we covered in the prepared remarks. Look, first off, we take any and all feedback, especially from our core fan base, extremely serious, high priority. We listen, we learn. At the same time, balancing the fan experience, I would say, with the business of sports is never easy, whether you're talking ticket prices or commercial integration. It's as old as time. And frankly, it crosses genres, right? It's no different than Hollywood when you go to the movie theater and you see the prices rising for admission and popcorn and candy, not to mention the 30 minutes of commercials and trailers prior to the film that's been also excessively talked about. Look, change takes getting used to. Back at ESPN, when -- I recall when we took our national ad windows in SportsCenter from 1 minute to 2 minutes, there was significant backlash that went on for months. When the NBA, as an example, even thought about putting a patch, a sponsorship patch on their jerseys, fans cried out. Now there's digital boards and NBA games on the baselines. The courts themselves have sponsors. I mean, look at Major League Baseball, the Dodgers just put a naming rights partner on the field at historic Dodgers Stadium. And criticism for the commercial breaks in the Final 4, in College Football, in the NFL, that's something that all those sports have had to manage. The WWE, in particular, is truly new to commercial integration and sponsorship and change will be more glaring for some as we inevitably commercially integrate. But I would tell you that candidly, there's no -- there's really no magic formula, Brandon. There's no serum for this. There's going to be some trial and error over time. We have experimented. We pushed some boundaries with various events, we've leaned in with others, we've pulled back. What I can tell you unequivocally, and this is what's most important as it relates to what Lawrence and Dana do at the UFC and what Nick and Paul do at the WWE and what Sean Gleason does at PBR, our product comes first. And marketers around the world recognize that our product, especially at WWE is strong. And our audience there is particularly unique. It's young. It's diverse. It's hard to reach. It's super passionate, and they want access to our IP, those marketers want access to our IP. And we're working to give them that access while maintaining the balance. And by the way, as we commercially integrate, that revenue allows us to be more creative with our product and with our superstars. I would just say finally, really just remember this, that our audience is resilient. We don't take it for granted. Does it mean we can do whatever we want to do? Absolutely not, quite the contrary, but it is resilient. And currently, we are experiencing record attendance, record viewership and record engagement. Brandon Ross: All right. While we're on the topic of... Operator: Your next question is from Sean Diffley with Morgan Stanley. Sean Diffley: Mark, I think you mentioned financial incentive packages pipeline growing, and you guys referenced Azerbaijan as a good example. I was curious if you could elaborate on some color and texture on what new deals are looking like and conversations are looking like? And is there any impact from the Middle East there on a go-forward basis? And then curious as PSKY and WBD potentially combined, what that could mean for UFC and Zuffa in terms of HBO+, Paramount+ and a Combat Sports super app? Mark Shapiro: Yes. First off, Sean, let me just say it sounded like we cut off Brandon. So Brandon, if you're listening or still on or maybe you got disconnected, just hit back and we'll come back around to you. Sean, you had a bunch of questions there, and we'll, of course, cover the board. Look, we're excited about this Paramount WBD combination. I can't really comment on who's going to carry us, who's not, who's going to promote us, who's not, who's going to market us, who's not, how much, when and where. But the idea of all of these assets, platforms and reach devices being in the hands of David Ellison and his team, just given what we've seen already from this partnership, we are ecstatic and frankly, anxious for them to close this deal and for us to get to the table and start brainstorming what we can do with all their platforms. And that's not just for the UFC, that's also for Zuffa Boxing because there's real growth potential there. And the idea of just having more eyeballs, bigger audiences, higher engagement, amazing content around us, similar to what we have with Paramount+, that is something that I can tell you this team is really excited about. And just in terms of Middle East and demand, if you will, and I'll let Andrew chime in as well. I would just want to make it very clear. Similar to what you've heard on the earnings calls with Live Nation and the Walt Disney Company, we have seen no consumer pullback whatsoever. And I'm speaking from a global perspective. So a lot in front of us in terms of the year. We're, of course, taking nothing for granted. We don't know where this is all going to end up. It feels like every other day, we're hearing that it's just about over and President Trump has a deal only for it not to be, but there seem to be some good news this morning. Bottom line is we're on track. You heard in my prepared remarks, our partners are on track. They want us there. They're thirsty to have us there. I think they're frankly thirsty to tell the world they are not just open for business, they are hungry for business and events. And Royal Rumble was a huge hit for us earlier this year in Saudi Arabia, highest grossing gate Royal Rumble. Of course, we don't take in that revenue, we get a FIP. But it was just a massive turnout and a massive sellout for Saudi and our partners there, and they want more. And we have more coming. We have six more events through the course of the year between Zuffa Boxing and WWE and UFC in the region. And most of those are in the fourth quarter. So we have some time, and we have 0 doubt that those are going to go off. And the demand for FIP is still strong. Our guidance is where it is. We've communicated that in the past, and we stand by that. Andrew, on the guidance? Andrew Schleimer: Yes. Look, I would say FIP is a major growth strategy for us and momentum continues. We have not seen a slowdown. We've recently announced a couple of deals most notably in Philadelphia, where we announced UFC 330 will be at Xfinity Mobile Arena in August. That's within FIP. So domestic demand for high premium intellectual property. We talked about Baku, and Baku is unique because we're going back there after sort of the test deal in that market last year with a multiyear deal at a higher rate than we received in 2025. We've announced our debut event in Belgrade, Serbia, which will be a Fight Night in early August as well. So really no corner of the globe untouched, and we're fairly bullish that this strategy continues to take hold. Seth Zaslow: Operator, if you can, let's go back to Brandon Ross. I think he got cut off. Operator: Yes, Brandon Ross from LightShed Partners. Brandon Ross: Not sure what happened there. The question I was going to ask is there's also been a lot of noise about weaker UFC cards lately. In your view, what's going on? And what are you guys doing to improve? Mark Shapiro: Well, that's the journalist in you there. I get it now. Brandon, let me leave no stone unturned with the direct questions. Look, bottom line is we don't buy it. Let's just start with this premise, right? The product is great at the UFC. The brand has never been stronger. Our reach has never been greater. So the foundational elements of UFC are in concrete. Anyone that came to our last numbered fight in Miami, which was UFC 327, was flat out blown away. Or anyone that went to our last Fight Night, which happened to be last weekend in Perth, Australia, a sellout or even watched it, witnessed an extraordinary sport. Look, we are always building at the UFC. We're in the building phase at all times. We find the best up-and-coming talent around the world, and we match them continually in the best fights. There's a huge movement right now with all these young fighters coming up in the ranks. Many of them are taking over slots in the top 10 from guys that have been named in the rankings for years, strong personalities that are busting just now, Joshua Van, Brazilian Carlos Prates, undefeated Michael Morales, the next generation or look at the White House Card, which we've put out there is a strong card. We've actually added a card to it, the UFC Freedom 250, which is it's stacked top to bottom, and we're using that opportunity to feature one of our most promising stars, Ilia Topuria. Dana White and his team have been doing this for 25 years. And look, the real truth of it is that we don't get to determine who wins, it doesn't work like that. You take these great personalities who hail from every corner of the world with exciting fighting styles. And if they win, you've caught lightning in a bottle. That's what we do. That's what Dana White does. And there's no better matchmakers in any sport than we have with Dana's team of Hunter Campbell, Sean Shelby and Mick Maynard. And then I would just say, I'd remind you finally that with any sport, there's just natural ebbs and flows, right? It's all very cyclical. Again, kind of harkening back to the ESPN days, the NBA was on fire with Michael Jordan and then he left and there was a bit of a dip. And then all of a sudden, it was Shaq and Kobe. And as long as Shaq and Kobe were in the NBA finals, the NBA was in good shape. But the year they weren't there or they were playing the Nets or the San Antonio Spurs were there, there was a falloff and they needed more stars and everybody talked about it and yearned and cried and commented. There was no social back then, but there was still a lot of noise. And now they're uber-rich when it comes to sports personalities and teams that are playing well as evidenced by the homegrown New York Knicks here. Operator: Your next question is from Stephen Laszczyk with Goldman Sachs. Stephen Laszczyk: Mark, you called out the strong engagement momentum you're seeing with your new distribution deals at ESPN and Paramount. I was curious if you could expand on that a little bit and maybe update us on perhaps to what extent you're seeing increases in engagement translate to other parts of the business like live events or sponsorship revenue, how some of those conversations progress? And to what extent the benefits you think could flow through the P&L this year and what we've seen so far play out and what's still to come? Mark Shapiro: Yes. Look, Stephen, just across the board, we're just -- as evidenced by our report today, I mean, we're hitting and firing on all cylinders, right? We just -- we have demand and fans, consumers. Frankly, they're in dire need or thirst for live experiences. And we're right at the top. If they can be there, fantastic. If they can't be there, the next best thing is watching it live. We're the definition of that theory. I mean WrestleMania was -- it hit the top 10 in 33 countries, which is above last year's 28. That was just for Saturday. The Sunday event hit the top 10 in 24 countries. So they want the unpredictability. And at the end of the day, given, again, the fan base, the youth, the demos, the diversity, the engagement, you heard David Ellison on his -- on the PSKY earnings call talk about the level of engagement they're seeing with UFC. That ultimately is going to translate in big upside, global partnerships upside, financial incentive package upside, folks buying more merchandise because they want to be closer to the brand, right? Just overall, the experience being in the middle of that and then being able to talk about that. So we're clearly bullish given what we're seeing. And we don't see a slowdown. And we're focused on the execution, right? I mean, Andrew talked about in his prepared remarks, the jump we're going to see in our EBITDA margin, the guidance we've put out there on the global partnerships and the FIPs, the traction is there. And as it relates to the UFC, we couldn't be more excited about the White House event because it's an opportunity to get more sampling, to get more awareness. And ultimately, that's just going to expand our audience, which is always, always good for business. Stephen Laszczyk: Great. And then maybe just on the partnership and marketing front, maybe for Andrew. I think growth decelerated in the first quarter quite a bit. I was just curious if you could talk a little bit more about the puts and takes of the first quarter revenue growth dynamic and then how we should expect growth in this line item to progress as we look into the balance of the year across both the UFC and WWE? Andrew Schleimer: Yes. So on UFC, partnership and marketing revenue for the quarter increased 4%. And that's largely attributable to timing, if not exclusively attributable to timing. We're bullish. Partnerships and marketing is core to our thesis, and we really see no slowdown at UFC or WWE for that matter. We had two fewer events in the quarter, two fewer Fight Nights, and we do allocate and recognize revenue on a per event basis. So nothing to read through on that side. As we look at WWE, partnerships and marketing revenue was impacted by geography. We did have 12 events internationally, which historically have been a bit harder to monetize than our domestic events. We did have an event in Riyadh, which had some restrictions that caused a bit of slowdown versus the prior year quarter. But candidly, there's nothing to read through or read into given the fact that we're well on our way to massive year-over-year growth in partnerships. Mark Shapiro: And we don't -- when we don't -- Stephen, when we don't monetize to the fullest on global partnerships for these international events like we do domestically. We still do well, but we don't do what we do domestically. We make it up and then some on the financial incentive packages. So just to underscore Andrew's point, not to read into it, you've got 12 events international here in the first quarter. This is a timing situation. Our pipeline is robust, and we are closing deals right and left as evidenced by some of the new categories we're finding. And I think there is some conversation continuing about how many categories can we unearth. And we would just tell you that we're chockful right now. A lot more to come. Operator: Your next question comes from Peter Supino with Wolfe Research. Peter Supino: I wanted to ask about the segmentation of demand. If you guys could share any color on how you see consumers at various price points acting across WWE and UFC and how that informs your strategy going forward in terms of trying to maximize your revenue at a given night. And then if you also would talk about the success of UFC on Paramount+. Obviously, that bigger stage is great for the brand, and I wondered how you expect that to show up across the business over the next few years. Mark Shapiro: Yes. I mean it's a little more of the same, Peter, in terms of how it's going to show up across the business. Look, they'll use all the bells and whistles and platforms they have at their disposal and what's to come with Warner Bros. Discovery to ultimately get our content to a larger audience. And as that audience converts, and it will do that. I mean that's MMA, right, think of where it was 20 years ago versus where it is today. Our fan base will grow. And as the fan base grows, it just ultimately fuels all these revenue-generating opportunities and pipelines that we have. So we're bullish on that partnership. And frankly, we're bullish on the marketing power of their platforms, in particular. And while we're just getting a little bit of taste of CBS here and there, that has proved to be a very powerful platform for us. And as you heard on the PSKY call, the age -- the average age of our audience is significantly younger than the average Paramount+ viewer, which helps them. The engagement has been strong, and we're talking millions of minutes that they're watching. And I would say, importantly, they're not just watching the fights, they're watching the ancillary program, similar to what's happening with Unreal on Netflix as it relates to the WWE and the success they're having there with Raw. So look, wider audience, wider reach ultimately equals a larger fan base. And a larger fan base ultimately is something that we will work with our partners to monetize. On the ticket front, look, we're not going to get into specifically how we break out our yield monetization strategy or the AI dynamic pricing tools that we use. But suffice to say, we like what we're seeing, our gates are strong. And we're more focused on making sure we deliver on the experience that folks are coming out to see. And we believe that coming out to see, as I've already said, is going to continue to really substantially increase. When you have a 4-day work week becoming a standard in the office, I'm talking about, as it has with many countries across the globe, leisure demand stops being concentrated into a Saturday night. It starts spreading into shoulder days. People crave physical aggregation, and that plays right into our strategy. Operator: Your next question is from Ryan Gravett with UBS. Ryan Gravett: Two questions for me. I guess, first on the PBR. I guess coming off the new rights deals you signed last year and the expansion of the Team Series planned for next year, I guess how should we think about the opportunity for growth at that property and the level of EBITDA contribution that it could drive for the company? And then, Andrew, I think it was about a year or 2 ago when you first talked about your comfort in operating the business at up to 3x leverage. I'm just wondering if your thoughts around leverage have changed at all now that you have all the media rights deals locked in to the end of the decade. Andrew Schleimer: Yes. So I'll hit the PBR and as well will take the entire question, Ryan. As I reported, our corporate and other segment where PBR sits generated revenue of $74 million in the quarter, which is up 36% over the prior year period. A couple of factors that drove that very impressive growth. Boxing obviously, is in there as well, but PBR and PBR media rights and just traction in that business is something that we're very, very excited about driving year-over-year increases. We anticipate there to be continued growth at PBR, which will be reflected in that segment. And it is high-margin growth, analogous to what we see in both the WWE and UFC segments. Look, we have an extraordinary financial position. Our balance sheet is strong. We're highly free cash flow generative. We are looking to continue to commit, to deploy and return capital to shareholders. As you saw today, as in our press release and our prepared remarks, our Board has authorized another $1 billion of share repurchase for us to be opportunistic to the extent we continue to believe there to be a dislocation from geopolitical uncertainty in our stock price. We are just about complete with our ASR, which will then shift to a $200 million 10b5-1 plan. And when that's all said and done, we now have $1 billion in our toolkit to put to work as authorized by our Board. So how we finance that is TBD. I'm comfortable with our leverage level. I'm comfortable at a higher leverage level because we will naturally delever over time by virtue of the robust growth characteristics of this company. So you can just pull it forward, the 2.3x that we are today at the midpoint of our guidance range, assuming no incremental debt will be well below 2x. And that obviously is an extraordinarily comfortable place to be. And that's not to say we wouldn't look to add more given the natural deleveraging characteristics. Seth Zaslow: Operator, why don't we take one last question please? Operator: Your last question will be from Brent Navon from Bank of America. Brent Navon: So just one for me on -- there have been several instances of high-profile one-off fighting events that are just really validating the fan interest in combat sports. But I guess the flip side is this demand could also make the demand for some of your fighters even stronger. So are you finding that it's becoming more competitive to retain top fighters? And anything you could share on how fighter comp is tracking this year relative to prior years? Andrew Schleimer: Yes. Look, we are -- data point that I can share Brent, is the one that we've said previously, where we -- out of the gate, when we did the Paramount deal, we doubled fighter bonuses at UFC, which is an 8-figure investment, that was inclusive in our full year guidance. Fighter compensation continues to grow at a meaningful clip, and we know what our core assets are, and we would never turn a blind eye to our most meaningful investment. So we believe that we make strategic and targeted investments in our athletes and our talent at WWE, not something that's keeping us up at night. Mark Shapiro: It's baked in, Brent. And at the same time, in terms of competition, absolutely, we have competition everywhere, always have. UFC has more and more competition. MMA, Combat Sports, Boxing, you see some of the new entrants getting into it, and you know some of the current players across the board. This is a highly competitive space, and we have to be at our best every day with our storylines, with our matchups, with who's on our roster. And from Dana to Triple H, it's something they think about when they wake up and it's on their mind when they go to bed, period. And that's on both sports. I mean we see it really across the board with wrestling and/or with the UFC. But as long as we're doing our job right, as long as we're putting the product out in front of us first, and that's our top priority, and it's our top focus. We're listening to the fans, we're serving up great experiences around our events. We're driving viewership with our partnerships and our holistic marketing plans. Well, then we should stay out in front, but we don't take it for granted, and we never will. Operator: This concludes today's call. Thank you for attending, and you may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to Kemper's First Quarter 2026 Earnings Conference Call. My name is Mark, and I will be your coordinator today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to introduce your host for today's conference call, Michael Marinaccio, Kemper's Vice President of Corporate Development and Investor Relations. Mr. Marinaccio you may begin. Michael Marinaccio: Thank you, operator. Good afternoon, everyone, and welcome to Kemper's discussion of our first quarter 2026 results. This afternoon, you'll hear from Tom Evans, Kemper's Interim CEO; Brad Camden, Kemper's Executive Vice President and Chief Financial Officer; Matt Hunton, Kemper's Executive Vice President and President of Kemper Auto; and Chris Flint, Kemper's Executive Vice President and President of Kemper Life. We'll make a few opening remarks to provide context around our first quarter results, followed by a Q&A session. During the interactive portion of the call, our presenters will be joined by John Boschelli, Kemper's Executive Vice President and Chief Investment Officer. After the markets closed today, we issued our earnings release, filed our Form 10-Q with the SEC and published our earnings presentation and financial supplement. You can find these documents in the Investors section of our website, kemper.com. Our discussion today may contain forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to, the company's outlook on its future results of operations and financial condition. Our actual future results and financial condition may differ materially from these statements. For information on additional risks that may impact these forward-looking statements, please refer to our 2025 Form 10-K and our first quarter earnings release. This afternoon's discussion also includes non-GAAP financial measures we believe are meaningful to investors. In our financial supplement, earnings presentation and earnings release, we've defined and reconciled all non-GAAP financial measures to GAAP where required in accordance with SEC rules. You can find each of these documents in the Investors section of our website, kemper.com. All comparative references will be to the corresponding 2025 period unless otherwise stated. I will now turn the call over to Tom. Carl Evans: Thank you, Michael. Good afternoon, everyone, and thank you for joining us. As I've done in previous quarters, I'll use my comments today to discuss how we look at the business, provide some context on the quarter's results and more importantly, update you on our primary focus, which is to improve profitability, reduce volatility and deliver value to our shareholders. Turning to the business. I think it's worth a brief reminder of who we are. We are a specialty insurer operating in a multifaceted competitive industry. We concentrate on distinct customer segments and markets that are not the primary concern of larger carriers. Through our two core segments, Auto and Life, we provide affordable, easy-to-use, personalized solutions to individuals, families and small businesses. We have a deep understanding of our customers and have developed products and services designed to meet their needs. We see meaningful near- and long-term opportunities across both businesses. Before we discuss the quarterly results in detail, I want to note the main takeaways for the quarter. Overall, financial results were disappointing and did not meet our expectations. Notably, we continue to face significant headwinds in our California personal auto business. Results were also impacted by statutory profit limit refunds in Florida. What should not get lost in the narrative, however, is that we have several areas of the business that are performing well, and we will discuss these shortly. First, let me spend a moment on Florida. The refunds are a function of state law that requires insurers if profits exceed certain thresholds over a 3-year period to return a portion of profits to policyholders. Last quarter, we explained how tort reforms enacted in 2023 have reduced loss costs and made the Florida market more competitive. Brad will discuss the effect of these refunds on our financial results. Importantly, our current auto business in Florida is performing well, and the rate adjustments we've made are leading to profitable growth. Matt will share more on Florida in a bit. As for our personal auto business in California, the increases in minimum liability insurance limits that went into effect in January 2025 continue to complicate and exacerbate loss costs. We believe we have a good grasp of the issue and are taking targeted actions to respond, including rate changes that are coming into the market in the second quarter, underwriting refinements and claims process adjustments. The benefits of these changes will take time to be clearly visible in results. Matt will have more to share with you on California. While we clearly need to improve the California PPA results, there are bright spots in our business that should be noted. Among the items we are encouraged by are the continued strong growth and attractive results of our commercial auto business, which just finished its best production quarter ever. Kemper Life continues to deliver solid, consistent results and remains a source of diversified earnings. And while the specialty, personal, auto results as a whole were not where we wanted them to be, we did see positive developments with profitable PIF growth in Florida and Texas, rate approvals in California and new product expansion that went live in Florida and was approved for rollout in Texas. On our earnings call in February, we outlined a number of enterprise priorities. We are making progress on our actions to improve results, enhance operational execution and reduce earnings volatility through diversification. As I noted, we are focused on growing profitably and reducing earnings volatility. As we reposition our personal auto book, we expect California to represent a smaller percentage of our overall portfolio. It will remain our largest market for the foreseeable future, and we continue to see value in our presence there given the size of the market and our differentiated expertise in operating in the state. The restructuring program we launched last fall is well underway. And to date, we've identified cumulative run rate savings of more than $60 million, the majority of which has already been actioned. We continue to expand this program to further optimize operations and increase efficiency. We were also engaged in a comprehensive review of our end-to-end claims processes. We have identified and are executing on some early opportunities to reduce loss costs. Brad and Matt will provide more detail on the actions we are taking, which will protect and advance our competitive advantages, enhance profitability, enable growth and ultimately create value for our shareholders. Brad, over to you. Bradley Camden: Thank you, Tom, and good afternoon, everyone. Let me start with a clear perspective on our performance this quarter. While results did not meet expectations, the shortfall was driven by two specific issues. Outside of these, the broader business is performing well. I'll walk through those items, what we're doing to address them and what's working well. I'll begin on Slide 5 with personal auto. Performance this quarter was primarily impacted by elevated loss costs in California and statutory premium refunds in Florida. In California, the environment remains our most significant headwind. The increase in minimum liability limits effective January 1, 2025, has led to greater attorney involvement in claims and higher loss costs. This trend has developed over several quarters, and we are addressing it through rate and non-rate actions, along with targeted claims process improvements. In Florida, the 2023 tort reform has materially improved PIP coverage performance. As a result, profitability exceeded regulatory thresholds for the most recent rolling 3-year periods. Subsequently, we increased our policyholder premium refund liability for accident years 2023 through 2025 and established a new liability for 2024 through 2026, reflecting our current loss expectations. We are taking actions to improve personal auto performance in California and outside of that market, results remain solid. In Florida and Texas, two key personal auto growth states, policies in force increased 4.9% sequentially with an underlying combined ratio of 93.7%, reflecting continued growth and attractive returns. In Commercial Auto, performance remained strong. We achieved record production and exceeded $1 billion in trailing 12-month written premium for the first time. Policies in force increased 3.2% sequentially and 10% year-over-year with a strong underlying combined ratio of 92.4%. In Life, results were stable with operating income of $18 million, supported by lower expenses and favorable mortality and lapse experience. From an investment perspective, net investment income was $107 million, up $4 million sequentially, primarily reflecting stronger alternative investment performance. In total, we reported a GAAP net loss of $1.7 million or $0.03 per share. Adjusted consolidated net operating income was $12.5 million or $0.21 per share. Excluding the impact of Florida refunds, adjusted net operating income was $34.6 million or $0.59 per share. Turning to Slide 6. Over the past several quarters, we have taken and continue to take actions to improve profitability, reduce earnings volatility and support growth. Our focus is on 3 areas: restoring personal auto margins, diversifying outside of California and reducing expenses. To improve margins, we have implemented non-rate actions and filed for rate in California. We received approval for a 6.9% rate increase on 2/3 of the book effective April 6. The remaining 1/3 of the book has received approval for a 3% increase effective early June. We expect initial benefits in the second quarter with a more meaningful impact in the second half of the year. We are also advancing portfolio diversification. Our new personal auto product has been expanded into Florida and approved in Texas. This product will improve alignment between rate and risk, helping support growth. At the same time, we are reallocating new business towards more profitable markets and reducing exposure in underperforming states, particularly California. On expenses, we continue executing our restructuring program. We've identified approximately $60 million in run rate savings with additional opportunities under evaluation. Moving to Slide 7. This slide outlines our restructuring progress since the third quarter of 2025. I'm going to discuss this in two pieces, expenses and loss cost management. On expenses, we are focused on organizational design, process improvements and leveraging technology to increase scalability. We've identified $60 million in run rate savings and actioned to $50 million to date. Our medium-term goal is to reduce the Specialty Auto expense ratio to below 20% from approximately 22% today. Moving to loss costs. We see meaningful opportunity in claims efficiency. With 3/4 of premium allocated to losses in LAE, even modest improvements can drive significant value. We've engaged a third party to review our end-to-end claims processes, starting with third-party liability. While still early, we see clear opportunities to improve loss and LAE performance. I'll now turn it over to Matt to discuss the Specialty P&C segment. Matthew Hunton: Good afternoon, and thanks, Brad. Let me start with a clear view of the quarter for the P&C segment on Slide 8. As Brad and Tom already mentioned, California Personal Auto was a distinct challenge in the quarter. While the impact was significant, the rest of the business contributed positively. Let me start with California. We continue to see elevated liability loss costs driven by broader legal system dynamics. We are taking tangible actions to address these challenges. We recognize the shift in these trends and moved decisively to bring pricing back in line with our long-term economic targets. Those rate actions are now approved and are beginning to earn in as we move through the year. At the same time, our claim organization has continued to refine and enhance end-to-end processes, particularly targeting third-party claim management and attorney involvement. As a result, we are beginning to see favorable offsets with modest reductions in liability severity. Importantly, we're seeing early signs that the California market is becoming more favorable with carriers across the industry both filing for rate and taking non-rate actions to restore profitability. So while California remains a headwind today, the combination of our internal actions and improving external conditions gives us increasing confidence in the path to recovery. As we think about the broader portfolio, the key priority for us is geographic diversification, ensuring we are balancing the business across markets and reducing concentration risk while maintaining strong returns, as highlighted on Slide 9. That strategy is clearly coming through in Florida and Texas. The product tuning actions we took late last year are having the intended effect. We are seeing growth in policies in force and importantly, that growth is coming through at attractive profitability levels. These markets play an important role in rebalancing the portfolio, positioning us for more consistent performance over time. Let me also briefly touch on Commercial Auto on Slide 10. This continues to be a bright spot in our Specialty business. We continue to demonstrate strong, consistent growth across multiple geographies while also achieving stable profitability. The business has delivered a combined ratio in the low 90s while growing at 23% annual rate since 2019, demonstrating both the quality of the book and the strength of our execution. Importantly, our Commercial Auto business, which offers specialized products for small businesses is becoming a larger contributor to the overall portfolio. Our approach is intentionally focused on targeting small business segments where we have both expertise and a competitive advantage. As this business continues to grow, it plays a meaningful role in further diversifying our Specialty Auto business, helping balance exposure across geographies and products. Finally, let me touch on a few of the strategic investments we're making to support the next phase of performance. We're encouraged by the early progress of our new product, BVP, which stands for Basic Value Plus. BVP materially advances our pricing framework and builds on our investments in data and data science over the past several years, enabling more precise risk selection and matching of rate and underlying risk. This product enhances our ability to reach customers across our target markets. BVP has been in the Arizona and Oregon markets for over 9 months, and we've seen encouraging early results. We launched in Florida at the end of the first quarter, and we recently received approval in Texas with a rollout planned in the second quarter. While it's still early, we're gaining momentum and the indicators are aligning with our expectations. We believe this will be an important contributor as we scale and drive profitable growth over time. We've also launched a series of new customer and agent self-service capabilities, including enhanced portals and digital tools. These investments are designed to improve the customer experience while also boosting operational efficiency, simplifying key service and claim interactions. Taken together, these initiatives support near-term performance while strengthening a more scalable, efficient and durable operating model for the business. Stepping back, while this quarter reflected concentration pressures driven primarily by California Personal Auto, many other parts of the business are performing well. We are taking decisive actions to improve performance. And while still early, the initial signs are encouraging. We are not where we want to be yet, but we are making real headway and believe the actions we are taking will enhance future financial performance. Thank you. I'll now turn the call over to Chris to cover the Life business. Christopher Flint: Thank you, Matt, and good afternoon, everyone. Turning to our Life Insurance segment on Slide 11. The Life segment delivered another quarter of solid performance, generating a reliable contribution to consolidated earnings. Earned premiums increased slightly year-over-year, and we ended the quarter with approximately $19.7 billion of in-force face value, reflecting consistent production and stable policyholder behavior. Adjusted net operating income was $18 million in the quarter, up slightly from the prior year period, supported by expense management and favorable mortality and lapse experience. Last quarter, we updated our product portfolio and expanded distribution of our liability offering and results are tracking in line with expectations. Average face value per policy increased modestly. Average premium per policy issued rose approximately 7%, reflecting strength in pricing and business mix and our total revenues grew driven by earned premiums and net investment income. We are also modernizing our life distribution model to enhance agent productivity and better align incentives to drive new business growth and further improve persistency. In closing, the Life business continues to perform well and deliver consistent results to the overall portfolio. I'll now turn the call back to Tom for closing comments. Carl Evans: Thanks, Chris. Before I provide closing remarks, I'd like to give a quick update on a couple of leadership items. Regarding the ongoing CEO search, the Board continues to make meaningful progress. There is strong interest in the role from highly qualified candidates who recognize the value of our brand and the significant opportunity that lies ahead for Kemper. We will provide an update when we have more to share. I'm also pleased to share that we have a new Chief Information Officer joining our executive team. Kelly Coomer joins us with a 25-year background in insurance technology leadership. We're excited to have her as we accelerate our technology strategy to support our key initiatives. To close, we remain focused on returning the business to the level of performance we expect and know it can achieve. While this was a challenging quarter, we are taking decisive action to improve performance and strengthen execution across the business. We believe in our core businesses and the value we bring to our customers, and we are moving with deliberate speed and accountability to drive better outcomes. We look forward to providing updates on our progress in the quarters ahead. Thanks for your time today, and we will now take questions. Operator: [Operator Instructions] And your first question comes from the line of Gregory Peters with Raymond James. Charles Peters: I guess for the first question, just focusing in on California. And the challenges that you're reporting there. And it's noted that you talked about the rate increases that you're going to start to implement this year. But it just doesn't seem like it's enough to get you down to the threshold of what your return targets look like. So I guess my question is, is there anything that you can do on the upfront risk selection to drive a better result in the California Auto? And related to that, I guess, are you anticipating filing for another round of rate increases anytime soon, considering where the profitability of the business is? Matthew Hunton: Greg, this is Matt. Great question. The short answer is yes. We have a bunch of obviously, rate actions that are going to market today. 2/3 of our book got rate implemented last month. We have the other 1/3 of our book is getting rate implemented next month. We have another set of filings out with the department already on the private passenger side to ensure that we're getting to the rate adequacy level, especially on the liability coverages, which is obviously where most of the noise is as it pertains to the FR changes, specifically in the minimum limits category. When you look at the rate action, the 6.9% that's filed, the reason we do that is, obviously, as we work with the Department of Insurance is we think it's an expeditious -- the most expeditious way to get to the rate need that we have. The impact of the rate varies dramatically by coverage. So for example, if you dissect the April change that we put in place, although in aggregate, it's 6.9%, it's about 50 points on bodily injury. So it's textured in a way that's getting to the coverages rate adequacy, and that will accelerate the combined ratio as that mix works its way through. That's certainly on the rate side. We -- like I said, we have another filing that's out there today. We have likely a subsequent filing once the May filing goes effective, that will be released as well. So there'll be a total of, I believe, about 4 filings that we'll hope to get effective this year that will impact the PPA book of business. On top of that, the other levers that we are pulling, we talked about the run-up in attorney activity and legal system abuse is impacting, obviously, bodily injury and PD severities. We're accelerating some claim efforts there that we're seeing early benefit that's offsetting the BI increases actually seeing BI severity come down that's working. And as Brad touched on, there's a series of expense actions that we have in place that will drive the combined ratio back down to targets as expeditiously as possible. A quick comment on the California marketplace. We took action in the back half of last year. Our filings were released in the early part of this year. We are actually seeing early signs that competitors are taking action as well. We obviously interact with many of our peers on the claims side, business management side. We are seeing filings come in through the Department of Insurance, similar type rate needs in other categories. Obviously, the carriers that have been most impacted by the FR changes are the ones that operate in the minimum limits category. Obviously, our book in California is about 90% minimum limits. But we are seeing other carriers on the non-rate side take action and on the rate filing side take significant action as well. Charles Peters: As I'm watching the different parts of your business move and each state has its own rhythm, so to speak, I'm mindful that an important part of your business is your distribution relationships. And I'm just curious how they're responding, how your agent relationships are working when there's some volatility around how you're pricing business and how your competitors are behaving. And just wondering if you're experiencing any shift in how your product is being distributed considering the challenges you've had over the last year. Matthew Hunton: Yes. So our agent relationships, we have long-tenured relationships with many of our partner agents. We're very transparent with them in terms of what we're seeing in the marketplace, where our costs are headed. And we have sort of a good back and forth in terms of how we navigate some of these cycles, and there's been quite a few cycles in our business over the last few years. With that said, we are making pretty significant investments and enhancing capabilities with our agent distribution partners. We've launched a series of new agent interaction portals on both the new and the renewal side, which is helpful for agents as they're navigating. We are launching new products. Obviously, we mentioned the BVP product. Those are all positive signs to our agents as we continue to sort of stay committed in the marketplaces we're open for business, specifically California, Florida, Texas, Arizona, Oregon, Colorado, right? We continue to maintain a presence in the marketplaces we play in, and we're not seeing any negative impact on the distribution relationship side. We actually have a pretty significant queue of agencies that want appointments from us. So we are working that thoughtfully. Obviously, when we think about expansion, it is profitable expansion. We're trying to get our combined ratios back in line with our targets, and then we'll thoughtfully grow policies in force. But we do have a queue of agents that want access to our products. Charles Peters: Just a clarification. When we talk about distribution, there's the Specialty Auto business and then the Commercial Auto business. Is it oftentimes the same agent that's producing business for both types of products? Matthew Hunton: Yes. There's significant overlap between our two businesses. Our commercial business is very much so a draft strategy to our personal lines business. So the individual risk that we insure on the personal line side, on the commercial line side, we insure they're small businesses. And so most of our agents that are appointed with commercial, our commercial products already have a personal lines appointment. The customer base is very much so aligned. Operator: And your next question comes from the line of Brian Meredith with UBS. Brian Meredith: I guess first question, just curious, I'm looking at your Commercial Auto results, you continue to have adverse reserve development on there. Maybe you can talk to me a little bit about what's going on there? And how comfortable are you with the profitability given the development you've been having? Bradley Camden: Brian, this is Brad. As you've seen over the last couple of quarters, we have had some adverse development in Commercial Auto, commercial vehicle. It's the same thing that we've been talking about. It's higher severity trends in bodily injury coverage. This isn't outside the range of normal expectations. When we think about the reserving range, you kind of reserve in the 50% to 55% range, half the time you're going to be higher, half the time you're going to be lower. Just given the trends and what we're seeing, particularly in California, a little bit of an adverse this quarter, improving from last quarters. And it continues to be on older accident years, particularly in accident years '22 and '23. now that we're roughly 3.5, 4 years away from those vintages, most of those accident years now and claims are fully developed. So a pretty good feeling of where we stand today from a reserving standpoint and nothing new there from what we said in the previous quarters. Brian Meredith: Got you. And then second question, just could you comment a little bit about the capital situation? I noticed you're now down to a 225% RBC ratio. You've only got $80 million of holdco liquidity. Anything to think about there? It seems like it's lower than it's been in several years. Bradley Camden: It's within the normal range, Brian. It's a little bit lower on a quarter-over-quarter basis. It's a little bit lower than where it was last year. We still have plenty of flexibility from a liquidity standpoint, $750 million, $100 million of liquidity. The capital from an RBC standpoint, that's looking at each legal entity. So I remind you that, that's not reflective of the entire ecosystem capital. So that's just the P&C entities there and the Life entities. We do have capital throughout the ecosystem at the holdco and elsewhere. So nothing to worry about. It's within our range of 225% to 300%, which we've been operating in for some time now. And our expectation is that we continue to improve our results and grow from here. Brian Meredith: Great. And just one other just quick follow-up question here. The technology initiatives you're doing, is any of that on pricing and underwriting? Or is it all more agency and process productivity? Matthew Hunton: So we've made on the technology initiatives, we've made a significant investment in our data infrastructure, our products, obviously manifesting ultimately with a new set of products in the marketplace. We've launched a series of new digital capabilities for both our agents and our customers that will drive efficiency, not only from a customer experience and agent experience, but also from an expense efficiency perspective. So very much so targeted on those two in-market capabilities. I don't know, Brad, do you want to add any context? Bradley Camden: And then Brian, and then also just investments across the organization on process improvements and making things make it work easier day-to-day for our individuals so that we have more time doing less of the blocking and tackling and more time analyzing so we can see around the corner. So we're seeing some scalability and efficiencies there. We've also moved almost our entire infrastructure to the cloud. So that's been very helpful with security and other things as well as app dev changes, et cetera. Operator: There are no further questions at this time. I will now turn the call back over to Tom Evans for closing remarks. Tom? Carl Evans: Thank you, and thanks again to everyone for joining us today and for your continued interest in Kemper. As we noted, we remain focused on executing against our priorities, improving performance and positioning the company for success. As always, we appreciate your time and support, and we look forward to updating you on our progress next quarter. Stay well. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon. My name is Jade, and I will be your conference operator today. At this time, I would like to welcome everyone to Paycom's First Quarter 2026 Financial Results Conference Call. [Operator Instructions] I will now turn the call over to James Samford, Head of Investor Relations. You may begin. James Samford: Thank you, and welcome to Paycom's Earnings Conference Call for the first quarter of 2026. Certain statements made on this call that are not historical facts, including those related to our future plans, objectives, and expected performance, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements made on this call are reasonable, actual results may differ materially because the statements are based on our current expectations and subject to risks and uncertainties. These risks and uncertainties are discussed in our filings with the SEC, including our most recent annual report on Form 10-K. You should refer to and consider these factors when relying on such forward-looking information. Any forward-looking statement made speaks only as of the date on which it is made, and we do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Also during today's call, we refer to certain non-GAAP financial measures, including adjusted EBITDA, non-GAAP net income, and certain adjusted expenses. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued after the close of the market today and is available on our website at investors.paycom.com. I will now turn the call over to Chad Richison, Paycom's founder and CEO. Chad? Chad Richison: Thanks, James. Thank you to everyone joining our call today. I'll briefly comment on some of our first quarter 2026 accomplishments and the progress we are making on our 2026 plan. Bob will review our first quarter results and full year guidance before taking a few questions. Let's get started. First quarter results were solid as we continue to advance our full solution automation strategy, create greater client ROI achievement, and deliver the world-class service that makes us the best in our industry. The 2026 plan that we laid out for you during our last call remains well on track, and I'm pleased with our progress. Our focus on client ROI achievement and world-class service continues to strengthen our client relationships, which helped increase revenue retention in 2025, while also improving our Net Promoter Score. Our clients are more engaged than ever and big promoters of our software. Discussions with them continue to be overwhelmingly positive as they use our software to drive automation, which is creating meaningful value for them. We also continue to see many clients return to Paycom after realizing their new provider systems don't produce automation and ease of use like Paycom. Our clients and their employees appreciate our single database architecture and employee-first technology, which enable the automation and decisioning across the platform, reducing complexity, improving accuracy, and driving efficiency. Our clients find that these strategic pillars help them achieve more ROI than anyone else in our space. We are also advancing our automation capabilities within our single database software. AI and automation are the future of our industry, and I am thankful we were early to offer our clients this level of functionality well before it becomes mainstream. Paycom is uniquely positioned within our industry as we are the most automated solution in the market. In fact, we have routinely been named the best HR and payroll software provider in our industry by third parties, most recently by G2, where we earned top rankings in their spring 2026 report across multiple categories. Our full solution automation strategy is working, and solutions like Beti, GONE, and other automated decisioning capabilities are eliminating manual processes, reducing redundancies, and helping our clients operate more efficiently. Forrester found that Beti reduced payroll processing labor by 90%, while also showcasing that GONE delivers an ROI of over 800%. Our AI solution, IWant, is accelerating speed to value for our clients by helping users get answers and complete work quickly without any necessary training in our software. As we continue rolling out more AI and automation across the platform, we are making our product easier to use and driving measurable value for our clients and their employees. While we are pleased with our momentum in a rapidly evolving market, the opportunity ahead of us is large as we continue to serve approximately 5% of the addressable market. This available market share represents a significant opportunity for Paycom over the long term. I want to thank our employees for their focus, execution, and the excellent start to 2026. Our people are what make Paycom a great place to work, and I am thankful Paycom was recently recognized as a 2026 Platinum Employer on the Where You Work Matters list. Paycom was the only company in our industry to receive the program's highest overall distinction of platinum, proving we are one of the best places to work in the U.S. Paycom was also the only company in our industry to earn a 5-star rating on USA Today's Most Trusted Brands in 2026. These distinctions are why brands all over the globe trust us to do their HR and payroll. As the most trusted HR and payroll provider, we have a lot of very exciting initiatives coming in 2026 to help our clients continue to create ROI, while also delivering world-class service. With that, let me turn the call over to Bob. Robert Foster: Thank you, Chad. We delivered strong first quarter results with total revenues of $572 million, up 8% over the comparable prior year period, and recurring and other revenue of $544 million, up 9% year-over-year. GAAP net income in the first quarter was $156 million or $3.04 per diluted share based on 51 million shares. non-GAAP net income for the first quarter was $161 million or $3.15 per diluted share. Revenue strength in the quarter, combined with operational efficiencies from automation, resulted in strong profitability metrics in the first quarter. adjusted EBITDA came in at $275 million, representing a 50 basis point year-over-year expansion to 48.2%. We are achieving operational efficiencies without compromising on sales and marketing effectiveness, world-class service, or product innovation. During the first quarter, we repurchased approximately 8.4 million shares of common stock, or approximately 15% of our shares outstanding as of the end of 2025, for a total of $1.06 billion, and we paid approximately $18 million in cash dividends. On May 4, the board approved a new $2 billion buyback authorization to replace our prior authorization. The board also approved our next quarterly dividend of $0.375 per share, payable in early June. Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $154 million. In April, we replaced our previous revolving credit facility with a new 5-year, $2.125 billion credit facility, of which $675 million is currently drawn down. The average daily balance on funds held for clients was approximately $3.1 billion in the first quarter of 2026, up 8% over the prior year period. Now let me turn to guidance for 2026. Following our first quarter results, we are reaffirming our full year revenue and adjusted EBITDA guidance ranges. We expect total revenues to be between $2.175 billion and $2.195 billion, or approximately 6.5% year-over-year growth at the midpoint. We expect full year recurring and other revenue to be up 7% to 8% year-over-year. Finally, full year adjusted EBITDA is expected to be between $950 million to $970 million, representing an adjusted EBITDA margin of 44% at the midpoint of the range. Included in total revenue outlook is interest on funds held for clients of approximately $103 million, which is unchanged from our outlook provided on the last call. Our first quarter represented a strong first step towards achieving our strategic and financial goals for the year, and we're excited about what's ahead. With that, let's open the line for questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Samad Samana from Jefferies. Jordan Ross Boretz: This is Jordan on for Samad. Thank you for taking my question. It's nice to see the recurring growth coming strong at 9%, which was ahead of our own expectations by a few points. I wanted to pick apart drivers of outperformance during the quarter there. Across key growth drivers, whether that be new booking, seller headcount versus productivity, employment growth, which factors performed better than your initial expectations and what contributed to that strength? Chad Richison: I would say it came in about what we expected for our expectations. You know, when deal starts matter within a quarter, and you know, we had a successful quarter in the first quarter. Also first quarter, to keep in mind, it is the quarter where we have our forms filing business. That also can contribute to a higher margin profile in the first quarter. Jordan Ross Boretz: Great. Maybe a quick follow-up. On the expense side, you're delivering some really strong leverage. I think the 50 basis points of gross margin expansion is particularly impressive, especially given the pressure coming from slow revenue. I'm curious, in the cognitive specifically, what's driving that healthy expansion this quarter? Do you have any puts and takes in the direction of gross margin as we think about the rest of the year? Chad Richison: You know, we had automated a lot, throughout last year, and we're starting to see some of the benefit of that. I don't know if Bob. Robert Foster: Yes. I would add the automation and the process efficiencies, and we started last year on expenses as well on all across the board, and we're seeing some of that benefit. Jordan Ross Boretz: Great. Congrats again on the strong results. Operator: Your next question comes from the line of Mark Marcon from Baird. Mark Marcon: Similar to the prior question, you ended up outperforming relative to our expectations for this quarter. Fully recognize the form filings. Been doing this for a while. I'm just wondering you maintain the guidance, and it looks like you had a pretty nice beat here in the first quarter. The guidance basically assumes in order to get to the 7% to 8% on recurring, we need to see a bit of a slowdown as the year unfolds. I'm wondering, are you just being conservative, or is there anything that you're looking at that would suggest that that's going to slow down a little bit? Chad Richison: Yes. Raimo, it's early in the year and sorry, I did it again, Mark..... Mark Marcon: You did. Chad Richison: I know. I did it again. It's early in the year and so, we did have a strong first quarter. We've got the full year left. We're happy with what was there, but we like our guidance throughout the remainder of this year. Mark Marcon: Okay. Can you talk a little bit about how the board's approaching, you obviously put your money where your mouth is with regards to the huge buyback, which we've written about before, and you're actually taking it up even further. Can you talk a little bit about the rationale for doing that now if in fact things are going to slow down? Again perhaps there's a little bit of conservatism in the numbers. Chad Richison: I mean, I feel like our guide does reflect stability throughout the year. I mean, as far as the stock and the repurchases, I mean, right now our stock doesn't really trade, I don't believe, off what we do. It kind of trades based on the AI prophecy of the day. I think there's a little bit of a sky's falling narrative out there and if you believe that narrative, I mean, our stock should almost be at zero. Our value proposition's getting stronger and stronger with our clients. Our Net Promoter Scores are going up. They're continuing to increase. You know, we're kind of valued, I believe, at kind of a fool's gold price and we believe we're precious metal. When you have a $2 billion buyback authorization with growing cash positive business, it benefits us to have these disconnects in our value. I believe over time, long-term investors win when we're able to repurchase these shares. Operator: Your next question comes from the line of Steven Enders from Citi. Steven Enders: Maybe just, dovetailing off of the, the last question, just, I guess, how are you kind of viewing I guess the framework for how you're thinking about the buyback and capital allocation from here and, and how do you kind of view the, I guess, mix between, I guess, leveraging more debt, to support the buyback and kind of just what that means moving forward, on those plans? Chad Richison: Well, I think it's all dependent on where the share price is. I mean, we definitely remain opportunistic when it comes to buybacks. As you mentioned, we are taking on debt for that. You know, we'll remain opportunistic as we go throughout the year and have opportunities. Steven Enders: Okay. Thanks for that. Maybe just in terms of the bigger kind of product strategy I guess with IWant kind of out in the market and the other automation solutions, just what have maybe you seen from how that's supporting top of funnel, new opportunities first time bookings and maybe just kind of broader pipeline conversion and how you're seeing those metrics maybe shift with the broader capabilities out there? Chad Richison: Yes. I mean IWant creates real value and was the first AI tool in our industry that accessed an entire system. You know, and we'll discuss future AI products as we're ready to launch them. I mean IWant's up another 33% just since the end of the fourth quarter from a usage perspective. Usage continues to do well with IWant as it becomes more of the predominant interface for many of our clients as well as their employees in how they both navigate, make functional changes, as well as gather information from our system. Operator: Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Devin Au: Hi, this is Devin on for Jason today. Thanks for taking our questions. I also wanted to follow up on the 1Q recurring performance too. I know you mentioned forms filing revenue, which sounds like it came in better. Could you perhaps speak to some of the sales retraining or changes that you have done late last year? Did you perhaps maybe see less disruption or some early signs of benefits during quarter that might have drove the strong start in the recurring growth of the year? Chad Richison: I mean, I would say that our, the changes in the sales department did not have any impact on the Q1 starts and revenue. Maybe toward the end, the March kind of level. Primarily those forms, that forms filing revenue would've been baked the end of last year and become somewhat routine as we process those throughout the quarter. Devin Au: Got it. Okay. Thanks for that. Maybe just sticking on the topic of sales, I know you mentioned, I think last quarter you're looking to expand kind of sales rep per office. Yes, that will be helpful. Thank you. Chad Richison: Yes, we continue to hire in sales. We continue to produce many of our largest classes we've ever had go through our training. You know, we have an award-winning sales team, and we're focused on remaining on top. You know, top salespeople, they want to sell the top products, and our salespeople have worked very hard to get where we are today, and I'm real proud of them. Paycom's a great place for salespeople, especially those who may be changing their careers. We found that even HR directors can make pretty good salespeople for us these days. Operator: Your next question comes from the line of Raimo Lenschow from Barclays. Raimo Lenschow: I finally made it. Quick question on IWant. The obviously usability is increasing a lot. What do you see in terms of pipeline bills when you kind of talk to your sales guys about, like, how that's impacting what's going on from pipeline bills how that's kind of helps you all, and then also, like, how that helps you with kind of trajectory or then speed as you go through the pipeline because it does seem like a very compelling offering? Chad Richison: Yes, I mean, IWant has definitely helped us. You know, it's automation throughout our system. You know, IWant makes it easier for you to access GONE, you know? Automation throughout our system as we've moved toward full solution automation IWant makes it easier for people to access that. It reduces the learning barrier to be able to utilize our software. And again, we're having strong use cases. As employees use it at one company and they go to the other company and they kind of go back into 1994 they like that technology. As we simplify our solution and deliver more automation, that does contribute to greater opportunity for leads and sales for us throughout this year. Raimo Lenschow: And then the -- if you think about this year, like, has macro impacted any of your thinking in terms of office openings or what you're seeing out in the field? Or because that's the one concern everyone has. I don't think there's that much data, but, like, any impact that you would see? Chad Richison: I will tell you that internally, everything's going really well for us. We had a great start to the year. We had a good finish last year. You know, we're working with our clients. Conversions are going well. Sales are going well. Our software development group continues to increase our innovation. I mean, it's not until we come on these calls that we find out that we're not doing that great, honestly. because, outside of these, we're doing very well. Raimo Lenschow: Okay, perfect. That's good to hear. Eventually, we will find out as well. Thank you. Operator: Your next question comes from the line of Jared Levine from TD Cowen. Jared Levine: Thanks. Can you talk about bookings performance in 1Q and thus far into 2Q? I guess, have you witnessed the inflection you were hoping for here? Chad Richison: Yes, I mean I'm pretty impatient, and I want it all just because of we shouldn't lose any deals. Matching my expectations, I think, is very, it can be a little bit challenging. I will say that book sales came in, according to budget and what our expectation was for first quarter. I also had kind of mentioned that we had pulled our sales group out of the field for a 3-month period of time. Not full 3 months, but you'd have to come for a week and then go back and then come back for a week. You know, that put a little air in the line, and we would expect as we move throughout the year to have greater opportunities for book sales to have some inflection there. Jared Levine: Great. In terms of CapEx, you did have some pretty good leverage here, I think right around 6% of revenue here in 1Q. Is that a kind of a reasonable expectation for the year here? Chad Richison: Maybe not. I mean there's moratoriums out there on different data centers. As a reminder, I don't know of anyone else in our industry other than us that operates their own data centers. We will have opportunities to expand in both power and purchase of certain items that we have, and we'll have to see how CapEx is impacted throughout this year. We're not ready to really give guidance on that right now. Operator: Your next question comes from the line of Bhavin Shah from Deutsche Bank -- sorry, apologies. Kevin McVeigh from UBS. Kevin McVeigh: Great. Thank you so much, and congratulations on the results. I mean, the buyback speaks for itself. I guess, obviously there's so much concern in the market from an AI perspective. Is there anything you're seeing from a client consumption pattern, whether it's formation down-market, mid-market, adoption of, kind of IWant relative to maybe Beti, that you'd call out just to help us dimensionalize or just really try to de-risk some of the concern that's out there? Cause you know, clearly you're not seeing it in your numbers, and to your point, Chad, right? It, we tell you how bad you're doing, it doesn't really seem like the business is operating that way. Just anything that you would point to try to just help us shift the narrative? Chad Richison: I mean, we've been selling AI here for a little bit now and getting clients to engage with it. I mean, AI changes things. I think it changes things for everybody, but it doesn't just change everything overnight. There are limitations to what should be deployed by a business that's full AI, and trust is very important. You know, we don't sell AI, we sell automated solutions to problems, and sometimes AI's the best way to solve for that, and sometimes it's not. Operator: Your next question comes from the line of Bhavin Shah from Deutsche Bank. Bhavin Shah: Chad, as you continue to lean on automation within the service organization, how are you seeing that impact your customer satisfaction levels and the time to implementation for new clients? Chad Richison: You know, automation is an important component of providing strong ROI, cases for both our clients and ourselves. You know, we continue to do that. It's very important to be able to automate, especially decisions where you expect consistent behavior. We've become very good at that. That's been a focus of ours for some time as we continue to build out our system to be fully automated. Bhavin Shah: Are you seeing any kind of improvement to retention, high level? I know you don't have to speak on a quarterly basis, but anything that you're seeing as you kind of automate this stuff and are able to serve your customers better? Chad Richison: You know, we do report retention once a year. We did report it last quarter for the previous year. It did increase. I do think that any time you're able to make it easier for a client to access value, which increases their ROI on their end, it does make it more difficult for them to leave. Or maybe they're just not motivated to go look because they are receiving the value. I think you couple that with the world-class service focus that we've had with our clients and we would remain hopeful for the remainder of this year to continue to do well with our clients. Operator: Your next question comes from the line of Daniel Jester from BMO Capital Markets. Daniel Jester: Maybe we can just talk about the go-to-market and I think you talked about in the past adding sales capacity, enlarging your sales offices. Maybe just expand on kind of what you're seeing in the sales force, anything you're doing differently as you're approaching the year ahead. Thank you. Chad Richison: Yes. We're doing a lot differently in our sales organization. That really started November 1, late October of last year. I'm not going to say it's necessarily different than things we had done in the past, but it was important for us to with the new strategy, right? As we continue to go out there and sell automation, it's important that we're converting clients the correct way, that they're receiving the ROI that we've promised them out of the gate, and that they don't have to wait. It's important that we're selling those things the right way. We're going to continue to do that. You know, at the end of the day, it doesn't matter how great a product is, someone's got to go sell it. You know, products don't sell themselves, and I think it's important that we remember that. We've always focused on having a world-class, best-in-class sales organization, and we've continued to maintain that as well as build onto it. Daniel Jester: Okay. Appreciate it. Maybe just in terms of your own organization and adoption of AI to boost automation internally, maybe share any examples that have gained particular traction, and maybe what the roadmap looks like for improving efficiencies inside Paycom. Thank you so much. Chad Richison: Yes. I don't want to really we're not going to really discuss, all the things that we're doing, with it internally, just for competitive reasons. I will say this, there's not an area of our business that isn't impacted through our automation strategy. You know, sometimes that's coding it the right way to get full automation and then sometimes it is, utilizing AI. Many times it's utilizing AI to build, what you need to be able to do that. We remain focused, throughout all of the departments that we have here at Paycom as well as all the functions. That's not a discipline that will go away. that will be something that we'll continue to do, into the future. Operator: Your next question comes from the line of Jacob Smith from Guggenheim Securities. Jacob Cody Smith: I understand we have these quarterly dynamics around extra Wednesdays again this year, it seems like you're starting to shift a bit towards a per employee per month model where clients are billed monthly regardless of payroll cycle. Is this only for new customers or are existing customers moving to this pricing model as well? What's the impetus behind rolling this out? Is there opportunity for more module uptake or price realization when having these discussions with customers? Chad Richison: I mean, our pricing, we consider it proprietary for competitive reasons, we don't really go through the pricing model. What I will say is that our pricing as far as what we charge to a client and their overall value hasn't changed meaningfully one way or the other. There are different pricing structures that are more helpful to some clients based on how they hire and their turnover and what have you. We work those through with each client individually. Operator: Your next question comes from the line of Jake Roberge from William Blair. Jacob Roberge: This is Jacob, on for Pat McIlwee. Thanks for taking my question. I just wanted to touch on retention, which we saw tick up in Q4. As you continue to see a nice momentum in usage on IWant, how should we be thinking about retention going forward? Kind of do you see it getting back to the 94%, 93% range from a few years ago? Thank you. Chad Richison: It's definitely a focus of ours. I mean, I would say not as necessarily an absolute number, but as a continuing to make sure that our clients are achieving the ROI that's out there for them, making sure that we're continuing to deliver world-class service and so that they can get that value. We are seeing our Net Promoter Score continue to be impacted to the positive, and I believe that all those things have an opportunity to impact us throughout this year. Operator: Your next question comes from the line of Brian Schwartz from Oppenheimer. Brian Schwartz: Chad, on the, on the sales, specifically with your newer sales reps, that are ramping, what are you seeing in terms of the efficiency trends relative to, say, the historical norms at Paycom? Then I have a follow-up. Chad Richison: I wouldn't say it's incredibly different yet. I mean, we have great reps that have been with us a long time, and they continue to sell and they can almost pick how much they're going to sell each year. Our new reps are coming out the gate better trained than what any rep we've put out in the last 6 or 7 years. They're more prepared to go out there. You know, we're excited about the ramp phase for them. I do believe we are seeing new ramp, new reps ramp faster than what our reps had in the past for probably the last 6 or 7 years, honestly. Brian Schwartz: The follow-up question I had was just on AI monetization in the category. I believe in your introductory comments you said that customers are now expecting AI in the HCM platform. Do you expect AI to be a lever for price realization over time or primarily a retention and a competitive necessity tool? Chad Richison: I mean, like I said, we don't sell AI in itself. We solve problems for our clients. A lot of that is through automation and AI. When we're able to do that, and we're able to impact the client in a meaningful way, and it does create measurable ROI for them oftentimes we get to share in that value that we've created. We do not charge for IWant. IWant is included with our system. Because clients use it does create greater usage for them, more value for them. Makes it easier for them to deploy additional products that we come up with to sell that creates value for them. It also makes it easier for us to service clients as they're able to service themselves much easier, through these types of technologies. All those contribute to opportunities for increases for us in both sales and other, as we move throughout, 2026 and beyond. Operator: Your final question comes from the line of Matt VanVliet from Cantor. Matthew VanVliet: I guess curious on how you've made progress, maybe breaking into some other verticals, whether that be in the public sector, or even some of the near adjacent geographies, that you've looked at. Curious in terms of what kind of resources you're putting in there and what kind of traction you're seeing. Chad Richison: Yes we've been industry-agnostic, and I would say geographically agnostic from that perspective. We do have offices that are all over the U.S., and through those we're able to cover the entire U.S. Although sometimes we have to fly to see somebody, if you will, because we don't have offices in every single city. We're continuing to see have positive discussions with clients or prospects regardless the industry or geography in which they're located. Matthew VanVliet: All right. Helpful. Then, I guess as you look at some of your competitors getting into things like expense management, curious on how you're approaching the overall product roadmap given the increase in velocity that's enabled by AI tooling. Are there areas of the platform that are interesting or do you have differing opinions on sort of whether or not you'd want to enter some things that are adjacent to what you're providing today? Chad Richison: Yes, we've provided an expense management module as part of our system probably for around 9 or 10 years. You know, we do continue to build out things that make sense. We really start with the client problem now, and that's very important, you know? We don't start with what is it like we would like to see developed. It's important that we're solving real-life client problems that they have today. That's been our focus. As we look into the future, we do continue to expand into other things. I also think there are opportunities for adjacencies for us. You know, you have to have everything prepared, and we've got to do it the right way. We have earned the trust of our clients and we'll continue to do that. The more trust we earn, the more opportunity we have to do business with them in other areas. And so we look forward to continue to earn that trust with our clients and to continue on as we have. Operator: This concludes the question and answer portion of today's call. I will now turn the call back over to Mr. Chad Richison for closing remarks. Chad Richison: Thanks, everyone, for joining our call today. We look forward to speaking with many of you at the Jefferies Conference on May 27, the Baird Conference on June 2, and the Mizuho Conference on June 9. We are executing well against our 2026 plan, delivering world-class service and ROI for our clients. I want to thank all of our employees for their contributions to a strong start to the year. With that, operator, you may end the call. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Operator: Good day, and welcome to the Houlihan Lokey Fiscal Year and Fourth Quarter 2026 Earnings Conference Call. [Operator Instructions] Please this note event is being recorded. I would now like to turn the conference over to the company. Please go ahead. Christopher Crain: Thank you, operator, and hello, everyone. By now everyone should have access to our fourth quarter and fiscal year 2026 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the Investor Relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements which are usually identified by use of words such as will, expect, anticipate, should or other similar phrases are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. And therefore, you should exercise caution when interpreting and relying on them. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the Form 10-K for the fiscal year ended March 31, 2026, when it is filed with the SEC. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These non-GAAP financial measures are not intended to be considered in isolation from, as a substitute for, or as more important than the financial information prepared and presented in accordance with GAAP. In addition, these non-GAAP measures have limitations in that they do not reflect all the items associated with the company's results of operations as determined in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website. Hosting the call today, we have Scott Adelson, Houlihan Lokey's Chief Executive Officer; and Lindsey Alley, Chief Financial Officer. They will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Scott. Scott Joseph Adelson: Thank you, Christopher. We ended fiscal year 2026 with a record $2.6 billion in revenue, up 10% versus last year and adjusted EPS of $7.56, up 20% versus last year. Both Corporate Finance and Financial Valuation and Advisory produced record revenues for the year and our Financial Restructuring business had 1 of the strongest years on record. Delivering these results against the backdrop of significant geopolitical uncertainty and macroeconomic pressures underscores the strength and resilience of our business. Since we went public 10 years ago, we have reported annual revenue growth in 9 of the 10 years. We ended the fourth quarter with revenues of $636 million, and adjusted earnings per share of $1.63. It is worth highlighting that our CF and FDA businesses each produce their highest fourth quarter revenues ever. Our quarterly results are typically more volatile than our annual results due to both external macro events and the timing of revenues. In FR, our fourth quarter results were impacted as the closing of 2 larger transactions extended beyond the quarter end. While the growth in our fourth quarter results in CF and FDA were impacted by recent external market disruptions, including renewed geopolitical uncertainty from the conflict in the Middle East and market volatility affecting the software sector. Notwithstanding the turbulence exhibited in the marketplace over the last few months, our business is in the best shape in its history. We have a record level of backlog and pipeline. We have a record number of managing directors and we have a record number of corporate acquisition opportunities in various stages of potential completion. In the fourth quarter, CF continued to see solid backlog growth and improved transaction metrics across most of our industry groups, technology being an exception. In addition, CF revenues outside the U.S. grew significantly faster than U.S. revenues in both the fourth quarter and fiscal year. Capital Solutions performed well in fiscal year 2026 and we enter year fiscal 2027 with strong backlog and high expectations for those services. Segments of our FDA business saw the same disruption from macro events in the fourth quarter, while others did not. But momentum for that business has returned to more normal levels, and we expect growth in fiscal year 2027. In FR, our expectations for fiscal year 2027 have improved. We are seeing multiple tailwinds, widening credit spreads, dislocation in private credit and the software sector and energy volatility. These factors are driving increased activity levels, including several notable recent wins, leading to higher expectations for fiscal year 2027. Based on these dynamics, we expect this business to continue to perform at elevated levels in fiscal year 2027. We successfully closed 2 previously announced transactions in the fourth quarter, welcoming new colleagues from Audere Partners and Mellum Capital. Additionally, we hired 4 managing directors in the quarter, bringing our total hired and acquired for the fiscal year to 33. We are also pleased to announce that we promoted 25 colleagues to Managing Director in the first quarter of fiscal year 2027. I would like to congratulate our new partners and recent promotes and wish them great success in the years to come. As we enter fiscal year 2027, our diversified business model positions us well to navigate whatever market conditions emerge. This diversification has consistently enabled us to perform through volatile periods, and we believe that advantage remains as strong as ever. And our global workforce continues to be the key differentiator. We recognize with gratitude the strength of our talented workforce now more geographically diverse and with a wider range of expertise and specialties than ever before. We continue to see a strong hiring market for senior talent. On the M&A front, our acquisition pipeline is as active as it has ever been with no shortage of compelling opportunities to further strengthen our platform. I would like to thank our more than 2,700 employees for continuing to deliver excellence to our clients and to 1 another. I would also like to thank our clients and shareholders who continue to entrust us on our journey of building the best investment banking advisory business in the world. And with that, I will turn it over to Lindsey. J. Alley: Thank you, Scott. Revenues in Corporate Finance were $434 million for the quarter, up 5% compared to the same period last year. We closed 171 transactions this quarter, up from 147 in the same period last year and our average transaction fee on closed deals decreased. M&A deal time lines have extended due to the geopolitical uncertainty created around the war in the Middle East and its ripple effects and we expect that dynamic to persist as long as there is uncertainty. These time line shifts may moderate our growth a bit in our first quarter for fiscal year 2027, similar to the impact on our growth in the fourth quarter. While the near term may show variability due to closing timing, the fundamental trajectory of the Corporate Finance business for the full year remains encouraging. Financial Restructuring revenues were $110 million for the quarter, ending the fiscal year with revenues of $529 million, down 3% from fiscal year 2025. We closed 30 transactions this quarter, down 21% from the same quarter last year and our average transaction fee on closed deals decreased. For Financial and Valuation Advisory, revenues were $91 million for the quarter, a 3% increase from the same period last year. We had 1,248 fee events during the quarter compared to 1,224 in the same period last year, a 2% increase. Turning to expenses. Our adjusted compensation expenses were $391 million for the quarter versus $410 million for the same period last year. Our only adjustment was $18 million for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio for the fourth quarter in both fiscal 2026 and 2025 was 61.5%. We expect to maintain our long-term target of 61.5% for our adjusted compensation expense ratio for fiscal 2027. Our adjusted non-compensation expenses grew 10.5% to $94 million for the quarter compared to $85 million for the same period last year. For the quarter, we adjusted out of non-compensation expenses $5.8 million in acquisition-related costs and $1.7 million in noncash acquisition-related amortization. Our adjusted non-compensation expenses grew 10.7% for the year, and we ended fiscal 2026 with an adjusted non-compensation expense ratio of 13.9%. We expect to see similar growth in adjusted non-compensation expenses in fiscal 2027. Our adjusted effective tax rate for fiscal year 2026 was 23.7% compared to 29.8% for fiscal year 2025. The decrease was primarily a result of the change in our policy where we are no longer adjusting out the impact of stock compensation deductions on our effective tax rate. For fiscal 2027, similar to last year, we expect our first quarter adjusted effective tax rate to benefit from the vesting of shares in May at grab prices for which the majority were significantly below where our stock is currently trading. Based on where our stock is trading today, we think that benefit may reduce our adjusted effective tax rate in our first quarter for fiscal 2027 to about half of our fourth quarter adjusted effective tax rate. Turning to the balance sheet. We ended the quarter with approximately $1.4 billion in cash and investments. As a reminder, a significant portion of our cash is earmarked to cover accrued but unpaid bonuses for fiscal year 2026 that will be paid this month end in November. Also in our fourth quarter, we repurchased approximately 300,000 shares as part of our share repurchase program. We will continue to evaluate balance sheet flexibility for acquisitions versus excess cash for share repurchases. Finally, the Board approved an increase in our quarterly dividend to $0.70 per share, 17% higher than our quarterly dividend in fiscal year 2026. The first quarter dividend will be paid in June. And with that, operator, we can open the line for questions. Operator: [Operator Instructions] The first question is from Brennan Hawken with BMO. Brennan Hawken: So you flagged really some pretty constructive comments on the outlook, even though that was it was maybe couched by some uncertainty to start out the year in 1Q. But I'd love to drill down on Restructuring. So last quarter, you guys said you expect Restructuring to face some revenue pressures, but now you've got an improved outlook. So does that mean that you're no longer seeing the pressures and you think the stability or growth are possible? Is it possible to put a finer point on that? Scott Joseph Adelson: Yes. Thanks, Brennan. I appreciate the question. I think that what you're seeing is kind of the flip side of the troubles that occurred on the Corporate Finance side during the quarter also created opportunity in -- on the Restructuring side. And I think that a number of people had the perspective even going in -- we were being a bit conservative last quarter when we talked about it because we did not actually see the new mandates coming in and the pace of that change, after the -- really the events in software and the war and energy all started to converge. We have seen that really change and the activity levels and Restructuring pick up materially. That gave us the -- as well as we said in our remarks, including some recent important wins to really give us confidence that we can continue to operate in Restructuring at elevated levels next year and probably beyond that as well. Brennan Hawken: Excellent. I appreciate that, Scott. And then you spoke to the backlog building in Corporate Finance. Maybe aside from tech. So we've been hearing about the need for sponsors to begin to transact. What are you seeing in regards to sponsors and the pressure for them to actually monetize? And how is the setback that maybe they're seeing in some of the tech-oriented investments playing through? And how do you expect that to impact as far as transaction volumes go when we move forward on Corp Fin? Scott Joseph Adelson: Let's take that in 2 separate pieces. Let's park tech for a moment. And just overall, if you look at sponsor activity, before really the conflict started what we had said was we had really seen things picking up quite a bit. And then obviously, that started and it created much more of a -- stop, we got to figure out what's going on here for a moment. And then if you really look the activity levels from a pitch standpoint, even in February, before it started, were really quite strong, more important metric is really the go to market when deals actually kick off. And as we sit here today, even in the last few weeks have been the most active we have seen in years. And so that activity level is increasing again at a pace that we feel good about. And software is -- I haven't talked really about software more than tech. Software is clearly a sector that is going to be impacted. And I don't think anybody really has an answer on how much yet. And I do think that there is a -- going to baby out with the bath water problem at the moment that everything that looks or smells like software is all of a sudden, not in favor. I think that will change as people dig in and there will be winners and losers like there are in every sector that you see a dislocation and it clearly will not be all software companies. J. Alley: And to put a finer point on it, Brennan, we have assumed that software will be affected in fiscal year '27 in our comments. Operator: The next question is from Devin Ryan with Citizens Bank. Devin Ryan: I just want to ask another 1 on sponsor slightly different angle. If you're trying to think about like order of magnitude of pent-up activity. We've seen larger deals in the market. And I think the argument of sponsors are going to come to be more active, but just trying to think about like how much more active, we have record duration of portfolios. There's record dry powder in the market. So how do you guys think about that? And the other part of the question is just, are buyers and sellers going to get aligned on price? The current vintage, some of those assets were bought at high valuation. So is that a risk or just not something that you guys see as an issue here as we get to maybe sponsors being able to exit some of these positions? Scott Joseph Adelson: Clearly, it has -- we talked about this a lot. We talked about the velocity of transactions. At the velocity has -- again, it is picking up. The -- we need to have some level of certainty in geopolitical issues where it's not to hit these road bumps along the way. But everything we are seeing is that sponsors want to begin to transact. There has -- you are correct that there are certain companies that will be under the price differentials that will be too difficult for them to deal with. There's no doubt about that. But that is -- from every indication we have, that is not the preponderance of the deal flow that is out there or anywhere near it. It really is -- there's different qualities, if you will, of assets that come out and the outstanding assets throughout the cycles have traded at really healthy prices with really no price degradation at all. It is really the ones below that as the market heats up, there is a greater receptivity to those companies and believing that you can really improve them and make them better and add that those companies are the ones that we really start to see in a healthier market begin to transact on a more regular basis. J. Alley: And Devin, we have a pretty compelling graph in our investor presentation, courtesy of Pitch Book that just shows the number of transactions within private equity, the growth over the last 10 years and the aging in this last year as of December 31, and over half of them are over 5 years old. And so -- I mean, there -- to answer your question with an exclamation point, there is a lot of pent-up demand. And we had started experiencing it well before the fourth quarter. I'd say it slowed down a bit in the fourth quarter, and we're seeing it tick right back up to where it was. So there's -- the market has gotten some comfort that there is at least containment in what's going on in the Middle East and software, I think, is a different story. Devin Ryan: Got it. I appreciate that color. And then as a follow-up, in Financial and Valuation Advisory, is that benefiting or going to benefit from the, call it, group scrutiny on private credit valuation driven just private equity more broadly, thinking that maybe that could drive more demand for valuation work and you guys would get involved in more situations with your clients? Just curious if that maybe a second derivative of some of this focus on private credit. Scott Joseph Adelson: Yes. We've talked about that a fair amount. That's really our portfolio valuation group, which has been growing quite nicely through all cycles and we feel very good about where that business is heading. And that is -- that TAM is continuing to grow and some of the things that you're talking about just -- are what grows it, is at the more -- getting marks more regularly is certainly 1 of those things and situations like we are seeing in private credit is a great example of why they need those marks on a more regular basis. Operator: The next question is from Brendan O'Brien with Wolfe Research. Brendan O'Brien: I guess to start, your comments on activity in Europe last year, certainly caught my attention. There's obviously a lot of interesting dynamics at play in the region at the moment. On the 1 hand, you have higher reliance on energy or an exporter of energy and so more sensitive to the price shock, but there's also clearly a push towards deregulation and more economically favorable simulative policies. Just want to get a sense as to what you're seeing or hearing from clients in the region at the moment and whether you expect that outperformance in terms of growth rate to persist? Scott Joseph Adelson: I think some of this is -- we just have a differentiated business in Europe at this point, and that is continuing to grow and the market is continuing to understand that. And obviously, our recent acquisition in France only adds to that. And so some of that growth is just -- we are in earlier stages in our business there and the market is really recognizing our differentiated product. The activity levels in Europe, broadly defined, we continue to see as being strong. And there's no doubt that some of the headwinds that you're discussing exist whether or not those wind up having a material impact on the year, we will see. But we feel good about our European and Asian businesses. And I think as we've said, even our Asian business even grew faster. Brendan O'Brien: Great. And I guess for my follow-up, I guess, on the FDA business, and specifically just AI implications for that business. On the 1 hand, I do see this as an area where you could see significant productivity gains given there are a lot of recurring cash. However, I've also been hearing some concerns on pricing pressures if this becomes more commoditized. Just wanted to get a sense as to how you're thinking about the implications of AI for this business longer term? How you're investing to kind of get ahead of the curve? And how you see that kind of impacting overall profitability of that business over time? Scott Joseph Adelson: Great. Thanks. The -- couple of things. We have been investing ahead of that technological corp for a very long time, actually, and FDA and 1 of our acquisitions. In the U.K. 2 years ago was along those lines as well. We certainly understand those pressures. And those -- none of those are new to us. And yet, we think that, that TAM is going to -- and it has been growing, as you can tell by our performance faster than any decline in pricing. J. Alley: And look, we have experienced pricing pressure on our FDA products for a decade, as Scott said, or more. And we have sort of reacted by growing our TAM at a rate significantly faster than the pricing pressure. And we expect that to continue. So we will continue to see pricing pressure. We also believe -- and you alluded to it at an earlier question -- it was alluded to in another question, that market for our TAM product, especially if private equity opens is going to double. And so we're, I think, pretty excited about all of that. And the other advantage is, very few firms have the wherewithal to invest in technology at the same pace that we are or that the big 4 accounting firms are. So this -- there is going to be a consolidation in this industry. A lot of the boutiques that are in and now just won't be able to keep up. And we think that for firms the size of Houlihan's, that is a huge competitive advantage for a business that requires a fairly significant spend in technology over the next 3 to 5 years. Scott Joseph Adelson: And we've talked about it before, but the data that we have from being enormous amount of marks that we do, obviously just makes our models that much better. Operator: The next question is from Ryan Kenny with Morgan Stanley. Ryan Kenny: Just a follow-up there on the need to spend on technology. Is there any update on non-comp outlook for this year or maybe longer term need to spend on non-comp? J. Alley: No. I mean, I think the technology spend that you've seen us making over the last several years is not expected to change. So non-comp is, as I mentioned on the call, expected to look a lot like fiscal '26 non-comp increases. I think 1 thing important when we spend money on technology for our Portfolio Valuation business or FDA business, that technology spend is transferable to our Corporate Finance business. Both businesses are high-volume businesses. And so it is -- we're able to spread the investments we make, whether it's in AI or whatever across really those 2 businesses, in particular, also will benefit our Restructuring business as well. So it's incorporated in the numbers and the assumptions we've made. Scott Joseph Adelson: I think you can think about it more -- I'm sorry about that. I think it's really more a matter of shifting priorities and to accomplish that. Ryan Kenny: Got it. And then separately on the capital side, you guys raised your dividend. Any update on how you're thinking about capital allocation to buybacks versus dividend versus potentially M&A? J. Alley: Yes. It hasn't changed. I think the quarterly dividend is really -- were increases a measure of our continued growth and our outlook for the next year. And our priority continues to be making acquisitions that we think are incredibly accretive to our shareholders and share repurchases after that. Now having said that, our goal is to maintain our share count, which we've done a pretty good job over the last several years. But we have maintained that balance sheet flexibility to make the acquisitions similar to what we did in February. And as Scott mentioned, we're going into fiscal '27, I think quite optimistic about the outlook for M&A for us this year. Operator: And next, we have James Yaro with Goldman Sachs. James Yaro: Scott, Corporate Finance did slow quickly relative to your previous guidance for the quarter having better than normal seasonality. You did talk about things already beginning to improve. How quickly can these deals turn back on and close? And then stepping back, do you think that there have been any permanent impacts to the Corporate Finance client backdrop from any of the either geopolitical or software issues? Scott Joseph Adelson: I don't think there's been -- the software, I don't know. Just flat out. We can't -- don't know. I don't think that it should have a permanent effect. I think it will have a permanent effect on some. And certainly, I don't think it should have on all, but I don't know. On the overall business, not at all, that we've talked about it throughout that we have been operating in a world where we have had just an elevated level of uncertainty, particularly geopolitical uncertainty. And when it rises above a level for whatever reason, in this case, it was conflict in the Middle East, people put their foot on the brakes, and they say, wait a minute, I need to understand what is going on, and that is what we saw. It clearly impacted our results. But as Lindsey pointed out, as it has subsided and people really just keep getting their head around higher levels of uncertainty and say, we have to get on with business and being an optimist, I do look at that and recognize there's a -- given the level of uncertainty, when it does subside to any reasonable level there is such a strong demand for activity to really ramp back up because we are seeing it in its early, early stages today, but again, there still is a reasonable amount of uncertainty. If that continues to subside, it will only get better and better. James Yaro: Okay. Great. Just 1 more on Restructuring. You talked about in the press release, lower average transaction fees on closed transactions. I'd just love to get your perspective on what -- but you -- and then in addition, you know that that's not a trend. But maybe just comment on why this isn't a trend, what happened in the quarter? And then also, you talked about 2 -- I think you talked about 2 deals that stretched beyond the quarter. Does that mean that we should have a seasonally elevated fiscal first quarter? J. Alley: So it's a good question. Look, I think that the transaction, the average transaction size for Restructuring, there are no trends. Some quarters, it's higher than others simply because of size of transaction. Corporate Finance does have an upward trend to it. And FDA in some cases, is flat given some of the comments we've made. Financial Restructuring is going to vary quarter by quarter, just depending on the size and makeup of the transaction that closed out quarters. So nothing to read into there. I think with respect to the second part of your question on... Christopher Crain: The 2 deals. J. Alley: The 2 transactions. Look, we're very comfortable saying they're going to close in fiscal '27. When you start pinning us down for quarters, we get a little bit antsy, but we do think that 1 of the reasons why we're comfortable at elevated restructuring revenues for fiscal '27 is simply because those 2 transactions are included in it, along with all of the other things that Scott mentioned. So we do expect them to close and likely in the first half of the year, as I said, but I don't really want to pin it on a space quarter. Scott Joseph Adelson: I think based upon what I know today, it's unlikely for them both to close in the same quarter as it sits today. If that were the case, I think we might say something different to you, but I think that because there's going to be spread out is something that I think just think about it as a normal elevated level. Operator: The next question is from Nathan Stein with Deutsche Bank. Nathan Stein: I wanted to ask a revenue split for the M&A and Capital Solutions businesses within Corporate Finance. What was this revenue split in the fourth quarter? And do you expect those levels to be sustained in fiscal '27? J. Alley: So we don't -- we won't give splits by quarter, but our Capital Solutions business is above 20% of our Corporate Finance revenues. Think of it that way. And I'd say the last couple of years, that number has gotten higher as a percentage of the overall Corporate Finance business. What happens next year? I don't want to get into that level of detail. But we have said before that business, the outlook for that business and the momentum in that business is exceptional. And so we'd love to be able to comment looking backwards a year from now and give you a bit more color. But looking forward, I don't want to get into that level of detail for Capital Solutions. But over 20% is kind of how I would think about it. Nathan Stein: And then I guess just on AI, do you have any updates for investors as to how you're looking at implementing AI across your business? Scott Joseph Adelson: I can get in an awful lot of details, depends on the time you really want me to take. Yes, I mean, we are embracing it fully, and there's really want to think about it. There's multiple ways to think about it. There's a front-end component to it. There's a workflow component to it. There's a operational or back office component to it. There's a moonshot component to it. And we have basically work streams in all those areas occurring. Operator: The next question would be from Alex Bond with KBW. Alexander Bond: So I heard the commentary on the strengthening M&A backlog, which is obviously good to hear. But curious how you would describe maybe how, if at all, the preannounce pipeline has shifted in terms of composition recently, whether it be sponsors versus strategics or any geographical mix shift. Just trying to drill down on where you've seen activity be most prevalent at the moment given everything that's going on in the market? Scott Joseph Adelson: Yes. Thanks, Alex. Good question. I mean it really has been across the board. I mean, our mix sponsored, non-sponsored doesn't change that dramatically. A lot of people talk about that a lot, but it is -- it's been -- it is fairly constant points different from period to period. So there are these dramatic swings that I think people may expect. Clearly, a number of the -- when we talk about pitch pipelines and things that have just kind of more visibility to it that tends to be more sponsor-driven simply because they just -- there's a cadence to that. And so that is clearly picking up as we were saying. In terms of U.S. is clearly a part of that. Europe is part of that. We have said Europe is growing faster, but to be fair, it's from a smaller base. And Asia is growing faster than that, but that's from a smaller base. So we are seeing activity in all 3 regions. I would say, appropriate for where they are in their maturation. J. Alley: And Alex, I mean, look, if there's some optimism in our voice, even given sort of the uncertainty of the last quarter, it's because it's firing on all cylinders across industry, across geography with the 1 exception of technology. And technology as pressure on it, and we've incorporated that into our thinking. And technology is a decent-sized business for our software is. But the other industries are -- and again, not hard to point to why, it goes right back to that there is a huge pent-up demand particularly from private equity to transact, and we're kind of right in the middle of that. Operator: Next question is from Michael Brown with KBW. Michael Brown: I wanted to ask Restructuring, maybe just to kind of narrow in a little bit there. So the activity levels there seem like they can be certainly broadening out. And I think you talked about an element of that they can stay elevated. They've been running at a healthy pace here for a while. So maybe just help us kind of frame what elevated kind of means now? So when we look at fiscal '27 and obviously, it's early days here, but fiscal '27 versus fiscal '26, does that just kind of mean potential for growth here? Is it possible in your view that we see kind of a new record for the business as we get to fiscal '27? Any kind of view on that based on what you're seeing in the activity? J. Alley: So I would answer it this way. We have been saying elevated levels for the last 3 years for Financial Restructuring, and we're using the same terminology. So I would just start there. Michael Brown: Right. Okay. Great. And maybe just switch gears to the follow-up on the capital allocation question earlier and the M&A question. So you talked about how the M&A pipeline is as active as ever. Maybe just talk a little bit about what's your top criteria there? You did some acquisitions in Europe, so maybe anything you kind of do geography-wise or industry vertical capability. And what deal size are you targeting now? Are you starting to think maybe about some larger-sized deals that could have more of a needle mover on the franchise? Or is that just kind of too hard to do just given the size and scale to platform that? Scott Joseph Adelson: I think we've talked about it before. I mean, first of all, there are geographic ones, there are product ones, there are industry ones, there is a complete portfolio. But really what drives it is cultural fit. I mean that is the single most important thing to us. Much more so than size or any of the other attributes that I just articulated, it really is cultural fit. And when we find groups of people that really fit with our culture, and we believe we'll be successful in our organization. We work on getting those deals done. And that feels comfortable that you will see more of that in the years to come. It will vary in size, but what hopefully won't vary is the cultural fit. J. Alley: And it's -- we have a lot of flexibility. I mean, remember, we keep saying the market is huge, and we are an incredibly small player in a huge market. And our last 3 transactions we've done are good examples of just the variability you're going to continue to see. The Waller Helms transaction was a transaction within the FIG space and a couple of niches within FIG where we were meaningfully underweighted, and it has been incredibly successful. The transactions that we did in February, one was on the product side in our Capital Solutions business, we were underweighted in real estate particularly in Europe, and we had a transaction that identified an opportunity to fill that in. And finally, we were significantly underweighted in the markets in France, and we found a geographic fit. And there are more of each of those. And so it's hard to answer the questions about what we're focused on. As Scott said, we have so many unfilled areas in product, geography and industry that it is much more about finding the right partners than it is about focusing on a particular niche because we're underweighted in it. Operator: Well, with this question, this is our last question in the queue. If there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Scott Adelson for any closing remarks. Scott Joseph Adelson: Thank you, Debbie. I want to thank you all for participating in our fourth quarter and fiscal 2026 earnings call. We look forward to updating everyone on our progress when we discuss our first quarter results for fiscal 2027 this summer. Operator: This concludes our conference. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Realty Income Q1 2026 Earnings Conference Call. [Operator Instructions] Please also note, today's event is being recorded. I'd now like to turn the conference over to Alex Waters, Vice President, Investor Relations. Please go ahead. Alexander Waters: Thank you for joining Realty Income's First Quarter 2026 Results Conference Call. Joining us on the conference call today are Sumit Roy, President and Chief Executive Officer; Jonathan Pong, Chief Financial Officer and Treasurer; Neil Abraham, Chief Strategy Officer and President, Realty Income International; and Mark Hagan, Chief Investment Officer. During this conference call, we will make certain statements that may be considered forward-looking statements under federal securities law. The company's actual future results may differ significantly from the matters discussed in any forward-looking statements. We will disclose in greater detail the factors that may cause such differences in the company's Form 10-Q filed today with the SEC. We will observe a one question and one follow-up limit during the Q&A portion of the call to ensure that everyone has an opportunity to participate. And with that, I would now like to turn the call over to our CEO, Sumit Roy. Sumit Roy: Thank you, Alex, and welcome, everyone. We entered 2026 with strong momentum, and our first quarter results demonstrate progress across the priorities that matter most for Realty Income. Disciplined capital deployment, durable portfolio performance and continued expansion of our private capital platform. In the first quarter, we delivered AFFO per share of $1.13, up 6.6% year-over-year and invested approximately $2.8 billion or $2.6 billion on a pro rata basis at a 7.1% initial weighted average cash yield. Our investment activity remained balanced between North America and Europe, and we also deployed approximately $1 billion into credit and structured investments. That strong start to 2026 supports our decision to raise the midpoint of full year AFFO per share guidance by $0.025, or approximately 60 basis points at the midpoint. Jonathan will walk through the quarter and our updated guidance in more detail. Looking ahead, our 2026 outlook reflects an anticipated acceleration from 2025 as we leverage our scale, data-driven and robust platform to strive towards consistent double-digit total operational returns for our shareholders. I'd like to briefly step back and place our recent announcements into the broader strategic context for Realty Income. Over the past several months, we've been deliberate in building a private capital ecosystem to diversify our sources of permanent equity, expand our investment opportunity set and support long-term value creation, all while remaining anchored in the same underwriting discipline, credit standards and focus on durable growing cash flow that have defined Realty Income since our inception. This is demonstrated through 3 critical achievements. First, we completed our $1.7 billion cornerstone capital raise for our Perpetual Life U.S. Core+ fund. Second, we formed a strategic partnership with GIC focused primarily on construction financing and takeout commitments for build-to-suit industrial in the U.S. and Mexico. Lastly, we raised $1 billion in equity from Apollo as part of a programmatic venture that strives to ultimately deliver Realty Income's dependable income to the massive insurance and annuity market. Taken together, these initiatives represent what we view as a meaningful evolution of the Realty Income platform, rooted in years of intentional planning to strengthen how we fund growth and deploy capital across cycles. Several years ago, we identified a potential concentration risk in relying primarily on public equity markets, where pricing, at times, can become disconnected from underlying operating performance and this discrepancy persists for prolonged periods. That realization led us to a fundamental question: how do we diversify capital sources to better leverage a platform designed to deploy billions of dollars annually while seeking to create long-term value for public shareholders. These partnerships represent the early stages of our private capital journey, and we expect to continue adding accretive sources of permanent capital over time. Today, we view private capital not as a single strategy, but as an ecosystem of distinct non-overlapping verticals tailored to different geographies, property types and investment mandates. This approach has expanded our investor base, strengthened our return profile through asset-light fee income and meaningfully broadened our investable universe. Importantly, it allows us to deploy capital across property types and across the real estate capital structure while preserving the core DNA of Realty Income. Each vehicle is designed to be complementary to our public REIT model and accretive to long-term per share value. Alongside that backdrop, our global platform evolution drove transaction activity during the third quarter. With approximately $2.8 billion of investment volume, we delivered one of our higher levels of quarterly deployment in recent years, supported by consistent execution across geographies, property types and investment structures. We sourced approximately $31 billion of investment opportunities during the first quarter, reflecting the depth of our global relationships and the scale of our platform. That sourcing allowed us to remain highly selective, closing on roughly 9% of what we reviewed while maintaining discipline on yield structure and credit. Approximately 94% of opportunities were relationship-driven, reinforcing the durability of our origination engine. Our European platform continues to be a key competitive advantage. Markets remain more fragmented and less crowded than in the U.S., allowing us to source portfolio-oriented tailored transactions with attractive duration and credit and to flex capital toward highly compelling opportunities. In the U.S., transaction markets remain active and competitive, particularly for small one-off assets. We continue to see meaningful value creation in larger and more structured investments where our relationships scale and underwriting capabilities provide a competitive advantage. We deployed $1 billion into credit investments globally, including 2 mezzanine transactions. The first was a $375 million loan alongside a sovereign capital investment firm backed by a portfolio of high-quality logistics assets leased to a strong investment-grade e-commerce client with a right of first offer on the underlying real estate. The second was a $190 million loan supporting the development of a data center campus in Virginia, pre-leased to an investment-grade hyperscale tenant. Our ability to invest across owned real estate, loans, preferred equity and structured investments gives us flexibility to remain disciplined and selective, particularly in periods of macro volatility. Our global platform, long-duration leases and conservative balance sheet position us to stay active while maintaining underwriting rigor. Our platform advantage continued to deliver strong operating results, and we ended the quarter with robust occupancy and reported recapture. Through proactive asset and property management, our teams remained focused on driving AFFO per share growth from the core portfolio. We combined deep familiarity with our assets and clients, proprietary predictive analytics and disciplined credit underwriting to maximize risk-adjusted economics on re-leasing and renewal outcomes. That approach generated outsized lease termination income of $40.2 million during the first quarter. And based on current visibility, we've increased our full year termination income outlook range to $45 million to $50 million. Overall, we believe Realty Income today is more differentiated and better positioned for long-term growth than at any point in our history. With that, I'll turn the call over to Jonathan. Jonathan Pong: Thanks, Sumit, and good afternoon, everyone. We had an active first quarter with several new capital partnerships that expand our financial flexibility and deepen our access to long-term oriented private capital. Combined with our established access to public markets, these initiatives broaden our investment buy box and support sustained global development. We ended the quarter with approximately $3.9 billion of liquidity on a pro rata basis. Subsequent to quarter end, we raised an additional $174 million of forward equity, bringing our current ATM unsettled balance to approximately $1.4 billion. Net debt to annualized pro forma adjusted EBITDA was 5.2x, within our targeted leverage range. And, inclusive of our outstanding forward equity, our leverage would sit at 4.9x. Subsequent to quarter end, we issued $800 million of 4.75% senior unsecured notes due 2033, swapping $500 million into euros for a blended yield of 4.44%. In addition to diversifying our sources of equity, we are also taking steps to broaden our access to unique sources of debt capital. In the first quarter, we established a new form of debt financing through a 10-year unsecured term loan with an affiliate of Goldman Sachs. The capital raise provided Realty Income the opportunity to partner with the local community via San Diego Community Power, supporting its long-term energy procurement objectives for San Diego residents. To facilitate this arrangement, San Diego Community Power utilized a well-established municipal prepay structure that enables a public agency to issue municipal bonds and use proceeds to prepay for future electricity deliveries while effectively lending a portion of the proceeds, in this case, $694 million, to Realty Income. In return, we agreed to pay a fixed annual interest rate of 4.91% through the Goldman Sachs term loan. We subsequently swapped $500 million of the notes to euros via a cross-currency swap, resulting in a 4.34% all-in blended cost of debt. The strategic benefit to Realty Income is the creation of a deep pool of new debt capital at attractive pricing that can complement our access to the public unsecured debt market. Our European operations continue to provide incremental low-cost financing flexibility. Euro-denominated debt is priced approximately 100 basis points inside comparable tenor U.S. dollar debt and serves as both a natural currency hedge and a tool to offset higher cost U.S. refinancings while remaining leverage neutral. Given our strong start to the year, we are increasing full year investment volume guidance to $9.5 billion at 100% ownership and raising the AFFO per share guidance range to between $4.41 and $4.44. As Sumit noted, we are also increasing the expected lease termination income guidance range to between $45 million and $50 million as we become increasingly proactive with our asset management platform. And lastly, we are lowering our credit loss outlook to approximately 40 basis points of rental revenue, reflecting improved visibility and performance across the portfolio. As Sumit highlighted, we now have 3 distinct and intentionally structured private capital vehicles through our partnerships with Apollo, GIC and the Perpetual Life U.S. Core+ Fund. Each vehicle serves differentiated investment mandates and is designed to provide Realty Income with 3 new alternative sources of long-term oriented equity. Our most recent strategic partnership with Apollo seeks to provide a repeatable source of low-cost property level equity while allowing us to retain operational control. We view this structure as a compelling complement to traditional public equity, and we expect it will carry comparatively less volatility of pricing and availability. A diversified net lease portfolio at scale is a natural complement to Apollo's perpetual capital AUM, which comprises a significant majority of their total AUM. Our initial transaction with Apollo resulted in a $1 billion equity investment in a highly granular, well-diversified long-duration retail portfolio of approximately 500 single-tenant properties contributed off our balance sheet. The joint venture includes a call option exercisable between years 7 and 15 that caps the cost of this equity at 6.875% during Apollo's ownership period. This structure provides meaningful long-term optionality as contractual rent growth compounds over time, increasing spread versus our long-term cost of equity and enabling incremental investment volume at lower return hurdles. We are pleased to partner with one of the world's leading asset managers and intend to scale this relationship beyond this initial product. The partnership is well aligned with Apollo providing long-term equity capital and Realty Income delivering sourcing, underwriting and asset management capabilities through our global net lease platform. The Apollo partnership represents our second programmatic private capital joint venture following the January announcement of our build-to-suit development JV with GIC. Finally, during the first quarter, we completed the cornerstone fundraising round for our U.S. Core+ open-ended fund, raising $1.7 billion of institutional capital, primarily from state, city and employee pension plans. The vehicle is designed to allow us to invest alongside high-quality institutional partners and assets with lower initial yields, but strong long-term growth characteristics, while generating high-margin capital-light fee income. Just as important, it is intended to broaden our buy box and enhance day 1 accretion by more efficiently matching capital to opportunity. With that, I'll turn it back to Sumit. Sumit Roy: Thank you, Jonathan. Our private capital initiatives represent a natural extension of Realty Income's long-standing business model. They're expected to enhance our ability to deploy capital through cycles, improve our cost of capital efficiency and strengthen our long-term value proposition for shareholders. We are encouraged by the progress to date and look forward to building on this momentum. Operator, we are ready for Q&A. Operator: [Operator Instructions] And our first question today comes from Jana Galan at Bank of America. Unknown Analyst: This is Dan for Jana. Could you provide more detail on the $40 million lease termination income recognized this quarter? For example, was it driven by a small number of tenants or broad-based activity and were they re-leased or sold? Sumit Roy: So this was obviously part of the forecast that we had shared with the market. If you recall, we had come out with a forecast of $40 million to $45 million. We were expecting this to be front loaded. We have increased that based on the momentum we've seen to $45 million to $50 million. So this was not concentrated in any one single name. It was across the board. And again, the rationale for doing this remains the same. It is 100% focused on trying to create and maximize our total return profile on our investments. And if we feel like we have the ability to recoup the remaining rent and be able to lease these assets to alternative tenants who are better suited for those locations, that is one of the main drivers of doing this. The second being rather than waiting for an asset to become vacant in 3 to 4 years from now, being able to recycle the capital today and create a value proposition for our clients who are not long-term occupiers of that asset is, again, a win-win situation. So it is really us leaning into our analytics and being much more proactive about harnessing these types of opportunities in our portfolio that's driving this. And despite the fact that it was all pretty much front loaded, the actual increase in lease termination is only $5 million. Unknown Analyst: And just as a follow-up, could you walk through the rationale behind the $40 million add-back to AFFO related to credit loss? Jonathan Pong: The add-back AFFO for credit loss is really a noncash dynamic. So we have loans that we invest in. These are noncash allowances for loan loss, very standard with how we've treated similar situations in the past. Sumit Roy: Coincidentally, they happen to be the same number, but it's -- one is CECL noncash-driven add-back, the other one is an actual cash payout to us, which is certainly part of AFFO. Operator: Our next question today comes from Brad Heffern at RBC Capital Markets. Brad Heffern: You obviously have the various private capital vehicles now. Clearly, you want to grow those. So I'm wondering where you see the split of private capital investing versus the traditional investing going in the coming years? Sumit Roy: Brad, this is a continuation of a theme that we've been touching on for the last, call it, 18 months now, where we used to share pretty much every quarter, some of the transactions that we were passing on just because it wouldn't fit what our public shareholders demand, which is day 1 accretion or spread investing along with meeting a long-term hurdle rate. And part of why we are doing what we are doing is to be able to continue to take advantage of transactions that we think that actually meet the long-term return profile. These are very good investments, and there's a pocket of private capital that is very interested in trying to take advantage of that. So that was really the genesis behind why we started to look at these opportunities. And if you think about the 3 buckets of capital that we have and you try to sort of dive in and analyze what is the potential overlap, if you will, on strategies, there's very little, if any, to be very honest. One is a potentially lower initial yield, but with higher growth, which lends itself to our open-ended fund. The insurance capital is much more steady-eddie, low-growth investments that don't necessarily meet the long-term hurdles, but are very good, predictable cash flow streams that works very well for insurance capital. And then the third is a build-to-suit that we have with GIC that is we go in with the intention to provide debt capital and then have the path to ownership downstream if we so choose to exercise. So I think these are 3 distinct strategies, which if you think about in the traditional sense of the word and how we were able to or not able to recognize earnings in these 3 different buckets and in some cases, not even do these transactions, it is now allowing us to execute those 3 strategies, and it's largely based off of third-party capital. And the way it translates to a positive for our public shareholders is through predictable permanent fee income stream, allowing us to recognize development investments that we make and interest income during development, which we were not able to do in the past and be able to satisfy a need by insurance capital that doesn't really work long term on our balance sheet, but allows us to create a fee income stream by leveraging our platform. So that's how the strategy that we have now started to implement and will continue to grow is going to benefit our shareholders is essentially monetizing the platform that we've built. Brad Heffern: Okay. And then it sounded like you did a data center development loan during the quarter. You obviously did the deal with Digital a few years back, hasn't been a ton of consistent investment in data centers. I'm wondering what does the playing field look like for O today in that space? And does it look more like data center loans? Or is there a chance that maybe the deal like you did with Digital would potentially come back from a pricing standpoint to being attractive? Sumit Roy: Yes. So the rationale here is, again, any time we are making credit investments, it's with a desire to own the real estate or at least a path to ownership. And so what we have said about our data center sleeve is we are highly selective around who our operator is going to be. And I'm very happy to say that we are partnering with one of the best private operators out there. We are also very highly selective in terms of the location of these assets. Once again, it is in Virginia, what I've described in the past as the epicenter of the data center business to, again, address the residual risk that is associated with these assets. And then the underlying asset itself, the lease itself needs to be able to fit into our investment thesis of being a single-tenant asset, long-duration lease well above growth rates that we've been able to realize on the retail side of the business, and it fits all those boxes. And so my hope is this is the second investment we've made with this particular developer, and it is with the intent to have a path to actual ownership of these assets. And in the meantime, we are lending our balance sheet. We are getting very decent yields on these investments, which will then allow us to be able to ultimately own the real estate. Operator: Our next question today comes from Michael Goldsmith at UBS. Michael Goldsmith: Sumit, in your prepared remarks, you talked about just all these private credit vehicles. And -- but you also mentioned that you're kind of in the early stages of this. So just kind of curious, are you thinking, hey, we've got -- we've done these 3 things and now we've got another 3 more to do in the next 24 months? Or should we be thinking about this as more longer term? I'm just trying to get a sense of how much more activity you expect in this avenue going forward? Sumit Roy: That's a good question, Michael. So let me step back and share with you that any time we are exploring attracting third-party capital, it was the singular intent to grow our earnings per share for our public shareholders. If it doesn't translate to that, there is no reason for us to be attracting third-party capital. So let's stop there. And if you filter any decision that we make and how it translates to growth and if there isn't a clear tie-in, then we are not going to be pursuing that capital source. So that's the governing factor on anything we do. The reason why I've said is what are we going to do in the future remains unclear. But our intent is we have effectively solved for what we need here in the U.S. and our build-to-suit with GIC also includes Mexico. But we are -- we do happen to be in other geographies as well. We are being approached by other sources of capital. And if we can create a distinct strategy that does not interfere with our ability to continue to buy on balance sheet and is truly accretive to what we are doing on balance sheet, those types of decisions and those types of channels are ones that we are going to continue to look at, continue to consider and potentially add to the ecosystem that we have created. Just like we've done on our investment side, where we've diversified asset types, we've diversified across geographies. We are trying to do the same on the capital side. Jonathan has done an amazing job diversifying on the fixed income side. We continue to do that today with this muni prepay structure that he talked about. But we had a single point of failure when it came to our equity capital, and that's what we are trying to diversify today. And hopefully, this is the path to being able to get to our double-digit total return profile that we are all singularly focused on. Michael Goldsmith: Got it. And just as a follow-up, it seems like you're doing an increasing amount of these credit investments. So how should we think about the duration of some of these investments? And it seems like a shorter WALT than maybe we've seen in the past. So can you just talk a little bit about what does that mean for the portfolio going forward? Sumit Roy: Sure. And again, great question, Michael. Now a portion of the investment that we made was on this build-to-suit in Mexico. It's a perfect example of how we are effectively lending during the construction phase with the intent to own the asset once it's fully stabilized. That is part of our credit investment. The other bigger credit investment was on this data center project. Again, the intent there is to lend capital to a partner that we have decided is the right partner going forward on our data center strategy. And what we are hoping and we believe will happen is on the back end, we are going to be the owners of these data center assets. And what it is effectively allowing us to do is get a much higher yield on the front end of the -- on the development side, which can then make up for perhaps a nominal yield when we are actually buying the assets on balance sheet. And so again, this is a strategy. Yes, we start off with the credit side of the business, but it is leading to what we believe is the real estate, which was the intent behind why we instituted this credit investment strategy to begin with. So there's a similar story behind every credit investment that we do. And we are acutely aware that these tend to be shorter duration, which, by the way, is by design. We want it to be shorter duration. so that we can then have the decision on whether or not when it comes to an end, do we own the real estate or not or at least develop relationships with clients or with developers who can then feed us a lot more product downstream, but we are starting the relationship building on the development side. So that is really the thesis behind why we are making credit investments. Operator: Our next question today comes from Smedes Rose at Citi. Bennett Rose: I just wanted to follow up on that on the credit investments or that sort of loan portfolio because we definitely see it with some of the other names that we cover, and it seems like, frankly, a good way to kind of build relationships and end up with real estate ownership. Is there kind of a I guess, sort of a limit and upper limit on how much you'd be willing to sort of build in this book. It looks like it's a little over $1 billion right now. Or like where do you think that could be in the next 2, 3 years as some of these early loans start to roll off and you're replacing them presumably? Sumit Roy: It's a good question, Smedes. Look, obviously, it's not going to suddenly start to dominate what we do. Our capital is very dear to us. And it is very important that we allocate it appropriately. And look, we turned down a lot more credit investments than we actually engage in. And so despite the plethora of opportunities available to us on the credit side, we are highly selective. And what size could it become? It's going to be a function of the overall size of our platform. Today, we are $90 billion plus/minus. We have a small book of loans. But again, it's by design, these loans are short duration and the hope is that the same capital will then be used towards the permanent buying of the real estate. And so if we can't create that clear path, it's not something that we are going to be leaning into unlike a credit -- a true credit company that all they do is invest in loans. In terms of percentages, I really don't have a number, Smedes. This is going to be opportunistic driven. It's going to be driven by the strategy that I've laid out. Bennett Rose: And then I just wanted to ask you too, maybe just a little bit just bigger picture. I mean you obviously took the investment volume outlook for the year up quite a bit. Also a theme we see across many of the reports this quarter. Could you just sort of talk to kind of generally what you're seeing? I mean I assume part of this is you have this access to these other pools of capital that's bringing opportunity. But just sort of bigger picture for the market in terms of how competition is trending or just U.S. versus Europe, sort of bigger picture. Sumit Roy: Yes. Look, we are -- obviously, we feel very confident of what our pipeline looks like. It is largely a function of the pipeline and our ability to forecast out what that's going to translate into for the entire year. That's what's helped us raise our number from $8 billion to $9.5 billion. And what I would say is we did about -- it was an even split between the U.S. and Europe. And this was something we started talking about last quarter, where we had started to see a bit more of a momentum here in the U.S. than we had seen for the prior 3 quarters in 2025, where Europe was dominating what we were getting over the finish line. And so I think that trend, we are continuing to see a lot of opportunities in Europe, and that will continue to drive a lot of the volume. But we are starting to see similar impact here in the U.S., which is a good thing, which is why it gives us the confidence to increase the investment to $9.5 billion. And the other piece is what you touched on, Smedes. I mean the fact remains that having these different sources of capital will allow us to do transactions that we wouldn't have done in the past. And again, why are we doing all of this? It is to help grow our earnings per share. And so that's what we are seeing. From a competition perspective, public markets here in the U.S., I think that hasn't changed much. There is certainly a lot more competition on the private side here in the U.S. I think our product is well understood now, and it's very attractive to private sources of capital to sort of pursue. So we do see that competition, but elevated interest rate environment will continue to be a benefit for us because debt capital remains elevated. And so in order for these private sources of capital to meet their return hurdles, it's going to be a little bit more of a challenge. Europe continues to be a very interesting area for us. I mean, I've mentioned this in the past, and I'll mention it again. I think Neil and the team have done a great job of becoming the go-to net lease name, especially in the U.K. and soon it's translating into mainland Europe as well, where we get a lot of off-market transactions where transactions are negotiated on an off-market basis and closed. And the fact that we have delivered for so many of our clients there, the repeat business continues to be a big driver of the volume that we've gotten over the finish line. I believe for this quarter, it was circa 94% was effectively relationship-driven businesses. So I think that's what the landscape looks like from a competition perspective. Operator: Our next question today comes from Wes Golladay at Baird. Wesley Golladay: Just a question on the U.K. Are you doing much over there right now on the investment side or in the pipeline? I'm just curious how the bond market volatility is impacting the bid-ask spread and maybe there's some opportunistic opportunities in the pipeline there? Sumit Roy: So I'll start it off and then, Neil, if I miss something, please jump in. Yes, it is absolutely true that the bond market in the U.K. is quite elevated. But it is also true that we are getting higher cap rates as a -- because of the cost of capital environment in the U.K. And more importantly, we are pursuing transactions, and we are providing solutions because of the retail footprint that we have that continues to be very attractive to potential clients, and it creates opportunities for us to invest with them either via the sale-leaseback route or through repositionings of assets where we are attracting these clients remains an area that is very helpful. But outside of that, Neil, if there's anything else you'd like to add in terms of the market, in terms of what you're seeing, that would be great. Neil Abraham: Thanks, Sumit. So I would say we continue to see a very healthy pipeline in the U.K. The higher rate environment has meant that yields are either moving out or will soon move out. And then beyond that, the historical pattern that we saw of funds having to sell just because of redemptions or end of life continues and makes it a very good time for us to consolidate the market there. Operator: And our next question today comes from Jim Kammert at Evercore. James Kammert: Given the intensified sort of asset management function vis-a-vis the capture of the lease term fees, is it a reasonable assumption that the annual lease term fee revenue can trend in the 85 to 95 basis point type level of ABR, which I think the '26 guidance equates to? Sumit Roy: I wouldn't look into what we are doing, what we did in 2025 and what we are planning on doing in 2026 as the new watermark for lease terminations. I think what we are trying to do, Jim, is make sure that if we are starting to see opportunities with certain clients, with certain assets that we are taking care of those right now. And this is an intent to sort of -- look, we did 2 very large-scale M&A deals in the last 4 years. And we obviously inherited a lot of assets that were not ideal for the long-term hold strategy that we have, generally speaking, on anything that we do organically. And so this is a mechanism that we are using to sort of reposition those assets with the right clients or accelerate the rent collection and dispose of these assets so that we can get to a profile of portfolio that will become -- that will fall into that long-term hold strategy. So I don't see $45 million to $50 million, which is our current forecast, continuing indefinitely for our strategy going forward. This is much more episodic and much more around what we see in our portfolio today. And I gave you the rationale as to why we see that. It's largely through these M&A transactions. James Kammert: The M&A context and cleanup makes a lot of sense. I get it now. Operator: Our next question today comes from Haendel St. Juste at Mizuho. Unknown Analyst: This is Mike on with Haendel at Mizuho. My question is, what is the time line to full deployment of the $1.7 billion U.S. Core+ Fund raise? And how much management fee income could that generate on an annualized basis? Sumit Roy: Thanks, Mike. Look, we are very close. I think in our opening remarks, we mentioned that we've raised the $1.7 billion, which we had forecasted to the market. We are very close to full deployment. Our belief is that the next time we are having this earnings call, all of that equity capital will be fully deployed. And then, of course, given that it is largely an unlevered structure today, we will still have dry powder to continue to invest beyond the $1.7 billion and get to a ZIP code of $3.5 billion to $4 billion of assets under management. I think we also share -- Jonathan, do you want to take the management fee comment? Jonathan Pong: Yes. In terms of the annualized management fees once fully drawn, it will be a little bit over $10 million on an annualized basis. And these are all base management fees, doesn't include any kind of promote accruals or anything. Operator: And our next question today comes from Anthony Paolone at JPMorgan. Anthony Paolone: Sumit, I think you talked a lot about just the debt and the why and so forth around all the deal activity. But just on -- for this year, the $9.5 billion, any sense as to, like, how much of that is likely going to be debt? And then of the rest, like how we should think about your share, just to try to roll all that up. Sumit Roy: I really don't have a number for you in terms of what's going to constitute debt of that $9.5 billion, Tony, I'm sorry. Like I said, it is very opportunistic. It is very episodic. Some of what initially starts off as a debt investment will then convert over to an equity investment because ultimately, the name of the game here is to own the real estate. So if this is the way how we can ultimately own the real estate and in the meantime, get enhanced returns, I think that is why we are doing what we are doing. But I'm sorry, Tony, I don't have a number of that $9.5 billion that I can share with you with a high level of confidence that it will constitute the debt piece of our investment strategy. Anthony Paolone: Okay. Fair enough. And then just my follow-up is on the Apollo transaction. How should we think about that as being whether -- like if there's new money coming in from that, is it likely that you'll just sell stakes in existing assets? Or will that be used to go out and buy new assets? I'm just trying to think whether that falls into the full year $9.5 billion if you continue to go down the path of using that capital? And also, just what do you think the capacity is there to -- that they have to offer you? Sumit Roy: Yes. You should expect any new capital that we raise through the Apollo channel will be on new investments. Now it is possible that just because of expediency, we end up warehousing the assets on our balance sheet, but it will be assets that we are buying with the intent of putting in into this Apollo strategy. So look, the proof of concept was very important for everyone involved, including Apollo and including us. And now that we have the mousetrap fully functional, fully endorsed by the rating agencies and the SEC, we're going to really lean into expanding that channel, but it should be on new investments that we make. Operator: And our next question today comes from Ronald Kamdem with Morgan Stanley. Ronald Kamdem: Just my quick one. Just looking at the real estate acquisition cap rates look like it came down another 20 basis points this quarter, similar to last quarter. Maybe can you just talk a little bit about the competition? And just your thoughts on just the cap rate compression that you've seen in any forward thoughts? Sumit Roy: Yes. Sure, Ron. Good question. No, this is precisely what we expected. When you are starting to buy assets into the fund, we have shared with the market that the fund is going to be buying assets at a lower yield. And when you blend all of that in, the fact that our average cap rate is going to be a little lower is a function of that strategy. So ultimately, it's all about growth. And if you look at the fact that we have effectively increased the midpoint of our guidance by $0.025, that is what's driving a lot of what we are doing. But the 6.7% is -- was fully expected, and it's a function of our -- us being able to deploy more and more of the fund capital into the assets that are lower yielding. Ronald Kamdem: Great. My quick follow-up would just be on -- if you could just give us an update on the watch list again. And going back to sort of the termination cost in the quarter, like how much of that are we through? Like is that a number that's going to recur over time? Or does that create a tough comp for next year? Sumit Roy: No, it's -- I think somebody prior to you asked this question, Ron. And I don't think you should expect us to come out with the same number year in, year out. I'm not going to say that next year, we won't have a similar number, but I'm just saying that this is being done with the intent of making sure that the remaining portfolio that we have is truly a long-term hold strategy for us. And we are trying to create a win-win situation for our clients who are not long-term tied to that particular location. And at the same time, for us, when we believe we can actually collect on the remaining rent and then be able to entice another client to step in on these particular locations. But yes, if next year, mathematically speaking, if our termination income is going to be less, it is a headwind. But we are not doing this with the intention of this is going to become an ongoing strategy, and it will have a similar quantum. It is largely being driven by asset management decisions that our asset management team is very focused on executing upon. Operator: Our next question today comes from Eric Borden at BMO Capital Markets. Eric Borden: Same-store rental revenue for theaters declined about 10% year-over-year. Just curious what drove the underperformance this quarter? And how are you guys thinking about the outlook and potential credit risk within the theater segment going forward? Sumit Roy: Yes. Great question, Eric. Look, I think there were a lot of adjustments that we made to both the -- when Regal came out of their Chapter 11 situation. And so -- that obviously is part of what is flowing through on a same-store basis. Also, I think the first quarter of last year, we moved some of the cash accounting to accrual accounting. And so from a comp perspective, we recognized and accelerated the recognition in the first quarter of last year. And so when you compare that to what we have this year, it was again a headwind. Some renewals that have gone through, we have shifted more to a percentage rent type of arrangement with some of these operators. And so the base rent is lower vis-a-vis the base rent, and that's all we actually compare. And so again, from a same-store basis, that too would have been a bit of a headwind. And then some restructurings at home emerged. And though the outcome for us was very good, there was a slight adjustment down on some of those on those rents, and that's what's flowing through the business. If you're talking about what do we think about the theater business going forward, there was a big conference a couple of weeks ago. So far, so good. First quarter was great. Second quarter is turning out to be pretty good. And the numbers that I've heard bandied about is $9.5 billion in sales, which is, of course, still not anywhere close to 2019 levels of $11 billion, but moving in the right direction. And so we hope to see some of this flow through on the percentage rent, but that gets calculated at the end of the fiscal year. Eric Borden: I appreciate it. And then more of a bigger picture question. Sumit, in your prepared remarks, you noted that you sourced $31 billion of opportunities, but only closed 9% selectively. Where are you seeing the largest disconnects today between your underwriting and seller expectations? Sumit Roy: Yes. Look, I do see some of it is just unreasonable expectations. The pricing seems to be off. Everything else would work, but there's a disconnect between what the seller wants versus what we are willing to pay. And some of the sourcing is on the higher-yielding stuff that we just are not comfortable given the risk-adjusted return profile that we are seeing, especially in an environment where interest rates are highly volatile and the cost of debt could be something that we are acutely aware of could be a headwind for some of these operators. And so it's a combination of multiple factors. Look, we've always been very selective. If you look at the history of what we've sourced and what we've closed, it is right in that 5% to 10% ZIP code. And so 9% this quarter is in line with what we've done. But the point for sharing these sourcing numbers is to say, look, it's all trending in one direction, and we are starting to source more and more, and it is absolutely a byproduct of the team that we have developed, the geographies that we've added, the asset types that we have decided to pursue, all of these swim lanes are translating into much higher volume. And it's allowing us to pick and choose the investments that makes sense for us. And so what we pass on, there could be so many different reasons, including the couple that I just shared with you. Operator: And our next question today comes from Greg McGinniss at Scotiabank. Greg McGinniss: Sumit, is there any color you could provide in terms of the potential annual capital contributions from GIC or Apollo, they're looking to place -- newly placed into these programmatic ventures? Sumit Roy: Yes. So Greg, the GIC partnership is $1.5 billion. That's their initial contribution to the partnership, the JV that we've created. Apollo, obviously, was $1 billion of $2 billion of assets under management. We don't have a number that we have shared with the Street in terms of how much more could this be. I mean it's going to be, again, opportunity driven. And this will be us in constant contact with our partners to make sure that when we are seeing something that they would be interested in participating and it meets their return profiles, et cetera. The return profile, obviously, it will meet because those are the only ones we're going to be sharing with them. But we don't have, Greg, a number in mind in terms of how much bigger each one of these partnerships would be. But let me just tell you this, that we wouldn't have engaged in either one of these partnerships if we didn't believe that this was programmatic in nature and could become a huge source of our alternative equity capital going forward. Greg McGinniss: Okay. And then from your data center comments, should we interpret that to mean that there's more of these investment opportunities in the pipeline with the same partner? And then any color on the magnitude or yield on those would be appreciated. Sumit Roy: Yes, you should assume that we are in ongoing discussions with our partners to obviously continue to grow this relationship. But once again, there are no definitive commitments on either side. So -- but the goal is when you're engaging with someone, the intent will always be to deploy more capital. And like I said, they are, in our opinion, one of the best-in-class private developers of data centers. Operator: And our next question today comes from Ryan Caviola at Green Street Advisors. Ryan Caviola: Europe investments this quarter had a weighted average lease term close to 6 years. Is that driven by potentially a return to retail parks that have those shorter terms or just a result of the general mix or maybe a different property type? Any color you could share there would be appreciated. Neil Abraham: I'll take this, Ryan. Thank you. So look, I think as we look at retail parks, we are consciously prioritizing investments where we believe there's roll-up potential. I think if you look at the recent re-leasing that we've talked about and other peers in the U.K. have talked about, there's now an acceleration in rent and a shrinkage in giveaways like TIs or CapEx. And so we're actively looking for retail parks. We continue to have a high-yield bogey on those. But increasingly, if we can find short tenancy, we are taking that. Ryan Caviola: Got it. That's helpful. And then just on cap rate trends, we touched on it briefly earlier in the call, completely stripping out the private fund cap rates that obviously drive down that weighted yield. Could you just give color on public acquisition cap rate commentary in terms of compression or stability, maybe a Europe versus U.S. split? Anything would be helpful. Sumit Roy: Yes. So Ryan, I mean, obviously, if you -- we've been asked this question every quarter for the last, I don't know, how many years. But every time I've made a comment around, we're starting to see the direction of drift of cap rates one way or the other, I've turned out to be wrong. I mean it's pretty much stayed in this ZIP code, if you will, for now 2 years and continuing. And if you look at what's happened to the 10-year, it stayed in this band of 3.8% to 4.4%, 4.5% for that same duration. And so it is so difficult. If you're asking for a forecast, Ryan, of where I see cap rates going, I might answer that question with a question, which is what is the direction of drift for the 10-year. I mean every day, we get this incredible volatility in terms of what people think will happen to the short-term rate and how it translates to the longer-term rate, et cetera, et cetera. So at this point, I'll tell you what we are seeing in the market is effectively what we've seen these last couple of years. It's the same ZIP code for assets that we are buying 100% on balance sheet. But obviously, our ability to do more and go after lower-yielding, higher quality, more growth assets has now widened. And so we are able to do a lot more. Operator: And our next question today comes from Jay Kornreich at Cantor Fitzgerald. Jay Kornreich: Just wanted to ask about geographies. You entered Mexico recently. And just wondering as you explore new investment locations beyond where you currently have a presence, are there any new frontiers that, I guess, screen more favorably that you'd like to expand into in the future? Sumit Roy: Yes. So Jay, if we talk about Mexico just for a second since you brought it up, and it is the last geography that we entered into. Look, it was largely a client-driven opportunity for us. We went in there with our partners who had decades of experience developing in that market. We tried to minimize the risk in terms of currency fluctuations by making sure that our leases were dollar-denominated with clients that we understood and we knew very well. And it was largely a macro thematic play seeing the nearshoring and the onshoring of what we see as basically tailwinds in the logistics sector, in the industrial sector. So this was our way of playing that particular theme with partners who we felt very comfortable with. And so if these types of thematic opportunities present themselves, Jay, we are happy to continue to expand geographies, et cetera. The good news is we've done it now in so many different geographies. We have the playbook down. We understand the risk. We know how to get our arms around the inherent risk of investing in new geographies. There was a piece that my colleague Neil did in the Financial Times, where he talks about how people underestimate the operational intensity of making these investments. We've got that covered. We are, I would say, at this point, got the blueprint and we recognize the risk, and we are happy to sort of absorb those for the right opportunities. Jay Kornreich: Okay. I appreciate that. And then just going back to the 94% of investments that you mentioned were relationship-driven, which seems like a very high number. Was that more so tied to the private partnerships that you've recently done? Or were there other dynamics that led to leveraging current relationships, I guess, more so than seeking new ones this quarter? Sumit Roy: A lot of them are existing clients that we have operating our assets. Some of it was developers that we have done repeat business with. Some of it was clients that we are co-investing with and looking at opportunities together. It's all of those elements that go into that 94%. And I think as we cultivate new relationships, as we cultivate new opportunities, you will see that number right around that 85% to 90%, 95%. It's been very steady. It's just that the quantum that, that percentage represents is continuing to grow as we become more familiar with -- as our name becomes more familiar in the sale-leaseback arena with developers, with clients and with capital sources. Operator: And our next question today comes from Jason Wayne at Barclays. Jason Wayne: Just on the properties that vacated early to date in your asset management strategy, could you talk to your expectations on mix for sale versus re-lease and what kind of re-leasing capture -- what kind of recapture rates you're seeing on those? Sumit Roy: Yes, sure. So Jason, any time an asset is coming up for -- there's a lease expiration in the near term, and I would say in the next 2 to 2.5 years, our asset management team is very focused on trying to figure out what is going to be the ultimate outcome. And then it can effectively take multiple routes. That is one of the strategies that they are executing. Another one would be if through our predictive analytics channel, if we're looking at location risk and we see that particular assets are no longer going to be viable, even if the expiration is 5, 7 years out, we would put those on the disposition bucket, and we would try to dispose of those assets. And so there's a variety of reasons. There could be a credit event that we see coming down the pipe that could help drive disposition decisions. We then look at, okay, even if this particular client is going to be willing to stay, what is the re-leasing rates that we believe we can get. And if our asset management team thinks that there is enough alternative clients that could be stepping in and giving us more, that's, again, a decision that they rely upon. Of course, all underpinned by the predictive analytics and what it's suggesting would happen in that particular location. So there's a variety of analysis that the asset management team goes through. And what they are focused on is what is going to yield the highest return -- economic return based on these various different decisions that one can take. And then they try to implement that highest return probability. And in some cases, taking a rent haircut is the right long-term decision. Having said that, if you look at what we've been able to achieve in totality every quarter, it's been like even last quarter, we just reported it, it's north of 103%. So our renewal rates and re-leasing rates in combination is yielding us north of 102%, 103% quarter in, quarter out. But like I've said before, sometimes the right decision is to take 99% recapture rate rather than trying to sell that asset vacant or try to attract a client knowing fully well that the recapture rate is going to be lower. So it's a very fluid strategy, Jason, but one that we believe that we have the best asset management team on the street. They have years and years of experience. And when you control so many assets for a given client, the benefit of having a conversation not on a single asset, but on multiple assets for that client is something that translates into these higher recapture rates that our asset management team does brilliantly on. So that's really how we think about renewals and releases and sales. Jason Wayne: Yes, that makes sense. And I guess just on the full year disposition volume. You gave $750 million last quarter on track. Is that still the expectation for this year? Sumit Roy: Yes. It certainly is. Operator: And our next question today comes from Upal Rana with KeyBanc Capital Markets. Upal Rana: Just one for me. I assume that you've spoken on several industries already, but I had a question on the gaming category. How are you viewing the industry today? And what's your appetite to invest more into that category through any of your investment vehicles as the category did tick a little higher to 3.2% in the quarter? Sumit Roy: Sure, Upal. Good question. I would put gaming in a similar thought process that I described our digital investments. And what I would say is the operator is going to be very important to us. The location of these assets is going to be very important to us. The sustainability of EBITDA and the ability of these operators to extract that EBITDA is what we are very focused on, which is why if you look at the investments we've made, largely 3 investments. right, Mark? It's CityCenter, Bellagio, and we own 100% of the Wynn in Boston. And so that will continue to dictate our gaming strategy. And obviously, having a very close relationship with both MGM and Wynn, one could argue 2 of the best operators in the space should yield more transactions for us. But again, we're going to remain very, very selective, Upal. Operator: And that does conclude our question-and-answer session for today. I'd like to hand the conference back over to Sumit Roy for any closing remarks. Sumit Roy: Thank you very much for joining us today, and we look forward to seeing you at NAREIT in a few weeks. Operator: Thank you, sir. That does conclude 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 morning, ladies and gentlemen, and welcome to Perrigo Q1 2026 Financial Results Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 7, 2026. I would now like to turn the conference over to Mr. Eric Jacobson, VP, Global Investor Relations. Eric Jacobson: Good morning, and good afternoon, everyone. Welcome to Perrigo's First Quarter 2026 Earnings Conference Call. A copy of the release we issued this morning and the accompanying presentation for today's discussion are available within the Investors section of the perrigo.com website. Joining today's call are Perrigo's President and CEO, Patrick Lockwood-Taylor; and CFO, Eduardo Bezerra. As a reminder, beginning this quarter, we are reporting segments aligned with our new commercial operating model. We have recast historical results under the new structure for comparability as provided in our 8-K filing, and this change had no impact on our consolidated financials or cash flows. Along with our new reporting segments, we have changed our main profitability measure to adjusted operating income. During this presentation, participants will make certain forward-looking statements. Please refer to the slides for information regarding these statements, which are subject to important risks and uncertainties. We will reference adjusted financial measures that are non-GAAP in nature. See the appendix to the earnings presentation for additional details and reconciliations of all non-GAAP to GAAP financial measures presented. Finally, Patrick's discussion will address only non-GAAP financial measures. Now to the agenda. We have several topics to cover today. First, Patrick will walk through the progress we are making with our Three-S plan and how first quarter results compare to our expectations. He will then provide the market overview and explain how our growth initiatives are expected to drive improved results. After which Eduardo will cover first quarter segment results, balance sheet and capital allocation and close with further details of our 2026 outlook. With that, I'll turn it over to Patrick. Patrick Lockwood-Taylor: Thanks, Eric. Good morning, good afternoon, and thank you for joining today's call. We are making steady progress in building a more focused, disciplined and consistent Perrigo. Challenging market environment impacted first quarter results. However, our Three-S plan to stabilize, streamline and strengthen the company is helping us navigate these conditions and positioning the company for long-term growth. The strategy is working as clearly demonstrated by our market share gains even in what we have highlighted as a transition year. Given these factors, we are reaffirming our 2026 outlook. Consistent with our prior commentary, results are expected to be weighted to the second half, supported by clear quantifiable factors, including stabilizing category consumption, the lapping of prior year manufacturing volume headwinds, benefits from cost-saving initiatives and delivery of our growth drivers. With those takeaways as a backdrop, I'll walk through how the Three-S plan is driving positive change. Our stabilization efforts have turned share losses in U.S. store brand OTC into a 100 basis point improvement in volume share during the quarter, six of seven categories gaining share. To further dimensionalize our performance, we have gained 270 basis points of U.S. store brand OTC volume share in the first quarter alone. Key brands in Europe also improved, gaining 20 basis points of value share in a challenging consumption environment. We have also stabilized results in Infant Formula with improved service levels and supply reliability. To streamline our business, we completed the divestiture of the Dermacosmetics business in April, an important milestone in further simplifying our operations and enabling debt reduction. Strategic reviews of our Infant Formula and Oral Care business are ongoing. Efficiencies are an important part of our streamlined pillar and our operational enhancement program generated more than $7 million of cost savings in the quarter and is on track for approximately $60 million to $80 million in savings for the year, with an additional $20 million to $40 million expected in 2027. To strengthen our business, we implemented a new category-led operating model and enhanced our commercial and category leadership, adding experienced talent with the capabilities and perspectives required for the next phase of Perrigo's evolution. These changes reflect a fundamental shift in how we operate. Our new structure aligns our decision-making, investment priorities and performance goals, enabling us to better leverage one of our most important competitive advantages, our scale. With more than 250 molecules, our deep retailer partnerships, a robust supply chain and our extensive regulatory capability, Perrigo is well positioned to be a leader in this category. And our new structure focuses our investments on fewer, bigger brands to target faster-growing categories where we have the greatest right to win. These changes are working as demonstrated by our strong market share performance. However, many of the benefits from these initiatives are not yet fully realized and are being somewhat obscured by the headwinds that we expect to ease in the second half of the year. Among those headwinds are softer cough and cold incidence and retailer inventory destocking. Those impacts, along with a $0.26 EPS headwind related to the carryover of prior year manufacturing volume headwinds weighed on first quarter results. As indicated last quarter, prior year manufacturing volume headwinds are expected to result in an unfavorable All In EPS impact of approximately $0.60 in 2026. Again, we believe those headwinds are largely transitory, resulting in 2026 itself being a transition year. As conditions evolve, consistent with our Three-S plan, we are focused on driving improvement in the areas within our control, streamlining our cost base while strengthening our top line growth. With that in mind, let's turn to the assumptions underlying our view of 2026 as a transition year, which largely played out as expected in the first quarter. Coming into the year, we anticipated market softness to carry over into the first half, followed by sequential improvement in the second half. In the first quarter, reduced cough and cold incidence and the impact of macroeconomic pressures, particularly in Europe, led to lower-than-expected consumption levels. We estimate soft cough and cold incidence was approximately a 3.5% headwind to CORE sales. In response to lower consumption, retailers in the U.S. and Europe reduced inventory levels, hampering sales further, resulting in an additional 3 points of CORE sales headwind. However, we, in line with other industry commentary, continue to expect sequential improvement in demand, led by stabilizing seasonal incidence of cough and cold. We also expect retailer inventory levels to positively adjust over time, in line with improved consumption. Our second assumption was our ability to build off our strong market share gains in 2025. We delivered on that expectation with solid market share performance in both store brand and branded products. Third, we expected to grow net sales through four key revenue building blocks: consumer-centric innovation, targeted geographic expansion, continued distribution gains and amplified demand generation. We've made progress across each of these areas in the first quarter, reaffirming our confidence in second half improvement. Turning to our financial results. The first quarter reflects category softness, partially offset by progress in our execution of the Three-S plan. CORE net sales declined 8.3%, driven primarily by softer category consumption in the Self Care segment due to reduced cough and cold incident and retailer inventory destocking. These impacts accounted for nearly 2/3 of the net sales decline. These impacts were partially offset by share-driven gains in the Specialty Care segment, particularly in the women's health category. All In net sales declined 7.2 points, reflecting similar pressures, partially offset by improved Infant Formula performance. Adjusted CORE EPS of $0.40 was impacted by prior year manufacturing volume headwinds and lower net sales volumes, primarily within our Self Care segment. Adjusted EPS results outperformed our expectations, benefiting from the net recognition of recovery of a portion of previously paid tariffs, a lower effective tax rate and benefits from our operational enhancement program. All In adjusted EPS for the quarter was $0.43. Turning to the market environment. Conditions remain challenging in the first quarter as expected. In the U.S., the OTC market declined 4.1 points in value, 2.1 points in volume, largely consistent with fourth quarter levels. European markets turned more negative, declining 3.7% in value and 4.4% in volume. Trends in both the U.S. and Europe were driven primarily by softer consumption demand in the cough, cold and pain categories within the Self Care segment. That weakness appears transitory, driven largely by challenging year-over-year comparisons and lower-than-normal illness levels as well as macroeconomic pressures, particularly in Europe. We expect the category to stabilize throughout the year as comparisons ease and more typical seasonal incidence patterns return in the second half of 2026. To mitigate category pressures, we are focusing on areas within our control. As I noted earlier, in the U.S., Perrigo grew volume share in six of seven OTC categories, and our store brand portfolio extended its streak to 12 consecutive periods of share improvement. Our priority brands gained value share in Europe, driven by strong performance from ellaOne up 200 basis points, Jungle Formula up 140 basis points and Physiomer up 50 basis points. Other areas of strength include Mederma Cold Sore and Opill, which increased 180 basis points and 40 basis points, respectively. Importantly, as we enter the summer period, momentum is building across our seasonal brands in several key European markets. Compeed is strengthening into peak season with impressive share gains and sellout trends supported by earlier activation and excellent in-store execution. For example, in Italy, Compeed achieved market share growth of 550 basis points to 35%. While in France, it is growing well ahead of the category, with Compeed up 160 basis points and our share approaching 36%. This was led by focused investment, improved activation, stronger retailer execution. And this strong performance gives us confidence in our ability to drive growth as demand builds through the summer. As category demand normalizes, we expect the increasing earnings power enabled by this brand strength to become increasingly visible. As we've discussed, we are driving share gains by scaling our CORE capabilities consistently across the portfolio. Nicotine replacement therapy is an excellent illustration of our approach to 360-degree innovation. Our process now develops claims, formulations and regulatory platforms once at the category level, then deploys them holistically across national brands and store brands across formats, geographies and price points. Importantly, this innovation expands the addressable market beyond traditional quitters to include vapers and dual users, allowing us to scale faster and unlock incremental demand without adding complexity. Store brand demand generation is another scalable differentiator for Perrigo. We are the only large-scale store brand supplier bringing national brand demand generation capabilities to retailers, allowing us to partner with retailers and elevate conversations beyond just the procurement price. Retailers are drawn to this program because it builds awareness for their business, it reinforces the perception of quality and equivalents, it drives household penetration and improved retailer profits. Retailers and more and more retailers are asking us to expand these programs across even more OTC categories. Demand generation is highly impactful for Perrigo. When we combine it with strong retail execution, we improve competitive takeaway and share gains. And these gains can be meaningful with a 1 point increase in U.S. store brand household penetration, representing incremental sales of more than $100 million of store brand OTC at retail. Targeted geographic expansion allows us to extend our existing successful initiatives into new areas. By selectively expanding priority brands into new markets, we can drive incremental growth with lower risk, achieve faster payback and higher returns. As a reminder, this is a long growth runway for Perrigo as today, we only serve approximately 5% of global households. Together, these capabilities form a repeatable and scalable growth model. 360-degree innovation expands our opportunity set. Store brand demand generation converts that opportunity into sustained consumption and targeted geographic expansion amplifies the impact, allowing us to scale performance across categories and regions. This is translating into early but significant in-market gains. This really is the outcome of what we have been working towards over the past 3 years, Perrigo sustainable growth model based upon a more focused portfolio that better leverages our core strengths, better leverages our unique asset base, underpinned by a much more effective commercial operating model. In summary, results in the first quarter reflect a very challenging market, but also demonstrates the effectiveness of our strategy. As we move forward, we are focused on building a more focused, disciplined and consistent business. By executing on our Three-S plan, we expect to mitigate current category challenges and drive long-term growth. We are reaffirming our full year 2026 guidance, which we expect to be weighted to the second half. That phasing is supported by clear quantifiable factors already underway. Our strategy is working. We are seeing market share gains. We've achieved a more focused portfolio. We have a more effective and scalable commercial model. I recognize that quarter 1 revenue and adjusted EPS are being driven by external factors that will need to be carefully managed. I'll now turn it over to Eduardo to walk through the financials in more detail. Eduardo Bezerra: Thank you, Patrick. Appreciate everyone joining us today. Before turning to the details of our first quarter financial performance, I want to provide an update on the goodwill impairment. As we discussed last quarter, the reallocation of goodwill following our move to the new reporting units was expected to result in an additional noncash impairment in the first quarter of 2026. And as expected, we recorded a noncash goodwill impairment charge of $331 million based on our goodwill impairment test as of January 1, 2026, which utilized the same underlying aggregate fair value of the business as the 2025 year-end goodwill test. This charge does not impact cash flows, liquidity or the ability to execute our strategy. From this point on, my comments will focus on adjusted non-GAAP results unless otherwise noted. As Eric said, beginning this quarter, we're reporting segments aligned with our new commercial operating model, and our new reporting segments include Self Care, Specialty Care and Infant Formula. Turning to our results, starting with the top line. CORE net sales declined 8.3% year-over-year, driven by softer consumption, primarily in cough and cold and retailer inventory destocking in the Self Care segment. Higher Specialty Care net sales partially offset that weakness driven by performance in our women's health category. On an organic basis, CORE net sales declined 11%. All In net sales declined 7.2%, reflecting the same factors impacting CORE results in addition to modest contributions from Infant Formula and Dermacosmetics business. Currency translation benefited both CORE and All In net sales in the quarter. Looking at adjusted operating income by segment, Self Care was the largest driver of decline due to lower net sales volumes, the carryover impact of prior year manufacturing volume headwinds and unfavorable mix. These factors were partially offset by the net recognition of recovery of a portion of previously paid tariffs and favorable currency translation. Specialty Care benefited from the lapping prior year Opill investments as well as favorable foreign currency, which more than offset the carryover impact of prior year manufacturing volume headwinds. All In adjusted operating income was primarily driven by the same factors as CORE, along with an $18 million impact from Infant Formula due to the carryover of prior year manufacturing volume headwind. These impacts were partially offset by operating income growth in all other segments. Turning to margins. Drivers of both CORE and All In margin changes were consistent with the segment results just discussed. CORE adjusted gross margin declined 160 basis points to 39.2%, primarily due to lower sales volumes, manufacturing volume headwinds and mix. These pressures were partially offset by the net recognition of tariff recovery and favorable foreign exchange. All In adjusted gross margin declined 340 basis points to 37.6% due to the same factors impacting CORE gross margin in addition to the manufacturing volume headwinds in Infant Formula we just mentioned. CORE adjusted operating margin decreased 110 basis points to 12.8%, reflecting gross margin flow-through, partially mitigated by lower advertising promotion spend, benefits from the operational enhancement program we announced in Q4 and favorable currency. All In adjusted operating margin decreased 240 basis points to 11.6% due to the same factors as CORE operating margin in addition to the impact from Infant Formula. First quarter CORE adjusted earnings per share was $0.40, coming in above our expectations primarily to the net recognition of recovery of a portion of previously paid tariffs and a lower effective tax rate. All In adjusted diluted earnings per share declined $0.17 to $0.43 due to the impact of lower sales volumes and the carryover impact of prior year manufacturing volumes in U.S. OTC and Infant Formula. Turning to cash flow. First quarter 2026 cash from operating activities decreased $49 million to an outflow of $114 million due to lower earnings and higher working capital in line with our previous expectations. As a reminder, the first quarter is typically our highest cash usage period amongst the year. Capital expenditures totaled $14 million, and we returned $40 million to shareholders through dividends. Turning to the balance sheet. Cash and cash equivalents were $357 million and total debt was $3.6 billion. During the quarter, we amended our $1 billion revolving credit facility, extending the maturity to 2031. Borrowings under the revolver were used to repay our $421 million Term Loan A, extending our maturity profile with no significant maturities until 2029. We expect to continue to actively manage and optimize our maturity debt profile going forward. After quarter end, we completed the sale of our Dermacosmetics business for upfront cash proceeds of approximately EUR 306 million, which we expect to use to support debt reduction. We remain focused on our disciplined capital allocation, balancing growth investments, deleveraging and shareholder returns. Looking ahead, although category dynamics were softer than expected in the first quarter, our guidance incorporates a wide range of outcomes and gives us comfort in reaffirming our 2026 outlook. We're closely monitoring retailer inventory changes, particularly the destocking activity observed in the first quarter, which we believe is largely related to the current consumption environment. As consumption levels improve, we expect inventory trends to stabilize. We're also actively managing the inflationary pressures related to the geopolitical developments in the Middle East and their impact on consumers and our cost base. To mitigate the estimated incremental in-year impact of $10 million on our cost base, we have implemented sourcing and cost management initiatives, and we will also evaluate pricing actions. As Patrick noted, we continue to expect results to be weighted to the second half of the year with approximately 30% to 35% of CORE adjusted earnings per share in the first half and 65% to 70% in the second half of 2026. This phasing is supported by clear quantifiable drivers, the majority of which are concentrated in the back half. The single largest sales growth contributor in 2026 is expected to be consumer-centric innovation. Approximately 60% of the benefit from innovation is expected in the second half, including the expansion of our Compeed portfolio and the introduction of new Infant Formula offerings. Several of our other 2026 drivers, including distribution gains amplified by demand generation activity with top retailers, targeted geographic expansion and benefits from our operational enhancement program are all expected to be back half weighted. In addition, we anticipate lower interest expense in the second half as we apply the Dermacosmetics proceeds towards debt reduction. In conjunction with those drivers, two of the most meaningful first half headwinds, the carryover impact of prior year manufacturing volume headwinds and a softer cough and cold season are transitory and expected to lap in the second half. As indicated last quarter, prior year manufacturing volume headwinds are expected to result in an unfavorable all-in earnings per share impact of approximately $0.60 EPS in 2026. We experienced roughly $0.26 of that impact in the first quarter. In summary, our outlook is based on clear drivers supporting our second half expectations, many of which are already underway while acknowledging the dynamic macro environment. As Patrick outlined, the Three-S plan is driving tangible improvements, and we're confident that we are positioning Perrigo to generate sustained growth of shareholder value over time. With that, I will turn the call back to Eric. Eric Jacobson: Thank you, operator. We're now ready for questions. Operator: [Operator Instructions] And I see our first question is from Chris Schott with JPMorgan. Ethan Brown: This is Ethan on for Chris Schott. Just to start off, and you touched on this during the call, but as we think about the operating margin recovery for the CORE kind of non-Infant Formula business in the back half of this year and into 2027, can you help level set how much of this is driven by working through higher cost inventory in the near term versus how much will require OTC volumes to rebound and normalize? And then my second question is just any updates you can offer on the Infant Formula strategic review and kind of latest thoughts on the timing more broadly? Eduardo Bezerra: This is Eduardo here. Thank you for your question. So as we highlighted, our operating margin in the first quarter, then as we provided our guidance in the first half of the year would be significantly impacted by the carryover volume variance that's impacting this first half. But also in the second half, we expect to see significant uptake on the market, right, in terms of the recovery of consumption that we're watching very closely, given some of the dynamics going on. And so we expect margin improvement because of the different activities we have. So innovation, continued distribution gains that we have there, also amplified demand generation as well as the opportunistic geographic expansion, and also the ramp-up of the operational enhancement program that will benefit our OpEx and operating margin. So overall, as we look into how we're going to see between the first half and the second half, we're going to see a very meaningful improvement on operating margin expansion because of these different factors. To your second question on the Infant Formula, right? So just giving a little bit of perspective, right? So the business, as we saw today, we had a very -- relatively good performance in the quarter with net sales growing about 2%, driven by higher contract manufacturing and also the store brand and branded formula were a little bit impacted by prior year comparisons, right? So from a market standpoint, we're seeing consumption to be in store brands is slightly improving versus what we had before. So the first thing to your specific question is we're keeping track of the business. And remember, we anticipated that margins would be significantly impacted by the carryover of manufacturing variances. From the overall strategic review that we're carrying and that we started, so the review continues. We're working with our advisers to assess all available options that we talked before between optimizing our network. And to that purpose, we've recently announced a rationalization of our capacity in one of our facilities that will help streamline the business and reduce our costs. But also, we're looking to the other options in terms of partnership and divestments. There's nothing more to share at this stage, and we continue with that, and we expect to provide further updates as we progress through the year. Operator: We have our next question from Susan Anderson with Canaccord Genuity. Susan Anderson: It's nice to see the volume share gains in the store brand in the U.S. I guess maybe if you could give some color on what's driving that share gain? What are you doing differently with retailers than you were doing before? And then also, I think maybe you said it was across most categories, but if you could talk about which categories you're seeing those gains across the portfolio? Patrick Lockwood-Taylor: Susan, this is Patrick. What's driving those share gains? So we're winning more contracts. So as you know, in 2025, I think it was about $100 million of net contract wins. Some of those are rolling out now. So we're taking a greater share of store brand contract volume. That's number one. Number two is not only do we want a greater share, we want to grow store brand share of the overall category. This basically is where we start to drive equivalents and the value proposition with end consumers, frankly, using brand-building marketing capability that we apply to our national brands. That grows consumer awareness and it grows household penetration of store brand. There's two critical things. You want a greater share of store brand and you want store brand to have greater share of the marketplace. That provides a double win for us. So that's really what's growing. In terms of -- I think I understood your question of which categories are growing. We compete in seven OTC categories. And I think in the presentation deck, we actually outlined which are growing. And I think -- so we're growing share in all of them with the exception of skin where there was some temporary supply disruption, but it's a very small business for us. The rest, which are the major categories, we're growing our share of store brands. So allergy is up 180 basis points, pain 110 basis points, digestive health is up 30 basis points, and probably the standout performance is in nicotine replacement therapy. And I heard this referred to by a competitor, where we're actually seeing a 540-point volume share growth this calendar year-to-date. So it's broad-based and it's substantial. Susan Anderson: Okay. Great. That sounds good. And then maybe if you could talk about how you're planning for cold/cough in the back half of the year. I guess, should we expect that to finally return to growth, particularly as we kind of lap some easier compares from last year calendar year? Or are you kind of thinking about it being more flattish? And then I guess final question, just are you thinking about any pricing for the back half of the year, particularly as we're seeing maybe some more inflationary pressures now? Patrick Lockwood-Taylor: Thank you. On cough/cold, I've been trying to predict cough/cold season for a quarter of a century, and I get it wrong as many times as I get it right. This was an abnormally weak cough/cold season, both in the U.S. and many countries throughout Europe and therefore, in totality. The rational forecast is always to take an average season. If we take an average season for '26, '27, that's going to be materially stronger than the season we've just been through. I think that's an entirely logical outlook and forecast. And the second part of your question was? Susan Anderson: Just on pricing, I guess, yes. Patrick Lockwood-Taylor: Pricing. We are -- so firstly, the inflationary pressures that we've seen from the Middle East have been very moderate for us, and we will just manage those through sort of normal operations. But we are starting to look at pricing depending on what happens with other commodity prices, et cetera. So yes, I would say we're in active consideration of that, both in the international branded business and our store branded business across both regions, yes. Eduardo Bezerra: I think the important thing as well, just to add to that point, Susan, is in times of inflation, et cetera, what we're going to be watching closely is the potential for pickup on store brands, consumption, right? So it's something that has been erratic over the past years, right, mainly because of the still strong, let's say, household wallet. Only the low-income consumers have been suffering the most. And usually, they are the ones that tend to have a direct correlation with store brand. But if that starts to impact further, the trade down could accelerate. And that's an opportunity that takes place, we're ready to take advantage of that. Operator: And we have our next question from Keith Devas with Jefferies. Keith Devas: Maybe just zooming out a little bit and just returning back to the macro picture as it pertains to consumer health. I know you called out some expectations for the second half to be better. Just hoping you can add more context on exactly what's driving that. I think we're seeing across branded and store brand consumption be a little softer than anticipated for longer than we would have thought. And so kind of just want to double-click on what's embedded in your expectations for the second half to be better? And is it maybe better visibility into the contract wins or the destocking easing. But just kind of unpacking that a little bit, I think, would be helpful. Eduardo Bezerra: Yes. Thanks, Keith. So remember, as we highlighted during our guidance, right, so incorporate a wide range of outcomes there. So as we look into that piece, so there are four key areas that we are driving a lot of consumption opportunities. So from the innovation side, right? So we mentioned a little bit about Compeed portfolio as well as on the Infant Formula side, bringing new offerings, including one focused a lot on the key competitor in the market right now with an organic formulation. Continued distribution gains. So we continue to focus a lot on that in the marketplace with further competitive take rate, and also the demand generation, right? So remember, we talked last year some of the examples like what we did on the [ Lifix ] in cough and cold and allergy. So we are seeing more and more retailers wanting to amplify that across their portfolio. And so we believe that's going to be a good opportunity to attract more consumers into our specific categories on store brand as well as the geographical expansion on our priority brands, right? But again, we acknowledge the recent developments, right? So we acknowledge some retailer destocking that took place in the first quarter. We believe that is mainly related to the soft cough and cold that they wanted to be more pragmatic on managing their cash in that sense and adjusted their inventory levels, but that's something we need to track closely. And the other thing as well is to what extent the Middle East geopolitical situation could further evolve into inflation and how could that impact consumption in the second half. So we still believe there will be a recovery because of the comparison last year was a significant decline, but we're watching that closely. I don't know, Patrick, anything you wanted to add as well? Patrick Lockwood-Taylor: Yes. I think that's right. I mean, fundamentally, there's not been a big shift in incidence across categories. Household penetration is quite stable from one -- for us, one small segment in an area of pain, but consumers are moving to alternate forms in pain from solid pill to creams, et cetera. So no radical change in incidence or household penetration. Plus, as we explained, the effects last year started to be seen in quarter 2. So we're very soon lapping the beginning of that category contraction. And therefore, just as a function of the math, it just stabilizes itself. There hasn't been a dramatic extraction of value that we can see that's going to continue into the remainder of the year. So again, the critical point, this is always going to be quite an unpredictable range this year. So we constructed guidance with a broad range of outcomes. You've seen what our sales guidance is for the year. And you heard last quarter how much of our demand generation activity and cost-saving activity is weighted into the second half. That helps insulate our outlook. So at the moment, we're confidently reaffirming our '26 guidance. Operator: We have our next question from Daniel Biolsi with Hedgeye. Daniel Biolsi: I was wondering if you could speak to the consumers' purchasing behavior in-store versus online for branded versus store label products in Self Care categories. Do you think there's like a notable difference with your largest customers? Are they doing a good job of highlighting store label alternatives in their searches? Because like when I look at the largest retailers, there's quite a big difference between them when I search for Advil versus ibuprofen, for example. Patrick Lockwood-Taylor: Good question. Some of our higher shares in store brand do tend to be on e-commerce interestingly. I think collectively, we can do a better job on store brand representation on e-commerce with some of our big traditional retailers in terms of landing pages, as you've just said, but also on some of the advertising. As you know, they buy equivalent and they can be a much better value at a time when more and more consumers are seeking value. I think that execution can be stronger. But -- so yes, I think the traditional e-commerce players playing -- doing it better, enjoy higher shares, actually seeing more and more competitive takeaway within that channel as well. Eduardo Bezerra: Yes. And Daniel, just to give you an important example like in women's health and Opill, right, in Q1, e-commerce grew like almost 30%. So that's an area where it's going very, very well. So we're seeing a very good uptake, while the sales on Opill were double-digit growth of plus 12%. So you see how e-commerce is taking a very important piece of that growth. Daniel Biolsi: And then can you share what the Board's thoughts are on the dividend currently? Eduardo Bezerra: Sorry, could you repeat that? Patrick Lockwood-Taylor: The Board's dividend. Eduardo Bezerra: Yes. So as we talked in the last quarter, we continue with our capital allocation plans, right, continue to invest into our base business as well as focusing a lot on debt reduction as well in keeping our shareholders' return, right? So we're going to keep that same focus going forward. And the Board will continue to assess that on a quarterly basis, what's our position to make sure we optimize our capital allocation and that they decided to keep that, and we're going to continue to have those discussions for the remaining of the year. Operator: There are no further questions at this time. I will now turn the call over to Patrick Lockwood-Taylor for closing remarks. Patrick Lockwood-Taylor: Thank you very much. And again, thank you, everyone, for joining us. So to close, I want to put this quarter into clear perspective. The work we've done over the past several years is driving meaningful change at Perrigo. We are a more focused, disciplined and consistent business, and that stronger foundation is enabling us to manage through a challenging environment more effectively than we could have done in the past. We are delivering on our promises. We completed the Dermacosmetics divestiture and applying those proceeds towards debt reduction. We are executing our cost-saving program in line with to slightly ahead of the expectation. We are simplifying our portfolio. We're strengthening our operations, including continued progress in Infant Formula. At the same time, we are delivering material share gains, reinforcing that our commercial strategy is working. But this was not a perfect quarter. Softer cough and cold demand, inventory destocking and European consumption pressures weighed on results. But importantly, our improved operating capabilities enabled us to mitigate those pressures and capitalize on opportunities where they emerge as demonstrated by the fact that both EPS and our share gains were ahead of our expectation. As we have moved into the second quarter, we're also encouraged by the continued momentum in market share and in-market execution that we are seeing across the portfolio. That progress gives us growing confidence as we move through the year and reinforces our conviction in our 2026 outlook and long-term trajectory. We remain focused on disciplined execution, controlling what we can and building enduring value over time. Thank you very much for your continued interest and support. Operator: Thank you, ladies and gentlemen. This concludes today's conference. We thank you for your participation. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to the Clearfield Fiscal Second Quarter 2026 Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Gregory McNiff, Investor Relations. Sir, please go ahead. Gregory McNiff: Thank you. Joining me on today's call are Cheri Beranek, Clearfield's President and CEO; and Dan Herzog, Clearfield's CFO. As a reminder, Clearfield publishes a quarterly shareholder letter, which provides an overview of the company's financial results, operational highlights, and future outlook. You can find both the shareholder letter and the earnings release on Clearfield's Investor Relations website. After brief prepared remarks, we will open the floor for a question-and-answer session. Please note that during this call, management will be making remarks regarding future events and the future financial performance of the company. These remarks constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements. It is important to also note that the company undertakes no obligation to update such statements except as required by law. The company cautions you to consider risk factors that could cause actual results to differ materially from those in the forward-looking statements contained in today's press release, shareholder letter, and on this conference call. The Risk Factors section in Clearfield's most recent Form 10-K filing with the Securities and Exchange Commission and its subsequent filings on Form 10-Q provide a description of these risks. With that, I will turn it over to Cheri. Cheri? Cheryl Beranek: Good afternoon, everyone. Thank you for joining us to discuss Clearfield's results for the second quarter of fiscal 2026. I'll begin with an overview of the quarter and our strategic priorities. And then I'll turn the call over to Dan to review the financial details and outlook. Second quarter net sales were $34.4 million, which came in towards the high end of our guidance range of $32 million to $35 million. Our performance was driven by continued strength in our Community Broadband market with year-to-date revenues up 5% over the same period of last year. Our net loss per share of $0.04 was within our guidance range. Our backlog rose 39% sequentially from the first fiscal quarter, resulting in a book-to-bill ratio of 1.3 for the quarter, consistent with typical summer seasonality and supportive of our outlook for the second half of the year. We are focused on consistent execution while investing in Clearfield's next phase of growth. To that end, we are building a significant pipeline of opportunities beyond our traditional broadband customer base. While these adjacent markets have yet to contribute meaningful revenue, reflecting their longer sales cycles, they do represent a compelling avenue for future expansion and early indications are encouraging. In particular, we are seeing increasing engagement linked to data center environments where capacity expansion is driving more consistent infrastructure planning needs. As these opportunities develop, we expect them to contribute meaningfully to revenue, driving a gradual broadening of our revenue base. Recently, Clearfield hosted Fiber to the Future at our headquarters, a program that brought together key thought leaders from across our industry. The event featured demonstrations of our BABA-ready cable extrusion capabilities and optical fiber termination solutions alongside insights from these leaders. Participants included executives from service providers, our top distributors, industry media, and association leaders gained a Clearview of how Clearfield's innovation and operational excellence position us to meet the growing data infrastructure demands driven by fiber-enabled Artificial Intelligence. As Edge AI takes shape, Clearfield demonstrated throughout the day its innovation and thought leadership. From an industry perspective, the pace of the BEAD funding process continues to be the primary constraint on our core business. While we are seeing early-stage planning and design activity across our customer base, the timing of funding disbursements remain uncertain, which is delaying order activity. We continue to expect meaningful BEAD-related revenue to materialize in fiscal 2027 as the program is deployed across the states. In response to the current environment, we have maintained a proactive approach to ensure that we are well positioned as demand materializes. We are deepening engagement with customers as projects progress towards execution and aligning our resources to support anticipated build activity, including the compliance with BABA requirements. Our focus remains on understanding where customers are in their planning process, and how we can best support them as projects take shape. We believe this approach enables us to allocate resources effectively and to stay closely aligned with customers as their deployments advance. Looking ahead, we are increasingly focused on longer-term opportunities tied to distributed compute and edge infrastructure. Industry trends continue to support a shift toward compute closer to the end user, as low-latency AI applications require faster processing capabilities between compute and storage rather than relying solely on centralized data centers. This dynamic will drive the build-out of smaller distributed edge locations that function like compact data centers and require high-density fiber connectivity, particularly in markets served by Community Broadband providers. As a result, there is growing demand for solutions that can be deployed quickly, scaled efficiently, and replicated across numerous sites. We are actively positioning the company to participate in this evolution. Our NOVA Platform announced last quarter, is designed to address this need by enabling the flexibility and scalability required to support the next generation of edge AI infrastructure. The platform has been well received, and we anticipate shipping in the second half of the fiscal year. You can also expect a series of new product launches as we bring proven, hardened, reliable, and scalable outside plant techniques and strategies into this space. With that, I'll turn the call over to Dan to review our financials and outlook in more detail. Daniel Herzog: Thank you, Cheri, and good afternoon, everyone. As a reminder, in November, we completed the sale of our Nestor Cables business. As a result, all financial results presented for fiscal year 2025 and all prior periods reflect the Clearfield segment as continuing operations only. With Nestor results reported under discontinued operations in our Statement of Earnings and Statement of Cash Flows, and reported as assets and liabilities held for sale in our Balance Sheet. With this transaction behind us, our focus and portfolio are now fully centered on the Clearfield business and the execution of our core strategy. Second quarter net sales were $34.4 million, a 15% decrease from $40.6 million in the prior-year second quarter. This decline was partially due to a pull-in by a Large Regional Customer into last year's second quarter from our Fiscal Year 2025, third quarter. Revenue was flat sequentially, primarily due to expected seasonality in the winter months. Gross profit margin was 32.5%, down from 34.4% in the prior-year second quarter and down slightly from 33.2% in the first quarter of fiscal 2026 mainly due to lower sales volume. Operating expenses for the second quarter of fiscal 2026 were $13.2 million in comparison to $12.3 million in the prior-year second quarter. Primarily due to investments to support future planned growth, including in adjacent markets. Net loss in the second quarter of fiscal 2026 was $500,000, or a net loss of $0.04 per diluted share, compared to net income of $1.3 million, or net income of $0.18 per diluted share, in the prior-year second quarter. We ended the quarter with approximately $147 million in cash, short-term and long-term investments and no debt. During the quarter, we repurchased 237,000 shares for $7.3 million as part of our share buyback program. For the third fiscal quarter of 2026, we anticipate net sales from continuing operations to be in the range of $42 million to $46 million. Operating expenses to remain relatively consistent with our second quarter and net income per diluted share in the range of $0.17 to $0.21. The earnings per share ranges are based on the number of shares outstanding at the end of the second quarter of Fiscal 2026 and do not reflect potential additional share repurchases completed. For the full year fiscal 2026, we are reiterating our guidance for net sales from continuing operations in the range of $160 million to $170 million, which represents approximately 10% top-line growth at the midpoint. Operating expenses as a percentage of revenue to remain consistent with Fiscal 2025 and net income per share to be in the range of $0.48 to $0.62 and with that, we will open the call to your questions. Operator: [Operator Instructions] The first question comes from Ryan Koontz with Needham & Company. Ryan Koontz: I wonder if you could give us a little more color on where BEAD is here. We're hearing from other vendors and just industry press that maybe Operators are starting to see that money in engaging in products. What are you seeing in terms of hard data from Operators that are going to get BEAD [indiscernible]? Are you starting to see forecasts or maybe early orders? Any color there would be great. Cheryl Beranek: Ryan, yes, the BEAD is, unfortunately, I would say, slower than expected. We are expected by the industry, but consistent with our outlook that we believe it is a '27 revenue opportunity for us, starting in late fall, early winter, and moving into next year. We absolutely are seeing customers talking about their planning cycles. We're talking to customers about their network designs and the kind of products that they'll be looking for from us and quoting that activity. I would say that there have been some challenges associated with trying to be able to align the availability of optical fiber from the fiber vendors so that there's a knowledge of when that product -- those materials are going to ship, so they can plan accordingly and to receive their financing. And so I would say today, it is -- I think the government still has some work to do in order to get material or the program underway. But then we're going to have some obstacles associated with just how that fiber -- excuse me, the project financing, the match gets aligned. And then as I indicated, some of the fiber that needs to be able to come from the domestic providers. Ryan Koontz: Maybe on the regional service providers, any updates there in terms of puts and takes and how you're thinking about this build season with the regionals broadly... Cheryl Beranek: I would say that that's -- we started with the negative, which is the things we can't control, which are the programs under BEAD. But as it relates to private financing, both in Community Broadband as well as in the Large Regional, we're seeing a strong build season, which is why we're looking at forecasting a 10% increase over last year. After -- for the year after a pretty slow start for the first half of the year. There has been some uncertainty in the Large Regional as they have been acquired by the Tier 1, so that those accounts have a little bit of learning to do. In regard to where the bathroom is in the new place or how they place their purchase orders, I guess, is a better way to say it. But we also are seeing other Large Regionals start to come into play and start to be more active in their deployments. So I think across the board, the Large Regionals are a nice healthy marketplace that will continue to build both with internal financing and with private financing from other vendors. Operator: [Operator Instructions] Since there are no more questions, this concludes the question-and-answers session. I would like to turn the conference back over to Cheri Beranek for any closing remarks. Please go ahead. Cheryl Beranek: Thank you so much. While it's unfortunate and disappointing that the BEAD programs are going to be delayed into '27 for any meaningful revenue. We are extremely proud and pleased with the work that we've done to stay alongside our customers and to be supporting them in their planning process. We thank our shareholders for continuing to be patience with us as we continue to support our customers, and are very excited about where that will go as we move forward. Also, want to reiterate the strength of private financing and the work that's being done to allow fiber-to-the-home to continue to expand as we know that fiber-driven networks do provide the best average revenue increase per subscriber for our shareholders or our service provider customers and are pleased and excited about where that will go. Finally, I did want to point out or remind everyone that Clearfield is about a Fiber-to-the-Anywhere opportunity. And our strategic plan very strongly supports our core marketplace and making sure that we protect our core, but we are investing over the course of the last, really, 18 months in adjacent market opportunities. Both bringing our existing product line to new markets as well as to be able to introduce new customers to new product lines. So continue to look forward to telling you about those in the coming months and quarters ahead. With that, we're excited about the Build Season. And unfortunately, well, fortunately, we're looking forward to warmer weather; it's a little chilly here in Minnesota today. Thanks so much. We appreciate your support. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon. Welcome to Airgain's First Quarter 2026 Conference Call. My name is Sherry, and I will be your operator for today's call. Joining us today are Airgain's President and CEO, Jacob Suen; and CFO, Michael Elbaz. As a reminder, this call will be recorded and will be made available for replay via the link found in the Investor Relations section of Airgain's website at investors.airgain.com. [Operator Instructions] I caution listeners that during this call, Airgain's management will be making forward-looking statements about future events as well as Airgain's business strategy and future financial and operating performance. Actual results could differ materially from those stated or implied by these forward-looking statements due to risks and uncertainties associated with the company's business. These forward-looking statements are qualified by the cautionary statements contained in today's earnings release and Airgain's SEC filings. The conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, May 6, 2026. Airgain undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call. In addition, this conference call will include a discussion of non-GAAP financial measures. Please see today's earnings release for further details, including a reconciliation of GAAP to non-GAAP results. I would now like to turn the call over to Airgain's CEO, Jacob Suen. Jacob? Jacob Suen: Good afternoon, everyone, and thank you for joining us. The first quarter marked a solid start to 2026 as we began converting the strategic groundwork we laid last year into broader commercial momentum across the business. Over the past several years, we have been transforming Airgain into a higher-value system-level connectivity company. In Q1, that transformation showed up through customer wins, expanded platform capabilities and deeper commercial engagements across our core markets and growth platforms. Let me start with our platform initiatives. First, we expand AirgainConnect's capabilities through the acquisition of the HPUE MegaFi 2 assets from Nextivity. This acquisition expands our portfolio and strengthens our vehicle gateway capabilities across public safety, utility and enterprise fleet applications. It also broadens what we can offer to our customers. Some customers need a fully integrated vehicle gateway. Others want a simpler high-power router solution. With AirgainConnect, we can now support a wider range of deployment needs, both AirgainConnect Fleet and AirgainConnect MegaFi 2 are part of the AT&T FirstNet offering, and customers can order these solutions directly through the AT&T Speed portal. We are also seeing encouraging progress in the AirgainConnect pipeline. In March, we closed a Tier 2 customer in the energy sector that upgrades across multiple U.S. regions. This customer is deploying AirgainConnect across a fleet of more than 300 maintenance and service vehicles following field trials that demonstrated improved connectivity performance and ease of installation. As of last week, our pipeline includes more than 55 Tier 1 and Tier 2 opportunities, up roughly 40% from the approximately 40 Tier 1 and Tier 2 opportunities we mentioned on our last call. The mix is also becoming more attractive with most of these opportunities now coming from non-first responder markets. Importantly, these opportunities are also advancing through the funnel. More than 1/3 of our Tier 1 and Tier 2 opportunities are now in trial or post trial stages compared to a quarter on our last call. This gives us increasing confidence that the pipeline is not only broader but also moving closer to conversion. At the same time, Tier 1 engagement continues to deepen with several opportunities becoming more strategic, while these larger opportunities take longer to convert we believe the pipeline is moving in the right direction. These emerging opportunities reinforce our view that the strategy we outlined on our last call is working and that AirgainConnect is positioned to become a more meaningful contributor as we move through 2026 and beyond. Second, we continue to advance Lighthouse. In the U.S., we are now working with a business sponsor and a Tier 1 mobile network operator to progress towards a live enterprise trial. This moves Lighthouse from network validation into the business and commercial base. If the trial progresses as expected, we believe initial commercialization opportunities could begin towards the end of 2026 with a broader opportunity developing in 2027. This opportunity with the Tier 1 MNO is being driven by clear customer pain points around coverage, capacity and the cost of network upgrades. In many in-building environments, traditional solutions such as DAS or small cells can be expensive, disruptive and slow to deploy. Lighthouse gets customers a faster and more cost-effective path to upgrading from 4G to 5G coverage. For indoor deployments, the value proposition is straightforward, better coverage, lower cost and faster deployment. For outdoor user cases, Lighthouse reduces coverage gaps and provides network performance benefits, non-disruptive integration and scalability. Based on our engagement with this Tier 1 MNO, we believe indoor deployments could represent the near-term opportunity with initial deployments targeted towards the end of this year. Outdoor deployments remain an important longer-term opportunity and are expected to follow a more expanded evaluation and commercialization cycle. In the Middle East, our relationship with Omantel remained an important entry point. Deployment activity was paused due to the conflict in the region, but engagement is now ongoing, and we expect to move forward with initial deployments over the coming months. We continue to advance our road map for integrated 4G and 5G coverage solutions designed for challenging indoor and outdoor environments. This road map supports 4G and 5G co-location, expands the range of deployment scenarios we can address and strengthens the long-term commercial opportunity for Lighthouse. We are seeing customer interest in trialing the combined solution as units become available. As our engagement with the Tier 1 MNO and enterprise customers has progressed, we believe we now have a clear path to commercialization with our current product road map. As a result, we have realigned our resources and priorities to focus on accelerating commercialization and revenue generation. Now turning to our core markets. In consumer, we secured a multiyear, multimillion dollar in-build antenna design win for a next-generation 5G home connectivity platform with a Tier 1 North American MNO with production units anticipated later this year. As expected, consumer revenue declined sequentially due to seasonality. Looking into Q2 we expect consumer revenue to remain relatively stable with underlying demand still healthy. The primary factor, we are monitoring in the near term is a supply constraint at the gateway level, particularly around memory availability and pricing. This is impacting our OEM's ability to ship finished systems and in turn, can affect the timing of our antenna shipments. At this point, this dynamic is limited to a single OEM serving cable operators. Based on feedback from this OEM, they are actively working to address the issue, and we believe the impact is temporary. As we mentioned earlier, we have secured 2 Tier 1 MNO design wins, and we remain on track for those programs to ramp in the second half of the year. In enterprise IoT, momentum is building. We received a $4 million purchase order from a long-standing IoT solution customer with shipments expected to be completed this year including initial shipments in Q2. This order reflects the resumption of demand from this customer and improves our near-term visibility. We are also seeing continued traction across our embedded modem portfolio and expanding opportunities in emerging applications. We increased our IoT presence in robotics through a new design win with Coco Robotics, and we are seeing additional activity in adjacent areas such as storms, including preproduction shipments in Q2 for a new customer program focused on autonomous VTOL rotorcraft for defense and commercial applications. Stepping back, Q1 reflects progress across our growth platforms in our core markets. Both enterprise and automotive grew sequentially. IoT momentum improved. AirgainConnect engagement product, Lighthouse move into more focused commercialization discussions and our consumer business remains supported by strong Tier 1 relationships. Just as important, our pipeline is broader and continues to expand. We enter this next phase with a more focused operating model, improving visibility and clear opportunities to convert customer engagement into revenue. With that, I'll turn the call over to Michael. Michael Elbaz: Thank you, Jacob. Before diving into the numbers, please note that my review of our financial results and guidance refers to non-GAAP figures. Information about the non-GAAP financial measures, including GAAP to non-GAAP reconciliations can be found in our earnings release. Now let's turn to our first quarter results. Q1 sales came in at $11.5 million which was at the midpoint of our guidance range. Enterprise sales were $5 million, up $0.7 million sequentially, driven by higher embedded modem sales. Automotive sales were $0.9 million, up $0.4 million sequentially, reflecting higher sales of AirgainConnect vehicle gateways. Consumer sales came in at $5.6 billion, sequentially down $1.7 million, primarily due to seasonal impact. Non-GAAP gross margin for the first quarter was 44.2% compared to 46.3% in the prior quarter and relatively flat year-over-year. The sequential decline was primarily due to a lower enterprise margin rate, driven by an unfavorable product mix. Non-GAAP operating expenses for the first quarter amounted to $6.1 million while modestly higher sequentially due to typically higher first quarter marketing and trade show activities, operating expenses declined by 8% or $0.5 million year-over-year as we continue to optimize our OpEx model. In Q1, adjusted EBITDA was negative $0.9 million, $0.2 million lower than the midpoint of guidance. Non-GAAP EPS was negative $0.08 compared to negative $0.07 midpoint of guidance. As of March 31, 2026, our cash balance was $7.1 million relatively flat sequentially. Net cash proceeds from our ATM were $0.6 million. Now moving to our outlook for the second quarter ending June 30, 2026. As a reminder, we provide quarterly guidance for sales, non-GAAP gross margin and expenses, non-GAAP EPS and adjusted EBITDA as we believe these metrics to be key indicators for the overall performance of our business. For the second quarter of 2026, we project sales to range from $12.5 million to $14.5 million with a midpoint of $13.5 million. The midpoint represents a 17% sequential increase driven by enterprise and automotive. We believe our outlook reflects improving demand visibility across the business and continued progress in converting the commercial traction Jacob discussed into revenue. We expect non-GAAP gross margin for the second quarter to be in the range of 42.5% to 45.5% or 44% at the midpoint. We project operating expenses to decrease sequentially to approximately $5.8 million. Non-GAAP EPS is expected to be positive $0.01 at the midpoint of our guidance. Adjusted EBITDA is expected to be positive $0.2 million at the midpoint of our guidance. Overall, the actions we have taken over the past few quarters have improved our operating leverage and position us to convert top line growth more effectively into profitability. Now I would like to turn the call back over to Jacob for his closing thoughts. Jacob? Jacob Suen: Thanks, Michael. As we look ahead, we have good visibility into Q2 and see positive momentum for both our core and growth platforms for the rest of the year. Beyond Q2, we see a broader set of drivers. Demand in our consumer business remains healthy, and we expect improvement as supply constraints ease. IoT continues to build momentum through repeat orders and new application design wins. AirgainConnect is progressing from engagement toward conversion with growing activity across utility and enterprise markets, and Lighthouse is moving towards targeted commercial deployment in the U.S. and Middle East. Taken together, these drivers reflect a more focused and better position business with a stronger platform portfolio, a broader pipeline and an operating model positioned for improved leverage as revenue scales. Our focus is execution, converting pipeline into deployments, driving growth and including profitability as we move through 2026. Operator, we're now ready to take questions. Operator: [Operator Instructions] Our first question is from Anthony Stoss with Craig-Hallum Capital Group. Anthony Stoss: Michael, I was trying to write as fast as I could. Can you just give me the revenue splits? I got consumer $5.6 million, but I missed auto and enterprise. Michael Elbaz: The guidance you meant, Tony? Anthony Stoss: No, the percent of revenue in the quarter that came from auto and same question for enterprise. Michael Elbaz: So auto would be about 40% approximately. I don't have the other numbers in front of me. And enterprise would be about higher actually, 50% approximately. Anthony Stoss: Enterprise 50%, auto 40% and Consumer 10%? Jacob Suen: No, no, no. It's... Anthony Stoss: Yes. September is $5.6 million. Michael Elbaz: Yes. I'll have to come back to you on this, Tony. I don't have those numbers in front of me. Jacob Suen: Yes, the bottom line is overall the enterprise and automotive, we're seeing a sequential growth, and we expect that momentum to continue. And consumer in Q1 was due to seasonality. So we also expect the consumer to improve throughout the year. Anthony Stoss: Perfect. And then Jacob, just getting on the... Michael Elbaz: Tony, the number is 49% on the consumer, 8% on the automotive and 43% on the enterprise in Q1. Anthony Stoss: Perfect. Related to the memory shortages, I get it. A lot of people are talking about it, thinking it's going to get worse throughout the remainder of the year. But given -- I guess the first part of the question is how much of your revenue was affected in Q1 as a result of not being able to ship? And then, Jacob, more longer-term picture, when do you think -- which quarter is it this year? Is it next year when you can get back to the kind of $7 million to $10 million in quarterly revenue on the consumer side? Michael Elbaz: So yes, Tony, this is Michael. So in terms of Q1 impact, we had no revenue impact from the shortages, and we had no gross margin impact from the shortages. In Q2, we are being conservative on the consumer. Typically, you would see that seasonal down in Q1, which we saw and a rebound in Q2. And right now, we are expecting to be relatively flat and mainly because one specific OEM is being impacted. They believe it's a temporary blip right now, and it will be worked out by the end of the quarter, but again, we're being conservative on that. Jacob Suen: Yes. And regarding your questions about the consumer revenue, certainly, as we indicated, the good news is that we always have the stability regarding the MSOs. We are now adding the MNOs. We are now working on 2 major MNOs in the U.S. So that should help us well positioned for the rest of the year. Are we able to get to the $7 million to $8 million range like we used to have, we do have the path for that. Now is that going to be happening this year or next year? We don't know that yet, although it's trending very positively. We mentioned about the design win with the MNO, that should be in the latter part of this year. Anthony Stoss: Got it. And then my last question related to AirgainConnect. Are you seeing a speeding up of some of these trials or your ability to convert? It's great to see that Tier 2 energy customer. What's your feel on how quickly you can convert the trials into more signed deals? Jacob Suen: So on the Tier 1 type of customers, we mentioned before, 12 to 18 months of the cycle time, and we are in the cycle time. The good news here is that the pipeline is changing favorably to us quarter-over-quarter. So for example, we mentioned on the call that we have a current pipeline of over 55 deals in Tier 1 and Tier 2 customers. 20% of that is Tier 1 customers. And of the 20% of that, the vast majority are for non-first responders. So they tend to be moving quicker. However, because those tend to be also strategic type of deals, they are also very much of a multilayer type of meetings, engagements, trials taking place. And so we are basically on track to what we had mentioned about the 12- to 18-month cycle. On the Tier 2, we just mentioned that we closed a Tier 2 customer. Overall, the velocity of the design wins that we have, primarily on the Tier 3 and the Tier 2 so far is accelerating. Last year, we would be closing 1 deal per month. And this year, so far, up until May, it's been about 2 deals per month. I hope this is helpful. Anthony Stoss: Perfect. Jacob Suen: Yes. Tony, also the Tier 1 opportunity size, the vehicle size is also getting bigger as we go after the non-first responder vehicles because a lot of these are large enterprise fleet. So we'll start to work on tens of thousands of vehicles instead of just several thousands or several hundred as in the case of the first responders. Operator: Our next question is from Jaeson Schmidt with Lake Street Capital Markets. Jaeson Schmidt: Just looking at Lighthouse and that potential trial here in the U.S., what additional steps, if any, do you guys need to complete to continue to move that forward? Jacob Suen: Jaeson, yes, Jacob here. So yes, it's actually a very significant milestone. And as I was alluding to in the call earlier, is the fact that -- basically, as far as the technology validation, that looks to be already proven with the trial we have done in the corporate office. And so now we are working with the business sponsor. So typically, they would not work with us to do a business sponsor until they feel very comfortable with the technology validation. So that phase is done. We are now working with them on their sales team to identify several potential customers that would be able to really take advantage of our Lighthouse product. And these are customers as we work with this particular MNO where they actually have to walk away from deals previously due to lack of budget using existing system. So our solution are giving them a fraction of the cost otherwise. So as an example, where they have to have using a system that's going to be $4 per square foot, now we're going to be able to offer them a fraction of that, so they can meet that budget. So those are the customers that we are targeting, and we intend to get 1 or 2 of those customers for the live trial and hopefully, in turn, become permanent. So that's where we're at regarding the progress with this particular MNO. Now as you know, dealing with MNO, it takes time, although they're really seeing a unique value with our Lighthouse. Jaeson Schmidt: Okay. That's good to hear. And then looking at the consumer segment, understanding the near-term dynamics, but do you guys have confidence that you will see that rebound in Q3? Or is it just too early right now? Michael Elbaz: It's a bit early right now, but let me put it this way. The demand is very healthy and the demand, what we mentioned before last quarter is that we were expecting a modest growth on the consumer market across the year. So from a demand standpoint, it's there. It's a question of supply and the timing of it. I should also mention from a consumer business model itself, the way it's being set up and really is based upon the strong relationship we have with the service providers, the OEMs themselves, the CMs and the distribution channel as well, too. And that gives us quite a bit of visibility, at least in the short term about some of the supply management that we have to do. The other piece also that I should mention is that typically, service providers have 2 or 3 OEMs. And typically, we are designed in with 2 OEMs. So if there is any type of supplier allocation being redone, for instance, we're still somewhat covered by it. Jaeson Schmidt: Okay. That's helpful. And then just the last one for me, and I'll jump back into queue. You're expecting a nice sequential downtick in operating expenses. Is this sort of a level we should feel comfortable with in the back half of the year? Or how should we be thinking about OpEx? Michael Elbaz: Yes. I think first half of the year, I believe, in 2026 is about 9% down compared to the first half of last year. As revenue grows, you would expect a modest uptick on that. But overall, our sense is that we definitely want to make sure that we have a very strong operating leverage so that when the top line grows and that top line should be having some higher gross margin than the corporate average. As it grows, then we really optimize our overall business model and be -- really offer some positive and accretive EBITDA margin in the long run. Operator: At this time, this concludes our question-and-answer session. If your question was not answered, you may contact Airgain's Investor Relations team at AIRG@gateway-grp.com. I would now like to turn the call over to Mr. Suen for his closing remarks. Jacob Suen: Thank you all for your thoughtful questions and for your continued interest in Airgain. If there's one key takeaway, it is that Airgain is a more focused and disciplined company with a stronger foundation and improving operating model and growing platform momentum. We believe the work we have done positions us to drive sustainable growth and improve profitability as we move through 2026 and beyond. We appreciate everyone joining us today and look forward to keeping you updated on our progress. Operator, you may now conclude the call. Operator: Thank you for joining us today for Airgain's First Quarter 2026 earnings. You may now disconnect.
Operator: Welcome to Carter's First Quarter Fiscal 2026 Earnings Conference Call. On the call are Richard Westenberger, Interim Chief Executive Officer and President; Chief Financial Officer and Chief Operating Officer; Allison Peterson, Chief Retail & Digital Officer; and T.C. Robillard, Vice President, Investor Relations. Please note that today's call is being recorded. I'll now turn the call over to T.C. Robillard. Thomas Robillard: Thank you. Good morning, everyone. We issued our first quarter 2026 earnings release earlier today. The release and presentation materials for today's call are available in our Investor Relations website at ir.carters.com. Note that the statements on today's call about items such as the company's expectations and plans are forward-looking statements. For a discussion of factors that could cause actual results to vary from those contained in the forward-looking statements, please see our most recent SEC filings as well as the earnings release and presentation materials posted on our website. In these materials, you will also find reconciliations of various non-GAAP financial measurements referenced during this call. After today's prepared remarks, we will take questions as time allows. I will now turn the call over to Richard. Richard Westenberger: Thank you, T.C. Good morning, everyone. We appreciate you joining us on the call this morning for an update on our business, and I'm pleased to have my colleague, Allison Peterson, who leads our North American direct-to-consumer businesses, joining me today to provide her thoughts. As usual, we have a lot going on here at Carter's. As I'm sure many of you saw, we announced a leadership transition last week. Doug Palladini has departed as our CEO. We have continued progress to report today, and I'd like to thank Doug for his leadership and contributions over the past year. Anyone who met Doug quickly appreciated his passion for our brands and our mission of serving families with young children, and we wish Doug all the best. We are looking forward to welcoming Sharon Price John as our new CEO next month. Sharon has a rich background in the children's industry, having held senior leadership positions at several outstanding companies in our space, and she has a demonstrated track record of driving transformation and growth. Now turning to our first quarter performance. The year is off to a good start. Our first quarter performance, both sales and earnings exceeded the expectations we shared with you on our last call. We saw higher year-over-year demand for our brands across all of our channels in the first quarter. Easter holiday came a bit earlier this year, which benefited demand. Our sense is that consumers were out shopping broadly in the first quarter. Earnings, although above our expectations were impacted by a number of factors, including the net negative impact of higher tariffs, spending and interest costs. Areas of progress that we'll highlight today include continued positive comparable sales in our U.S. Retail business, driven in part by the success of our investment in demand creation in driving higher traffic to our U.S. stores and websites. We're also continuing to attract new consumers to our brands, including Gen-Z. Balancing out these encouraging green shoots are multiple and continued uncertainties in the marketplace, including the evolving tariff landscape and questions about the resilience of the consumer in the face of ongoing inflation and other pressures. And we remain on our journey to improve the profitability of the company. We know we have continued work to do on this objective in particular. Today, we'll share our thoughts on these matters and how we're thinking about our business over the balance of the year. In reviewing our first quarter performance and our outlook, our comments this morning will track along with the presentation posted to the Investor Relations portion of our website. Turning to our presentation materials. Beginning on Page 2, we have our GAAP basis P&L for the first quarter. Our net sales were $681 million. Our reported operating income was $28 million compared to $26 million last year, and our reported earnings per share were $0.39 compared to $0.43 in first quarter last year. On the following page, we've summarized our non-GAAP adjustments. We had no adjustments to our reported results in the first quarter of 2026. Last year, we had adjustments related to operating model improvement costs and leadership transition costs, which reduced our reported profitability. Our comments this morning will speak to our performance on an adjusted basis, which excludes these unusual items in the prior period. Our first quarter adjusted P&L is on Page 4. Our net sales in the first quarter of $681 million represented growth of 8% over the prior year. On these sales, gross margin was 43.1%, a decrease of slightly more than 300 basis points compared to prior year. As expected, year-over-year, our gross margin rate was pressured by tariffs, a gross incremental impact of roughly $50 million in the quarter. This negative impact was partially offset by improved pricing, other supply chain mitigation initiatives, a higher mix of U.S. retail sales and the benefit of our productivity initiatives. On a consolidated basis, AURs improved in the high single digits and units were up low single digits. In U.S. Retail, first quarter AURs were up low single digits, and we achieved higher pricing gains in our U.S. Wholesale and International segments. First quarter adjusted SG&A increased 3% over prior year to $270 million. The increase was driven by incremental investments in demand creation and general inflationary pressures in wages and rent, which were partially offset by the benefits from our productivity initiatives. We do believe our productivity initiatives are delivering as expected, roughly $6 million in cost reduction in the first quarter between the cost of goods sold and SG&A lines of the P&L. These savings are helping to fund our investment agenda, including the incremental spend on demand creation. While spending was up in dollars, we achieved 180 basis points of leverage in the quarter. First quarter adjusted operating income was $28 million with an adjusted operating margin of 4.2%. While ahead of our expectations, this profitability was lower than last year. Clearly, we're focused on delivering growth in both the top line and operating earnings. And to this end, we have operating income growth planned in the second half of 2026. Below the line, net interest and other expenses increased over prior year as expected due to higher interest costs and a higher debt balance related to the refinancing of our senior notes in fourth quarter last year. Our effective tax rate was approximately 28% in the first quarter, up 60 basis points compared to prior year, which was driven primarily by the new higher minimum tax in Hong Kong, which we highlighted last quarter. For the full year, we're forecasting an effective tax rate of approximately 22%. The net of all this on the bottom line, first quarter adjusted earnings per share were $0.39 compared to $0.66 last year. The impact of our debt refinancing on first quarter 2026 EPS was approximately $0.08 per share. On Page 5, we have the details of first quarter performance by business segment. As mentioned, consolidated net sales grew roughly $50 million over last year's first quarter or by 8% with growth in each of our business segments. Adjusted operating income declined $7 million, resulting in the adjusted operating margin of 4.2%, which I just mentioned. We achieved meaningfully higher profitability year-over-year in our U.S. Retail and International segments. However, these gains were more than offset by lower profitability in our wholesale business, which can be attributed to the net negative impact of tariffs. Corporate expenses for the first quarter were comparable to prior year. And Allison will now provide some additional perspective on our U.S. Retail businesses beginning on Page 6. Allison Peterson: Thank you, Richard. Our U.S. Retail business delivered strong performance for us in the first quarter, continuing to build on momentum we've seen over the past several quarters. Total U.S. Retail sales -- net sales grew nearly 13% in the first quarter. Comparable retail sales increased over 10% versus last year and nearly 5% on a 2-year basis. This was our fourth consecutive quarter of comp growth, and we continue to improve our comp trend on a 2-year basis. This quarter, performance was strong across both stores and e-commerce with strength spanning all product age segments. Our baby assortment remained the primary driver, while we also delivered growth in toddler and kid. We do believe an earlier Easter contributed to business in March as we expected. We estimate the earlier and stronger Easter selling period likely contributed about 2 points of comp in the quarter. Comps were strong in both retail channels driven by higher traffic and higher average transaction values. We are seeing some increased penetration of our opening price point product and clearance sales were up in the quarter. We think this reflects a consumer who is more focused on price. This makes sense to us in the context of higher gas prices and volatile consumer confidence, likely in part due to continued persistent inflation across the economy and the unsettled global situation. Despite these factors, we successfully increased AURs by low single digits in the first quarter while also increasing units by double digits. As Richard mentioned, in addition to the benefit of our demand creation investments, improving traffic across our retail channels, we're also seeing good progress in growing our consumer file. Our active consumer count continued to grow in the first quarter, and we added new Gen-Z consumers to our business who are gravitating to our higher AUR products. Despite the negative net impact of higher tariffs, the strong comp sales performance and benefits from our productivity initiatives led to good improvements in Retail's operating profit and margin in the first quarter. On Page 7. During the first quarter, we launched a collaboration between Disney and our OshKosh brand featuring Winnie's the Pooh. This initiative was seamlessly integrated across our digital and physical touch points through distinct and compelling consumer experiences. Consumers love the unique product, which leveraged OshKosh iconic denim. While not a material contributor to sales in the quarter, it was a highly successful collaboration, which brought new consumers to our portfolio of brands and overpenetrated toward Gen-Z. Notably, the average AUR of this special product was more than double our U.S. Retail average. On the following page, as we've shared previously, continued investment in marketing is a very important element of our growth strategy. We saw strong results from our marketing investments in the quarter, resulting in increased traffic to our channels and growth in our consumer file. We have added tactics to connect to consumers in the places where they are spending significant time discovering brands. Social media and connected TV are 2 great examples of channels where we are seeing increased engagement while leveraging content creators and influencers for their authenticity and high credibility with consumers. I'll now turn the call back to Richard. Richard Westenberger: Thank you, Allison. Turning to our performance in U.S. Wholesale and International on Page 9. In U.S. wholesale, net sales were up slightly over last year. Although we improved pricing in response to tariffs, this was offset by a reduction in unit volume. Exclusive brand sales grew versus last year, driven by the Child of Mine and Just One You new brands, while sales of Simple Joys were comparable to prior year in the first quarter. This is an improvement in recent trend for Simple Joys. As expected, profitability in wholesale was lower than a year ago. Virtually all of this decline can be attributed to the net negative impact of the incremental tariffs. As we mentioned on our last call, we expected first quarter wholesale sales to be softer and that tariffs would meaningfully affect this segment's profitability. As we look to the second half, we believe we're well positioned for sales and operating profit growth in wholesale. Our customers have responded well to our fall and winter product offerings, which has driven sequential improvement in our seasonal order bookings. In addition, the net impact from tariffs tapers meaningfully beginning in the third quarter. Our businesses outside the United States have continued to deliver good performance. Total reported international net sales increased 14% over last year and by 8% on a constant currency basis. Growth in the quarter was driven by our businesses in Canada and Mexico. The largest component of international, our Canadian business posted strong total and comp sales growth, similar to the U.S. business likely benefited from the earlier Easter holiday, and we saw strength across both our stores and e-commerce channels. Demand in Mexico was particularly strong in the first quarter. Easter is very important in this market, and our Q1 business reflected strong holiday demand. Total net sales grew over 40% in Mexico with $3 million of the growth attributable to better exchange rates. Our team delivered a plus 21% comp in Mexico in the first quarter. Last year's business had been negatively impacted by some distribution center disruptions, which benefited this year's comparison somewhat, but the underlying trends and demand profile of our business in Mexico continue to be very strong. We're continuing to pursue store growth in this market with plans to open 12 new stores this year. International operating income was approximately $4 million in the first quarter compared to roughly breakeven performance last year. The improved profitability was driven by productivity savings as well as lower product costs resulting from favorable exchange rates. On Page 10, we have some photos of a new store in Mexico. Our team in Mexico has done a great job taking our successful co-branded store model from here in the U.S. and deploying it across the market in Mexico. On Page 11, we've provided some balance sheet and cash flow highlights. Our balance sheet is in good shape, and we ended the quarter with substantial liquidity. Net inventories were $466 million, down 2% compared to prior year and down over 14% from year-end. First quarter inventory units were 9% lower than a year ago. The amount of ending inventory value attributable to the incremental tariffs at the end of the first quarter was $26 million. Excluding this amount, inventory dollars year-over-year were down 7%. We generated positive operating cash flow of $6 million in the first quarter compared to a use of $49 million last year. This better result was due to improved working capital and favorable timing of interest payments versus the prior year. And in the quarter, we paid $9 million in dividends. Before I cover our expectations for second quarter and the balance of the year, I'd like to summarize some of our thoughts on tariffs, which can be found on Page 12. The impact of tariffs on our results is a complicated topic and made even more so by the developments in the courts and ongoing uncertainty about the future direction the administration may take. For context, we've always paid import duties at Carter's. Tariff rates have typically differed somewhat by country of origin. But in total, we historically paid a little over $100 million annually to bring our products into the United States. This represented a historical effective tariff rate of roughly 13%. The imposition of the additional IEEPA tariffs was estimated to add over $200 million of incremental tariffs to this historical baseline, bringing the effective tariff rate above 35%. Our plans for the year were developed assuming these IEEPA tariffs would be in place for the entire year. Given the Supreme Court's recent decision, the overall tariffs were reduced to a 10% additional tariff rate for all countries, also an additional incremental tariff rate in India related to Russian oil purchases was eliminated. As a reminder, for financial reporting purposes, tariffs become part of inventory costs when product is received. These costs are added to the balance sheet value of inventory. Any changes in tariff rates, including reductions, are not an immediate benefit to the P&L. That benefit occurs over time as products are sold and their cost, including tariffs become part of cost of goods sold. Our guidance reflects the benefit of the lower 10% incremental tariff rate on imports through the second quarter and the elimination of the India Russian-oil-related tariff for the balance of the year. We've assumed the higher IEEPA level tariff rates incorporated into our original plan remain in effect for product imported through the second half of the year. We maintain this assumption for higher-than-historical tariff rates based in part on comments from the administration that they intend to reimpose higher tariff rates at least commensurate with what was implemented under IEEPA beginning midyear. If this does not happen or if tariffs return entirely to their historical baseline rates, we may have some upside to our outlook, all else being equal. Needless to say, we expect changing tariff rates may impact the marketplace conditions, especially pricing, which makes it difficult to call significant changes to our previous outlook for the year right now. Turning to our outlook for 2026 on Page 14 of the presentation materials. As we indicated in our press release this morning, we are reiterating our full year sales and earnings guidance. The year is off to a good start, and we're certainly pleased by that, but the lion's share of our year is still ahead of us, and we're mindful of a number of uncertainties that complicate projecting too far out into the future right now. The consumer continues to spend, but as we noted earlier, has become more value focused as of late. We believe fluctuations in consumer confidence and inflation may continue to affect demand for our brands. We're watching the marketplace closely. Some competitors may begin to take their prices down, and we may need to respond accordingly to ensure we're as competitive in our pricing as needed. To this end, we may need to reinvest some portion of potential upside from lower-than-planned tariffs into sharper pricing in certain parts of the business. It's certainly our intention to hold on to the pricing gains we've achieved to the greatest extent possible. And as I said earlier, we're cautious that we're out of the woods when it comes to tariffs, it's possible that new tactics could be employed by the government to reinstate the previous IEEPA level tariffs or an even higher level of tariffs on imports across a range of our sourcing countries. To reiterate our expectations for the full year, we're expecting net sales growth in the low to mid-single digits over 2025. This growth reflects anniversarying the extra week in 2025's calendar. We're expecting growth in each of our business segments. In our U.S. Retail business, we're planning low single-digit sales growth with comp sales up in the mid-single digits. In U.S. Wholesale, we're planning net sales up in the mid-single digits. And sales in our International segment are also planned up in the mid-single digits, reflecting growth in each of the principal components in International, Canada, Mexico and international partners. On profitability, we're expecting adjusted operating income will also grow in the low to mid-single digits over 2025. We continue to forecast that more of our profit growth will occur in the second half of the year. In part, this is due to the higher year-over-year investment spending and interest costs in the first half of the year versus the second. As we indicated on our last call, we're also expecting a smaller net negative impact from tariffs in the second half of the year as tariffs become more comparable and a more significant benefit from pricing as planned in the second half versus the first half of the year. 2026 earnings per share are expected to be down low double digits to down mid-teens over 2025's adjusted earnings per share of $3.47. Our outlook for operating cash flow in the range of $110 million to $120 million remains unchanged. Also unchanged is our forecast for CapEx of approximately $55 million in 2026, with investments in new stores in Mexico, distribution center upgrades and technology initiatives accounting for the majority of planned spend. Our expectations for the second quarter are summarized on Page 15. Second quarter net sales are expected to increase in the low single digits compared to last year. By segment, we're expecting in U.S. Retail growth in the low single-digit range with comparable sales planned up mid-single digits. As expected, we saw some softening of demand trend in April. In part, we think given the strength of business in late March in advance of Easter, April comparable sales in our U.S. Retail business were down just under 4%. On a combined March and April basis, comps were up in the high single digits. In U.S. Wholesale, we're planning net sales up in the mid- to high single-digit range. In international, we're planning net sales roughly comparable to a year ago. We're planning second quarter gross margin down approximately 100 basis points over last year, principally due to the net unfavorable impact of tariffs, offset somewhat by higher planned pricing, supply chain mitigation actions, a higher mix of U.S. retail sales and productivity improvements. We're planning second quarter adjusted operating income in the range of $11 million to $13 million. Second quarter adjusted EPS is projected in the range of $0.02 to $0.06. Before we open it up to questions, I'd like to thank our thousands of employees across the globe who work tirelessly every day and exhibit such passion for our brands and the families we serve. We are extremely grateful for their efforts. And with those remarks, we're ready to take your questions. Operator: [Operator Instructions] Our first question comes from Paul Lejuez with Citi. Brandon Cheatham: This is Brandon Cheatham on for Paul. I just wanted to touch base on the SG&A change. I think previously, you were looking for that to be roughly flat year-over-year, and now you're looking for a low single-digit increase. I was just hoping that you could unpack what changed there. Richard Westenberger: Sure. So I'll try to give you a little color on that. Well, first, I would say it's expected to be up very low single digits. So it's not something that I'm viewing as an enormous reset to our expectations. A couple of things contributing to that. First, we've had a handful of our intended store closings that are pushing out a bit in the year. They're just going to happen a bit later for a variety of reasons. That is additive to the SG&A line. Also, we've made a decision to spend a bit more on marketing. We feel like we're generating very good returns from those investments. So there's a modest uptick in the spend on marketing, driving very good returns. That's also additive to the SG&A line. Beyond that, I would say there's a couple of areas that are running a little bit harder than planned. Professional fees are a little higher, perhaps a little bit more incremental impact from inflation across wages and rent. Those are the primary drivers. But we have a good record of managing spend pretty tightly here, and my expectation is we'll continue to do that. Brandon Cheatham: Got it. And just as a follow-up on the tariff assumption. So you're assuming that you have a 23% effective rate for basically 4 months and then we return to the 36% rate. Can you just help us like what are you assuming the impact is on gross margin for the balance of the year? By my calculation, it seems like the effective tariff rate that you're assuming before was 36% goes to 32%. Just help us how much of that is flowing through on gross margin in your guide. Richard Westenberger: Yes. I would say it's a difficult question to answer with a lot of precision around just what may happen in the landscape. I think we've given ourselves a little bit of room in terms of what may happen from a marketplace pricing point of view. We obviously held our full year guidance. To your point, we've assumed those tariff rates go back up to the IEEPA level for the second half of the year. The upside that we've reflected in having the benefit of the lower 10% rate and the elimination of the India specific tariff is about $30 million, but there is still considerable gross margin pressure in our plan in the second half. Now there's a higher benefit from assumed pricing in the second half as well. So -- but it is still dilutive on the gross margin line for the year. Brandon Cheatham: But all else equal, you're assuming that $30 million flows through to gross profit or you don't anticipate maybe raising prices as much in the second half? Richard Westenberger: Yes. I think we've just given ourselves a little bit more room, a little bit more flexibility on that pricing and gross margin line of the P&L. So we have not flowed it through. We've held the full year guidance, but that's the benefit of all things being equal, if we're able to achieve our planned pricing and given the reduction in the tariff rates that we will realize in first half imports and such, that's the amount that would flow through. But again, we're not flowing it through because there's just too much uncertainty in the marketplace right now. Operator: Our next question comes from Jay Sole with UBS. Jay Sole: Richard, I'm curious what initiatives maybe that have been going on for the last couple of quarters that were maybe started with Doug in his tenure will continue versus like what stuff might kind of be paused as you wait for Sharon to come in and put her stamp on the business. Can you give us a little sense of that? Richard Westenberger: Sure. Well, as you know, Jay, having followed us for a long time, we have a number of things underway here that we think are generating good returns for us. I think, first and foremost, the investment in demand creation really is -- has been an inflection point for us in terms of driving improved traffic, both to the stores and to the website. That has been an issue in our U.S. retail business for a couple of years prior. We felt like we under-indexed relative to some of the better brands out there, our peers in the industry. So I think we will continue to ramp that up, and we're watching for any signs of inefficiency in that spend. We've not reached that point yet. So that certainly will continue. I think the overall emphasis just on brands and product. This is a product-centric company. And so we continue to work very hard on our assortments to make sure that we've got the most compelling product that attracts and motivates today's generation of parents. That's an evolving landscape. And so I think the attention around the product side of things, in particular, will continue. I think the emphasis on productivity, and that's a broad range set of initiatives, starting with our store fleet. So as you know, we have pruned a number of unproductive low-margin stores. If you're going to have stores, they need to be special, they need to be productive. And so all the efforts that are looking at improving the productivity of our retail store fleet. We've got initiatives also around the e-commerce side of the house. So enhancements are being made to the website that has a lot to do with just the experience for the consumer online, more branding stories. We have a great transactional website. We think there's an opportunity again to have the power of the brand to shine through a bit more distinctly. And so our teams -- our great e-commerce teams are working on that. So I would say more will go forward versus stopping or pausing. Sharon certainly will come in, and we expect her to put her fingerprints on the organization and on the strategy. Fortunately, she's been read in on a number of the things that we have underway here, and I think that was a point of attraction for that we're not starting over. We're not starting from blank slate. There's a lot of good things that are underway here, and I would expect most of those to go forward. Jay Sole: All right. That's super helpful. Maybe if you can also give us a sense of what do you think the children's apparel industry grew during the March-April period? I mean you believe you took share? I mean, how do you think about that? Richard Westenberger: Yes. I don't know about the March-April period specifically. For the first quarter, our data suggests that the market was up just under 5% year-over-year. So there was healthy growth, and that's on top of considerable growth in the market in the fourth quarter. So the consumer does seem to be outspending on their kids. We think that's a healthy backdrop for our business. Our data suggests that we've maintained our share overall. Operator: Our next question comes from Jon Keypour with Goldman Sachs. Jonathan Keypour: I have 2 questions. One of them is very quick. The first is just what can you tell us about tariff refunds you anticipate getting, timing and potential use of those funds? And then just on advertising as a percent of spend, I think historically, you guys have been around 3%, and you have mentioned some willingness to pick that number up to 5%. It sounds like acceleration on the advertising is going to be part of the SG&A increase in the guide. I'm just wondering, it seems like the ROI is very good or the ROAS is very good on the advertising piece, not to put an even more pointed kind of focus on it, but like why not more, I guess? At what point do you feel like you can really accelerate and get up to that 5% and how it still be incremental and still get the right return? Richard Westenberger: Right. Jon, thanks for the question. First, as it relates to tariff refunds, there's about $130 million of incremental IEEPA tariffs that we paid between last year and early this year before the Supreme Court's decision. That is the amount that we have filed for refund with the government. So our claims have been entered into CBP's portal. We do see some progress. We've been tracking this pretty closely as everyone in the industry has. It does look like there is some progress and an intention to start disbursing those funds. We're not counting on that. We're not recognizing that until the cash hits the bank account. But we're in line for our refund, and we're monitoring it closely. As it relates to use of the funds, capital allocation is something that we talk about with our Board all the time. We'll continue to do that. We're not necessarily in a liquidity crunch. We're not constraining investment right now based on not having that tariff money. Our first preference would be to put the money back to work in the business. And so we're actively looking for opportunities to accelerate the growth of the business. Again, we're not capital constrained, where we have good investment cases for investment, we're continuing with that work. And marketing is a good example of that. I would say we're stepping up the investment by a little over $20 million this year. So that 3-ish percent number will start to inch up a bit. I think we're stepping our way into it and monitoring it and measuring it to make sure that we're getting the kind of returns that we should and that make the investment justified. To your point, we might be able to go faster, but I think $20-plus million investment is significant for us. We want to just make sure it's generating the right returns, and we'll continue to spend as we start to see these -- the benefits in the business. Operator: Our next question comes from Jim Chartier with Monness, Crespi, Hardt. James Chartier: Richard, just curious what gives you the confidence for second quarter comp sales to be up mid-single digits given the softness that you saw in April? Richard Westenberger: Yes. Thanks, Jim. I think that the April softness wasn't entirely unexpected, just given the strength of business in March. I think Easter was probably a bit more pronounced of a benefit than we had planned. From the commentary that I've read, others in the industry saw their businesses soften a bit in April. That combined number of high single-digit comp was terrific. We've already -- we're only a few days into May. We've started to see business turn solidly positive again from a comp point of view in our U.S. retail business. And then the compares become a bit easier. May and June are easier compares than April was a year ago. So I think we feel like we've got good momentum in the business. I think, again, the marketing investments appear to be successful in driving traffic to both channels. So that's what gives us the encouragement that we'll achieve that result. Allison, anything that you would add to that? Allison Peterson: The only other thing I would add is that as we continue to see our consumer file grow, that gives us some momentum with bringing new and returning customers back to the brand. James Chartier: Great. And then can you talk about the Umbro collaboration? What are you seeing with that? And then how are you thinking about collaborations going forward? Is that something you think you want to increase the number as you go forward? And what does the pipeline look like? Allison Peterson: Yes. Thanks for the question. I think we are feeling very bullish on collaborations. We've spent some time on the call talking about our collaboration with Winnie the Pooh and OshKosh, and we're very, very happy with the results we saw from that collaboration. Umbro has also started out strong. We are seeing, as with most things, people excited to purchase the baby products first as it relates to the size offerings, and we see toddler and kid a little bit purchase closer to the time of the event, so knowing that the World Cup is up and coming. We anticipate that we'll still see some nice demand. I would say from an experience perspective, we're very excited with how the Umbro collaboration has come to life across all of our channels, very similar to what we saw with Winnie the Pooh. And we do feel pretty confident about our collab pipeline for the rest of the year. Richard Westenberger: Jim, I think the collaborations have been a good way for us to introduce something new, some newness in the assortment, which is a bit of a spark again on that traffic front, brings the consumer in, they find something new and different relative to their expectations. So we'll do it selectively, I think, going forward where it makes sense for our brand and then obviously, whoever we're collaborating with. But there's a place for it in our business in a more meaningful way than we've done historically. Operator: Our next question comes from Ike Boruchow with Wells Fargo. Irwin Boruchow: Richard, 2 for me. I guess the first question is, I know the queue will come out later, but can you share, at least at a high level, the gross margin details, the decline in the first quarter at retail and what it was at wholesale in the first quarter? I guess I'm asking because it seems clear there's a much larger decline in wholesale. And I kind of just want to ask why you're not able to mitigate the pressure in one channel versus the other? And then the follow-up to that is to stay with wholesale is that the wholesale margin run rate now looks like it's come down to more like a mid-teens versus the low 20s a few years ago. Do you expect that to regain that lost margin in '27 and beyond? Or do you kind of view this as the new normal with some structural changes in that channel and DTC kind of is the margin opportunity for the consolidated business going forward? Richard Westenberger: Right. Yes. So good questions. I won't comment on the specific gross margin changes by channel. Those are in the queue. And to be honest, I don't have them right in front of me, but I'll speak at a high level. The wholesale business, for sure, has been more impacted by tariffs, and that's for a variety of reasons. We are much more in control of our destiny in our U.S. DTC business than we are with wholesale. And we plan that business collaboratively with our wholesale customers. And this has been an evolution. The landscape has been evolving as it related to the tariffs being put in place and how the industry has responded. I'd say there's been good partnership and collaboration with those customers, more of a sharing convention of the cost of the tariffs as we've kind of stepped our way into them. I think we've made more progress as we've gotten into 2026, but that coverage was less than what we had achieved in our U.S. Retail business, where we just obviously control much more of the various levers in the business, pricing units and so forth. So it was expected coming into the year that we would not fully cover all of the costs of tariffs in the wholesale channel. And that has had, to your second question, the flow-through impact on wholesale segment profitability. And there's other things that have affected it as well. We've made some make investments in the product itself, which we felt like we had to make from just a competitiveness of the assortment point of view, and that has caused the margin to run down a bit. It's been a very margin-rich business over the years for many years. I think the mix has also changed pretty considerably over the years as it relates to the customer profile. So the department stores, which are the best margin part of that business have just continued to decline. And I think that's more structural as it relates to the industry, nothing to do with their regard for Carter's or the demand for our products. It's just that as a channel has not grown and has been contracting a bit. Business is more concentrated in the mass channel than it had been. Target and Walmart continue to be very good margin businesses for us, but probably not quite at the rate that those department stores have been over time. So I think for the next little bit, the margins will be lower than they've been historically, but our internal plans show margin expansion over time. That's an important objective for all of us that every part of this business is expected to grow its profitability over time. And that's how we're approaching it. But certainly, the impact of tariffs cannot be underestimated in this part of the business. It's also the part of the business that I think will benefit most directly if tariff rates come down more permanently. So most impacted on the way in. And as tariffs go out, hopefully, this is part of the business that should recover more dramatically and more rapidly. Irwin Boruchow: And Richard, you mentioned competitors that may look to take prices lower and you may have to adjust your business. Is that a comment that's more related to your direct-to-consumer business? Or is that more related to the wholesale business? Richard Westenberger: Well, I think it's a comment about the marketplace more broadly. I think tariffs have been an industry issue. So our wholesale customers have faced it with developing their private label assortments with everything else that they're buying in other national brands as well, certainly in our DTC business as we look at other near-end competitors, we're watchful of what they may be doing as well. There's other challenges as it relates to inflationary pressures as well, which may provide the industry some motivation to keep pricing. So as we look into early next year with what's going on with oil prices and commodity costs, we're seeing a bit more inflation than we had originally planned for early next year product deliveries. Transportation costs are going up. We're seeing some additional fuel surcharges. We have an awesome supply chain that does a great job. So we're not disadvantaged in any aspect of how we procure our products, but the entire marketplace is going to see these pressures, including the cost of bringing the goods over to the United States. So tariffs are one element of the cost structure, but I think we have to look at all the other input costs as well. Operator: Our next question comes from Tom Nikic with Needham. Tom Nikic: I've got 2 hopefully quick ones. First, question, Richard, I apologize if you said this already, if I missed it, but did you say anything about store openings and closures for this year? Richard Westenberger: I don't know if we commented on it specifically, Tom. The plan is to close about 60 locations across North America, most of those here in the U.S. As I mentioned, there's a handful of stores that have pushed out timing-wise, probably a bit more into Q4 versus Q3 as originally envisioned. There's -- from memory, we closed about 10 stores in the first quarter, though, another 20 or so that we will close here in the second quarter. And then we have a handful of new store openings. Those are really just stores that were planned originally as part of last year. They've kind of locked over the calendar year-end date, and they'll happen now in 2026. Tom Nikic: Got it. Okay. And then on the wholesale channel, I believe you said that the Amazon business was flat this quarter. Is that sort of a sign that, that business has now stabilized and maybe the declines there are finished? Or was there anything kind of one timing there or anything timing related on the Amazon front? Richard Westenberger: Tom, I would say on Amazon, we actually had growth in the Amazon relationship in the first quarter. And my comment was specifically that Simple Joys volume was comparable in the first quarter, which is an improvement over where we've been. We do have Simple Joys planned down a bit this year, not at the same rate that we've seen over the last couple of years, and we're starting to see the ramp-up of the sale of our flagship brands, for Carter's, OshKosh, Little Planet. They exhibited some growth in the first quarter. There's stronger growth that's planned in the second half for those brands, which we intend to offset Simple Joys being down. So we've planned growth with Amazon for the full year. Operator: Our next question comes from Kendall Toscano with Bank of America. Kendall Toscano: I just had a follow-up on tariffs and just to make sure we're thinking about the timing correctly. But assuming it takes until July to sell through the inventory, you brought in at the 36% rate. So starting around August, you'll start to see some benefits from the lower rates that have been in effect since February 24. I guess how long would you assume it reasonably takes to sell through this inventory that you've been bringing in at lower rates for the last 4 months? Would it be through the end of the year? And I'm just kind of curious how should we think about -- if you're assuming then that the back half of the year, tariffs jump back up to a higher rate, assuming the incremental IEEPA tariffs, when does that hit the P&L? Is it during 2026? Or would it be beyond? Richard Westenberger: Yes. Thanks, Kendall. It would be a mix. I would say, on balance, our turn assumption, which drives the -- how inventory cost bleeds into the P&L is kind of 4 to 5 months. It depends a little bit on the sales rate of product. But the assumption is that we're going to see higher tariffs again and that those will be implemented midyear. And so to the extent we import product beginning in that kind of midyear time frame, those would go into our inventory costs. And we'd be selling that product over the balance of the year and into early next year. We start to sell kind of spring product. There's pre-ship product for spring '27 that we would sell in the fourth quarter. So all of that in our current hypothesis would be subject to the renewed higher tariff rates. I hope it doesn't happen. I hope they find a different path forward and we go back to where we've been historically, but we'll see. Kendall Toscano: That's helpful. And then one other question I had was just on unit growth versus AUR. Obviously, specifically on the U.S. retail business, you had a pretty nice acceleration in units to up low double-digit percent this quarter. Curious how you're thinking about the balance of the year and whether you'd expect unit growth to remain as strong? Richard Westenberger: Yes. I think unit growth may be at the high watermark as it relates to Q1 as we plan the business. I think it will moderate a bit in Q2 and then it will moderate further in the second half where we have more benefit from pricing planned in. That's just how we've planned the business. There's historically been a pretty elastic relationship as you take prices up. Now we've been benefiting, I would say, from a little bit more stickiness, a little bit more inelasticity, particularly among the baby category where we have the most equity with consumers. I would say, among some of our higher-priced, higher AUR goods where the aesthetic, the benefits, the features are a little bit more apparent to the consumer, that has shown some greater inelasticity as well. But pricing is a bigger part of the calculus in the second half and the units won't be as strong, at least as we're looking at it today. Operator: Our next question comes from William Reuter with Bank of America. William Reuter: So you mentioned that you have kind of made the assumption that these 301 tariffs, the U.S. trade representatives will indeed move forward with those. Have you talked to your wholesale partners in terms of Walmart and Target or in the event that they do not put 301 tariffs in place if they expect that you will reduce prices based upon the fact that prices have been set based upon IEEPA tariffs from last year? Richard Westenberger: Bill, I won't comment on specific conversations with specific customers. I would say that we plan the business collaboratively with our wholesale customers. They've been good partners as we have faced this issue as an industry. And I would expect that if we get relief on tariffs that, that would be the spirit of conversations going forward as well. But obviously, we have an interest as an industry to see these costs go away. This is a value-oriented product category. Even small cost increases have been historically difficult with pricing increases over the years to cover. So we'll face those conversations when that situation emerges. I hope that situation emerges where tariffs have gone away, and we're looking at a nice benefit to potentially I'd be discussing together. William Reuter: So does every analyst that's been calculating this for the last couple of years. The second part of my question, you mentioned that good sell-through of winter products has resulted in stronger spring order books, maybe than you've seen in a little while. I guess how much visibility do you have into your order books for the remainder of the year? Any way you can give some context for what types of increases we might be seeing? And I guess, how much remains kind of uncertain, meaning I'm not sure what level of communication from your wholesale customers they provide at this point? Richard Westenberger: Yes, Bill, I would say we've sold in the fall and winter at this point. So I think we have pretty good visibility to the majority of, I would say, seasonal product shipments for the balance of the year. Now an order doesn't necessarily mean that it wouldn't change over time. If conditions change, there is some history that orders could be canceled, but that's -- we don't have a long history of that. So I would say reaction by the wholesale customer set to our product itself with the various meetings we have to show them the line and such. And again, we plan the business collaborative with them. We get their input on the kind of products that they're looking for has been extremely positive and more positive than in recent seasons. So that translated to an improved order profile for the second half of the year. The other component that is a little bit more of a game time read on business is just what happens with replenishment. Replenishment is between 30% and 40% of the business at wholesale, and that depends on how the register is ringing. And so if consumer demand continues to be strong, that's potentially some upside to the forecast as well. But I would say we have good line of sight to seasonal bookings, and that's been an improving outlook for us. William Reuter: That 30% to 40% number is very helpful. Operator: This concludes the question-and-answer session. I'd now like to turn it back to Richard Westenberger for closing remarks. Richard Westenberger: Well, thank you very much for joining us this morning. We appreciate your participation in the call and your questions and your investment in Carter's, and we look forward to updating you on our next call. Goodbye, everybody. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Welcome to Adient's Second Quarter Earnings. [Operator Instructions] I'd like to inform all participants that today's call is being recorded. If you have any objections, you may disconnect at this time. I will now turn the call over to Linda Conrad. Thank you. You may begin. Linda Conrad: Thank you, Denise. Good morning, everyone, and thank you for joining us. The press release and presentation slides for the call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Jerome Dorlack, Adient's President and Chief Executive Officer; and Mark Oswald, our Executive Vice President and Chief Financial Officer. On today's call, Jerome will provide an update on the business. Mark will then review our second quarter financial results and our outlook for the remainder of our fiscal year. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Jerome and Mark, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today, and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. And with that, it is my pleasure to turn the call over to Jerome. Jerome Dorlack: Thanks, Linda. Good morning, everyone, and thank you for joining us to review our second quarter results. Today, we will focus on the quarter's solid performance and provide an update to our fiscal year 2026 outlook. Overall, Q2 results came in line with our expectations, reflecting typical seasonality in China and some temporary production inefficiencies on a few key programs. Despite that, revenue was up 7% year-over-year, driven largely by FX tailwinds with underlying growth in both the Americas and Asia. Adjusted EBITDA was down modestly year-over-year, reflecting temporary mix, launch costs and customer-driven inefficiencies, partially offset by favorable FX and SG&A. Free cash flow in Q2 reflected the normal seasonality of the second quarter, and we ended the quarter with a cash balance of $831 million and $1.6 billion of liquidity. Given normal cash flow seasonality and the increased geopolitical uncertainty, we paused stock repurchases during the quarter, consistent with our approach last year. Turning to growth. We continue to aggressively pursue new business in all regions. In the Americas, more OEMs are announcing their intention to onshore production in the United States. We are working with our customers to capitalize on these opportunities as their plans materialize. We have also won significant conquest programs in South America and China. And in China, our growth over market remained strong despite the overall production volume challenges in the region. Finally, as we look beyond the quarter to the full year, based on what we know today, we are increasing our guidance modestly for revenue, adjusted EBITDA and free cash flow. Favorable volumes and strong business performance are being muted by $35 million of expected input cost headwinds, which Mark will outline further in his remarks. Turning now to Slide 5. While I just noted that Adient is raising guidance slightly for fiscal year 2026, we acknowledge that the overall macro environment remains volatile. The ongoing geopolitical conflicts, elevated energy and commodity costs, trade policy uncertainty and shifting consumer sentiment continue to influence the industry. While nobody can predict what will happen for the remainder of the fiscal year, what differentiates Adient in this environment is our operating model. We combine strong commercial discipline and pricing mechanisms with exceptional operational execution, flexing labor, controlling costs and launching flawlessly, supported by a strong balance sheet with ample liquidity. That allows us to execute at a high level even amid production volatility and supply chain challenges. Despite these external headwinds, our year-to-date results reinforce our ability to execute. We continue to drive positive business performance despite temporary disruptions and customer-driven inefficiencies. We continue to outpace the market in China as expected. And we maintain margin discipline across regions, while preserving a strong and flexible capital structure. This is how we manage what's within our control and why we continue to deliver on our commitments and maximize long-term shareholder value. Before I get into the regional update, I want to recognize our global team's exceptional performance year-to-date. We have received over 60 awards in the last 2 quarters, comprised of recognition from our customers, industry organizations and independent quality assessors across the globe, a testament to our operational excellence and the trust our customers place in Adient. In addition to these noteworthy accomplishments, Adient continues to be recognized as an employer of choice in the regions we do business, validating our commitment to our people and enabling us to attract and retain top talent worldwide, which strengthens our ability to execute. These recognitions validate that our strategy is working. We are winning with customers, investing in our people and delivering the consistent quality that builds long-term partnerships and shareholder value. Now, let's talk a bit more about the regions on Slide 6. While our business is global, each of our regional businesses is impacted by unique market dynamics, and each is facing its own set of opportunities and challenges. In the Americas, we are navigating a complex and dynamic environment, driven in part by tariff policies, which are manageable at current rates but continue to be fluid. Onshoring and growth remain a key focal point for the Americas team, especially as onshoring momentum continues. In addition, the teams are driving margin improvements through our continuous improvement programs, automation and optimizing our manufacturing footprint. The team is also focused on launch execution for multiple programs, including the Kia Telluride, Rivian R2 and the Toyota RAV4. In EMEA, market uncertainty and overcapacity persist and continue to impact not just Adient, but the overall industry. Our team continues to rise to these challenges. We are pursuing and winning new and replacement business and continue to strengthen our supplier-of-choice status in the region. Operationally, the European team is driving favorable business performance through commercial execution, cost discipline and restructuring actions that more than offset the current volume headwinds, all while successfully executing more than 30 launches so far this year. Turning to Asia. The market dynamics with shorter vehicle development cycles and innovation are a key differentiator. As we will highlight in a few slides, our Asia team continues to commercialize innovation products, which our customers are excited to invest in. Despite industry pressures in China, we continue to outperform the market through launches with local OEMs, which now represent about 70% of our wins. Our world-class JV structure further strengthens our local presence and expands our market. Beyond China, Asia outside of China is also positioned for above-market growth in the second half of this year as new launches ramp. While we do expect some manageable margin compression, the region is expected to remain accretive to Adient's EBITDA and cash generation. While each region is distinct, what ultimately defines Adient is that we operate as one unified company. Across every region, our teams are aligned around the common purpose, serving our customers, supporting our employees and delivering value for our shareholders. We do that through disciplined execution, seamless collaboration across borders, a strong culture of integrity and the ability to adapt quickly as conditions change. Turning to Slide 7. This page highlights how our growth strategy has continued to gain momentum. In the Americas, onshoring and conquest wins continue to drive meaningful volume gains. This quarter, we secured roughly 200,000 incremental units from the Chevrolet Equinox U.S. onshoring and conquest win, along with approximately 180,000 units from Volkswagen conquest programs in South America. These wins reflect the strength of our footprint and our ability to execute reliably as customers regionalize production. That momentum is showing up in our forward book as well. FY '27 booked business has increased to about $400 million and FY '28 to roughly $630 million, representing close to 700,000 incremental vehicles and market share gain. Importantly, that figure reflects what we booked to date. Onshoring trends continue, and we remain in active discussion with global OEMs on additional opportunities that extend beyond what's captured here. We continue to see ourselves as a net beneficiary of customer onshoring. In Asia, our team has done an exceptional job of competing and winning in a highly dynamic market. As I mentioned in the last slide, approximately 70% of our new business wins in China are with local OEMs, reflecting strong customer relationships, faster development cycles and Adient's ability to localize engineering and execute at scale. That execution is translating into above-market growth with China up 10% in Q2 versus a declining industry. Taken together, this reinforces the momentum we're building across regions as onshoring, conquest and localized execution continues to expand our growth runway. Moving to the next slide. After the quarter-end, we announced the completion of a tuck-in acquisition that expands our foam manufacturing footprint in the Americas. We acquired a foam production plant in Romulus, Michigan, which supports multiple OEM seating programs, expanding our Americas foam network to 10 plants and 30 plants globally. This is a strategic core business move that strengthens our vertical integration capabilities and helps improve supply assurance and responsiveness for our customers. Our focus is on a smooth integration with uninterrupted service, and we see opportunities over time from logistics advantages, operational flexibility and productivity improvements. This targeted acquisition strengthens Adient's operational model by further improving control over critical inputs, lowering execution risk and supporting more resilient margins. We are thrilled to welcome the Romulus employees to Adient and are excited about the capabilities and commitment they bring to our organization. Moving on to Slide 9. I want to spend a moment and talk about our recent launches and the new business wins because these are important proof points on how Adient is growing. These wins aren't about volume alone. They reflect higher content, more complex seating systems and deeper integration with our customers across the regions. In the Americas, Adient continues to be a net beneficiary of customer onshoring trends. We are happy to announce the recent conquest win with the Chevrolet Equinox, highlighting once again our world-class footprint, consistent operational execution and strong customer partnerships reinforce our supplier-of-choice status. We also recently won conquest business on several Volkswagen platforms in South America. This is strategically important growth for Adient as it deepens our footprint with a major global OEM, strengthens our regional manufacturing relevance and positions us for sustained revenue growth and incremental opportunities in the market over the coming years. In EMEA, program wins such as the new Porsche SUV and recent launch of the Citroen C4 demonstrate continued momentum with leading global OEMs. Importantly, these wins reflect disciplined, selective growth, where we are prioritizing programs that align with our operational strengths, higher value content and improved earning resilience in the region. In Asia, growth is being driven by domestic OEMs and EV platforms, including Xpeng, Leapmotor and Changan, where we are delivering advanced comfort features, high adjustability and multivariant seating architectures, often with Adient-led engineering development in region. Importantly, many of these awards involve premium comfort content, higher complexity and greater value per vehicle. When you look at this slide, I think it's important to step back and look at the balance of our growth portfolio. On one hand, programs like the Chevrolet Equinox represent disciplined growth on high-volume onshore ICE platforms, where Adient is winning complete seat content, taking share through conquest and leveraging our market-leading North American footprint, delivering strong execution and solid cash generation. At the same time, launches like the Rivian R2 and Leapmotor D19 position us on next-generation EV platforms, where higher complexity, tighter integration and engineering-led execution support higher content per vehicle and stronger higher-quality earnings over time. Together, these programs demonstrate that we're not making an either/or choice between legacy and next-gen. We're deliberately building a portfolio that balances scale and cash flow today with complexity-driven higher-quality earnings tomorrow. That balance is exactly what underpins the sustainability of our results and our confidence in the long-term outlook. Overall, this slide reinforces why Adient continues to be the supplier of choice, winning across regions, technologies and vehicle segments, while executing complex launches at scale. Turning to Slide 10. I want to highlight 2 recent innovation milestones that underscore how Adient continues to turn technology leadership and realize commercial execution. Most recently, we achieved an industry-first launch of our StepJoy foot massage system on the NIO ES9. This is a key example of how we're expanding seating comfort beyond traditional lumbar and back applications, while maintaining compact packaging, cost efficiency and automotive-grade reliability. Importantly, this is not a concept. It is in production today, validating our ability to industrialize differentiated comfort solutions at scale. In parallel, we're advancing our mechanical massage portfolio with ProForce Massage Flow, which builds on our already validated ProForce platform. ProForce Massage significantly expands massage coverage and gives customers the ability to offer premium seating experience, providing differentiation over traditional highly commoditized massage offerings offered by our competitors. The modular design and production validation allows this technology to be deployed across multiple seat architectures and vehicle segments within an OEM, enhancing scalability, and is already scheduled for production on 2 C-OEM models. The ProForce system is differentiated from what our competitors offer. Together, these launches demonstrate how we're leveraging innovation to drive higher content per vehicle, deepen OEM relationships and support higher-quality earnings over time. This is how innovation plays into Adient's operating model, disciplined, scalable, differentiated and commercially focused to help our customers enhance their overall in-vehicle experience. Before turning this over to Mark, I want to pause here on Slide 11 because this slide really connects the dots between our operating model and what it delivered this quarter. We speak a good deal about operational excellence, profitable growth, innovation and being a supplier of choice, but these are not abstract concepts. They are the foundation that allows us to execute consistently, especially in an environment like this one. In the second quarter, that execution showed up in very tangible ways. We delivered multiple complex launches as planned, continued to convert supplier-of-choice recognition into conquest and onshoring wins, and advanced innovation programs that are already in production and generating value for our customers. We also strengthened our footprint and reduced execution risk through a targeted tuck-in acquisition. Our teams have received more than 60 customer and industry awards across the region over the past 2 quarters, reflecting Adient's day-to-day execution and quality, launch performance, responsiveness and employee satisfaction. This recognition is translating directly into outcomes, key talent retention, deeper customer trust, conquest and onshoring wins, and the ability to launch more complex, higher-content programs consistently. That external validation reinforces why our operating model continues to scale in a challenging environment. These proof points are the direct result of how we run the business every day, and they're what gives us the confidence in our ability to convert performance into cash flow generation and sustainable value creation going forward. Now, I'd like to turn it over to Mark to walk you through the financials. Mark Oswald: Thanks, Jerome. Let's turn to financials on Slide 13. Adhering to our typical format, the page shows our reported results on the left side and our adjusted results on the right side. As a reminder, the prior period included a onetime noncash goodwill impairment charge of $333 million related to the EMEA goodwill impairment, which impacted our GAAP reported results in Q2 of fiscal year '25 and affects the year-over-year comparability. My comments will focus on the adjusted results, which exclude special items that we view as either onetime in nature or otherwise not reflective of the underlying performance of the business. Full details of these adjustments are included in the appendix of the presentation for reference. Moving to the right side, high level for the quarter. Sales for the quarter were $3.9 billion, up 7% year-over-year, reflecting favorable FX, solid volumes and strong underlying business performance. Adjusted EBITDA was $223 million. While this was down year-over-year, the comparison reflects the impact of near-term customer-driven production inefficiencies and increased launch expense as we continue to invest in future growth. Equity income was lower year-on-year as a result of lower volumes with certain of our customers in China. Adjusted net income was $41 million or $0.52 per share. Let's dig a bit deeper into the quarter, beginning with revenue on Slide 14. I'll go through the next few slides relatively quickly as details for the results are included on the slides, allowing sufficient time for Q&A. We reported consolidated sales of $3.9 billion in the quarter, which was an increase of $254 million compared to the same period last year, primarily reflecting better FX tailwinds, along with favorable volume and pricing. On the right side of the page, we are presenting regional performance on a trailing 12-month basis. This view helps normalize seasonality and timing effects inherent to our operating model and provides a clear picture of the underlying trends. In the Americas, we are seeing growth of 5%, outperforming a flat market, primarily driven by Adient's customer profile, pricing and new vehicle launches. In EMEA, sales have trailed the market, reflecting customer volume and mix and deliberate portfolio actions such as the recent closure of our Saarlouis Ford plant. For China, while the trailing 12-month view is influenced by earlier-period softness, recent performance has notably been stronger. This quarter, sales in China grew at double digits, while the overall market declined, building on first quarter's significant outperformance. We expect this trend to continue over the next several quarters based on our book of business and launch schedule. Unconsolidated revenue declined year-over-year, reflecting planned program exits in Europe and lower volumes in China. Turning to Q2 EBITDA performance. Adjusted EBITDA of $223 million included approximately $8 million of temporary customer-driven production inefficiencies, which we expect to recover in future periods, and $11 million of launch expense, which supports future growth in our expanding program portfolio. Excluding these items, Adient's underlying business performance remains solid, reflecting the strength of our operating model and the continued focus our teams have on operational excellence and delivering on our full year commitments. As shown on the chart, volume and mix was an approximate $18 million headwind, mainly driven by the shift to China OEMs versus foreign manufacturers in China, which, as mentioned previously, will result in margin compression that we view as manageable, plus a variety of higher volumes on lower-margin platforms in North America in Q2. As in prior quarters, we've provided detailed segment-level performance slides in the appendix of the presentation for your review, but I'll briefly summarize each region at a high level. In the Americas, we had a solid underlying business performance, reflecting strong execution and program momentum. Results for the quarter were partially impacted by mix, temporary production inefficiencies and launch costs to support the region's future growth. In EMEA, the team continued to focus on driving positive business performance despite a challenging macro environment. And along with FX tailwinds, this helped mitigate the ongoing mix headwinds in the region. In Asia, results were impacted by equity income, the timing of commercial negotiations and planned increases in launch as the region invests in new programs and growth. Equity income was unfavorable year-on-year, primarily reflecting lower volumes in our China joint ventures. Moving on, let me flip to our cash, liquidity and capital structure on Slides 16 and 17. Starting with cash on Slide 16. For the quarter, the company generated $8 million of free cash flow, defined as operating cash flow less CapEx. In addition to the typical seasonality of our business, second quarter cash flow benefited from approximately $90 million of timing-related items, specifically related to a commercial agreement and a hedging transaction. Both items will reverse and become outflows in the third quarter. On a year-to-date basis, free cash flow totaled $23 million and included the benefit of the same $90 million timing effect just mentioned. Excluding this impact, year-on-year cash flow performance reflects favorable working capital fluctuations, driven by typical period-to-period swings, lower cash restructuring outflows in Europe, timing of dividend payments, and an increase in cash spending, supporting Adient's growth initiatives and automation spend. Important to point out, last quarter, we highlighted a nonrecurring tax settlement in a certain jurisdiction that increased our tax -- cash tax forecast for fiscal year '26. That settlement was paid out in our second quarter. Despite the expected $90 million outflow in the third quarter, we continue to expect strong free cash flow in the second half of the year, consistent with our historical seasonality, and remain confident in delivering on our free cash flow commitment. Turning to our balance sheet on Slide 17. Adient continues to maintain a strong and flexible capital structure. As of March 31, we had a total liquidity of approximately $1.8 billion, consisting of $831 million of cash on hand and $957 million of undrawn revolver capacity. Again, worth mentioning, the $90 million, which benefited second quarter free cash flow, was also included in the March 31 cash balance. I would also point out, Adient did draw on our ABL during the quarter due to typical seasonality and normal working capital fluctuations for our business. The ABL was fully repaid within the quarter. On a trailing 12-month basis, our net leverage was 1.8x, which remains comfortably within our targeted range of 1.5x to 2x, reflecting both disciplined capital management and the underlying earnings power of the business. Importantly, we have no near-term debt maturities, providing us with significant financial flexibility as we navigate a dynamic operating and macro environment. Overall, the capital structure remains strong and flexible. Turning now to our expectations as we move from the first half into the second half of fiscal year 2026. The first half of fiscal 2026 delivered solid business performance that was in line with our internal expectations despite a challenging operating environment. We remain focused on what was within our control, maintained discipline in execution and cost management, and exited the first half with a solid cash position and a healthy balance sheet. As we look to the second half of fiscal year '26, we currently anticipate approximately $35 million of input cost headwinds. Approximately $25 million is related to Middle East conflict through higher chemical and freight costs, and additional $10 million is driven by higher costs as a result of the LyondellBasell chemical supply disruption. This $35 million of higher input costs is expected to be more than offset with the benefits from volume and the acceleration of business performance. The team remains focused on driving business performance and generating cash. Turning to our updated outlook for fiscal 2026. Based on our performance year-to-date, improved customer production schedules, we are modestly increasing full year guidance for revenue, adjusted EBITDA and free cash flow. We now expect consolidated revenue of approximately $14.8 billion, up from our prior outlook of approximately $14.6 billion, reflecting solid first half performance, updated near-term customer production schedules and the latest S&P Global production assumptions. Adjusted EBITDA is expected to be approximately $885 million, up from our prior guidance of $880 million, reflecting the impact of higher revenues and increased business performance, which are helping to offset the $35 million of anticipated higher input costs. As a result of these updates, we now expect free cash flow of approximately $130 million, up from $125 million previously. This improvement reflects the pull-through of incremental adjusted EBITDA and continued focus on working capital discipline and cash generation. Cash taxes are still expected of approximately $125 million, no change from prior guidance. CapEx also remains unchanged at approximately $300 million. We have included a simple adjusted EBITDA bridge within the materials on Slide 20 that illustrates the components of our revised guidance. Before wrapping up, I want to spend a moment on Slide 21 because this page speaks to the durability and trajectory of our cash generation. As we've discussed, the $130 million of free cash flow expected this year reflects several elevated and transitional cash uses that are not structural to the business. As these items normalize, we expect materially stronger EBITDA to free cash flow conversion. Capital expenditures are expected to remain at about $300 million, supporting growth, innovation, operational excellence, while remaining aligned with our long-term capital allocation framework. Restructuring cash flows are expected to normalize as European actions progress. Similarly, interest expense is expected to ease with opportunistic repricings and voluntary debt paydown. And finally, cash taxes are expected to revert to a more normalized level following this year's nonrecurring settlement payment. Taken together, these actions clearly outline the path to a structurally higher free cash flow profile. Longer term, as business performance and volume continue to scale and calls for cash remain relatively stable, we believe Adient is well positioned to generate materially stronger free cash flow, supporting disciplined and balanced capital allocation, driving enhanced shareholder value. With that, let's move to the question-and-answer portion of the call. Operator, can we have our first question, please? Operator: [Operator Instructions] Our first question does come from Colin Langan with Wells Fargo. Colin Langan: Any color on why the revenue increase? I mean, we've seen S&P actually lowered numbers, at least on the calendar year. Anything in particular that's driving that? Is that just a geographic mix, certain platform mix? Mark Oswald: Yes. Colin, I'd say it's a combination of, one, you have to adjust that we're on the September 30 fiscal year, right? Obviously, we're 2 quarters through. Third quarter, we have pretty good visibility now based on production call-offs, right? And then, it's -- as you indicated, it's based on geographic mix, it's customer platforms that we're exposed to, et cetera. Colin Langan: Okay. And any color on the onshore bidding? I mean, you seem to have won a pretty large chunk of that so far. Has this been sort of a short-term action wave and then more actions will come in a few years? Or is this actually still even early days for some of the onshoring opportunities, and we'll see the larger numbers coming as more stuff gets bid and onshored? Jerome Dorlack: Yes. I think we're -- in terms of the discussions with the customers, I think they're still very active, still very dynamic. At the point where we're at now, I think a lot of them are waiting to see how the USMCA negotiations and discussions go. Once there is clarity on how that shapes up and what the rules in terms of content, how long that agreement will be, whether it will be an annual evergreen or another 7-year bilateral or trilateral, whatever that shapes up to be, I think that will then free up the next wave of onshoring discussions. I think what's important though and how you think about Adient and how we're positioned, and we've presented figures on this in the past, among seating suppliers, we have the best footprint to be able to capitalize on this. We have more JIT facilities than anyone -- than any other seating supplier in the U.S. From a geographic standpoint, we're best positioned to be able to capitalize on this. We have the capacity to be able to do it. And then, because of our leading modularity, ModuTec, and capabilities, and now with the foaming acquisition, we have the capital ready to be able to deploy the footprint to be able to deploy it and the customer relationships to be able to capitalize on this. And I think we still feel pretty strongly we'll be a net beneficiary of onshoring. Operator: Our next question comes from Nathan Jones with Stifel. Andres Loret de Mola: This is Andres Loret de Mola on for Nathan Jones. Just on margins, the decline of 70 bps, can you maybe give a little bit more color on the temporary customer-driven costs? And are they recoverable later on? Mark Oswald: Yes. So good question. So yes, if you look at that 70 bps, I'd say 60 bps is really related to mix. And as I indicated in my prepared remarks, a lot of that mix was -- obviously, we were very transparent that as we continue to shift and pivot to the Chinese local manufacturers there, there's going to be margin compression. That's the majority of that. There was also some, I'd say, higher-volume, lower-margin business in the Americas that we saw for the quarter. We do view the mix shift over in China to be very manageable. We've indicated that's going to be falling up somewhere around 100 basis points when we get through the year. So 1 quarter does not make a trend. We have a pretty good line of sight in terms of what launches are coming on, where production is heading over there. Same thing with the Americas just in terms of where we see the volumes heading over there in the next couple of quarters. Andres Loret de Mola: Got it. That's helpful. And then, just on the split domestic versus foreign OEMs in China, I mean, can you guys -- I know you said 70% launches with local OEMs. Can you provide a kind of breakdown of what that mix is now and sort of what you expect for 2026? Mark Oswald: Yes. So last year, we ended 2025, we were somewhere just north of 60-40 mix over there. And so, as we continue to win -- and we indicated last year, our 2025 wins was also skewed about 70% local Chinese to 30% foreign. So, as we continue to launch this year, that's going to be trending from, call it, that low-60% to that 70% mark over the course of the next 12 months or so. Jerome Dorlack: Yes. And I think as we indicated in the prepared remarks today, our bookings this year are mirroring that same bookings rate, so 70% domestic, 30% [ transplant ] for the win rate. So if you look at our forward roll-on, we would expect our roll-on to continue to drive mirroring that 70% domestic, 30% [ transplant ], so continuing a very aggressive roll-on business and rotation into the domestic OEM. And it really is leveraged by our world-class joint venture footprint that we have there, working with our joint venture partners and really the way we operate our business in China for China with local Chinese leadership, local Chinese management and leveraging our technology. And that's why we talked a lot today about technology, bringing technology to scale there, and it's not commoditized technology. It is leading-edge technology there that allows our customers to be able to price for value, price for the customer in that region through the products we deliver there. Operator: The next question comes from Joe Spak with UBS. Joseph Spak: Mark, I want to go back to your comments on normalized free cash flow. And I want to sort of bridge that a little bit to sort of next year as well. And I realize like you're not going to guide '27 now and a lot can happen between now and then. But you are talking about $400 million on the backlog. So even if we assume 10% incremental margin, that's like $40 million in EBITDA. The recoveries from the Middle East is another $25 million. The supply disruption is another $10 million. You have business performance. There's the $100 million in free cash flow timing items you mentioned in '26. So I guess what I'm getting at is, it seems like based on what we know now, and I know things can change, it seems like free cash flow could be up over $200 million next year. I'm just wondering if we're thinking about that correctly, if there's any other offsets we should be thinking about? And if we do see that, I know you said you paused the buyback activity for uncertainty, but why wouldn't you sort of try to maybe get ahead of what seems like a pretty good inflection of cash flow and buy back the stock when it's at relatively attractive valuations? Mark Oswald: Yes. Great questions, Joe. I think you're thinking about the buckets the right way. Clearly, there's going to be revenue growth that we've been very transparent in mentioning. So obviously, that will convert. If I look at my calls from cash, as I indicated, those will be relatively stable to improving, right, as my cash taxes trends back to its normalized level. Restructuring -- now, again, restructuring over time will trend back to its normal level in Europe. We obviously still have to look to see the European landscape over there. I don't think anybody is expecting that to get much better over there, right? So we have to see what our customers do with their programs, what that means for our restructuring. But all in all, that will trend back down to its normalized level. Interest expense, as I indicated, we're opportunistic with repricing like we've been doing with the Term Loan B as we basically do some voluntary debt paydown because we do recognize that the disciplined capital allocation policy includes not only share buybacks, but also debt paydown, right, inorganic growth opportunities as we demonstrated this past quarter with the Woodbridge business. Yes, I think you're right. I think the cash definitely trends higher. So I think you're thinking about that in the right way, Joe. In terms of why not get in front of it earlier and we hit the pause button this year on the share repurchases, as I indicated, we got into Q2 -- because of normal seasonality and working capital needs, we actually did draw on the ABL, right? So we drew $150 million that will be called out in our Q this afternoon when we release that. When we paid that back, clearly, the war in the Middle East, it started, it escalated. We started to see chemical prices increase. We had the supplier [indiscernible] right. So there was greater uncertainty. So it was prudent for us to do that as we went through Q2. As we go through the balance of the year and we go into next year, there's really been no change in our capital allocation policy. We still expect to be good stewards of capital. We'll still be balanced with our allocation policy right. So, no change from that perspective. Joseph Spak: I guess, the second question, just I want to go back to China. Again, on the one hand, you're talking about 70% of the wins in China is domestic. That's coinciding with margin degradation in the region, which I know you said you can expect, and I think the slides had a comment about how it's manageable. But can you just help us like level set like -- because it's sort of tied up within the -- what you show for APAC. I know some of the China business is unconsolidated. Like, where are we now? What level does that backlog really come on at from a margin perspective? And like where can we see margins going? I think you've been very clear, and we can appreciate that, that's going to be a margin headwind. But what's sort of the steady-state level for that business? Mark Oswald: I think as we go through the balance of this year, as I indicated, do I still expect us to be down about 100 bps in 2026? Absolutely. As we continue to win new business over in that region, the team has been working very hard just in terms of, again, using automation over there, right? They're basically being sourced, the whole seating, whether it's trim, foam, JIT, right, metals, right, which continues to help out the overall earnings profile of that business over there, right? So the team is working hard to continue to maintain it at 100 basis point degradation. We view that as manageable. As we get into 2027 and start to finalize 2027, and we'll be back out with that. But again, I think that 100 basis points is probably good for your modeling at this point. Operator: The next question comes from Mike Ward with Citigroup. Michael Ward: Mark, maybe just to follow up a little bit on what Joe was asking. On the excess cost, the $25 million, $35 million, does that -- if you're able to recover it by the end of this year, does that provide some upside to your current forecast? Mark Oswald: Yes. So again, Mike, if you think about chemicals in particular, right, we have pass-through agreements and escalators with our customers, right? Those typically come on at a 2-quarter lag, right? So third quarter, I'm not expecting any recoveries. Am I going to start getting some of those recoveries in the fourth quarter? Absolutely. Will some of that bleed into '27? Yes. Some of the, what I'd say, customer production inefficiencies, right, we called that out. Is the Americas team going to go back and work with our customers to try and recoup some of that in the back half of this year? Yes, there will be tough commercial negotiations. So could there be some upside, Mike? Possibly. But again, tell me when the war in the Middle East is going to end, tell me what oil prices are going to do, tell me how fast LyondellBasell can get their facility up and operating, right? So those -- we're trying to balance what I'd say is the risk for the balance of the year versus, as you indicate, some opportunities for the balance of the year. That's why we came out with the $885 million guide. That's our best 50-50 look right now in terms of where we think the year is going to end. Michael Ward: Makes sense. And maybe, Jerome, on more of a strategic standpoint, I mean, the trim acquisition, in North America, what type of level of vertical integration do you have for a typical seat? Jerome Dorlack: Yes. So the Woodbridge plant is a foaming plant for us. If you look at our business in North America, I mean, on an average contract, given our customer mix and our customer platform mix, especially when we talk about the large truck platform that we acquired, it would have been 2 quarters ago when we went from just having the JIT and foam, we acquired JIT, trim and foam on that, we will be well over 80%, probably 85% vertically integrated on our business in North America. It is a very, very healthy level now in our North America business. And when I say vertically integrated, I speak about JIT, trim and foam. We've talked a lot about the metals business and trying to look at the metals business and wind out some of our non-healthy metals business. So we've been, I think, very transparent on that. But on the JIT, trim and foam level, it's a very healthy level of vertical integration now in the Americas business. And it's one of the reasons why you've seen the Americas business really have a, I think, nice progression on the margin expansion and the cash flow progression as well. Operator: Up next is Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: I was hoping to first follow up a little bit on the commodities outlook. I know obviously, a lot of moving parts between the disruption and the conflict. But at least in terms of the disruption piece, do you have good visibility in terms of the supply? Is it really just a question of higher pricing and basically recoveries coming with a lag? Or is there also -- I guess, what sort of visibility do you have in terms of essentially ensuring supply? And then, what does that look like into 2027? Jerome Dorlack: Yes, I think you have to -- I think, Emmanuel, you have to break it down into 2 pieces. I think you have to break down the LyondellBasell issue and then maybe break down the Middle East/Strait of Hormuz issue. So on LyondellBasell, I think our team in the Americas, with our customer group, has done a very good job of working through alternative means of supply and securing alternate supply chains. So I think we have good line of sight, alternative chemicals supplied, validation underway with our customers. I think we've been able to tie that off. On the Strait of Hormuz, at the moment, I think we have line of visibility as much as anyone in the industry can have when it comes to supply. I'll go back to Mark's comments. I don't think we can sit here today and be any better forecasters or prognosticators that would say, if it remains the way it is, I can't tell you what's going to happen in 3 months, 5 months, 6 months or anything along those lines. I don't know that I can give you a better answer than anyone else can on that topic, Emmanuel, nor should we really be doing that. So again, on LyondellBasell, I think we've done a very good job working with our teams. I think we're supplied. We have supply secured. On Strait of Hormuz, I don't think we're in any better condition or any worse of a condition than anyone else in the industry on that topic. Emmanuel Rosner: That's helpful. And then, one follow-up on the normalized free cash flow. So obviously, a decent piece of it would be normalization of restructuring spending. It doesn't seem like 2027 would necessarily be the year, first, with potential restructuring needs in Europe. I guess, what would need to happen to be able to sort of like lower this restructuring need? It just feels like in Europe, there's maybe some structural industry trends that would require ongoing restructuring for longer. Jerome Dorlack: I think it's too early to say, Emmanuel, whether 2027 is normalized or not normalized, whether there's a tail-off or not a tail-off. I think we're very much in active discussions with a couple of key customers around the key -- a couple of key JIT manufacturing sites right now and what the future of those sites will be. So it's just -- it's too early to say what '27 and even '28 look like at this point. In terms of what needs to happen in Europe, I think there needs to be stabilization within the European theater on industry volumes and capacity rationalization across not only the JIT landscape and the seating landscape, but also our customers' manufacturing landscape. And I think there's still announcements coming out at our customers, where they're trying to repurpose their manufacturing facilities. You've seen announcements around that. And with that, that opens up opportunities for us to be able to service them in different ways than maybe we would traditionally do. And it's some of those discussions that we're in with them. So I think it's too early to say what our '27 restructuring looks like, whether it tapers off or it doesn't, and the same would go for '28. Operator: The next question comes from Dan Levy with Barclays. Dan Levy: Your second half guidance, you're basically saying that you're offsetting the weaker half-over-half revenue and the onset of some of these commodity costs with better business performance, which you've done a really good job putting up. Maybe you could just remind us sort of like what's hitting now? And then, you've broadly talked about a number of different work streams in terms of restructuring, balance-in, balance-out, labor efficiency. Maybe just give us a sense where you are on your journey on business because it's been so good for so long. And what else is sort of the next front here on continuing to drive those benefits as opposed to sort of clearing out already the low-hanging fruit? Mark Oswald: Yes, Dan, maybe I'll start on what we see first half, second half, and Jerome can comment just in terms of certain of the automation, which is going to contribute to the efficiencies and business performance. But you're absolutely right. When I look at first half, second half, sales are going to be down slightly where we called out $35 million of higher input costs. But I've also got the benefit of lower launch costs in the second half of the year. I've got better business performance. As we indicated, business performance starts to accelerate, whether that's through the lower launch costs, my ops waste, my C&I efficiencies that the plant builds as I go through the second half of the year, right? Some of the, what I'd say, frictional costs that [ hit ] in Q2 with the customers, we'd expect that to subside as we go through Q3, Q4. So it's really the acceleration of business performance that really gives me comfort in terms of confidence in what I think I can do in second half versus first half despite the lower levels of [ buying ]. Jerome Dorlack: Yes. And then, to your -- second part of your question, what is the -- I'll use my words, the next frontier of driving business performance? We've talked a lot about automation starting to flow in. And even this year, if you look at the capital expenditures that we're putting into the business, that step-up year-over-year in automation, that will start to pay dividends as we get into '27 and '28. And we're really leading the industry in terms of some of the automation we're doing in our foaming business, some of the automation we're putting into our metals business, our trim business, and then, on the JIT side of it, what we've been able to do with our modularity. The feedback we get from our customers is your modularity offerings are leading edge. It's one of the reasons we've been able to conquest and expand our backlog in the JIT side is through our modularity offerings. With that, we're not only able to offer more competitive pricing to our customers, but it also leads to some of this margin expansion story, better roll-on, roll-off into the business. And so, when you look at the restructuring coming in, in Europe starting to pay dividends, but then also modularity, better roll-on, roll-off and then the automation piece of it, that's really where we see this then starting to fuel some of the additional margin expansion that we'll see in the Americas and in our European business going forward and that sustainability piece. And then, just coming back to some of the questions that we had earlier in the call around Asia and China in particular. I think it is worth continuing to highlight that even though there will be margin compression on the Asia side -- or the Asia Pacific business, as revenues grow there, even with that margin compression, it will still be cash-accretive, margin-accretive and still expanding cash flows for Adient overall. I think it's always important to keep that in mind. Dan Levy: Great. As a follow-up, I wanted to just -- I asked a similar question on the last earnings call, but I think it just gets to a broader theme on where we are on market share dynamics in the seating market and more specifically within North America because one of your competitors has talked about sort of a growing pipeline and traction on awards. So can you just give us a sense, broad strokes, what we are seeing on market share dynamics? Is there sort of a consolidation within yourselves and another one of your competitors away from the rest of the field? Jerome Dorlack: Yes. I think that that's a fair way to characterize it. I think if we look at where the wins are occurring, where some of the market share is coming from and how that pie is shaping up, I think based on the competitive offering that we're able to bring forward, our modularity solutions, the technology that we're able to put in place, I think the pie continues to shrink into those who are able to bring the most competitive offerings forward, who have the balance sheet to be able to do it, who are able to deploy the capital and who are the suppliers of choice into their customers. And I think Adient is certainly one of those, if not the preeminent one in the space. And I think with that, we're at the bottom of the -- or I guess, the midpoint of the hour. I just want to close the call by first thanking all of the 70,000 Adient employees around the world for your commitment to making the company what it is, and then thank all of our customers for your continued support to the business and to the company, and then thank all of our owners and shareholders for your ongoing support. Thank you very much, everybody. Mark Oswald: Thank you. Linda Conrad: Thank you. And in closing, I want to thank you once again for your interest in Adient. If you have any follow-up questions, please feel free to reach out to me. With that, operator, we can close the call. Operator: Thank you. That does conclude today's conference. We thank you for your participation. Have a wonderful day. And at this time, you may disconnect your lines.
Operator: Good morning, ladies and gentlemen, and welcome to CVG's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I will now hand the conference over to Michelle Hards, Vice President of Investor Relations. Please go ahead. Michelle Hards: Thank you, operator, and welcome, everyone, to our first quarter 2026 conference call. Joining me on the call today are James Ray, President and CEO; and Angie O'Leary, Interim Chief Financial Officer. This morning, we will provide a brief company update as well as commentary regarding our first quarter 2026 results, after which we will open the line for questions. As a reminder, this conference call is being webcast and the Q1 2026 earnings call presentation, which we will refer to during this call is available on our website. Both may contain forward-looking statements, including, but not limited to, expectations for future periods regarding market trends, cost savings initiatives and new product initiatives, among others. Actual results may differ from anticipated results because of certain risks and uncertainties. These risks and uncertainties may include, but are not limited to, economic conditions in the markets in which CVG operates, fluctuations in the production volumes of vehicles for which CVG is a supplier, financial covenant compliance and liquidity, risks associated with conducting business in foreign countries and currencies and other risks as detailed in our SEC filings. I will now turn the call over to James to provide some highlights on our first quarter performance. James Ray: Thank you, Michelle. Good morning, and thanks to all those who joined the call. Before turning to the results, I'm excited to welcome Angie O'Leary, our Interim Chief Financial Officer, to her first earnings call. Angie brings extensive knowledge of CVG to the role and her extensive experience will be critical as we look to sustain our current momentum going forward. Please turn your attention to the supplemental earnings presentation, starting on Slide 3. As we have highlighted on this slide, CVG delivered year-over-year revenue growth driven by strong results within our Global Electrical Systems and Global Seating segments. This is a testament to our efforts to reduce concentration of cyclical North American Class 8 end markets. Combined with the actions taken in recent quarters to improve operational efficiency, CVG is well positioned to capitalize on the recovery in our end markets that we are beginning to experience. During the quarter, we delivered adjusted gross margin of 12.2%, up 140 basis points compared to last year and 250 basis points sequentially from the fourth quarter of 2025. The continued year-over-year and sequential improvement in profitability was again driven by our focus on improvements in operational efficiency. One of our stated objectives over the past year has been to grow our Global Electrical Systems segment. And our success is evidenced by the 14% growth in segment revenues in the quarter. This growth has been driven by the ramp of previously mentioned programs across the North American and international markets. Our Aldama, Mexico and Tangier, Morocco facilities, we have mentioned on previous calls, are serving the growing demand in this segment. Their utilization should increase further as we ramp production under our Zoox contract and other new business wins, which is expected to provide a growth tailwind starting in the second half of this year. Another highlight in the last quarter was the execution of a sale-leaseback transaction of our Vonore, Tennessee manufacturing facility. This facility is strategic for our Global Seating business, and we expect it to support future growth. The transaction, which we will discuss in more detail later in the call, provided us with cash that we used to pay down debt by $12.8 million since the end of 2025, facilitating a net leverage ratio reduction from 4.1x at the end of 2025 to 3.8x at the end of the first quarter. Our goal remains to bring leverage back down to the 2x level over time. Looking forward, while there is still plenty of macroeconomic volatility and uncertainty, we are encouraged by the operational efficiency improvements we've made and the early signs of end market improvement with the Class 8 truck production projected to grow 9% in 2026, while we simultaneously benefit from the ramp-up of new business within Global Electrical Systems. Our focus for the balance of the year remains on continued disciplined execution, prudent cost management and putting CVG in a position to drive accretive growth due to improving demand trends. Turning to Slide 4. I will provide more details on what we're seeing in the Global Electrical Systems segment. I'll get into the drivers momentarily, but we continue to expect our Global Electrical Systems segment sales to increase more than 10% in 2026. Again, this increase is driven by the continued ramp-up of new business wins, which is accelerating the utilization of our recent capacity additions in Mexico and Morocco. The structural improvements to our business model in this segment are helping to drive growth and reduce volatility. The biggest driver of recent performance as well as our expectations for growth in 2026 and beyond is the ramp of new business previously won. We spoke last quarter about the Zoox robotaxi program, and we are starting to ramp production to support that program. This ramp is expected to solidify CVG as a strategic supplier to the autonomous vehicle sector. As Zoox and other programs ramp up, we are seeing improved utilization at our new production facilities in Aldama, Mexico and Tangier, Morocco, helping drive margin expansion. The low-cost facilities have the capability to meet the unique needs of programs such as Zoox and other new programs. As these ramp-ups continue and other programs contribute, we expect to see continued margin improvement throughout 2026 and beyond for the Global Electrical Systems segment. With that, I would like to turn the call over to Angie for a more detailed review of our financial results. Angela O’Leary: Thank you, James, and good morning, everyone. If you're following along in the presentation, please turn to Slide 5. Consolidated first quarter 2026 revenue was $171.5 million compared to $169.8 million in the prior year period. The increase in revenues was primarily due to higher sales in Global Electrical Systems and Global Seating, partially offset by lower sales in Trim Systems and Components. Adjusted EBITDA was $4.8 million for the first quarter compared to $5.8 million in the prior year period. Adjusted EBITDA margins were 2.8%, down 60 basis points compared to adjusted EBITDA margins of 3.4% in the first quarter of 2025, driven primarily by higher SG&A expenses, partially offset by higher gross margins. Interest expense was $4.1 million compared to $2.5 million in the first quarter of 2025, driven by higher interest rates resulting from our refinancing completed in the second quarter of 2025. Net income for the quarter was $0.9 million or $0.03 per diluted share compared to a net loss of $3.1 million or a loss of $0.09 per diluted share in the prior year period. GAAP net income for the quarter included multiple items worth noting, including a gain on sale of assets of $14 million, a warrant liability revaluation expense of $5 million and a loss on partial extinguishment of debt of $2 million, all on a pretax basis. The gain on sale and loss on extinguishment of debt related to the sale-leaseback transaction of our Vonore, Tennessee manufacturing facility. Adjusted net loss for the quarter was $3.4 million or a loss of $0.10 per diluted share compared to adjusted net loss of $2.6 million or a loss of $0.08 per diluted share in the prior year period. Net income and adjusted net loss were impacted by higher sales and improved gross margin performance, offset by higher SG&A and interest expense. Free cash flow from continuing operations for the quarter was $11.7 million compared to $11.2 million in the prior year period, aided by our recently executed sale-leaseback transaction. At the end of the first quarter, our net leverage ratio calculated as our net debt divided by our trailing 12-month adjusted EBITDA from continuing operations was 3.8x, down from 4.1x at the end of 2025. Turning to Slide 6. I want to highlight the year-over-year and sequential adjusted gross margin improvement we saw in the first quarter. Reflecting back to the strategic portfolio and footprint actions taken in 2024, we've shown continued improvement on the gross margin front. We've driven structural improvement in our operations through both footprint consolidation and operational efficiencies. We continue to optimize our supply chain even in the face of tariff changes and input cost increases. We've seen improvement in plant productivity as well, helping to reduce costs and waste. And finally, our focus on driving product mix improvement and recovering tariff and other cost increases through pricing are supporting margins. Our continued focus in these areas should drive additional operating leverage as volumes recover. Turning to Slide 7. I'd like to highlight our progress on our deleveraging efforts. As previously stated, net debt to adjusted EBITDA stood at 3.8x at the end of the first quarter of 2026, down from 4.1x at the end of 2025, aided by our recently completed sale-leaseback transaction involving our Vonore, Tennessee manufacturing facility. This transaction generated $16 million in gross proceeds with the net proceeds of $14.6 million used to prepay a portion of our existing term loan facility. We reduced total debt by $12.8 million in the quarter. Under the terms of the agreement, CVG leases back the Vonore property for a 20-year term with an initial annual base rent of approximately $1.4 million for the first year. This transaction demonstrates our commitment to cash generation and deleveraging to better position CVG driving future growth and shareholder value. We remain focused on achieving our targeted goal of 2x net leverage. Moving to the segment results, starting on Slide 8. Our Global Seating segment achieved revenues of $74.5 million, an increase of 1.5% compared to the year ago quarter, with the increase primarily driven by higher international volumes, offset by decreased customer demand in North America. Adjusted operating income was $3.6 million, an increase of $0.9 million compared to the prior year period as operational efficiencies drove expanded margins on higher sales volumes in the quarter. Turning to Slide 9. Our Global Electrical Systems segment first quarter revenues were $57.4 million, an increase of 13.9% compared to the year ago quarter, primarily due to the ramp of previously awarded new business wins in North America and internationally. Adjusted operating income for the first quarter was $0.5 million, an increase of $0.3 million compared to the prior year period, primarily attributable to increased sales volumes and operational efficiencies. As production continues to ramp in 2026, boosted by the Zoox robotaxi program, we remain well positioned to drive continued growth and margin expansion in this segment. Moving to Slide 10. Our Trim Systems and Components revenues in the first quarter decreased 13.9% to $39.5 million compared to the year ago quarter due to lower sales volume from softening customer demand. As a reminder, this segment solely serves the North American market and is most directly impacted by the reduction in Class 8 production volumes, which were down 27% year-over-year in the first quarter based on ACT data. Adjusted operating profit for the first quarter was $0.1 million compared to $1.6 million in the prior year period. The decrease is primarily attributable to lower demand levels. However, we did see sequential improvement from Q4 of 2025 of 620 basis points in gross margin and 430 basis points in adjusted operating margin, indicating that our previous actions to reduce headcount should position the segment with improved operating leverage as North America Class 8 truck production recovers. That concludes my financial overview commentary. I will now turn the call back over to James to cover our end market outlook, key strategic actions and a review of our 2026 guidance. James Ray: Thank you, Angie. I will start with our key end market outlook on Slide 11. According to ACT's Class 8 heavy truck build forecast, 2026 estimates now imply a 9% increase in year-over-year volumes. ACT is then forecasting a decline of 2% in 2027 before rebounding 25% in 2028. Similar to last quarter, we also think it is helpful to provide a more granular drill down into the quarterly ACT data and outlook. Q1 2026 production came in at 54,000 with expectations for a meaningful uptick in Q2 and further growth in Q3 and Q4. Moving to our construction market outlook. Based on recent commentary and outlooks from our customers and key market players, we expect the construction market to be up in the low single-digit percentage range, primarily driven by lower interest rates and fiscal stimulus initiatives for 2026. Turning to Slide 12. I will share several thoughts on our outlook for 2026. Our guidance ranges are based on current macroeconomic trends, forecasted Class 8 truck build rates, demand levels in construction markets and the ramp of new business. In spite of continued macroeconomic uncertainty, we are reaffirming our net sales and adjusted EBITDA guidance ranges for 2026. Our net sales guidance range of $660 million to $700 million, which again represents a growth of nearly 5% over 2025 results at the midpoint, remains supported by strong growth in our Global Electrical Systems segment. Our adjusted EBITDA guidance range of $24 million to $30 million represents growth of approximately 50% over 2025 results at the midpoint of the range, reflecting the operational leverage we expect to see as end markets recover, driving increased capacity utilization. Based on our first quarter performance, the expected program ramps and current customer demand levels, we have maintained these ranges. But if ACT Class 8 forecast play out as projected, we'd expect both metrics to come in toward the high end of the ranges provided and plan to give a further update on our second quarter earnings call. Finally, we continue to expect to generate positive free cash flow in 2026, supported by the recent sale-leaseback transaction. We expect to prioritize free cash flow for debt paydown, driving net leverage toward our targeted leverage ratio of 2x. With that, I will now turn the call back to the operator and open up the line for questions. Operator? Operator: [Operator Instructions] Your first question comes from Joe Gomes with NOBLE Capital. Joseph Gomes: I like the momentum we're seeing. So I just wanted to start out, James, you talked on the Global Electrical Systems about the differentiated solutions and positioning the company to increase content per vehicle. And I was wondering if you could give us a little more color there. I don't want to give exact numbers maybe on percentages. I mean, how much growth could we see in terms of the increased content per vehicle and kind of like what's the timing on that? James Ray: Thank you, Joe. That's a good question. And it really varies by the architecture of the vehicle in the end market. So for example, we talked about Zoox autonomous vehicles. Due to the redundant nature from a safety perspective, the electrical content in an autonomous vehicle is almost double because of the redundancy. So that is one indicator that's going to give us a lot of opportunity for growth. Also, in our legacy end markets with construction agriculture and even in the Class 8 market, as vehicles develop more content for either autonomous operation or feature comfort additions, that increases the content in our legacy end markets as well. And there's not really a number I could put on it, but I would say it's incremental to our current share of wallet per vehicle. And then in addition to that, some of the new business that we continue to win, we're focused on these higher content applications, which will allow us to continue to further utilize the capacity we have in place and also plan for additional capacity as time goes on and these volumes continue to ramp up. We have enough capacity to support us in electrical for the next year or so. But this time next year, we'll be planning additional -- potential additional capacity if these programs continue to ramp as planned and if the markets continue to recover as planned. Joseph Gomes: Okay. Great. And then the Class 8 truck market, we're seeing another -- or we've seen since the beginning of the year, really strong order growth. I think the report came out yesterday, April marked the third straight month exceeding 140% year-over-year growth. Just from where you sit, I know you guys look at the ACT numbers, ACT is talking about 9% growth year-over-year. Do you think maybe that number, if we continue to see these types of levels could be low for the year? James Ray: Well, as you know, and as you've stated previously, there is volatility in the truck build forecast. And it's not as a result of ACT not fully comprehending what the opportunities are. It's more of a result of external exogenous events that happen, whether it's constraints on supply chain, freight due to geopolitical, whether it's tariffs, whether it's interest rates. So all indications right now based on the inbound orders really over the last 5 months, their forecast, I have a level of confidence in that it will sustain these levels. Now anything can happen, and that's why we're a little cautious on our guidance change right now because we really based our guidance on this customer -- specific customer forecast by end market and by model that we participate on. So we are seeing in our schedules finishing up Q2 and going into Q3, projected build increases from our large Class 8 customers. Also, in addition to that, now that we're formally in production on the Zoox autonomous robotaxi program, we're seeing more firm schedules as they ramp their factory in California to build vehicles. So we're working collaboratively with both Class 8 end markets and our ConAg end markets as well as the autonomous and electric vehicles we're participating on. And that's really probably the heaviest weighting that we put on our guidance. ACT is a data point as well as we look at the industry reports and earnings reports from our large customers, too, as they have projections. And the qualifier I'll put out there, too, Joe, is that there are supply chain constraints that OEMs, Tier 1s, Tier 2 suppliers have to deal with. And the turnaround, if you look sequentially from Q1 to Q2 and then Q2 to Q3 from a projected truck build standpoint, there could be some pressure on the supply chain to be able to respond to that type of increase. The trade issues, the fuel prices, those impact those constraints as well, all the way down to Tier 2, Tier 3, Tier 4 suppliers as well as freight carriers. So we're being cautious right now. And I think as we get through Q2 and have better visibility into Q3, we'll have a better understanding of whether or not there is upside to that ACT forecast. Joseph Gomes: One more and then I'll get back in queue. SG&A was up about $2.5 million year-over-year. Maybe you could just give us a little more color as to what was behind that increase and whether that the first quarter number is a good number going forward? Or do you think that comes back down for the rest of the year on a quarterly basis? Angela O’Leary: Yes, I can jump in there. The SG&A increase for the quarter is really driven by our incentive compensation coming back over the prior year. And we have different parts of that program. Part of it is related to a long-term performance awards that are tied to our stock price, and those awards get valued quarterly. And I would expect that we'll continue to see SG&A at this level for the balance of the year. James Ray: Yes. I'd like to add to that also, Joe, is that as you're aware, we've had a lot of focus really over the past 6 quarters on adjusting SG&A down. And we've eliminated quite a few heads across the globe in response to the market softness, which helped us preserve margin. As we ramp back up as far as like adding shifts to some of our plants, we need more salary people and support people. If those volumes hit that ACT is forecasting in several of our plants, we have to add another shift. We have the floor space. We have the equipment. We're just going to have to bring labor back in, both direct labor and indirect labor as well as salary expense. So we're starting to see that in some of the plants that we're ramping up in. But our intention is to harvest the entitled operating leverage and really look at the SG&A adds very surgically. The compensation and benefits and those things, that's one piece. But the thing that is really our focus is headcount and expense, discretionary expense as well as expense related to starting up. But we would expect that level to hold throughout the year as a percent of sales, if not have some improvement if sales really go up, we'll get more leverage through there. Operator: Your next question comes from Gary Prestopino with Barrington. Gary Prestopino: I think you may have answered this question, but when you talked about you have enough capacity through 2026 for what's going on, particularly in the Global Electrical business, you will not have to look for a new facility. You have room in your existing facility to add lines. And I think that you answered that question when you were talking about the last... James Ray: That's correct. Gary Prestopino: Okay. All right. So we're not looking at any big major expenses related to new plants. James Ray: Not for another year or so, Gary. Gary Prestopino: Not for another year? James Ray: Yes. We will not be looking at adding additional floor space for at least another year or so. But it depends on how volumes ramp, but we should be good until the end of '27 before we start adding another rooftop for electrical based on floor space and capacity we have. Gary Prestopino: Well, if you do, that means everything is going real well. James Ray: That's a good problem to have. Gary Prestopino: It sure is. In terms of the Global Electrical, can you maybe break down for us just what percentage of that business is going to -- strictly to the EV market and then further break it down as to the percentage that's going to North America and Europe? Because obviously, the North American market on the EV side is getting hit. But what I'm hearing is that Europe and China are still going full bore at building and selling EVs. James Ray: About 10% to 12% of our business goes into the EV market to date. The majority of it is in EMEA. And we have some programs here in North America, but Zoox will become the largest EV end market as it ramps. And that percentage of revenue -- of total revenue for EV will grow pretty substantially as a percent of the total EV as Zoox ramps up in North America. And we still have business that we won in EMEA that has not launched. So as that business ramps, we would expect the EMEA percentage to also increase as a percent of their total sales. Gary Prestopino: Okay. So you're still launching some business in EMEA as well. All right. I think I may have asked Michelle's question a while back. But in terms of Zoox, how long is that contract for? James Ray: Well, we have agreements with Zoox that really take us through the end of the decade here. We have supply agreements and statements of work that carry us over the next few years. Zoox has a number of programs in the future that they will continue to bring new models to market. That's their plan. I can't speak for Zoox or what the timing is or what the configuration of those models are, but we have been in close collaboration with them on both the current model that just started production as well as the next-generation models that they're starting to evaluate. Gary Prestopino: Okay. And then lastly, just getting back to -- just talking about Global Seating. How does that break out between aftermarket and OEM? Or is it mostly OEM? I'm not -- I just want to get clarification on that. James Ray: Yes. Aftermarket sales are approximately $50 million to $60 million. It depends on the volume and the promotional and the seasonality. But in general, it's in that range of the total Seating business. The positive things that we're seeing in that Aftermarket business, as we've talked about in prior earnings calls, we were putting a lot of focus on our field sales rep organization and the management of that as well as bringing out new configurations as shown in the slide deck for the presentation to promote certain aspects of the current market interest. whether it's the 250th anniversary or whether it's a Hunter special that you've seen on the slide. And we're seeing orders to date up about 20% on our Aftermarket orders. Obviously, they're timed at different points for delivery. But one of the things that has enabled us to generate higher orders year-over-year is our capacity alignment and getting fast turnaround on shipments. So we're really focused on getting seats out within 5 to 7 days of the order, if not sooner. Sometimes it's a little longer depending on the configuration. But we see that as a growth driver, especially with the Class 8 truck production to date has been low. We've been really putting a lot of focus on that. So not only when the production comes back to higher levels, there is an opportunity to continue to drive further aftermarket orders as well. So we're really excited about that segment. It's had a lot of success, and we're going to continue to invest in it because from an earnings profile, it's very attractive to us from a mix standpoint. We have more promotional opportunity, and we have more margin opportunity as well. Gary Prestopino: Okay. And just lastly, when we're talking about commercial and off-highway seats, the OEM market, that runs anywhere from Class 8 to things like Volvos or stuff like that? James Ray: Yes, that's correct. But it's primarily Class 8. We do have seating products globally, not just in North America, but in EMEA and in APAC outside of heavy-duty truck. And most of our business outside of North America is tied to ConAg and other end markets, office seating, stadium seating, bus seating. There are a number of categories when you look at our footprint outside of North America that we have a lot more traction in outside of heavy-duty truck. So that also opens up the window for us to put more emphasis on growing heavy-duty truck in some of those areas as well as here in North America, kind of a cross-sell looking at can we get into other end markets in North America. And we do have ConAg seats that we produce in our Vonore, Tennessee plants as well. So with the sale leaseback, that's now a very strategic long-term portion of our footprint. And we're really excited about continuing to invest in that site for future growth in the Seating business. Operator: [Operator Instructions] This concludes the Q&A session. I will now turn the call back to Mr. Ray for closing remarks. James Ray: Thank you. Thank you all for joining today's call. I also want to thank the employees of CVG who really helped deliver strong results and are excited about our growth prospects going forward. We continue to execute and deliver on our goals of driving operational efficiency, improving our revenue mix and driving accretive growth. We've made substantial progress operationally, and we are positioned to drive both growth and margin improvement as end markets recover. We look forward to updating CVG's progress next quarter. Thank you. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Instacart First Quarter 2026 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Rebecca Yoshiyama, Vice President, Head of Investor Relations. Please go ahead. Rebecca Yoshiyama: Thank you, operator, and welcome, everyone, to Instacart's First Quarter 2026 Earnings Call. On the call with me today are Chris Rogers, our Chief Executive Officer; and Emily Reuter, our Chief Financial Officer. During today's call, we will make forward-looking statements related to our business plans and strategy, developments in the grocery industry and our future performance and prospects, including our expectations regarding our financial results and share repurchases. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. You can find more information about these risks and uncertainties in our SEC filings, including our last Form 10-K. We assume no obligation to update these statements after today's call, except as required by law. In addition, we will also discuss certain non-GAAP financial measures, which have limitations and should not be considered in isolation from or as a substitute for our GAAP results. A reconciliation between these GAAP and non-GAAP financial measures is included in our press release, which can be found on our Investor Relations website. Now I'll turn the call over to Chris for his opening remarks. Chris Rogers: Thanks, Rebecca. Good morning, everybody, and thanks for joining us. Q1 was a strong start to the year. We grew GTV 13% and total revenue 14% year-over-year, surpassing $10 billion in GTV and over $1 billion in total revenue for the first time. We also expanded profitability and repurchased $349 million in shares, reflecting our continued confidence in the business. Stepping back, the headline is simple. Our strategy is working. We're the leading grocery technology platform, delivering a best-in-class consumer experience, powering retailers through our marketplace and enterprise capabilities and operating a scaled advertising ecosystem for brands. Each part of our strategy is getting stronger on its own. And more importantly, they're compounding together. When we improve the consumer experience and scale our marketplace, we drive growth for our retail partners. We extend those capabilities into retailers owned and operated channels, which deepens our integrations and allows us to create better, more differentiated experiences for consumers. And as our platform grows, it creates more opportunities for us to expand our ads and data capabilities while also unlocking efficiencies that we can reinvest back into the business. That combination is what's driving our results and gives us confidence in our runway ahead. Now let me walk you through what we're seeing across each of our key growth engines. Starting with marketplace. Our fundamentals are strong, and we remain laser-focused on delivering the best end-to-end grocery experience. We center on what matters most to customers: selection, quality, affordability and convenience, and we're increasingly using AI to make our experience more personalized and intuitive. You can see this in all the product improvements we've made, which may sound simple individually, but at our scale, they compound quickly. For example, we continue to enhance our search functionality, making it faster and more relevant while also guiding more new users toward search earlier in the journey. That matters because customers who use search are about 5x more likely to place their first order. We're also improving how consumers discover and access savings, making promotions more visible and easier to understand, including offers like free pasta sauce when you buy $10 more of meat. That's helping customers save while also driving larger baskets. And as we continue to raise the bar on quality, we've upgraded our AI-powered replacement flow to better reflect consumer preferences in real time, a strong example of how data and technology have come together to improve outcomes for both shoppers and customers. On top of this strong foundation, we're introducing new AI-powered capabilities. With over 1.6 billion lifetime orders, we have a unique and deep understanding of the grocery journey, and we're using that to build the gold standard of agentic grocery AI. We recently began testing Cart Assistant, our AI-powered conversational shopping experience, now available to about 25% of U.S. customers. Early feedback is encouraging with customers using it to discover recipes, build meal plans, quickly assemble baskets and research products. These are some of the most time-consuming parts of grocery shopping, which highlights the meaningful role generative AI can play in enhancing the online grocery experience. These advancements are also why we've decided to integrate Instacart with AI platforms like ChatGPT and most recently with Claude. We want customers to experience conversational grocery shopping combined with the power of Instacart selection, data and fulfillment wherever and however they choose to shop. In addition to all of these product improvements, affordability remains a key growth lever. Consumers are very focused on value, and we're continuing to give retailers better tools to deliver that. For example, over the past several quarters, we partnered closely with Sprouts to launch Sprouts Rewards across their online properties, in addition to enabling native sign-up, account linking and digital coupons directly on our marketplace at the same time they rolled out the program in stores. We're also seeing club retailers continue to outperform on the platform, driven in part by programs we helped launch like Costco's executive member benefit. We're also making progress on price parity. Retailers who offer price parity, meaning no markup on item prices, continue to grow faster on our platform. We saw that with both Hy-Vee and Raley's after they moved to price parity in Q1, and we're building on that momentum with more recent launches of Fareway as well as several other local independent grocers. Our next growth engine is our enterprise platform. Retailers choose Instacart because of our purpose-built grocery technology across e-commerce, retail media, in-store and AI solutions. The breadth and depth of our platform is difficult to replicate and it delivers clear results. At the center of our enterprise platform is our storefront technology, which powers over 380 grocery e-comm sites. Our flagship offering, Storefront Pro, supports partners like Costco, Publix and Sprouts, and continues to gain traction because it drives meaningful outcomes. On average, grocers who upgrade to Storefront Pro see an over 10 percentage point lift in online sales and a more than 5 percentage point lift in 90-day new user retention. A strong example of this is ALDI. In Q1, they launched a redesigned U.S. website and mobile app nationwide powered by Storefront Pro, another clear signal of how valuable our technology can be to large established retailers. We partnered with ALDI for a long time, starting with our marketplace and expanding into services like alcohol, EBT SNAP, flyers and the custom integration to bring their weekly finds online. Since 2019, we've also powered their online grocery delivery and their pickup experience through our fulfillment technology. So their decision to double down on Storefront Pro and launch Carrot Ads is a clear example of our enterprise strategy in action. We're now extending that approach with our newest enterprise offering, AI solutions. As we build leading AI capabilities on our marketplace, we're bringing those same tools to retailers' owned and operated channels. We're already seeing strong engagement here, particularly with Cart Assistant, where we're working with partners like Kroger and Sprouts to bring these capabilities to life. And we've also recently signed additional partners, including Food Bazaar, Heritage Grocers, Restaurant Depot, Save Mart and Woodman's. All of this growth across marketplace and enterprise strengthens our advertising and data capabilities. In Q1, we grew advertising and other revenue 16% year-over-year, our fastest growth rate since Q3 2023, driven by continued expansion and diversification across both sides of our ecosystem, where we're accelerating both supply and demand. On the supply side, we're expanding inventory and providing our best-in-class ads capabilities across more surfaces. This is driven by our healthy growing marketplace and our expanded network of over 310 Carrot Ads partners, where we recently launched new partners like ALDI, Dierbergs, Fareway and Jerry's Foods. On the demand side, we're seeing broad-based strength across over 9,000 brands advertising on our platform. This is supported by our focus on making it easier for brands to get started and scale. New brands to our ecosystem can now launch high-performance campaigns in minutes with fully automated tools and our AI-powered recommendation engine in our self-service platform, Ads Manager, continues to gain traction. We're also using AI to enhance performance across our platform. For example, we recently launched a new generative recommendation system that can use real-time context to better understand the consumer's intent. Previously, adding milk to your cart might result in a recommendation to add cookies or cereal or sliced cheese. Now based on additional items in your cart like flour and eggs, we can better predict that you're actually shopping for baking essentials. This leads to more valuable suggestions like vanilla extract and cinnamon and early data shows that this is driving higher engagement and better results for advertisers. Beyond advertising, we're also making progress on data monetization. Our off-platform partnerships where we allow brands to leverage our first-party data to make their campaigns more effective on platforms like Meta, The Trade Desk, TikTok and more, we're continuing to scale as we attract incremental budgets from ad partners. And our consumer insights portal, which aggregates real-time high-quality insights into consumer behavior, continues to attract new subscribers like Kraft Heinz, and drive deeper engagement with existing partners like Advantage Solutions. So when you step back, our growth engines are working the way we want them to, and we're carrying that momentum into Q2. We're also continuing to invest in longer-term growth opportunities. International is off to a strong start. As you'll recall, we're taking an enterprise-led approach, partnering with retailers and scaling technologies that have already proven to solve retailers' needs. In Q1, we launched Storefront Pro with Costco in Spain and France. And while it's still early, consumer demand is encouraging and tracking ahead of our initial expectations. A few weeks ago, we acquired Instaleap, a strategic acquisition that aligns perfectly with our goal of bringing our grocery technology to a global audience. Instaleap has built a versatile fulfillment platform that can adapt to different market dynamics across regions. And just as importantly, they've built strong relationships with grocery retailers around the world, particularly in Europe and Latin America. This is exactly how we want to expand internationally, focused, partner-led and grounded in existing capabilities that we know work. We're also seeing strong progress with our in-store technologies. Caper, our AI-powered smart cart, is now live in more than 100 cities, including recent expansions with Wakefern and Allegiance retailers. Customers are continuing to enjoy their Caper experience, which is driving higher baskets, new loyalty and omnichannel activations and early traction with our real-time inventory and aisle-aware advertising experiences. Alongside Caper, solutions like FoodStorm and Carrot Tags are helping retailers modernize in-store operations and improve both efficiency and customer experience. When you put this all together with signals from our shopper network and deep retail integrations, we're developing a truly complete view of the omnichannel grocery experience. That's already starting to unlock new capabilities. For example, we've begun piloting Store View with partners like McKeevers, Sprouts and more, who are leveraging real-time computer vision to improve shelf availability and accuracy. Over time, we expect this to translate into additional benefits across our ecosystem, including better availability, better recommendations, more efficient fulfillment and more valuable advertising for retailers and brands. Okay. Before I hand it to Emily, let me close where I started. Our strategy is working. Our marketplace, enterprise platform and advertising ecosystem are each getting stronger, and we're gaining momentum on longer-term growth initiatives that are built on our critical advantages. Together, this creates an increasingly powerful platform that positions us very well for durable, profitable growth. We're operating from a position of strength in a large underpenetrated category, and we're focused on extending our lead by continuing to drive value for our partners while growing the pie across the ecosystem. With that, I'll turn it over to Emily to walk through the financials. Emily Maher: Thank you, Chris, and hello, everyone. We entered 2026 with strong momentum, and our Q1 results clearly demonstrate that our focus and investments across our key growth engines and new initiatives are working. Our performance continues to be supported by strong operating fundamentals with multiple levers in our P&L that allow us to balance growth and profitability in a disciplined way. Now let me provide more color on our Q1 results. In Q1, GTV was $10.29 billion, up 13% year-over-year, primarily driven by orders of $91.2 million, up 10% year-over-year. As we expected, GTV growth outpaced order growth as we lapped the launch of our $10 minimum basket feature for Instacart+ members in Q1 2025. Average order value of $113 was up 3% year-over-year, reflecting the ongoing deepening of customer engagement across our platform and strong performance from club retailers, which tend to have larger AOVs. Transaction revenue was $733 million, up 13% year-over-year, representing 7.1% of GTV. Transaction revenue as a percent of GTV was flat on a year-over-year basis, driven by increased fulfillment efficiencies, largely offset by lower payment revenue. As a reminder, because we manage multiple levers across our P&L, we expect transaction revenue as a percent of GTV may fluctuate from quarter-to-quarter. Advertising and other revenue was $286 million, up 16% year-over-year. As Chris noted, this was our strongest growth rate since Q3 2023, and helped drive our advertising and other investment rate to 2.8%, up from 2.7% in Q1 2025. This outperformance in Q1 was driven by broad-based strength. Large brands performed well, while mid-market and emerging brands leaned in particularly strongly to start the year. Total revenue was $1.02 billion, up 14% year-over-year, primarily driven by GTV growth. GAAP gross profit was $738 million, up 10% year-over-year, representing 7.2% of GTV compared to 7.4% in Q1 2025. The year-over-year decrease in GAAP gross profit as a percent of GTV was primarily driven by an increase in cost of revenue as payments to publishers scale with the expansion of Carrot Ads and off-platform partnerships. As a reminder, we expect year-over-year growth in payments to publishers to moderate in 2026 compared to 2025. GAAP total operating expenses were $556 million, representing 5.4% of GTV, compared to 6.1% of GTV in Q1 2025. Adjusted total operating expenses, which exclude the impact of stock-based compensation expense and certain other expenses were $463 million and represented 4.5% of GTV compared to 4.9% of GTV in Q1 2025. The year-over-year improvement in both GAAP and adjusted total operating expenses were primarily driven by increased operating leverage across all line items. In particular, G&A benefited in Q1 from the repeal of Canada DST late in the quarter, which is not a benefit we expect moving forward now that this matter is resolved. As a reminder, we continue to expect Q1 to be our lowest quarter of stock-based comp in a calendar year, followed by a sizable step-up in stock-based comp in Q2 due to the timing of our annual refresh grants. GAAP net income was $144 million, up 36% year-over-year. Adjusted EBITDA was $300 million, up 23% year-over-year. We also generated operating cash flow of $268 million and free cash flow of $253 million, both down 10% year-over-year, primarily due to the collection of a large accounts receivable balance from a retailer that benefited cash flow in Q1 2025 and the payment of $60 million in regulatory settlements made in Q1 2026. In Q1, we repurchased $349 million of shares and ended the quarter with $323 million of remaining buyback capacity. We closed Q1 with approximately $880 million in cash and similar assets. While our balance sheet remains strong, and we expect to generate meaningful cash flow in 2026, we recently established a $500 million unsecured revolving credit facility to provide additional operating liquidity. Separately, today, we announced a $1 billion increase to our buyback authorization. We are well on track to return the majority of free cash flow via repurchases this year, and this increase will enable us to remain opportunistic in our buyback approach in 2026 and beyond. Now on to our Q2 outlook. We anticipate GTV to range between $10.1 billion to $10.25 billion. This represents year-over-year growth between 11% to 13% with GTV expected to continue to outpace orders growth. We expect advertising and other revenues to grow 11% to 14% year-over-year, reflecting the ongoing benefits of diversification across both supply and demand on our platform, even as brands continue to navigate a dynamic macro environment. We are also guiding to Q2 adjusted EBITDA of $290 million to $300 million, representing year-over-year growth of 11% to 15%. For the full year, we continue to expect adjusted EBITDA to grow faster than GTV while moderating in the rate of expansion as we reinvest to accelerate across our multiple growth engines and lap some of the more significant operating expense efficiencies realized in 2024 and 2025. Overall, we delivered strong Q1 results and are building on the momentum as we enter Q2. Our operating fundamentals are strong, and we're well positioned to continue driving long-term profitable growth and shareholder value. With that, we'll open up the call for live questions. Operator, you may begin. Operator: [Operator Instructions] Our first question comes from the line of Colin Sebastian of Baird. Colin Sebastian: Maybe just following up on the Q1 performance and the acceleration in overall revenue growth. If you look across the platform at the core products and the newer initiatives where you're making investments, maybe it would be helpful to break out -- break down that growth a bit in terms of what's driving the most incremental improvement in marketplace, enterprise and advertising, and how you see those factors playing out as we look ahead to Q2 and the balance of the year, particularly given some of the shifts in the macro and competitive environments? Chris Rogers: Yes. Thanks, Colin, for the question. So look, we are happy with our growth results. As you heard, Q1 was another strong quarter of 13%. It was our ninth consecutive quarter of double-digit growth, and we surpassed $10 billion in quarterly GTV, which that was a milestone for us. And we do think that the consistency of our growth is an important indicator, and that's why I said our overall strategy is working. We're continuing to attract and engage more monthly customers because we're relentlessly focused on making our service better every quarter with constant improvements across the entire customer journey from when a customer opens the app to when they're building their basket to when they check out right through to when they get the delivery, the exact thing that they ordered. So that might sound simple, but again, at our scale, these improvements compound quickly. And then at the same time, we're extending that experience and all of our technology across more surfaces with our strong enterprise momentum. We're now at over 380 storefront clients and our recent launches like Restaurant Depot as an example, and Cub from Q4, they're performing well. And in Q1, we're very proud that ALDI returned to Storefront Pro. And then across all of it, AI continues to meaningfully accelerate our progress. It's allowing us to onboard retailers faster. It's allowing us to customize for retailers faster. It's allowing us to improve personalization for customers while also unlocking entirely new experiences, for example, with Cart Assistant, which, as I mentioned upfront, we're now testing with 25% of customers. Early feedback is encouraging, and that's only going to get better over time. So when you put it together, there's multiple engines driving our growth across the company. Our strategy is working. We're strengthening our core experiences. We're expanding our technology across more surfaces. And then AI is further accelerating our growth. So we feel really good about the fundamentals and how we're executing and our trajectory overall. Operator: Our next question comes from the line of Eric Sheridan of Goldman Sachs. Eric Sheridan: Maybe 2, if I can. One, on the advertising side, what do you see as some of the most interesting growth opportunities that present in new mediums or new formats for advertising as you think over the next 12 to 18 months? And building on the answer on the enterprise side, would love to go a little bit deeper in the Instaleap acquisition and what you think that means for an international opportunity around enterprise in the years ahead? Chris Rogers: Thanks for the question, Eric. I mean there's no question in our mind that the innovation around ads is going to come from AI and everything related to how AI can advance advertising mediums and platforms. For us, AI is completely core to our advertising efforts at this point, and we're using it in a few major ways. One is we're using it behind the scenes with ranking and relevance and personalization. We're making all of our sponsored ads more relevant with AI. We're driving stronger engagement and more items added to the cart. With advertising tools and efficiencies, we're making it easier for advertisers to manage and drive performance of campaigns, especially when it comes to emerging brands. There have been multiple examples over the last few months, including our AI-powered recommendations for advertisers alongside a suite of bid and budget and category imagery recommendations. This is all fueled by AI. We also launched AI-powered landing pages for display campaigns. And then the third pillar here, and I think this is going to become increasingly relevant is AI with conversational commerce and agentic experiences. We're innovating here alongside the team that's building our agentic consumer experiences, and our ads are going to be informed by how consumers engage in agentic shopping. So our strategy is going to be to build trust and utility with consumers and leverage all of the learning across everything we know from online, but also in-store and our learnings from Caper Cart to incorporate that into the overall shopping experience there. On Instaleap specifically, so look, we view Instaleap as an extremely strategic acquisition for us despite the relatively small size. It's fantastic tech. It's a really special team. This is a great example of our M&A philosophy in action. We look for technologies and capabilities that complement our existing platform and accelerate our growth in a disciplined way. And Instaleap is just a great combination of that. Their grocery technology is resonating with retailers around the world, and they have deep retailer relationships in markets that we want to pursue. And so that put them squarely in a sweet spot for us as a grocery tech company with global ambitions and a land-and-expand strategy on the enterprise side, where we can offer all of their current customers many more products with our existing services from our enterprise suite of products. So we're thrilled to have them as part of our team. Operator: Our next question comes from the line of John Colantuoni of Jefferies. John Colantuoni: Chris, last quarter, you mentioned aspiring to faster growth. As you look back at what you've accomplished in the first 4 months of the year, what needs to happen for you to realize that goal? And second, could you just talk a little bit about what drove the broad-based strength in the advertising business? I'm curious if this was more of an industry dynamic or more of a unique dynamic to Instacart? Chris Rogers: Yes. Thanks for the question. You're right. We did say our ambition was to accelerate and we have been accelerating our growth. We're very happy to provide another double-digit guide of 11% to 13% for Q2. And although we don't guide beyond our current quarter, I can talk a little bit about why I'm confident in our ability to drive long-term durable growth. Our strategy is unique and differentiated. No one else is doing what we're doing. And we've built a model with multiple paths for growth that all reinforce each other. So our core experience, so that's across marketplace and enterprise, that continues to improve. And there's more runway to go because we're the category leader in a very large underpenetrated category. And then our enterprise platform, in particular, which leverages all of our marketplace innovations, that continues to be a real strategic advantage with retailers. And the model is simple. We help enable retailers to grow and we grow with them. And we're now operating at considerable scale. As mentioned, 380 storefronts, and we believe that there's even more upside to land more retailers in North America and abroad, big and small and to expand with more products and services with our existing partners. And as we look forward to get to your question about the -- some of the newer initiatives, our foundation is allowing us to invest in many of these new initiatives. We're taking our enterprise products to new international markets. That unlocks a much larger market opportunity for us. We're extending beyond e-commerce into omnichannel with in-store technologies like Caper Carts, like FoodStorm, Carrot Tags. And because we're already deeply embedded with retailers because of our enterprise platform, we're in a unique position to help power that shift. And then once again, AI is a real accelerant for us, helping us move faster across everything and power entirely new customer experiences, including AI solutions for retailers, which is just starting to get off the ground. So look, when I step back and I look at the total picture here, we have strong execution in the core business, and we're layering in new growth drivers that are going to expand our platform over time. And that's what gives me a very high degree of confidence in our ability to drive sustained long-term durable growth. On your second part on ads, look, we're also really happy with the momentum on the ad side. As mentioned, Q1 was our strongest ads and other revenue growth since Q3 of 2023, and we feel great about the underlying fundamentals that are driving the business. So first of all, the fact that we're driving overall platform growth year-on-year does drive more advertising participation. But we're also seeing strength in our core on-platform offering, where we're continuing to innovate, that includes the sponsored products, which continues to be the main growth driver from a format perspective. And again, this quarter, strength came from all brand cohorts, so large accounts, mid-market accounts and emerging brands. But maybe backing up, what you're seeing here is also a reflection of our plan in action. So our ambition is to build one of the largest and most effective ads ecosystem where brands come to us to drive performance across Instacart and multiple other surfaces. And our strategy to get there is working. We're laser-focused on building diversification across supply, meaning more surfaces where we place ads and demand, meaning more brands investing and current brands investing more. And to break that down, on the supply side, we're continuing to grow our Carrot Ads network where this is where we extend our reach and our tech and our demand on to retailer websites. We're now at 310 partners. We have a healthy pipeline. And remember that as we expand with Storefront Pro, those clients almost always enabled Carrot Ads. So our enterprise expansion also helps build our ads ecosystem. We recently signed partners, as I mentioned upfront, like ALDI and Dierbergs and Fareway and Jerry's. On the demand side, we're seeing broad-based strength from over 9,000 brands that are advertising with us. Large brands performed well in Q1, but also, in particular, we saw strong engagement from mid-market and emerging brands. We've also been expanding our platform through partnerships with Meta and Google and TikTok and Pinterest and The Trade Desk. So this is where CPGs use their first-party data to target our high-intent audiences and then we provide them with measurements and performance on Instacart. And importantly, with this initiative, we believe we're gathering incremental budgets for these campaigns because we're tapping into existing digital ad spend. So at the highest level, on the ad side, our stated strategy of building one of the most powerful ads ecosystems is working, and you're seeing that show up in our results. Operator: Our next question comes from the line of Ron Josey of Citi. Ronald Josey: Chris, I wanted to ask just a little bit more on price parity here, just given it drives greater adoption and sales. And specifically, in your conversations with retailers and how they think about price parity, just talk to us about how they are approaching this as Instacart becomes more of a weekly and habit as opposed to just convenience overall. And then as you think about enterprise and Storefront Pro and the 10-point lift in online sales after launching Storefront, just talk to us about what's driving specifically adoption here? Is it just greater penetration of these retailers on the platform or greater sales? Any insights there would be helpful. So price parity and adoption of Storefront Pro. Chris Rogers: Yes. Thanks for the question. So on price parity, just to be very clear, so retailers set item level prices on our marketplace and on our owned and operated sites, obviously. So some choose to mark up prices to help offset the fees that we charge the retailer, but many do offer price parity. That said, if I come at this from a bit of a consumer lens, customers are seeking value and the retailers on our platform who are delivering it are -- they're growing faster and they're retaining customers better over time on our platform. And so that -- the data is clear. Price parity retailers grow faster. They grow 10 percentage points faster. And so this gives the retailers an ability to drive incremental sales on Instacart, especially as they're competing with each other for share. So that can be very critical to them in the long run. We're a very large platform now, and retailers are motivated to win share on Instacart. But it's also important because they don't want to lose share to other large digital players who are increasingly trying to win share of the grocery market. So that's where the conversation with retailers centers with us. It's -- if it's an incremental sales and share opportunity for them, the results in the -- that we're seeing over time are very clear. And so we work with them. We work with them on this, and we work with them, obviously, on a bulk of other affordability strategies to allow them to perform well with consumers who are looking for value on the platform. Your second question was around enterprise and the adoption of enterprise. And what I'd say here is like, look, why do retailers use us? It's because we're able to extend all of the scale from our marketplace where we're doing hundreds of millions of orders, and we're able to offer that to them in a way that allows them to compete with some of the largest digital players with a very high-quality experience. And so if you look at what -- the fact that we're offering end-to-end technology right through from e-commerce, including search and all the relevancy and the personalization that we're continuing to offer, combined with our efficient cart and checkout and order orchestration right through to when it gets delivered to the customer's home, that's a very complex experience. It's difficult to get right. And that's why when retailers are evaluating their options on how they want to perform and compete in the e-commerce sphere, they look to Instacart because we're able to give them that scale and leverage those learnings. We are seeing a 10% lift in performance, and that's because, again, because of the experience that we're driving on marketplace that we're able to extend onto their sites. And so what I'll say is we think that there's quite a bit of runway here. There's -- again, we're at 380 retailers overall. We're seeing performance on this side of the business for them and for us, and we're going to continue to lean into this as a strategic growth driver. Operator: Our next question comes from the line of Shweta Khajuria of Wolfe Research. Shweta Khajuria: Can you hear me? Chris Rogers: Yes. Shweta Khajuria: Okay. Can you please talk to the opportunity and/or risk with agentic? I mean you addressed that a little bit. I guess one of the questions we get is around the development of AI platforms where a consumer can order for delivery, a basket of items and then the AI platform chooses whether it is Instacart or DoorDash or Uber Eats, which platform is the best use case, potentially risking organic traffic. So could you please talk to how you view this and what your pushback is? And the second question is, could you please talk to the order growth versus AOV? Anything in particular beyond the $10 minimum that we should think about? Chris Rogers: Yes. Thank you for the question. As it relates to third-party platforms and AI platforms and how we think about that, our strategy here is pretty simple. We want to be wherever customers are while also maintaining control of the experience and maintaining control of our data. So -- and at the same time, I should mention that we're building the gold standard of agentic experiences using all of our proprietary data directly on Instacart and on our retailer partner side. So we want our direct agentic experiences to be the gold standard. In terms of traction with some of these other platforms that we've chosen to integrate on like OpenAI and now Anthropic, it's still very early in engagement, but we are viewing this as an incremental demand channel in a very large, again, underpenetrated category. If we co-create the experience with these partners, these integrations will allow us to engage -- allow customers to engage with Instacart in new ways, and we believe it's going to help accelerate online grocery adoption over time. And if that happens as the leader in the online grocery category, we think we're going to win. And then again, we're very disciplined when it comes to things like data. We're staying disciplined when it comes to how we're surfacing that. And so we're doing that in a very controlled way to minimize any disintermediation risk and continue to have our proprietary data to be a strength of ours as we build the experience on our first party. For the second part, I will turn it to Emily to talk about the orders growth. Emily Maher: Sure. Let me first speak to orders growth, and then I'll jump into AOV. So orders growth of 10%, as you noted, was a little bit of a step down from prior quarters. And this was largely in line with what we expected and communicated. And so in specifics, in Q1, the main dynamic, as you pointed out, was that we were lapping the full rollout on a year-over-year basis of the $10 minimum basket benefit that we had applied for Instacart+ members. So through the year in 2025, the $10 minimum really drove smaller incremental orders, and that was a meaningful driver of order frequency throughout 2025, in addition, obviously, to ongoing order growth. And so as a result of that, you're seeing GTV at this point grow faster than orders. As we look ahead, we expect that to continue. We expect user growth to be the primary driver of order growth. And while frequency will continue to play a role, we do expect, as I said, user growth to be the primary driver. On AOV, similarly, this was, again, largely in line with what we had expected and communicated in prior quarters. If you look back at 2025, we consistently said that AOV, if you excluded the impact of restaurants, which launched in '24 and the $10 minimum basket benefit was actually continuing to increase year-over-year. And so what you're now seeing is that underlying strength coming through a bit more clearly as we lap the impact of $10 minimum and now 2 years into restaurants. And so what I'd say on AOV is that there's a couple of things driving that underlying strength. One is the ongoing deepening of customer engagement across the platform. And that's because, of course, retained customers typically go on to shop more and spend more over time. We have continued strength in the weekly grocery shops. We have strong performance from club retailers who tend to have a bit higher AOVs. And we're also seeing high-value business customers shopping at some of our recent launches like Restaurant Depot. So really seeing some great trends in AOV across the board. Operator: Our next question comes from the line of Josh Beck of Raymond James. Josh Beck: I wanted to go back to the Cart Assistant. It sounds like 25% of your customers are starting to see the functionality. What have been some of the early learnings? Has anything stood out with respect to conversion or basket size, ad monetization? We've heard some comments from others in the industry. So just kind of curious what you are seeing there. And then also on the search functionality, it sounds like there's an enhancement underway. Is it kind of moving from a more of a keyword index framework to maybe something a little more nuanced with LLM? Just kind of curious what's going on under the covers there. Chris Rogers: Yes. Thanks for the question, Josh. So first of all, on Cart Assistant, again, we've been investing in this. It's still early. We're at 25% of our U.S. consumers who are being exposed. And the learnings were really what I described upfront, which was consumers are using it to save time and get additional value and get inspiration and drive discovery with things like recipes and meal planning. We're seeing consumers do product research through our Cart Assistant. And remember, when we're building these types of experiences, we're really trying to understand how consumers are going to engage with this longer term. So of course, you can come to Instacart and you can engage with Cart Assistant as a digital agent to help you build a basket faster from the onset. But we're also looking at experiences throughout the customer journey where customers can interact with Cart Assistant a little bit more behind the scenes to help them with things like understanding if there's any gluten in their cart as an example. And so we're still studying a lot of the engagement data, and we're still learning. But from an impact perspective, what I will say is that, I mean, we do think AI overall is going to be a meaningful growth driver for the category over time. And at a high level, it's because what it does is it makes grocery shopping simpler and more intuitive. And that should accelerate online adoption by driving better conversion and higher retention and larger baskets and more frequent ordering. And we think we are in a very unique position to bring all of that to life because of our proprietary data from our 1.6 billion lifetime orders and because we're operating an at-scale fulfillment network with shoppers in physical stores and because of our deep retailer integrations, for example, with inventory systems. No one else has this combination, and that's what's allowing us to move from more of a front-end AI experience to actually -- experience that will actually help you complete your order, and that's going to be very difficult to replicate. On your second word around -- your second question around search. So search, in particular, helps customers find what they want faster and customers that search are 5x more likely to place their first order. Key to search is having rich data as well, right? We need to be able to access the catalog. It's not easy to do in grocery, and that's another reason why we see so much traction on the enterprise side of the business because search is a very nuanced example of something that takes years of data and millions of orders to get right? And that's really what we're seeing there. So we're going to continue to innovate. We want search to be as relevant as possible for consumers. We do think search helps consumers complete their basket faster, and we know that it drives that likelihood to place a first order. So we're going to continue to invest there. Operator: Our next question comes from the line of Justin Patterson of KeyBanc. Justin Patterson: Great. Could you talk about some of the guardrails you have around AI costs? We've seen a lot of companies taking different approaches to managing increased token consumption. So I'd love to hear about how you're thinking about that. And then separately, I'd also love to hear about how you're thinking about just advances in recommendation and ranking models benefiting both conversion rates over time and having applications to the ad side. Emily Maher: Sure. In terms of guardrails around AI costs, look, I think this is something that's evolving real time. So I think about 2025 as a point in time where we were more experimenting and seeing where we were seeing adoption and allowing people to try to adopt AI across their workflows and then, of course, across the consumer experience as well. So I think we're definitely monitoring this real time. And to the extent we're seeing either efficiencies in workflows, finding ways to offset those costs in other ways. As it relates to consumer experience, I'd say it's still early, but we are looking for metrics around ways to, again, offset those costs through things like better customer engagement, better conversion, et cetera. So I think it's still early, something we're monitoring and adapting to really quarter-by-quarter. Chris Rogers: And to your second question about recommendations, as I mentioned upfront, we're using data and demand signals to invest to make recommendations as relevant as possible. And the major innovation here has again been around AI. And this is why I've talked about this both as a consumer experience element, but also a brand and advertising element because now you're able to do it across your content with semantic intelligence. So our view is that as we make recommendations more relevant, we're just going to help consumers to find what they're looking for and complete perfect orders. And we think that, that's going to help us on both the advertising side and just with overall consumer experience. Operator: Our next question comes from the line of Nikhil Devnani of Bernstein. Nikhil Devnani: I wanted to ask about enterprise. So you have several products now available to retailers. I guess when you step back at the aggregate level, how should we be thinking about the size of this business now in terms of contribution to revenue or GTV? And then also the economics of these orders as this product continues to grow and become a bigger portion of the mix of the business for Instacart, how do the economics stack up relative to your marketplace business? Chris Rogers: Yes. Thanks, Nikhil, for the question. Why don't I take a step back and talk about how we think about the enterprise business and then Emily can dive a little bit deeper into the margin side of the question. So look, we do believe that enterprise is playing an overall highly strategic role with us with retailers and our ability to deliver for them, but also deliver the best customer experience across both enterprise and marketplace. To really emphasize why that is. First of all, enterprise enables these much deeper retailer relationships, and it gets us on the same side of the table where we're innovating with them. We're now doing -- we do short- and long-term planning. And these relationships often lead to these technical integrations that really only exist to make the experience better, which they do across their owned and operated sites and our marketplace. And enterprise, of course, drives overall efficiency for us. We make very good use of our marketplace innovation by extending it to enterprise clients. And as a result, it lowers our cost to serve through shared infrastructure. It also allows us to reinvest even more in shared technology and capabilities that benefit everyone. And it also increases order volume and density, which also helps us on the cost side. As we've stated in the past, both enterprise and marketplace are growing, but the way that we think about enterprise is less as a stand-alone line item and more of a core part of how the overall platform compounds over time. So Emily, do you want to expand on that? Emily Maher: Yes, sure. From an economic standpoint, I mean, first of all, we don't break out the specifics of economics in part because, as Chris spoke to, really all parts of our ecosystem work together. So for example, the fact that we have marketplace and enterprise benefits our fulfillment cost as just one example of how we think about scaling the 2 sides of our ecosystem. We -- what I would say is that both marketplace and enterprise generate profit positive dollars. I'd say both are contributing to overall growth. And when we think about the specific economics, I'd also say that each retailer is really different. Our contracts retailer by retailer are bespoke. And that is because when we go to a retailer, we're working with them to figure out the right construct or constellation of different products and services and how they work together. And we're really looking holistically at that partnership to say, does this make sense from an economic standpoint for us, for them. And so it makes it difficult to disentangle any one part of our ecosystem. Nikhil Devnani: And if I could just add a quick follow-up. So to what extent do you want to scale white label logistics for these partners internationally as you offer enterprise? And if that is a big part of the road map, I guess, how do you think about the investment required to do that in a new country with less of an existing infrastructure already? Chris Rogers: Yes, I can take that. Thanks, Nikhil. Like look, we're very excited about our plan to take our tech and our enterprise tech to new markets for the first time. And we believe that, that is a very promising future growth lever for us. We, of course, have ambitious plans. But as that said, we're being very disciplined on how we approach it. That's why our strategy is an enterprise-led strategy. We're taking proven products like Storefront Pro and Caper Carts and FoodStorm to retailers who are facing the same challenges that we've already solved in North America. And that's what also gives us confidence in product market fit. In other markets, retailers are telling us that there's a fit. And we're seeing encouraging signs. As I mentioned upfront, Costco Storefront Pro expansion in France and Spain is performing ahead of our initial expectations. So we're very excited about this. We're excited about our Instaleap acquisition as an accelerant for what we're trying to do internationally. But again, we're going to be very disciplined. We're taking our current products to new markets, which again gives us cost leverage. And yes, anything to add, Emily? Emily Maher: Yes. I think the only thing I'd add is that our focus really is on the technology layer. So if you think about Instaleap, it's about fulfillment tech, the orchestration layer, the great retailer relationships they bring to bear. As Chris mentioned, enterprise-led really focused on existing tech like SFP, FoodStorm and Caper. So the question was asked really, I think, with a focus on logistics. I think that is something that we can do internationally. I wouldn't say it's our priority. So we will obviously consider that on a case-by-case basis. Operator: Our next question comes from the line of Jason Helfstein of Oppenheimer. Jason Helfstein: Maybe 2 quick ones. Can you give us your thoughts on the advertising outlook for the rest of the year? Obviously, this quarter was quite strong. And then just -- I don't think we've heard anything on Instacart+. Just any thoughts you want to share, increased -- is this an increased focus this year? And then any just concerns with lapping any of the credit card promotions around Instacart+? Chris Rogers: Yes. Thanks for the question, Jason. I'll start on the ads side. So look, looking ahead on ads, we just provided another strong guide for Q2, 11% to 14% growth for ads and other. And although we don't provide specific quarterly guidance beyond that, we are confident in our ability to deliver our long-term targets on ads of 4% to 5% of GTV. And that's because at the highest level, we believe that we have the right strategy, we're executing against it, and we're successfully expanding our scale and reach towards our goal of being a leading ad ecosystem. And when we break that down into some of our core building blocks and components, we do see headroom across the ecosystem. So starting in our core, we're continuing to innovate on platform. As mentioned in an earlier question, we're using AI innovation more than ever to provide tooling like our new AI-powered recommendations. We're using AI to drive more personalization and relevancy, which all translates to better performance for brands. And then we're taking that innovation and we're extending it on to our Carrot Ads networks, where we're at 310 partners and growing, and we have a healthy pipeline. And we're extending our ads innovation in-store with Caper Carts, which is still very early, but I firmly believe is going to be one of the most interesting advertising opportunities for brands in-store. And then we're monetizing our data in a couple of ways. Off-platform, which we touched on, but again, we've built a strong foundation with all of the right partners. We're excited to scale that further and tap into incremental budgets and with our new data solutions like our consumer insights portal, where brands can access unique real-time data insights. So again, we're confident in our ability to scale ads and other over time. Of course, there's lots of puts and takes in the advertising business on a quarterly basis, but we firmly believe in our ability to hit our long-term targets. Emily Maher: On IC+, I wouldn't say it's an increased focus specifically. I think it's a continued focus for us. It has always been a key part of our overall strategy. And we are seeing paid IC+ members continue to grow. They are continuing to represent the majority of GTV and orders on the platform, and they also continue to be more engaged and retain better than nonmembers. And effectively, how we think about this is that it is -- that strength is really reflected in our overall fundamentals. So you remember last year, we talked about the fact that our MAU, we're seeing the best retention in a few years, right? So you're seeing that in MAU growth and just in overall user engagement. So we're focused on continuing to drive overall value for the program, right? It's anchored in the $0 delivery minimum, which we lowered to $10 for grocery and $25 for restaurants. Obviously, things like Access New York Times Cooking and Peacock, and we're always evaluating new ways to drive value for members. In terms of lapping the benefits, I wouldn't say there's anything I would call out as it relates to lapping the IC+, but we, of course, continue to look for ways to drive increased value for our members. Operator: Our next question comes from the line of Ken Gawrelski of Wells Fargo. Kenneth Gawrelski: Could you talk about the factors impacting incremental margins in the 2Q guide? Obviously, some strong GTV growth guided to at the high end, but maybe a bit softer incremental margins. If you could talk about the factors. That's question one. Question two, please, maybe could you talk about the success you're having with partners working towards price parity? What are the continued challenges? What are the successes maybe you've had there? And how would you evaluate your progress? Chris Rogers: Perfect. Okay. Thank you for the question. On the first one, look, I'll let Emily speak to some of the shorter-term kind of puts and takes between quarters. But at the highest level, as it relates to profitability, nothing's changed about our strategy. We're confident in our ability to hit our long-term targets of 4% to 5% of GTV. But let me share how we're thinking about investing in our business overall. So as a reminder, we are the category leader in a very early market with tons of upside. So yes, we're investing and we should be investing. We're investing in our core where our fundamentals are strong. Our product keeps getting better, which means that we can acquire and retain customers more efficiently. And in many ways, we're still early in our journey when you think about some of our mid- to long-term growth areas like in-store technology, where the bulk of grocery transactions still happen, international markets where we're just getting started, although again, being very disciplined there and building leading-edge AI solutions. And on all of these, we have high conviction that these investments are going to pay off over time because they're proven models like land and expand with enterprise, which is our international play. We have a right to win in these areas. We are investing in a very intentional way and in a very disciplined way so that we can continue to deliver profitable growth. And again, we feel good about our ability to hit our long-term targets of 4% to 5%. But in the meantime, we're going to continue to invest because we see so much opportunity in front of us, and we see attractive investment opportunities to drive growth. Emily Maher: Yes. Just to add a little bit of color specifically on Q1 and Q2. I don't think there's anything fundamental that's changed in the business from Q1 to Q2. And I think we've also been consistent with saying that we do expect the pace of margin expansion in 2026 to moderate versus 2025. So again, nothing new or different that we're seeing in terms of what's happening away or deeper inside the business. A couple of things I might call out as it relates to Q1 and Q2. So I did mention on the call earlier that Q1 benefited from the repeal of Canada's digital services tax. What happened there was it happened very late in the quarter. So typically, we manage through surprises that come whether they're positive or negative, meaning we reinvest things that come to the upside or we manage around things to the downside. But what happened here is it was something we expected in Q2 and it ended up happening in the last couple of days of the quarter. And so we just didn't have time to reinvest at levels that we found attractive. And so that is something that doesn't recur in Q2. In fact, as I mentioned earlier, something we expected to happen in Q2 and got pulled forward into Q1. The other thing I might call out is that Q2 of '25, we did see a step-up in transaction revenue as a percentage of GTV from 7.1% to 7.3%. And so again, when you're thinking about the year-over-year comparison, there's just going to be some differences in terms of how you look at Q1 versus Q2. And so generally speaking, that's why we really focus on overall annual improvement in EBITDA and EBITDA margin because in terms of operating the business, you may have just quarterly fluctuations. So I wouldn't think about anything truly different in Q2 that we're seeing relative to the last couple of quarters. Chris Rogers: And to your question on price parity, look, the success that we've seen is a steady drumbeat of retailers moving towards price parity since we've really outlined this as a priority and an opportunity for retailers last year. So we saw Schnucks move to price parity last year, Heritage Grocers so far this year, Hy-Vee, Raley's, Fareway, several independent retailers. We're seeing that play out in their performance. Again, the data is very clear that retailers that market price parity see a 10 percentage point acceleration. They retain better. The challenge, of course, being here that ultimately, retailers set pricing on the platform, it's up to them to make that investment and to kind of evaluate the short- and long-term return and the strategic nature of wanting to capture digital sales and share versus some of the retailers on our platform, but also some of the largest digital players that they're ultimately competing with. And so the challenge is really it's a retailer's decision whether or not to go to eliminate the markup and price parity to stores. Operator: Our last question comes from the line of Andrew Boone of Citizens. Andrew Boone: I just wanted to ask about Caper Carts. Chris, you mentioned the opportunity with in-store. Can you just flesh that out, talk about where you guys are in terms of scaling that and then expectations we should have going forward? Chris Rogers: Sure. Thanks for the question. So first of all, at the highest level, we very much believe in the in-store opportunity for technology. E-commerce is at low double digits. So the vast majority of transactions will still happen in-store for the foreseeable future. And there is a massive opportunity to modernize and digitize that experience with seamless operations, advanced personalization, way finding, advertising to help customers in-store discover products, save money while they shop. On Caper, specifically, we're seeing great momentum with Caper. We're now live in more than 100 cities with over a dozen retail banners. From a scale perspective, we're continuing to expand with Wakefern, where we're now live at about 20% of stores. We launched new pilots recently with Sprouts and Wegmans and Coles in Australia, where we've announced an upcoming pilot with Morrisons in the U.K. So I'm confident that Caper has runway ahead, strong product market fit with consumers and retailers. This is one of my main learnings. Customers love the experience of using the cart and retailers love it for the operational benefits and the potential to turn their in-store customers into omnichannel customers. And it's also driving higher basket sizes for retailers. So we're making traction on Caper. We're making traction with ads on Caper, and we think that it's a great mid- to long-term growth lever for us. Operator: Thank you. This concludes the question-and-answer session. We'd like to thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good day, and welcome to the Bruker Corporation First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joe Kostka, Director of Bruker's Investor Relations. Please go ahead. Joe Kostka: Good morning. I would like to welcome everyone to Bruker Corporation's First Quarter 2026 Earnings Conference Call. My name is Joe Kostka, and I'm the Director of Bruker Investor Relations. Joining me on today's call are Frank Laukien, our President and CEO; and Gerald Herman, our EVP and CFO. In addition to the earnings release we issued earlier today, during today's conference call, we will be referencing a slide presentation that can be downloaded from the Events and Presentations section of Bruker's Investor Relations website. During today's call, we will be highlighting non-GAAP financial information. Reconciliations of our GAAP to non-GAAP financial measures are included in our earnings release and are posted on our website at ir.bruker.com. Before we begin, I would like to reference Bruker's safe harbor statement, which is shown on Slide 2 of the presentation. During this conference call, we will or may make forward-looking statements regarding future events and the financial and operational performance of the company that involve risks and uncertainties, including those related to our recent acquisitions, geopolitical risks, wars or blockades, market demand, tariffs, currency exchange rates, competitive dynamics or supply chains. The company's actual results may differ materially from such statements. Factors that might cause such differences include, but are not limited to, those discussed in today's earnings release and in our Form 10-K for the period ending December 31, 2025, as updated by our other SEC filings, which are available on our website and on the SEC's website. Also, please note that the following information is based on current business conditions and our outlook as of today, May 6, 2026. We do not intend to update our forward-looking statements based on new information, future events or for other reasons, except as may be required by law, prior to the release of our second quarter 2026 financial results expected in early August 2026. You should not rely on these forward-looking statements as necessarily representing our views or outlook as of any date after today. We will begin today's call with Frank providing an overview of our business progress. Gerald will then cover the financials for the first quarter of 2026 in more detail and comments on our reconfirmed full-year 2026 financial outlook. Now I'd like to turn the call over to Bruker's CEO, Frank Laukien. Frank Laukien: Thank you, Joe. Good morning, everyone. Thank you for joining us on today's first quarter '26 earnings call. While U.S. academic demand, tariff and currency headwinds have continued to pressure our year-over-year results, we are pleased that our first quarter '26 financial performance came in well ahead of expectations. We are also encouraged that in the first quarter, our Bruker Scientific Instruments segment or BSI bookings grew organically in the high-single-digits. We saw strength in industrial research orders and encouraging double-digit bookings growth year-over-year in academic orders from outside the United States. This demonstrates, we think, that our novel and performance-leading post-genomic disease biology research solutions are truly enabling and that we can expect momentum in U.S. academic demand once the NIH funding environment improves. In the first quarter, we benefited from strong demand in a few areas more unique to Bruker; as our AI-driven semiconductor metrology business, and our similarly AI-driven SciY scientific software and lab digitization businesses as well as our European Middle East security Detection business all saw organic bookings growth of greater than 20% in the quarter. Let me give you a little bit more color. Order strength in Semi Metrology, which is now a greater than $300 million annual revenue business for Bruker, was driven by AI demand for memory chips and for advanced packaging, particularly in the U.S. and in APAC. Many of the world's top semiconductor manufacturers rely on Bruker metrology tools for front-end and back-end applications, including development for their next-generation products. The rapidly increasing need for computing power and emerging applications for artificial intelligence provide strong secular tailwinds in Semi Metrology. Another area that may have been less visible to you so far, another area of our portfolio benefiting from the AI megatrend is SciY, which is now about a $50 million revenue business. SciY offers lab digitization and scientific software going from research through development all the way to manufacturing and enabling integration, automation and digital transformation. These SciY solutions facilitate the capture, ingestion and standardization of data so that it is AI-ready, alleviating bottlenecks in the digital transformation that is revolutionizing scientific research and paves the path to so-called self-driving labs, or SDL, which can accelerate R&D, quality control, and also chemical and biomolecular manufacturing. In another area, our security detection business, we are seeing significant demand for our explosive trace detection systems from airports in Europe and the Middle East as well as for CBRN detection solutions. Our security detection business has grown from a niche business a few years ago to about $70 million in revenue expected this year. Finally, we are delighted in the turnaround in our BEST segment, where we have obtained in the first quarter about $80 million of multi-year orders for our research instrument subsidiary, Fusion Technologies, Fusion Energy, and in the last 5 months, December through April, about $600 million of multi-year orders for our high-performance superconductors from major MRI customers. So, all good at BEST. So strong academic demand for our post-genomic solutions outside of the U.S. and these mentioned areas of idiosyncratic strength were contributors to our BSI book-to-bill ratio, which in Q1 was again comfortably above 1.0x, now the third consecutive quarter. This encouraging momentum is expected to carry us back to organic revenue growth in the second quarter and for the remainder of the year. Very importantly, Bruker's innovation engine has been quite impressive, we think, this year already, and we have introduced very impactful new products and solutions at recent scientific and medical conferences. These launches further strengthen our leadership position in NMR. I think we are clearly leading the way in multi-omic, high-fidelity, and high-plex spatial biology. And we're also bringing major innovations to clinical microbiology and molecular diagnostics. So let's dig in. Let's turn to Slide 4 now for the P&L performance of the business. Our Q1 reported revenues of $823 million increased 2.7% year-over-year, an FX tailwind of 4.5% and a growth contribution from M&A of 2.6% more than offset an organic decline of 4.4%. BSI segment revenues were down 5% organically, while BEST saw organic revenue growth of 3% net of inter-company eliminations. Our first quarter '26 non-GAAP gross and operating margins were 50% and 10.2%, respectively, both down year-over-year and both inclusive of significant headwinds from foreign currency trends year-over-year but also both ahead of expectations. Our Q1 '26 diluted non-GAAP EPS was $0.31, down from $0.47 in the first quarter of '25, but meaningfully ahead of our prior expectations. Please turn to Slides 5 and 6, where we highlight the first quarter constant exchange rate, or CER, revenue and bookings performance of our 3 Scientific Instruments groups and our BEST segment year-over-year. In the first quarter, BioSpin Group revenue was $198 million, with a CER decline in the high-single-digits percentage. Revenue growth in preclinical imaging systems, SciY software and our services business were more than offset by weakness in NMR systems due to soft ACA/GOV performance in China and Europe. In the first quarter, BioSpin installed the world's highest-field preclinical MRI system, an 18-Tesla preclinical system at the Champalimaud Institute in Lisbon, Portugal. However, BioSpin saw a headwind to revenue growth from the 1.2 gigahertz NMR installed in the first quarter of '25, as there were no gigahertz-class systems in Q1 of '26. In Q1, our CALID Group had revenues of $316 million with mid-single-digit percentage CER growth. CALID growth was led by molecular spectroscopy, which also saw strength in security detection orders. Microbiology and Infection Diagnostics had solid revenue growth. And in life science mass spectrometry, contributions from our recent M&A more than offset revenue software in U.S. ACA/GOV. Encouragingly, life science mass spec orders growth in the U.S. ACA/GOV was positive in Q1 year-over-year. So perhaps it is stabilizing. Of course, we'd like it to come back and rebound, but maybe that will happen in the next couple of quarters. Turning to Slide 6 now. In Q1, Bruker Nano revenue was $246 million, with CER revenue declining a mid-single-digits percentage. Strong revenue growth in Semi Metrology was more than offset by weakness in ACA/GOV and industrial markets. Nano had strong orders across the group, including tools for X-ray industrial research, spatial biology, high-bandwidth memory, and advanced packaging metrology, all driven by AI. Finally, first quarter BEST CER revenues grew 3%, net of intercompany eliminations, driven by our superconducting wire business. Research Instruments, RI, that business saw very strong orders in Q1, as I said earlier, from Fusion and BEST received very large multi-year superconductor orders in the last 5 months from all 3 major MRI OEM customers. Moving on to Slide 7. I won't -- the next 3 slides, I will not read everything, but I'll give you a highlight. We had a pretty significant NMR innovations at the Experimental NMR Conference in Asilomar in 2026 for research and pharma markets. A lot of it is software, a lot of it is AI-driven, making protein NMR really much easier. In the past, I think protein NMR had a disadvantage compared to cryo-EM or X-ray crystallography and that it required more expertise, but that's really changing pretty rapidly. And AI, with its unique abilities to get dynamic and binding information, is becoming much more accessible. There are some other innovations from extreme new sensitivities and enable new fields shown on the right to just a good old next-generation NMR console, the AVANCE NEO-X, which we think will unlock a replacement cycle. Moving to Slide 8. At AGBT and then following AACR, I really think Bruker is clearly leading the way in spatial biology for capturing complexity of disease biology and integrating it from, well, even 3D genomics with a very unique PaintScape system that we launched to the CosMx system, which is upgradable for our customers and which, of course, were already a year ago. We showed multi-omic whole-human-transcriptome. We've added now a whole-mouse-transcriptome. We're doing T-cell receptors, microRNA. And most importantly or very importantly, I would say, we have added high-plex proteomics, that combination of whole-transcriptome and high-plex proteomics is really very, very powerful and readily adopted by comprehensive pathways for better LLM, so just for better disease biology. We think that continues to be very unique. Enough on that slide, let me talk about Clinical Microbiology on Slide 9. We had another conference -- crucial conference, the Global ESCMID Conference, which stands for Clinical Microbiology and Infectious Disease in Munich. We introduced our new MyGenius PRO higher-throughput system, sample-to-answer higher-throughput system for all the markets that we drive from Bruker ELITech. And delightfully, this is also the system that Hitachi is introducing in Japan using our molecular diagnostic assay; so it's very an important development. Meanwhile, we have many, many introductions, too many to specify in the MALDI Biotyper workflow and identification and even hospital-acquired using the IR Biotyper. I won't go through it; this is more for your reading if you are interested, but significant innovation in microbiology, typically a state area of diagnostics. Right. So in summary, good execution, disciplined management by our teams drove us to outperform our expectations in the first quarter. Order trends are improving, including in unique areas of our diversified portfolio, and we're optimistic that improved organic growth will follow. Importantly, we are very committed to controlling and reducing costs, which is crucial to improving our margin profile rapidly. Benefits from our cost-out plan, the Bruker Management Process will be explained by Gerald, but are now clearly evident in our P&L, and we're further expanding these cost-cutting initiatives, as Gerald will discuss shortly, keeping us on track not only for significant margin expansion and strong EPS growth this year, but also into next year and beyond. Given the dynamic macro, shall we say, and geopolitical environment, we believe it is prudent for now to confirm our prior '26 guidance. The outperformance in Q1 has been encouraging and encouraging start to the year, and it provides us with improved visibility and confidence, and we look to build on that momentum in the second quarter. With that, let me turn things over to our CFO, Gerald Herman. Go ahead. Gerald Herman: Thanks very much, Frank, and thank you, everyone, for joining us today. I'm pleased to provide more detail on Bruker's first quarter 2026 financial performance, starting on Slide 11. Despite significant macro and foreign-exchange headwinds in the quarter, we delivered financial performance ahead of expectations we outlined in our earnings call in February. The first quarter '26 reported revenue increased 2.7% to $823.4 million, which reflects an organic revenue decrease of 4.4% year-over-year, well ahead of our original expectations. Acquisitions added 2.6% to our top-line and foreign exchange was 4.5% revenue tailwind. The highlight of the quarter was our strong bookings performance, with BSI segment organic bookings up high-single-digits and bookings growth across all groups. We saw order strength in Academic & Government research, excluding the U.S., in industrial and semi-end markets, and geographically in Europe and the rest of the APAC region, with marked order improvement also seen in China. Back to revenue for the quarter, geographically and on a year-over-year organic basis, in the first quarter of '26, our Americas and European revenue both declined in the low-single-digits percentage, while Asia-Pacific revenue declined in the low-double-digit percentage, driven by a greater 20% decline in revenue performance for China. In our EMEA region, revenue was up low-single-digit percentage. From an end-market perspective, we saw organic revenue growth in semi, biopharma, and hospital clinical markets more than offset by double-digit declines in Academic & Government research and industrial markets. Within the BSI segment, systems revenue declined in the low-double-digit percentage and aftermarket revenue grew in the high-single-digits percentage organically year-over-year. Q1 2026 non-GAAP gross margin decreased 130 basis points to 50%. Non-GAAP operating margin was 10.2%, a decrease of 250 basis points year-over-year. The decrease reflects headwinds of 350 basis points from lower volume and unfavorable mix, 170 basis points from foreign exchange, and 30 basis points from tariffs. These headwinds were partially offset by a 300-basis-point benefit from our cost-saving actions taken in fiscal year '25, now helping our performance in fiscal year '26. On a go-forward basis, we expect the year-over-year foreign exchange and tariff headwinds on margins to ease as we lap the introduction of U.S. tariffs and the significant depreciation of the U.S. dollar, which occurred in the second quarter of 2025. On a non-GAAP basis, Q1 '26 diluted EPS was $0.31, down from $0.47 in Q1 of '25. Our non-GAAP EPS performance includes a foreign exchange headwind of $0.05 and a $0.05 impact from the MCP offering we completed in September 2025, net of interest cost savings. On a GAAP basis, we reported diluted EPS of $0.02 compared to $0.11 in the first quarter of 2025, with the decline mostly due to lease impairment and restructuring charges related to our cost-saving actions. Beyond the $100 million to $120 million in annualized cost-saving targets that we announced last year, we're now tracking around $140 million in expected savings on an annualized basis. We cleared most European labor hurdles in the first quarter and expect to see the majority of savings reflected in our second-quarter and second-half results in fiscal year '26 and beyond. Weighted average diluted shares outstanding in the first quarter of 2026 were 152.7 million, an increase of 800,000 shares, or 0.5% from the first quarter of 2025. Turning now to Slide 12. We generated $71 million of operating cash flow in the first quarter of '26, up slightly compared to the prior year. Capital expenditure investments were $24 million, resulting in free cash flow of $47 million for the quarter, an improvement of $8 million year-over-year. We finished the quarter with cash and cash equivalents of approximately $133 million. During the quarter, we continued our deleveraging actions with $180 million debt paydown, eliminating a Swiss franc-based term loan. At the end of the first quarter, our net leverage ratio declined to 2.9x. Turning now to Slide 14. We are reconfirming our Full Year '26 outlook using the stronger execution in the first quarter to substantially de-risk the second-half ramp in growth, margins, and EPS. Therefore, we're reconfirming the following guidance: reported revenue of $3.57 billion to $3.60 billion, representing reported growth of 4% to 5% compared to fiscal year '25. Organic revenue growth of 1% to 2% year-over-year with acquisitions contributing 1.5% and an estimated foreign exchange tailwind of also 1.5%. We continue to expect organic non-GAAP operating margin expansion of 300 to 350 basis points, largely driven by our cost-saving actions, offset partially by approximately 50 basis points of foreign exchange headwind and resulting in a non-GAAP operating margin expansion of 250 to 300 basis points compared to the 12.6% operating margin posted in fiscal year '25. On the bottom line, we continue to expect non-GAAP EPS for fiscal year '26 in a range of $2.10 to $2.15 or non-GAAP EPS growth of 15% to 17% compared to fiscal year '25. We're estimating a foreign exchange headwind of 8% to fiscal year '26 EPS, implying non-GAAP CER EPS growth of 23% to 25% year-over-year. Other guidance assumptions are listed on the slide. Our fiscal year '26 ranges have been updated for foreign-currency rates as of March 31, 2026. Now to add a bit of color to the second quarter of 2026, we've now delivered 3 consecutive quarters with a BSI book-to-bill over 1 and expect to return to organic revenue growth in the second quarter. We estimate second quarter organic revenue growth to be in the low- to mid-single-digit percentage year-over-year. With the easing of tariffs and foreign exchange headwinds we experienced in the second quarter of '25 in the second quarter of '26, we expect a meaningful year-over-year step-up in non-GAAP operating margin and non-GAAP EPS with continued improvements in both metrics expected in the second half of the year. To wrap up, Bruker's first quarter '26 results were pressured by macro and market headwinds, but our teams executed very well to deliver results ahead of our expectations. Coupled with continued momentum in our order book, this gives us further confidence in our ability to deliver solid financial improvements for the remainder of the year and beyond. And with that, I'd like to turn the call back to Joe. Thank you very much. Joe Kostka: Thanks, Gerald. We'll now begin the Q&A portion of the call. Operator: [Operator Instructions] The first question is from Puneet Souda with Leerink Partners. Frank Laukien: We do not hear your question. Operator: Yes. I'm sorry. I put Michael Ryskin on the podium with Bank of America. Puneet will be next. Michael Ryskin: Congrats on the quarter, and I appreciate all that commentary. I want to start with some of your comments on demand trends OUS. You talked about A&G being a little bit better, OUS. The U.S. weakness is not surprising. Would love any additional color you can provide on how sustainable that is? You've got good visibility into order trends. Just do you think that could persist going forward and especially your comments on China and Europe? Frank Laukien: Mike, thank you. Thanks for your comments. I think the order growth in Q1 outside of the United States in ACA/GOV was particularly high. That's probably not sustainable, but it's healthy. It's quite healthy and also shows that even with incremental growth in ACA/GOV budgets outside of the United States that our tools are very much in demand and are a high priority. So people really want the proteomics, metabolomics, multi-omics, very differentiated tools, the second-generation proteoform tools, functional proteomics tools with timsOmni is in very much in demand. I think it's ushering a new era in proteomics. And yes, we're leading the way in spatial biology and good old NMR, NMR and related techniques are just very powerful and becoming less domain of just experts becoming Via AI, quite honestly, becoming more accessible, namely the results and the insights, not necessarily how to run the spectrometer. So it's good trends. And I think it shows that we're not just going with the macro A&G trends, but I think that we're hopefully have a right to win as it's sometimes called with particularly relevant tools that are truly enabling. So I think it's a good indicator. I wouldn't quite take the OUS Q1 order rate and extrapolate from that because that was -- but I think we can look at high single-digit growth in these types of orders. And I'm more optimistic that NIH funding and funding disbursement will come back now in Q2 and maybe that makes for good Q3 orders, which shall see. Michael Ryskin: And then maybe for my follow-up, the other point that I thought was really interesting was some of your commentary on some of these really niche Bruker-specific end markets or applications where you're benefiting from some of the more recent macro disruptions, Security, Defense, things like that. You called out a couple of those. I was just wondering, any way you could aggregate that what percent of your portfolio in industrial is exposed to some of those end markets where you're seeing that 20% growth now. Like you said, a bunch of those might be $50 million, $70 million of revenue. So on the one-off, if things that can slip under-the-radar, but you lump them all together, that could be a nice little offset to what's going on in [indiscernible]. Frank Laukien: Yes, it's well above 10%, right? We haven't done that, but yes, a quick math would show that it's 10%, greater than 12%. And there are some others of these Street loves to call them idiosyncratic growth-drivers. Yes, we have them too. And we will do that. So it's clearly quite -- it's moving the needle. It's more than 10%, 12%, but we'll aggregate that at some point. I don't have it at my fingertips. Operator: Next, we have a question from Puneet Souda with Leerink Partners. Puneet Souda: So, first one, actually, maybe for Gerald. On the margin side, could you elaborate a little bit on the second-half ramp? It is -- I mean, first of all, congrats on the quarter, but just it is steep still. Could you maybe talk a little bit about in terms of overall, is it just organic growth recovery? Or are you expecting more from the cost initiatives? Maybe just give us the puts and takes given the ramp here. Gerald Herman: Yes. So Puneet, it's Gerald. I think, generally speaking, we are expecting continued improvement in the overall revenue performance sequentially as we march through 2026. Our operating margin performance is very strongly driven by our cost-saving actions, and you've already heard me describe those in my prepared remarks. We're expecting 300 to 350 basis points of organic improvement. That gets better as we move through the year, starting in the second quarter because of some of the headwinds that I mentioned on foreign exchange and tariffs get dissipated in the second quarter. But more fundamentally, as we march through the third and the fourth quarter, we expect to see stronger operating margin performance, mostly driven by improved market conditions, as you just heard about our order performance and, of course, the cost-saving actions. Frank Laukien: Driver of cost savings this year, Puneet. Puneet Souda: So maybe just, Frank, just on Spatial and AI, 2 areas I just want to touch on. Maybe on AI, can you provide what level of visibility you have from the customers, your confidence in continuing to grow that here in '26 and then '27? Or is it just something that we should just observe the AI demand and the broader macro? And on the spatial side, there was an instrumentation launch in the market. Just wondering how you're thinking about potentially freezing of the market this year and then longer-term demand for NanoString products there? Frank Laukien: Yes. So the AI trend and that, of course, always included logic and next-generation logic chips and GPU and other -- that's been strong all along. Advanced Packaging continues to be very strong. And it's also not only one company anymore. There are now some other companies that are also really benefiting from that. And then really, the big step-up more recently, as you've all read, of course, and we're benefiting from that is in high-bandwidth memory. And of course, again, Advanced Packaging for including all of that. So that's an additional boost. That looks quite durable. I mean, I don't think that was a lucky quarter or 2 or 3. I think that looks like a very durable trend. And we're built into that supply chain with our semiconductor metrology tools and even our RI tools that are now also north of $25 million a year. They go into the lithography, the Extreme UV via the size ASML supply chain. So there's an additional driver that's now coming becoming significant. So these are strong trends. On the SciY side, the lab-digitization and not just for our instruments, for other instruments and just about all the data in the lab and then the scientific software to do something with that, the FAIR reporting principles, these are very strong drivers, primarily in biopharma, but also in other industries and even some academic customers are benefiting from that, but it's primarily driven by biopharma. Again, a very high priority for all of them. When you sometimes -- the Street worries about, well, are they still buying instruments with all this AI? Yes, they're buying instruments, but boy, are they investing in software and digitalization and projects to get their labs, not only R&D, but QC and QC accompanying the transition to manufacturing and then scale-up. These are very strong trends. I think that business will continue to grow very rapidly. Spatial Biology, it was remarkable to read that someone invented what we did a year ago, but anyway, not to be too cagey here. I think it's a confirmation of what we've been driving this whole-genome, whole-human-genome, now whole-mouse-genome-transcriptomics -- but we're still very much ahead of that with additional transcriptomes with -- we're actually delivering this stuff. This isn't just all promised for later this year. We've been delivering it since last year. And very importantly, we have the high plex or fairly high plex proteins, which really makes pathway analysis so much more powerful. So I feel really good about us leading the way and really benefiting from the new trends in spatial biology. And so yes, we'll leave it at that. Operator: The next question is from Tycho Peterson with Jefferies. Tycho Peterson: Frank, just to circle back on the semi comments. So you had a push out $40 million last quarter. Did you recapture that in this quarter? And the original guide, I think, for the year in semi was low-single-digit. Maybe just given what you're seeing in the order book, talk a little bit about how you feel about that as you go through the year? Frank Laukien: I don't have all the details at my fingertips. I think we recaptured only some of that in Q1. Some of that has to do also with customer site availability. And as you know, in that industry, you deliver precisely when they want it, not when you have it ready. So I don't think it's completely captured, but some of it went into Q1. So I don't have a really crisp answer for you, but the answer is some, but not all. Tycho Peterson: And for the full year, just is low-single-digit still what you're thinking on semi? Frank Laukien: On the revenue, I need some help from my team here. I don't have that at my fingertips. We may be able to get back to you on that during the call. Someone is nodding, so the answer seems to be, yes. Tycho Peterson: Maybe just U.S. academic, Frank, your comment, you let it slip, you thought it could pick up in 2Q potentially. I'm just curious what you're seeing out there. How have expectations changed since February? What gives you that confidence we'll see it maybe sooner rather than later? Frank Laukien: Well, it certainly seems to have bottomed or stabilized. Now we want more than that. And yes, in a few weeks ago, we got news that a lot of -- a number of our applicants, especially from NIH got e-mails, not only did they have a good score, but that they would probably get funded the checks did not come immediately or the money transfers, but now I read in some of the industry reports, right? From you and others that also disbursements are not going up sequentially at least. And we know what the budget is. We know how little has been spent so far in a way. We're doing the math that everybody else is doing. And when you go to conferences, it's -- people aren't bullish, but U.S. Academic conferences, but they expect this to stabilize somewhat and maybe also. There's still political uncertainty for sure. And it's not -- I expect it will pick up from, obviously, and I think we've bottomed in I'm somewhat optimistic that there will be a fair amount of funding between now and the end of the Government fiscal year at the end of September and perhaps that will relate to good Q2 or Q3 orders. And some of that will go into Q4 orders. If money is released in Q3, calendar Q3, some of that will go into Q4 orders. So we're far from -- we're not bullish on that, but we think it's stabilizing and poised to pick up a little bit. And we have many other areas of strength. So for this year, we're not banking on that. Most of that will then go into next year's revenue for us anyway, but we're expecting a gradual -- an improvement and perhaps good orders from U.S. Academic, wouldn't that be nice in the second half of this year. But we're not building that into our guidance. So we can deliver, we think, our guidance with or without that. If it comes, it's going to be actually upside. Tycho Peterson: And then just quickly for Gerald, can you give us the 2Q margin target? I don't think we got that. And should we assume B2B holds above 1 for 2Q? Gerald Herman: To answer your last question, yes. And on your earlier question, we mentioned in my script, the low to mid-single digits organic revenue growth color for the second quarter of '26. Frank Laukien: And a significant margin pickup -- but we didn't give any numbers. We didn't give any ranges. Operator: The next question is from Brandon Couillard with Wells Fargo. Brandon Couillard: It'd be great to get some color on China. I think you mentioned revenues were down over 20%, but Gerald alluded to a market improvement in orders. Just unpack what you're seeing across the end markets there and whether that's maybe starting to pick up a bit. Gerald Herman: Brandon, it's Gerald. I'll just take that one quickly. Yes, we did have a significant drop in overall revenue in the first quarter, but that's largely driven by weaker order demand in the prior year. So we think that's just played out. With respect to the first quarter order performance in China, it was solid, I guess, I'd say. Now again, we're coming off of relatively softer comps, but still very encouraging in China to see some improvement on an order-basis in the first quarter. Brandon Couillard: Okay. And Frank, you care to touch on the BioSpin leadership given Falko Busse’s departure recently. He's been there a long time, and leadership in BSIs been immutable over the past decade. Just curious if you have any more color. Frank Laukien: Yes. That's right. By the way, on China, I wanted to add because of some news yesterday, some of the diagnostic businesses of other companies are under pressure, reimbursement or competitive or otherwise in China. Most of our diagnostics businesses, we have very, very little exposure there, which is primarily focused on Europe, the U.S. and the rest of the world ex-China. So we don't have -- that's a headwind we don't have for once. BioSpin leadership, yes, we -- Falko, indeed, has effectively left, but I think he has several months with that he's still phenomenally with us. But we're stepped with other people into the leadership, and I'm taking the opportunity to reorganize that a little bit, including the Group Structures and we'll probably give you a better idea of the new Group Structures by middle of July. But that's -- I think it's on a very good path. And I think you'll actually have a team with even more closeness to customers and impact -- very impactful, not just innovation for innovation's sake, but very impactful innovation, very, very customer-driven, cost effective, but also, I think, very accountable. So I'm actually pretty pleased in what we're doing at BioSpin, but more in July. Operator: The next question is from Doug Schenkel with Wolfe Research. Douglas Schenkel: I want to follow up on one of Tycho's questions. In Q2, the year-over-year comparison is the most favorable of the year. In previous conversations with you, we got the sense that you were expecting better than low single-digit to mid-single-digit organic growth. So with those 2 observations in mind, was there any pull-forward of revenue into Q1 at the expense of Q2? And are you still expecting Q2 to be the highest organic growth quarter of the year? Frank Laukien: So, very discerning question. I don't think we have a lot of pull-forward, maybe there's quarterly fluctuations and some things move back and forth. that's why we didn't call it out. But maybe there was something like $8 million to $10 million in one could argue was pulled-forward into Q1, but it's not particularly material, and it also tends to be what's typical between quarters. That's not an unusual number. And to your second point, mathematically, yes, that looks to be correct that we -- as we see it right now, the cadence is indeed that the organic revenue growth in Q2 would probably be the highest of the year. We'll see about that, but that's how it lined up initially, and that side still looks correct. And yes, some of that has to do with a weaker Q2 of '25, as you exactly -- as you pinpointed. Douglas Schenkel: Okay. And then I don't know if this is a Frank or a Gerald's question. I think some of the unfortunate developments in the world and the ongoing uncertainty, I guess the good -- the silver lining is some of that leads to increased demand for Bruker products and services. On the flip side, obviously, there's an increase in freight and input costs. Keeping in mind, you did not change your guidance for the year, the 250 to 300 basis points of margin expansion, does that suggest that you have fully captured and feel very comfortable that within that range, within that target that you will be able to overcome any freight, input, or related costs? Gerald Herman: Yes, Doug, it's a fair question. The short answer is yes. We think that we have built into the guide the variability associated with related energy costs. And we think moderate increases will be absorbed through the elements that we've already laid out. So we're comfortable with where we are. Frank Laukien: As you've noticed, we have not increased guidance. We have not taken the Q1 beat, or part of it to guidance. We just want to have more -- even more confidence in our guidance and maybe you all have more confidence in our guidance. And we are expanding our cost cutting, and it's, of course, intended to make sure that we continue on our significant margin ramp also into '27. But some of that is also, I guess, a cushion in case -- well, in what we now see, there is increasing freight costs, there is increasing helium costs and things like that. So yes, we think we've got it baked in, but that's also why we kept our guidance as is for now. Operator: The next question is from Subbu Nambi with Guggenheim. Subhalaxmi Nambi: Could you walk us through some of the other end-market assumptions besides Academia for second quarter and how that will step up for 3Q? And any puts and takes there? Gerald Herman: With respect to the guide, we don't provide a lot of detail on the end-market elements, Subbu. What we can say is we are continuing to expect strength in ACA/GOV outside the U.S. We're continuing to expect strength in certain industrial markets and in the semi space for sure, those would be some of the core elements. Frank Laukien: I would add to that, that I think the clinical microbiology and molecular diagnostics business will do well. Their placements, if you recall, for the Bruker ELITech molecular diagnostics last year were something like more than 30% higher than our business plan, which bodes well for consumables pull-through the following year. And Q1, again, has been just excellent with placements something like 40% ahead of plan. That doesn't show up in the P&L, right? Initially, that's a CapEx, if you like, because these are reagent rentals, but it very much then has a buildup of consumables that comes after it. So those are some of the things that you will want to keep an eye on, plus the other things that we discussed. Subhalaxmi Nambi: That's helpful. And my follow-up to Doug's question. From the Middle East conflict, would you expect additional tailwinds to the Defense business? And at what point does that become an upside to the current guide based on what your starting assumptions are that you had at the beginning of this year? Frank Laukien: Yes. Remember, our stuff doesn't shoot, it measures. So it's -- but nonetheless, detection, of course, is important and people are concerned about things that happen behind the lines and all. So yes, I mean, it's already kind, obviously, because of Ukraine and -- but not only the country of Ukraine, but many other European countries thinking we don't want to become the next Ukraine. So they are investing in detection capabilities. And our detection business over 2 or 3 years has essentially doubled to where it's now meaningful. And yes, that has helped the order trends, and I expect that to continue. I don't think it will affect Guidance this year. It's just one of the good guys on our list of things that are helping us meet and perhaps exceed Guidance. I don't think it's going to make a -- if there are bigger orders, they tend to be long term. If you get another big order at some point this year, it's going to go into '27 and sometimes '27, '28 revenue. These things are not turning quickly. Hopefully, that helps. Operator: The next person in the queue is Casey Woodring with JPMorgan. Casey Woodring: I wanted to follow up on some of the margin-ramp questions and just ask about mix dynamics. Curious to hear what mix impact was on the 1Q margin? And then how much of a mix tailwind do you need to see to hit that second half margin step-up and your visibility into that? And then just a follow-up to that piece, I wanted to just clarify on the cost-outs, is the $140 million in expected annualized savings, is that expected to hit by year-end this year? Gerald Herman: I'll start in the reverse order. On the $140 million of annualized savings, what you're going to see is those pieces will be fed into the quarters as we move forward. So you will not see the full $140 million for sure in the P&L by the end of the year. But as we march into '27, you'll start to see the impact of that for sure. With respect to the mix question, I would say just generally, in Q1, we did have somewhat of unfavorable mix in the quarter, mostly driven by the gigahertz-class item that was not in Q1 of '26, but was in Q1 of '25. Our expectation is that the mix situation will actually improve as we march through the rest of 2026. We've had a couple of quarters of more challenging mix issues, and we're expecting to see that improve as we move through the rest of the year. And then I think I said earlier, I think with respect to the operating margin performance of the company, we're doing -- we've taken significant cost-saving actions, which are basically going to secure, we think, the operating margin performance of the business, not only in '26, but beyond that. And we expect to see those -- that ramp of operating margin improvement as we step sequentially through the second, third and fourth quarters. Hopefully, that's helpful. Casey Woodring: Yes. And then just a quick follow-up. On BEST, you talked about the major orders coming through on the MRI side, up to $600 million now. Can you talk a little bit about how incremental those orders really are? I believe some of those are with existing customers. So I would just be curious to hear any thoughts on that. And I would also be curious to hear what the lead-time is for those orders. And if it's safe to assume those would start to contribute maybe in the first half of '27, or if there's any possibility that happens in '26? Frank Laukien: So, they're not incremental. They're not all incremental, but they -- after maybe a period of uncertainty and some organic decline, moderate organic decline being BEST being a headwind last year. We think this year, it's already going to be a tailwind. Some of these orders are kicking in this year. Some of them are 2, some of them are 5- or 7-year orders, so it's pretty long-term. It bodes well for continued moderate organic growth in the BEST business, I would say, compared to organic decline last year. And now that a lot of these things, these major orders with the major MRI companies of the world are settled for multiple years, we think what's built in there is a healthy single-digit organic growth. And so it's that stabilizes, that turns it around. But no, it's certainly -- it isn't all incremental. Some of these fusion orders at RI are incremental, some of this and mostly in '27, '28 revenue performance. And some of this stuff here is just reversing the trend and setting up a very stable, healthy trend, we think, for multiple years to invest. Operator: The next question is from Patrick Donnelly with Citi. Patrick Donnelly: Frank, maybe one for you on ACA/GOV. Certainly, I appreciate the commentary on the U.S. and a little bit on China. Can you talk about what you're seeing in Europe? We've seen some mixed data points from others on that region for ACA/GOV. Just curious what you guys are seeing and the expectations going forward there. Frank Laukien: Yes. I wish I had a better crystal ball, Patrick. I -- one quarter, as you know, some of there's always fluctuations in that. So it was good in Q1, but I expect single digit. I don't even want to specify whether it's low, mid or high. I expect probably mid- to high single-digit organic growth in that also in Europe, given the strength, not so much necessarily all the budgets because there's some defense pull on that as well, right? Now budgets are not only going up in Europe for research, but funding for our equipment for Proteomics and now Proteomics 2.0. The age of the proteoform, the intact functional proteins and leadership in Spatial Biology, clear technological leadership and applications leadership in Spatial Biology, and a recovery of NMR, I think this all bodes well for us to grow ahead of the general funding environment. So if I had to put a number on there, I think it's mid- to high-single-digit growth opportunity, Organic Growth Opportunity, but there will be quarterly fluctuations. Patrick Donnelly: Understood. And then, Gerald, I was hoping to pin you down a little bit on some of the 2Q moving pieces. I just want to make sure, is there an ultra-high-field in the quarter? And then I wanted to follow up on Tycho's margin question. If you could just help us out a little bit on the margins. I think previously, folks are thinking mid-teens for 2Q and then the earnings number, what that might shake out as would be appreciated. Gerald Herman: Yes, we can go through some of that in more detail separately. But what I'd say is, first of all, we don't expect a gigahertz-class system in Q2 of '26. So I think that will have some impact related to your modeling. I think generally speaking, as I said earlier, we are expecting a step-up in operating margin performance fairly significantly in the second quarter sequentially. Sequentially from Q1, certainly on a year-over-year basis as well. And I think just from an EPS perspective, we expect to do better in the second quarter than we did sequentially on the first quarter of '26. And we can talk about more of the gory details, if you'd like later. Frank Laukien: One last question. We probably should wrap it out at about 9:00 because there's another company starting their earnings call, and we want to be respectful of that. Operator: Yes. So, this concludes our question-and-answer session. I would like to turn the conference back over to Joe Kostka for any closing remarks. Joe Kostka: Thank you for joining us today. Bruker's leadership team looks forward to meeting with you at an event or speaking with you directly during the second quarter. Feel free to reach out to me to arrange any follow-up. Have a good day. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by. Welcome to Quanterix Corporation Q1 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Joshua Young. You may begin. Joshua Young: Thank you, Preyila, and good afternoon, everybody. With me on today's call are Everett Cunningham, Quanterix' President and CEO; and Vandana Sriram, Quanterix' Chief Financial Officer. Today's call is being recorded, and a replay of the call will be available on the Investors section of our website. During the course of today's presentation, we will make forward-looking statements covered under the U.S. Private Securities Litigation Reform Act. These forward-looking statements are based on management's beliefs and assumptions as of today, May 6, 2026. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that might cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. To supplement our financial statements presented on a GAAP basis, we have provided certain non-GAAP financial measures. These non-GAAP measures are used to evaluate our operating performance in a manner that allows for meaningful period-to-period comparison and analysis of trends in our business and our competitors. We believe that such measures are important in comparing current results with other period results and assessing our operating performance within our industry. Non-GAAP financial information presented herein should be considered in conjunction with, not as a substitute for the financial information presented in accordance with GAAP. Investors are encouraged to review the reconciliations of these non-GAAP measures to the most directly comparable GAAP financial measures set forth in the presentation posted to our website and in the earnings release issued today. Finally, any percentage changes we discuss will be on a year-over-year basis unless otherwise noted. Now I'd like to turn the call over to Everett Cunningham. Everett? Everett Cunningham: Thanks, Josh. I'm happy to be here with all of you this afternoon. My time at the company has been very exciting and informative, and I'm more confident than ever about the future of Quanterix. Now in that spirit, I'd like to start off by sharing some of my key observations in my first 100 days with the company. First, we have a passionate employee base full of people who want Quanterix to win and be successful for the long term. Now based on our customers' feedback, we remain the market leader in early detection of critical disease biomarkers, and that's a great position to be in, one that we must capitalize on. Next, we have an installed base of over 2,300 instruments across passionate customers who appreciate the value of our products and services. Our market-leading technologies include Simoa, where we are the leaders in ultrasensitive digital immunoassays for protein biomarker quantification and spatial, where we have the highest plex proteomic platform on the market. Now these are both businesses where we can generate strong growth and build solid businesses moving forward. Next, our strong foundation positions us to be a leader in the Alzheimer's diagnostics industry. Now it's early innings, but I believe in our capabilities, and I want to invest in them now. So in summary, I believe that we have a clear path towards profitability for our research tools business and a balance sheet to support our growth ambitions for our Alzheimer's disease diagnostics with approximately $100 million in cash and no debt. Now this journey, I'm here to undertake is exciting, and I couldn't be more excited to be here. Now moving from a high-level observation to more of a detailed strategic and tactical consideration. I gathered a lot of feedback in my first 3 months here. The company has many strengths to build upon, but we're not currently fulfilling our potential. So as a result, I'm making some operational as well as strategic changes now and in the future quarters that will help us better capitalize on our compelling opportunities. One overriding philosophical change that we must move the company from a mode of integrating and realizing synergies to a mode of investing and growing our business for long-term growth. We are allocating resources to growth opportunities where we see compelling near-term returns while ensuring that we continue to hit our annual operating targets in 2026 and beyond, just as we delivered our $85 million of cost synergies from the Akoya acquisition. In the first quarter of 2026, we reported $36.4 million of revenue as our end markets remain difficult. While our consumable revenues performed as planned, our revenues from our instrumentation business was slightly softer than expected. Now some of the shortfall is related to timing issues, but there's also some changes that we're going to be implementing to bring more focus to our sales efforts. These changes will bring benefits as the year progresses. Now, in addition to investing in growth opportunities, we are hard at work at creating a culture of operational execution and delivering quarterly expectations as a key tenet of our organization we are building here at Quanterix. We've established good operational rigor, which can be seen in our gross margin performance, our disciplined approach to spending and in our ability to consistently hit our cash usage targets. Now during the last call, I shared details of my 30-year commercial background at companies such as Illumina, Quest Diagnostics and Exact Sciences. I know what best-in-class commercial organizations look like, and I've identified multiple opportunities to take Quanterix to the next level of operational performance. As a result, we're making several investments to improve our commercial effectiveness in 2026 and beyond. Now these investments include: we're going to elevate our pharma partnerships in our accelerator business with an experienced senior leader. This important business has slipped in recent quarters, and we are changing that now. I expect that myself, the new leader and our current professionals in this space will have frequent and candid dialogues with our pharma clients to understand how we can better solve for their needs. Now with our best-in-class technology and solutions, we expect significant improvement this year. Next, we are expanding our team of lead generation representatives to improve our outbound targeting and drive net new business. We're also going to hire new market development leaders that will support the sales team in training, systematic value propositions and competitive positioning. This is intended to refocus our sales force on their customers while clarifying Quanterix' many advantages of our overall value propositions in our key end markets. We will be harder hitting on differentiation. For example, we will highlight our ability to detect proteins more accurately than others while doing it more consistently. Next, we're leveraging Thermo Fisher's distribution capabilities to improve our online presence. Now this will have a dual benefit of helping our customers by easing their barriers to access for our products while reducing the manual work of our commercial team to provide pricing quotes. Everything that we're doing is centered on investments that will yield near-term returns to sharpen our focus, expand our opportunity set and grow our top line performance in 2026 and beyond. Now our customers have told me repeatedly that we are the market leader. Armed with this feedback, we're adjusting our course and importantly, we're moving quickly with a sense of urgency. Now we're also increasing our investment in our Alzheimer's diagnostics business. Health care providers who treat Alzheimer's want a reliable noninvasive test to drive earlier intervention of this terrible disease. We firmly believe and industry leaders concur that we have the best performing and most comprehensive Alzheimer's diagnostics test available today in LucentAD Complete, and we expect to garner meaningful market share as blood-based biomarker testing continues to grow. So we're making the following investments in our diagnostics business. First, we are hiring a new diagnostics leader reporting directly into me to build and invest in our emerging diagnostics business. With this move, we are bringing in strong leadership to expand and strengthen our diagnostics portfolio as part of our commitment to advancing our position in the nascent Alzheimer's testing market. Next, we are upgrading our next-generation Simoa HD-X platform and expect to file for IVD status with the FDA in 2027. Now this will position us not only to serve research customers who increasingly request IVD solutions for their clinical trials, but it will also set us up to support the distributed IVD model for our lab customers. Next, we are investing in lab infrastructure and implementing new targeted sales and marketing tactics to increase mind share for our LucentAD Complete test in anticipation of FDA clearance in the second half of this year. Now these investments will build on the strong momentum that we have in our diagnostics business. As a matter of fact, today, we just announced an important and exciting partnership with Tempus AI. Under this agreement, LucentAD Complete will be integrated into [ EHR ] systems at select Tempus Partner Health System locations as part of the Tempus Next program. Now patients who meet the clinical criteria will be flagged using a proprietary algorithm and testing will be available for order at a clinician's discretion. Now to help fund these investments, we're streamlining our product road map. Now my engagement with customers and collaborators in this sector over the past 3 months has led us to prioritize our Simoa HD-X platform and other investments, both on the research tools and diagnostics sides of the business. Also, we're incorporating learnings and enhancements from our next-generation platform into the HD-X upgrade. And additionally, we are continuing to gather feedback from our early access launch program that we expect to incorporate over time into the next-generation Simoa program. Now on the spatial side of our business, our 2 key priorities for 2026 are to expand our PCS biomarker panels for discovery applications and to release new reagents for the HT platform to better support clinical applications. Now from a financial perspective, we continue to expect to reach cash flow breakeven performance by the fourth quarter this year. The entire company is committed to building a profitable and sustainable research tools business that are leaders in both spatial and ultrasensitive proteomics. Now we expect the investments that I discussed today will help drive commercial effectiveness in the second half of 2026. We are not waiting for better markets. Instead, we're making thoughtful and deliberate decisions to drive Quanterix to where the industry is going. And finally, we are excited about our Diagnostics business as we are delivering on key milestones this year while welcoming in a proven seasoned business leader to accelerate our performance in this space. Now let me turn it over to our Chief Financial Officer, Vandana Sriram. Vandana Sriram: Thank you, Everett, and good afternoon. Total revenue for the first quarter was $36.4 million, an increase of 20% from the previous year. Organic revenue declined by 21%. Revenue from our diagnostics partners was $2.9 million, up meaningfully year-over-year from $1.6 million in the first quarter of 2025. This reflects increasing volume for our single biomarker test from our diagnostics enablement partners. During the quarter, both of our end markets and our consumables revenue were largely in line with our expectations, but we saw slightly weaker-than-expected results in instrumentation with a handful of instrument transactions getting pushed into the second quarter. From a product perspective, Simoa contributed $24 million, a 21% organic revenue decline and spatial reported $12.4 million, down 26% year-over-year. Instruments revenue was $4 million, comprised of $2.3 million from Simoa and $1.7 million from spatial instruments. We placed 16 Simoa and 11 spatial instruments in the quarter. Consumables revenue was $21.4 million. This consisted of $14.5 million in Simoa and $6.9 million in spatial consumables. Accelerator Lab services were $4.3 million, $3.5 million in Simoa and $800,000 in spatial. Our customer mix was meaningfully skewed to academia, which represented approximately 65% of the business in Q1. On a pro forma basis, assuming Quanterix and Akoya were combined for the full year, academic revenue for the first quarter declined approximately 16%. Pharma revenue declined 33% year-over-year, primarily due to fewer large accelerator projects and spatial instruments placed. As Everest already mentioned, we are adding resources and refocusing strategies towards the pharma end market, and we expect to see better results here in the coming quarters. Moving on to the P&L. Gross profit and margin for the first quarter were $15.6 million or 42.7%. Non-GAAP gross profit was $18.5 million and non-GAAP gross margin was 50.9%. The synergies from the Akoya transaction are apparent here. Even with a reduction in pro forma revenue, we are maintaining non-GAAP gross margin over 50%. Operating expenses for the quarter were $56.9 million. Included in operating expenses are approximately $22 million of costs related to acquisition, integration, restructuring and purchase accounting. Notably, this includes a $19 million onetime write-off from an intangible asset related to the termination of an Akoya Diagnostics development agreement. Offsetting this, other income contains $22 million of liabilities written off, resulting in net noncash income of $2.3 million from this termination. Non-GAAP operating expenses were $34.7 million, a decrease of roughly $2.3 million sequentially as a result of the synergies. We are now operating the new Quanterix entity at roughly the same level of operating expenses we had when we were a stand-alone company. As Everett mentioned, as a result of the Akoya integration actions taken to date, at the end of Q1, we have delivered the $85 million of annualized cost synergies that we committed to as part of the acquisition. The combined entity is operating as expected. And while there are a few remaining actions to complete, we will not continue to report these synergies after this quarter. Our adjusted EBITDA was a loss of $9.8 million, a sequential improvement of $1.5 million despite lower revenues versus the prior quarter. We ended the quarter with $102.6 million of cash, cash equivalents, marketable securities and restricted cash. During the quarter, we used $19 million of cash, of which $4.2 million was related to onetime integration and employee-related costs. Adjusted cash usage during the quarter was $14.7 million. The first quarter is our highest quarter of cash usage, similar to many companies due to approximately $11 million of annual payments such as insurance renewals and annual bonuses. As we look ahead, we expect our cash usage to move meaningfully lower as these annual payments are behind us and we make progress towards our cash flow breakeven target. Finally, turning to guidance for 2026. We are maintaining our guidance for the full year 2026, and we continue to expect to report approximately $169 million to $174 million of revenue. We expect GAAP gross margin to be in a range of 41% to 45% and non-GAAP gross margins to be in a range of 49% to 53%. In the first quarter, we changed our accounting policy for classifying shipping and handling costs for product sales to record them within gross margin. Historically, they were recorded in SG&A expenses. We believe this classification is preferable because it better aligns costs with related revenue and is consistent with our peers. We reflected this reclassification in our GAAP margin guidance, but there is no change to the underlying non-GAAP margin expectation. We continue to anticipate achieving cash flow breakeven in the second half of the year and expect to end the year with cash in the range of $100 million with no debt. And finally, in terms of our quarterly cadence, we expect second quarter revenues to be roughly in line to slightly ahead of Q1, and we expect that the commercial initiatives that we're investing in will help to drive increased revenues in the second half of 2026. I will now turn it back over to Everett for closing remarks. Everett Cunningham: Thanks, Vandana. We're moving quickly. We're making decisions that will improve our commercial effectiveness, streamline our product management priorities and also enable Quanterix to capitalize on a compelling opportunity in the Alzheimer's diagnostics market. And we're doing all this while moving Quanterix closer to cash flow breakeven performance. And with that said, I'd like to turn it over back to Josh for questions and answers. Joshua Young: Thank you. Preyila, please assemble the Q&A roster. Operator: And your first question comes from the line of Kyle Mikson with Canaccord. Kyle Mikson: Good to hear all these updates here changes and so forth. I guess, Everett, the one that sticks out to me is the preparation for the IVD submission for HD-X in '27. I guess like the question is kind of like why do you need IVD for that system? You talked about, I think pharma important there as well as a distributed model. But maybe just dive into is that -- is this needed more for Alzheimer's, neurology or oncology? Is that part of the aspiration here? And then maybe like a decentralization strategy internationally. I'm curious if that's in the works as well because when you think about this compared to some other platforms that we know of, it could be interesting to think about long term. Everett Cunningham: I appreciate the question. And I will just go back to my last 3 months of being out in the market, talking to customers. We're investing in our HD-X platform because it's our workhorse. We have a really good robust installed base. It's our installed base. The timing of it fits nicely to our diagnostics build-out. And also with making the machine more reliable, it's also going to benefit our research customers, too. So when we build the machine, it is for 2 reasons. First of all, it will solidify our research-only business. It will get us ready for diagnostics, and it will give us what I would just say, optionality to have a distributed plan for our lab partners, both domestically and internationally. And that's why we've made the choice of really prioritizing our focus in getting that machine IVD ready in 2027. Kyle Mikson: Yes. Okay. That was great. And then maybe just a follow-up. What's the status of the Simoa 1 platform? And honestly, I think you were talking about like an early access last quarter. And that platform, I believe, was -- had some translational use cases like may be higher plex. And so I feel like given the focus on pharma going forward, it could have actually aligned with that. So could you just give us an update there? Everett Cunningham: Yes, absolutely. And thanks. We're still very focused on being technology leaders in the marketplace. And Simoa ONE is part of our next generation. We are still doing early access with Simoa ONE. We're getting feedback from our customer, and we're looking to take that feedback and actually help us with our HD-X next generation and our HD-X upgrade. So Simoa ONE still is part of our portfolio, and we're getting really good feedback. Kyle Mikson: Awesome. And then finally, on proteomics competition relevant recently, obviously. You guys obviously targeting low plex, a little bit of mid-plex. You got the sensitivity advantage that probably is driving this firm hold on the low-plex market, we would hope. Can you just talk about what you're seeing competitively over the last few months and maybe going forward and just speak to your conviction level that you're going to maintain this share or increase it? Everett Cunningham: Yes. We feel -- and I'll have Vandana help me too. We feel really good about our position in the spatial low plex market. We have 10x the number of low-plex assays available in the marketplace. compared to our competition. Our installed base in this space is larger than our competition. Quanterix focuses on part of the translational research market that includes later-stage clinical trials, of which reproducibility is really, really important. Again, feedback from our customers, we lead in that space. Where I see benefits of our spatial business moving forward, our tools, our technology is market-leading. We're going to improve our reach to our customers. We're putting in more marketing investments. We have amazing exciting launches in the spatial space, and we feel that that's going to give us a boost in the second half. Vandana, I don't know if you want to mention anything else? Vandana Sriram: No, I think that's exactly right. On the Simoa front, while there has been a lot of talk of competition, I think all of the data and all of the research suggests that we have the broadest menu as well as the greatest level of sensitivity as well as lot-to-lot and lab-to-lab reproducibility versus anyone in the market. And then on the spatial side, with a concentration both in the research and in the clinical side, there's a lot of exciting things going on there. As Everett said, we're now going to kind of turbocharge that to make sure we're getting the right share of market that we deserve. Operator: The next question comes from the line of Puneet Souda with Leerink Partners. Puneet Souda: So I'll ask my questions in one. First, Everett, great to see the actions you're taking on the diagnostics side, bringing in leadership and investing into that business. Just wanted to get a sense of the level of investment that you need there? And how should we expect -- what should we expect for Alzheimer's in the overall guide here? This looks like a second half weighted guide. So I just wanted to get a sense there. And then could you maybe also elaborate as you transition some of the business or the focus from the core tool side to the diagnostics side, is there a chance for any air pocket? Obviously, that's a question that we frequently get from investors. Everett Cunningham: Yes. Maybe I'll start out with just the diagnostics investments, Puneet. Listen, I feel good about bringing in a seasoned leader. I'll give you a little bit of background. I can't name the person specifically yet, but in a couple of weeks, we'll be able to name. This leader has 25-plus years in diagnostics. I've worked with this leader before. Not only the sales side, but they know important customers in this space. They've had really good payer and reimbursement interactions. They know the blood-based biomarker business. And so it's like the perfect fit for Quanterix and where we are now. So that's one. And this person, along with many others here at Quanterix is going to help me build out that end-to-end plan. What we're investing this year, I feel is really appropriate. We're adding right now feet on the street that will help us sell LucentAD Complete and also help with our lab partnership that we have going now. We're investing in clinical utility studies. Those clinical utility studies will read out in the second half. And we're thinking about what is the next phase that we need also to continue to move this forward. And then just to me, I look at this as a surround sound type thing when I think of diagnostics. Our lab infrastructure needs to be ready for order to cash. And so we're investing in our lab infrastructure, too. We will be ready once we get FDA clearance in the second half, we will be ready to what I would say, scale. The last thing I'll mention for a diagnostic standpoint, and I've always thought this way, even back in my Exact Sciences and Quest Diagnostics days, we're not going to do this alone. We're going to have smart, unique partnerships to help us scale this business, and we started now. Our partnership with Tempus AI is a great example of what we're doing and how we're creating scale in the business. We have lifeline screening, again, more scale in helping us get our LucentAD and our LucentAD complete that's out there. We'll do the same once we get FDA clearance of how do we organically build scale, but how do we create really smart partnerships moving forward. Vandana Sriram: Yes. And Puneet, to address your questions on what this means from a financial perspective, we've always had a baseline level of investment in Alzheimer's diagnostics, frankly, for the last 3 or 4 years at this point. What we're doing in this plan right now is being very, very deliberate on where our investments go. We've streamlined projects in other parts of the business where perhaps that payback was not as immediate as these are. And that's what's helping us fund both the commercial acceleration as well as the acceleration in the diagnostics platform. And then from a revenue perspective, as you know, we did almost $10 million of revenue from our partners in 2025. Our expectation is that we have about the same level in 2026. We'll probably have less instrument sales, but an increase in consumable sales as our partners start to do more tests. We're not counting on revenues from direct testing in 2026. We think it will take some time for that to inflect. If that happens sooner, that will be helpful to us, but we're not counting on that picking up very quickly. Everett Cunningham: And Puneet, the last part of your question in terms of how do you balance both. My first 3 months here, I've had a lot of interaction with our commercial colleagues with Ben Meadows, our new Chief Commercial Officer. We have a solid research business, research tools business. The relationship that they have with the customers in the academic space and the research space, it's really, really deep, and we're going to help them get even deeper with the enhancements that I talked about during my remarks. It's an end, and we're going to build up that same expertise on the diagnostics side. Today, we have the appropriate size of our diagnostics business just based on where we are. But the new leader that's coming in will build a plan that will assume, again, FDA clearance. We have a good price crosswalk. We're going to get scalable reimbursement. We will be able to toggle very quickly to build out scale in our diagnostics. We're going to balance on both research, tools and diagnostics. Operator: The next question comes from the line of Dan Brennan with TD Cowen. Daniel Brennan: Maybe first one, just it was already kind of asked in one way in terms of the guide. So if you're kind of flattish in Q2, it implies almost like a 40% back half sequential like second half, first half. So could you just break down a little bit more what would be the drivers of that? Do you want to share any color, maybe instruments, consumables and service, maybe core Quanterix versus spatial? And then I can have a few more questions. Everett Cunningham: Yes, Dan, let me talk about the investments that we're making that these aren't investments that have a year ROI. And I'm just taking this from my past experience of, hey, we need to build out momentum within the next few quarters. These are the investments that we're making. Let me just maybe give a couple of them color to give confidence of our second half ramp. Our lead generation reps are critical to our growth. Our lead generation reps are working with our marketing team and taking our robust leads that we have and making them credible, making phone calls to ensure that when they hand them over to our sales reps, those leads are ready to buy. We've already instituted lead generation reps. And in the first 3 weeks, we're seeing a market difference in terms of net new opportunities. So I look at in the second half, our net new opportunity growth to be absolutely better than it was in Q1. Secondly, our marketing. We have appropriately put investments in marketing on both the Simoa and spatial side of the business to develop more of a multichannel approach. So I always like to say we're selling when people are sleeping. So we feel that that's going to be a major benefit to our business. And then lastly, what I'll add is we are looking strategically at areas to where we could put just more feet on the street on the commercial team today. And like I said, Ben Meadows and the team have done a good job of, again, not overhauling, so we create disruption, but strategically putting more feet on the street so we can get more opportunities in the second half. Vandana Sriram: I think the only thing I'd add there, Dan, is there's also a lot happening on the product side. We recently announced a new molecular barcoding option for customers, which gives our spatial customers a whole new channel for self-serve opportunities on the assays. We also have a handful of assay launches as we generally do that are now coming online and are expected to have more of an impact in the second half of the year. Daniel Brennan: Great. Okay. Are you guys assuming end markets improve as part of the outlook? Obviously, it has been challenging, but we've heard various signs of things getting a little bit better here. Just wondering how you think about that as you contemplate like the improvement in addition to obviously, all the critical company-specific things you're doing? Vandana Sriram: Yes. So on the end markets, on the pharma side, we do think that the end markets are strong. It has really been a little bit of the focus that's been lacking on our side, which we've already started to correct and we're starting to see the results on. The academic side was a little bit slow in the first 3, 4 months of the year. As you know, overall funding slowdown has been a little bit slow. So we're not counting on a big rebound over there, but we do think there might be a small amount of improvement as we get towards the end of the year. But we're not assuming markets change materially. We're really assuming that a lot of the growth is going to happen from our actions, both on the product side as well as on the commercial side. Everett Cunningham: And the only thing I'll add, again, just from an execution standpoint, in the first quarter, start of the second quarter, the communications, the sales calls, the KOL kind of interaction has been very, very solid on our side. We're not waiting for markets to improve. And I think those conversations, that consistent relationship connection that we have with our critical customers, when markets do improve, we will be there to capitalize on that. Daniel Brennan: Great. And then you listed, I think, 4 studies in the press release or maybe in the deck. Are any of those -- I mean, obviously, I'm sure they're all important. Otherwise, you wouldn't have listed them. But any of them stand out more than not in terms of either that will play into FDA play into the label or will they all just be pieces of the puzzle as you build the marketing plan on your diagnostic assay? Everett Cunningham: Yes. Listen, I like the studies that we have. First of all, they're with 3 credible partners, the study dynamics that I've been reviewing on a weekly basis. We're hitting really good enrollment. The settings are mostly in that -- where people are being treated in the specialty care and primary care setting. It demonstrates how LucentAD Complete changes clinical decision-making and patient outcomes. So we're looking at the right things from a clinical utility everyday diagnostic standpoint. I will also add too, I'm excited about the timing. The timing is spot on for us to read out in the second half of 2026, and that will just bolster our meetings with payers to get widespread reimbursement. Daniel Brennan: If I can sneak one final in. Just on the spatial side for Akoya, since you do break it out, like is there an implicit assumption and maybe you've already done this at 4Q when you set the initial guidance, but how are you thinking about kind of the contribution organically for spatial in 2026? Vandana Sriram: Yes. We didn't break out the guide between Simoa and spatial just because they are starting to -- we are starting to kind of report them all together. Our expectation of mix between Simoa and spatial between 2025 and 2026 was relatively consistent though. Operator: Thank you. And there are no further questions at this time. Ladies and gentlemen, this now concludes today's conference call. Thank you all for joining. You may now disconnect.
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 everyone to ACADIA Pharmaceuticals First Quarter 2026 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Albert Kildani, Senior Vice President, Investor Relations and Corporate Development. Please go ahead. Albert Kildani: Good afternoon, and thank you for joining us on today's call to discuss ACADIA's first quarter 2026 financial results. Joining me on the call today from ACADIA are Catherine Owen Adams, our Chief Executive Officer, who will provide some opening remarks; followed by Tom Garner, our Chief Commercial Officer, who will discuss our commercial brands, DAYBUE and NUPLAZID. Also joining us today are Elizabeth Thompson, Ph.D, Executive Vice President, Head of Research and Development, who will provide an update on our pipeline programs; and Mark Schneyer, our Chief Financial Officer, who will review the financial highlights. Catherine will then provide some closing remarks before we open up the call for your questions. We are using supplemental slides, which are available on our website in the Events and Presentations section. On today's call, both GAAP and non-GAAP financial measures will be discussed, including non-GAAP NUPLAZID net sales and non-GAAP total revenues. The non-GAAP financial measures that are also referred to as adjusted financial measures pertain only to NUPLAZID sales in 2025 and their impact on total revenues. All references to non-GAAP are reconciled with the most directly comparable GAAP financial measures in our earnings press release and slide presentation, which has been posted on the Investors page of the company's website. Before proceeding, I would like to remind you that during our call today, we will be making several forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, including goals, expectations, plans, prospects, growth potential, timing of events, future results and financial guidance are based on current information, assumptions and expectations that are inherently subject to change and involve several risks and uncertainties that may cause results to differ materially. These factors and other risks associated with our business can be found in our filings made with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which are made only as of today's date, and we assume no obligation to update or revise these forward-looking statements as circumstances change, except as required by law. I'll now turn the call over to Catherine for opening remarks. Catherine Owen Adams: Thank you, Al. Good afternoon, everyone, and thank you for joining us today to discuss our first quarter 2026 results. ACADIA delivered a solid start to the year with total revenue of $268 million in the first quarter, representing 11% year-over-year growth on an adjusted basis. DAYBUE had an especially strong quarter with sales of $101 million, up an impressive 20%, our highest year-over-year growth since the third quarter of 2024, marking an excellent start to the year. We are excited about the successful launch of DAYBUE STIX with strong feedback from both caregivers and health care providers. As announced last month, DAYBUE STIX is now broadly available across the United States, and we're seeing strong early uptake from both new and previously discontinued patients that gives us confidence in our growth outlook. NUPLAZID sales were $167 million in the first quarter, up 6% year-over-year on an adjusted basis. The first quarter performance reflects that some patients were slower to refill than in prior years. We are pleased to report that these refill dynamics have since normalized. Importantly, we saw double-digit referral growth in the first quarter and robust demand growth at 8%, even prior to the expected impact of the recent sales force expansion. I'm pleased to share that we are reaffirming our 2026 net sales guidance for both DAYBUE and NUPLAZID. Looking at our pipeline, we have several significant catalysts on the horizon. Most notably, we are approaching the highly anticipated Phase II readout for remlifanserin in Alzheimer's disease psychosis, which we continue to expect to share results from in the August to October time frame. This represents a key inflection point for our company and could unlock substantial value given the significant unmet medical need in this indication. Additionally, the timing of our Phase III study in Japan for trofinetide has accelerated, and we now expect results in the September to November time frame of this year. I want to remind everyone of the tremendous opportunity we have across our pipeline. We have 4 molecules targeting large markets with a combined full peak sales potential of $11 billion, with approximately $4 billion of that specifically attributable to remlifanserin across the ADP and Lewy body dementia psychosis indications. This underscores the transformative potential of our research and development efforts. With that, I'll now turn the call over to Tom to provide a more detailed insight into our commercial performance. Thomas Garner: Thank you, Catherine. Let me dive into the details of our first quarter performance. Starting with DAYBUE. I'm pleased to report another excellent quarter with revenue of $101 million, representing 20% year-over-year growth. This was another record quarter for unique patients receiving shipments, highlighting the continued momentum and durability of the DAYBUE franchise. Growth was fueled by robust referral volumes driven by new patient starts, alongside meaningful reengagement of previously discontinued patients following the recent approval and launch of the new powder for oral solution formulation of trofinetide, DAYBUE STIX. During the first quarter, we launched DAYBUE STIX with a focus on centers of excellence to ensure optimal launch execution while gathering valuable real-world feedback. We've been extremely pleased with both the initial uptake and positive experiences we've received from both caregivers and health care providers. Through Q1, we received DAYBUE STIX prescriptions for more than 250 individual patients, demonstrating strong early demand for the new formulation. Notably, nearly 30% of these patients were either treatment naive or restarting therapy, aligning with our expectations and further supporting DAYBUE's growth outlook. In addition, we're also seeing strong interest from existing patients in switching to the STIX formulation. Collectively, this early experience demonstrates how DAYBUE STIX can help retain current patients, bring discontinued patients back into therapy and grow the treated patient population, aligning closely with our long-term growth strategy for DAYBUE. From a patient and caregiver perspective, DAYBUE STIX offers meaningful advantages, including flexible dosing volume, potentially shorter dosing time, a preservative-free formulation, no requirement for refrigeration and enhanced portability. These attributes are resonating strongly with early feedback reinforcing the value of the new formulation, as you can see on this slide. Caregiver response has been particularly positive with more than 80% of those who have tried STIX reporting high satisfaction, complemented by strong endorsement from health care providers across Rett centers of excellence where the product was available through the first quarter. Following the focus launch, we announced in early April that DAYBUE STIX is now fully available in the U.S. We look forward to seeing the continued impact of this broader rollout for patients and caregivers. Outside of the U.S., our global named patient supply programs continue to contribute meaningfully to our growth through the first quarter. The number of patients receiving product through our NPS programs continues to increase over time, providing important access to patients. The recent Delphi expert consensus reinforces DAYBUE's position as the standard of care for Rett syndrome, reflecting broad adoption across centers of excellence and accelerating uptake among clinicians treating Rett patients. This important publication demonstrates that Rett syndrome experts agree that DAYBUE plays a crucial role in patient care, including the importance of initiating treatment early and dosing individualized to the patient's needs. The Delphi publication adds to the growing body of real-world experience supporting DAYBUE, complementing our robust clinical trial programs that support the meaningful impact that trofinetide can make for patients living with Rett syndrome. Taken together, the successful launch of DAYBUE STIX, combined with sustained referral strength and durable patient persistence positions DAYBUE for continued growth through 2026 and beyond. Now turning to NUPLAZID, which delivered sales of $167 million in the first quarter, representing 6% growth year-over-year on an adjusted basis. I'd like to walk through the dynamics behind the quarter and explain why our confidence in full year performance remains strong. Starting at the top of the funnel, physician referral growth was strong at approximately 11% year-over-year, even ahead of the anticipated impact of our sales force expansion, which was completed in the quarter. This level of referral growth reflects continued physician confidence in NUPLAZID, driving strong underlying demand. However, as Catherine noted, first quarter performance was impacted by a temporary increase in patients taking longer than expected to refill their prescriptions. This dynamic emerged in January and extended into early February as refill timing lagged historical first quarter patterns. Importantly, these delays proved temporary. Patients who are late to fill returned in the latter part of the quarter, and we have now returned to normal patterns. Despite the short-term timing impact, NUPLAZID delivered 8% year-over-year demand growth in the quarter, reinforcing our confidence in the full year outlook. As a reminder, our commercial strategy is focused on driving earlier awareness and use of NUPLAZID in the Parkinson's disease psychosis journey through smart, disciplined execution. We're sharpening prescriber reach, improving call quality and maintaining tight segmentation while strengthening field and digital engagement in order to engage physicians earlier and convert strong referral momentum into improved pull-through. Building on this foundation, we expect to realize the full impact of the recent 30% expansion of our customer-facing teams by late 2026 and into next year as we extend these capabilities across a broader target universe. In addition, we anticipate further benefits from our direct-to-consumer efforts. We've recently renewed our partnership with Ryan Reynolds for the unbranded More to Parkinson's campaign, reflecting its strong resonance with patients and caregivers, enabling us to introduce new content and creative to further raise awareness of Parkinson's disease psychosis. Since launching the campaign, awareness of hallucinations and delusions amongst the Parkinson's disease community has increased from 8% to over 30%, underscoring the campaign's significant impact. We're complementing this with refreshed branding creative on nuplazid.com to engage patients earlier in their journey and clearly reinforce NUPLAZID as the only FDA-approved treatment for Parkinson's disease psychosis. I'd also like to highlight a significant milestone for NUPLAZID. This year marks the 10-year anniversary of its FDA approval. Over the past decade, nearly 100,000 patients, along with their families and caregivers have benefited from this therapy. This milestone underscores both the durability of the NUPLAZID franchise and its meaningful impact on the Parkinson's disease community. In summary, NUPLAZID remains firmly on track for another strong year with continued referral momentum, the scaling impact of our expanded sales force and ongoing market development supporting our path towards approximately $1 billion in annual sales by 2028. And with that, I'll now turn the call over to Liz to provide an update on our pipeline developments. Elizabeth Thompson: Thank you, Tom. Before turning to pipeline updates, I want to briefly address the retirement announcement we shared last week. For personal reasons, I've decided to retire by year-end. But while we seek the right next head of R&D, I remain fully engaged in driving our pipeline forward. We will ensure continuity through this transition, including supporting the upcoming Phase II readouts and early Phase III planning for remlifanserin. With that context, I'll now walk through the key R&D progress for the quarter. I'm pleased to share updates on our pipeline, which continues to offer meaningful opportunity with real momentum building across multiple programs. Across our 8 disclosed programs, we continue to anticipate initiating 5 additional Phase II or Phase III studies by the end of 2027, demonstrating the breadth and depth of our development portfolio. Most recently, we successfully initiated our first-in-human study of ACP-271 in healthy volunteers, and I'm pleased to report that the study is going well to date. We continue to advance enrollment across several key studies. Our Phase II study of ACP-211 in major depressive disorder is progressing as is our Phase II study of remlifanserin in Lewy body dementia psychosis. And of course, both of these programs represent significant opportunities to address substantial unmet medical needs. Looking ahead, we currently anticipate reporting 4 Phase II or Phase III study readouts by the end of 2027. And of course, the closest to these is the top line results from our Phase II study of remlifanserin in Alzheimer's disease psychosis. The Alzheimer's study is still enrolling, and the enrollment dynamics continue to support our expectation for top line results in the August through October 2026 time frame. As a reminder, throughout the study, we focused on ensuring our patient population has biomarker-confirmed Alzheimer's disease, which we think could be an important component of both technical and regulatory success. We're excited for this readout and what it could mean for the future of the company if successful. But most importantly, as a step towards relief for the patients and families affected by this challenging condition. Turning to regulatory and international developments. The trofinetide reexamination process in Europe remains ongoing, and we continue to expect that process to conclude by late June. We remain focused on working closely with European regulators to address their questions and support the positive benefit-risk profile of trofinetide for patients with Rett syndrome. In Japan, enrollment in our Phase III trial with trofinetide has been progressing exceptionally well, and I'm pleased to share that we now anticipate completing enrollment this quarter. This accelerated time line positions us for top line results in the September through November time frame this year, which represents an earlier completion than we previously anticipated. Now as a reminder, this is a small study that was designed with regulators to provide descriptive information on Japanese patients receiving trofinetide. We expect this study to provide the remaining new data needed for our Japanese filing package, which will rely largely on the LAVENDER trial to establish trofinetide's efficacy and safety with an expected regulatory submission in 2027. These pipeline developments underscore our commitment to advancing innovative treatments across neurological and rare diseases, and we look forward to sharing more updates as these programs continue to progress. And with that, I'll turn the call over to Mark. Mark Schneyer: Thank you, Liz. I'll now walk you through our first quarter 2026 financial results. Starting with our revenue performance. Total revenue for the quarter was $268 million, up 11% compared to adjusted total revenue in the first quarter of 2025. NUPLAZID generated $167 million of net product sales in the first quarter, representing 6% growth year-over-year on an adjusted basis. As Tom discussed, we are very encouraged by the strong demand growth and referral growth in the quarter, which we saw even before the anticipated impact from the field force expansion that was completed in the quarter. The gross to net adjustment for NUPLAZID in the quarter was 22.1%. As stated in our press release, NUPLAZID year-over-year growth metrics are derived by comparing our Q1 2026 GAAP NUPLAZID net sales to our Q1 2025 non-GAAP NUPLAZID adjusted net sales. DAYBUE delivered strong performance with $101 million in net sales, up 20% year-over-year. Our DAYBUE results reflect the robust momentum Tom described in both the U.S. market and through our international programs. The gross to net adjustment for DAYBUE in the quarter was 25.8%. Turning to our operating expenses. Research and development expenses were $76.9 million compared to $78.3 million in the first quarter of 2025. Our SG&A expenses were $171 million compared to $126.4 million in the first quarter of 2025, reflecting our continued investments in our commercial franchises with increased marketing investments for NUPLAZID and the expanded field footprint for both NUPLAZID and DAYBUE, which both took place after the first quarter of 2025, which is an important consideration in any year-over-year comparison. Our cash position remains exceptionally strong with $851 million at the end of the first quarter as compared to $820 million at the end of the fourth quarter. This increase reflects our positive operating cash flow generation and positions us well to execute on our strategic priorities. Moving to guidance. I'm pleased to reaffirm our full year 2026 guidance for net sales and expenses. In terms of quarterly progression, we expect total revenue to be back-end loaded as the year progresses with a greater sales contribution from both brands in the second half of the year, driven by the expected productivity ramp from our expanded NUPLAZID field force, coupled with broader availability and adoption of DAYBUE STIX. With that financial overview, I'll turn the call back to Catherine for her closing remarks. Catherine Owen Adams: Thank you, Mark. As we wrap up today's call, I want to highlight the key milestones and catalysts that make 2026 such an exciting and potentially transformative year for ACADIA. First and foremost, we're approaching our highly anticipated top line results for remlifanserin in Alzheimer's disease psychosis, which we expect to report in the August to October time frame. This represents the most significant near-term catalyst for our company with the potential to unlock tremendous value and address a massive unmet medical need affecting millions of patients and their families. The ADP market represents a substantial opportunity with no currently approved therapies and successful results could position remlifanserin as a cornerstone therapy in this underserved patient population. We also anticipate top line results from our Japan Phase III trial with trofinetide later this year, which could establish an important new market for DAYBUE. This accelerated time line reflects strong international engagement and our commitment to bringing innovative treatments to patients worldwide. Importantly, as we head into these upcoming data readouts, while Liz has announced her intention to retire at the end of the year, we are grateful that she will continue to lead R&D to provide continuity and leadership while we look to find a strong replacement. Beyond these clinical and regulatory milestones, we have a strong commercial foundation. And we're pleased to reaffirm our 2026 financial guidance for total revenues of $1.22 billion to $1.28 billion. Furthermore, our cash balance of $851 million provides us with significant strategic flexibility, enabling us to pursue business development opportunities, including potential acquisitions, licenses and partnerships that could complement our existing portfolio and further accelerate our growth trajectory. We remain actively engaged in evaluating opportunities that align with our strategic focus on neurological and rare diseases with significant unmet need. Throughout all of these initiatives, we remain steadfast in our mission to turn scientific promise into meaningful innovation for underserved communities. Every program in our pipeline, every commercial initiative we undertake and every strategic decision we make is guided by our commitment to bring life-changing treatments to patients and families who need them most. The combination of our strong commercial performance, robust pipeline and solid financial foundation positions ACADIA exceptionally well for both near-term catalysts and long-term sustainable growth. We're excited about the opportunities ahead and look forward to sharing our progress with you throughout the year. And with that, we're happy to take your questions. Operator? Operator: [Operator Instructions] Your first question comes from Tessa Romero with JPMorgan. Tessa Romero: So I wanted to ask a pipeline one here. So where are you more precisely in terms of enrollment of the Phase II RADIANT study of remlifanserin in Alzheimer's disease psychosis? And how confident are you in your time line from August to October of this year? When might you see the last patient in? And then second question is just how is enrollment going in your Phase II ILLUMERA study in Lewy body dementia psychosis? And what is the right way to think about the potential time line to data there as well? Catherine Owen Adams: Thanks. I'm going to ask Liz to take us through the time lines for remlifanserin. Elizabeth Thompson: Sure. So Tessa, thanks for the question. So first off, for the ADP program, we continue to feel very good about that August to October time frame. And the study is still enrolling, but we are getting to the last phases of enrollment. So we feel confident about that time line. That said, I'm not yet able to narrow that any further than what we have right now. As we look at Lewy body, I'm pleased with the enrollment progress that we have there. I don't think we've yet shared publicly what our expectations around the end are. We want to get a ways into enrollment. So I do look forward to sharing more about that in the future. But so far, pleased and on track with what I was hoping for. Operator: Your next question comes from the line of Ash Verma with UBS. Ashwani Verma: So maybe just on this upcoming Phase II study, I know you mentioned the biomarker-based selection for confirmation of the Alzheimer's patients as opposed to just looking at the clinical presentation. Can you help us explain a little bit why is that critical for clinical trial execution? And just in the real-world setting, I know patients are typically not diagnosed based on the clinical presentation and imaging -- sorry, they are diagnosed based on clinical presentation and imaging and not necessarily biomarker confirmation. So how does that inform the applicability of the results to real world? And then secondly, just on ACP-204. So I mean, NUPLAZID has a black box warning for this increased mortality in elderly patients. Given that this is kind of a connection of that, would the molecule still put the black box warning if it comes to the market? Catherine Owen Adams: All right. Thanks, Ash. Some comprehensive questions to get to. So let's start at the top and go down. Elizabeth Thompson: There was a lot in there. I was madly writing down. So hopefully, I captured everything. So in terms of the biomarker basis, I think this has been a really interesting thing to watch in the Alzheimer's field with a number of years back, there was the idea of biomarkers being part of a clinical trial basis way of thinking about diagnosis. And at this point, it actually is considered part of the diagnostic pathway for Alzheimer's. I fully anticipate by the time we would make it to FDA with our potential package for remlifanserin that there would be an expectation that Alzheimer's disease is a biologically confirmed disease. And so we've been -- we put this in place to try to future-proof the program that we have. And I think that probably touches a little bit on your point about real world. I think that the real world is starting to move that way as well. So we think that this has an important component of regulatory success. I should note, it may also have a potential opportunity for improving technical success. There is a possibility that this helps you be more confident that the patient population you have is truly Alzheimer's and that there's less heterogeneity in that patient population from a response perspective. So we think it's important on both aspects. Finally, to your point about the black box warning it's a really great question. There was an FDA workshop probably about 1.5 years ago at this point. And one of the discussion points was about the black box warning and for future agents, what kind of data might be necessary to help FDA make data-based decisions on individual agents. So we attended that eagerly, learned from it and have taken into account feedback that we got both through there and through other discussions about the kind of information we need to collect to be able to let FDA make a specific decision on remlifanserin and whether it does or does not warrant such a box warning. So right now, I don't know. But we know the data we need to collect, and we do think that there is good reason to think that this could be a path forward without a black box, but it's going to depend on the data at the end of the day. Operator: Your next question comes from the line of Ritu Baral with TD Cowen. Ritu Baral: I've got some more remlifanserin questions as well, extending from clinical into commercial. One, as we think about that Phase II data that's coming, what should our expectations around either effect size or delta on the SAPS-H+D? Is there an accepted minimal clinically important difference here? And what frames success on a statistical level? And then as we look at our market model, just given the recent competitive approval Alzheimer's agitation drug, how should we be thinking about differential diagnosis between the two indications, accurate diagnosis and sort of decision -- treatment decisions between the two? Catherine Owen Adams: With all the interest in remlifanserin. So I'll ask Liz to kick that off and then maybe Liz and Tom can both talk to the market a little bit as well. Elizabeth Thompson: Yes, absolutely. So in general terms of what we should all be looking for and what defines Phase II success for us as we are walking into this readout, there are a few things that I'm looking for. I mean the main thing really with any Phase II is what you're looking for is Phase III enabling data. You're looking for information that helps you know what to do in a Phase III, any modifications you may need to make, et cetera. Beyond that, I'll be looking for continued information that suggests that remlifanserin is delivering results that are consistent with our TPP. We're not going to know all of those definitively coming out of Phase II, and there will be some things that we already feel pretty good about, but I'll be looking -- we want to make sure that we've got something that can be dosed once a day that can be done easily with respect to conmeds, with respect to food, anything that makes it easy for patients to take their drug. We are, of course, looking for efficacy. We'll be pleased with an effect size that's in line with what we're powered for, which is a 0.4 or moderate effect size. We'd be pleased with safety that looks similar to the pimavanserin profile. And this part, of course, we definitely won't be able to definitively answer out of Phase II, but continued data that suggests that there's no deleterious impact on movement, on cognition, which from the overall pimavanserin data set, we do feel good about. And hopefully, we'll get some directional sense there. To the question about MCID on SAPS-H+D, that's not a well-established one at this point. Part of what we would be doing for a dossier that would go into FDA eventually is establishing that MCID based in part on the Phase II data that we have. We are, however, also looking at, in addition to just the delta, some responder levels those who have improved by at least 30%, those who have improved by at least 50%, which we think help contextualize the meaningfulness of those results. And then I think there was also a question about the recent Otsuka approval in agitation. I'll just briefly say we're always happy to see more options for patients. Alzheimer's disease is a complex disease with many manifestations that are really profoundly impactful for patients and their families. What I think is important to keep in mind is that we always did envision as we looked at our business opportunity for remlifanserin that there is a potential competition, particularly including agents that would be approved for agitation and that there are distinctions between agitation and psychosis. Agitation is complex. There are a lot of things that can play into it. It can stem from pain. It can stem from cognitive challenges, and it can stem from psychosis. For remlifanserin, we are optimistic. There is some pimavanserin data suggesting that in those patients who have significant agitation and significant psychosis, if their psychosis improved, it did seem to suggest that their agitation improved as well. So there may be an aspect of agitation, but I wouldn't expect that we would have impact on pain-induced agitation, et cetera. And sort of on the flip side, if you look at molecules that are effective in agitation, there's not necessarily a good reason to believe that they can be impactful on any of the things that are actually driving that agitation like psychosis. I mean, actually, if you look at de -- goodness, if you look at various components, they actually can be associated with an increase in psychosis. So taken together, I think we think that there's ample room for multiple players in this space and that effective players in agitation are going to be meaningfully impactful for the opportunity we see with remlifanserin. Operator: Your next question comes from the line of Yigal Nochomovitz with Citigroup. Unknown Analyst: This is Caroline DePaul on for Yigal. So switching gears to DAYBUE STIX, you disclosed that 30% of patients are either treatment-naive or returning after previously discontinuing the liquid formulation. Just wondering how this compares to your expectations for the launch? And do you still expect to capture 400 or over 400 incremental patients with STIX? And if so, what is the anticipated cadence for capturing those patients? Thomas Garner: Perfect. Thanks for the question, Caroline. So let me provide some additional color on your question just regarding kind of our expectations and performance through the first quarter. So just as a reminder, our launch strategy was very focused on COEs through the first quarter. So we've not yet gone broadly into the community. However, we have been very, very pleased with the initial uptake that we've seen. So the 250 patients that -- or the 250 prescriptions that we had, we actually shipped 220 of those in the quarter, which, again, I think just talks to the fact that we're able to get this drug into patients' hands quickly. In terms of how it's doing versus expectations, we would actually say that the ramp in terms of speed that we're seeing here is actually going quicker than we anticipated. I mean I think the 450 that you referenced is what we had spoken about at JPM, we still think that, that holds true. And we had modeled that over a 3-year period, which would basically get us to STIX being the dominant SKU by the end of that time. I think we may end up in a situation where it goes slightly quicker than that. But again, I think the 30% that we're seeing is broadly in line with our expectations. And we're encouraged by the fact that it's not only returning patients but naive patients as well, supplemented by the fact that we're also seeing significant interest from patients already receiving the liquid formulation. So I think taken together, it gives us real optimism for the future of DAUBUE more broadly and the role that STIX can really play in fueling that growth. Operator: Your next question comes from the line of Brian Abrahams with RBC Capital Markets. Brian Abrahams: Maybe going back to remli. As we think about remli and what could generate success in the upcoming study, I guess, can you -- what exactly are the key differences on potency, saturation and receptor binding properties that you might expect from 60 milligrams of remli as compared to the marketed and current and previously tested dose of pimavanserin? Or should we think about this more as being just having a more homogenous population in a study design that leverages prior learnings and uses a more sensitive endpoint? Elizabeth Thompson: It's a great question, and I think we can think of it as potentially a little bit of both. What we do know from our prior pimavanserin work is that if you look over the exposure response range, there does seem to be a suggestion that at exposures that are higher than what you can get to with the currently marketed dose of pimavanserin, you are able to get greater efficacy. So there is at least a good reason to think that we're able to push to higher exposures as we are with the 60-milligram dose, we may be able to get further up on that exposure response curve. That said, even if that doesn't play out exactly the way that we're expecting it to, I do think that having a study design that is really specifically focused in on the Alzheimer's population. I think that's first and foremost, our learning from regulatory in times past is that they're going to need data that are specific to that population, which as I mentioned before on this call, we're going the extra step in biomarker confirming. That's going to be important. And we think that it's going to be -- we've done other modifications of things like trying to make sure that we have a slightly more severe baseline population in terms of their psychosis based on pim data that suggested you get better responses there as well as the fact that we're looking at endpoints that we think SAPS-H+D as well as other things that we have in our study like the NPIC that we think may be better suited to being able to distinguish differences than the NPI-NH that we used way back in the day in our Phase II trial. So I think it's a little bit of all of the above. Operator: Your next question comes from the line of Tazeen Ahmad with Bank of America. Tazeen Ahmad: How are you thinking about the read-through from the Phase II study for Alzheimer's onto the Lewy body study itself? Going back to a few years ago when a similar study was done, pima did seem to show a pretty strong signal there. So regardless of how it turns out for Phase II for Alzheimer's, how should we be thinking about the derisking for Lewy body for next year? Elizabeth Thompson: Love that question, and I love what's baked into it. I agree that while it's in small numbers of patients, I've always found the data in pimavanserin in Lewy body to be fairly striking. In the HARMONY study, just for people who are a little less familiar than you are, the withdrawal study, there were about 20 patients per arm with Lewy body. And of those who had their treatment withdrawn about 55% of them relapsed and those who continued on only about 5% did. So striking while in a small number of patients. So that actually, to your point, regardless of how the ADP study turns out, and we do have high hopes for that based on all the things that I just talked through in the last few answers. But regardless, I think we remain very optimistic about the Lewy body study. I think the one thing that could be a read-through would be something significant from a safety perspective. I'm not currently anticipating that. But obviously, we only know that when we get the data at the end of it. Thus far, though, we're optimistic about Alzheimer's. But regardless of that, I think we're very optimistic about Lewy body. Catherine Owen Adams: Can you talk a little bit about how we think the formulation of remli might suit the Lewy body patient as well in terms of the fragility in the dose set? Elizabeth Thompson: So we do think that, obviously, the Lewy body patient population, both of these patient populations, obviously, are complex and with significant needs. Lewy body, generally speaking, is, I think, accepted to be a little bit more frail, and we think it is even more important to have something that is very safe and something that is very easy to take, which again has been something we've really prioritized with remlifanserin. Catherine Owen Adams: We look forward to seeing you next week. Operator: Your next question comes from the line of Marc Goodman with Leerink. Marc Goodman: Yes. My question is on NUPLAZID. And if we had a delay in patients that you know are kind of getting on therapy, but they were delayed from January and part of February, why would we not have a great second quarter that kind of makes up for that low first quarter because your guidance is kind of all this back-end loaded discussion. So I think you understand the question. Catherine Owen Adams: Yes. So let me kind of address that initially. I think we are expecting a strong second quarter, Marc. The dynamics that Tom referred to are definitely showing that from the current sales force. When we talk about the back end of the year, it's really the impact of the additional expansion. But let me just hand it over to Tom to sort of talk you through those specifically. Thomas Garner: Absolutely. So thanks for the question, Marc. So as a reminder, we executed the 30% expansion of our sales team in Q1. That team has been in the field for now around kind of 6 weeks by the time we got to the end of the quarter. So we're really not seeing the full quarter impact of the productivity ramp that we anticipate seeing. You are correct. We saw a very nice increase in referral volumes, 11% year-over-year. We saw good demand growth. But we did have this issue just in terms of late returning patients through the quarter, which was kind of further impacted by the normal Q1 dynamics you would expect to see for Medicare population. So moving forward, we anticipate that the productivity ramp will continue to impact us moving into the second quarter and beyond. We're continuing to push on the DTC efforts that I mentioned, both in terms of our unbranded, more Parkinson's and branded efforts. And in addition to that, all of the additional work that we're putting into place just around the expanded target universe that we're now going after. As a reminder, we've now increased to a target universe of just over 10,000 HCPs. We believe that tackling that is going to lead to significant uptick for the brand more broadly because we still have plenty of share growth that we can continue to drive over the coming quarters. In terms of the question just guidance, I don't know if Mark wants to add. Mark Schneyer: The one thing I'd add -- thanks for that comment. Just from a financial perspective, it's more late to refill of existing patients, not new patients. So those patients that were late to refill essentially missed the script in the year. So it's kind of a lost revenue. The good thing, though, is it's not a lost patient. Those patients have come back based upon our historical numbers and have refilled in the quarter. So it positions us strong going forward, but not necessarily just a rebound of recouping what was missed in January and early February. Operator: Your next question comes from the line of Jack Allen with Baird. Jack Allen: Just two quick ones from us. On remli, in the ADP study, this is a placebo-controlled study, and the FDA has started to put out a lot of guidance around potentially allowing for filings on single trials. I just wanted to hear any thoughts you had on the potential to file on positive results in a placebo-controlled setting for remli. And then briefly on DAYBUE, it seems like you're making a lot of progress with the STIX formulation, and you have thrown out the $700 million kind of aspirational sales number for 2027 longer-term guidance there. I'm curious to what extent you factor in gene therapy in Rett into that longer-term guidance as well? Catherine Owen Adams: Do you want to take this? Elizabeth Thompson: Sure. So great question about the single trial. And obviously, we've had lots of discussions about this. What I'd say is, thus far, I think we're all still waiting for a guidance document around this to have a better understanding of the thought process. It's not clear some of the things which I anticipate will likely still apply things like the size of the safety database. And those are the types of considerations that make it such that my current expectation is that our base case assumption, which is that we need our Phase II and we need Phase III is going to be what we're going to need at the end of the day. I do want to note that, obviously, if we were to see really striking results in this trial, we certainly would go have a conversation with FDA to explore what possibilities exist. But right now, again, our base case assumption is that we are going to need more than the single study just purely based on the size of exposure that we would have. Catherine Owen Adams: Just a top line basis, I think we continue to be very confident in our $700 million guidance for 2028. We have, of course, thought about competitive dynamics through that period, including gene therapy. Tom, do you want to add anything else that the team has been thinking through? Thomas Garner: Yes, absolutely. So again, very pleased with the initial progress that we've seen with STIX. Obviously, this is complementing what we've already been driving over the last year with liquid as well as we continue to expand into the community. I think it's worth reminding everyone that our penetration for DAYBUE across both COEs and community physicians is still in like the 40% mark. So we still got significant headroom for growth for this brand, and we believe with STIX, we can capture both naive and restart patients who may have stopped. And as a reminder, we have around 1,000 patients who have tried DAYBUE, but are no longer continuing treatment. We believe that we're going to be able to reengage those, and we've already seen that through the first quarter. As it relates to gene therapy, as we mentioned on the call, we've also been very pleased to see the Delphi consensus published, which clearly positions DAYBUE as standard of care for patients living with Rett syndrome. Our view is that I think it will be good news to have more treatments available for the Rett disease for the Rett syndrome population. I think we have to wait and see what the data actually tells us as the gene therapies come to the fore, and we're going to be interested to see how that plays out. But irrespective, we believe that DAYBUE will have a role to play across all of these patients moving forward, whether gene therapies exist or not. So again, as Catherine said, we feel really good about the $700 million that we stated by 2028. Operator: Your next question comes from the line of Ami Fadia with Needham. Ami Fadia: My question is on remlifanserin. With regards to the powering of the study, I think you mentioned that you're looking for a 0.4 point change. What is the minimum effect size that you need to see for the study to be statistically significant? And then as we also are expecting data from Cobenfy study, where they'll be looking at the endpoint of NPIC, when you give us the top line data readout, would you be providing NPIC data? And at what time point is that being measured? Just trying to get a sense of how will we compare data across trials just to sort of understand the competitive profile for this product when the data reads out? Elizabeth Thompson: Well, I always feel like I need to start with saying, you need to be careful in cross-study comparison. in this case. I think an important thing that I should note is that NPIC was an addition to our study after it had gotten started. It was actually one of the earlier things that I did in my tenure here. And accordingly, we don't -- we will not have NPIC data on all patients who are participating in the Alzheimer's study. So we think that this is going to be important in the Phase II Alzheimer's study, sorry, I should be clear there. We think this is going to be important information, but I don't know that I would anticipate it would be, for example, part of a top line result. It is an exploratory endpoint with a subset of patients. In terms of powering expectations, so we are powered at 80% for an effect size of 0.4. So you can imagine there's a little bit of flex around that with scenarios that could still be statistically significant, but that's generally what we're looking for. Operator: Your next question comes from the line of Sean Laaman with Morgan Stanley. Katherine Delahunt: This is Katherine on for Sean. We had another one on DAYBUE STIX. As adoption scales, can you just provide some color if you expect any meaningful change in persistency versus the liquid formulation? Or is the primary benefit improved front-end initiation and reduce early friction? And then just as a quick follow-up. I think you mentioned about 1,000 patients have previously tried DAYBUE. Can you share more about your strategy to reengage these patients? Thomas Garner: Absolutely. So let me take that for you, Katherine. So starting with persistency. What I would say is we are monitoring this very, very closely because as you would imagine, if we can improve persistency further over and above what we're seeing with liquid, obviously, that would be very advantageous for us. Just as a reminder in terms of the latest data that we have, just regarding persistency with the liquid formulation, at 12 months, we are now north of 55% remaining on treatment through 12 months, and we're retaining about 50% of patients through 18 months. So persistency for liquid actually continues to improve over time. And the latest data that we have is that 74% of our active patients have actually been on treatment for 12 months or longer. So we continue to be pleased with just the growing group of like persistence -- persistent patients who are continuing to see benefit with DAYBUE. STIX, to your question, we believe it can help in terms of initial friction. Obviously, there is some significant advantages that we believe exist that go beyond the liquid formulation. But as it stands at the moment, it's probably too early to be definitive as to how STIX will perform in the real world in comparison to liquid, but we will be sharing more detail in due course. Catherine Owen Adams: Do you want to talk to the 1,000 patients then how many of those we think might be up for grabs? Thomas Garner: Yes, absolutely. So as you think about the 450 patients that we spoke about earlier on in the year and you kind of break that down, we think that roughly 3/4 of those would be naive to treatment and the remaining quarter would be restarts. If you look at what we're seeing so far, through Q1, it's roughly a 50-50 split of that 30%. So we're seeing both naive. We're also seeing returning patients. But as I mentioned on the call, we're also seeing significant interest from existing patients receiving the liquid formulation in switching to STIX. So taken together, that's where we are. And just to close this one, the momentum that we saw in Q1 actually has continued into Q2 as we've gone broader into the community. So again, excited to share more details in due course, but we're very pleased with the initial uptake of STIX. Catherine Owen Adams: I think Q2 will be a much more descriptive story about STIX and the types of patients we're seeing, but we look forward to sharing more then, Katherine. Operator: Your next question comes from the line of Evan Seigerman with BMO. Malcolm Hoffman: Malcolm Hoffman on for Evan. Asking about STIX again. I just wanted to see if there was any specific stocking for the STIX formulation this quarter. And then also, I want to get a sense of how you can ensure patients proceed with refills for the STIX formulation to kind of continue the strong momentum we've seen in this quarter. Appreciate it. Thomas Garner: Perfect. Yes, happy to take that,. So first question in terms of stocking, what I would say is very similarly to what we see with liquid. We supply everything through a single specialty pharmacy, and it really is on a patient-by-patient basis. So there is very limited stocking that we are anticipating or have seen. And then in terms of refills, as I mentioned, of the 250 prescriptions that we actually had in the quarter, over 220 were actually filled. So we're not seeing any issues as it relates to payers or formulary issues on the whole. We're actually seeing it seems to be very smooth and in line with our expectations, which again is a nice proof point that the strategy that we've employed here in terms of a limited launch has worked well for us. Operator: Your next question comes from the line of Rudy Li with Wolfe Research. Guofang Li: Just a quick follow-up for LBDP trial. So how will these two endpoints being measured in the ADP trial help inform the benefits in LBDP, which is measuring a different endpoint of SAPS-LBDP? And to what extent their components overlap? Catherine Owen Adams: I think it was a little bit difficult to hear some of that Rudy, but I think it was to do with the different measurements of endpoints in ADP and LBD and tau versus maybe the alpha-synuclein view of biomarkers. Okay. Elizabeth Thompson: Thank you. I missed a bit of it appreciate it. So first off, I guess, a couple of important things with respect to the biomarker considerations. There are a number of more established biomarkers at this point that are considered to support the Alzheimer's diagnosis. And so we are actually requiring a biomarker confirmation for -- of the diagnosis for entry into Alzheimer's. The Lewy body field is in a much more exploratory phase. And so we are including an assessment of alpha-synuclein, but it's not a requirement to get into the trial. It's a thing that we think is going to help inform us in terms of potential future trial design and also hopefully contributing to the science. In terms of the endpoint, there is a fair amount of overlap between the SAPS-H+D and the SAPS lewy body. They are both derived from the overall SAPS scale and are a similar but not exactly the same subset of attributes. The SAPS Lewy body, in particular, was based on those aspects that we saw in the PDP and the pimavanserin PDP trial that seem to be most impacted. So that was the driver behind that, but a lot of overlap between those two endpoints. Operator: Your next question comes from the line of David Hoang with Deutsche Bank. Samuel Beck: This is Sam on for David. Back to DAYBUE, is there anything else that you're able to share on the prescribing penetration dynamics in the quarter as it relates to the community setting versus centers of excellence? And as a follow-up, noting that the STIX formulation was initially launched in centers of excellence. How should we be thinking about the impact of that formulation in terms of how you think it would resonate prescribing in the community through the rest of the year in the future? Thomas Garner: Absolutely. So happy to take that question, Sam. So as you would imagine, given our strategy for DAYBUE STIX is really focused on COEs at launch, we did actually see an increase in terms of the number of prescriptions or the overall volume of prescriptions that was coming from COEs in the quarter. So I think we were at roughly 79% was coming from the community in the quarter. -- from the COE versus a lower number from the community. And I think that, again, that's just reflective of the fact that there's been this significant excitement amongst the community around STIX. As you think about kind of the penetration that we have, which again, we've spoken about in the past, we still have significant opportunity. So our penetration within COEs, even with STIX is around 60%, our penetration in the community currently sits at around 28% before the launch of STIX. Of note, both of those have grown significantly over the last year. Most importantly, though, our penetration within the community, which, as a reminder, is about 65% of the overall available volume has grown by about 7% on an actual basis over the last year. So again, I think a nice proof point that the strategy that we've employed to kind of focus on COEs, but expand our reach into the community and STIX is very much going to be a part of our strategic road map there is working for us, and that's what's giving us real confidence in the outlook for DAYBUE for this year and moving forward. Operator: Your next question comes from the line of Yatin Suneja with Guggenheim. Yatin Suneja: Just a quick one on the reexamination process happening in Europe. Could you just talk about where you are? What do you expect to learn from the process there on trofinetide? Elizabeth Thompson: So the reexamination process, there are a few points along the way. There is the original intent to request reexamination. We did that very shortly upon receiving the original negative opinion. There's submission for -- there's assignment of new rapporteurs, which has occurred. There is -- my voice is going today. There is submission of the ground for reexamination, which we have completed. We anticipate an upcoming SAG meeting, and then there may or may not be an oral examination meeting. So we are just past the submission of our ground for reexamination. Operator: Your next question comes from the line of Paul Matteis with Stifel. Julian Hung: This is Julian on for Paul. Really quickly on BD, just curious if anything has changed and how you may be prioritizing external innovation versus internal, especially with the announcement disclosed last week elsewhere. Also just curious on -- do you plan on disclosing total number of shipments at all moving forward? I know it's something that you disclosed in 4Q. And I know you said there was a record number this year, but I just want a clarification on that. Catherine Owen Adams: I'll get the team a rest from answer and give Liz the rest and tackle both of those. So in terms of BD, as we've stated, we remain very active and focused on our BD strategy. As you pointed out, we do have a very rich internal pipeline and our late stage is certainly looking great in the next 2 years. But obviously, we're managing this for the longer term, and we're really focused on kind of two areas really right now. One is later-stage assets that we could bolt on to our current commercial franchise, which Tom is leading with such great success. And so we're looking there. But we're also looking at continuing to refresh our early-stage pipeline, which Liz and her team are managing. So those kind of our two main areas of focus right now. We have a lot of ability to flex with our balance sheet, and we know that it's a very competitive process. We are actively involved in processes, and we continue to look for the right fit for ACADIA. We're not under any particular pressure right now, but we are looking for strong fits for our business moving forward to drive that long-term value and growth for our shareholders, but also more importantly, the patients that we aim to serve. In terms of the shipping, we did commit to kind of moving now towards financial dollar top line. We feel after 3 years of launch that sort of specific patient level metrics on shipping to DAYBUE is probably not the right way to assess the brand. We will continue to give clarity like Tom has to say on the STIX dynamics, you can see that playing forward. But in terms of patients shipped, we're not going to be sharing that anymore, but it just does continue to grow, and we're very confident again in our full year forecast for both brands, and thank you for the question. Operator: Ladies and gentlemen, that does conclude our question-and-answer session. And I would now like to turn the conference back over to Catherine Owen Adams for closing comments. Catherine Owen Adams: I just like to thank everybody for the great questions today and the team here for answering them and specifically Liz for all the great answers on remlifanserin. We're very excited about the next few quarters for ACADIA, both with our commercial brands, but also obviously, the top line results of remlifanserin. And we look forward to continuing to discussing with you and to our conferences in the next coming weeks. Thanks again for your interest in ACADIA today. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good morning, and welcome to the Unisys Corporation First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Michaela Pewarski, Vice President, Investor Relations. Please go ahead. Michaela Pewarski: Thank you, operator. Good morning, everyone. Thank you for joining us. Yesterday afternoon, Unisys released its first quarter 2026 financial results. Joining me to discuss those results are Mike Thomson, our CEO and President; and Deb McCann, our Chief Financial Officer. As a reminder, today's call contains estimates and other forward-looking statements within the meaning of the securities laws. We caution listeners that these statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed on this call. These items can be found in the forward-looking statements section of yesterday's earnings release furnished on Form 8-K and in our most recent Form 10-K and 10-Q filed with the SEC. We do not assume any obligation to review or revise any forward-looking statements in light of future events. We will also refer to certain non-GAAP financial measures such as non-GAAP operating profit that excludes certain unusual or nonrecurring items such as postretirement expense, cost reduction activities and other expenses that the company believes are not indicative of its ongoing operations. While we believe these measures provide a more complete understanding of our financial performance, they are not intended to be a substitute for GAAP. Reconciliations for non-GAAP measures are provided in the slides for today's call, which are available on our investor website. With that, I'd like to turn the call over to Mike. Michael Thomson: Thank you, Michaela. Good morning, everyone, and thank you for joining us to discuss the company's first quarter 2026 results. We're off to a good start in 2026. Both growth and profitability were modestly ahead of the expectations we provided, keeping us on track to achieve our full year guidance ranges. Strong new business signings improved our trailing 12-month book-to-bill ratios and will contribute to in-year revenue. While geopolitical events have introduced new uncertainties in the market, client budget seems to be loosening a bit and especially in the commercial sector and in Europe. Project volumes are beginning to materialize on the back of last year's renewal with solid pipeline in place for the remainder of the year. First quarter profit improvement keeps us on track to achieve our full year free cash flow expectations and reflects our focus on adopting AI and continued workforce optimization. As expected, our pension deficit and estimates for future cash contributions remain stable due to the actions we took last year to remove the majority of the pension contribution volatility, allowing us to focus on strategic growth and efficiency initiatives. Looking more closely at the first quarter, revenue was up 1% year-over-year and 3% in our Ex-L&S solutions. Volumes with existing clients were better than anticipated, including a modest pickup in the PC refresh cycle. This helped offset some of the top line effects from client attrition and modest price pressures created through sharing AI cost savings with clients, which we discussed last quarter. While AI efficiency gains reset market pricing last year, they're benefiting gross margins, which improved 80 basis points in the first quarter, including 170 basis points of Ex-L&S gross margin expansion. Turning to client signings, our first quarter wins increased confidence in achieving our 2026 performance goals and we continue to have a higher portion of guided revenue contracted and in backlog compared to a year ago. The first quarter new business TCV was $158 million, up 16% sequentially and 45% year-over-year. This was our strongest quarter of new business signings since the fourth quarter of 2024, with growth from both new logos and the existing base. Several multiyear contract wins illustrate our ability to gain market share when leading with innovation. For example, we had several notable signings for our agentic service desk powered by our service experience accelerator capabilities. During the quarter, we won a large new scope contract to provide our agentic service desk with one of the world's premier quick service restaurants, expanding our existing support to the entirety of their nearly 14,000 restaurants in the United States, with additional growth opportunities around the world. We also signed a new logo in Australia, which will be our first deployment of our agentic service desk in the Asia-Pacific region, where we landed several recent wins. As a part of this engagement, we will provide elevated IT support to approximately 11,000 employees in Australia's Department of Health, Disability and Aging, where we now support numerous regulatory functions. This is a multiyear contract, which has options extending to 10 years and is structured on delivering against automation and service experience outcomes rather than ticket volumes. The value behind our service experience accelerator is proving to be a compelling point of the spear solution for new business, delivering measurable results and quickly orienting us as an experienced AI partner in moving enterprise AI from concept to reality. Our Device Subscription Service, or DSS, continues to resonate with another first quarter win at a large financial client in the United States. Clients are grappling with evaluating OEMs and hardware costs, understanding device AI capabilities and forecasting headcount fluctuations, all of which makes our clients more open to our intelligent refresh offering, which simplifies the process and helps offset cost pressures. We have recently expanded our intelligent offering to encompass certain IoT devices through a deeper partnership with Dell. Several key engagements for application development and management also contributed to strong first quarter new business TCV. For example, we expanded our existing services relationships with ENAIRE, Spain's air traffic controller, a client of 30 years. Renewal included a sizable new scope, which involves managing more than 100 of our clients' existing applications across numerous functions, with additional funds budgeted for future projects to design, test and deploy new applications. Our application capabilities also opened the door at the largest community college system in the United States with Unisys signing a new logo agreement to modernize and manage an important student-facing applications that provides their approximately 2 million students with resources and tailored education pathways for more efficient incoming transfers, graduations and entry into the workforce. This engagement established a solid foundation, which is already leading to additional work expected beginning in the second quarter. We also made progress on our initiatives to cross-sell CA&I application services into our ECS client base. In the first quarter, we signed a renewal with a large Colombian retailer for existing ClearPath Forward and managed services that integrated new scope application development work supporting the client's core commercial and inventory applications. Across our segments, TCV renewal rates were strong and above 95% for the total company. We are also seeing some unexpected extensions from attrited clients stemming from the lack of readiness from the new service provider. At one such client, we were awarded a large new scope in the first quarter for infrastructure and modernization services. We believe this win demonstrates the desire of some of these clients to remain engaged with us, which we attribute to the deep relationships we've established, our delivery track record and the broadening awareness of our capabilities. Looking at our go-to-market and pipeline, we've seen a modest pick-up in client demand over the past few months and a stronger pick-up with new logos where qualified pipeline increased sequentially in Ex-L&S solutions. A number of these opportunities originated from a new initiative within our direct sales organization, which is the development of rapid value assessments for our key AI-enabled solutions. These repeatable assessments help quantify time to value, inclusive of estimated timelines and outcome-based pricing scenarios, easing friction associated with returns on AI investments, especially in the mid-market. We're currently utilizing rapid value assessments for our agentic service desk, intelligent operations and security operations with assessments for agentic application transformation and management and intelligent device refresh in the works. We're also generating more leads by collaborating with alliance partners on development and marketing around a narrower set of solutions, which identified overlapping priorities and strong value propositions. These efforts have led some partners to place Unisys more prominently on their road maps and using us as their primary and preferred implementation and managed service partner for their technology and are directly handing off leads in areas such as enterprise service management, unified endpoint management and field services to implement technology for smart reading rooms, kiosks and digital signage. I want to shift the focus to discuss our investments in the business, much of which is concentrated on leveraging artificial intelligence to move into higher-valued services and penetrate emerging market opportunities stemming from AI. Our approach towards enterprise AI has been to avoid simply rebranding existing solutions as AI-enabled, but instead to use AI to fundamentally transform the outcomes we deliver to our clients and that positions us well for future-proofing our client relationships. In our Ex-L&S IT services, this involves thoughtfully choosing partnerships to strengthen, enhancing the skills of our workforce, expanding our operational accelerators and constructing agentic workflows and governance frameworks to deliver secure, reliable results. We have also been proactive about rolling out delivery innovation in our existing base to create measurable results, increasing our relevance and thought leadership with clients, prospects and industry analysts. We're working to maximize that momentum by investing more deeply in our talent. We're expanding our forward-deployed engineering capabilities to increase capability in areas such as agentic application services. We view Agentic AI as a major opportunity for organizations to close the modernization gap, especially in public sector and higher education. Expanding our forward-deployed engineering capabilities positions us to take a more prominent role in designing and managing agentic workflows, whether they enhance software applications or replace elements of their functionality. In some cases, we're seeing client interest in expanding these services beyond central IT to reshape business as usual and functions such as HR and finance. As we think about upskilling for AI more broadly, the skills and demand are rapidly evolving almost on a daily basis, with the one constant being the pace of change coming from frontier models, hyperscalers, software and OEM providers. We're committed to maintaining a platform and model-agnostic approach that best addresses a given used case within a specific industry for a specific client. At the same time, significant existing technical debt within IT estates will require subject matter expertise to meet clients where they are today and help them transform and transition their technical debt over time. To do that successfully, we're aligning certain technical resources around key models and platforms to provide specialized consulting to both our external and internal delivery teams. Physical AI infrastructure is another emerging growth vector for Unisys, stemming from demand for AI compute and the rapid build-out of data center capability that's occurring. Data center builds are expanding the need for field technicians knowledgeable in the installation and maintenance of complex AI-focused IT infrastructure. Our large globally scaled field services organization with cutting-edge training and delivery experience connects humans, data and AI agents on one trusted platform. In the first quarter, we signed a new business engagement with a leading global OEM to support the build-out of a large U.S.-based data center. While the initial scope is small, it lends credibility to our specialized capabilities for the installation and support of AI infrastructure. AI infrastructure is just one element of our overarching strategy to expand our field service revenue streams. We're continuing to grow hybrid infrastructure volumes and focus on generating opportunities in network equipment and enterprise storage. We're also broadening field service capability in a variety of hardware, most notably within offices, restaurants, retail and manufacturing facilities. In L&S Solutions, we're approaching AI from both ends, infusing AI functionality directly into the ClearPath Forward ecosystem, while also making it easier to extend ClearPath Forward data and applications to fuel AI in other parts of the enterprise. During the quarter, we put out a new release of AB Suite, which is our low-code development environment for building applications on top of ClearPath. The update suite development enhance data encryptions and simplify integration of data with external environments without disruption of mission-critical operations. The release also adds capabilities for generating AI-based synthetic test data, allowing developers to rapidly test new functionality, while reducing the risk of exposing sensitive data, strengthening security and compliance. In addition to AB Suite release, we launched a new AI developer toolkit with practical guidance for building AI data models within the ClearPath Forward ecosystem. This is the first in a series of targeted client AI-enabled initiatives aimed at reinforcing ClearPath's value proposition and role as a long-term AI-ready platform that clients can rely on for decades. Taking a step back across all our segments, we're seeing AI disrupt the status of the industry and push clients to rethink their solutions and IT providers. This has given us an opportunity to show our agility and step into a more prominent role with clients and partners and accelerate the shift in our brand perception. We also hear it in our conversations with and recognition from the industry analysts and advisers that influence client decision-making. In the first quarter, Unisys was again named a leader in reports on end-user computing services and mid-market digital workplace solutions by Avasant and Everest. We are also newly included in the HFS report on next-generation IT infrastructure services, which includes providers able to help enterprise reimagine infrastructure specifically for AI-native operations and distributed digital environments. These acknowledgments follow Gartner's elevating Unisys to a global leader in digital workplace services. With that, I'll turn the call over to Deb to discuss our results in more detail. Debra McCann: Thank you, Mike, and good morning, everyone. As a reminder, my discussion today will reference slides from the supplemental presentation posted on our website. I will discuss total revenue growth, both as reported and in constant currency and segment growth in constant currency only. I will also provide information, excluding license and support or Ex-L&S to allow investors to assess our performance outside the portion of ECS, where revenue and profit recognition can be uneven between periods due to license renewal timing. Looking at our results in more detail, as Mike mentioned, the year is off to a good start. As you can see on Slide 6, first quarter revenue was $438 million, up 1.3% year-over-year, which included an approximate 600 basis point benefit from foreign exchange relative to the prior year period. In constant currency, revenue declined 4.5% with the largest declines in L&S Solutions due to renewal timing and anticipated volume declines in our Ex-L&S solutions. Excluding license and support, first quarter revenue was $372 million, up 3.1% year-over-year and down 2.9% in constant currency. I will now discuss segment revenue performance in constant currency terms shown on Slide 6. First quarter Digital Workplace Solutions revenue of $118 million was down 6.5% year-over-year. This decline was better than we had anticipated and reflected the factors we have discussed in previous quarters, such as client attrition, pricing dynamics in the industry and lower base levels of PC field services volumes that are stabilized, but down year-over-year. At the same time, growth in areas such as higher-value field services and better-than-expected volumes helped mitigate some of those effects. For example, our volumes and revenue from high-end enterprise storage have nearly doubled on a year-over-year basis. And as Mike mentioned, we continue to see significant market opportunities across a more diverse set of higher-margin field services, including AI infrastructure and IoT devices. We are also pleased with our DWS pipeline, which is up sequentially. First quarter Cloud, Applications and Infrastructure Solutions revenue was $182 million, representing a 2.4% year-over-year decline. The decrease primarily reflected lower volumes, especially at certain U.S. public sector clients and client attrition. As you may recall, we began seeing public sector clients pull back in the first quarter of 2025 due to uncertainties related to federal funding levels and those year-over-year headwinds should lessen as we lap declines in subsequent quarters. Within the Enterprise Computing Solutions segment or ECS, our License and Support Solutions revenue was $66 million, down 12.4% year-over-year due to the timing of the renewal schedule. There is no change to our expected weighting of 30% of full year L&S revenue in the first half and approximately 70% in the second half and we continue to expect $400 million of average annual L&S revenue in 2027 and 2028. Artificial intelligence has been and continues to be a driver of L&S consumption and in churn revenue and we are evolving our ecosystem with innovations that facilitate enterprise AI, both on our platforms and external AI-enabled client environments that can utilize valuable data generated by our systems. We continue to detect no change in client commitment to the ClearPath Forward ecosystem resulting from AI and code refactoring. On the contrary, there are some signs that our ecosystem evolution is leading to certain clients with migration plans reevaluating specific workloads to retain and outsource management to Unisys, which we attribute to consistent investments in platform modernization and sustainability of our skilled workforce. In our specialized services and next-generation compute solutions, the Ex-L&S portion of the ECS segment, first quarter revenue was $50 million, down 2.5% year-over-year. This was ahead of our expectations due to improved volumes and additional scope in some of our business process solutions, which partially offset declines from the phasing of project work. Total company TCV was $274 million for the quarter, up 33% year-over-year. New business TCV totaled $158 million, up 16% sequentially and 45% year-over-year. This is the highest level of new business TCV we have had in 4 quarters. Trailing 12-month book-to-bill was 1.2x for both total company and Ex-L&S Solutions. We ended the year with backlog of $2.96 billion, up 2.4% from the prior year-end. Moving to Slide 8, first quarter gross profit was $113 million and gross margin was 25.7%, up 80 basis points from the prior year. Ex-L&S gross profit was $73 million and Ex-L&S gross margin was 19.5% in the first quarter, up 170 basis points year-over-year. Improvement was primarily driven by expanded use of intelligent automation and ongoing workforce optimization. During the first quarter of 2026, a transaction within the company's U.K. business process outsourcing consolidated joint venture generated $3 million of non-segment revenue and gross margin benefit with no net cash impact. Total company and Ex-L&S gross margin benefited by 50 and 70 basis points, respectively. The transaction is expected to generate $12 million of gross margin benefit for 2026 evenly among the 4 quarters. We remain on track to deliver our targeted 150 basis points of annual Ex-L&S gross margin improvement amid a challenging growth backdrop, although our path may not be a straight line. I will now touch briefly on segment gross profit shown on Slide 8. DWS segment gross margin was 13.5% in the first quarter compared to 14.2% in the prior year period. Contraction primarily reflects impact from exited clients and growth in lower-margin device subscription service revenue in the quarter, which can have larger components of hardware, but offer a strong entry point for expansion into higher-value offerings. DWS margins are expected to improve as we move through the year and benefit from the implementation of delivery initiatives. CA&I segment gross margin was 21.8% in the first quarter, up 230 basis points year-over-year. The improvement was driven by continued workforce and labor market optimization, along with higher productivity supported by greater use of intelligent automation, especially within our central application capabilities. The segment also benefited from increased project volumes in higher-margin solutions relative to exited contracts as we see continued traction in high-value application services and multi-cloud management, which leverage more of the latest AI models and tools for delivery. ECS segment gross margin was 46.9% in the first quarter, down 80 basis points year-over-year. This was driven by lower L&S gross margin due to the timing of license renewals, partially offset by nearly 70 basis points of improvement in SS&C Solutions, which was helped by improved utilization in business process solutions. Across our segments, we are providing our associates career pathways and upskilling in emerging technologies, which is supporting our workforce optimization and internal staffing and our low trailing 12-month voluntary attrition of 11.1%. Turning to Slide 9, first quarter non-GAAP operating profit margin was 4.5%, up 170 basis points year-over-year. This was modestly better than the slightly positive margin outlook we provided last quarter, primarily due to execution against our operational efficiency objectives and increased L&S volume. SG&A was $92 million, down $5 million or 5% year-over-year, keeping us on track to reduce SG&A by $10 million to $20 million in 2026. As a reminder, these savings are concentrated in streamlining corporate functions outside of sales and marketing and most of the restructuring costs to achieve have already been recognized. Adjusted EBITDA was $46 million in the quarter, representing a 10.6% margin, up 130 basis points year-over-year. GAAP net loss was $36 million or a diluted loss of $0.50 per share, while non-GAAP net loss was $10 million or a loss of $0.14 per share. Turning to Slide 10, capital expenditures totaled approximately $21 million in the first quarter, relatively flat on a year-over-year basis and consistent with our capital-light strategy. As a reminder, a significant portion of capital expenditure relates to development for our ClearPath Forward ecosystem, comprising our L&S solutions. Free cash flow was negative $26 million compared to positive $13 million in the prior year period. The decline was driven by the timing of interest payments on our 2031 senior secured notes with payments now occurring in the first and third quarters. In addition, the first quarter interest payment included interest related to an 18-day stub period. Pre-pension free cash flow was $2.9 million in the first quarter, net of $28.2 million of pension and $0.2 million of postretirement contributions. The quarter included approximately $12 million of contributions to our U.K. pension scheme that are incremental to our previous full year forecast. Our joint venture partners funded these contributions, resulting in no cash impact to Unisys. For the remainder of 2026, we expect cash contributions to all global pension plans of approximately $69 million. Our cash balance was $380 million as of March 31st compared to $414 million at the end of 2025. Our liquidity position remains strong, supported by significant cash balances and undrawn $125 million ABL facility with an accordion feature up to $155 million and no significant debt maturities until 2031. Our net leverage ratio, inclusive of pension is 2.9x, down from 3.2x a year ago. Turning to our global pension plans, based on market conditions, we estimate that as of March 31st, both GAAP deficit and aggregate expected contributions through 2029 are essentially unchanged from year-end. As a reminder, we provide more detailed projections for estimated cash pension contributions and GAAP deficit at year-end. Quarterly updates reflect estimated impacts of asset returns, market conditions and assumed deficit reduction from contributions. Following our capital structure transformation in mid-2025, which included a $250 million discretionary contribution to our U.S. qualified defined benefit plans, we took actions that removed substantially all volatility from our expected U.S. contributions. This increased stability, along with the existing stability in international contributions set through trustee negotiation has significantly increased certainty for investors as to our future cash needs and trajectory of deficit reduction. Turning to Slide 12, I will now discuss our financial guidance for the full year and the additional color we provide. We are reaffirming our full year guidance range and expect total company revenue to decline between 6.5% and 4.5% in constant currency, which based on April 30th foreign exchange rates equates to a reported revenue decline of negative 3.5% to negative 1.5%. Guidance assumes Ex-L&S revenue constant currency decline of 7% to 4.5% and full year L&S revenue of $415 million. As a reminder, the timing and exact amount of L&S revenue can be difficult to forecast with precision, as it depends on renewal timing, term and client consumption levels among other factors. We are reaffirming guidance for full year non-GAAP operating profit margin of 9% to 11%, which assumes a slight year-over-year increase in L&S gross margin, targeted Ex-L&S gross margin improvement of 100 to 200 basis points and $10 million to $20 million reduction in operating expenses. Looking specifically at the second quarter, we expect approximately $450 million of total company revenue on a reported basis, which assumes approximately $70 million of license and support revenue. Based on these assumptions, we expect second quarter non-GAAP operating margin of approximately 5%. We expect second quarter items impacting GAAP net income of approximately $30 million, primarily related to pension expense. We expect a number of elevated noncash expenses impacting GAAP net income and earnings per share later in 2026 related to pension annuity purchases and streamlining certain legal entities, which we will guide on a quarterly basis. Also, as a reminder, in 2025, we removed hedges on our intercompany balances, which could create noncash FX gains as the U.S. dollar strengthens or losses as the U.S. dollar weakens. These are difficult to guide due to constantly changing rates, but will impact quarterly GAAP net income. There is no change to our expectation for full year free cash flow of approximately negative $25 million, which translates to positive $72 million of pre-pension free cash flow. This assumes approximate payments of $85 million in capital expenditures, $70 million of cash taxes, $70 million of net interest payments, $30 million in aggregate environmental, legal and restructuring payments and $102 million of postretirement contributions with approximately $29 million of which is expected in the second quarter. We are focused on continuing to increase our efficiency and profitability during this period to maximize our underlying cash generation levels for investment and capital return. Before we open the line for questions, Mike has a few additional remarks. Michael Thomson: Thank you, Deb. I want to reinforce 3 key points we hope came through in our commentary today. First, our confidence in the guidance ranges we've reaffirmed today is reinforced by our first quarter financial performance as well as the strength of our client signings, book-to-bill and backlog position. Second, our L&S solutions are durable and we are continuing to make investments to modernize our ClearPath Forward ecosystem and solidify our platforms as a key enabler of enterprise AI. Third, artificial intelligence is not only allowing us to provide more cost-effective solutions for our clients, but creates opportunities for us to help enhance our clients' business processes and end user experience, which creates a variety of new outlets for Unisys. We hope you'll join us on June 2nd to discuss these opportunities and more at our upcoming Investor Day, which you can RSVP for on our investor website. Operator, you may now open up the line for questions. Operator: [Operator Instructions] The first question that we have comes from Rod Bourgeois of DeepDive Equity Research. Rod Bourgeois: So it was helpful to hear some of your AI initiatives across your different segments and the accelerator work and the service experience work and so on. I wondered if you could just take us through quickly each of your segments and how AI is -- what are the headwinds and the tailwinds from AI? And maybe the net effect when you look across how AI is affecting you across your key segments? Michael Thomson: Great. Yes. Look, I think as we've stated in previous calls, we see AI in general as a significant tailwind for -- not only for us, but I think for the industry in general, but specifically embedded in our segments. And I apologize, I'm fighting a little cold here. So when we think about the impact in DWS, so we've already talked a little bit around some of the headwinds, which is really just the renewal cycle and the reestablishment and cost sharing of applying AI to that renewal. But moreover, I think we've been able to mitigate a lot of that headwind. Clearly, we've embedded AI into our solutions. We've seen the industry analyst reports on how that's set. So we think there's some real opportunity there, not only to have that in our solutions, but in our skill sets that we're bringing to market. So we mentioned in our prepared remarks, many opportunities inside of DWS, whether that's infrastructure, AI and the build-out from a field services perspective, all of the work that we're doing with agent force embedded in Salesforce opportunity and application of AI with our team in there and most prominently in DWS would be embedded in our solution experience accelerator and our agentic service desk. So we're seeing that really resonate, seeing some nice uplifts in pipeline, et cetera, in that particular business segment. So really happy there. And clearly, we think it's net-net, a positive long-term statement for the industry and for Unisys. From CA&I, you've heard in the prepared remarks in general across the board, the benefit there is clearly around AI application as it applies to modernization, the adoption of AIOps in our intelligent operations framework and the work we're doing around the agentic build of what we consider to be the action layer or the application or even above the application layer, that's been really growing across the board for us. And we think it's something that will continue to grow and actually probably opens up TAM for us for areas where we can really penetrate with that agentic layer that historically we may not have played in. So really pretty bullish on the application transformation layer embedded in CA&I. And then in ECS, I mean, it's been a powerful story for the last several years. We've talked roughly around $40 million of increase per year over the prior 3 years of consumption. The work that we've done to continue to embed technology enablement from an AI point of view into the ClearPath Forward ecosystem, we mentioned, in particular, the developer toolkit for AI that really allows for testing and utilization, and I'll say, bimodal data transfer has been really important. And we continue to develop the AB Suite to again allow for innovation and flexible deployment. So we see the technology continue to enhance the utilization of various aspects of AI in ClearPath. And again, we've seen that result over the course of the last several years from enhanced consumption and we see that trend continuing. So really happy with how it's shaping up, starting to see a little bit of relief, I think, from the macros, which has again given us confidence in our guidance as we said it. Rod Bourgeois: And just a follow-up on AI in your ClearPath Forward business. You've rolled out these new AI releases. Can you talk a little bit about the impetus to develop those AI releases and what the early client reaction is? And even to the extent that you're partnering with the AI models on that, just a little more color on the development of those releases and the reaction in the ecosystem? Michael Thomson: Sure. Great question. So look, this is not something that we've picked up in the last 3 months in reaction to what's going on in the market. These AB Suite releases have happened over the course of the last couple of years. This is just the latest release that's going out there. Clearly, there is an ask and road map discussions that we're having with clients. And it's really about access to data, portability of data, continued consumption of data and our ability to continue to build out above the, I'll say, the ecosystem layer or what you would consider the hypervisor layer or core layer of data and usage. The -- I'll say the issue du jour there is really about maintaining the support and steady run of the base and utilizing the emerging technology, you talk about frontier models as an example, being able to extract this valuable data that's embedded in ecosystem and marry that to frontier models to really help our clients continue to take advantage of that data set and do that in a manner so that they're not putting at risk anything in the ecosystem. They run the resiliency, the security, et cetera. So we see this as just a continuation of our ClearPath 2050 strategy and it happens to be the emerging technology that's there today. But we do a little bit and continue to work with kind of joint road mapping on some of these providers. And it extends beyond frontier, right? It's also OEM providers as well as some SaaS applications that sit on top of that ecosystem. So this, again, has been multiyears in the making. And I think from a client perspective, aligned to the expectations that we've set with our clients over the course of managing their road maps. Operator: The next question we have comes from Mayank Tandon of Needham & Co. Brandon Thomas Barron: This is Brandon on for Mayank. And I'm just wondering, like given the strong quarter, can you talk a little bit more about the reaffirmed guidance? Is that taking into account some macro uncertainty at buffer? And what are the levers that get you to the high or low end of the guide? Michael Thomson: Yes. Look, I think, obviously, we've reaffirmed guidance. We talked about Q1 being a little stronger than expectations. Kind of early in the year to be thinking about the impact of that. Obviously, our guide to constant currency, Deb mentioned in her prepared remarks some of the movement in FX embedded in that. So we'll have more color in Investor Day around how that relates to whether we're maybe moving towards the higher end of that or where we sit from a guidance perspective. I guess the message that I would want to leave you with is we feel good about Q1. It's a little better than we expected. We assumed in our guidance, as we talked about when we said it, that no real changes in the macroeconomic environment, although it's maybe moving a little more favorably from a macros perspective, I wouldn't consider one quarter to be indicative of the full year. So when we get a little bit more visibility through Q2, clearly at Investor Day and then obviously, if not Investor Day at our Q2 earnings, we'll talk about what -- kind of how we feel about that guidance range. Debra McCann: Yes. And to answer as far as some of the levers, I mean, it will really -- the signing momentum, if that continues and kind of the conversion timing of that revenue and then field services volumes, those are probably drivers we'd be looking for. Michael Thomson: Yes. And just to tie into that, I mean, as we've continued to enhance and improve our gross margin, that we have a lot more control over, obviously, and continue to work our programs and execute against those programs. And then to Deb's point, as these things become revenue recognition in year and we get to run rate on things that we've already sold and have started to implement, we're expecting some pull-through on margin there as well. Brandon Thomas Barron: Great. And then you guys also mentioned some cross-sell momentum in the quarter. I'm just wondering how big of an opportunity that is for you guys and the dynamics of the cross-sells? Especially with current clients upgrading IT and infrastructure for these AI initiatives? Michael Thomson: Yes. Look, I think -- look, in general, and I mentioned in my prepared remarks one specific client where they had 100 applications sitting kind of on top of our ClearPath Forward ecosystem and we're helping modernize those applications. And there's a great example of kind of that agentic action layer to modernize that. So we see that biggest cross-sell opportunity embedded in application modernization, and specifically, agentic -- I'll say, agentic AI applied to that action layer, the more of that we see, the more of that we're able to accomplish. And I think the market's knee-jerk reaction a little bit on SaaS providers, et cetera, we're not a SaaS provider per se, but we certainly play in the area of supporting SaaS application as solution implementers on the SaaS side. And the ability to use that agentic layer, I think, opens up TAM for us to lean in more heavily in that arena. And the ClearPath Forward ecosystem application construct is really a great proof point of that. We've seen a couple of instances of that recently, and we expect that, that will continue. Operator: The next question we have comes from Matt Dezort of William Blair. Matt Dezort: This is Matt on for Maggie Nolan. Congrats on the good results. Can I ask about the strong new business TCV? I think it was up 45% year-over-year, strong backlog too. I guess, Deb, you touched on it a little bit, but how should we think about conversion timing and ramp periods as well as margin profile of these new wins and your ability to continue to win work at these improved margin levels going forward? Michael Thomson: Great. So yes, super happy with the year-on-year uptick there. We mentioned in our prepared remarks about these rapid value assessments. Part of our strategy that we implemented at the tail end of last year and have carried through to Q1 this year is really looking at these point-of-spear opportunities and how emerging technology really avails itself not only in the AI embedded in our solutions, but the skills that we've got around that AI implementation and the conversion of technical debt. So happy with that uplift. We're seeing some real success in the top end of the funnel as well. Clearly, these solutions are resonating with clients. Now these RVAs or rapid value assessments are typically more point-of-the-spear things and are typically a little smaller engagements as a means to open the door. So we expect that the transition time will be faster. We also expect that much of that work is really more kind of time and material or outcome-based pricing. So we don't have the typical 18-month transition on some of those. And then it's really about the expansion post that RVA adoption is kind of what our focus is on top of that. So we think it will be more volume, perhaps a little smaller value, right, of the actual deal, because it's point-of-spear oriented, but gives us a real jump-off point to expand to other aspects of the business. So again, strong year-over-year TCV growth in that, as well as top of the funnel pretty happy and aligned to what our expectations were when we made those changes at the tail end of last year. Debra McCann: Yes, I think on -- yes, you also asked about margin. And I just think it's mix depending on kind of the solutions that we're signing. I think we mentioned there are some DSS have lower margins, right, but still are really good entry way into the client. Michael Thomson: Yes, that's a great point, Deb. Thanks for chiming in there. Mix is exactly right. And if the TCV is coming from the RVAs, then they're probably already at our accelerated margin profile. But as Deb mentioned, a good chunk of that pipeline aligns as we talked about, our DSS solution, which have a hardware mix in the solution itself, which kind of impacts the total margin of the contract, but not the services piece of our margin. Really, it's more the pass-through component of the hardware. But all in all, good line of sight, good progress and feel like the strategy is taking hold. Matt Dezort: Got it. As a follow-up, can I ask about pricing and just consumption pricing? I think IBM discussed the evolution they're seeing in the mainframe platforms to account for MIPS and AI and additional consumption parameters. Are you doing something similar with your pricing in CPF? And how are you maintaining your deserted premium here while adapting to these changing market dynamics? Michael Thomson: Sure. So great question. Look, the pricing discussions that we've had over the last probably 4 quarters were really pricing discussions as it pertains to Ex-L&S. Your question, obviously, is L&S pricing. We have not really had pricing pressure on the L&S side. It is a premium service, our clients view it as a premium service. We continue to get increased consumption out of that business. And most of that consumption increase is really based on the comments that I made earlier around enabling the data sharing and testing and the like embedded in what's going on in L&S. Typically, from an L&S renewal, as you know, Matt, the revenue recognition and that costing or pricing happens at deal signing and it's usually for the entire duration of that deal and it's upfront from a perspective of usage or consumption. So -- and we've been able to, over the course of the last 5 years and don't expect this to change, get price increases on those licenses as well as the support of that environment. So it's not really been pricing pressure at all on the L&S side of the business and we're quite confident that, that's going to continue. Operator: The next question we have comes from Anja Soderstrom of Sidoti. Anja Soderstrom: So AI seems to be a strong driver for you. But what kind of margin impact do you expect that to have? Michael Thomson: Look, I think we've been pretty consistent that the AI that we've embedded into enabling our solutions continues to have margin expansion and improvement. I think we were probably, what, Deb, almost 600 basis points over the last 3 years in Ex-L&S. Debra McCann: Yes. Yes. Michael Thomson: That is a byproduct of embedding that into our solutions. Clearly, when we have a new logo and they're utilizing the new solution, immediately, we get that impact immediately through -- and we've talked about last quarter, as an example, pushing our agentic service desk into the entire legacy base of clients. We should be above 40% of that base using our agentic service desk by the end of the year. So we still have some improvements that we expect on margin beyond this year for the existing base and we expect that we'll continue to offer this solution at an enhanced margin profile. So if I look at kind of where we are in the adoption of AI into our solutions, we're probably about halfway there in the existing base. And so again, we're talking about from our guidance, another 100, 200 basis points of potential improvement on the Ex-L&S side. And there should still be more in '27 as we continue to deploy our agentic offerings into our existing base. Anja Soderstrom: Okay. And then can we just double-click on the opportunities you see with the field services? Michael Thomson: Yes. So that's one we've been continually bullish on, as you know, and it really comes in 3 flavors. The embedding AI in the way we actually deliver our services from a field service point of view, i.e., location of the technicians, sending data to the technicians on the site with next best case cause of issues, looking and using data to understand how to do preventive things while on site, et cetera. So that's kind of a base used case of traditional elements and how AI is enhancing that. The second and third, I think, are actually more exciting, right? So one is around the different types of field service deployments. We talked about the work we've been doing on infrastructure and high-end storage and kind of moving up stack from a field service technician perspective. We talked in the prepared remarks around the data center work for installation and maintenance of things like liquid cooling for GPU chip configuration in a data center in general. And we also talked about the expansion of field services to other areas. In general, if you think about conference rooms, kiosks, office environments, et cetera, and the data telemetry around IoT devices and how that ultimately aligns to having a field service orientation. As you know, we're one of the few companies with the kind of global scale and reach from a field services point of view. And we think that, that's a differentiator from our perspective. And the alignment of that to our agentic service desk, knowledge management, et cetera, and the skills that we've got globally in field service, we've been investing in that area for several years when I think you've seen a lot of the market kind of curtail some of their investment in that space. We're pretty excited about the opportunity it brings to us. Operator: The next question we have comes from Matthew Galinko of Maxim. Matthew Galinko: I was just hoping you could expand a little bit more on the pipeline for field services around data centers and AI data centers? Michael Thomson: I mentioned on my prepared remarks that we had won an engagement there. We've been in the hunt for a couple of others as well. There's billions of dollars being spent in that space. And our goal is to really have our associate base totally prepared to handle significant volume as it pertains to data center construct, installation of racking in there and obviously, the component pieces around immersion cooling, liquid cooling, et cetera. So the pipeline has been, I would say, fairly strong. Our discussions with clients or prospective clients in that pipeline is going, I think, incredibly well. And we're happy about the fact that we are in the hunt for a whole host of opportunities there with some pretty significant players. So clearly, the market awareness of our abilities and skills in that space is out there. And again, these deals take a little bit of time to materialize. But I guess what I would say to you is that we're certainly getting significant invites and that we've got really good opportunities in the pipeline to expand that opportunity for the company. Operator: The next question we have comes from Ana Goshko of Bank of America. Ana Goshko: I have a pension question. So Deb, you mentioned the -- some charges to come later this year related to pension annuity purchases. And I know those purchases helped to reduce the overall liability and then in the medium to long term also help to reduce the amount it's going to take to reduce the pension deficit. But it wasn't clear to me that you had already agreed to do the annuity purchases this year. I know those are cashless. So is that kind of a done deal? Or is it still something that you're considering? Debra McCann: Yes. No, it's not a done deal. It's still in our plans. As we laid out last year, we were going to do some annuity purchases. We did some last year at the end of the year and our plan was to do more this year, but it's not locked in. And that's why we don't know the exact amount of the charge, it will depend on the timing. And so that's why as the year goes on and we get closer to locking that in, we'll give a sense of what that noncash charge would be. Michael Thomson: Yes. Ana, it's Mike. So when we talked about -- even when we did the debt, we talked about roughly $600 million worth of pensions annuities. I think we did, Deb, like $375 million, something like that. And so this would kind of be the other half of that. You're right that is cashless to us. As you know, we've done about 6 of these already. And so when we do them, you make an offer and then you get bids. And there are -- and there has been high interest in those bids. Normally, we get maybe 4 to 7 folks bidding on that. And then it's really a matter of does the bid come through at a rate that we think is worth it from our perspective. So you're right, it is still a little bit market-oriented, but our availability to do another one starts in Q3. And so we fully expect to put that offer out in Q3 and we fully expect that we'll get the same level of demand that we've gotten historically and it really comes down to the economics of the rate. Ana Goshko: Okay. Okay. Great. Understood. And then secondly, I think I asked the same question last quarter. But the debt market has been just very messy for software-related companies and IT-related companies generally. So that's kind of created an opportunity potentially for you to buy back bonds at an attractive rate. I know you've got uses for your liquidity, but you do have a strong liquidity position. So I think you bought back just a tiny bit of bonds in the quarter and about $2 million. And just wondering if that's something that has continued after quarter end or just kind of your view is on basically tapping that opportunity? Debra McCann: Yes. So we have windows where we can purchase. And you're right, we did in Q1, purchase an immaterial amount and at an opportunistic value, we feel. And so we'll continue to look at our liquidity, our cash and assess that as time goes on and as the windows open that allow us to do that. So we'll continue to keep an eye on that and see when the price is opportunistic, look at the overall liquidity picture and make that determination. Operator: The final question we have is a follow-up from Rod Bourgeois. Rod Bourgeois: Yes. I thought I would just ask, in the public services, you had some delays with the government shutdown and some other decision challenges there. The question is, is that starting to turn? And then similarly, on PC refresh, is that also at a point where you should see some upside there as well? Or is it still a little bit of a wait and watch going on? Just those updates would be helpful. Michael Thomson: Sure. Look, I would say, in general, public sector has been more favorable than it has in previous quarters. So -- and I would throw higher end in that same viewpoint. I think some of the noise has started to settle down and some of that project work is starting to return. So again, I wouldn't say 1 quarter or 1.5 quarter is indicative of the future. But I'm encouraged by what we're seeing as far as the loosening of the belt a little bit here and getting back to a little bit more normalcy in that space. I think they also recognize that in many cases, there are significant laggards from a technology perspective and the utilization of the emerging technologies, specifically this influx of these agentic AI models can help leapfrog them and get them not only up to date from a technical debt perspective, but catch them up for perhaps multiyear lag effect. So that's been, I think, pretty positive in the market. And then as far as your comment on PC refresh, yes, we saw a little better than expected in Q1. Again, I'm hesitant to say that, that is a byproduct or that's going to just continue throughout the remainder of the year, but there are certainly some elements that would suggest that it should, specifically as we talk about the Microsoft licensing component, et cetera. So we -- and again, we're coming up against comps of a pretty low year. But I would remind you that, at least for us, the reliance on that refresh cycle is less and we continue to train and educate the workforce on the infrastructure component of the field services arm that is impacted by those PC refreshes. We've extended that IoT devices to go beyond PC refresh. So it's an important factor. But when we set our guidance, we expected it to be pretty flat and maybe even still a little declining. So -- and it's actually performed a little better than our expectations. Operator: The final question we have comes from Sean Perkins of Deutsche Bank. Sean Perkins: I'd like to dig into a little bit more about the data center opportunity that you highlighted to some of the work you have there. Perhaps if you can discuss maybe some of the clients that you're seeing engage with you in those arenas and then how you're -- what the go-to-market strategy for your business is there to as far as given the market -- and to think about the market opportunity size? Michael Thomson: Well, thanks, Sean, for the question. I'm not really at liberty to share actual client names, but I would say to you that, obviously, we're engaged with the OEMs in regards to that and they're an entry way into some of these clients. And I would say, at least for a couple in the pipeline, it's kind of the who's who in that space. So we feel really, again, privileged that those types of clients are engaging with us to talk about the installation and maintenance of such a high-profile investment for them. And again, there are billions of dollars, as you know, being spent in this space. We think there's a really big TAM. And we've been using this, I'll say, period of the last 12 months to really make sure our workforce is trained up on the utilization of this new technology, not only on how to deploy it, but clearly, the implementation of racking and cabling and immersion cooling is a pretty technical aspect. And so the recognition of our capabilities to do that puts us in really good stead. And again, I would just say that we're talking about some major OEMs and major players in data center build. Operator: Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.
Operator: Welcome to the SolarEdge Conference Call for the First Quarter ended March 31, 2026. This call is being webcast live on the company's website at www.solaredge.com in the Investors section of the Events Calendar page. This call is the sole property and copyright of SolarEdge with all rights reserved and any recording reproduction or transmission of this call without the expressed written consent of SolarEdge is prohibited. You may listen to a webcast replay of this call by visiting the Event Calendar page of the SolarEdge Investor website. I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations. Erica Mannion: Good morning, and thank you for joining us to discuss SolarEdge's operating results for the first quarter ending March 31, 2026, as well as the company's outlook for the second quarter of 2026. With me today are Shuki Nir, Chief Executive Officer; Asaf Alperovitz, Chief Financial Officer; and Meir Adest, Co-Founder of SolarEdge. Shuki will begin with a brief review of the results for the first quarter ended March 31, 2026. Asaf will review the financial results for the first quarter, followed by the company's outlook for the second quarter of 2026. We will then open the call for questions. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. We encourage you to review the safe harbor statements contained in our earnings press release and our filings with the SEC for a more complete description of such risks and uncertainties. We disclaim any obligation to update any forward-looking statements. Please note, during this earnings call, we may refer to certain non-GAAP measures, which are not measures prepared in accordance with U.S. GAAP. The non-GAAP measures are being presented because we believe that they provide investors with the means of evaluating and understanding how the company's management evaluates the company's operating performance. Reconciliation of these measures can be found in our earnings press release and SEC filings. These non-GAAP measures should not be considered in isolation from, as substitutes for, or superior to financial measures prepared in accordance with U.S. GAAP. Listeners who do not have a copy of the quarter ended March 31, 2026 press release may obtain a copy by visiting the Investor Relations section of the company's website. With that, I will turn the call over to Shuki. Yehoshua Nir: Thank you, Erica. Good morning, everyone, and thank you for joining our call today. Last quarter, I spoke about SolarEdge shifting from defense to offense with 2026 being a year of transformation and acceleration for the company. Our priorities are clear: driving towards profitable growth, expanding global market share, scaling SolarEdge Nexis and investing in high-growth adjacencies such as AI data center power. And we are doing this while maintaining the operational and financial discipline we have established. The team's morale and energy are the strongest they have been in years, and we are all aligned around improving our execution and maximizing the various opportunities ahead of us. The first aspect of our transformation is achieving profitable growth. We have been steadily growing our revenues while expanding our gross margins in recent quarters. First quarter revenue was up on a year-over-year basis for the fifth consecutive quarter, growing 46% over Q1 2025. This was achieved without a significant pull forward of revenue and was once again accompanied by expanded margins. At the midpoint of our guidance, we expect to approach breakeven operating profit in the second quarter. This marks an important milestone in our transformation and reflects the relentless focus our entire team has had on operational efficiency and delivering best-in-class products and customer experience. The next area of transformation is market share gains. Starting with the U.S. resi market. The market got off to a slow start this year as customers face changes in tax credit policies and uncertainty related to FEOC. These uncertainties have slow tax equity funding for TPOs, creating strain on installer businesses and cash flows. Even so, we believe we are well positioned to benefit when the market rebound since the anticipated market evolution towards the 48E tax credit and higher battery attach rates are expected to play directly to our strength. Mainly, our position as the leading provider to TPOs and our fully integrated DC-coupled battery architecture. Turning to the U.S. C&I market, where we continue to build momentum. As you know, our scalable architecture of inverters and optimizers enhances the returns for C&I rooftop projects by harvesting more energy, enhancing safety, and enabling customers to benefit from tax credit with products that are designed to be both domestic content and FEOC compliant. These advantages have resulted in share gains more specifically, in continued penetration of enterprise accounts, which come with a more stable cadence of business and improved visibility. We view this position as structural rather than cyclical. Domestic content and FEOC compliance are difficult for non-U.S. competitors to replicate quickly. And we expect this continue to support our market share over multiple quarters. We secured additional safe harbor transactions from both resi and C&I customers in the quarter and expect to secure additional deals in the second quarter, primarily through the physical work test method. These transactions provide several important strategic benefits. First, they increase the visibility of our potential future revenue and share gains. The associated products can be deployed for up to 4 years and will translate into revenue when the customers take delivery of the entire product. Second, they create a natural entry point for incremental sales. When installers complete a safe harbor solar installation that also requires a battery or an EV charger, we are well positioned to capture that asset. Third, these transactions allow us to size our operations more efficiently and support the most stable and predictable manufacturing profile over time. Next, let's turn to Europe. The market was slow in the first 2 months of the year, but picked up in March, a trend that continued into April, driven in part by rising electricity prices in the region. Despite the slow start, we delivered a strong first quarter in Europe with revenue reaching its highest point since Q4 2023. The revenue growth is a result of stronger battery demand in both resi and C&I across the region. I would like to highlight that the strength in Europe is even before we have fully ramped the export of U.S. manufactured products and before the roll out of SolarEdge Nexis platform. Speaking of Nexis, our third area of transformation is product innovation and leadership. The SolarEdge Nexis launch event in Germany exceeded our expectations. Nearly 1,000 installers joined us in person of or via the live stream, creating an atmosphere so electric you could feel it in the room. What's made the moment truly powerful was our customers' reaction. Their enthusiasm wasn't just polite applause, it was genuine excitement because Nexis was built for the customer. Every feature exists because we listened closely, understood their pain points and learned what they valued and what frustrated them in day-to-day installations and operations. Their feedback became the blueprint for Nexis and the result is something we believe is truly special. The excitement is already reflected in the order book. Our entire planned Q2 Nexis production is fully booked by European customers, and we continue to expand capacity to meet additional demand. We believe the Nexis platform positions us at the leading edge of technology and future innovation. It also enables us to address incremental segments of the market, including larger homes which account for over 50% of the residential market in Germany. In addition, 2 weeks ago, we unveiled the second generation of our commercial battery, the CSS outdoor 197 kilowatt-hour solution, which marks another major step forward in our energy storage road map. This new system is purpose built for medium to large scale installations, whether deployed as a stand-alone storage asset or paired seamlessly with PV. What sets the solution apart is the software suite, which enables multiple optimization mode from maximizing self-consumption to peak shaving, tariff optimization and managing export and import limitations. The fourth element of our transformation is investing in AI data center power solutions. At GTC26, NVIDIA featured a live, energized 800-volt DC power rack which reinforced that high-voltage DC power is moving from concept to infrastructure road map. The 800-volt DC evolution aligns exceptionally well with the technical capabilities SolarEdge has been building for 20 years. We believe this represents a multibillion dollar addressable opportunity over time. Our plan is to deliver a working system in 2026, initial pilot installations in 2027 and a broader roll out in 2028. Since our last call, we've continued to advance our solid-state transformer platform and have made progress toward the system capable of converting 34.5 kilovolt directly to 800-volt DC at efficiencies above 99%. To summarize, we're executing on our transformation plan. We believe we have a clear line of sight to profitable growth. We have multiple tailwinds supporting continued global market share gains. We're moving towards high-volume shipments of new products. We're advancing our AI data center power solutions. We firmly shifted to offense and will press our advantages in every market that we serve. Lastly, I would like to briefly address our CFO transition. Asaf will continue in his role through June 9, and I would like to use this opportunity to thank him for his professionalism and commitment to the company and for all the work he has done to further our turnaround. Our CFO search is well underway with strong candidates. Our finance organization is deep. Our systems and processes are well established, and we expect no disruption to our 2026 plan, also our financial discipline. With that, I will turn the call over to Asaf. Asaf Alperovitz: Thank you, Shuki, and good morning, everyone. Starting with our quarterly results. Non-GAAP revenues for the first quarter were $310 million, up 46% year-over-year and down 7% quarter-over-quarter, outperforming the typical seasonal decline of 10% to 15%. This result does not include any significant onetime or pull forward of revenue from safe harbor. Revenues from U.S. this quarter amounted to $150 million, down 20% quarter-over-quarter and representing 51% of our revenues. Revenues from Europe were $114 million, up 14% quarter-over-quarter and representing 37% of our revenues. International Markets revenues were $38 million, up 5% quarter-over-quarter and representing 12% of our revenue. Non-GAAP gross margin this quarter was slightly up to 23.5% compared to 23.3% in Q4 towards the high end of our guidance. We achieved higher gross margins despite the lower revenue, largely due to a more favorable product mix and lower seasonal warranty costs. A brief note on tariffs. On February 20, the U.S. Supreme Court ruled that certain tariffs imposed under the International Emergency Economic Powers Act or IEEPA, were invalid. The recent submission process with the U.S. Customs and Border Protection has already commenced, and we anticipate that the refunds could total approximately $55 million. These potential refunds are not included in our Q2 guidance. Non-GAAP operating expenses for the first quarter were $97.7 million. However, excluding a onetime doubtful debt expense of approximately $14 million, our ongoing operating expenses were approximately $84 million, below our guidance range and down from $88.7 million last quarter. This doubtful debt is related to one of our U.S. customers, but not to Freedom Forever, which I will discuss shortly. This OpEx reduction is largely reflective of our ongoing cost control, the efficiency measures we've implemented and our focus on our core businesses. And we are keeping our costs in check despite the continued headwinds we faced from a strengthening New Israeli Shekel against the U.S. dollar. A brief note on our exposure to the bankruptcy of Freedom Forever. Freedom has been a long-standing and valued partner of ours, and we appreciate the scale they brought to the residential solar market over the years. We have a net 0 exposure on our balance sheet as we have not recognized significant revenue from Freedom over the course of the last 18 months. During this period, payment received were first applied to a reduction in their outstanding balances. Given the uncertainty around Freedom's financial position, remaining amount owed to us has been fully offset by a deferred revenue liability on the balance sheet throughout this 18-month period and netted to 0. We hold the UCC lien against Freedom's assets, representing the amounts owed to us by Freedom, which will equal approximately $100 million. We do not know what, if any, the amount will be recovered but any amount we ultimately recover would be recognized as a benefit in our P&L in the period received. Non-GAAP operating loss for Q1 was approximately $25 million. When excluding the onetime $14 million doubtful debt expense, our ongoing operating loss was approximately $11 million, flat with Q4 despite 7% lower revenue. As these results demonstrate, we're relentlessly pursuing give us greater operational efficiency as we continue to journey back to profitable growth. Our non-GAAP net loss was $26.3 million in Q1 compared to a non-GAAP net loss of $8.2 million in Q4. Non-GAAP net loss per share was $0.43 in Q1 compared to $0.14 in Q4. Both non-GAAP net loss and loss per share were also impacted by the onetime $14 million doubtful debt charge I just mentioned. Turning now to our balance sheet. As of March 31, 2026, our cash investments totaled approximately $583 million. During the first quarter, we generated roughly $21 million of free cash flow. Our cash and investments increased by about $2 million in the quarter, as free cash flow was partially offset by several items, the largest being a onetime nonoperational $26 million payment related to a lease amendment for our new headquarters. Aligned with our efficiency measures, this amendment significantly reduces our planned footprint when we move into the new campus next year and is expected to lower our annual lease expenses by approximately $8 million. Our capital expenditures this quarter were approximately $4 million. For the full year 2026, we anticipate capital expenditures in the range of $60 million to $80 million. The main buckets of CapEx this year are: one, increased production capacity in the U.S. for both PV and batteries. Two, investment in our new headquarters in Israel, largely related to advanced R&D facilities; three, investment related to our AI data center offering and lastly, ongoing maintenance CapEx. Despite this higher CapEx and our planned investment in working capital to support our anticipated growth and the Nexis launch, we expect to generate positive cash flow for the full year 2026. This reflects solid underlying operating performance, continued discipline in managing expenses and capital investment and our continued ability to monetize 45x credit which are an important contributor to our cash flow expectations. Turning to our working capital items. Our rigorous focus on cash management continued to yield positive results. In Q1, our cash conversion cycle reached its fastest point in many years, driven by lower DSO and higher DPOs. And this is despite our inventory growing by $44 million, largely related to higher raw materials procurement in support of our Nexis launch and higher battery demand. AR net decreased this quarter to $223 million compared to $267 million last quarter, driven by a strong collection. Turning now to our guidance for the second quarter of 2026. We're expecting revenues to be within the range of $325 million to $355 million. This range does not include any significant onetime pull forward of revenue. We expect non-GAAP gross margins to be within the range of 23% to 27%. This range does not include any impact from potential IEEPA refunds. We expect non-GAAP operating expenses to be in the range of $86 million to $91 million. For comparison, ongoing operating expenses in Q1 were $84 million, excluding the onetime $14 million debt charge. The midpoint of our OpEx guidance, therefore, reflects a modest sequential increase, driven primarily by the strengthening of the New Israeli Shekel against the U.S. dollar, net of our hedging activities. At the midpoint of our Q2 guidance, the implied EBIT loss for the period is approximately $3.5 million, bringing us close to breakeven. This represents a meaningful step in our focus on gradual progression towards profitable growth as we move into the third quarter. I will now turn the call over to the operator to open it up for any questions. Operator? Operator: [Operator Instructions] And our first question today comes from Mark Strouse with JPMorgan. Mark W. Strouse: Shuki, I think you touched on Europe a bit. I was hoping that you could just kind of give a real-time update what you're seeing in Europe over the last couple of months, not necessarily overall 1Q, but really just since the conflict in Iran broke out, what you're seeing with power pricing, what you're seeing kind of real-time demand in that region broadly? Yehoshua Nir: Yes. Thank you, Mark. And so as we said, the first 2 months of the year started slow and then since March, including April, which is part of Q2, obviously, we've seen an increased activity and increased demand coming from the region. And it's around -- across several countries. It's not just unique to one specific country. We believe it's partially related with the increase and the expected increase in electricity prices as you noted. The war in Iran impacts these prices. And what we've seen actually is not only an increase in demand for PV only, but actually an increasing demand for PV plus storage and as we mentioned before, both in C&I and in resi, we are seeing that increase. And the SolarEdge solution that actually is not only the inverter and the battery, but actually sophisticated energy management system that in more advanced markets where dynamic tariffs and sometimes negative tariffs may change the ROI quite significantly. That combination of a battery, inverter, and a system that manages the storage, the import, export and other features is very much in need. So we are seeing, as I said, stronger demand coming from the market, and we are well positioned to service both on the C&I side with the introduction of the second-generation storage solution and with the upcoming rollout of Nexis. Mark W. Strouse: Okay. And then as my follow-up, I was hoping you could comment on C&I within the U.S. You mentioned that you're gaining share, which makes sense because of your Dom Content and FEOC. Just curious if you can comment on the competitive environment. If you're seeing some of your existing competitors potentially move around their operations, if you're seeing any new competitors potentially coming into that space? Yehoshua Nir: Yes. So the U.S. C&I, as you know, there are 3 leaders in the market. There have been leaders in the market of rooftop C&I for the last several years. Out of these 3, we are the only ones who can offer our customers not only a winning solution, but actually something that -- a product that is qualified for both domestic content and FEOC compliance. So with that, we are seeing something that is not cyclical, it's actually structural, a change that we believe will help us maintain that level of share for the quarters. Now to the best of our knowledge, none of these 2 other major competitors has made any changes to the domestic content and/or one of them in the FEOC compliance. Other -- there are obviously other players that have a much lower market share that can penetrate this market. But we believe that we've established our solution not only by harvesting more energy, but actually by integrating together with the systems of enterprises, which is a much more stable and predictable segment of the market. And also -- and we mentioned it as well, we are in the process of securing safe harbor transactions with the larger customers, the ones that who are interested in that through the physical work test, which helps us to secure future revenue and future share as well. Operator: Our next question comes from Philip Shen with ROTH Capital Partners. Philip Shen: First one is a follow-up on Freedom. I think in the documents or the bankruptcy docs, they owe you guys a $50 million on credit line and then $56 million on a product debt line. What do you have a lien on with respect to those credit facilities? In the first day of the hearing, it seems like these liens are or may be in dispute and that you may not have a lien cash collateral. So I was wondering if you think that's true. It also seems like the company was late on making payments in Q4 and that's why you may have secured the lien. So I just was wondering if you could address if you think you're covered on the loan? And then this other $14 million expense you took that's not Freedom. Can you give us a little more color on who that might be and what the situation is there? Asaf Alperovitz: Thank you for your question. As it relates to Freedom, maybe I'll give some background history. I think I related to that in the prepared remarks, I think we said that we did not recognize any meaningful revenue from Freedom Forever, over the past 18 months. While Freedom, as you know, has been a valued customer of ours. Over the year, our current financial exposure to them in our books is 0. During this 18-month period, the payments that we received from Freedom were first applied to a reduction in their outstanding balances, the loan we mentioned and so forth. And I think we've taken a very cautious approach and because of the uncertainty around Freedom's financial condition and any remaining amounts owed to us by them, we have fully offset -- fully offset by a deferred revenue liability on our balance sheet throughout this entire period. So net 0 exposure. As it relates to the lien that you just mentioned, so we do hold a lien. It may allow us for some level of recovery, if any. But we are certainly not relying with that on our outlook. If anything will be received, it will be an upside. And again, we are not relying on that. I think it's also important to say before I get to your second question in terms of this $14 million doubtful debt is that when we are looking ahead, we continue to believe that demand for solar and storage will be driven primarily by attractive, both projects and system economics, regardless of which installation companies are active in the market, in the field. Of course, the solar landscape will further evolve, and we expect more partners to choose SolarEdge, particularly as we scale out the rollout of Nexis, which we believe will strengthen our value proposition and positioning with both installers, distributors and homeowners, of course. Now regarding your second question about this $14 million of doubtful debt that we have recognized in this quarter. So it's -- as I said, $14 million. It's a U.S. customer that is experiencing financial operational challenges lately. We believe and of course, it's not Freedom, just to avoid any confusion. It's another customer, not related to Freedom, whatsoever. We are not disclosing the customer name. And we believe that given the circumstances and the financial challenges this customer is experiencing, we took a conservative and responsible approach. We've actually written down the entire amount they owed us. We do hope, of course, for their recovery. And if conditions improve in the future, if they will improve, we will reassess the situation accordingly. Did I answer your question fully, Phil? Philip Shen: Yes. Operator: Our next question comes from Brian Lee with Goldman Sachs. Brian Lee: I guess one question I had just around the -- you said for Q1 results as well as Q2 guide, there's not a significant amount of pull-forward revenue, i.e., safe harbor. But you did say that there's a significant amount of physical work test safe harbor that you're seeing or anticipating. So just question would be, I think your peer has had multiple straight quarters of meaningful amount of safe harbor revenue as well as what they're anticipating in the current quarter. And you guys apparently are seeing a lot more on the other classification of the physical work test. Is that a function of your strategy go-to-market in sales? Is that just a function of your customers? Or is there any kind of market share implications of why your #1 competitor in the U.S. resi market is seeing a lot of sort of in-period safe harbor versus the physical. Just curious on kind of how we should interpret that. Asaf Alperovitz: Thank you for the question. I'll start, and I'm sure Shuki will share more color on the market indication. So as we discussed in the prepared remarks, in the last couple of quarters, we have signed multiple physical works transactions with both leading TPOs and enterprise customers alike. We believe also that some of our existing and potential new customers may be interested in signing additional transactions before July, July 4, that is. Also, we are in the process of closing more deals. And we -- as I said, we believe we're very well positioned to do that with all TPOs in the market given our key advantages from harvesting more power, efficiencies in both high and low power, DC-coupling solutions, et cetera, et cetera. And we believe it all represents a great opportunity for us to increase market share. And clearly, as we signed such transaction, for us, it increases the visibility significantly for up to 4 years horizon. And it also helps us secure market share, significant market share. Shuki, do you want to add any color? Yehoshua Nir: Yes. So to your first point, Phil, yes, neither Q1 revenue nor the Q2 guidance assumes any significant pull forward of revenue related to the 5% safe harbor. I think that we covered it in previous calls, but just to make sure that everybody is on the same page, the 5% safe harbor deals are transactions in which the customer is actually buying the product in the first 100 days after the signing of the contract. And it's not necessarily for products that are going to install in the period. This is why they are referred to as pull forward of revenue. While the physical work test has a built-in advantage to the customers because they will complete the transaction only when they need the product, and this is when they're going to install the product. And from our perspective, as Asaf mentioned, it's a future, revenue, and share. It does allow us to have a more efficient operation because we get predictability for customer forecast and orders, and it does line up the revenue together with the actual purchases from the customers. And whether there are advantages and disadvantages to physical work test, we believe that the physical work test provides better visibility for us and better -- and some advantages to the customers. And because on the resi side, we've actually -- we are securing the deals using the Nexis platform, that actually provides the level of confidence that the customers need that this is a product that will actually be modern and a leading product also in the next 3 to 4 years, and we are sharing the same view. And that allows us actually to plan forward and for them to plan forward on a system that is robust, that is here to stay, and that is about to be rolled out in the coming quarters, which was from the bottom, from the ground up was designed to be PV plus storage plus sophisticated energy management system. On the C&I side, as Asaf mentioned, large companies they are interested in physical work test because they have visibility into their business and what they would like to do with regard to PV, and we are best positioned to support them in that. That's the reason that you see a lot of interest in our physical work test. Brian Lee: Okay. Yes, makes a lot of sense. I'll follow up on it. Just second question on Europe. It seems like that's going to be a source of strength going forward, and you're seeing some good trends there. Can you kind of level set us a little bit? I know historically, Europe has been a lower price environment based on some of our data, it seems like at least 20% lower, if not more ASP per watt? And then I think you also had maybe more commercial versus resi mix in Europe historically. What are kind of the pricing and margin implications for you guys as Europe maybe becomes a bigger source of the mix and outgrows some of the challenges that you're seeing in the U.S. give us any thoughts on pricing and margin specific to Europe? Yehoshua Nir: Thank you, Brian. And as you know, in the last several quarters, we've been excited about the potential in Europe, the potential SolarEdge has in Europe. The region in which SolarEdge lost share in previous years was mainly Europe and was actually, was Europe. And we see a huge potential to actually gain share both in the residential and the C&I side of the market. And in a way, we mentioned it. Q2 supply of Nexis for Europe is already -- all of it is booked. It's not a very large quantity, but it's all booked. And we are working very hard in order to increase the supply to support the Q3 demand. So when we bring Nexis, and we talked about the launch event and the excitement and all the benefits that Nexis has. And because of that, we don't think -- and we talked about it in the past, pricing is not necessarily a matter of just the price in the market, but it's also the relative advantages that you -- that one product has versus another and what it does bring to the customer. And while we've always harvested more energy, now with the energy management system that we are introducing and the dynamic tariffs, and the increasing electricity prices in Europe, the benefits that are coming from a system that can actually optimize the entire energy consumption, import and export is significantly higher. And we believe that we will be able to actually have with stable pricing, we can actually gain market share. Now as it pertains to margin, we -- Asaf will add more color. But at the outset, we've just started exporting U.S.-made products into Europe. So the inverters and optimizers that are made in the U.S. when they are going to be exported -- when they are exported to Europe will generate better margins. And Nexis as a platform and as a product is a better cost advantage by itself. So that will be also a tailwind for our margins. But Asaf, do you... Asaf Alperovitz: Yes, maybe just to add, I mean, as you know, we do not break down margin by territory or product. But to give you some color, very generally, the U.S. resi margin profile would be the highest and the EU storage or international market storage is the lowest. But again, now that as Shuki mentioned, we started exporting the U.S. produced products to Europe. The cost structure will significantly improve. With that, of course, we work hard to also enhance the European product margin. Operator: Our next question comes from Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: I appreciate the opportunity to connect here. I wanted to just follow up, maybe just on this other customer Freedom. Just to what extent -- what market share do they represent with you all? What market share do they represent in the marketplace such that we just try to understand what that means as a headwind, and I understand because I heard your comments, in the answers you're saying, you're on the offense. How do you think about the market sort of displacing those lost sales? Again, I'm thinking more prospectively. Obviously, you've been underweighting these customers of late. How you think about that mix shift of your own customer base evolves here? And then I've got a follow-up. Asaf Alperovitz: Thank you. In terms of the $14 million customer for which we have this doubtful debt provision, I can say that for the last 3 quarters or so, we have very low revenue from them reported in the book. So no direct impact, I would say. And we believe that generally, there is no vacuum in the market. So certainly, new potential players in solar will get in. And I think as Shuki and I mentioned, considering the Nexis rollout and our significant advantages, we believe that we are best positioned to gain market share with such players. Shuki, do you want to add anything? Yehoshua Nir: Yes. We do recognize, Julien. It's a good point. And we do recognize that these 2 valued partners of ours. We wish they will do better, they would recover and they will come back to be loyal partners with SolarEdge. And the demand is not -- is fulfilled by the channel and it's coming from homeowners, TPOs and C&I customers. And the advantages that we deliver to them and to the installers are such that we believe will help -- will convince others that they would like to join the SolarEdge installation group. But we are -- we do hope that these partners of ours do recover and that they go back to install many, many SolarEdge systems. Julien Dumoulin-Smith: Got it. Excellent. And then maybe taking more of the offensive step, how do you think about coming back maybe this year, providing some sort of Analyst Day like view and providing some sort of presumably multiyear view on not just resi, but also the C&I and perhaps novel products here. How do you think about kind of giving a full-fledged and full-throated view on some of the emerging end markets but also product portfolio here? Just to make sure we've asked it explicitly. Yehoshua Nir: Yes. Thank you. As you know, and I talked about it, Asaf has been a great partner of mine, and we are making good progress with the CFO transition. And we do plan to have an Investor Day after Labor Day. And on that day, obviously, we will have the new CFO, may well join us, and I will be there as well. Hopefully, you guys will be able to join us as well for something that it will be a bit longer term and a bit deeper than what we can do on quarterly call. Operator: Our next question comes from Chris Dendrinos with RBC Capital Markets. Christopher Dendrinos: I just wanted to follow up on the comment on picking up more installers. I guess what I'm wondering is, can you speak to adding new customer base, new customers with that transition to TPO and 48E? Are you in conversations to add a new group? Yehoshua Nir: Yes. Thank you, Chris. We've always been in conversations with different installers in the market. We do see an uptick in their interest in working with SolarEdge with upcoming Nexis. And we believe that installers, installation companies, their business is around identifying what the market needs and then being able to deliver that to the market. So obviously, there are -- we're in discussions with different groups and different installation companies. And we believe that once the demand for the SolarEdge solutions is out there, there will be installation companies that will be able to actually install them and bring that value to the customers. Christopher Dendrinos: Got it. And then maybe just as a follow-up here on Europe, you highlighted growing demand. Strength in Germany. Are there other regions where you're seeing similar strength? Or is this maybe more isolated to Germany? Yehoshua Nir: Yes. So what we said about Germany was actually that we are seeing some strength in March and April, but also Nexis is actually opening a new segment for us that is about 50% of the market, which is the large homes and large installations that are above the 10 kilowatts. We also are seeing an increase in demand for upsell to existing installed base in the Netherlands and in other countries as well. In the Netherlands, it's more pronounced, obviously, because of the very large installed base that we have and the benefits that homeowners over there are going to help if they do that ahead of the January 1st expiration of the feed-in tariffs. We also see in Italy, we have a strength in the commercial storage. So as we mentioned in the previous call, we have focused our energy, attention and go-to-market motion into, I would say, 10 countries in Europe. And in all of them, we are seeing that demand is picking up, and there is interest in partnering with SolarEdge. One thing -- one other segment that we can actually address with Nexis, that we didn't mention before is the new build. In different countries, in different states, actually in the U.S. as well, there are incentives for builders if they do include the system over there. And there is a variation of Nexis that is actually very attractive for that segment of the market as well. Operator: Our next question comes from Colin Rusch with Oppenheimer. Colin Rusch: Could you talk about remaining inventory in the channel that you guys still see cleaning out or any of that, that may be a little bit of headwind here over the next couple of quarters? Yehoshua Nir: Yes. Thank you, Colin. So as we said in previous calls, the vast majority of our distributors in Europe have already resumed normal levels of inventory. And as you know, days of inventory in the channel is a result of the amount of inventory divided by the sales. And when sales are picking up, actually, what you're seeing is that the days of inventory by definition are going down. So that situation has not changed, if at all, it's even improved a little bit. But as we said before, when we talk about normalized levels of inventory, there are gives and takes ins and outs, et cetera. Sometimes one distributor can have a bit too much and another distributor can have a bit too little. So when we look at it from a market perspective, from a company perspective, our channel inventory is normalized. And I'd like to emphasize that as we move into the single SKU concept, it will allow our distribution partners to carry much less inventory in order to fulfill the very same sales, actually, one could say that to fulfill even more sales because they will have to have only one type of inverter for the single phase or for the 3 phases, as an example, also the C&I. And that will support different levels of power as opposed to the 4 or 5 different SKUs that they had to carry before. And we are working with; them through this transition. So hopefully, we'll see the channel inventory even becoming healthier in the future. Colin Rusch: Excellent. And then following up on the data center opportunity, can you just give us a current status on where you're at from a product development perspective in terms of subunits or subsystems within the product? How mature that is? Where you're at with testing at this point? And when we could see a little bit more robust product announcement for you guys? Meir Adest: Yes. Thanks for the question. Basically, what we're doing these days is preparing prototypes, which we could share with hyperscalers and potential hyperscalers now potential customers. We're planning on showing it off a proof-of-concept towards the end of this year so that we could then have pilot plants at their data centers throughout next year, leading to ramp-up and mass deployment in 2028. Operator: Our next question comes from Corinne Blanchard with Deutsche Bank. Corinne Blanchard: Maybe one thing I wanted to clarify. We have heard from some of your peers about the price cuts. Is it a strategy that you have also been implementing or that you intend to implement? Or are you in a different set of in the market? Yehoshua Nir: Yes. Thank you. So we have not implemented the price cut. And as I mentioned before, we believe that price reflects -- value is reflected in the price. It's not necessarily a cost plus model. And we believe that with the value that we bring to the customers that both in terms of the C&I side, with the storage and the energy management over there and in the resi side with Nexis that has a much, much better performance in low-power and high-power versus competition. We feel confident that we can gain share, while keeping this premium over competition. At the same time, the market is dynamic. And if we see a need to change it, as I mentioned earlier, the Nexis and the products that are made in the U.S. allow us some room that are lower-cost products. And that will allow us some room to move, if we need to. Corinne Blanchard: Maybe another one on battery. I mean, your battery shipments were pretty strong this quarter, especially again if we compare versus some of your peers. Can you just talk again how do you view that trend to continue for the rest of the year? And maybe if you have a different view, Europe versus the U.S., that would be helpful. Yehoshua Nir: Yes. So generally speaking and talking about the market in general, you see attach rates of storage to PV going up and to the right, I would say, in almost every segment in almost every state or country. Some of them are very advanced. In some places, we have more than 90% attach rate, like NEM 3 installations in California and some of them are still early on in their advancement towards higher attach rates. So having a battery -- you can have a battery of stand-alone as well. Our C&I battery can be a stand-alone as well. But the combination of PV plus battery allows in a dynamic rate environment, it allows for a much, much higher return on investment if it's managed well. And I'll give you just one example. If at noon, the rates are very low or sometimes negative, and at night, the rates are high. It would make sense that you charge the battery from the solar during the lunchtime. And then when the night comes and its peak hour and the rate is high, you'd use the battery in order to power your house or your business. And that requires -- it's not that sophisticated, the way I explained it. In some cases, it becomes a little bit more sophisticated because we need to predict what the solar production is going to be next day and what the rates are. But having that system in place actually increases the ROI quite significantly. And the benefit that SolarEdge has, we mentioned this earlier as well is higher efficiency in low power. And most people don't realize it, but most of the time, their houses are operating on 1 or 2 kilowatts and even less. And the round trip efficiency of SolarEdge Nexis is higher than competition on that regard as well. Operator: Our next question comes from Maheep Mandloi with Mizuho. Maheep Mandloi: Maybe just in the U.S. solar market, how much of the guidance in Q2 kind of embeds that or U.S. market in general? And how to think about the progress here in Q3, Q4 for solar specifically outside of the Nexis platform? Yehoshua Nir: Yes. So thank you, Maheep. And if I understood you correctly, you're asking about how does the resi U.S. market dynamics, how are they affecting our Q2 guidance? Maheep Mandloi: Yes, in resi and commercial combined, yes. But just trying to understand the mix for U.S. in Q2 and how do you think about that in Q3, Q4? Yehoshua Nir: Yes. So obviously, as we said, the resi market in the U.S. started the year slower than anticipated even because of the slowdown in tax equity investment. We hope that this situation is resolved one way or another in the coming months. And then we believe that the market is going to be stronger. For Q2, we didn't assume that the market is going to be strong. On the C&I side, the market continues to be in a good shape. And we are seeing -- as we said earlier, we are seeing a structural change that is leading towards our share, and we expect that to continue actually. Asaf Alperovitz: I think you also asked about -- to give some color beyond Q2. So as you know, we do not provide guidance beyond the next quarter. With that, what we can say and what we believe is that we do have an opportunity to continue growing, certainly in Q3, supported by our market share momentum, they continued rollout of Nexis, the introduction of the new C&I battery storage solution and all of these things that Shuki mentioned. So that's as much of color that we can provide for the longer term. Operator: And we'll go next to Vikram Bagri with Citi. Vikram Bagri: I wanted to go back to the challenges faced by customers in the U.S. I was wondering how much stress are you seeing in the U.S. market? We have one bankruptcy announced and one doubtful expense. We have a fair idea about who it might be. Are you seeing the situation get worse due to capital costs and availability issues? Is this stress something that you foresee could accelerate after safe harbor expiration? And I asked because you saw this Freedom Forever issue, seems like coming from a mile away and you manage the balance sheet very well. I was wondering how many more customers are you monitoring for such issues? Is that a meaningful number? Asaf Alperovitz: So maybe I'll start and Shuki can provide some more business market indications. We had a very solid team here at treasury, and we always, of course, look and review and we have set of process procedures to ensure we manage our customers' credit very well. I think beyond this, thank God, we don't see major exposure, not in the U.S. or I would say, globally. Of course, from time to time, things may change and sometimes you have unexpected surprises. But generally, I would say, we don't see significant exposure related to any of our significant or major customers, globally. Yehoshua Nir: Yes. I just would add to that, that as we said earlier, we -- the market dynamics are right now, there is a concern about the slowdown of tax equity investments. We believe that the underlying demand for solar plus storage systems exists. It does add value to many homeowners around the U.S. The TPOs and other providers are going to find a way to deliver that value to these customers. And if -- whether it will be with this type of investors or other types, we are -- we believe that we'll find a way. And once they do, once the market rebounds, SolarEdge is very well positioned to benefit from. We are the natural partner for the TPOs, the battery -- the increased attach rate for batteries and solar is something that plays to our strength. So we are -- when we look beyond the current quarter, we believe that we can see the growth resumes. Vikram Bagri: Got it. And then switching gears, are you on track to onshore residential inverter and optimizer production to the U.S. by 2Q? And I think the target was midyear, if you can update us about the timing since it's a meaningful driver of 45 benefits and hence the gross margins, trying to understand how much of that onshoring is baked into second quarter guidance and how much of that shows up in third quarter? Yehoshua Nir: Yes. So onshoring of manufacturing, and we said it before, we've ramped up our manufacturing. We have a manufacturing facility through our partners. We're working with Jabil and Flex. So with our partners, we have manufacturing facilities in Tampa in Florida, in Austin, Texas and in Salt Lake City. All 3 manufacturing facilities are already ramped. U.S. demand was actually served by domestic manufacturing since last year. And as we said in our previous call, we started exporting U.S.-made products to Europe and to Asia, and we are continuing in that trend going into the second quarter. At this stage, I would say, for inverters and optimizers, more than 90% of our production is made in the U.S. Operator: At this time, we've reached our allotted time for questions. I'll now turn the call back to Shuki Nir for closing remarks. Yehoshua Nir: Yes. Thank you for your interest in SolarEdge and joining our call today. I would also like to thank the SolarEdge team for their continued commitment, and we look forward to updating you in future quarters. Thank you very much. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Operator: Welcome to the IonQ First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Hanley Donofrio, Director of Investor Relations. Please go ahead. Hanley Donofrio: Good afternoon, everyone, and welcome to IonQ's First Quarter 2026 Earnings Call. My name is Hanley Donofrio, and I am the Investor Relations Director here at IonQ. I'm pleased to be joined on today's call by Niccolo de Masi, IonQ's Chairman and Chief Executive Officer; and Inder Singh, IonQ's Chief Operating Officer and Chief Financial Officer. By now, everyone should have access to the company's first quarter 2026 earnings release issued this afternoon, which is available on the SEC's website and on the Investor Relations section of our website at investors.ionq.com. Please note that on today's call, management will refer to non-GAAP financial measures. While the company believes these non-GAAP financial measures provide useful information to investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. You are directed to our earnings release for a reconciliation of adjusted EBITDA and adjusted EPS for the closest comparable GAAP measures. During the call, we will discuss our business outlook and make forward-looking statements, including those regarding our guidance for 2026. These comments are based on our predictions and expectations as of today and are not guarantees of future performance. Actual events or results could differ materially due to a number of risks and uncertainties. Therefore, you should not put undue reliance on those statements. We refer you to our recent SEC filings, including our annual report on Form 10-K for the year ended December 31, 2025, for a more detailed discussion of those risks and uncertainties. We undertake no obligation to revise any statements to reflect changes that occur after this call, except as required by law. Now I will turn it over to Niccolo de Masi, Chairman and CEO of IonQ. Niccolo de Masi: Thank you all for joining us today. 2026 is off to a strong start at IonQ, and our results this quarter serve as a powerful validation of what we built throughout our transformational 2025. Financially, we have delivered the biggest quarter in IonQ history thus far, and our fourth consecutive quarter of record-breaking results. $64.7 million of GAAP revenue in the first quarter of 2026, is more than 8x what we delivered in the same period last year. Our strong momentum is a testament to the demand for our industry-leading quantum computers as well as the commercial impact of our entire quantum platform. As I outlined on our fourth quarter call in February, a key objective for 2026 is to drive superior financial performance by leveraging our scale and Quantum product families, combined with increasing geographic breadth and depth. We are executing well and have today raised our full year revenue expectations to $270 million at the high end. Our results were underpinned by accelerating global quantum computing system sales, increasing high-margin cloud utilization and deepening application layer partnerships with our enterprise customers. I am tremendously excited about IonQ's ecosystem progress, which was on full display at the New York Stock Exchange when we rang the bell with over 50 customers to celebrate World Quantum Day. IonQ is defining the Quantum technology market and establishing the leading hardware and software quantum industrial ecosystem. Our organic performance is a direct reflection of this leadership as we architect and deliver the Quantum platform for the next century of computation. We continue to widen our lead across commercial and technical frontiers. Our parallel gate architecture with electronic qubit control will allow us to solve problems at a scale and cost that we believe will be unmatchable. On April 14, we rolled out clear third-party validated benchmarks, showcasing the incredible time to solution and cost to solution advantages that our Quantum computers already possess. These metrics represent the speed and economics with which our systems deliver accurate solutions to the world's hardest problems. As you can see on Slide 6 of our investor presentation, we presently enjoy up to 10,000x faster time to solution on key quantum algorithms, including 1,000x faster for the Quantum [ Ferrer ] transform. The Quantum [indiscernible] transform, in fact, enables many critical use cases, such as cryptography, molecular drug discovery, advanced material synthesis and unlocking fusion energy, making this timely solution valuable today and into the future. It is not a coincidence that several of the key utility scale applications, described by DARPA's quantum benchmarking initiative could take advantage of quantum farer transforms under the hood. IonQ's time to solution advantage with Quantum ferrer transform and other benchmark algorithms today, underscores our fidelity and connectivity advantages that we expect to endure throughout the coming decades. I am proud to report that we have presold our first chip-based 256-qubit system in the first quarter. We are moving with conviction to demonstrate this technology by year-end with customer systems expected to begin commissioning by the end of the second quarter of 2027. While much of the industry remains in the scientific research phase, IonQ has been able to focus on delivering production-ready systems that are shaping the quantum market globally. We remain the first and only quantum company in history to have demonstrated the critical technology components at the performance levels required for full fault tolerance. The next critical frontier in our industry is the efficient use of quantum error correction to convert high-quality physical qubits into even higher quality logical qubits, unlocking new frontiers of scale and impact. This is the bridge to utility scale, fault tolerant quantum computing. And it should be no surprise that IonQ is leading here as well. Just last month, we published our complete architectural blueprint for our flexible modular framework that describes how our technology scales through to 2030 objectives of a fully fall tolerant system with millions of physical qubits and logical error rates as low as 1 in 1 trillion. Our walking cat paper described IonQ's end-to-end architecture for full fall tolerant quantum computing, spanning compiler design and error correction to hardware, control systems and ion movement. This historic paper outlines in manufacturable detail, how we will move from today's IonQ commercial systems to deploying and commissioning INQ's utility-scale quantum computers to customers. The level of detail and completeness in our blueprint is a global first and historic milestone for the quantum industry as a whole. Along with the academic community, there has been strong and broad recognition that this is the industry's first clear detailed manufacturable path to scaled fall tolerance systems. For those able to follow along in our investor presentation, please see Page 7 for details. IonQ's specificity sets a new standard and distinguishes IonQ with its tangibility resting on capabilities our hardware has already demonstrated including 99.99% 2-qubit fidelity and reliable ion transport. This historic work demonstrates precisely why IonQ is on track to be the first to unlock fully full-tolerant quantum computers as we published clearly in June 2025. Our level of transparency is only possible through our 30 years of innovation. Only IonQ has the operational maturity and engineering predictability of generations of deployed systems as we now accelerate into a new phase of manufacturing and scale. Moving on now to SkyWater and our merchant supplier activities. As most listeners know, in January of 2026, we announced our intent to acquire SkyWater, in order to accelerate the U.S. quantum industry and deepen our commitment as a merchant supplier. We expect the transaction to close in the second or third quarter of 2026, subject to customary regulatory approvals. Over the past quarter, our commercial collaboration with SkyWater has already yielded multiple test iterations for our 256-qubit chip. As we shared in February, we hit the ground running with multiple initial tapeouts. Today, I am pleased to report that we have already received some of the first ion trap samples back from SkyWater and have demonstrated on the sample chips the critical performance we need for the complete 256-qubit chips. To design, fabricate and test these chips with SkyWater within a single quarter has been a delight. Our commercial partnership with SkyWater is a demonstration of the kind of acceleration, we hope our investment will bring for all customers of our quantum merchant supply function. And we expect these benefits to grow even further once the combination is complete. We already act as a merchant supplier with our industry-leading atomic clocks, sensors and networking products being sold to other quantum companies. When the SkyWater transaction closes, IonQ will be the largest quantum merchant supplier in the world, but [ Thomas Sanderman ] continuing to lead SkyWater. We view this transaction as not only accelerating IonQ's commercialization of fall tolerant quantum computers, but also using our balance sheet to secure the scalability of the entire U.S. and allied quantum market. As it is a frequent question from our community, I will now walk through our application and quantum algorithm momentum in a bit more granularity than in prior quarterly calls. This work can be seen in our investor presentation on Page 8. Applications and quantum algorithms are another cornerstone competitive advantage for IonQ. We know that for customers, value is measured not just on a machines architecture, but by how that architecture ultimately delivers customer value and results. We are confident IonQ already delivers a potent combination of orders of magnitude faster time to solution. The most accessible cost solution, reliability and quality that customers cannot find anywhere else. We have more than doubled our quantum algorithm and applications team size in the past few quarters, in response to strong demand. We continue to grow internationally, adding both application engineers and field engineers to support customer appetite for implementing IonQ's Quantum solutions in their organizations. We are deliberately focused on early advantage verticals, pharmaceuticals, financial services, energy and logistics. Real-world examples from just the past few quarters include the following partnerships. In the financial sector, we ran the world's first large-scale portfolio optimization, quantum algorithm using real S&P 500 data. This showcased along with [indiscernible] Quantum, our systematic improvement in portfolio quality and execution time in a production environment. Our trapped ion hardware has a long-term structural advantage for dense portfolio optimization such as these, because of its all-to-all connectivity industry-leading single qubit and 2-qubit gate fidelities. With Synopsis, we demonstrated accelerated computer-aided engineering workloads through quantum enhanced graft partitioning. We achieved double-digit percentage advantage in end-to-end time for large-scale structural models such as the Rolls-Royce jet engine and automotive models also. Trucially, this demonstration was integrated into their existing cloud workflow with 0 new infrastructure required. Ion Ride is using IonQ to optimize shipment allocations and fleet orchestration for electric and autonomous freight, delivering measurable gains in real-world logistics efficiency. We have already demonstrated real-world commercial validation using anonymized logistics data and historical cancellation logs. By achieving an increase in shipments delivered, this work will underpin very significant revenue gains for our partner at fleet scale. With Quantum Basel, we are advancing hybrid quantum classical techniques to optimize large language models and reduce energy consumption. Our results show that IonQ quantum computer energy consumption scales approximately linearly with qubit numbers for shallow circuits. By comparison, classical simulation exhibits exponential scaling. We are on track to demonstrate significant energy savings with improved inference performance as we scale these capabilities. These 4 production-oriented applications are just some of the examples our customers are deploying to actively drive business advantage and growth. We are proud to announce in parallel that our work to positively and powerfully impact humanity itself has this quarter seen a step change. We are now working with participants from the welcome [ LEAP ] initiative out of the U.K., which is a program designed to accelerate human health to apply our quantum optimization to improve cancer research. Our work introduces new computational approaches for reconstructing difficult regions of DNA that are often missed or misread by existing methods. This could become a useful foundation for future studies of genetic changes that matter in human disease, including cancer. Last quarter, we also announced a commercial partnership with CCRM and which is 1 of the world's leading accelerators for advanced therapies. We are very excited about the work we are doing with them, which includes cell and gene therapies for cancer and immune system rebuilding. This work is truly world-changing offering a powerful new future for human health. We have also begun work on combining our quantum optimization technology with computational methods for gene therapies. That includes optimization of mRNA sequences that get delivered into cells. Long term, we anticipate personalized medicine acceleration. For those following along in our investor presentation, this can be seen on Page 8. Let us now turn to the rest of our unique and expanding Quantum platform. Building on the momentum of our recent deployments of Quantum Communication Networks in Switzerland, Romania and Slovakia, IonQ has now successfully deployed Poland's first national quantum communications network. This is 1 of the largest terrestrial quantum key distribution networks in Europe, and it cements our position as the partner of choice for sovereign quantum security. We are similarly expanding our Quantum platform leadership domestically by announcing a new statewide Quantum networking initiative in the great state of Florida and the first commercial sale of a quantum memory node into the Mid-Atlantic regional Quantum Internet hosted at the University of Maryland. These partnerships underscore that IonQ is proudly playing a central role in the development of our secure national quantum infrastructure. On the technical front, we continue to innovate and lead the market as the only public company with a scaled quantum networking division. Last year, in partnership with the Air Force Research Lab, we achieved the first qubit to telecom frequency conversion in a field deployable system, enabling real-world quantum networks on existing telecom infrastructure. Last month, on World Quantum Day, we announced that in conjunction with AFRL, we connected qubits from 2 separate systems. This is the first demonstration of connected commercial quantum computers, demonstrating the operationalization opportunity of Quantum interconnects and paving the way for distributed quantum computing that will underpin the future of secure global communications. Our contract with DARPA's [ HARC ] program is another testament to our leadership in Quantum memory, modular quantum computing and scalable networking architectures using quantum interconnects. IonQ is playing a critical role in enabling a new class of networked quantum computers that can combine multiple qubit types into an interconnected high-performance architecture. To our knowledge, we are the only industry player to win a hardware award as part of [ HARC ]. This contract is another powerful example of how IonQ is already serving as the leading merchant supplier to the entire quantum industry with key IP, including the world's most accurate commercial clocks that matter to any modality's long-term scaling and manufacturability. Turning now to Slide 9 in the investor presentation. Momentum remains strong at IonQ Federal. We continue to advance through DARPA's quantum benchmarking initiatives and are building out our capabilities to support next-generation GPS, alternative PMT and other mission-critical initiatives for our nation. We were awarded a $39 million contract to advance next-generation space communications on the Space Development Agency's halo program. This paves the way for mission-ready quantum space systems for national security. Just this week, we expanded our space mission and sensing capabilities with a new product launch delivering persistent change monitoring intelligence from space. We were also awarded a spot on the Missile Defense Agency's Shield contract, which is focused on the rapid delivery of innovative capabilities to the war fighter with increased speed and agility. Our technology platform represents a dual-use advantage for our nation and its allies underpinning both economic growth and national security. We are proud to be the partner of choice for U.S. and allied governments in this geopolitical quantum space race. In order to do this work with U.S. government agencies, high-technology readiness levels are an imperative. Our quantum sensors and clocks have reached TRLs for deployment on land, sea, air and space. At this very moment, we have quantum sensors currently deployed on a Navy ship and in space on the X-37B spaceplane. Our Quantum Security products similarly have already reached deployment-ready TRLs across critical infrastructure, telecommunications and national networks, providing mature deployable quantum security solutions today is vital to ensuring continuity for communications as quantum computers become ubiquitous. Before I close, I would like to touch on [indiscernible] and talk through Page 10 in our quarterly investor deck. Lately, Q-Day, the threshold where Quantum Systems render current RSA encryption obsolete has dominated industry conversation. We have been transparent in our assessment of Q-Day's time line since publishing our technology road map in June 2025. Based on our public road map, we expect to achieve the logical qubit count required to challenge RSA 2048 encryption in the 2028 to 2029 window. China's stated goal is 2029 and their government quantum efforts. It's worth noting that our peers have now recognized this accelerated time line with Google very recently bringing forward its expectation for Q-Day from the mid-2030s to 2029. As we continue to accelerate the time line toward Q-Day, we view it as a strategic responsibility to also provide the solution. We are not just identifying the future risk we are delivering mature field deployable hardware and software cybersecurity solutions that allow global governments and enterprises to both enhance cybersecurity today and ensure our nation's protection in the age of Quantum ubiquity. IonQ is uniquely positioned to deliver post-quantum security solutions precisely because we're the ones defining the offensive frontier. Our deep understanding of how advanced Quantum Systems challenge RSA and ECC encryption allows us to build superior defenses. This creates a powerful strategic flywheel, our hardware leadership informs our security and innovation and our security expertise derisks the quantum transition for our customers. As I said in our full year call in February, 2025 was a strategic and financial inflection point for IonQ. Today, I am confident that 2026 is in turn the year we move from platform building blocks to platform execution at scale. We will continue to deliver superior financial performance, unlock exponential value through applications and system-level breakthroughs and operate with both discipline and speed. IonQ's mission is to pioneer and globally commercialize the world's Quantum solutions, positively impacting every aspect of applied science while ensuring U.S. and ally leadership in this generational and geopolitically vital technology race. I want to thank my colleagues for their extraordinary efforts and the broader quantum industry for their partnership. With our strong capitalization, unmatched talent density and clear road map, IonQ is 1 platform, 1 team primed and poised to win. I'm now delighted to hand the call over to Inder Singh, our COO and CFO. Inder Singh: Thank you, Niccolo. We are very proud to report our strongest quarter in the company's history, delivering $64.7 million in GAAP revenue, which is 755% year-on-year growth. This is now our third straight quarter of record-setting revenue growth. These results exceeded our revenue guidance by over 30% and our own expectations. Importantly, our results are underpinned by strong organic growth, which we expect will continue through the remainder of the year. In fact, as we indicated last quarter, we are expecting organic revenue growth to be 100% for the full year even exceeding 80% that we reported for 2025. I'll now cover our financials in more detail, which you can also see in our investor presentation on Pages 12 through 18. Consistent with the additional color we started to provide you last quarter regarding the different areas of our revenue and the composition of our revenue I'm going to touch on 4 key aspects: One, is commercial. Two will be geography. Third, we're introducing a metric around multiproduct sales, and of course, I'll again talk about remaining performance obligation, also known as RPOs. Number one, let me address our commercial revenue. I'm pleased to report that approximately 60% of our revenue came from commercial customers this quarter, similar to what we reported for all of full year 2025. This demonstrates that we are firmly entering the commercialization of our quantum technologies. Commercial revenues consist of Quantum platform contracts with non-U.S. government customers. We are happy to see this metric remain high as our revenues grow. We are happy that our commercial sales have now become a major part of the business and importantly, a takeaway for us is that our Quantum solutions have moved well away from the lab and squarely into real-world applications and deployment, as Niccolo described. Number two, our global revenue mix. I'm also pleased to report that we are seeing demand for our products come from around the world and from more countries than ever before. In Q1, approximately 35% of our revenue came from international markets. We've now sold solutions in over 30 countries compared to a year ago when we had customers in just a few. As I said last quarter, we're working on pursuit and capture in a very methodical way, and it is now starting to pay off as we begin to see revenues come from many more parts of the world. Number three, we are providing you with an additional metric, a new view into our revenues, which you look at and I would best describe it as multiproduct sales. Multiproduct sales means what percent of our revenue came from customers who have now bought more than 1 product from us, for example, computing, networking, sensing, security, et cetera. I'm pleased to report that in Q1, over 1/3 of our revenue came from multiproduct sales. The reason this is important is consistent with the strategy that Niccolo laid out last year, we have become the go-to place for all things Quanta. Under the leadership of [ Scott Mallard ] who head global sales for us, we have created a methodical approach to our go-to-market strategy. This includes cross-selling across our business, very disciplined pipeline development and conversion, our land and can strategy and yes, an amazing group of sales leaders that we are deploying around the world. While we may or may not always share all metrics every single quarter, we want to provide you color that will help you look at our business. You should know that we are investing in growing our revenues across our entire suite of products. It was Niccolo vision a year ago to develop this Quantum platform company, and we are seeing that play through our financials now. This multiproduct metric represents how that platform strategy has turned into financial outcomes. Number four, let me spend a moment on our remaining performance obligations or RPOs, which is a widely accepted measure that companies use to gauge their visibility over several quarters. As of March 31, 2026, our reported performance -- the remaining performance obligations or RPOs stood at $470 million compared to approximately $72 million a year ago. That represents a growth of 554% year-over-year. From our lens, RPOs help us get context around the continuing growth of our company as well as provide visibility potentially beyond the next few quarters. As all of you know, RPOs turn into revenue as performance obligations are met and RPOs get replenished with TCV from new sales. In Q1, to give you some context, for every $1 of revenue we recognized, we added roughly $2.5 in RPOs. And again, some use this as a proxy for backlog. To summarize my revenue comments, this first quarter of 2026 was another record-setting quarter with a revenue profile of 60% commercial, 35% international, 35% multiproduct and RPOs grew 554% year-on-year. And yes, we expect 100% year-on-year organic growth. Let me turn to our investments and profitability metrics now. First, let me talk to you about R&D. As of last quarter, our biggest investment area continues to be R&D and GAAP R&D in Q1 grew 215% year-over-year to $125.7 million. For some context, last year, our R&D exceeded the entire reported R&D in the quantum industry. Our strategy is to accelerate our innovation deliver the most powerful quantum computing solutions to the market, connect all things quantum them and secure our customers in a post quantum world, as Niccolo described. As a prime example of our innovation leadership and the compute power we intend to deliver and are delivering. Today, we're deploying our fifth-generation compute system called Tempo. We are now well on our way to the 256-qubit sixth generation system, and we are starting to turn our focus also on the seventh generation 10,000 qubit solution. We will maintain this relentless focus on innovation and our financial firepower allows us to do so. Turning now to adjusted EBITDA. We recorded a loss of $96.8 million for the first quarter. In this quarter, adjusted EBITDA included approximately $12 million of expenses related to our commercial agreement with SkyWater for the fabrication of our industry-leading ion trap. This commercial agreement remains in place until the approval and close of SkyWater. Excluding the SkyWater, commercial agreement end of $12 million, adjusted EBITDA would have been $85 million. Turning now to net income. In Q1, we reported a positive $805.4 million in GAAP net income, which was mainly due to an approximately $1.1 billion mark-to-market warrant valuation. As in prior quarters, let me remind you again that this warrant mark-to-market is a noncash item and depends on the stock price at any given time. Therefore this net income, including the volatility does not represent the operating performance of our business. Let me now turn to our financial [indiscernible] as a company. Cash cash equivalents and investments as of March 31, 2026, were $3.1 billion. This provides us with the visibility in financial firepower to accelerate our R&D road map, invest in new product development, scale our go-to-market engine and also to acquire critical capabilities. In addition to supporting our investment capabilities, our financial firepower provides comfort to our customers as well that we will be there for them, not just today, but in the coming years. This helps us create stickier relationships with top-tier customers who want to align with our multiyear road map. With my COO hat on, let me highlight a few areas we are driving towards excellence in our execution. As Niccolo shared last quarter, that is 1 of our prime objectives for 2026. Last quarter, I noted that near-term demand for some of our products in compute was outpacing our ability to perhaps meet that demand. And so this quarter, I'm happy to report we've addressed that and already strategically accelerated our ability to address the demand by growing our deployment teams, forward deployed engineers, manufacturing capacity and field operations. For 1 small example, we have more than doubled our manufacturing over the Tempo to meet the demand that we are seeing. Looking into the future for our 256-qubit system. Last quarter, I shared that we had completed tapeouts A, B and C and have started working on tapeout D. This quarter, I'm pleased to update you that tapeout D has been completed. The designs have been handed over to the foundry and their chips are now progressing well through the fabrication process. As part of this process, we received the first fully fabricated ion intra prototypes. I'm happy to share that they're already beyond the critical quality metrics needed for 256-qubit devices. Not only that, but also these metrics are approaching what we will eventually need to our 10,000 qubit device and beyond. This is an important milestone, it means we're proving out the path for the 256-qubit chips that are in fab at this time as well as the generations beyond. Building on our progress at the chip level, I'm pleased to share that we are also now wrapping the first engineering prototype for the full 256-qubit computer. This means that we're now moving from component-level testing to system-level testing. These are very important strides towards delivering the full 256-qubit system to the market in the future. And we're not stopping there. As I mentioned, our team is already starting stride towards our seventh generation 10,000 qubit chips. The key to scaling into our 10K high cubic count system is the integration of active CMOS design where SpyWater really helps. By moving control functions directly on to the silicon with CMOS, we are taking advantage of the scaling techniques of the existing global semiconductor industry in a nutshell, we're executing on our strategy. Let me now turn to financial guidance. As you have heard today, we have built a strong foundation for what we expect will be another historic year for IonQ in 2026. With that in mind, we are pleased to raise our revenue guidance for the full year 2026 to be between $260 million and $270 million. For context, even the lower end of that guidance doubles the company's year-over-year revenues. For the second quarter, we are projecting revenues of between $65 million and $68 million. We are also reaffirming our projections for full year 2026 adjusted EBITDA, to be in the range of negative $310 million to negative $330 million. We look forward to the remainder of 2026 with confidence and believe that IonQ is well positioned with the talent density, the processes, the technology and the innovation investment to remain the trail basing and quantum leader that we're establishing and have established already. With that, operator, please open the call for Q&A. Operator: [Operator Instructions] Our first question comes from John McPeake of Rosenblatt Securities. John McPeake: Thanks. Nice work. So I think you've got 3 customers now for the 256. You just called out Cambridge. I think last call, you talked about Quantum Basel and also there's Horizon Quantum out there. Could you talk a little bit about the likely delivery schedule and how the -- how we should think about the revenues coming in from these? And then I just have a quick follow-up. Niccolo de Masi: Yes. Thanks, John. Thank you for the comments as well. Look, we are laser-focused on our fifth-generation machine because customers are laser focused on it. The demand that we're seeing is actually for many more customers that I can share today. You mentioned if you a few important, but as I look at the demand for our fifth generation machine, and in fact, customers will look at it and say, well, we might also want to look at your next and your [indiscernible]. That remains very, very strong. So we will continue to announce new wins. I mean, first quarter is obviously just the beginning. As I look at through the rest of the year, the demand is strong. The need for us to have the manufacturing and deployment capabilities was necessary, as I mentioned last quarter. And we've made those investments by bringing on board and deploying, frankly, folks that will be building these. You'll see many more announcements coming in the future. I mentioned, Scott and team are busy responding to some of the demand signals that we're seeing for Tempo. And importantly, early demand signals also for our 256. Remember, when customers buy something as unique as a computing platform they're buying the platform, meaning a multiyear view, not having to shift direction 12 months from now. So we're ensuring that we are in the right places with the right customers. who not only have the desire and interest in our solutions, yes, but also the long-term conviction to remain with us over multiple years. Quantum Basel is an excellent example of that. And there are many more we'll be announcing. Our focus is to make sure that 2026, we deliver on the guidance we've provided you and hopefully see and Tempo will be a big driver of that as well as the rest of our platform. But also 256 is just around the corner, looking into 2027 and beyond. So hope both of that addresses your question? John McPeake: It does. I just have a quick follow-up. The road map has 12 logical very respectable 10 to negative 7 2-qubit gate error rate. Will that be calibratable? In other words, could you have more logicals with slightly higher error rates? Is that in the cards because that's a very low error rate, but it's lower logical as a result. Niccolo de Masi: Yes. So I said in my script, this is Niccolo, that we're expecting 10 to the minus 12 error rates as our architecture matures. And so you're going to see even lower error rates in the coming generations of systems. The other thing that we are making progress on is reducing the ratio still further between the physical and logical qubit ratio. So I think there's probably some modest upside in the public road map that we published last June in terms of physical and large low qubit counts, accelerating a bit further, at least on the logical front. But as we've said consistently for the last year 2, if not 5, frankly, the advantage of our architecture is we have the highest fidelity qubits naturally. And that makes everything easier, right? It makes the ratio of physically lower as it starts out lower even before we start trying to optimize it. And it means their rates are lower, right? And you can see, particularly the advantages in having lower error rates on things like Page 6 in the investor deck, right, where we're talking about time to solution and the high fidelity 2-qubit parallel gate architecture we've developed. Time to solution is obviously a product of how many times you got to take what's called a shot and a certain algorithm and of course, how accurate the shops are. Our shots are all very accurate, so we don't have to take very many of them, right? And that's an advantage that we expect is going to endure throughout our entire architecture. And we're already obviously demonstrating in Grand style now. And obviously, with the walking cat architecture now all publicly available, you can see how we're going to hold that all the way through 2030. Operator: Our next question comes from Craig Ellis of B. Riley Securities. Craig Ellis: Congratulations on the momentum to start with your guys. I wanted to go back to the point that you made, Nicolo on the April 14 Photonic Interconnect announcement. And it's great to see something that I think some people are calling an Ethernet moment. But the question is, as you look at what that means and how customers are engaging what are the revenue implications of that either later this year or out on the road map as we look at that advancement in technology. Niccolo de Masi: Well, we're not going to give you a precise guidance on the revenue impact in out quarters. But I will say that the beauty of our lead in quantum networking and photonic interconnects, is threefold, right? So one, we think we can push our systems a long way vis-a-vis getting 2 million physical qubits on a single chip. At some point though, we may want even bigger systems. And so data center opportunities arise at some point in our architecture, whether it's 2 million per chip or it's 4 million per chip or even 10 million per ship. At some point, we may want 100 million qubits, right? I mean I'm very bullish on humanity's ability to take advantage of more compute power, and particularly more quantum computing power. And I think at some point in the future generations of quantum computers themselves will help us figure out how to optimize and take advantage of even bigger quantum computers. The second thing that does is it builds us an expanded merchant supplier capability. right? So I talked in my prepared remarks about the fact that our Quantum memory solutions and IP actually will allow multiple modalities to potentially connect together in a pretty seamless fashion and work together. And I think that's exciting vis-a-vis again, where the world will be in the coming years and decades. And then, of course, thirdly, we've talked a couple of times about the fact that we have multiple customers in the networked quantum computer category. Air Force Research Lab is obviously the first of those, and that continues to be a large contract that we prove out every quarter every year. My colleague, Inder mentioned a few other customers, both last quarter and this quarter is taking Quantum network computers. So in summary, there's really 3 great lever points for us, and we continue to invest and of course, protecting our Quantum networking and photonic interconnects because it's something that we've been working on, including from our founder, Chris Monroe early on. And believe it or not, Chris Monroe continues to work on that. So we're very excited that our lead there we believe, to be as prodigious as the computing one. The world is going to need, obviously, protected communications between quantum computers. And this is precisely why we expanded the vision of the company 15 months ago, 18 months ago from computing into networking. Inder Singh: Yes. And I'll just add, what Niccolo, I agree with everything you just said. So in Q1, we saw growth in every product line, Craig, year-on-year. And if you look at our guidance for the year without commenting on individual quarters, just look at the math, the company is doubling. Organic will be doubling. Therefore, it needs the rest of the company other product lines that we have also have a doubling effect on the company in total to get to the guidance that we've provided you. The interconnects, the ability to narrow our computers together, the ability to deliver hybrid compute. Those are the things that we are uniquely positioned. We can compute -- we can connect an ion tract type of quantum machine with someone else's. So we are, in that way, being very agnostic. We want the whole industry to grow. We want to become the networking and the compute leader in many ways in terms of our own innovation and we want the rest of the industry to succeed as well because that's how you make it the successful, durable industry. We have moved ourselves out of the lab into the commercial market. We want everyone else to do that as well, and that's how we grow. We are happy to see the results that we're delivering. We keep investing and Niccolo is all constantly getting calls in for, would you like some more investment and things like that. So I think there are ideas always that are in front of us. We are very happy with the portfolio we have. It was put together about a year ago by Niccolo strategy, become the first quantum platform company, and you will establish basically a critical mass that allows the industry to scale but also all set innovate and scale. So strong first quarter across every product line, a strong year. I think you can sort of do the math around the growth of the other products, not discontinued. Craig Ellis: That's really helpful, guys. And Inder, I'll ask a follow-up question that relates to the COO hat that you also were and it's directed that how go-to-market changes as you bring [ Scott Millard ] in from Dell. And you talked about wanting to be a service provider and span a range of solutions. You would seem to have just an ideal background for that. But how does go-to-market change as we think of the next few years in the company pursuing the road map that you laid out at Analyst Day? Inder Singh: Yes. Look, becoming a successful technology company is a team sport. You have to have the legal professional to do the commercial negotiations. So [indiscernible] you're seeing deployed around the world, working in partnership with Scott, my teams in the finance area, helping to Scott succeed at force. Scott himself developing a methodical pursuit and capture. These are not things companies do until they have critical mass. We think we're there, right? So that's where we're now investing not just R&D, but go to market. And some of the leaders that have joined the company would amaze you in terms of their knowledge of the market, the mindset of the customer. There's not a vertical that I think Quantum not touch eventually, it will touch everything. Some will be early adopters, some will lag. Areas like financial services, which needs protection now to the Q-Day comments that Niccolo made, life sciences companies that need faster innovation because they're competitive and they're trying to solve some of the most intractable problems that humanity faces and others. So we're happy to be the 1 that actually brings all that together, whether it's connecting our machine to someone else's or our's with interconnects, as you mentioned. But I'm happy to see kind of the flywheel effect starting to take over, Craig. Happy to follow up with you offline as well. Operator: Our next question comes from Troy Jensen of Cantor Fitzgerald. Troy Jensen: Congrats on the results and all the technical milestones. Maybe to start here with Niccolo. I agree 100% around the cusp of all your guys' quantum advantage, really helping to solve some commercial applications that we haven't done previously. But I was just curious, how do you think about like pricing the value that you guys are creating, because if you are enabling like new drug discovery and new material science, I mean, there are huge market opportunities. So can you just talk about how you kind of price and think through the value you're delivering here? Niccolo de Masi: Yes. So look, we obviously are innovating business models at the same time as we are building the Quantum ecosystem here. Inder as eloquently talked in the last few quarters about the platform strategy translating into real momentum. And so obviously, we are pricing things differently when there's a network Quantum computer and we're providing more value there than obviously just a single system that's not quantum networks. And there's going to be a fair amount of price exploration, frankly, on a global basis as our Quantum platform continues to mature. What I am excited about this quarter, in particular in this year really is that the market continues to come towards us. And Inder mentioned the fact that, at times, there is greater short-term demand and able to supply it. So we're very focused on improving manufacturing capacity at IonQ in total across the entire platform. We are working on both individual customer sales that can at times be multiproduct, but we're also working on some very large initiatives at the national scale. And I think it's safe to say that -- there is a fair amount of bespoke consultative selling that's going on. If you think about the breadth and depth of our product families as well as the geographies that we now have traction in. Now obviously, because of our cost advantages and because of the fact that we have always tried to forward invest in manufacturing capacities, I mean we did that obviously on both coasts in the U.S. years ago, for example, we have, we believe, the greatest power per unit dollar that's on offer in the marketplace. And that's, of course, our goal. I have talked in prior quarters about the fact that we do 3 things at IonQ across the company, right? We meet and beat financial expectations. We meet and beat expectations, and we continually refine our internal operating system. So as we see how market demand evolves, we will get more efficient about what we're bundling and how we're deploying configuring and delivering that. But right now, we're very much at the start of that S-curve, if you will. And I think there's orders of magnitude of growth to be had here and orders of magnitude of maturation to be had in our sales ops, manufacturing, deployment organization. We're proud of the fact that we believe we lead the industry right now in maturity, but we recognize that as revenue continues to grow, this organization will have to keep getting standardized and keep growing up. So we'll keep you posted as we standardize, but we're not quite at the point whereby we're listing rack prices on our website. Inder Singh: I think less about pricing to me, it's more about meeting the customer where they are. So a customer can choose to buy a system. They can choose to access it via the cloud, they can choose to ask us to provide them an edge device that connects them to something. So we meet them where they are. It's less about competing with price. It's more about ensuring that we give them what they want and frankly, can afford, and so cloud access is obviously cheaper than buying a computer device. So not everyone will buy a computer, not everyone will be happy with a [indiscernible]. Troy Jensen: Easy follow-up for you, Inder, did you report a number of 10% customers in size at all? Inder Singh: We did not in this quarter, Troy. Operator: Our next question comes from Quinn Bolton of Needham. Shadi Mitwalli: This is Shadi Mitwalli for Quinn. Congrats on the progress. I guess as IonQ transforms into a quantum platform company. Can you just talk about some of the solutions you've been bundling for customers, and then has the bundling been more IonQ driven or customer-driven? Inder Singh: Yes. Great question. The customer journey in Quantum is not very dissimilar than the customer journey in traditional networking and compute. I mean sometimes customers start in 1 area and expand it to another or vice versa. So we have claimed examples where we can say a customer started with buying a network from us and then saying, okay, please add a computer now and then maybe saying add security. On the other hand, somebody may start with the compute device sitting next to a GPU cluster or an AI factory. And what they want is to have hybrid workloads. The types of sort of like large-scale matrix multiplication that is required for LLM runs on the GPU. But where you need simultaneous analysis of all possible outcomes in a fraction of the time you need to give. So we're seeing both. And I think over time, you'll see the industry evolving into something that resembles frankly, networking. And I do think that we want to be in every part of that. And I think 1 of the really important parts to consider here is there's a Quantum Advantage Q-Day coming up and whether have as rapidly, whether we do it as a nation or someone else does it, there's a protection angle that has to be pursued as well. So we're finding some customers say, well, protect me first. Lock down my crown jewels, help me understand how I can protect what I value most and then go from there. So all those conversations are happening. They're starting from different places, maybe ending in other places. That multiproduct thing that we introduced and Niccolo and I introduced this quarter is around how many customers or what percentage of our revenue at least is now employing more than 1 product. And I think that's the network effect. Operator: Our next question comes from Richard Shannon of Craig-Hallum. Tyler Perry Anderson: This is Tyler on for Richard Shannon. I just wanted to first understand -- when does the architecture that you had recently published intersect into your road map? Like when do you have a -- what size QPU would that architecture be implemented? Niccolo de Masi: You're talking about the semiconductor road map, right? Tyler Perry Anderson: So yes, the most recent paper. Niccolo de Masi: Walking cat architecture, I think, is your question, right, for full fault tolerance? Tyler Perry Anderson: Yes. Niccolo de Masi: Yes. So I mean, look, we're going from 256 to 10,000 qubits out to 1 million, right? So this full-fault tolerant architecture kicks in every generation but obviously, 10,000 qubits is when you start to see all of the full benefits of the fault tolerant architecture. So next year and beyond. Inder Singh: And then basically use that as a jumping off point to go from 10,000 to 20,000 to 200,000, 2 million. And that just leverages a semiconductor ecosystem that is well tested, developed and we can just take advantage of. Niccolo de Masi: So we're working on like 3 generations of systems at the same time, right? So we're trying to obviously continue to accelerate here, as I said, every quarter. If we can find ways to go faster, we will. Tyler Perry Anderson: And then could you level set on how many satellites you have up in the space right now? And if you could what you think you would have exiting the year and whether or not you have a quantum memory in a satellite. And I presume that would be connecting Florida and Maryland, but any information on that would be helpful. Niccolo de Masi: Look, I think some aspects of our business are highly classified. We have a constellation of satellite is what I can say. I think that we look at the ability to connect things on the ground from ground-to-space, space-to-space space-to-ground under the water even. So we want to make sure that we can meet the customers' needs and not everyone needs everything. To your point, we're very uniquely positioned that we have the most accurate atomic blocks, the most accurate sensing. And yes, we have satellites, too. So I look at it as that platform story, not everybody needs everything. But some of the things that we invest in are ground-based and to your point, some are not. Inder Singh: All I'd add to that is, I think it's safe to say, I said in my script that we're focused on next-generation PNT, positioning, navigation and time. This is obviously dual-use. It's important for our Department of or it's also important for things like the future of autonomous driving and more precision and more reliability and robustness in GPSs, obviously vital. We're a very unique company in the sense that we have obviously, a leadership position in QKD. We have a leadership position in optical interconnection space and also leadership position in quantum sensing and space and atomic clock. So there's a good amount of I think both U.S. and allied enthusiasm for different configurations of what we're opting we'll update the market, obviously, as we can and as we make progress. Operator: Our next question comes from Antoine Legault of Wedbush Securities. Antoine Legault: Congratulations on the results as well. With regards the time line compression for Q-Day. I think, Inder, you mentioned it briefly, but are you seeing a shortening of the sales cycles within enterprise customers? Or put differently, is there more impetus for enterprises to migrate to PQC standards? And has that driven any acceleration in revenue growth recently? Inder Singh: Look, I can't comment on industrial customers before. We are seeing customers wake up to the fact not just because we're saying it, but Google saying it others are saying it, right? I mean there's an acceptance now that things are about to change in a very radical way in a very short time line. And if you look at our road map, our road map probably gets us there before many other companies. So when we look at the need for creating solutions that solve chemistry problems or, to your point, encryption as well. We also have to ensure that we are ready to secure our customers. And we're starting to see the conversations start around let's talk about security. So as I said earlier to a prior question, that has become more prevalent now than it was a year ago for sure. I'm not going to tell you that everyone is thinking, "Oh, I need to do something for tomorrow. I think people are realizing it's not 20 years away. So that's what they were hearing from some others in tech. We were saying quite the opposite, right? We were saying we're going to build the most powerful computing devices on the planet, and we are. So I think that the national conversation when you have the compute power that creates enormous amounts of exponential amount of compute, energy and power and then solutions that help guard us today so you can deploy the compute solutions you want and secure what matters to you. We're very unique in that mission. Antoine Legault: And just a quick follow-up. On the recent Florida [indiscernible] announcement, can you give us a sense of the scope of that engagement, what it means for the company? Or just more broadly, do you see that as a replicable model in other states or jurisdictions. Niccolo de Masi: Yes. So it's a phased contract. And obviously, it will connect a limited geography to start with, but there's ambitions from Florida's Secretary of Commerce to expand that to be a statewide initiative Universities are leaning in, obviously, in Florida. The state is also leaning in. And I think they recognize that as Q-Days coming earlier, the need to secure critical infrastructure for the state continues to climb. And it's now inside the planning horizon for both enterprise and government partners when we're talking about something that is 2 or 3 years away, not a decade away, right? And so all of a sudden, and there's broad agreements, we were the early mover and leader on this last summer, but there's now a very broad agreement, right, between geopolitical competitors through to large enterprise, non-Quantum enterprise and, of course, ourselves and Quantum enterprise that this is very much something that if you're a CIO, CTO, a CISO, you now need to plan in because the chances of your job, life expectancy running right through this have just skyrocketed, right, in the last year. So it has been a nice piece of momentum uptick for sure, Inder mentioned landing and expanding. And I think this is, for sure, part of that precise strategy. I think we're just getting started here, obviously. And so we will be growing in sophistication. As you can see in our presentation. We talk about security as a key tenet of what it is that we provide, and we've been investing in this as well. So I'm looking at Page 10 in particular, when I talk about the full stack of cyber for the Quantum era, right? And that stack is going to get deeper and broader itself also, and we intend to be the leading player here, obviously, as we are today. Operator: Our next question comes from [ Nehal Koski ] from Northland Capital Markets. Unknown Analyst: The $12 million impact from SkyWater, is that 100% realized in COGS? Would that have been 100% realized in COGS? Inder Singh: The expenses I talked about? Unknown Analyst: Yes. Inder Singh: Yes, it's more R&D tooling and things like that. Unknown Analyst: Okay. So then can you talk to the driver of gross margin being down about 600 basis points Q-on-Q. Inder Singh: Yes. I mean I've said this on prior calls, and I want to make sure that I make this very, very clear. This is a nascent industry. This industry in which scale will build over time. We are very focused on gross margin, obviously. We start with a huge advantage. Niccolo mentioned this earlier. We have a bill of material that is a fraction of the cost of any other modality. So you start with that and then you add capabilities on top of it. The better way to think about a business like this or frankly, any other high-tech business on the cutting edge, whether it's AI companies or sell to others, is EBITDA, and that's why we guide EBITDA because R&D is a big component as much as you're focused on COGS, yes, I am, too. But R&D is an important ingredient in our recipe right now, to maintain and accelerate into our road map. So that's what we look at. Yes, as our revenues are doubling this year and maybe more than doubling this year for the guidance, and continue to grow, we have the ability to then drive a cost margin across the goods sold focus as well. At the moment, it's a mix of things. It depends on what you sell more of in any given quarter. So I would not assess on the gross margin. I'd urge you to think more about a more fulsome view, which is EBITDA margin. Unknown Analyst: Okay. Great. Two more questions, please. Niccolo, the walking cat architecture, can you discuss what you see as the advantages relative to some other new relatively qubit architectures, specifically qubit architecture, specifically? Niccolo de Masi: Yes. I mean, look, the main advantage is ours is shop ready, and we're ready to go, and we've gotten there first as we have with everything else in more detail and more constructability, right? It is simple. It is all to all communication. It is parallel gate, okay? And we're going to have a lot more physical qubits, which means more logical qubits given our error correction ratio is very low on a single chip, right? So we'll be able to tackle problems in the fault tolerant era that simply will not be tackleable by other architectures because they won't have enough logical qubits. 100 large qubits will not do, what, 1,000 or 10,000 large qubits can do on a single chip where it can communicate quickly to each other and seamlessly to each other. The parallel gate aspect, I'll highlight because that's really quite unique. And I would also say that if you go through our BOM, or bill of materials, we announced last September, our Analyst Day at the NYC that our bill of materials in 2025 was under $30 million. That's truly astonishing. It's manufacturable. It is low. It is modest energy consumption. It is modest BOM. And because of the way architecture is built, it's really quite robust, right? We don't have a bunch of dilution refrigerator requirements that drives energy cost, space, and BOM up a long way quickly. What we have is something that can fit near the front line, can fit in your basement type thing, can fit in a normal data center, right, section of an office or a building. And because we also control a lot of the IP, I would argue all the best IP for networking and memory, we have extensibility to full data center offerings already being worked on already being built in. My friend Inder here mentioned hybrid workflows, hybrid data centers are coming. There's a recognition of that need. And IonQ, because we're networking forward and always have been, has thought about obviously how that component will fit into our architecture as and when we would like to roll out. You see customers beginning to obviously work on that, whether it's AFRL and others as early as last year, that's going to accelerate, obviously, an enthusiasm is my prediction. So built for scalability is really my summary here, right? It's modular, it's simpler, it's regular and it uses, of course, manufacturing techniques that are well proven, so we can move quickly and we can move at global scale. Unknown Analyst: One of the things that jumps out to me from the explanation that you just gave was the scalability. And I think that you're intimating towards a better error correction capability, lower physical to logical qubit ratios. Is that contemplated in the long-term road map that you guys had laid out a year ago where when you're talking about a 200,000 physical qubits, you're at 8,000 logical qubits, that basically implies 25 to 1 -- is that -- was that already contemplated that you were going to be moving forward with a walking cat architecture that enables the relatively low physical to logical qubit ratios? Niccolo de Masi: Yes, for sure. I mean this is -- we've been very clear on this, I think, in every meeting call and presentation we've done, right? Because we have the highest fidelity, 49s because we've proven ion transport and ion 49s and we -- yes, we've been working with architecture for a long time. I mean it's a multiyear effort, not a multi-week effort type thing. So yes, I mean, when we publish things in our road map, we have a very high, what I would call, do say or say do ratio, right? So end of the day, we do what we say we're going to do both technically and of course, financially each quarter and each year, and we're proud of that. And these are the goals that our entire team very much prides himself on delivering step 1 and then overdelivering against thereafter. So yes, I mean I'm very proud of the team. We're proud to be there first yet again. I'm not surprised because I said that we would get there last summer. First, and we continue to march right up this curve right on schedule. Unknown Analyst: Okay. Great. And real quickly, do you have the average duration on the RPO. Inder Singh: I mean -- but you can imagine that it's multiyear. In our [indiscernible] that will be filed, we'll break out for you what percent of that will turn into revenue in this year and then the rest of it turns into future years. What I like about it is we're talking years, right? I'm not talking about 1 quarter visibility. You start to look beyond a quarter, you can now focus on the long term. You can talk about R&D investment for the next 5 years. And you asked a really go question. And by the way, congratulations on launching coverage on the quantum sector and welcome to the party and the enlightened side. The thing that I would urge you to keep in mind though, and I know you know this, modalities that have lots of errors to start with, talk about error correction, modalities that have very few errors do not talk about error correction. Whether lucky or smart, the founders of this company 3 decades ago, [ victor ] modalities that have highest coherence, best fidelity, lowest error rate. 3 of the 4 ingredients that you absolutely must have. The fourth speed, so we are now trying to build the fastest, most powerful computing devices on, I think, the market today and probably in the coming years. We talk a lot about U.S. questions around cost of goods and things like that. customers think about total cost of ownership. Think about what it means to buy a superconducting based solution, which is great, no NOC. But then you have the operating costs after day 1. So we don't suffer from that. We don't suffer from the bill of materials issue. We are more around creating the best and most, I'll call it, app and App Store and iPhone analogy, which Niccolo talked about a lot. And if you think about that, as we build the next computing device, i.e., the next iPhone, we're also, at the same time, building the applications that can run on. That's really important. Keep that in mind just as much as we think about the power of the machine. That's number one. Number two, we're not just a maker of machines anymore. We are a maker of solutions, entire solutions end-to-end. So it's a platform company. And I think customers are starting to talk more around that and saying, let's talk about that other side of your portfolio, and then we'll come back to [indiscernible]. Operator: Our next question comes from Peter Pang of JPMorgan. Peter Peng: Just on the near-term question, you guys gave an updated annual revenue guidance. And just based on your second quarter guidance, it would imply a pretty flattish revenue through the remainder of the year? I know you guys talked about expanding capacity to accelerate the demand. To what extent are you still constrained as we look out in the back half of the year here? Niccolo de Masi: We're exercising proven look, it's a nascent industry, right, Peter. I mean, thank you for the question, by the way. It's a good one. Look, when we guided for Q1, a quarter ago, we guided for a number you saw. We beat that by $15 million. Not that we expect it to be the -- $15 million, but we knew we would work towards what we've been doing for 4-plus years, providing guidance on technology and financials, and trying to either meet or exceed on both. So I think stay with us on the journey. As we look at this company and the potential it brings, the total cost of ownership differentiation, which no 1 is really talking about yet. The fact that we can deliver the 10,000 machines and then the 20,000 beyond. And to someone's question earlier, it becomes a modular upgrades, modular upgrades, not a machine replacement at that point. So you get a sticky, very, very sticky relationship with the customer and the mutual dependence. So thank you. I appreciate your question. We are trying to be responsible stewards of investment, capital and what we say to investors with the hope that we can at least meet those expectations that we set out there. And last 4, 5 years would suggest we can actually even beat them. Peter Peng: Great. And then just for your next -- the 10,000 qubit chip, can you update us on the time line? Is that a calendar '27? Or is it calendar '28? Maybe just update on timing of that? Inder Singh: Yes. Look, I think we are focused this year on the Tempo, right? So 2026 when we last spoke, 2026, Tempo, 2027 in market 256 year after that in market 10K. Now because we have a team that is integrated across our compute now under leadership unified leadership, I would say, Matt, perhaps we can do things differently, perhaps we can do things more efficiently, maybe even faster. So we will invest in continuing to move our road map to the left. You've seen us do that twice. When we bought Oxford ionics, we moved our 5-year road map to the left. And when we announced the proposed acquisition of SkyWater, and we'll wait for the right approvals to happen, of course, and all that, we will be able to perhaps move, as you saw in our announcement, the road map yet again to the left. So the investment dollars that we have and the capacity to keep putting money into this business and delivering solutions faster and yes, financial outcomes also perhaps earlier and better, is what we're focused on. So 10k and this year, Tempo, next year, the 256 year after that 10k, my colleague, [ Chris Balance ] at Oxford who obsesses over this 24/7 and his entire team are making sure that they can execute with precision for more and more demanding customers. Our devices are not in the labs anymore, remember. Our devices are deployed in hybrid compute environments around the world, and those folks expect machines to work like turn on day 1, work, and provide the compute power that they need and the application development. So it's a continuing dialogue. We're happy to have it with you, Peter. It's an interesting evolving area. And when Niccolo and I joined the board 5 plus years ago, we didn't think the industry would be where it is perhaps 5 years from now, we'll look back and say, wow, so $3 billion of investment power, perhaps more singular focus on meeting the customer where they are, not trying to outcompete anyone else except ourselves, compete against ourselves, that's how you win, and that's our focus. Operator: Our next question comes from Vijay Rakesh of Mizu. Vijay Rakesh: Great to see solid guidance. Just 2 quick questions, 1 on short term and 1 on longer term. On the short term, as you look at that mix of hardware and platform services, should that mix be about the same going forward? Or do you expect 1 to accelerate? Inder Singh: Again, I think it depends on where the customer begins their journey with us, right? So again, #1 rule in business meets the customer where they are, meet their current need, understand what they need before they try to sell them something, and then do the land and expand and anything else in cross-selling that you want to do. So rather than worrying about which part, which product of our doesn't would be growing more than others. I look at the whole company -- that's how Niccolo looks at it, we look at it as 1 P&L, and we're trying to drive outcomes for our customers. The good news is the multiproduct sales that we just talked about, are demonstrating that customers are maybe starting with 1 and then adding more than one. And I hope that number will continue to grow over time. Our focus on 1 P&L, 1 R&D capability across the company, teams focused on the best efforts in terms of driving innovation. And our job is basically making sure that they succeed and create innovation to happen faster and faster. This is not about Moore's Law. This is way faster than Moore's law, right? You know. So that's how we look at it, Vijay. Vijay Rakesh: Got it. And then on your 2027 you have the ambitious plan of getting to 10,000 physical and 800 logical, how is that looking, I guess? Inder Singh: Yes. Early indicators, as we said in the prepared remarks on the 256, last quarter, we said we had already started to make progress on the tape-out. This quarter, we started to do system-level testing on 256. So when you get comfort with that generation of product, you can now turn your focus to the next, right? And it's always like a learning curve. Niccolo well. There's always an curve, but there's also a learning curve. And each learning curve helps you with the next one. Niccolo, I don't know if you want to add something. Niccolo de Masi: Well, no, I want to add to this is we're working on 3 generations in parallel. Obviously, we've talked in my prepared remarks about our success in the first quarter on the 256 tape-out with SkyWater. We expect continued progress, momentum, success there. Obviously, the difference between our architecture and what you might see in the marketplace is we've published the shovel-ready blueprints, right? We've been working on that for quite some time. We've published it. And our architecture is very scalable, very unique, very modular. And ultimately, it is something which is fully proven already in terms of what the components need to be, right? It's simple. It's regular. It has unified error correction, it's got parallel gates and execution. And ultimately, it's got subroutines with dedicated components tiled in the hierarchy on each chip. And so going from 10,000 to 100,000 to 1 million is not a particularly demanding leap. I think if you looked at what has been driven between generations of classical GPU architecture, I would argue that we are on parallel or simpler, right? And so we look at this scaling now, as we've said repeatedly last year as really an engineering challenge. Everything in our blueprint is extremely realistic in terms of the constraints and the specific details on the competitive design, the error correction, the hardware control systems, ion movement, parallel gates, the fidelities that we're acquiring are all less than what we've proven in the lab already, right? So I'm not saying that it's not hard. I'm not saying that there won't always be some things that sort of crop up when you move from a few systems to dozens or hundreds or even someday thousands or millions of systems. I mean that's all possible with this architecture. But nevertheless, it is all very digestible and it's been done many times in the history of humanity, right? So I think every -- of course, every year, it becomes yet more proven out. We sell more systems, and we prove out another generation. But the hard work has been done on this architecture on the components of the architecture that have all been demonstrated in the last year and years for that matter. This is really the culmination of 30 years of work. And the reason we're ahead is we've been thinking about it longer than everybody else. We built the first Quantum Longi gate in '95. And today, we have the highest 2-qubit gate fidelity. And of course, we also have the first shovel ready blueprint because we're not resting on our laurels. We can continue to put the pedal to metal and we keep pushing this. And we keep investing, and we will continue to do that. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Niccolo de Masi for any closing remarks. Niccolo de Masi: Thank you, operator. As I shared in our annual letter to shareholders last week, my personal journey with IonQ dates back to reading our founders seminal paper on the world's first phonologic gate as an undergraduate physics student in the 1990s. That moment was a shot heard around the world for anyone passionate about quantum mechanics and it cemented my commitment to this company's mission. Today, 1 year into my role as Chairman and CEO, IonQ has evolved from a quantum computing pioneer into the world's preeminent full stack Quantum platform and U.S. merchant supplier. We're the only company delivering integrated solutions across quantum computing, networking, sensing and security in all major and allied geographies and in all domains from submarines to satellites for the warfighter. We believe passionately in the importance of our merchant supply mission for the U.S. and allied quantum industry. We are investing and building a foundation to support the acceleration and commercialization of the entire quantum ecosystem as we have already done with our atomic clocks, sensors and quantum networks. Our North Star is the pioneer of Quantum Solutions and quantum applications that create durable value across global industries, and we are poised to transform sectors spanning pharma, finance, energy, defense, materials, logistics, GPS, cybersecurity and far beyond. Our revenue momentum underscores how we are already positively our global customers in these domains. We have 1,500 world-class professionals, comprised of over 300 PhDs and the deepest IP portfolio in the industry with over $3 billion of cash on the balance sheet. We are now moving from Quantum platform building blocks to Quantum platform execution at scale. IonQ is 1 platform, 1 team, primed and poised to win. I want to thank our shareholders for their continued trust and our colleagues for their extraordinary efforts. Thank you again for joining our call. We look forward to 2026 with confidence. Operator: Thank you. This call has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings, and welcome to the Coherent Third Quarter Fiscal Year 2026 Earnings Call. It is now my pleasure to introduce your host, Mr. Paul Silverstein, Senior Vice President of Investor Relations for Coherent. Please go ahead. Paul Silverstein: Thank you, operator, and good afternoon, everyone. With me today are Jim Anderson, Coherent's CEO; and Sherri Luther, Coherent's CFO. During today's call, we will provide a financial and business review of the third quarter of fiscal 2026 and the business outlook for the fourth quarter of fiscal 2026. Our earnings press release can be found in the Investor Relations section of our company website at coherent.com. I would like to remind everyone that during our conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These are subject to a number of significant risks and uncertainties, and our actual results may differ materially. For a discussion of factors that could affect our future financial results and business, please refer to the disclosure in today's earnings release, our most recent Forms 10-K and 10-Q and the reports that we may file on Form 8-K with the Securities and Exchange Commission. All our statements are made as of today, May 6, 2026, based on information currently available to us. Except as required by law, we assume no obligation to update any such statements. During this call, we will discuss non-GAAP financial measures. You can find a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release and investor presentation that can be found on the Investor Relations section of our website at coherent.com. Let me now turn the call over to our CEO, Jim Anderson. James Anderson: Thank you, Paul, and thank you, everyone, for joining today's call. Coherent is a global leader in photonic technology, which is foundational to the performance and scalability of AI data centers and critical to many important industrial applications. We are at the center of an extraordinary expansion in optical networking infrastructure, driven by the rapid growth of AI and the increasing need for bandwidth and energy efficiency. As a result, we delivered another quarter of strong financial performance with accelerating growth, expanding margins and improving profitability. Importantly, we are seeing continued strengthening in demand across our business. This quarter, we experienced another step function increase in our order book, driving our backlog to a record level. Customer demand remains exceptionally strong with no signs of attenuation, and our visibility continues to extend further into the future with orders now reaching into calendar 2028 and customer LTAs extending to the end of the decade. This demand is increasingly translating into near-term shipment and revenue opportunities as we continue to expand capacity. Given both the near- and long-term demand strength, combined with our continued expansion of production capacity, we expect a period of sustained strong revenue growth over the coming quarters. We expect strong sequential revenue growth in our June quarter, and we continue to expect fiscal '27 growth rate to exceed our fiscal '26 growth rate. Turning to our Q3 operating results. Revenue increased 9% sequentially and 27% year-over-year on a pro forma basis, representing an acceleration in our year-over-year growth rate versus the prior quarter. Non-GAAP gross margin expanded both sequentially and year-over-year and the combination of revenue growth, margin expansion and operating leverage drove non-GAAP EPS growth of 55% year-over-year. We continue to grow profitability significantly faster than revenue. We are pleased with the continued execution, but we also see significant opportunity ahead as we scale the business to meet the demand environment in front of us. Our Datacenter & Communications segment continues to be the primary driver of our growth and accounted for 75% of total company revenue in Q3. Growth in this segment accelerated again this quarter with revenue increasing more than 40% year-over-year. Segment performance was driven by both accelerating demand and strong execution across our product portfolio. In our data center business, revenue increased 13% sequentially and 37% year-over-year, representing a second consecutive quarter of double-digit sequential growth. We expect data center growth to further accelerate in the current quarter, supported by exceptionally strong demand, improving supply and continued progress in our capacity ramp. Demand in our data center business remains exceptionally strong and broad-based across multiple customers and product categories. We expect the accelerated growth in the current quarter to be driven by both transceivers and OCS systems. Within transceivers, we expect growth to be driven by both 800 gig and 1.6T. In particular, we expect 800 gig revenue to grow year-over-year in calendar '26, while 1.6T transceivers ramp rapidly through the balance of this calendar year and into next year as a broad range of customers adopt 1.6T. Given the exceptionally strong demand environment and the industry-wide constraints in indium phosphide, capacity expansion remains one of our highest priorities. Importantly, we continue to make excellent progress on our 6-inch indium phosphide ramp, which is a key driver of our long-term capacity expansion and a meaningful differentiator for Coherent. We are now seeing the benefits of this ramp in both revenue and margin, and we expect those benefits to increase further over the coming quarters. We remain on track to achieve our goal of doubling internal indium phosphide output capacity by the end of this calendar year. And based on current execution, we now expect to reach that milestone 1 quarter earlier than originally planned. We also expect to more than double our internal indium phosphide capacity again by the end of calendar 2027. Our 6-inch platform is producing EMLs, CW lasers and photodiodes and the yields for each of the 3 device categories continues to exceed those of our 3-inch production lines. During the quarter, we shipped our first transceivers containing components produced on our 6-inch lines, and those shipments contributed to both sequential revenue growth and gross margin improvement. The initial 6-inch production contribution came from our Sherman, Texas facility, which is the world's most advanced indium phosphide production site and will play an important role in ramping CW laser production for our CPO solutions, including those supporting our NVIDIA partnership. Given the success of the 6-inch ramp to date, we have also announced plans to begin 6-inch indium phosphide production at a third site in Zurich. Overall, we are very pleased with the execution of our production teams. As we continue to ramp 6-inch output, we expect increasing benefits to both revenue and gross margin across our transceiver and CPO product lines over the coming quarters. We expect OCS revenue to grow this quarter as we ramp production capacity to meet demand. We have increased our view of the OCS market opportunity to over $4 billion, reflecting expanding use cases across data center interconnect, scale-out and scale-up networks and continued broadening customer engagement. We believe OCS also expands our role into higher-value layers of AI networking infrastructure. We recently resolved the bottleneck in our production capacity and are now ramping output rapidly across 2 production facilities. As a result, we expect strong sequential revenue growth over the coming quarters as production improvements translate into higher shipments and backlog conversion. We also continue to make strong progress in co-packaged optics, which we believe represents one of the most important long-term growth opportunities for Coherent. As we have discussed previously, CPO expands our role in AI data center architectures, particularly in the scale-up portion of the network, where optics is expected to increasingly complement and over time, displace copper. We believe CPO represents more than $15 billion of incremental addressable market opportunity. In March, we announced a strategic partnership with NVIDIA focused on multiple CPO-related products and solutions. This partnership includes both NVIDIA's $2 billion equity investment in Coherent and a multiyear supply agreement extending through the end of the decade. The agreement covers multiple CPO-related products, including our high-power CW laser and provides meaningful long-term visibility into future demand. More broadly, our CPO opportunity is supported by the breadth and depth of Coherent's photonic technology platform. We believe our breadth of photonic technology and our manufacturing scale, position us very well to support a broad range of customer requirements across key optical components, subsystems and higher-level assemblies. We expect initial scale-out CPO revenue to begin ramping in the second half of this calendar year with scale-up CPO revenue expected to begin ramping in the second half of calendar 2027. In addition to NVIDIA, we are also engaged with multiple other customers across a broad range of CPO and MPO opportunities. Overall, we believe CPO will become a significant contributor to Coherent's long-term revenue growth and margin expansion and will further strengthen our strategic position in AI data center infrastructure. Turning to our Communications business. Revenue growth accelerated significantly in Q3, with revenue increasing 16% sequentially and 60% year-over-year, driven by strong demand across data center interconnect, scale-across and traditional telecom applications. We expect strong sequential growth again in the current quarter. Demand remains broad-based across customers, products and end applications. We are seeing strong momentum across our communications portfolio, which spans components, modules and systems, reflecting both favorable market conditions and Coherent's strong competitive position. In particular, we continue to see robust demand for our DCI solutions, including ZR and ZR+ transceivers as well as strong demand across our broader transport portfolio. One additional growth driver that we are particularly excited about is multi-rail. These solutions address the increasing need for greater bandwidth and connectivity between AI data centers as workloads become more distributed across multiple locations. We believe multi-rail represents a significant expansion of our communications addressable market opportunity, and we expect initial revenue to begin ramping in the first half of calendar 2027. Overall, we believe our communications business is very well positioned for continued strong growth, supported by current demand strength, our expanding portfolio and the ramp of important new platforms over time. Across our Datacenter & Communications segment, the breadth and depth of Coherent's Photonic technology portfolio, combined with our manufacturing scale, continue to resonate strongly with our customers. As a result, we have signed or are in the process of finalizing long-term supply agreements with multiple strategic customers that include both multiyear demand commitments and upfront investment to support capacity expansion. Turning to our Industrial segment. Revenue declined modestly both sequentially and year-over-year on a pro forma basis, reflecting continued softness in parts of the broader industrial market. However, we are seeing encouraging signs of improvement, particularly in semiconductor capital equipment, where bookings have increased meaningfully. We expect that improving demand to begin contributing to revenue growth in the current quarter and to support further sequential improvement through the balance of the calendar year. Over the longer term, we see important incremental growth opportunities for our industrial technologies and AI data center applications. At OFC, we highlighted our data center XPU cooling solutions and thermoelectric generators, which address the growing thermal and power challenges created by larger AI data centers. Our proprietary Thermadite material can improve thermal performance and help enable higher XPU efficiency, while our advanced materials for thermoelectric generation can improve data center power efficiency through waste heat recovery. We are engaged with multiple strategic customers on these technologies, and we believe they represent a meaningful expansion of our long-term market opportunity. We expect revenue from these products to begin ramping in the second half of calendar 2027. Overall, while industrial remains a smaller contributor to our current growth than data center and communications, we believe it is positioned to become an increasingly important source of incremental revenue and diversification over time. In summary, we delivered another quarter of strong financial performance with accelerating revenue growth, expanding margins and increasing visibility into future demand. We are operating in a highly favorable demand environment driven by AI data center expansion, and we believe Coherent is uniquely well positioned to capitalize on this opportunity, given the breadth of our photonic technology portfolio, our manufacturing scale, our continued capacity expansion and the increasing conversion of demand into backlog and revenue. I want to thank the entire Coherent team for their strong execution and continued innovation. I'll now turn the call over to Sherri. Sherri Luther: Thank you, Jim. In our third quarter, we delivered accelerated double-digit year-over-year revenue growth and meaningful gross margin expansion, significantly improving profitability. We have strategically increased our capital investments to expand internal capacity in support of the rapidly growing demand in data center and communications. In addition, we also continued to strengthen our balance sheet, reducing our debt leverage ratio to below 1x. I will now provide a summary of our Q3 results. Third quarter revenue was a record $1.8 billion, up 7% sequentially from the second quarter, and up 21% year-over-year, driven by growth in AI data center and communications demand. On a pro forma basis, revenue increased 9% sequentially and 27% year-over-year, excluding revenue from our Aerospace and Defense business and our Munich, Germany product division, which were sold in Q1 and Q3, respectively. Our Q3 non-GAAP gross margin was 39.6%, a 57 basis point improvement compared to the prior quarter and a 105 basis point improvement as compared to the year ago quarter. We continue to execute on our gross margin expansion strategy, where we generated sequential and year-over-year increases in gross margin, primarily in the Datacenter & Communications segment. These improvements were driven by reductions in product input costs, yield improvements from 6-inch indium phosphide as well as significant benefits from pricing optimization. Third quarter non-GAAP operating expenses were $348 million compared to $321 million in the prior quarter and $297 million in the year ago quarter. R&D expense as a percentage of revenue increased to 9.9% in Q3 compared to 9.4% in both the prior quarter and the year ago quarter. The sequential and year-over-year increases in R&D were primarily in the Datacenter & Communications segment product road maps. These investments are focused on multiple short- and long-term revenue growth drivers, namely in transceivers and CPO as well as new high-margin, high-value systems such as OCS and multi-rail. We continue to focus on investments with the highest ROI that drive the future growth of the company. SG&A expense as a percentage of revenue declined to 9.4% in Q3 compared to 9.6% in the prior quarter and 10.4% in the year ago quarter with continued progress on driving efficiencies and greater leverage in SG&A. We are already seeing benefits from our low-cost regional shared services initiatives within the G&A functions as we streamline processes and gain better leverage and efficiency. In addition, our ERP consolidation project has made great progress where the majority of the company is now in a single ERP platform. We expect additional benefits from these initiatives in Q4 with more meaningful benefits into fiscal year 2027. Our third quarter non-GAAP operating margin increased to 20.3% compared to 19.9% in the prior quarter and 18.6% in the year ago quarter due to strong revenue growth and continued gross margin expansion. Third quarter non-GAAP earnings per diluted share was $1.41, up 9% from the second quarter and up 55% from the year ago quarter. The acceleration in earnings outpaced revenue growth, driven by strong top line performance as well as gross margin expansion. Our cash balance increased to $3 billion from $1.5 billion in the prior quarter, primarily due to the $2 billion equity investment from NVIDIA that we announced on March 2, 2026. We focused our capital allocation priorities during the quarter on investments that drive long-term revenue growth and profitability, specifically investments in our data center and communications business and our R&D product road map as well as capacity expansion. We also made $162 million in debt payments during the quarter, reducing our debt leverage ratio to 0.5x, down from 1.7x in Q2 and 2.1x in the year ago quarter. Our capital expenditures increased to $290 million compared to $154 million in the prior quarter and $112 million in the year ago quarter. These investments were focused on expanding our internal capacity to support the exceptional demand in data center and communications. Due to our strong bookings and the rapidly growing demand, we expect capital expenditures will increase sequentially in Q4. We continue to be on track with our capacity expansion plans. With a strong balance sheet and continued focus on improving profitability, we are well positioned to support the unprecedented customer demand with investments to rapidly expand our production capacity. As a reminder, at the end of January, we closed the sale of our Munich, Germany product division. For reference, over the prior 4 quarters, this business contributed average quarterly revenue of $25 million with a gross margin well below Coherent's corporate gross margin. Our Q3 results included $8 million in revenue from this business. I will now turn to our guidance for the fourth quarter of fiscal 2026. We expect revenue to be between $1.91 billion and $2.05 billion. We expect non-GAAP gross margin to be between 39% and 41%. We expect total operating expenses of between $360 million and $380 million on a non-GAAP basis. We expect the tax rate for the quarter to be between 18% and 20% on a non-GAAP basis. We expect EPS of between $1.52 and $1.72 on a non-GAAP basis. With our strong backlog and excellent visibility, we are focused on rapidly expanding our internal capacity with investments that drive the long-term growth and profitability of the company. We will continue to allocate capital in a disciplined manner as we execute against our long-term financial target model and drive durable shareholder value. That concludes my formal comments. Operator, please open the call for Q&A. Operator: [Operator Instructions] We take the first question from the line of Samik Chatterjee from JPMorgan. Samik Chatterjee: Congrats on the robust set of results, numbers here. Jim, maybe if I can start off with the guide for the June quarter. It is implying an acceleration from Q3, so the increases you had in Q3 from a revenue perspective. And particularly when I look back through the year, every quarter, you've managed to sort of accelerate the sequential revenue growth. So maybe if you can sort of dive into, one, what's the driver on the demand side that's helping you lead to that acceleration? And maybe also contextualize it in terms of supply and how that's helping with the acceleration as well? And I have a follow-up after that. James Anderson: Yes. Thanks, Samik, for the question. Yes, if you look at the midpoint in the June quarter guide, certainly, we expect acceleration in growth versus prior quarter and if you look at the year-over-year growth rate as well. We really believe the current June quarter kind of represents a new inflection point in our revenue growth rate moving forward, so faster growth this quarter. And as we look forward into fiscal '27, which starts in July, we expect our fiscal '27 growth rate to be above fiscal '26. And on the demand side of the equation, I would say that just -- it looks exceptional right now, both in terms of the degree of demand, but also our visibility on demand. If we look at just bookings in the prior quarter, bookings in the prior quarter were up substantially from the previous quarter, record bookings, incredible amount of backlog, and we've now got orders that extend out into calendar '28. And so we have just tremendous demand ahead of us, but also great visibility on that demand. And that demand is coming from places you'd expect, certainly data center and growth, both transceivers with some of the new growth vectors we're bringing on as well as communications. And then probably more importantly, on the supply side of the equation, that's probably really more than our focus. Demand looks great. What we're doing is ramping supply very, very quickly. And both this quarter, but moving forward, we're bringing on substantially more capacity over the coming quarters. And probably the best single example of this is just the indium phosphide capacity that's coming online. Indium phosphide has kind of been the key constraint for us for a number of quarters. It's a constraint for the industry. But our target this year is to double our indium phosphide capacity. And the great thing is we're -- it looks like based on the current execution, we'll achieve that goal next quarter, which is 1 quarter earlier than we thought. And when I look into next calendar year, we expect to more than double indium phosphide capacity again. So that's a quadrupling of capacity over a 2-year period. And so that looks really good. And so I think that really unlocks an acceleration in our revenue growth moving forward. And that's kind of on all the existing business. Then you layer on top of that some of the new growth areas and new growth vectors that are coming online. OCS is ramping. We expect that to contribute to growth this quarter and grow sequentially. CPO revenue kicks in, in the second half of this year. That's -- we view that as all incremental. Our multi-rail systems will start contributing revenue in the first half of next calendar year. And then we think thermal solutions will start to generate revenue in the second half of calendar '27. So we sort of have these multiple growth vectors that are layering on top of the existing business growth. So we feel really good about the growth and the sort of accelerated growth ahead of us. Samik Chatterjee: Got it. Got it. And then maybe just a follow-up on similar lines. You mentioned the acceleration on the indium phosphide capacity. Given that you're tracking a bit ahead relative to your target for 2x in the first year? How should we think about potentially upside or accelerating the target for 2x sort of next year as well? And as investors, how should investors think about the impact of that on gross margin? How material is it? When does it start to be material to your gross margin trajectory as well? James Anderson: Thanks, Samik. Actually, on the second part of your question on gross margin, we already started to see the impact of 6-inch indium phosphide capacity, which has a much better cost structure. So 6-inch versus 3-inch is more than 4x as many devices at less than half the cost. We already started to see that contribute to gross margin expansion in our fiscal Q3. As Sherri said, I think in our prepared remarks, our guide in the current June quarter has gross margin going up sequentially. Again, part of that, what's driving the gross margin expansion is the 6-inch indium phosphide capacity, which just gives us a much, much better cost structure. But overall, I'm really pleased with the execution on our 6-inch indium phosphide ramp. There's kind of 2 factors underneath there. There's just the raw capacity ramp, but also very important is the yields. And so the team has executed ahead of plan on the raw capacity ramp, but also we're seeing very healthy yields. We're in production on 3 different types of devices, EML, CWs and PDs. And all 3 of those devices have yields on 6-inch that are higher than our 3-inch production yields. And Texas was the first facility we started ramping 6-inch on. Super pleased with the progress there, because we saw such good yields out of the gate from Texas, which is the world's leading indium phosphide production facility. We started production in Sweden. And now we announced a third site that we're going to start production on 6-inch indium phosphide and that's Zurich, and we'll start to see production from that third site at the beginning of calendar '27. So this ramp of indium phosphide 6-inch is both -- it unlocks a lot of additional growth for us, but it's also definitely contributed to gross margin as it becomes a bigger portion of our indium phosphide overall production capacity. Operator: We take the next question from the line of Simon Leopold from Raymond James. Simon Leopold: The first thing I want to see if you could address is there's a perceived gap versus one of your primary competitors that stems from investors comparing their forecasts and your forecast in categories like the OCS and CPO. How do you explain the difference? And then I've got a quick follow-up. James Anderson: Yes. I think, Simon, on both of those new growth areas, we feel really good about the growth that's ahead of us. On OCS, we recently, just over the last couple of months at OFC, we doubled our forecast of the market opportunity there. The revenue growth rate, the sequential growth that we're guiding in the current quarter, part of that growth, that sequential growth is OCS systems growth. We feel great about the differentiation of our technology. It's a very differentiated technology that provides both higher reliability, but much, much better power efficiency. And so we feel really good about the long term, both the short- and the long-term growth prospects on that product line. And we've really been focused on just ramping capacity as fast as possible. And as I mentioned in the prepared remarks, we did kind of have a breakthrough over the last couple of months on removing a bottleneck in the production capacity that's allowed us to ramp production at a much faster rate, and we're ramping in 2 sites in parallel. So we feel good about the OCS, both the long-term opportunity, but the ramp in the near term as well. And then look, CPO is -- I think it's a transformational growth opportunity for the company. We see that market size as over $15 billion, and that's probably a conservative estimate over the coming years. We've -- CPO revenue for us will start in second half of this calendar year, and that will be initially scale-out CPO revenue. And then we expect to see the beginning of scale-up CPO revenue in the second half of calendar '27. And we're engaged with multiple customers. Obviously, we have a public announcement that we did with NVIDIA on our partnership with NVIDIA. That's all around CPO. That's a multibillion-dollar agreement that extends out through the end of the decade. And importantly, is it's multiple different CPO solutions. So if you look at what can we provide in the CPO solution, it's not just the laser, right? We're certainly providing the high-power CW laser. But beyond that, we're providing the external laser source module. We can provide the fiber attach unit, which includes micro-lens arrays. It includes polarization maintaining fiber. So we have our own fiber optics fiber that we'll provide in those solutions. Within that external laser source, we provide all of the ingredients, not just the laser, but the isolators, the thermoelectric coolers. So there's a tremendous amount of content that we expect to provide in CPO. And I see this as a major new growth area for the company. And I think we're very, very well positioned in CPO. And like I said, first revenue will start in sort of later this year, this calendar year. Simon Leopold: Great. And just as a follow-up, I appreciate you don't want to get the -- micromanaging each product segment, but I'd like to see if you could confirm if the 1.6 terabit transceiver revenue exceeded, let's say, $100 million in the March quarter. And if not, when can we get to that milestone? James Anderson: Yes, Simon, we don't break out individual data rate revenue for our transceiver business. But we expect 800 gig to grow this year. It will probably grow again next calendar year. And then on top of that, 1.6T is ramping at an incredibly rapid pace. In fact, as I think we've shared in the past, that 1.6T ramp is actually faster than what we would have thought, say, a year ago, which we're really pleased with. And so if you look at our incremental or sequential growth in the current quarter, a good portion of that is driven by the 1.6T ramp. And we expect 1.6T to not just contribute to the current quarter sequential growth, but to continue to ramp very quickly over the coming quarters as well. And so I think really the growth drivers for our transceiver business are really 800 gig and 1.6T combined, not just this calendar year, but next calendar year as well. Operator: We take the next question from the line of Thomas O'Malley from Barclays. Thomas O'Malley: My first one is on gross margin. So if I look at gross margins in March at 39.6% and then I look at gross margins last year at 38.5%, the incremental on a year-over-year basis is around 44%. So since that time, I mean, you've increased 6-inch production, you've doubled indium phosphide almost, you exited some businesses. In fact, like your data center business, you kind of report -- well, you could assume some percentage of this comms business, but that's growing really nicely as well. So why aren't you getting more incremental fall-through on the gross margin side? Is there any puts that you could highlight that are preventing you from kind of breaking out on that line item? Sherri Luther: Yes. Thanks, Thomas. So the way -- a few things I'll just highlight from a gross margin perspective is that if you go back about to the end of Q4 of 2025, we've increased our gross margin sequentially in 7 out of the past 8 quarters. And if you include the 57 basis points improvement from our -- just our recent Q3 quarter, that's an increase of about 530 basis points. And then if you tack on to the midpoint of our guide for Q4, that takes you to 570 basis points improvement. So I think that's pretty good progress. I mean we're not done, but I am pleased with the progress that we've made there. And the target that we put out at our Investor Day last year was greater than 42%, and we are super, super focused on making sure that we get to that target. And when you look at the drivers of our gross margin expansion strategy that we've been executing on quarter over quarter over quarter, it's cost reductions, it's yield improvements and it's pricing optimization. And when you look at our Q3 quarter, each of those areas increased quite significantly from the prior quarter in each of those categories. And so we talked a little bit about some of those in my prepared remarks. But from a cost reduction perspective, we had improvements from 6-inch indium phosphide. We've talked about the fact that it's half the cost, right, when you go from 3-inch to 6-inch. So we're already seeing the benefit of 6-inch. We also talked about yield improvements in Q2 that we saw in 6-inch. So we're continuing to see yield improvement as we continue to ramp. And we talked about how we've got 2 sites going in parallel. We've got another site coming up. I expect to continue to see improvements on 6-inch as we bring the other site up and as we continue to ramp 6-inch. That's going to continue to add benefit to our gross margin. And the other areas of cost reductions that we've seen, actually, that's been predominantly in our data center and communications business. So the majority of -- well, over the majority of our improvements in gross margin have really been in the data center and communications business. So I'm really pleased with that progress. We've also seen pricing optimization benefits. That has significantly increased quarter-on-quarter and certainly year-over-year. And that's been not only in the industrial business, but that was actually quite sizable in our data center and communications business. So I'm really pleased with the progress we've made so far. We're going to continue to drive to get to our target and super focused on doing that, but I'm quite pleased with the progress so far. And we're early stages is the way that I would look at it. Thomas O'Malley: And then just as a follow-up, in the preamble, Jim, you mentioned some bottlenecks that were being relieved in the OCS business. What specifically are you referring to? And how much of an impact could that have on production? James Anderson: Yes, there were some internal components or some components that we make internal to Coherent that we're pacing our production capacity expansion. And so we were able to sort of dramatically improve the amount of internal components that we were producing. And so that really unlocked an acceleration in our production capacity. And so the last month or 2, we've seen a really good ramp-up in our pace of production and expect that to continue. So we're seeing a much faster ramp of production on OCS than, say, a few months ago, which is really good. Operator: We take the next question from the line of Blayne Curtis from Jefferies. Blayne Curtis: Actually, I wanted to ask about scale-across just becoming a big talking point. You called it out in the comm business. Maybe you could just talk about kind of where that is today? And as you look to fiscal '27, how do you frame that ramp for scale-across? James Anderson: Yes. Thanks, Blayne. Yes, we're seeing just tremendous growth in the scale-across part of the business. This falls within our Communications segment, which I mentioned in the prepared remarks. So scale-across or DCI, also within that communications segment is traditional telecom. But the fastest growth that we're seeing is in that scale-across piece of the business. In the most recent quarter, we saw a 16% sequential growth and 60% year-over-year and here, again, similar to data center, just the demand is exceptional. The visibility is exceptional. We have LTAs that are in place with customers in that segment. And we're seeing -- it's really broad-based across almost every product we have in that segment and broad across customers as well. And just to give you a sense of the products in that segment would cover components like pump lasers. It would cover modules like ZR/ZR+ transceivers, which would be the 100 gig, 400 gig and 800 gig ramping ZR/ZR+. It covers line cards and amplifiers and then full systems as well. And so yes, this -- we expect this area, just given the demand we see in front of us and the visibility of this to be a very strong growth area for us moving forward. And then a new system that we think is going to continue to accelerate our growth rate here is multi-rail. And so our multi-rail technology, which we highlighted at OFC, this helps provide a huge capacity increase within the same power and physical area of the prior solution. So it's a tremendous benefit to the customer. And we have a number of very differentiated component technology pieces that go into that system that really position us very well. And we're selling full systems, and we expect that revenue to start in the first half of calendar '27. And so just another growth vector layering on top. So very strong growth in this area, and we expect that to continue given the strong growth that we see ahead of us. Blayne Curtis: And then I just wanted to follow up on Tommy's gross margin question. I just want to better understand the tailwinds. You called out 6-inch as being the biggest driver. I'm assuming the 6-inch volumes that you mentioned you're shipping in your units are still fairly small. So are there start-up costs that kind of roll off there, and that's what the savings are? And then as the -- is [indiscernible], is that a gross margin uplift as well? James Anderson: Yes. So when I mentioned in the prior quarter, the 6-inch, I mentioned that as it was one of the contributing factors. There were actually a number of other contributing factors to gross margin expansion in the prior quarter. And in our guide for the current quarter, it's kind of similar. 6-inch is a contributor, but there's other factors as well. There's pricing and other cost structure improvements that we made. And yes, I would say we're still pretty early in the 6-inch ramp. If you think about the 6-inch -- so we shipped our first transceivers last quarter that included devices from our 6-inch. And that was just the initial production that we started. That will ramp significantly over the coming quarters. So I think there's much more of the 6-inch benefit is ahead of us. If you think about the total doubling of capacity and the fact that all of that doubling of capacity is 6-inch, by the end of this year, next quarter, half of our capacity will be 6-inch. So I think that benefit from 6-inch is more ahead of us. And then on the 1.6T question, yes, we definitely see that as beneficial to gross margin. we expect -- just like we've always seen in prior transitions of speed of data rates at the beginning of the life cycle of a new data rate, generally, the gross margins are better than the prior data rate. So we would expect 1.6T to be beneficial to gross margin for the transceiver business. Operator: We take the next question from the line of George Notter from Wolfe Research. George Notter: I was just curious about anything more you could tell us on the new LTAs that you're signing. Obviously, we learned a lot around the NVIDIA transaction. But you mentioned there's a number of other deals that you guys have brought in. Anything you can tell us in terms of how big those deals are? What kind of duration are we talking about? Are they funding your capital expansions? Like anything you can tell us like financially just in the aggregate, more details would be interesting. James Anderson: Yes. Thanks, George. Yes, there were a couple of additional LTAs that we signed in the prior quarter. And then I would say there's a number of other ongoing discussions. We would expect to close some additional LTAs this quarter very soon. And those LTAs usually have 3 parts. You asked about kind of a CapEx commitment. Yes, there's usually an upfront investment from the customer. to help with the CapEx. And that can come in a number of different forms, but there's usually some upfront investment, which kind of represents sort of skin in the game from the customer and which we view as really positive. And then there's -- of course, there's a supply commitment from us. But the third element is there's almost always some sort of demand minimal -- at least minimal demand commitment from the customer to make sure that, that capacity is going to get utilized. So those are kind of 3 parts of the LTA. Almost every LTA has those 3 parts in it. And so yes, I would say good progress last quarter in additional LTAs, and we anticipate more LTAs to come and yes, significant in size. George Notter: Anything about the genre of customer here? Is this cloud providers? Is this systems manufacturers? Anything else you could say? James Anderson: It's both, right? We would see -- we expect LTAs from both hyperscalers as well as other system customers. So I would expect both. Operator: We take the next question from the line of Vivek Arya from Bank of America Securities. Michael Mani: This is Michael Mani on for Vivek Arya. I wanted to dive in deeper with some of the CPO LTAs or long-term agreements that you're dealing with, including NVIDIA, but maybe some of the other deals that you're kind of eyeing over the next couple of years. What's the mix of these agreements between lasers, ELS modules, which you highlighted OFC and the various other components that you could sell into a CPO solution like fiber attach units. How does that vary by customer? Like what are the puts and takes there based on the deal? James Anderson: Yes. It kind of -- it can depend by customer, but it's important to keep in mind that we have a very broad portfolio of CPO technology that we can bring to the customers. I think that's a real advantage for us. And we -- at OFC, we laid out all the different types of technology that we can bring to a CPO solution. Lasers, the high-power CW lasers is certainly one important component, but it's not the only. We can also bring 200 gig and in the future, 400-gig VCSELs as well. There's some applications where VCSELs are sort of a better laser technology for like near package optics. But beyond that, if you look at the external laser source, we can provide that module. But within that, almost all those key optical ingredients we have in-house as well, not just the laser, but the isolators, the thermoelectric coolers. So all of the ingredients that go in that, which customers view as a big strength because we're not dependent on others for those technologies. And then the actual fiber attach unit, so this is the -- what connects the switch chip or the XPU to the faceplate or to the external laser source module, we can provide that entire assembly as well because we have the lens arrays, we have the polarization maintaining fiber. So we have all the ingredients for the CPO solution. And I would say most customers are leveraging, if not all of that portfolio, certainly a good portion of that portfolio. Michael Mani: Great. And for my follow-up, I just wanted to ask about the 2 incremental opportunities you highlighted for '27, right, with multi-rail and thermal management products. So you said revenue timing for first half, I think, for multi-rail and second half for the thermal products. But what are the milestones between now and then from a customer perspective? Like when do we get a better sense of how large those ramps can be? And what does the competitive landscape look like in both of those areas? And how do you think you're especially differentiated, if you could articulate that? James Anderson: Yes. Michael, on the -- let me start with the multi-rail, which is the near-term one. I would say the milestones are just the typical engineering milestones that we would walk through with the customers. There would be a qualification, a pilot run, very normal engineering milestones that we're moving through. And again, we would expect revenue to start in the first half of '27. I think as we get closer to that revenue ramp, we can provide just some better idea of what the rate and pace of that revenue ramp is. But we see that as a substantial new product line with significant revenue opportunity. I mean, we sized the market for multi-rail at least $2 billion over the coming years, and it could be larger than that. And the technology that we have is very differentiated. With multi-rail, it's really all about the underlying technology. And without going into a bunch of the technical details because we covered this at OFC, but there's a number of key components that go into that multi-rail that are unique to us or we have unique differentiation that position us really well. So we feel really good about the competitive positioning on multi-rail. And then the second part of your question, definitely, thanks for asking about the thermal solutions. We're very excited about this. This is us taking our industrial technology, some of our materials technology that we apply to the industrial market and re-purposing this for data center. An example is our Thermadite technology. Thermadite is a material that it's a proprietary material that only Coherent provides. And if you look at Thermadite applied to the cooling of, say, a switch chip or an XPU or an ASIC chip relative to the current thermal solutions, which are usually copper-based solutions, a Thermadite or other type of material that we could provide can provide heat transfer that's either 2x better than copper, sometimes up to 5x better than a copper solution. So this is a massive improvement for customers because what that means is if we use one of those thermal solutions that have 2 to 5x better thermal properties, it allows the say, the XPU, the GPU to run at a much higher frequency or utilization rate because it can be cooled much more effectively. So it's almost like getting sort of more tokens out of the same CPU or GPU. And so it's a big win for our customers. We're really excited about that, very strong customer engagements there. And again, just kind of moving through the normal engineering milestones, but we would expect revenue in the second half of next year. By the way, the other one that I would mention, which is really a great technology is our thermoelectric generators where we're harvesting waste heat from the -- again, the CPU or GPU, harvesting waste heat and converting that back into electrical energy, which is pumped back into the data center. So a great efficiency gain for power efficiency in the data center. So yes, we're excited about those new thermal solutions. Operator: We take the next question from the line of Papa Sylla from Citi. Papa Sylla: Congrats on the results. Maybe, Jim, my first question is around pricing in general from like a transceiver perspective. Obviously, you were, I guess, too, had one, as a seller of transceivers, but also a buyer of lasers and electrical component as well. And at least kind of yesterday or over the past couple of days, we have been hearing kind of some laser pricing increases, particularly for EML. So I'm curious if you are seeing that on one front, but also are you able, if that's the case, at the transceiver level, pass through those costs? Are you -- do you have enough levers in general at the transceiver level to also increase pricing given the demand supply imbalance? James Anderson: Yes. Let me start with the pricing and come back to the cost. On price, yes, I would call pricing very healthy, very healthy dynamics around pricing. Because of the supply versus demand, I think pricing has been very good, right? And one of the things that always happens as we change data rates is the ASP goes up with the new data rate. So 1.6T pricing, higher than 800 gig, et cetera. And so I would say the pricing dynamics are very healthy. And then on the cost side, remember that most of the components that go into our transceivers are internally sourced. And so that buffers us from any increases, provides some level of buffer against increases in pricing in externally sourced. Now we do use some externally sourced components. We do that for strategic reasons. But yes, we view it as we've been successful at either passing along those external component price -- higher prices or offsetting that with our own internal production as well. So we've -- the combination of pricing and cost has been -- we've seen higher gross margins. I think Sherri shared in her prepared remarks, specifically in data center and communications, we've seen the gross margin improvement we've seen is primarily coming from that component of our business. Papa Sylla: Got it. That's very helpful. And then in terms of my follow-up, it seems like it's very clear that the demand you are seeing for 1.6T is very strong, the early deployments at least. So I'm curious if you can touch a little bit on the mix you are seeing between EML, SiPho and perhaps even VCSEL. And maybe a follow-up to that is kind of what would be, generally speaking, the margin implication of selling higher SiPho transceivers versus EML or vice versa? James Anderson: Yes. On the second part of your question, we really don't see a significant margin difference between EML or SiPho-based transceivers. Both those transceivers are in the same ballpark of gross margin. And we're ramping both 1.6T, we are ramping both EML and cycle-based 1.6T. Remember, even a SiPho-based transceiver requires a CW laser based on indium phosphide, right? So either way, they both require indium phosphide capacity, which is, again, ties back to why we're driving one of the reasons we're driving higher indium phosphide capacity ramp. But for us, the mix is really determined by -- between EML and SiPho is really determined by kind of the customer applications. So we work with the customer on which one of those 2 technologies just fits their application better. And there can be pros and cons depending on the type of application. And then we do expect VCSELs to be used later on as well. Our 200-gig VCSEL development going very well. And beyond just 200-gig VCSELs that go into transceivers, we see 200 gig where we expect 200-gig VCSELs to be adopted in some CPO applications or NPO applications as well. But yes, that initial 1.6T ramp is a combination of EML and SiPho-based 1.6T. Operator: We take the next question from the line of Ruben Roy from Stifel. Ruben Roy: Jim, the kind of the discussion around CPO has certainly seemingly accelerated since the beginning of the year through OFC and even over the past few weeks with some of your peers and yourselves talking about it. First question, just a clarification on the second half scale-out, '27 scale-up ramp. Are those ramps tied to NVIDIA specifically? Or are there other customers contributing to those initial scale-out CPO revenues for you? And then the second part of the question is, as you think about CPO and new opportunities like multi-rail and the components that go into multi-rail, my understanding is some of those things have higher margin structures than maybe other indium phosphide or silicon photonics components. How are you thinking about allocating capacity across some of these sort of, let's call them, newer growth areas as you think about the next 12 to 18 months? James Anderson: Yes. Thanks, Ruben. On the CPO, certainly, now that the NVIDIA partnership is public, yes, they're -- clearly, they're probably our lead customer on CPO -- and -- but we do expect other customers to follow as well. And we're engaged with multiple different customers. It's actually a pretty wide set of customers, and we expect to have CPO solutions across multiple customers. But definitely, NVIDIA would be kind of the lead customer for us. And then on the second question on multi-rail, yes, definitely higher gross margin structure in that part of the business. You're absolutely right that there's some specific components that go into multi-rail solutions that are quite high margin that also rely on indium phosphide capacity. In general, the way we look at capacity allocation is we allocate indium phosphide capacity to whatever drives the most -- the highest margin dollars. So whatever drives the maximum amount of margin dollars for the company, that's where we allocate the capacity. Operator: We take the next question from the line of Sean O'Loughlin from TD Cowen. Sean O'Loughlin: Jim, congrats on a solid set of results, as always. One of the things, and I think this speaks a lot to maybe Blayne and Tom's questions earlier in the call is one of the things that investors are trying to get a better handle on is, as you ramp 6-inch indium phosphide and the capacity there, the delta between maybe shipping initial SKUs, initial transceivers revenue, as you mentioned, versus having that line fully qualified at some of your customers for volume production. And I'm going to ask the question in a way that I know is the wrong way to frame it. But if I think about we're going to double indium phosphide capacity next quarter, why hasn't that translated into doubling revenue? And that's, I think, where I'm having conversations with a lot of folks, if you could just comment on that. James Anderson: Yes. Remember that there is a latency from the indium phosphide devices to when we actually ship transceivers, right? So when the indium phosphide devices, whether that's an EML or CW laser come out of the production facility, it's really probably the next quarter, 2 to 3 months later before we see the transceivers then shipped based on those devices, right? And as an example, those transceivers that shipped in our March quarter, that was indium phosphide devices that were produced in either our September or the early part of our December quarter. So there's usually a lag of a few months from when the devices are made to when we see those -- those show up in transceiver shipments. Sean O'Loughlin: And then just can you comment, Jim, on anything on the customer side? Or should we assume that there's a much tighter relationship between once the transceiver ships there, we've already been through the qualification process. Is that how we should think about it since it's... James Anderson: Yes, there's nothing unique about the devices on 6-inch versus 3-inch in terms of qualification. There may, in some cases, need to be qualification, but that would have already happened ahead of production shipments, right? So when we're talking about production shipments, the qualification is already complete at that point. Sean O'Loughlin: Got it. That's helpful. And then maybe related to the CW EML question, and I know I just -- I wasn't not listening. I know you're going to say it's sort of agnostic and you go where the customer goes. But if you could maybe comment on the 400-gig silicon photonics that you demonstrated at OFC and maybe some of the other industry commentary that maybe questioning the viability of silicon photonics and CW lasers at 3.2T, that would be helpful. James Anderson: Yes. Thanks, Sean. Yes, as you mentioned at OFC, we demonstrated 400-gig silicon photonics that would enable 3.2T. That -- we demonstrated that, but it could be used in either transceiver or could be used in CPO. So we demonstrated just the capability to do that. The form factor may be CPO or transceiver or both. But we would -- but we believe we have a path to 3.2T or 400 gig per lane silicon photonics based on that demonstration. And we're certainly -- we certainly expect to have both solutions based on 400-gig differential EMLs, which we already have but 400-gig silicon photonics as well. And by the way, we're -- we have 200-gig VCSELs that we're working on, but we also have 400-gig VCSELs that are in development as well. Those are a little further out, but we're certainly working on that as well. So we think we've got a really robust road map of multiple different laser technologies to support the future road map for our customers. Operator: Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Coherent's CEO, Jim Anderson, for his closing comments. James Anderson: All right. Thank you, operator, and thanks, everybody, for joining us today. In closing, we are certainly very pleased about the strong third quarter performance and the continued momentum across our business. Demand remains exceptionally strong, and we see accelerating growth ahead of us as we ramp capacity significantly over the coming quarters. I want to thank our employees for the great execution and the continued innovation, and we look forward to updating you at our next call in another quarter. Thank you. Operator: Thank you. Ladies and gentlemen, you may disconnect your lines at this time. Thank you for your participation.