加载中...
共找到 37,646 条相关资讯
Operator: Greetings, and welcome to HASI's First Quarter 2026 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Aaron Chew, Senior Vice President of Investor Relations. Aaron Chew: Thank you, operator, and good afternoon to everyone joining us today for HASI's First Quarter 2026 Conference Call. Earlier this afternoon, HASI distributed a press release reporting our first quarter 2026 results, a copy of which is available on our website, along with the slide presentation we will be referring to today. This conference call is being webcast live on the Investor Relations page of our website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements which are subject to risks and uncertainties described in the Risk Factors section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those stated. Today's discussion also includes some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings release and presentation. Joining us on the call today are Jeff Lipson, the company's President and CEO; as well as Chuck Melko, our Chief Financial Officer. Also available for Q&A is Susan Nickey, our Chief Client Officer. To kick things off, I will turn it over to our President and CEO, Jeff Lipson, who will begin on Slide 3. Jeff? Jeffrey Lipson: Thank you, Aaron, and welcome to our first quarter 2026 earnings call. We are pleased to report a strong start to 2026 with outstanding financial results and a positive outlook for the business. In Q1, adjusted EPS was $0.77, driven by growth in revenue across the board, along with 0 new share issuance from our ATM. Adjusted ROE was 15.7%, the highest quarterly level in our history. Adjusted recurring net investment income was up 29% year-over-year to $101 million, and our managed assets were up 13% year-over-year to $16.4 billion. We continue to execute on our 2026 business plan, and we are reaffirming our 2028 guidance of $3.50 to $3.60 adjusted earnings per share and adjusted ROE of 17%. Moving to Slide 4. It's important to highlight how our Q1 results represent particularly strong performance in light of the ongoing volatile geopolitical and macroeconomic developments impacting financial and energy markets. Most notable, of course, is the Iran war, creating volatility, particularly in oil prices and jet fuel availability. Separately, the increase in power prices in the U.S. has created affordability challenges. Additionally, credit and liquidity challenges have emerged in the private credit sector with implications across financial and credit markets. Despite these challenges impacting the economy, our business has remained consistently profitable with ongoing earnings growth as we effectively address this volatility. In fact, certain of these developments reinforce the value of renewable energy and HASI's investment thesis. For example, once installed and operational, renewable energy projects have minimal operating costs and do not depend on an ongoing supply of fuels, but instead are powered by naturally replenishing resources. Renewable energy projects are less vulnerable to geopolitical volatility and bolster energy independence and national security, and they provide a high degree of cost certainty and visibility. The intermittency of renewables can be increasingly improved by continued storage development. In addition, beyond the implications for renewable energy, the recent geopolitical and macroeconomic uncertainty has also served to accentuate the prominent attributes underpinning HASI's business model of offering differentiated capital solutions to clients supported by project cash flows. This business model results in HASI offering our investors low-risk, diversified exposure to growth in U.S. energy transition infrastructure, stability and visibility of long-term predictable revenue and a proven track record of exceptional risk-adjusted returns. In the face of this backdrop, we continue to demonstrate the resilience of our business and our ability to execute at a high level with strong operating results. Turning to Page 5. We closed more than $460 million in new transactions in the quarter that will be held at CCH1 and on our balance sheet. And we increased fee-generating assets 130% year-over-year to $1.1 billion. In terms of the returns on these investments, new asset yields on portfolio transactions closed in the quarter remain over 10.5% for the eighth quarter in a row. Supported by the increase in new asset yields over this period, our portfolio yield rose 90 basis points year-over-year to 9.2%. Finally, we continue to optimize our balance sheet in the first quarter of 2026. As Chuck will provide greater detail on shortly, we were active issuing low-cost, long-duration debt and redeeming higher coupon debt while issuing no ATM shares in the quarter. Turning to Slide 6. We highlight the investment activity for the quarter, including a robust Q1 total volume of $637 million, of which $462 million will be held by CCH1 and on our balance sheet. This volume keeps us on pace for the $2 billion to $3 billion expectation for 2026 that we discussed on the Q4 call. The investments were well diversified and underwritten with attractive risk-adjusted returns. Our investment platform is continuing to deliver on our goals and fueling the continued growth in our profitability. Turning to Page 7. On Monday, we jointly announced with Ameresco the creation of Neogenyx, a newly formed joint venture representing the spin-off of Ameresco's biofuels business. We are excited about co-investing in what we expect to be the premier developer and owner-operator of biofuels projects. Ameresco has been a partner of HASI for over 20 years and across more than 60 investments, and we have tremendous familiarity and confidence in Mike Bacus and their team. This investment fits well into the HASI business model as it includes a very strong partner, an asset class renewable natural gas in which we have extensive experience, operating projects that we were able to diligence, a business model well suited to current and expected future market demand and a structure that provides a priority position on cash flows. Neogenyx' existing portfolio of operating projects allow the company to have scale from day 1 and a strong pipeline of identified development opportunities that will facilitate future growth. Our investment in the venture is initially $400 million, and we will own 30% of the enterprise with a priority position on cash distributions until a hurdle return is achieved. And our long-term expected return on investment is higher than our typical investment given the large upside potential of the business. Turning to Page 8. Our pipeline remains greater than $6.5 billion as end market dynamics, including consolidation, continue to result in a wide variety of developers and sponsors seeking project level capital. In addition, power demand continues to result in an elevated level of development activity and policy items are well understood and workable. I also want to mention a definitional change. We first introduced the concept of what we call the Next Frontier in our Q4 2024 call, to illustrate the tremendous growth opportunities for the business. We continue to pursue certain of these asset classes, and we'll disclose closings as they occur. However, from a presentation perspective, we have recategorized these into the 3 existing core segments and an Other Sustainable Infrastructure category as appropriate in order to simplify our disclosure. And with that, I would like to turn the call over to Chuck to discuss our financial results and funding activity in greater detail. Charles Melko: Thanks, Jeff. We are continuing to build off the success achieved in 2025 and have had a great start to the year. We have increased our adjusted EPS to $0.77 per share in the first quarter compared to $0.64 per share in the same period last year. Our adjusted earnings increased 31% from Q1 last year to $102 million in Q1 this year. This increase is predominantly driven from the growth in our investments in CCH1 and our portfolio. Our focus on being more efficient with the deployment of equity capital has contributed to our higher adjusted ROE this quarter to 15.7% compared to 12.8% in the same period last year. The marginal ROE that we are generating, is making an impact, and we are benefiting from the reduction of share issuances that we need to fund the growth of our business. While we achieved growth in our adjusted EPS, our GAAP results included an HLBV loss related to the timing of tax credit sale proceeds distributed to tax equity investors. And we expect this HLBV accounting will fully reverse next quarter. On the next slide, we have seen growth in our adjusted recurring net investment income of 29% to just over $100 million, and this source of income is not only generating a good base of recurring earnings, but is also growing into a larger component of our overall earnings relative to our other sources of income, as we illustrated on last quarter's call. Our gain on sale this quarter was $23 million. And as we often highlight, our gain on sale income does not increase quarter-to-quarter on a trend line. And while we do expect full year gain on sale to be similar to last year because of the higher level of gain on sale this quarter, it is reasonable to expect lower levels of gain on sale for the remaining quarters of the year. The other component of our revenues that consists of upfront fees from CCH1 and other advisory-related fees continue to increase and contributed $9 million to our earnings this quarter. On the next slide, as we close transactions, they become managed assets, which are held either on our balance sheet directly or indirectly through CCH1. These transactions can also be held in securitization trusts where we typically hold a residual interest. We generate upfront and ongoing income from these transactions and a growing base results in more earnings. Our managed assets are now at $16.4 billion, up 13% year-over-year, and we are continuing to see the high-quality performance of these assets that are reflective of our prudent underwriting with an average annual realized loss rate of less than 10 basis points. The portfolio continues to be well diversified. And in addition to the diversity of asset classes, each of the individual investments also typically consists of multiple projects with uncorrelated cash flows. The earnings power of our portfolio demonstrated by our portfolio yield has increased to 9.2% and is a result of the continued closing of transactions into our portfolio at higher yields. The CCH1 assets in which we hold 50% of the equity in our portfolio, are now at $2.3 billion and are providing a growing stream of ongoing management fees. We also just recently completed a private debt placement at CCH1 in which the notes were priced at a spread of 195 basis points to the 10-year treasury, a tighter spread than the previous issuance. This is further validation of the quality of the assets that we are investing in and a contributor to the increasing returns on our investments in CCH1. On the next slide, we are continuing to realize a lower cost of capital and successfully manage our liability structure, as demonstrated through the transactions that we executed in February. We issued a total of $1 billion in bonds between a $400 million senior bond priced at 6% and a $600 million junior subnote priced at 7.125% The proceeds of these transactions were used to retire our remaining $450 million senior bonds due 2027 with an 8% coupon and create additional liquidity for the upcoming $600 million maturity. The outcome of these transactions resulted in a lower cost of capital as the spread on our senior bonds improved 50 basis points and the subordination premium on the junior sub notes improved by 48 basis points from the most recent issuances. The maturity profile of our debt platform was significantly extended with the senior bond offering a 10-year maturity and on our junior sub note a 30-year maturity. Adjusting for the upcoming 2026 maturity, which we have already reserved for with our existing liquidity, the weighted average maturity of our corporate term debt extended from 7.9 years to 12.8 years. On the next slide, I've already made some brief comments on the topics outlined here, but there are items that really emphasize the benefits of our capital platform. First is our liquidity position. It is a real strength to our business to have the flexibility and timing to access the market and raise capital opportunistically and reduce our costs. We currently have $2.3 billion available, a portion of which we plan to use to pay off the $600 million of remaining notes due in June. After this maturity, our next corporate bond is not due until 2028. Lastly, with our focus on funding more investment with the need for less additional equity, the use of CCH1, issuance of junior subnotes and the higher reinvested portfolio cash, resulted in no additional shares issued through our ATM in the first quarter, and we are on track to issue a minimum amount in 2026 based on our current funding expectations. When coupled with the growth in our managed assets, we are on track to meaningfully accelerate our profitability. I will now turn the call back to Jeff. Jeffrey Lipson: Thanks, Chuck. Turning to Slide 14, we display our sustainability and impact highlights, noting our cumulative carbon count and water count numbers, reflecting the significant impact of our investment strategy. Let's wrap up on Slide 15. We reiterate the themes of strong returns in the business, coupled with ongoing access to low-cost capital that will continue to drive our business towards achieving our guidance levels. I will conclude by addressing the management changes announced today. First, I would like to welcome Christy Freer to our executive team as our Chief Legal Officer and look forward to working with Christy. Next, I want to acknowledge Marc Pangburn for his tremendous contribution to HASI over the last 12 years, as Marc has been instrumental in closing countless important transactions that have led to our success. In his new role at GoodFinch, we will continue to work closely with Marc, and he will continue to provide value for HASI by optimizing our SunStrong business. Our prosperity has always been a function of numerous dedicated and talented individuals. The 4 executives identified in today's press release are all enormously talented and have already built teams and contributed significantly to HASI's success. I have full confidence in each of them, in their expanded roles, and I'm thrilled we have this depth of talent in our organization. Annmarie Reynolds, who recently closed Neogenyx; and Manny Haile-Mariam, who recently closed Sunzia, are extremely well qualified to be our Co-Chief Investment Officers. They both possess outstanding leadership qualities and significant commercial acumen as well as a track record of success. Daniela Shapiro, who has grown our BTM business significantly over the last 4 years; and Viral Amin, who has upgraded our risk management infrastructure, are both accomplished leaders who will do a tremendous job as our Co-Chief Risk Officers and investment committee members. They both possess leadership, credit and commercial skills, extremely well suited to their critical roles. I'm very excited by these executive appointments, and I congratulate all. Thank you. Operator, please open the line for questions. Operator: [Operator Instructions] Our first question comes from Vikram Bagri with Citi. Vikram Bagri: To start off, I wanted to dig into this new JV with Ameresco. I understand the return on that project is higher than where you're tracking -- where you have been tracking recently. Could you clarify what the yields are or returns are on that investment? Also, if you can clarify relative to your 30% equity interest, what would be the initial cash flow from that, your take of cash flow will be initially? And then finally, how do you see this JV evolve? Is this going to be a vehicle for consolidation, organic growth? Is the -- do you envision this JV to take the company public at some point or Ameresco buys you out in the long term? And then I have a follow-up. Jeffrey Lipson: Sure, Vikram. Thanks for the question. I would say the venture is primarily focused initially on organic growth. There may be consolidation over time in terms of buying other platforms, but that's not the principal objective. There's a critical mass of operating projects going in day 1, and there's a very strong pipeline that the team there has developed. So it's a little bit more focused on organic growth. In the long term, whether we someday jointly take this public is much too early to say. We're kicking it off this month. So again, we're focused on building this up into something very special, but the exit strategy, it's a little premature to talk about. In terms of our cash flow, the initial investment based on the operating projects is roughly $100 million. The other $300 million will go in as additional projects are developed. And then our -- I think you asked about our cash flow coming back. That's not something we would disclose. Obviously, we have an expectation based on contracts of a certain amount of cash coming back and has a very strong cash yield, but we won't disclose that specifically. Vikram Bagri: Got it. And then as a follow-up, I see you moved 2 receivables from category 1 to category 2. Can you provide more details on that? Fully understanding that this is relatively small for you. I'm just trying to understand in which market are you seeing some stress? Are these residential solar assets, utility scale, RNG and if both the assets are in the same sector? Any color you can share on that would be helpful. Charles Melko: Vikram, this is Chuck. Yes. So on the question of the category 2 there, I mean, just to set the stage here, I mean, you definitely hit on the point that we do have very small amounts in that category. It isn't often you see too much movement in that category, but we still have 98% of our portfolio that's in the category 1 bucket. The item that moved in there, I mean, I think what we'd say with that is that there is a project that is having some technical challenges with some of the equipment, and it needs some -- a little bit more investment to correct the issue at hand with the equipment itself. But there are various plans to get that project where it needs to be on our original economics. And we certainly think there's a good outlook for that. So it's one of those things where we track projects, as you know, every quarter. And when we see something -- that there's something going a little bit in one direction here that we need to pay attention to, we will not hesitate to put in category 2 because we are paying attention to it. Operator: Our next question comes from Chris Dendrinos with RBC Capital Markets. Christopher Dendrinos: Great. And maybe to follow up on Vik's question there and ask this more directly. There is some challenges going on in the resi space right now and a few other folks have highlighted some debt challenges. Are you seeing any of that on your end? And is there any kind of risk exposure there that you could speak to? Jeffrey Lipson: Thanks, Chris. I would say, generally, no, there is a bit of an uptick in some delinquencies in the resi sector generally, and we're seeing a little bit of that in our portfolio as well. But it's tracking well within our original underwriting expectation of charge-offs and our loans there are all performing, literally 100% of the loans in resi are performing. So again, it's well within our underwriting guidelines, and we're not seeing stress in that portfolio. Christopher Dendrinos: And then maybe as a follow-up here, the tightness in the tax equity markets have been kind of broadly highlighted that some of the banks are maybe taking a step back near term waiting for treasury clarity. Is that translating into any sort of funding opportunity for you all where maybe there's a hole in the cap stack and you're able to kind of fill it here? Jeffrey Lipson: I'm going to ask Susan to answer that. I think on -- or at least respond to the part about the tightness in the market in terms of refilling gaps in the capital stack, that's usually not the dynamic. The tax equity obviously serves a specific purpose in terms of the tax attributes that it would be hard to substitute traditional HASI capital for that tranche. But the first part of the question around the tightness of tax equity, I'm going to let Susan answer. Susan Nickey: Yes. Thanks. A couple of comments on that. One is that just in terms of the tightness, it's important to note that the reports from last year is that the tax equity market actually grew significantly. Crux is one of the -- the Crux platform tracks some of that data and the total market increased 26% to $63 billion. And very importantly, the tax transfer market, which is still in its third year, grew 50% to $42 billion. So as we move -- and some of the -- at the end of the year, some of the corporates, and there's now nearly 25% of Fortune 1000 companies participating in the market who're dealing with their own understanding of where their corporate tax bill was going to settle with the change in the tax laws. But as we move into this year, I think some of that tightening that's been reported is what we're seeing and hearing from some of the stakeholders, but also from Crux is starting to have more liquidity as corporate buyers know where they're settling out in that regard and providing some uplift. I think the second issue, which is a bit different is regarding the FEOC rules related to clean energy tax credits being transferred and not to Foreign Entity of Concern ownership. And that reflates again, to 2026 tech-neutral tax credits, not the '25 or before substantial safe harbor pipeline through '23, which will -- many of the players already have their inventory set. So what we expect in that regard is certainly the IRS and treasury have been coming out with guidelines, and we need them -- people are waiting for that guideline on -- to be clarified on those -- the tax credit ownership. And again, there's precedents, but as we know, with ambiguity. Some tax equity investors and banks are waiting for that clarity, which should come. And that is important, obviously, for the whole industry because nuclear, carbon capture, geothermal, all the technologies need that guidance. And I'd say lastly, we certainly want to keep working to expand the tax credit market given there'll be continuing growth in the supply with all the different projects being built with these technologies and manufacturing and HASI is working with the industry in American Clean Power to develop standardization documents to help facilitate growing the corporate tax credit market. Does that help address what you've heard? Christopher Dendrinos: Yes. Well, I guess maybe just a quick follow-up would be, I mean, is this any way to have a bearing on the investment pace that you all are going on right now? Susan Nickey: Not -- in our pipeline, again, as we've talked about significant, our sponsors, and it's really across certainly the grid connected, and I think Sunrun and others have mentioned it, have safe harbored their pipelines through 2030, if not the next 2 years. So it wouldn't directly impact what we're seeing in terms of growth. Operator: Our next question comes from Ben Kallo with Baird. Ben Kallo: My first question is just on CCH1 and the capacity left there under that agreement. And then following that, has anything changed with your partner in the -- their appetite to invest more after that first tranche? Jeffrey Lipson: So thanks, Ben. On the second part of the question, no, our partner has continued to express significant enthusiasm around the partnership. And as evidenced by the upsize late last year, has shown a strong willingness to continue to invest. As we disclosed here on Page 11, the assets are $2.3 billion. The commitments are a bit higher than that for some things that are in CCH1, just haven't funded yet. And as I think we mentioned last quarter, as structured right now and given our pipeline, we certainly have enough capacity for this year. And we're working on a CCH2. We've started to commence some activity there. I can't say too much in terms of detail there, but we certainly are intending to have that up and going by the time CCH1 capacity has been utilized. Charles Melko: I'll also add -- sorry, Ben, just also to provide a little bit of context for the capacity that we have. And we've said that in the past that we've got roughly about $5 billion of capacity available, and that's comprised of the equity commitments between us and KKR. It's roughly about $3 billion. And then -- as we said before, we are -- and we did mention in our call here that we have issued some debt at CCH1. So keeping our leverage ratio at CCH1 under 1x -- anywhere between 0.5 to 1x debt to equity, that gets you to a total of $5 billion and comparing that to the $2.3 billion that we currently have in there. Ben Kallo: Okay. Great. Just on -- in terms of your cost of capital, can you talk about how much you think you can reduce your cost of capital? I know you guys have done a lot. But also, I just -- going from '25, I think on Slide 17, you had 5.8% interest expense over average debt balance. It ticked up in Q1. So maybe the -- could you explain that a bit? And then just how much more you think you can reduce your cost of -- your total cost of capital going forward? Charles Melko: Yes. So the uptick that you're seeing in Q1 is largely attributable to the issuance that we've done on the junior subordinated notes. So they do carry a little bit higher of a coupon. But from an overall cost of capital standpoint, because we get 50% equity credit for purposes of our leverage ratios with the rating agencies, we do have to -- we do get to issue less equity. So a little bit higher coupon that we're paying an interest expense, but we are issuing less shares. So overall, it is a benefit to our cost of capital. And I think if you took out from that 6.1%, the interest expense related to those hybrids, the debt cost is relatively flat, around 5.8% or so compared to last year. Now on the -- how much further can it go question, we've obviously seen a benefit and reduction of spreads on the debt that we're issuing. And I think a large part of that is due to just the efforts that we put into getting out there and talking to the investment-grade investor market, and we've had some success with that. We're still relatively new to the market. So there is a little bit improvement we could see on the spread. But as you probably know, spreads across the board are a little bit tight in the investment-grade market, and they can only go so far. But right now, with the guidance that we have out there, do we need this to go lower? No, we absolutely don't. And with the margins and the yields that we're seeing on our assets and the equity efficiency that we're seeing, we don't really need it to go down to further increase our returns. Operator: [Operator Instructions] Our next question comes from Maheep Mandloi with Mizuho Securities. Maheep Mandloi: Maheep Mandloi from Mizuho. Maybe just on the investment with Ameresco's Neogenyx. Can you just talk about the rationality over there or like what motivated you to invest? Is it somewhat similar to what we have seen with -- on the resi solar side, which helps with ITC or something else which helps you capture more value with the RNG assets? Jeffrey Lipson: Sure. Thanks, Mandeep. I think -- and I talked a little bit about this in the prepared remarks, some of the attributes that really attracted us here were, first and foremost, the partnership we have with Ameresco and the trust and familiarity we have with their team. It's very consistent with how we've built the business with programmatic partners. Here, we were able to, again, diligence all of the investments day 1. RNG is something we're very familiar with, and we've been very active in RNG, as you know. And so it's an asset class we well understood. And then there was great alignment with the Ameresco team of what we want to do with this business going forward, what the relative structure of the parties would be in terms of ownership and cash flows. And so it's a real opportunity for us to do something perhaps slightly different than we've done in the past, but with very, very similar attributes and certainly more upside than most of what we do at the project level investing. Maheep Mandloi: Appreciate it. And on the Ameresco's deck, they kind of talked about a $2 million to $4 million of net income to you guys from the -- for this year for Neogenyx. Is that like the framework we should think about and build upon that going forward? Or how to think about the modeling here? Jeffrey Lipson: Sorry, I missed one word there, Mandeep. Can you just repeat that question, please? Maheep Mandloi: Yes, sure. On Ameresco's presentation, they talked about your minority interest in the net income at around $2 million to $4 million for this joint venture. Just curious if that's something we should assume for modeling purposes for this year for -- on your...? Jeffrey Lipson: No. From a HASI perspective, our accounting, of course, is different than Ameresco's. Our accounting here will be simply an equity method investment, consistent with what we've done in the past. We underwrote this in terms of cash-on-cash IRR, and we're going to account for it consistent with how we've accounted for our other equity method investments. So there's no pass-through of direct income as part of our accounting. And Chuck may want to expand on that. Charles Melko: Yes. Maheep, I think at Ameresco's release, all they did for that number was simply just take 30% of the total EBITDA expectations for that project, which, as we've mentioned, this is an investment that is very similar to what we do where it's a structured equity investment. And when you have structured equity investments, we're focused on the cash-on-cash returns. There's targeted returns that we go after. And it's not as simple as just taking 30% of the total project EBITDA. Operator: Our next question comes from Noah Kaye with Oppenheimer & Company. Noah Kaye: The first one, just on the 12-month pipeline. You replenished this right, quarter-over-quarter, it's still greater than $6.5 billion. It looks like the largest percentage increase and therefore, dollar increase was in grid-connected assets. And certainly, that tracks with the increase in grid scale renewables being deployed. But maybe just comment a little bit on what drove that uptick? And can you talk a little bit about the nature of those transactions? Are these primarily mezz debt, pref equity or of a different nature? Jeffrey Lipson: Sure. Thanks, Noah, for the question. And I always caution against too much precision on pipeline disclosure. Of course, it's greater than $6.5 billion and it's a 12-month pipeline. So there's always a little bit of judgment involved. But to answer your question, grid-connected does have a very strong pipeline. The vast majority of it is programmatic partners that HASI has worked with before and the majority of it is pref equity on solar projects. So I think that's the majority of that pie slice of the pipeline. Noah Kaye: Very helpful. And then this was a quarter where there was 0 ATM issuance. The progress from the company and becoming more capital light, we're all seeing it. I think in the deck, it says minimal equity issuance expected for '26. Not asking you to put any kind of finer point on that, but from an equity perspective, I mean, how close do you feel this business is to really a self-funding model? Jeffrey Lipson: I would say very close. I think that minimal you can interpret as if the volume of fundings this year is within the expectation that we set, that could very well be 0. If we're a little more successful than that estimate and we end up doing $4 billion or $5 billion, then certainly you would see us issuing more equity, but that's accretive equity, and that's a really big year in terms of new originations. So that's a good scenario as well. But I think if we hit the expectation range that we established, I think we'll be -- we are already self-funding. Charles Melko: Noah, I'll also add to this that we certainly have seen an uptick in transaction closings that we've had. And looking forward, we do expect some growth in that number. And if you go back to the slide that we prepared last quarter where it shows how far our each dollar of equity goes, we are making much better progress on how little equity we need to issue when we're making our fundings. But what you will see -- certainly see in the future is that if we are issuing equity, the percentage of that equity relative to the total fundings is much, much lower percentage than you've seen historically. Operator: Ladies and gentlemen, that was the last question for today. The conference call of HASI has now concluded. Thank you for your participation. You may now disconnect your lines.
Operator: Welcome to the Brookfield Business Corporation First Quarter 2026 Results Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the queue, simply press 1-1 on your touch-tone phone. I would now like to turn the conference over to Alan Fleming, Head of Investor Relations. Please go ahead, Mr. Fleming. Alan Fleming: Thank you, Operator, and good morning. Before we begin, I would like to remind you that in responding to questions and talking about our growth initiatives and our financial and operating performance, we may make forward-looking statements. These statements are subject to known and unknown risks and future results may differ materially. For further information on known risk factors, I encourage you to review our filings with the securities regulators in Canada and the U.S., which will be available on our website. We will begin the call today with Anuj Ranjan, our Chief Executive, who will provide an update on our strategic initiatives. Anuj will then turn the call over to Stuart Levings, Chief Executive Officer of Sagen, our Canadian residential mortgage insurer, to talk about the positioning and performance of the business in the current environment. Jaspreet Dehl, Chief Financial Officer, will then discuss our financial results for the quarter. After we finish our prepared remarks, the team will be available to take your questions. With that, I would now like to pass the call over to Anuj. Anuj Ranjan: Thanks, Alan, and good morning, everyone. Thank you for joining us on the call today. We had a great quarter, which was defined by three things. First, Clarios received $1 billion of cash tax credits, the first of similar amounts we expect annually through the end of the decade. Second, we sold a 27% interest in La Trobe Financial, the Australian asset manager and lender, at an implied 3x multiple of our capital in just under four years. And third, we committed to lead a $500 million investment alongside OpenAI with the newly created OpenAI deployment company, a platform built to deploy enterprise AI inside real operating companies. We also completed our corporate simplification in March and, since closing, our daily trading volumes are up 40% compared to average levels last year. We are anticipating about 5 million shares of incremental demand from index rebalancing over the next few months, both very important steps towards improving the trading liquidity and index demand of our shares. Let me touch on a few of the defining highlights of the quarter in more detail. Starting with Clarios, which received its fiscal 2025 cash tax refund of $1 billion in March tied to its U.S. production in the critical minerals sector. This is equivalent to about $1.50 per share of Brookfield Business Corporation, and we expect these credits will continue annually through 203[inaudible]. Today, Clarios is our largest and most valuable business, and with the investments it is making to expand production capacity and scale its critical minerals capabilities, we see a path to the value of our investment in Clarios doubling over the next five years. In addition, during the quarter, we reached an agreement to sell a minority interest in La Trobe Financial at a $2 billion valuation. Since we bought the business, we transformed it from a mortgage lender to a leading asset manager in Australia and increased its AUM from $10 billion to $16 billion. This sale realizes $1 per share in cash and results in a 35% IRR and a 3x multiple of our capital. In a market that is increasingly appreciating critical cash-generative industrial and services businesses, we expect our monetization activity to continue. The sale of La Trobe is the latest example of our strong track record of value creation built on a simple approach of buying, building, and operating vital industrial and services businesses. When the right moment arrives, we monetize to realize value and we redeploy that capital into new opportunities to fuel our engine and continue compounding value at scale. We recently did just that, committing to lead a $500 million Brookfield investment in DeployCo alongside OpenAI and a group of global investors. Our share of the investment is expected to be about $150 million. Stepping back, AI adoption is moving quickly, and returns will not only accrue to those who build the models, but to those who can deploy them at scale inside real operating businesses against real P&L. This requires operating capabilities, proprietary data, technical talent, and experience running and transforming industrial and services businesses. DeployCo is focused on enabling large organizations to move pilot use cases to full enterprise-wide implementation, addressing one of the primary bottlenecks in realizing AI-driven productivity. The platform will combine engineering talent, a strong commercial relationship with OpenAI, early access to models, and the capabilities of best-in-class operators like ourselves to deploy AI at scale. With more than 300 operating companies across the Brookfield ecosystem, we have a direct line into where AI creates value, and, importantly, where it does not. We have already been using AI in our own businesses as the latest tool to accelerate transformation, enhance growth, and drive efficiencies. We expect to draw on DeployCo’s capabilities to drive even harder in these areas to automate workflows, improve decision-making, and capture meaningful productivity gains in our own operations. As we look forward, the market for what we do is as attractive as it has been in the industry. Demand for essential services and industrial businesses has rarely been stronger, and we have the capital, capabilities, and the expertise to execute. We are in an excellent position to build on a strong start to the year and continue compounding capital for our shareholders. With that, I will turn it over to Stuart. Stuart Levings: Thank you, Anuj, and good morning, everyone. I will start with some comments on our resilient business model, and then provide an update on the overall Canadian housing market and how Sagen is performing in the current environment. As a reminder, Sagen is the leading private mortgage insurer in Canada operating in a highly concentrated, regulated market with only three providers and significant barriers to entry. Mortgage insurance is mandatory for homes purchased in Canada with a down payment of less than 20%, making this an essential service for our customers. The business model generates strong margins and returns on equity that have proven to be resilient through prior housing and economic cycles. During Brookfield’s ownership, we have grown our market share, repositioned the investment portfolio, reduced our expense ratio, and optimized the capital efficiency of the business. As a result, our return on equity has expanded from low double digits at acquisition to over 20%, allowing the business to provide meaningful distributions to shareholders, including Brookfield Business Corporation. That resilience is particularly important given the backdrop of the current Canadian housing market. To put that in context, the average house price in Canada has declined by 20% since early 2022 due to weaker sales activity driven by higher interest rates, constrained affordability, and lower consumer confidence. This has continued into the start of the year. We believe several factors, including continued undersupply of housing and modest improvements in affordability, coupled with stable interest rates and a renewed focus on housing support from the federal government, should provide a floor to home prices over time. Any improvement in the trade and geopolitical outlook should also bode well for a housing market recovery. Against that backdrop, Sagen continues to perform well. Our borrowers are typically first-time homebuyers, and this cohort has been more resilient and active over the past 12 to 18 months relative to the overall market. This is due in large part to the additional support provided by the change in mortgage insurance eligibility rules introduced in late 2024. Specifically, the increase from 25- to 30-year amortizations and from $1 million to a $1.5 million price cap. These changes drove a significant increase in the volume of insured mortgages during 2025, and while their pace has slowed, this segment of homebuyers was still more active than the general market during the first quarter of this year. We have also maintained a consistent focus on high-quality loans and a well-diversified portfolio, facilitated by our rigorous underwriting process. The average credit score of newly originated loans remains high, with a significant portion greater than 760. Approximately 80% of the insurance portfolio is backed by fixed-rate mortgages, providing borrowers with payment stability. The majority of the remaining variable-rate mortgages have constant payments where only the mix between principal and interest is impacted by fluctuations in rates, thereby providing a similar degree of payment stability. In addition to the quality of our insurance portfolio, strong oversight and regulation including mandatory loan amortization, full borrower recourse, and debt service stress tests for all insured borrowers serve to mitigate the risk of borrower default. For example, all insured borrowers in Canada are subject to a stress test that builds in a cushion for affordability in a rising rate environment, and insured borrowers facing financial hardship can extend their amortizations under our loan modification program. As a result, losses in our business are primarily driven by two factors. The first is unemployment, which drives the frequency of delinquencies. The second is the change in home prices, which influences the degree of loss given default. We see both of these factors as manageable in the current environment. Overall unemployment has remained relatively stable and, importantly, unemployment in Sagen’s core homebuying cohort—typically dual-income households between 25 to 54 years of age—has been quite resilient. Second, after a period of exceptional home price appreciation where borrowers have built significant embedded equity in their homes, the loan-to-value profile and loss ratio performance of our portfolio is now returning to more normalized levels in line with our long-term expectations. The business continues to be very well capitalized and, importantly, our regulatory capital model is designed to perform through the cycle. As we look forward, we expect losses to remain within our long-term expectations, reflecting the strength of our high-quality, regionally diversified portfolio, loss mitigation strategies, and disciplined risk management framework. As a result, we are confident in the continued resiliency of Sagen’s performance to support strong returns on equity and consistent cash generation, providing for approximately $400 million of annual distributions on a full-cycle run-rate basis. With that, I will hand it over to Jaspreet. Jaspreet Dehl: Thanks, Stuart, and good morning, everyone. We generated first-quarter adjusted EBITDA of $582 million compared to $591 million in the prior period. Current-year results reflect the impact of lower ownership in three businesses and include $27 million of contributions from new acquisitions. Excluding tax benefits and the impact of acquisitions and dispositions, adjusted EBITDA was up approximately 5% compared to the prior year. Adjusted EFO for the quarter was $279 million compared to $345 million in the prior period. Prior-period adjusted EFO included a $114 million net gain from the disposition of our offshore oil services shuttle tanker operation. Turning to segment performance, our Industrial segment generated first-quarter adjusted EBITDA of $320 million compared to $304 million last year. Excluding the impact of acquisitions, dispositions, and tax benefits, segment performance increased by 7% compared to the prior year. Performance at our advanced energy storage operations was supported by the ongoing mix shift toward higher-margin advanced batteries, partially offset by the impact of slightly lower overall volume. Results at our engineered component manufacturer increased more than 10% on a same-store basis compared to the prior period, benefiting from recent commercial actions and increased margins despite end-market softness. Moving to our Business Services segment, we generated first-quarter adjusted EBITDA of $208 million compared to $213 million last year. On a same-store basis, adjusted EBITDA increased by 7% over the prior year. Results reflect solid performance and realized gains at our residential mortgage insurer, which continues to generate strong returns. Performance at our dealer software and technology services operation is supported by contractual annual price increases as the business continues to make strategic investments toward strengthening its customer service and product offering. Finally, our Infrastructure Services segment generated first-quarter adjusted EBITDA of $90 million compared to $104 million last year. Prior results included contributions from our offshore oil services shuttle tanker operation, which was sold in January 2025, as well as the impact of the partial sale of our work access services operations completed in July 2025. Results at our lottery services operations are supported by the ramp-up of recently secured contracts and growing share with existing customers. Performance at our modular building leasing services operation benefited from increased sales of value-add products and services. Turning to our balance sheet and capital allocation priorities, we ended the quarter with $2.4 billion of pro forma liquidity at the corporate level, including the fair value of units we received in exchange for the partial sale of interests in some of our businesses. During the quarter, $43 million of the units we received were reduced. Our strong liquidity position gives us significant flexibility to support our growth and balance capital allocation priorities. During the quarter, we completed the $250 million buyback program launched in February. Since that time, we have deployed approximately $285 million toward repurchases, including $65 million of repurchases during and subsequent to quarter-end. Going forward, we expect to remain opportunistic under our NCIB program, balancing buybacks with our other capital deployment opportunities. We will now open the call for questions. With that, I would like to turn the call back to the Operator. Operator: Certainly. As a reminder, ladies and gentlemen, if you would like to ask a question, please press 1-1 on your telephone keypad. Our first question comes from the line of Bart Dziarski from RBC Capital Markets. Your question, please. Bart Dziarski: I wanted to ask around Sagen. Stuart, thanks for joining the call this morning. We saw the loss ratio increasing to 12%. The last few years, it has been running around 5%. Could you give us a bit more detail as to what drove the reserve strengthening that was described in the MD&A? And then I heard you mention normalization to the long-term targets. Could you remind us what those long-term target loss ratios are? Thanks. Stuart Levings: Yes, certainly. Thanks for the question. Principally, what is driving the loss ratio higher is that the loss given default has increased a little bit more on recent delinquencies, and that is because house prices have been declining, as I noted in my comments. Frequency has not materially picked up. Unemployment, as you know, is the biggest driver of that, and that has been relatively stable. But certainly, in the books where we are seeing some pressure—which would be the 2022 and 2023 vintages—there is not as much equity, and so the loss given default there is larger. That is the primary driver of the uptick in the loss ratio. That said, we do not see the loss ratio migrating a lot higher this year. Our long-run pricing loss ratio is in the 15% to 20% range, and I think we will be comfortably below that this year. Over the longer term, it will trend back toward that 15% to 20% only because we are coming out of abnormally low loss environments. We saw incredibly strong house price appreciation and very strong employment, so we cannot look at the prior years of single-digit loss ratios as being normal. All that said, keep in mind there are tremendous capital buffers in the business, and we do not anticipate any impact on our ability to maintain our annual distributions. The business is built to handle the kind of economic volatility that we see right now. Bart Dziarski: Great. Very helpful. Thanks for the color. And then a follow-up on—or I guess a question around—Clarios. Anuj, you expressed confidence around the value doubling over the next five years. Could you help us understand the key value levers to drive that increase? And you have held this asset since 2019, so how should we think about where that value accrues to in terms of whether you expect to hold it for another five years or look to surface that value via exit? Thanks. Anuj Ranjan: Sure, thanks. I will start, then I will get Jaspreet to chime in on the bridge to value creation. I would say this is an incredible business. It generates a lot of cash flow. It is a real market leader. The shift that we are seeing to advanced, or absorbent glass mat, batteries is an area in which Clarios is gaining more market share and achieving higher margins as well, and so everything is going the right way and on the right trend. Layer into that some of the tax credits that we are now receiving and the greater certainty we have around them going forward, this is an incredible business to continue to hold. We think it will continue to generate significant cash flow that the business can invest in, use to delever, and, in time, use to pay dividends. This is one of our real cash compounders—the kind we aspire for all of our businesses to eventually become. Therefore, we are in no hurry to exit, given the cash profile we see in the near term and coming years. However, of course, we are always opportunistic and thinking about value, and if the market recognizes the value in the company that we see, and the cash it generates in our hands, we will keep our options open. I will turn it over to Jaspreet on how we see the value doubling over the next few years. Jaspreet Dehl: Thanks, Anuj. Hi, Bart. Keeping it high level and simple, as we discussed at investor day, based on our view of NAV today, Clarios is about 30% of our NAV value, which implies about $15 per share. On an LTM basis, the business is generating about $2.3 billion of EBITDA. If you take a conservative view on annual EBITDA growth—say, mid-single digits—the business, which has comfortably been delivering that, could exceed $3 billion in five years. We view this as a 9x to 10x multiple business. On $3 billion of EBITDA, that is about $30 billion of enterprise value. With the cash flow generation organically in the business, plus the impact of the tax credits, over the next five years the business can generate circa $8 billion of cash. When you take that cash against where debt is today, which is about $11 billion, $8 billion of cash generation over the next five years brings net debt down to significantly lower than $4 billion. So on $30 billion of enterprise value and $4 billion of net debt, you have equity value of approximately $26 billion. That, when you take to BBUC’s share, basically doubles that $15 per share contribution from Clarios. There are a lot of numbers there, but that is the bridge. Operator: Thank you. Our next question comes from the line of Devin Dodge from BMO Capital Markets. Your question, please. Devin Dodge: Yes, thanks. Good morning. I wanted to start with some questions on DeployCo, the AI deployment platform you talked about, Anuj. This is a bit of a different investment for Brookfield Business Corporation, as it does not come with a control position. A two-part question: first, can you speak to the role or influence that Brookfield will have at that business? And second, is DeployCo primarily an advisory-type business, or will some of the invested capital be used to acquire technology and equipment? Anuj Ranjan: Sure. Hi, Devin. Happy to take that. As you know, we have been talking for many years now about AI’s role in transforming more traditional operating businesses—the real bedrock of the global economy. The real bottleneck is not the technology or capital; it is change management—the ability to deploy AI at scale. OpenAI has also recognized this. The demand for their enterprise solutions far exceeds the ability to actually deploy them in enterprise, and so they saw an opportunity to create a vehicle—an advisory and services business—to implement AI and these solutions in enterprise businesses at scale. For us, first, as an investor, we thought that opportunity was very exciting. We believe in it and have seen it firsthand while operating companies. We know the opportunity is real and that this is a business that can scale dramatically. Second, we have structured our investment as a preferred instrument, which gives us a lot of downside protection. We will earn returns in excess of our 15% target, and we are very comfortable with that, while retaining meaningful upside if, with our partners—OpenAI and others—we are able to scale it. Third, as an owner of operating businesses, we see this as an opportunity to benefit from what the OpenAI deployment company will do. We will have access to leading technology at very early stages, and access to the talent required in the OpenAI deployment company to implement these latest AI technologies across our portfolio companies in BBUC. This is a huge advantage that we think will pay dividends across the portfolio. We signed an agreement to invest $500 million, of which about $150 million is BBUC’s share. In terms of governance, we are a minority investor with a preferred instrument that has a minimum return in the high teens—above the 15% that we target—so we are quite comfortable. We have standard minority governance that you would expect in a business like this. Devin Dodge: Great color there, Anuj. Appreciate that. One quick follow-up: does the agreement for this JV limit Brookfield’s ability to invest in the deployment of other AI models? Anuj Ranjan: No, it does not. We will always use whatever is the best tool or technology for our portfolio companies, or as they see fit. This just gives us an additional benefit to access technology early, as well as the talent and change management capability to implement it in our companies. Operator: Thank you. Our next question comes from the line of Scott Fletcher from CIBC. Your question, please. Scott Fletcher: Hi, good morning. I wanted to ask a question on BRK. I believe it was awarded a new concession earlier this week. How meaningful could that be for the business? And then, as it relates to BRK, is there any update on the monetization front? We have seen a couple of interest rate cuts in Brazil, which I am assuming should be helpful for buyer interest down there. Jaspreet Dehl: I will take that. You are right—towards April, BRK won a new concession in the northeastern part of Brazil. As you are aware, it takes time to ramp up these concessions. It does represent a meaningful win for the business, and we think over time it will grow substantially and add to the overall portfolio and the earnings power of the business. It is small today, but once fully ramped up, we expect it will be a pretty significant part of the overall business. Scott Fletcher: And on the monetization front, any update there? Jaspreet Dehl: We are continuing to focus on monetizing the business. As we have talked about before, our base case is still an IPO. We think this is an incredible business that would make a great public company. The market environment in Brazil has been choppy, but it is stabilizing. Interest rates were at record highs around 15%. We have seen a few interest rate cuts and are sitting at about 13.5% now, which is going in the right direction. Our view would be to still do an IPO of this business when we have the right market window. Scott Fletcher: Got it. Appreciate the color. I will turn it over. Operator: Thank you. Our next question comes from the line of Scott Fletcher from CIBC. Your question, please. Scott Fletcher: Hi again. I wanted to ask a question on CDK. There have been some headlines around the creditors there. From a bigger-picture perspective, with the price where the bonds are, it would imply the equity is under some pressure. In a situation like this, what is your general approach to getting as much value as you can out of a situation like this? Jaspreet Dehl: Hi, it is Jaspreet. Maybe I can get started. Our general approach is that we look to make investments that generate our 15% to 20% targeted returns. We have an incredible operating team that works with all of our businesses to create value, and we have built an incredible track record not only over 25 years of doing this, but also over the last 10-plus years as a public company. Having said that, every once in a while there are situations that do not go our way or in line with our expectations and underwriting. We have dealt with them from time to time. Our approach is always value preservation. When we underwrite a business, we are underwriting to a base case and upside, but also a downside case. In every situation, we want to protect and preserve our capital and be able to eke out a return on the investment even when things do not go according to plan. When we do get into those situations, we put our shoulder behind it, add focus, swarm the business, and put our best people on it to work through the situation. You have seen that journey in one of our businesses, Altera, where we were in a very difficult situation given what was going on broadly in the market, and we worked hard to turn that around and return the majority of our capital. All of my comments are our general approach to difficult situations and not specific to CDK or any other business. Scott Fletcher: Thanks, I appreciate the comments. I understand the situation is hard to comment on specifically. One clarification on the tax credits—both were for the 2025 year that was received. Is there any additional clarity on the 2024 credits, which I think are still pending? Jaspreet Dehl: Yes. We received the $1 billion for 2025, and the 2024 credits are still under processing at the IRS. We have not received any feedback to indicate that the refund should not be coming as part of this process. The basis of that credit is no different from the 2025 credits. As Anuj said in his opening remarks, we feel very confident about our eligibility for the credits through the end of the decade. Scott Fletcher: That is good news for sure. Thank you for the answers. I will pass the line. Operator: Thank you. This does conclude the question-and-answer session of today’s program. I would like to hand the program back to Anuj for any further remarks. Anuj Ranjan: Thank you all for joining us this quarter, and we look forward to seeing you next quarter. Jaspreet Dehl: Thank you. Operator: Thank you, and thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
Operator: Good day, and welcome to the Kingsway First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. With me on the call are JT Fitzgerald, Chief Executive Officer; and Kent Hansen, Chief Financial Officer. Before we begin, I want to remind everyone that today's conference call may contain forward-looking statements. Forward-looking statements include statements regarding the future, including expected revenue, operating margins, expenses and future business outlook. Actual results of trends could materially differ from those contemplated by those forward-looking statements. For a discussion of such risks and uncertainties, which could cause actual results to differ from those expressed or implied in the forward-looking statements, please see the risk factors detailed in the company's annual report on Forms 10-K and subsequent Forms 10-Q and Forms 8-K filed with the Securities and Exchange Commission. Please note also that today's call may include the use of non-GAAP metrics that management utilizes to analyze the company's performance. A reconciliation of such non-GAAP metrics to the most comparable GAAP measures is available in the most recent press release as well as in the company's periodic filings with the SEC. Now I would like to hand over the call to JT Fitzgerald, CEO of Kingsway. JT, please proceed. John Fitzgerald: Thank you, Holly. Good afternoon, everyone, and welcome to the Kingsway Earnings Call for the First Quarter of 2026. Fund model to acquire and build great businesses. We own and operate a diversified collection of high-quality services companies that are compound long-term shareholder value on a per share basis, and we -- we also continue to benefit from significant tax assets that enhance our returns. In short, Kingsway is uniquely positioned within a tax-efficient public company framework. Kingsway or KSX segment and our Extended Warranty segment. March stood out as a particularly good month, and we see clear business momentum across our portfolio, entering what are seasonally stronger summer months for many of our businesses. As a result, we are pleased to reiterate our expectation for double-digit organic growth in revenue and profit at both KSX and Extended Warranty. We are also pleased by our acquisition pipeline, which remains robust. We have already -- we already have one acquisition under our belt in 2026 with the tuck-in purchase of Ledgers by our subsidiary, Ravix Group. We continue to anticipate completing three to five acquisitions in 2026, in line with our target. Before turning the call over to Kent for a review of our financials, I would like to provide additional color on three key topics: operating performance, capital markets and corporate governance. Let's start with operating performance. As mentioned, both our KSX and Extended Warranty segments came in ahead of our internal expectations in the first quarter. I was particularly encouraged, however, by how broad-based the performance was across our portfolio. The KSX segment achieved record quarterly adjusted EBITDA of $3.5 million in Q1. The first quarter is seasonally lighter for many of our operating companies compared to the stronger summer months, which positions KSX for even better results in the quarters ahead as seasonal tailwinds kick in. Roundhouse had another strong quarter and continues to execute well. Demand from natural gas infrastructure customers is robust, especially in the context of recent geopolitical events, and our team at Roundhouse is racing to keep up. March was record-setting for Roundhouse with monthly revenue above $2 million for the first time ever under Kingsway's ownership. IS Technologies had a great quarter with substantial top line and bottom-line gains relative to the year, ago quarter. All three service lines were up year-over-year and the combination of a fully staffed sales team and a stronger commercial footing are now paying off as business momentum accelerates. Within Kingsway Skilled Trades, Buds Plumbing had an excellent quarter with healthy growth relative to the prior year. Southside and AAA are still in their investment phase, but we believe both companies are poised to accelerate financial performance as they enter the seasonally strong Q2 and Q3 periods. SPI was up significantly versus the prior year, reflecting both solid execution and healthy demand in the market it serves. Annual recurring revenue increased by over 45% from the prior year quarter and retention metrics were strong with gross revenue retention of 97% and net revenue retention well over 100%, reflecting both pricing and expansion with existing customers. DDI came in ahead of budget and continued to gain traction with new customers. After a period of investment, DDI is poised for a strong second half as DDI converts last year's operational work into this year's commercial momentum. Ravix came in well ahead of budget in Q1. 2025 was a challenging year for Ravix, but with a more diversified customer base and a refreshed commercial strategy, we believe Ravix has good momentum and will return to growth in Q2 and beyond. We remain confident on the Ravix platform and see meaningful long-term opportunities in this business. Overall, this was a strong quarter for the KSX segment with performance that was broad-based rather dependent on one or two bright spots. KSX is off to a great start in 2026 with more to come. At Extended Warranty, modified cash EBITDA came in ahead of internal expectations and cash sales were up 11.8% year-over-year. The growth was both volume and price driven. VSC contracts sold were up low single digits and revenue per contract increased high single digits year-over-year. The combination of strong top line growth and moderating claims growth supports our view that Extended Warranty is on track for an excellent year. Next, let's touch on capital markets. At the end of March, Kingsway announced that our Board of Directors had proposed a name change to Kingsway Corporation and a proposed stock ticker change to KWY, which are intended to better reflect the company's business evolution and long-term strategy. The proposed name change is subject to shareholder approval at the company's upcoming Annual General Meeting of Shareholders scheduled for May 18. We have consistently heard from investors that Kingsway Financial Services no longer accurately describes the company's operations and creates unnecessary confusion in the capital markets, particularly given our exit from the insurance business nearly a decade ago. This change is an important step towards simplifying and clarifying the Kingsway equity story. Following approval of the proposed name change, we intend to move expeditiously to effectuate both the name change and the stock change to KWY. Importantly, the company's CUSIP number will not change. We also look forward to working closely with the major financial data and index providers to ensure the investment community can quickly and accurately understand Kingsway's business and strategy. In the months ahead, we expect to relaunch Kingsway's brand, corporate identity and website. Please stay tuned for more details on this exciting update. I would also like to draw attention to an update we made to our face financial statements, starting with our Form 10-Q for this quarter. In the past, Kingsway's face financials have read like those of an insurance company, which has been challenging to decipher for many investors. As Kent will explain in greater detail, our face financial statements have been updated to better reflect the service business model of our KSX segment, which now represents the majority of the company's revenue and profit. We believe this is a positive change that will make Kingsway's financial statements more readable and accessible to the investment community. Finally, corporate governance. I'm thrilled to share that Adam Patinken was recently elected Chairman of Kingsway's Board of Directors. Adam has played an important role in Kingsway's evolution and has been a valued partner to the management team and the Board. We're pleased to have his continued leadership in this role, and his experience and perspective will be welcome as we seek to build a far larger, more profitable and more valuable Kingsway. I'm also delighted that Terry Cavanaugh, who served as Board Chairman in the last 12 years, accepted Adam's request to continue to serve as Vice Chairman of the Board. It makes for a smooth transition and positions Kingsway to achieve our financial and strategic ambitions in the months and years ahead. The entire company is thankful for Terry's many years of service as Chairman and grateful for the continued wisdom and counsel he provides. With that, I'll turn the call over to Kent to walk through the financial results in more detail. Kent Hansen: Thank you, JT, and good afternoon, everyone. For the first quarter of 2026, consolidated revenue increased 37.4% to $39 million compared with $28.3 million in the first quarter of 2025. Within that total, KSX revenue increased 80.7% to $21.1 million compared with $11.7 million in the prior year quarter. Extended Warranty revenue increased 7.2% to $17.9 million compared with $16.7 million a year ago. As JT mentioned, Extended Warranty cash sales increased 11.8%, positioning our Extended Warranty segment for continued double-digit organic top line growth in 2026. Consolidated net loss for the quarter was $2.2 million compared with a net loss of $3.1 million in the first quarter of 2025. Consolidated adjusted EBITDA for the quarter was $2.4 million compared with $1.4 million in the prior year quarter. Turning to segment profitability. KSX adjusted EBITDA increased by 82% to $3.5 million compared with $1.9 million in the first quarter of 2025. Extended Warranty adjusted EBITDA was $0.4 million compared with $0.9 million a year ago. Portfolio LTM EBITDA for the operating companies was $22 million to $23 million as of March 31, 2026. We continue to view this as a useful measure of the trailing earnings capacity of the operating portfolio and one that aligns with how we assess the business internally. Turning to the balance sheet. Total net debt was $63.9 million as of March 31, 2026, compared with $62.4 million on December 31, 2025. As JT mentioned, we completed an update of our face financial statements as reported in today's filing with the SEC and Form 10-Q. Specifically, Kingsway's income statement has been updated to better reflect the business services operation by including gross profit, breaking out depreciation and simplifying other line items. Kingsway's balance sheet has also been updated to a classified balance sheet with a clear breakout between short-term and long-term assets and liabilities. We believe this update better reflects our current operation as KSX is now the majority of Kingsway's revenue and profit and will make our financial statements more readable and accessible to investors. I personally would like to express a big thank you to our Kingsway accounting team, especially Kelly Marchetti and Nanette Voyles as well as our external service providers for working together to implement this positive update that should be helpful to investors going forward. With that, I'll turn it back over to JT. JT? John Fitzgerald: Thank you, Kent. Overall, the first quarter came in ahead of our internal expectations, and we're encouraged by our business momentum as we enter the seasonally strong summer months. Our performance was broad-based and provides us with confidence in reaching our 2026 targets. Kingsway is off to a great start with lots more to come. Finally, before moving to Q&A, I'd like to remind everyone that we are hosting our Annual Investor Day on Monday, May 18, at the New York Stock Exchange. But the theme of the day is from theory to action, and we plan to tie together the theory of the search fund model and the Kingsway Business System to the tangible business results of our operating companies. To that end, I am pleased to share that joining us at our Investor Day will be Miles Mamon, the CEO of Roundhouse; and Davide Zanchi, the CEO of IS Technologies. I'm excited for them to share their stories with the investment community and look forward to an informative day. Those interested in attending the Investor Day in person can RSVP by emailing james@haydenir.com. A webcast will also be available for those who cannot attend in person. We look forward to seeing you on May 18 at the New York Stock Exchange. With that, operator, we're ready to take questions. Operator: [Operator Instructions] James, the floor is yours. James Carbonara: Thank you, operator. I'm for investors, I'm reading in the questions that came by e-mail. The first one that came in is you mentioned you were working with financial data providers and index providers following the name change, to help investors better understand Kingsway. Can you please provide more details on what you mean by this? John Fitzgerald: Yes. Thank you, James. Yes, look, if you go across the various data aggregators, Bloomberg, Cap IQ, FactSet, Yahoo! Finance, et cetera, I think we're sort of listed alternatively as either a property and casualty insurance business, a leased real estate business or I think in one case, an auto and truck dealership. And so, what I mean by that is reaching out to each one of these data aggregators and providing them a unified description of our business that accurately describes what we actually do and also getting classified under our GICS code, GICS code away from property and casualty to a holding company, specialized service business holding company. So yes, hopefully, that answers the question. James Carbonara: Thank you, JT. The next one, Roundhouse, had another strong quarter. Can you share more about what's driving the momentum there? John Fitzgerald: Yes. Good question. I would say that I think it starts with the secular tailwinds that we knew were in place when we made the investment, those being, one, increased natural gas activity in the Permian Basin and continued build-out of the infrastructure to support midstream gas transmission, which -- where the motors that we service are in place. And combined with an ongoing shift away from legacy gas-powered motors to electric motors. So that would be kind of the secular -- 2 secular tailwinds. And I think -- for the business itself, we saw very strong momentum in the field service, service line, which is a unique specialty that Roundhouse has being in Odessa in quick contact with the installed base there. And so, I think that this is just a continuation of the momentum that was already present when we acquired the business. So we're happy to see it. James Carbonara: Excellent. The next question, cash sales grew nicely in the quarter, and you mentioned G&A growth outpacing revenue reflects investments in organic growth. Can you touch on the G&A investments driving the expense growth and when might that spread close? John Fitzgerald: Yes. I assume this is in the warranty segment. So the G&A investments we're talking about there are predominantly sales and marketing expense, but also a fairly large ERP conversion at PWI, which should be complete by the end of Q2 or early Q3. And so yes, I think that we'll just be disciplined and manage our cost structure to make sure that we're getting the benefit of operating leverage as those businesses continue to grow. James Carbonara: Excellent. The next question, you mentioned DDI is setting up well for a stronger second half. Can you share any color on the customer acquisition traction that you are seeing? John Fitzgerald: Yes. I mean I think the story with DDI that we talked about in the prepared remarks was kind of speaking to the natural sort of operator journey in these small businesses, which is stabilize and then build the foundation and then grow. You got to kind of build a foundation that creates reliability and quality and earn the right to grow. And so, late last year and early this year, starting from 0, basically, the company didn't have any outbound sales function. They have built a sales process and have begun building kind of top of the funnel, mid-funnel and actually onboarding new hospitals. So we're pretty excited about the activity there and have visibility into a nice pipeline that gives us confidence in the second half. I will say that because of how integrated this business is with their hospital customers that it can be a longer selling cycle, but we're certainly very encouraged by kind of the size and shape of the pipeline at this early stage. James Carbonara: Great. I see two more questions in queue. The first, you mentioned the skilled trades platform continues to take shape with Buds Southside and AAA. Could you talk about the vision for that platform and what you're most excited about as you continue to build it out? John Fitzgerald: Yes. I mean I think that we've said from the beginning that you start with kind of big picture macro, it's a very large addressable market, $120 billion TAM that is both highly fragmented and kind of mission-critical services, right? And -- so our objective is to first operate those businesses with excellence, grow them organically and then continue to grow that platform via a measured acquisition campaign. I think that we've sort of said that we would like to do two or three acquisitions a year on that platform. And I think that there's a very long runway ahead of us to do that. James Carbonara: Great. And lastly, the last question is you've talked about Kingsway being uniquely positioned to run the search fund model at scale within a public company framework. As the portfolio has grown, what are you learning about what makes this model work? John Fitzgerald: Yes. Well, that's a great plug for our Investor Day. I think we'll probably dive into that again on the 18. But yes, I would say I think that we're learning the value of what I would call compounding learning, which is very valuable. I think we're getting better and better and learning more and more, whether that's on OIR selection, acquisition underwriting and diligence and closing and operationally, I think that the sort of compounding effect over time of the learning engine of both us at the holding company, more importantly, our very talented young CEOs is just really a powerful force. I think we're also compounding talent, right? I think that with every new acquisition, every new OIR, both the kinds of their capabilities are compounding, but it is also allowing us to attract an even higher caliber of candidates to the platform. So, compounding learning and compounding talent. I think as the portfolio has grown, I think the model works, our decentralized model as it grows, we'll continue to see more operating leverage from the kind of holdco expense over a much broader base of businesses, which is exciting. And then I would say that maybe we didn't fully appreciate this when we first started. But I'm seeing now sort of the flywheels within the flywheel, right? So we think of Kingsway as a large flywheel. We buy businesses, we grow them, we generate cash flow, we delever, we redeploy that capital to the new acquisition. But when I say flywheels within a flywheel, we're getting to the point of maturity now where several of our businesses themselves are their own flywheels within the system, where they are doing tuck-in acquisitions without any additional incremental capital from Kingsway. And so that was maybe something that we didn't fully appreciate or anticipate at the outset, but I think it will be a very powerful source going forward. And I think it takes kind of that long-duration capability within a public company to be able to see that play out. James Carbonara: Great. I see no further questions emailed in. JT, I'll pass it back to you for closing remarks. John Fitzgerald: Okay. Well, thanks, everyone. I appreciate it. I think it was a strong first quarter. It sets us up well for a great year, and I hope to see everybody or as many of you as possible at the Investor Day in New York in a couple of weeks. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by. My name is Carla, and I will be your conference operator today. At this time, I would like to welcome everyone to the Karat Packaging First Quarter 2026 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Roger Pondel. Please go ahead. Roger Pondel: Thank you, operator. Good afternoon, everyone, and welcome to Karat Packaging's 2026 First Quarter Conference Call. I'm Roger Pondel with PondelWilkinson, Karat Packaging's Investor Relations firm. It will be my pleasure momentarily to introduce the company's Chief Executive Officer, Alan Yu; and its Chief Financial Officer, Jian Guo. But before I turn the call over to Alan, I want to remind our listeners that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to numerous conditions, many of which are beyond the company's control, including those set forth in the Risk Factors section of the company's most recent Form 10-K as filed with the Securities and Exchange Commission and copies of which are available on the SEC's website at www.sec.gov, along with other company filings made with the SEC from time to time. Actual results could differ materially from these forward-looking statements, and Karat Packaging undertakes no obligation to update any forward-looking statements, except as required by law. Please also note that during today's call, we will be discussing adjusted EBITDA, adjusted EBITDA margin, adjusted diluted earnings per share and free cash flow, all of which are non-GAAP financial measures, as defined by SEC Regulation G. A reconciliation of the most directly comparable GAAP measures to the non-GAAP financial measures is included in today's press release, which is now posted on the company's website. And with that, I will turn the call over to CEO, Alan Yu. Alan? Alan Yu: Thank you, Roger. Good afternoon, everyone. We began 2026 with a robust first quarter. Year-over-year sales increased almost 13% with momentum building throughout the quarter. Our performance during the quarter accelerated significantly, starting with modest weather impacted growth in January to growth exceeding 20% in March, which included some pull forward of orders. The acceleration reflected improving demand, strong execution across the organization and continued gain in the market share. Notably, our online sales, which are typically at a higher contribution margin, returned to robust growth this quarter after we pivoted to grow and fulfill our own online sales on our company storefront and third-party platforms. Compared to the prior year quarter, online sales increased almost 10% to $19.5 million in the first quarter of 2026 from $17.8 million in the prior year quarter, with momentum building steadily throughout the first quarter, achieving 19% year-over-year growth in March 2026. Gross margin remained resilient at 35.5% despite the continued impact of higher tariffs. This performance demonstrates the effectiveness of our diversified sourcing strategy and was further supported by a favorable product mix and pricing. As we look ahead, we are closely managing a dynamic cost environment given the sharp increase in oil prices and the resulting impact on product costs, we are implementing price increases on select plastic items beginning in the middle of this month. While certain sourced product costs are rising, we expect tariff saving under the current trade policy to begin reducing cost of goods sold this month. These savings should partially offset inflationary pressure and together with our pricing action, we expect to support gross margin stability. Importantly, we are well positioned to continue gaining market share amid ongoing rising supply challenges. Our strong inventory position and disciplined supply chain execution give us confidence in our ability to consistently serve customers and meet demand. Turning to innovation and sustainability. Our paper bag product category continued to expand steadily, driving a year-over-year increase in eco-friendly product sales of 16.9% in the first quarter. We also successfully closed another national chain account for paper bag during this quarter, further strengthening our leadership position and reinforcing our long-term strategy in sustainable packaging solutions. Our sourcing diversification initiative continues to deliver tangible benefits. We have proactively rebalanced import volumes across geographies in response to evolving tariff structures, strengthening our cost competitiveness and consistent product availability. In this quarter, we increased domestic purchase to 18% compared to 14% in the prior year quarter and increased sourcing from Malaysia and Vietnam to an aggregate of 17% from 12% in the prior year quarter. At the same time, we reduced purchase from Taiwan in the current quarter to 46% compared to 54% in the prior year quarter and reduced sourcing from China to 11% compared to 18% in the prior year quarter. Additionally, we expanded our sourcing footprint by adding a new supplier in South America, which further reduces geographic risk and enhanced supply chain flexibility. We remain focused on providing responsive customer service and disciplined execution, which are a hallmark of Karat Packaging while advancing Karat's operational efficiencies. These efforts are reflected in better operating cost leverage, which decreased to 28.3% in the first quarter of 2026 from 31.8% in the prior year quarter. In summary, we delivered a strong start to the year, maintained margin resilience in a challenging environment and continue to invest in growth areas that align with our customer demand and long-term industry trend. I will now turn the call over to Jian Guo, our Chief Financial Officer, to discuss the company financial results in greater detail. Jian? Jian Guo: Thank you, Alan. I'll begin with a summary of our Q1 performance, followed by an update on our guidance. Net sales for the 2026 first quarter increased to $116.9 million, up 12.9% from $103.6 million in the prior year quarter. The increase primarily reflected $12.1 million in volume and mix and a $2.0 million favorable impact from pricing. Sales to chain accounts and distributors, our biggest sales channel were up by 15.1% in the 2026 first quarter. Online sales, as Alan discussed earlier, rose almost 10% over the prior year quarter and sales to the retail channel declined 12% from the 2025 first quarter. Cost of goods sold for the 2026 first quarter increased 20% to $75.4 million from $62.9 million in the prior year quarter. The increase was driven primarily by sales growth and higher import costs of $7.3 million, primarily as a result of higher import duty and tariffs, which increased from $3.4 million for the 3 months ended March 31, 2025, to $10.5 million for the 3 months ended March 31, 2026. Gross profit for the 2026 first quarter increased to $41.5 million from $40.8 million in the prior year quarter. Gross margin for the 2026 first quarter was 35.5% compared with 39.3% a year ago. The year-over-year decline in gross margin reflects the expected impact from higher input costs, which increased to 13.8% of net sales from 8.6% in the prior year quarter as well as elevated inventory adjustments as a percentage of net sales. These impacts were partially offset by lower product costs as a percentage of net sales. Operating expenses in the 2026 first quarter increased to $33.1 million from $32.9 million last year. The increase was primarily driven by higher rent expense of $0.6 million associated with the opening of the company's new Chino distribution center in March 2025, along with a $0.6 million increase in salaries and benefits. These increases were partially offset by a $0.7 million reduction in online platform fees resulting from a shift away from third-party fulfillment of online orders as well as a $0.4 million decrease in shipping and transportation costs due to lower online shipping rates. Operating income in the 2026 first quarter increased 8.2% to $8.5 million from $7.8 million in the prior year quarter. Total other income net decreased $2.9 million for the 2026 first quarter from $1.1 million in the prior year quarter. Net income for the 2026 first quarter increased 4.8% to $7.1 million from $6.8 million for the prior year quarter. Net income margin was 6.1% in the 2026 first quarter compared with 6.6% last year. Net income attributable to KARAT for the 2026 first quarter increased 5.2% to $6.7 million or $0.34 per diluted share from $6.4 million or $0.32 per diluted share in the prior year quarter. Adjusted EBITDA for the 2026 first quarter rose to $12.5 million from $11.9 million for the prior year quarter. Adjusted EBITDA margin was 10.7% compared with 11.5% for the 2025 first quarter. Adjusted diluted earnings per common share increased to $0.34 for the 2026 first quarter from $0.33 per share in the comparable prior year period. We executed strong working capital management during the first quarter, generating operating cash flow of $7.2 million and free cash flow of $6.3 million despite continued heavy duty and tariff payments as discussed earlier. We paid out a regular quarterly dividend of $0.45 per share to shareholders on February 27, 2026. As of March 31, 2026, we had $90.7 million in working capital and $36.4 million in financial liquidity with another $5.7 million in short-term investments. On May 5, 2026, our Board of Directors approved a regular quarterly dividend of $0.45 per share payable May 28, 2026, to stockholders of record as of May 21, 2026. Looking ahead to the 2026 second quarter, we expect net sales to increase by approximately 8% to 10% from the prior year quarter. As Alan noted earlier, some timing shift of orders in March contributed to a softer start in April. Since then, we have replenished inventory, and we're confident in our ability to achieve our sales target. We expect gross margin for the 2026 second quarter to be within 35% to 37% and adjusted EBITDA margin to be within 11% to 13%, excluding potential tariff refund impact under the current trade policy. For the full year 2026, we expect net sales to grow in the low double-digit range over the prior year. We expect gross margin for the full year 2026 to be within 34% to 36% and adjusted EBITDA margin to be within 11% to 13%, excluding potential tariff refund impact under the current trade policy. As Alan mentioned earlier, we are seeing accelerated growth in our pipeline, reflecting our strong market positioning and initiative to continue gaining market share in a dynamic trade and supply chain environment. We expect to continue to drive top line growth sustain our gross margin and continue to deliver strong profitability with enhanced operational efficiency and disciplined cost management. Alan and I will now be happy to answer your questions, and I'll turn the call back to the operator. Operator: [Operator Instructions] Our first question comes from the line of George Staphos with Bank of America. Kyle Benvenuto: This is Kyle Benvenuto on for George. You noted the sharp increase in oil prices is pressuring costs across sourced products and plastics. Within both your 2Q and 2026 margin guidance ranges, what oil price assumptions are embedded? And at what point would the mid-May plastic price increases no longer be sufficient to protect the 34% margin floor for the year? Alan Yu: Well, here's what we see on the oil prices. Yes, you're correct. Oil price has gone up and raw material has gone up sharply. But the issue is we were able to negotiate with our vendor to support a less increase versus the full increase impact of the oil prices. So majority of our partner vendors overseas have absorbed majority of the increases. So that's -- and also, that's where we're seeing that -- we're giving minimum increase in the May 15 to June area. That's how I see it. Is there going to be escalating -- is this tension going to escalate more? Right now, we see that the resin price has stabilized in Asia. It has come down a little bit also. So we do not see at this point that the raw material prices will go up even higher from this point. Kyle Benvenuto: Thank you Alan. And then one more question for you, and I'll turn it over. Your guidance points to 8% to 10% sales growth for 2Q. How much of this is driven by the expansion of new national accounts versus organic volume growth from your existing customer base? Alan Yu: We're seeing a sharp increase in our online sales portion of our business. For example, last month, April, we topped our record over double digit in terms of online sales. And we do foresee that this quarter, we will have a record sales online as well. Last year, we did about $72 million to $73 million online revenue. And this year, we are on track for $100-plus million on online revenues. So majority of the growth -- actually, a big chunk of the growth is from online sales revenue. From our national chain accounts, yes, we do see some of the national chain pipeline converting to revenues. So that is also a segment that we do see a growth in the national chain account, especially its summer season, most of these chains are going to increase their order for their drink cups and carriers as well as the deli part of our food segment of our business is we will expect an increase in that segment as well. So these are all organic growth, by the way. Operator: The next question comes from the line of Ryan Meyers with Lake Street Capital Markets. Ryan Meyers: First one for me, I just want to make sure I understand this dynamic correctly. And Alan, you had called out the 20% growth that you saw in the month of March. And then obviously, the second quarter guidance is only 8% to 10% revenue growth. So it sounds like you guys saw some pull forward in order demand that drove the strength in March and then things kind of stabilize a little bit in the second quarter. That's where that delta is between that 20% and that 8% to 10% growth is. It's not necessarily the business is slowing... Alan Yu: No, it's not. And also, we want to be conservative in terms of our growth numbers. We do expect our full year guidance to be in range with what we have guided earlier this year. So second quarter, we're seeing some softening in April because of the pull forward from March. And in this month, so far, we're seeing a very positive revenue growth in terms of May. But that -- then we want to be conservative and cautious in terms of making sure that we meet the guidance or exceed the guidance. Ryan Meyers: Yes. Fair enough. No, that makes sense. And then just thinking in terms of pricing, you called out that in the prepared remarks and talked a little bit about that. But how much price do you feel like needs to be taken for you guys to preserve your gross margins? And then thinking about that, industry-wide, what does your price increases look like compared to competitors? Are you still feeling like you're priced below where the market is and that's allowing for some of those share gains? Alan Yu: Yes. We're hearing that our price announcement was 5% to 15% depending on category-wise. And our peer group are seeing to have a price increase of 8% to 12%. So we are in the lower range of the price increase among our peer group because we do want to -- we understand that this is a difficult environment that foodservice is having a challenging year and all the beef prices are up. So we do want to support our partners in this term. So basically, we're actually announcing a lower price increase. But because of some help with the tariff that in the past, past 6 or 9 months, we were paying 20% tariff. Now we're down to 10% tariff. There may be changes in July and August. But at least for now, we're seeing a 10% tariff reduction is helping our gross margin a lot. So that's where we see that. We do see a stronger gross margin for this quarter versus the prior quarters. That's why we're saying that our net sales should be -- we should be on track with our net sales. Operator: And the next question comes from the line of Ryan Merkel with William Blair. Benjamin Schmid: This is Ben Schmid on for Ryan. First question here, just to put a finer point on March and April. Is there any way to size the pull-forward impact in March? It sounds like April might have been down. So just a finer point there would be great. Alan Yu: I would say that about $2 million were pulled forward from April to March. Benjamin Schmid: Okay. Got it. And then last one for me. So I know you guys mentioned a win this quarter, but any other updates on the pipeline of potential wins you guys discussed last quarter? Alan Yu: We are working with very large chains, actually a few large chains that might be converting in this quarter or at least next quarter. But this quarter, we are converting some of the existing customers, adding additional SKUs to the existing customers, such as -- their eco-friendly product line and paper bags. So that's what we're seeing right now. Operator: And we have no further questions at this time. I would like to turn it back to Alan Yu for closing remarks. Alan Yu: Thank you, everybody, for joining our conference call on first quarter Karat Packaging earnings. We look forward to seeing you next time. Thank you very much. Have a wonderful day. Bye-bye. Operator: Thank you. Ladies and gentlemen, this now concludes today's conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Eastman Kodak Q1 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to hand over the conference to our first speaker today, Denisse Goldbarg. Denisse Goldbarg: Thank you, and good afternoon, everyone. I am Denisse Goldbarg, Eastman Kodak's Chief Marketing Officer. Welcome to Kodak's First Quarter 2026 Earnings Call. At 4:15 this afternoon, Kodak filed its Form 10-Q and issued its release on financial results for the first quarter of 2026. You may access the presentation and webcast for today's call on our Investor Center at investor.kodak.com. During today's conference call, we will be making certain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. We intend for these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Investors are cautioned not to unduly rely on forward-looking statements, and such statements should not be read or understood as a guarantee of future performance or results. All forward-looking statements are based on Kodak's expectations and various assumptions. Future events or results may differ from those anticipated or expressed in the forward-looking statements. Important factors that could cause actual events or results to differ materially from these forward-looking statements include, among others, the risks, uncertainties and other factors described in more detail in Kodak's filings with the U.S. Securities and Exchange Commission from time to time. All forward-looking statements attributable to Kodak or persons acting on its behalf only apply as of the date of this presentation and are expressly qualified in their entirety by the cautionary statements included or referenced in this presentation. Kodak undertakes no obligation to update or revise forward-looking statements or reflect events or circumstances that may arise after the date made or to reflect the occurrence of unanticipated events. In addition, the release just issued and the presentation provided contains certain measures that are deemed non-GAAP measures. Reconciliations to the most directly comparable GAAP measures have been provided with the release on our website in our Investor Center at investor.kodak.com. Speakers on today's call are Jim Continenza, Kodak's Executive Chairman and Chief Executive Officer; and David Bullwinkle, Kodak's Chief Financial Officer and Senior Vice President. We will not be holding a formal Q&A during today's call. As always, the Investor Relations team is available for follow-up. I will now turn the call over to Jim. Thank you, and have a great day. James Continenza: Welcome, everyone, and thank you for joining the First Quarter 2026 Investor Call for Eastman Kodak. The story of the first quarter is a story of consistency, stability and growth. This reflects our transformation over the last 7 years and our focus on execution and our continued investment in the business. Now I'm pleased to see strong year-over-year performance over the last 3 consecutive quarters. Let me give you some highlights from the first quarter. Consolidated revenue is up 7% to $265 million compared with $247 million for first quarter 2025. Revenue increased in both our key businesses, print and AM&C. We had gross profit percentage of 22%. That's 3 percentage points or 16% higher than first quarter 2025. Operational EBITDA was $15 million compared with $2 million for the first quarter 2025, up $13 million. Moving on to Advanced Materials and Chemicals. We saw AM&C revenue grew by $2 million or 3%, which was driven by a $3 million increase in film and chemicals, which was partially offset by $1 million for lower inks and consumables. Let's talk about our still films. We've invested heavily back into film, and we're starting to see great results from that. An example, in still film, recently launched a professional film sold directly to distributors. Our objective is to stabilize the market and continue to meet demand. I am really proud to see motion picture continue to increase. We launched a new film called VERITA 200D, which was used in Euphoria Season 3. A lot is going on. Many Oscar winning movies, including One Battle After Another and Sinners were shot on Kodak film and the long-anticipated Christopher Nolan's The Odyssey is also shot on Kodak film. We remain committed to film and maintaining supply for our customers. A quick update on our Pharma business. Our new cGMP pharmaceutical manufacturing facility is up and running. I am really proud to say we recently opened the Kodak Advanced Electrophysiology Lab in partnership with SUNY Geneseo. The lab will enhance our research capabilities and support future product development. We continue to work towards obtaining Class 2 certification to manufacture more complex, high-margin products in the United States. Moving on to some highlights from our commercial print business. We continue to provide a full range of print solutions to our customers. Our revenues increased by 9%, even in the difficult times we're going through. There are some supply issues on aluminum. There is issues on delivery, logistics. A lot is going on. Prices have increased greatly on raw materials such as aluminum, but yet we're still able to maintain our revenue and supply our customers. As our commitment to print continues, and we continue to invest in innovation, I'm pleased to announce we recently launched the SONORA UltraXR plate in Europe, which will expand our SONORA Ultra portfolio. As I stated last quarter, and I'll state it again, as we continue to fix the balance sheet, invest in the infrastructure of the business, and focus on key products, our next steps are growth. We must continue to grow our business. We have built a stable, growing Kodak by consistently executing our long-term plan. We stay on track regardless of all the events happening around us. We're leveraging our core strengths. We're strengthening our balance sheet. We're investing in growth products. As we continue to invest in operational excellence and execution, right, we continue to diversify our portfolio by using the different technologies and skill sets we have in the business. As we stated before, right, our goal is to continue to work on the balance sheet. I'm proud to say today, we are net debt positive. One of the most important aspects is by meeting our customers' needs. And the only way we can do that is by continuing to focus on operational excellence. We have to be better than everyone else, and we're going to continue to keep investing and getting better every single year. Now I'm going to turn it over to Dave Bullwinkle to discuss our first quarter financial results. Dave? David Bullwinkle: Thanks, Jim, and welcome to the call, everybody. Thanks for joining us today. This afternoon, the company filed its Form 10-Q for the quarter ended March 31, 2026, with the SEC. As I do on each and every call, I encourage you to read the filing in its entirety as there is a plethora of information contained in the materials we have provided publicly. As a reminder, references made during my remarks are included in the company's earnings press release and Form 10-Q filed today. So let's begin with the key financial highlights for the first quarter of 2026. We delivered strong financial performance despite sharp commodity swings and persistent inflationary pressure. The results reflect substantial year-over-year improvement in revenue, gross profit and operational EBITDA, underscoring our disciplined execution and progress against our long-term goals. In fact, this is the third consecutive quarter of year-over-year growth for these measures. Key metrics. Revenue was $265 million, an increase of $18 million or 7% year-over-year with increases in Print, Advanced Materials and Chemicals. On a constant currency basis, revenue grew $11 million or 4%. Gross profit was $57 million, which is up $11 million or 24% year-over-year. Our gross profit percentage increased to 22% compared to 19% in the prior year quarter, reflecting our operational execution. Operational EBITDA for the quarter was $15 million, and that's an increase of $13 million compared to the prior year quarter, primarily driven by improved pricing, partially offset by higher manufacturing costs and higher silver and aluminum prices. For the quarter, we reported a GAAP net loss of $16 million compared with a GAAP net loss of $7 million in the prior year quarter, an increase of $9 million. Let me walk you through the main factors behind this result and share with you some additional helpful information. $12 million of the loss was driven by a change in the fair value of an embedded derivative related to our Series B preferred stock. This accounting impact resulted from our previously announced amendment to the Series B agreement and the change in fair value was primarily caused by the increase in our stock price during the quarter. This is fully disclosed in our Form 10-Q. $5 million of the loss relates to stock-based compensation expense, which is a noncash expense and does not impact our liquidity. We also recognized $4 million of noncash pension income this quarter, but this reflects an $18 million decrease compared to the prior year quarter. This is driven by the termination of the KRIP pension plan, which we completed in the fourth quarter of 2025. As a result of the planned termination, we expect pension income to be lower year-over-year in each quarter of 2026. So we will see this reoccur every quarter this year. Partially offsetting these items, GAAP net loss benefited from an $8 million year-over-year reduction in interest expense, mainly due to term loan repayments resulting from the pension plan termination and reversion. While these items affect comparability, they reflect deliberate actions we took to strengthen our balance sheet, reduce debt and build long-term value. Now that I've explained some of the key drivers of the year-over-year change in our net loss, I've also included a simple reconciliation in today's materials to explain how the GAAP net loss translates to operational EBITDA. We received feedback from investors and questions about this, so we're covering it here. EBITDA measures the profitability of our business by excluding its components of interest, taxes and noncash charges like depreciation and amortization. As you know, EBITDA stands for earnings before interest, taxes, depreciation and amortization. To arrive at operational EBITDA from net loss, we start by adding back those standard items of interest expense, tax expense and depreciation and amortization expense. In addition, to arrive at operational EBITDA for Kodak, we remove those nonoperational items shown on the waterfall slide. Number one, nonrecurring and other items. This category primarily contains the $12 million expense we booked in the quarter for the fair value change in the preferred stock derivative. This derivative is the value of the conversion option for our stock. We expect to fair value this every quarter, and the changes will be recognized in our income statement. Second category are noncash items of expense or income. In this case, it is a net expense item. This represents an adjustment to remove stock-based compensation expense, which we talked about earlier, and it's almost fully offset by the corporate component of pension income, which we also discussed earlier in my remarks. As I have said, these adjustments remove the impact of items that can cause GAAP volatility, but do not reflect day-to-day operations. Therefore, we consider them nonoperational. The resulting operational EBITDA provides a clear view of how our underlying business is performing. We've consistently used this metric as our segment measure as well, which is disclosed in all of our earnings releases and fully reconciled in that material. I hope this provides helpful context of the company's performance and financial statements. If you have further questions, please don't hesitate to contact us. Moving on to our cash performance for the first quarter. We ended the quarter with $299 million of unrestricted cash, a decrease of $38 million from December 31, 2025. Let me briefly walk through the key drivers of our quarter end cash position. First, as expected, we received $46 million in cash proceeds from the redemption of hedge fund investments related to the KRIP pension reversion during the quarter. Second, working capital was impacted by a $38 million increase in inventory with $35 million of this increase occurring within our AM&C segment. This was largely driven by average commodity cost of silver more than doubling from year-end and increases in the volume of silver we carry on the balance sheet due to supply terms. Inventory in AM&C also increased as we built ahead of a planned second quarter plant shutdown for maintenance. Partially offsetting these impacts within working capital, accounts payable increased by $9 million and accounts receivable decreased by $9 million, both helping to partially counter the inventory increases. Last, as required under the term loan amendment, we made a $50 million principal payment on our higher rate term loans in March. This was funded primarily by KRIP investment asset redemptions. These actions strengthen our liquidity profile and reduce future interest expense. As of March 31, 2026, the company's net debt positive position increased from $128 million at December 31, 2025, to $139 million at March 31, 2026. This is an $11 million improvement in the quarter. This reflects a further strengthening of our financial position. As I conclude, I want to leave you with a few clear takeaways from our first quarter results. Number one, financial results were strong. We delivered solid year-over-year growth in revenue, gross profit and operational EBITDA, and this is for the third consecutive quarter. We did this despite economic headwinds in commodity pricing and inflationary impacts as well. Most notably, our operational EBITDA increased sharply even as the business managed through those impacts. Again, as I talked about earlier, and we fully reconciled for you, operational EBITDA is our key internal measure of profitability. It's how we measure and disclose the results of our segments in our public filings as well. Finally, I am proud to say that our balance sheet is stronger than it's been in many, many years as we continue to see the benefit of the decisions we've made to reinforce our foundation. With $299 million of unrestricted cash, we are in a net debt positive position relative to our short- and long-term debt, and this is for the second consecutive quarter. We have also continued to delever the balance sheet, paying down $50 million of higher rate interest debt in the quarter. Thank you for your time and attention. I'll now return it back to Jim. James Continenza: Thank you, Dave. In summary, we've built a strong, stable Kodak over the last several years, by consistent execution of our long-term plan and making the appropriate changes in the environment as it changes around us. We have delivered 3 consecutive strong quarters year-over-year. We continue to invest in AM&C and print and grow those products. We focus on operations, but more importantly, 3 key areas that we always focus on manufacturing, selling and service. Everyone in the company is geared around focusing on those 3 areas. The goal is to deliver long-term value to our shareholders, our customers and our employees. With that, I want to thank everyone for their time and listening to the Eastman Kodak First Quarter 2026 Investor Call. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the ZipRecruiter First Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Emilio Sartori, Head of Investor Relations. Emilio, please go ahead. Emilio Sartori: Thank you, operator, and good afternoon. Thank you for joining us for our earnings conference call, during which we will discuss ZipRecruiter's performance for the first quarter ended March 31, 2026, and our guidance for the second quarter of 2026. Joining me on the call today are Ian Siegel, Co-Founder and CEO; and David Travers, President and Interim CFO. Before we begin, please be reminded that forward-looking statements made today are subject to risks and uncertainties relating to future events and/or the future financial performance of ZipRecruiter. Actual results could differ materially from those anticipated in these forward-looking statements. A discussion of some of the risk factors that could cause actual results to differ materially from any forward-looking statements can be found in ZipRecruiter's quarterly report on Form 10-Q for the quarter ended March 31, 2026, which is available on our Investor website and the SEC's website. The forward-looking statements in this conference call are based on the current expectations as of today, and ZipRecruiter assumes no obligation to update or revise them, whether as a result of new developments or otherwise. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP results. Reconciliations of the non-GAAP metrics to the nearest GAAP metrics are included in ZipRecruiter's shareholder letter and in our Form 10-Q. And now I will turn the call over to Ian. Ian Siegel: Thank you. Good afternoon to everyone joining us today. ZipRecruiter opened 2026 with a strong first quarter, delivering revenue of $107.5 million and beating the midpoint of our guidance. Net loss was $4.7 million, and adjusted EBITDA came in above the high end of our guidance range at $9.7 million. At ZipRecruiter, our mission is to actively connect people to their next great opportunity. We do that by playing the role of active matchmaker. Increasing direct meaningful conversations between employers and job seekers is a central focus of our R&D. And in Q1, we saw engagement increase across multiple metrics. First, we launched our next-generation search and matching AI engine in Q1. This represents a massive leap forward in how we drive more conversations between employers and job seekers. This engine delivers 2 major upgrades: a step change in how we assess candidate qualifications; and a new level of precision in interpreting job seeker intent. The results were immediate. Application volume increased by 37% for job seekers using the new engine. While only live for a subset of job seekers, we expect a full rollout by the end of Q2. We also created significant momentum with Be Seen First, a product that empowers qualified high-intent job seekers to stand out by highlighting exactly why they are a fit for a role. Adoption is scaling fast. Over half of our paid employers now receive Be Seen First responses on their postings. In Q1, 12% of all applicants chose to be seen first. Only qualified candidates for a role can utilize this feature, ensuring a high-quality experience for employers. Be Seen First candidates are nearly 2 times more likely to receive a message from an employer than those using traditional applications. Over the past year, we've deployed multiple products and enhancements across both sides of our marketplace. From ZipIntro and our redesigned resume database to Be Seen First and our next-generation search and matching engine, each innovation is focused on the same goal, driving more conversations between employers and job seekers. This momentum is reflected in both our data and job seeker app store reviews. With a 4.9 rating and over 1 million combined reviews, ZipRecruiter remains the #1 rated job search app on both iOS and Android. Over the course of Q1, we saw a notable increase in positive reviews, specifically mentioning getting a call from an employer or landing an interview compared to Q4. We believe the most valuable thing we can do for job seekers is get them into conversations with employers. And the most valuable thing we can do for employers is deliver them candidates they want to engage with. The data is moving in the right direction. The app store reviews are one signal. The product data is another. Together, they tell a consistent story. The quality of connections happening on ZipRecruiter is meaningfully improving. All of these improvements were delivered against what remains a sluggish hiring backdrop. In Q1, the quits rate and total hires stayed near their lowest levels since 2015, while job openings were down 3% year-over-year. In spite of this subdued hiring environment, ZipRecruiter outperformed our Q1 results, and we believe this is due to our product improvements and the efficacy of our marketplace. The pace of innovation across our marketplace is accelerating. In a market where many companies are competing on the breadth of their AI capabilities, we believe the long-term winners will be those that translate technology into real outcomes. Employers finding the right person, job seekers landing the right role, that is the bet we are making. We believe the quality of our marketplace has never been stronger and that we are building a business that will capture disproportionate share as the hiring market normalizes. Q1 is evidence that we are moving in the right direction, and we look forward to showing you more. And with that, I'll turn the call over to Dave to share some additional business highlights, financial results and guidance. David Travers: Thanks, Ian, and good afternoon. Our performance in the first quarter reflects the continued success of our product-led strategy. I'm excited to share several highlights with you. On the SEO front, we are seeing strong growth in high-intent traffic despite a year-over-year decline in total web traffic across the hiring category. In Q1, our engaged job seekers, defined as those who applied to job postings, grew 26% year-over-year through organic search. At the same time, we are leaning into Generative AI. In March, we launched the ZipRecruiter app for ChatGPT, extending our reach directly into the AI tools job seekers are increasingly adopting. We see this as an early step in broadening our presence across Generative AI platforms, and we'll look to expand our integrations over time. Taken together, our increased share of total traffic, 26% year-over-year growth in engaged job seekers through organic channels, and a new distribution footprint across Generative AI platforms, we believe ZipRecruiter is gaining share at a moment when cyclical hiring demand remains muted. That combination does not happen by accident and we believe it positions us to disproportionately capture volume when the hiring market normalizes. After investing over $1 billion over the past 15 years to achieve over 80% aided brand awareness on both sides of our marketplace, we are now leveraging our branding expertise to empower our customers to tell their own stories with multimedia branding. In Q1, we rolled out integrated branded pages for our employer listings on ZipRecruiter, powered by Breakroom, a workplace rating and job marketplace platform, to increase visibility of employers' brands to job seekers. These pages allow employers to move beyond static text and use video, images and testimonials to showcase their true workplace culture. We look forward to scaling these multimedia capabilities across our entire marketplace. Finally, our enterprise strategy continues to gain traction. Adoption of our automated campaign performance solutions grew over 50% year-over-year as large employers look for more efficient hiring solutions. Our go-to-market improvements drove a 5% year-over-year increase in performance marketing revenue, proving that our technology investments are delivering for employers of every size. With that, I'll now discuss our financial results and guidance. Our first quarter revenue of $107.5 million came in ahead of our guidance midpoint, with a 2% decline year-over-year and a 4% decline quarter-over-quarter. The year-over-year decrease was driven by a soft hiring environment, while the sequential decline reflects post-holiday seasonality, where employers join or return to our platform over the course of the quarter. We finished the first quarter with over 63,000 quarterly paid employers, which was flat year-over-year and represented a 7% increase sequentially. Quarterly paid employers remaining flat year-over-year in spite of macroeconomic volatility, demonstrates the stability of our employer base. The sequential growth is consistent with our historical seasonal patterns where quarterly paid employers typically grow over the course of Q1 after the holiday slowdown in Q4. Revenue per paid employer was $1,698, down 2% year-over-year and down 10% sequentially. The year-over-year decrease reflects more muted hiring demand. The sequential decrease was primarily driven by seasonal growth in the number of quarterly paid employers as they ramped up their hiring campaigns over the course of Q1. Our net loss in the first quarter was $4.7 million. Adjusted EBITDA in Q1 was $9.7 million, representing a 9% margin coming ahead of the high end of our guidance range. This compares to an adjusted EBITDA margin of 5% in Q1 of '25. Cash, cash equivalents and marketable securities totaled $393.5 million as of March 31. During the first quarter, we repurchased 3.5 million shares totaling $9.4 million. Moving on to quarterly guidance. Our Q2 revenue guidance of $112 million at the midpoint represents a return to flat revenue year-over-year and 4% growth quarter-over-quarter, demonstrating the impact of our hiring solutions despite underlying macro headwinds. Our adjusted EBITDA guidance for Q2 is $13 million at the midpoint, representing a 12% margin. Looking beyond Q2, we continue to expect hiring demand to follow a typical seasonal cadence throughout 2026, albeit at subdued levels. Under this scenario, we expect to achieve flat year-over-year revenue in 2026, which is a 5 percentage point improvement over the 5% decline in 2025. In this scenario, we also believe adjusted EBITDA margins can expand by 5 percentage points from 9% in 2025 to 14% in 2026. This margin expansion reflects our commitment to operational efficiency alongside targeted investments aimed at capturing growth. The stabilization in the business and accelerating pace of innovation we've seen in our marketplace are encouraging. We remain confident that our focus on driving more meaningful conversations between employers and job seekers will position ZipRecruiter to outperform the broader hiring category over the long term. With that, we can now open the line for questions. Operator? Operator: [Operator Instructions] Your first question comes from Ralph Schackart with William Blair. Ralph Schackart: First question, maybe can you talk about the differences you might be observing between SMB and Enterprise segments? It sounds like you're making some good traction within Enterprise. And then as 2026 progresses, how would you expect perhaps the behavior within each of these segments to perhaps change? And then I have a follow-up. David Travers: Thanks, Ralph. This is Dave. So yes, we've been pleased with the execution we've seen on both sides of both customer segments, SMB and Enterprise. Enterprise mainly comprises performance marketing revenue, so it was up 5% year-over-year. That continues a long-term trend of expanding our percentage of revenue that comes from Enterprise. So 24% of revenue this quarter. If you did go all the way back to our S-1 pre-COVID, in Q1 of 2019, we were at 12% of revenue. So we've doubled our percentage of revenue and we expect to continue to expand revenue there over time. As it evolves over the course of the year, I think we expect to, as I said, continue to see that. And what we've seen in talking to the customer base from both sides is consistent with the macro data we've seen. We're in a subdued but relatively stable environment and that captures the mood of employers on both sides of the marketplace. They're responding to conversations being driven and job seekers are responding to that, as we talked a lot about in the letter, and we expect to continue to see the benefits of that as we continue to execute. This year is consistent with our guidance when we're guiding to double our top line growth versus what we did Q2 over Q1 last year, showing $4.5 million of growth top line at the midpoint as opposed to just over $2 million in the same quarter last year. Ralph Schackart: Great. And then just a follow-up, maybe shifting gears a little bit. You talked about the Zip app for ChatGPT. Just curious what you're learning there? I think you talked about expanding potential integrations. Any more color you could add on the product front there would be great. Ian Siegel: Well, the new app went live on ChatGPT and on a percentage basis, the growth of LLMs in general has been impressive as a new traffic source. Overall, LLMs still represent a -- they are still a tiny contributor in the overall mix of where traffic comes from to ZipRecruiter, but it's good to be there at the beginning and to enjoy the ride up with them as they become an ever more popular way for job seekers to look for work. Operator: [Operator Instructions] The next question comes from Justin Patterson with KeyBanc. Justin Patterson: I'd love to hear more about just the upcoming rollout of the next-generation AI engine. It sounds like you had some really strong returns so far. So how are you thinking about that as a potential market share driver in a market that's still a little bit subdued here? And then the second question, just as a quick follow-up. We've seen a lot of companies just trying to balance the productivity benefits against the rising token costs from Gen AI tools. So I would love to hear more about how you're thinking about that dynamic and what it might mean toward your longer term headcount needs? Ian Siegel: Well, I'll take the second question first and then go to the first question last, which -- AI is permeating really every department within our company. It's driving extraordinary efficiencies across the board, which we haven't looked at as a cost-saving opportunity as much as we've looked at it as a mechanism by which we can realize and increase our ambitions. So if anything, it has accelerated our road map as opposed to saved us money. And you can see that -- output of that acceleration in Q1 where multiple large-scale initiatives, some of which have been worked on for over 1 year, we were able to deploy. The next-generation search engine is one of those. It increased applications by 37% for the job seekers who are exposed to it. We expect all job seekers to be on the next-gen search engine by the end of Q2. It's really exciting. These -- This algorithm and the other components of this were -- they were retrained to prioritize more meaningful signals for job seekers in terms of the depth of their interest in roles. We can see that play out when we use those algorithms to deliver results and that they're applying at a far higher rate, and these are jobs that they are far more qualified for at the same time. Further, when they do apply to those jobs and when they are qualified for those jobs, adoption of Be Seen First has been exciting. We saw 12% of total applicants choose to be seen first when they apply, and this is confirming an extraordinary advantage to them because employers who are looking at their list are seeing these very interested candidates who have now got a mechanism to show their enthusiasm. They're not just qualified, they're eager. And that is coming through and employers are engaging with those candidates at almost twice the rate that they're engaging with candidates to go through the normal apply process. Overall, when we look at all the features that we've launched, not just in this quarter but really over the last 3 to 4 quarters, and it's including things like ZipIntro, it's things like our redesigned resume database, the acquisition and deployment of Breakroom, what you see is that the strategy we've built is working, and it's not me saying that or say it's not just me, it's the job seekers. I've been really excited reading the reviews and seeing the spike in the specific language that those reviews contain. The job seekers are using the language that we use internally when we talk about our objectives. They are saying that they are getting more interviews and they're getting more phone calls from employers. They are saying, "ZipRecruiter works." That's exactly how we look at it internally and how we describe it. So it's really rewarding to see the strategy paying off both quantitatively and qualitatively here. There's so many more improvements to come. We're really excited about the momentum we have here, and AI is proving to be an incredible accelerator of our ability to rapidly deploy these improvements. Operator: Your next question comes from Josh Chan with UBS. Unknown Analyst: This is [indiscernible] on for Josh. I wanted to ask on the margin, because the margin certainly came way above what we expected. So I was just wondering if you can provide more color on where -- what drove that upside against like maybe your internal expectations because it also came above the guide as well? David Travers: Thanks. This is Dave. Good question. So yes, the EBITDA margins this past quarter did come in above expectations and above the high end of the range we had said earlier. Obviously, when you look at it from a year-over-year basis, we've been driving efficiency across all 3 major categories of expense: G&A; sales and marketing; and R&D. However, versus our expectations and what we had last quarter, as we've said many times, we're scientists, not artists when it comes to sales and marketing investments. And this quarter, the team did an extraordinary job of looking for and finding high ROI marketing opportunities and areas to invest in our go-to-market. And so we saw that in the results and the results were that we came in above the high end of the range. So obviously, that gives us increasing confidence in our ability to achieve the likely scenario we laid out for the whole year, which is top line being flat, which is 5 percentage points better than prior year, obviously, and at the same time, improving bottom line margins from 9% to 14% for the full year, which is also 5 percentage points improvement along the bottom line. And so that execution this quarter gave us even more confidence about our ability to do that, and we felt great about it. Operator: That is the end of the Q&A session. This concludes today's call. You may now disconnect.
Operator: Good afternoon, everyone. My name is Megan, and I will be your conference operator today. At this time, I would like to welcome you to The RealReal First Quarter 2026 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Caitlin Howe, Senior Vice President of Finance. Caitlin Howe: Thank you, operator. Joining me today to discuss our results for the period ended March 31, 2026, are Chief Executive Officer and President, Rati Levesque; and Chief Financial Officer, Ajay Gopal. Before we begin, I would like to remind you that during today's call, we will make forward-looking statements, which involve known and unknown risks and uncertainties. Our actual results may differ materially from those suggested in such statements. You can find more information about these risks, uncertainties and other factors that could affect our operating results in the company's most recent Form 10-K and subsequent quarterly reports on Form 10-Q. Today's presentation will also include certain non-GAAP financial measures, both historical and forward-looking. We have provided reconciliations for historical non-GAAP financial measures to the most comparable GAAP measures in our earnings press release, which is available on our Investor Relations website. I would now like to turn the call over to Rati Levesque, Chief Executive Officer of The RealReal. Rati Levesque: Good afternoon, and thank you for joining us on today's call. Q1 demonstrated the strength of our platform as our financial and operating results exceeded expectations. I'm very proud of the team's execution during the quarter. Q1 was our fourth consecutive quarter of double-digit top line growth and our third consecutive quarter of growth exceeding 20%. We also expanded adjusted EBITDA margin by over 400 basis points year-over-year. Trailing 12-month active buyers grew double digits year-over-year, which reflects higher levels of trust and an acceleration in engagement with our platform. I want to take a step back to provide perspective on where we've been, where we are and where we're headed. 2024 was about stabilization. We defined our strategic direction and got to work executing against it. We stabilized operations, improved unit economics and validated our transformation. 2025 was about optimization. Last year, we articulated our growth playbook and go-to-market engine to unlock supply and drive profitable growth. The results validated our approach. We surpassed $2 billion in GMV, accelerated top line and delivered positive adjusted EBITDA in every quarter. 2026 and beyond is about compounding. We've laid a solid foundation and the mechanics are working. Now our customer relationships, our data, our brand and our scale are reinforcing each other, each one making the next stronger, compounding our advantages. We've become the barometer of the luxury industry. We capture luxury demand in real time. The categories, brands and looks trending on our platform are often the earliest signal of where the market is moving. Our customers come to us first to see what's trending, what their items are worth and where fashion is heading. A customer's relationship with TRR begins before the transaction and continues long after it. When you consider that about 50% of our customer base is Gen Z and millennial, it's clear that resale is not a passing trend. It's a core component of the future of luxury. And with 47% of luxury consumers considering resale value when purchasing in the primary market, we're changing how people shop. Our business helped to drive this shift. We've created a full-service managed marketplace with the authentication, logistics and trust luxury requires. By modernizing how consumers think about fashion and the value of their closet, we're cementing the operating system for luxury ownership. We are leaning into this vision through three strategic pillars. First, our growth playbook, which is how we unlock supply and drive flywheel behavior as we become the default luxury resale destination; second, obsessing over service, which informs our mindset in every customer interaction and turns transactions into relationships; and third, operational excellence, which is how we use AI, automation and data to improve unit economics and enable scale. Our first pillar is our growth playbook and the mechanics are working. Our sales team remains a key competitive asset. We are actively deepening our moat, empowering our sales team to act as trusted advisers, helping to manage our consignor's closet. Our algorithmic pricing tools equip our sales team with data-driven earnings estimates, giving consignors clarity and confidence. In a brand-forward marketplace, this trust deepens engagement and loyalty, which keeps consignors coming back. We're also extending the reach of our sales team through our referral programs. With the Real Partners program, we're building a network of stylists, closet organizers and real estate agents, the professionals' closest luxury closets who refer their clients to TRR and earn commission. It's an efficient way to reach high-value consignors, and we see significant long-term potential to expand our partner base. Turning to stores. Our stores continue to deepen the consignor relationship, and we're excited about the new markets we're adding for 2026 in San Francisco and Boston. Stores play an important role in generating supply. Sellers who engage with the store deliver 40% more value. In terms of newer supply channels, our drop-ship and vendor channels are expanding. We're building an asset-light international supply network and starting to develop a partner base in places like Italy, France and Japan. Building on our success with drop-ship in the U.S., we see significant runway to grow this channel over the medium term. These supply strategies are successfully driving the compounding mechanics of our platform and accelerating our network effects. As buyers become consignors, our flywheel spins. These flywheelers, whom we affectionately refer to as RealRealers, spend 50% more time with us than the average customer and the flywheel accelerates. The next strategic pillar, obsessing over service, propels the growth playbook forward. Service and data insights for both sellers and buyers helps turn a one-time transaction into a relationship. The full MyCloset suite is the product manifestation of our vision to become the personal adviser to the closet, creating the system of record for our customers' luxury assets. MyCloset will provide real-time estimated value, price tracking and trend intelligence. This further removes friction for the seller and engages customers beyond the transaction. On the buyer experience, our product road map includes AI recommendations in the near term, followed by enhancements in search and discovery. Every item on our platform is unique, which makes agentic and conversational search powerful, and we're excited to continue rolling out features in 2026. Through our growth playbook and obsessing over service, we are building the infrastructure layer for luxury and efficiently connecting buyers to consignors. Our third pillar, operational excellence drives profitability and scalability. Our AI-enabled intake system, Athena, is automating the repetitive data-driven parts of intake, freeing up our experts to focus on the valuable work that requires specialized expertise and judgment. We're targeting to end 2026 with nearly 50% of items fully flowing through Athena, improving processing times, speed to site and our unit economics. Beyond intake, our pricing strategy is also getting smarter, building on our foundation of structured market signals to inform pricing, we've recently introduced AI-powered image embedding. By incorporating image data, our models better account for visual characteristics when determining market value. These visual details give us better comparables to price against and help maximize earnings for our consignors. Later this year, we're rolling out an automated storage and retrieval system at our Perth Amboy authentication center, adding automation and increasing our capacity by 35%. This lets us efficiently handle growing volume at higher speeds without opening additional warehouses, more throughput in the same footprint. Together, these 3 strategic pillars are compounding our advantages and extending our leadership position in the growing luxury resale market. None of this is possible without our consignors. Over the past 15 years, we've paid out more than $6 billion to our consignors, who trust us with pieces that carry real meaning and real value. I also want to sincerely thank our team. None of this happens without you. Together, we built a strong foundation, and I'm excited about where we're headed next. I will now turn the call over to Ajay. Ajay Gopal: Thank you, Rati. Good afternoon, everyone. I am pleased to review our financial results for the first quarter of 2026, which demonstrate a powerful start to the year and the continued disciplined execution of our strategic pillars. We are helping customers view their closets as an asset class, and The RealReal is the trusted destination to manage and monetize those assets. In Q1, we delivered robust top line growth with GMV increasing 24% and revenue up 19% year-over-year. Beyond the headline numbers, we saw deeper engagement with our platform. In Q1, 43% of our new consignors came from our active buyer base. These flywheelers or RealRealers, as Rati mentioned, enhance our network effects and are an important driver of our long-term growth. Our approach to unlocking high-quality supply, combined with our focus on operational efficiency is yielding results. In Q1, we achieved adjusted EBITDA of $13.1 million or 6.9% of total revenue and expanded our margins by 430 basis points, which showcases our ability to drive operating leverage. Now turning to our detailed first quarter results, beginning with top line. Q1 GMV of $606 million increased 24% compared to last year. On a 2-year stacked basis, GMV was up 32%. Q1 total revenue of $190 million increased 19% year-over-year. Consignment revenue grew 18% and direct revenue increased 26% compared to Q1 of 2025. Buyer engagement accelerated with trailing 12-month active buyers up 10% year-over-year. Average order value of $646 increased 15% versus last year. Q1 take rate of 36.4% declined 220 basis points year-over-year. This was due to a favorable mix into higher-value items. As we've explained before, these items carry a lower percentage take rate while generating more profit dollars and improved unit economics. On margins and profitability, first quarter gross profit of $141 million increased 18% year-over-year. Gross margin of 74.5% decreased 50 basis points compared to the prior year, driven primarily by the mix of products sold. First quarter operating expenses leveraged 730 basis points year-over-year as a percent of revenue. The improvement was driven by operating efficiencies and volume leverage on fixed costs. As we continue to scale Athena, outbound automation and other productivity initiatives, we are driving operating leverage. First quarter adjusted EBITDA was $13.1 million, an increase of $9 million versus the prior year and 6.9% of total revenue, an increase of 430 basis points year-over-year. Moving to the balance sheet and cash flow. We ended the quarter with $139 million in cash, cash equivalents and restricted cash. Our operating cash flow in the first quarter was negative $16.6 million, $11.7 million improvement year-over-year. As a reminder, our cash flow is influenced by seasonal factors and similar to prior years, we expect our cash flow to be back half weighted. Moving to our financial outlook. Based on our strong performance, we are increasing our full year outlook and providing guidance for the second quarter of 2026. We are raising full year GMV to the range of $2.42 billion to $2.47 billion, representing 14% to 16% growth year-over-year. Revenue is expected to be between $770 million to $784 million, translating to 11% to 13% growth versus last year. Adjusted EBITDA is expected in the range of $59 million to $67 million, which represents 8.1% margin at the midpoint. This is an improvement of approximately 200 basis points versus 2025, and we remain on track to reach our target of 15% to 20% adjusted EBITDA margins over the medium term. Moving to our outlook for the second quarter. We expect GMV in the range of $590 million to $600 million, representing 17% to 19% growth year-over-year and 32% on a 2-year basis at the midpoint. Revenue is expected to be between $186 million to $189 million, representing 13% to 14% growth versus last year. Second quarter adjusted EBITDA is expected to be between $11 million and $12 million, representing 6.1% margin at the midpoint and approximately 200 basis points of margin expansion year-over-year. In closing, our performance is evidence that our strategy is working. We are driving top line growth while strategic investments in AI and automation are enabling us to expand margins over time. Each year, over 35 million buyers purchase luxury goods in the U.S. primary market and resale adoption is growing. We are helping to drive that adoption through our unique approach to unlocking supply, removing friction for our sellers and accelerating the flywheel. I want to extend my gratitude to our entire team for their hard work and execution to start the year. With that, we will move to Q&A. Operator? Operator: [Operator Instructions] Our first question will come from Marvin Fong with BTIG. Marvin Fong: Congratulations on the strong results. I guess I'd like to just kind of start -- I mean, obviously, we can see your guidance is calling for fairly consistent growth on a 2-year basis for GMV. But just in light of the Middle East conflict and surging fuel prices, just both on the demand and the supply side, is there anything to call out shifting product mix on buyer demand and on the supply side, might you be seeing any incremental supply coming your way as consumers try to cope with the cost of living? Rati Levesque: Thanks, Marvin. Thanks for the question. A couple of things. So I'm hearing what is kind of our confidence in the full year. This is now our fourth consecutive quarter of double-digit growth. We're seeing the customer, both buyer and consignor being quite resilient actually, and that continues. That trend continues. Our value props are resonating with our customer. And I think at the end of the day, it's that intersection between value and luxury that we can offer. So when value of dollar becomes top of mind for our customer, that's kind of where we are. And we, of course, have that higher income customer profile as well. Our supply looks quite healthy, all driven from our growth playbook that we talk about, retail becoming mainstream, but also this flywheel. So you saw an acceleration in our buyers and those buyers becoming sellers. So the top of funnel metrics were focused more of our marketing dollar and top of funnel, but also around our social channels working, and really driven by mostly Gen Z and millennials. So continuing to build trust with our sellers and continuing to see kind of the top of funnel metrics be quite healthy. Marvin Fong: Got it. And if I could do a follow-up, just obviously, we saw the surge in AOV and consumers clearly are shopping your higher-end items. Just why do you believe that's happening? And how sustainable is that trend, I mean, considering, theoretically, the consumer is a bit stressed here, but you guys continue to outperform in handbags, jewelry and those types of items, it sounds like. So just any thoughts on how sustainable that trend is? Ajay Gopal: Thanks for the question, Marvin. We've seen a healthy balance between price and volume in our -- over the last few quarters that's been driving our growth. I think the shift to AOV is it's a testament to the trust that we've built in our platform and the willingness that customers demonstrate on being interested in coming to The RealReal for high-value product. For us, what's exciting, it really showcases the flexibility of our marketplace, right? As customer preferences shift from one category of fashion to another, we are able to quickly pivot and meet them and get them exactly what they're looking for. Operator: Your next question will come from Dylan Carden with William Blair. Dylan Carden: I hope that worked. Curious, you're seeing this really nice balance between customers and AOV. And I'm just kind of curious how you're thinking about that through the balance of the year. And then on marketing and sort of customer acquisition, it seems you speak to flywheel and this idea of compounding. And I'm just curious if there's sort of also a healthy repeat trend in this business where you're out there acquiring either sellers or buyers and part of what you're seeing, particularly on sort of the order side or the order value side is sort of return of some of the efforts that you made in the last sort of 2 or 3 years. Ajay Gopal: Yes. Dylan, thanks for that question. Yes, we are seeing a nice mix of customer growth and sort of their willingness to buy higher-priced items. In Q1, we reported an acceleration in active buyers, which came in at 10% on a trailing 12-month basis. And we've seen a lot of success in mixing -- in shifting the mix of our products into higher value and capitalizing on that opportunity. I'm going to turn it over to Rati for the other part of the question around flywheelers because it's a really exciting story there. Rati Levesque: Yes. So with the flywheelers, you've heard us talk a lot about that, and our strategy there is working. So we've seen acceleration in buyers, but it's not just about bringing in any buyers. It's bringing in the buyers that are sticky but also turn into consignors. So as retail is becoming more mainstream, we can kind of target the right flywheelers and bring them into our ecosystem. And again, that's more driven out of Gen Z and millennials. So our marketing investment has very much been focused around that. They have a high confidence in our ROI, and then obviously, leveraging AI through our smart engine and more targeted offers as well. And you hear me talk about social, but also things like our affiliate program and referrals are our fastest-growing segments. And so we're optimistic in our investment here in focus. Dylan Carden: Would further retail expansion be a piece of that going forward? Could you accelerate stores? Do you need to accelerate stores? Rati Levesque: Stores is always a part of our strategy, our retail locations, and that's the buzzwords, you always hear me talk about the growth playbook, but that's a part of the strategy. It's marketing. It's our sales engine, the IP of our sales team and the retail location. So that trifecta really working together compounds our growth rate and compound supply. Operator: Your next question will come from Ike Boruchow with Wells Fargo. Irwin Boruchow: I guess maybe Ajay, I'm trying to think about how the flow of the model should move from here. I understand what's going on with AOV and take rate. I think you had said 3 months ago, take rate should be pressured in the first half and normalize in the back half. Can you kind of give us some specifics on how you're expecting that to flow? And then kind of a similar question on the direct side of the business, I think up 26%. Like does that growth rate moderate further as you move through the year? Just kind of curious on those two line items, how we should be thinking about the model? Ajay Gopal: Absolutely. Thanks for the question, Ike. So maybe starting with take rate, our blended take rate in Q1 was 36%. And just as you pointed out, and we'd mentioned earlier, right, we do expect pressure on our take rate just from the shift in the mix, right? We -- our take rate is designed in such a way that it gives us strong unit economics across a pretty wide price band. And as we mix into higher-value items, the percentage is a little lower, but those items generate better unit economics and stronger profit dollars. So a good trade-off for us at the business. We expect that to continue, as you can read into our Q2 guidance. And we do expect that to sort of start to -- those two lines to get a little closer as we get into the second half. That's our expectation. But at the end of the day, like I said earlier, it really depends on where the market preference shifts and our ability to be able to capitalize on that shift in real time. The direct revenues, we've made some changes to direct revenue last year. We really looked -- took a hard look at the mix of what was in there and improved the margins as well. So in Q1, it grew 26%, slightly higher than the aggregate business, but not by much, right? Because GMV was up 24% for the total business and direct revenues grew 26%. So we think it's in a good place right now. It will scale with the business, and we expect it to be in that range of 10% to 15% of total revenues going forward. Operator: Your next question will come from Bobby Brooks with Northland Capital Markets. Robert Brooks: So obviously, you're seeing excellent buyer growth in the Gen Z and millennial cohorts. But I was curious, is that the same from the consignor growth point of view? I think that a bigger piece of that supply that you guys talk about or kind of we all know that is just sitting in people's closets, collecting dust are probably more towards the Gen Xers and even maybe baby boomers. And maybe the consignor growth matches the generation mix of the buyer growth. And if that is the case today, could you just discuss your approach to winning the consignors and buyers from that older demographic? Rati Levesque: Yes. Thanks for the question, Bobby. So actually, many -- like I said, many of our new consignors come from our buyer population. And those trends and patterns, we have not seen change. They may be a little more diverse on the supply side, but still driven by millennials and Gen Z as well. As far as tactics specifically to bring on the flywheelers, like I mentioned, reconsign is a big one. So MyCloset, you heard me talk about that a little bit, but this one-click reconsign button to get people to consign as first-time consignors before we know when they bought a handbag, for example. And 6 months later, they're ready to consign it. How do we give them the right signals and how do we personalize our offerings to bring them on as consignment. That's really working. Pricing estimators are really working, leveraging our sales team is all really working, giving them the base of consignors to go after our leads and opportunities is also really working. So all of that kind of together, along with our retail locations is bringing on the supply, but also in this kind of those same cohorts as the buyer, very similar to the same cohorts as buyers. Robert Brooks: Got it. And then just mention building this international pipeline of supply, and I think you specifically called out France and Italy. I just want to unpack that a little. Is that with the kind of individual consignors that you guys -- are currently your bread and butter in the U.S.? Or is that working with brands directly or manufacturers directly? Just really curious to hear more there. Rati Levesque: Yes. So drop-ship, it still continues to be early days here. We continue to learn. I will say it's meaningful growth rate, but not what's driving the growth. So yes, directly able to unlock supply from international vendors or partners like we talked about in the opening remarks. This enables us to kind of test and learn as we think about a more localized approach to international. So we're kind of taking this crawl, walk, run approach. We're launching cross-border this year, again, focus on demand there with the idea that we're focused on drop-ship and bringing on some of these international partners that way, looking to see what kind of product we can get from some of these international partners look like, what does the sell-through look like? Before we kind of move into a broader, more localized strategy. The opportunity here is huge. As we know, the TAM is really big, and we're excited about the next steps here. Robert Brooks: Got it. And then just one last one for me. So the implied revenue guide, a little bit of a decel comparatively to 1Q, but 1Q had the easier comp with the California fires from last year, right? And it seems -- it just seems like listening to the commentary and the tone that things are really accelerating for the business and maybe that year-over-year 2Q revenue guide at face value doesn't really express that fully. So I was just curious to hear your thoughts on kind of my line of thinking there. And maybe if I am right, could you just expand a little bit more like below the numbers on the acceleration or momentum that you're seeing in the business? Ajay Gopal: Thanks for that question. I can take that one. So Q1 was really strong. GMV was up 24%, and it was also our fourth consecutive quarter of accelerating GMV. When we look at what's driving that strength and what's driving that performance, it's a lot of the fundamentals, right? We are -- it's the growing interest in resale as a category. It's our ability through our strategic initiatives to unlock supply and bring that supply on to a high-trust marketplace. And we're seeing that translate into strong growth of the business, attracting more buyers, which also came in at a nice 10% growth on an active basis. So when we look at Q2, all of those fundamentals continue to be true, right? We have high confidence in the guide that we've provided. We're starting the quarter strong. And when I -- it gives that confidence also translates into the full year guide where we've increased the midpoint of our guidance from 13.5% GMV growth to 15% GMV growth. So we'll keep executing and delivering against that plan. Operator: Your next question will come from Matt Koranda with ROTH Capital. Matt Koranda: A lot of the demand stuff has been covered, but I wanted to dig a little bit more into the O&T expense. You leveraged that nicely in the quarter. But I guess on a per order basis, it was kind of flattish. As Athena penetrates further into the business later this year, I guess, how should we be thinking about per order sort of O&T expense and whether we get leverage later in the year? Ajay Gopal: Yes. Thank you for that question. Operations and tech was a significant source of operating leverage for us. It has been -- it was true in last year when it leveraged 330 basis points. And in Q1, it drove 320 basis points of leverage. We think it continues to be a source of where our margin expansion is going to come from. When you look at our full year expectation to expand EBITDA by 200 basis points as we balance our expanding margins with delivering growth, ops and tech will continue to be a key component of that margin expansion. Matt Koranda: Okay. And then just philosophically, if you get upside from efficiency around Athena implementation, is that -- are those dollars that you would consider reinvesting in marketing to speed up customer acquisition? Or is that something you'd let flow to the bottom line? Maybe just a little bit on your thought process around how you think about upside as you implement Athena? Ajay Gopal: Yes. Great question. I mean we love that question. Definitely see it being reinvested back into growth, right? We are -- you've seen us put more money into marketing as we are able to gain more confidence on the return against that spend. The ROI is definitely there. We're also excited to invest a little in product and technology. There's been some very impressive gains in the world of artificial intelligence. And we see an opportunity to translate those gains in AI into our business model. So we will continue to lean into things that drive growth and balance that with expanding margins. I think we are set up to do both. Operator: Your next question will come from Mark Altschwager with Baird. Mark Altschwager: I just wanted to ask about the supply pipeline, watches, jewelry, handbags, that's really been the AOV story for a few quarters now. Can you talk us through the supply visibility as you look 6, 12 months out? I mean, are you seeing any signs of tightening in those particular categories? Or is it still feeling pretty robust there? And then relatedly, Ajay, just bringing it back to the model, we do begin to cycle the step-up in AOV from last year. I think the revenue guide seems to imply some moderating AOV growth in the back half. I mean is that the right expectation? Or is there a view that you could still be in the early innings of this AOV momentum? Rati Levesque: Thanks, Mark, for the question. I'll take the first one before I hand it over to Ajay. So on the supply side, what are we seeing? Watches, jewelry, handbags, high-value items in general, seeing strong supply coming in through there, strong inventory. Again, this is because of our retail locations, because of our incentives for the sales teams and how we've really prioritized this area. Our NPS is great for the mid- and high-value product as well. So we're seeing like all of that top-of-funnel metrics, our investment in marketing really pay off and bring in the right type of supply. The interesting thing about us is all this data that we have, right? The 15 years of proprietary data to help us leverage AI. So what that means is we have this agility to our business so we can scale up supply in the areas where customers want very quickly. And we see those trends very quickly, and we can take that out to the sales team and make sure that they're incentivized the right way. So we're not seeing any slowdown in high value. If anything, that's picked up pretty nicely, and obviously has a lot to do with how big the TAM is. But the top of the metrics are solid. And just tactically, I brought up the flywheel, but also Real Partners and affiliates. So these closet organizers, these stylists, we're really starting to see momentum there with the type of product they're bringing in that again gets -- is a mix of a really nice high and mid-value product, the agentic kind of search on the discovery side, of things selling through in a nice way, gets more money for our consignor and kind of accelerates that flywheel. Ajay Gopal: I can take the second question, Mark, around sort of AOV for the second half. I think it really goes back to this concept of balance between price and volume growth for us, right? We've seen a healthy balance between the two, and there are quarters where one tends to be a little higher than the other. When you read into our implied second half guidance, yes, we do expect the balance to shift a little bit versus Q1 to a more -- less on AOV, more on units. But really, it comes down to what the customer is looking for and where fashion preferences shift. We have the ability to quickly move in that direction. And just as you saw us capitalize on that trend with jewelry and watches, to your point last year, we'll do the same regardless of where that shifts. Operator: Your next question will come from Ashley Owens with KeyBanc. Victoria Apostolico: It's Victoria on for Ashley. Given the recent increase in oil and gas prices and the pressure we're seeing on the lower-income consumers, are you seeing any divergence in activity between higher-value customers and the more aspirational buyers on the platform? Rati Levesque: Thanks, Victoria. Yes, we're not seeing any kind of change in trend when I'm looking at the health of the consumer. Right now, like I said, the buyer and consignor continues to be resilient headed into the quarter. And I really think, again, testimony to our trust, but also, again, that intersection between value and luxury, so that dollar going a lot farther with us. The resale continues to become mainstream. And we're seeing -- as far as trends go, we talk about high-value, but also emerging brands and vintage. So we're much more now the place where people are discovering new brands as well. And if anything, we're also seeing -- because of the trust that we built and the testimony to our trust, we're seeing first-time buyers spending more in their first purchase. So that's the great thing about our marketplace. And I'd say one other thing that I'm seeing is, I'd say resale in the past was maybe one transaction. It's becoming -- it's less of a trend and a fad now and more we're developing this deeper connection with our customer. And we talk about it a lot in the metrics, right? Almost 50% of customers consider the resale value before purchasing in the primary market now and almost 60% prefer the secondary market outright. So we're seeing definitely a change in the behavior as people are changing the way they shop. Victoria Apostolico: Okay. Great. And then just concerning the consumer pressure, I was curious about how prior cycles went. Has this helped grow adoption for resale in the past? Rati Levesque: Yes. So we haven't been through like a recession, for example, a macro. I would say that we were built out of a recession. We say that quite often. The question is do people want to monetize their closet if they're feeling a little bit of pressure. Again, I don't know. But what I do know is and what I can tell you is what we're seeing right now. And supply pipeline looks really good, new consignors, new buyers. We are seeing people wanting to monetize their closet right now. We're seeing people really buy into the value play. And like I said, that intersection between value and luxury really works in our favor right now. Operator: Your next question will come from Jay Sole with UBS. Jay Sole: Hope you can hear me. My question is on just AI and operational throughput. I guess how much of the margin expansion in Q1 was driven by Athena and some of the smart sales impacted by smarter AI pricing? That's the first question. And then sort of any color on AI rollouts versus any kind of seasonal tailwinds, specifically, are you seeing a measurable decrease in time to site for unique SKUs? Ajay Gopal: Yes. Thanks for that question, Jay. I'll take the first part of it and then hand it to Rati to talk about the broader sort of AI strategy that we see on our business. As it relates to Athena, it is a pretty material component of the source of efficiency that we are seeing in operations and technology, at the end of the year with 35% of items being processed through that workflow, and we see that getting close to 50% towards the year, so -- towards the end of this year. So it will continue to be a source of efficiency for us. We also have other things we're working on within the operations line. One of our investments this year is in implementing an automated storage and retrieval system in one of our fulfillment centers, and we're excited about that because it's going to allow us to move things faster through our fulfillment centers, and it also allows us to get more out of our existing capacity footprint. So 35% more from the fulfillment center where we would be putting in this technology. So that's as it relates to what we're doing around operations in Athena. I'll turn it to Rati to talk about sort of the broader AI strategy in our business. Rati Levesque: Yes. Thanks, Jay. So I mentioned this earlier, but I think what puts us in a really great position is we have 15 years of proprietary data to position us and leverage AI. So at the end of the day, it's about removing friction, unlocking supply, lowering fixed and variable costs. Our objective is to find these efficiencies, also shorten our SLA, service level agreement with our customer, but while also taking dollars out of the unit cost. So Athena is one way that we do that, but also how do we get to 15%, 20% adjusted EBITDA margins. It's leveraging our moat, our expertise, authentication, pricing and data, our sales team. We're well positioned to kind of take advantage of these efficiencies. So examples might be smart sales, which you've heard us talk about in the past, authentication as well. An automated storage and retrieval system we're launching right now that will really help a lot of the OpEx costs. And then leveraging across our corporate functions as well. And then on the site experience side, we think about improving discovery or conversational search via agentic AI. So we're pretty excited to test and start using the agentic AI, this human agent collaboration. And it's early innings of capitalizing on the significant and growing TAM. Operator: Your next question will come from Marni Shapiro with The Retail Tracker. Marni Shapiro: Congratulations on a fantastic quarter. I'm curious, I know we love talking about technology and everything, but I'm kind of curious about the customer side of things just a little bit more. I have a couple of friends -- several friends who actually consign with you and buy with you. And a few of them have said that the experience has been a lot better. So I'm curious about what you're doing to enhance that experience on the buyer side, on the consignor side? And how is it, I guess, rolling out? And what should we expect the rest of the year? Rati Levesque: Yes. Thank you for the question. As a team and as a company, we've really been focused around obsessing over service. You hear me talk a lot about that in our script. So whether that is a pricing estimator that we've launched, reconsign, our operational excellence, really looking at kind of the exceptions and making sure that they're going down the right path. MyCloset is another one, right? Or just that deeper connection that we're -- that we have now with the consumer to build trust with our sellers, empowering them with that rich data that we have. And then search and discovery is something else that we're working on this year. So really thinking about both the consignor and seller -- sorry, the consignor and the buyer experience and really kind of listening in on what the pain points are and addressing them as a team. So still we get really excited about talking about that and how do we kind of continue to increase our NPS. The price estimator is actually launching today. There's a select group of sellers, so check that out, and we'll continue to do our hard work here. Marni Shapiro: And can I ask a follow-up on that? Because I feel like there are a lot of places to consign or try and sell your pre-loved merchandise. Are you hearing from your customers, whether it's consignors and/or buyers that the trust factor is the thing that's most important. It feels -- we all know that there's a lot of dupes out there. We all know it's hard to verify some of them. Is that the kind of the moat, I guess, that you guys have? I know it's not digital, but I feel like trust is almost more important than making it easy in a weird way. Rati Levesque: Yes. So it's definitely around our trust is really important. And the way that we kind of cement our trust is through our sales organization, our pricing and data, our expertise that we have. It's great to see growing interest in the category, but it validates that resale is not just a trend, but really here to stay and kind of cemented into the infrastructure layer of the fashion industry or marketplace. So our value props really resonate with our customer. And like I said, the IP of the sales team, the authentication and expertise and just building that trust and community, again, driven by Gen Z and mostly millennials. But we are definitely unique and really doubling down on our competitive moat here. Marni Shapiro: That's great. And also, I know this wasn't new, but amazing that Andy was wearing thrifted and pre-loved items throughout Devils Wears Prada 2. I was like, oh my God, this is just genius for you guys. So congratulations. Rati Levesque: Thank you. Ajay Gopal: Thank you. Operator: Thank you. That concludes the Q&A session and today's call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the Synaptics Third Quarter Fiscal 2026 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Munjal Shah. Please go ahead. Munjal Shah: Good afternoon, and thank you for joining us today on Synaptics' third quarter fiscal 2026 conference call. My name is Munjal Shah, and I'm the Vice President of Investor Relations. With me on today's call are Rahul Patel, our President and CEO; and Ken Rizvi, our CFO. This call is being broadcast live over the web and can be accessed from the Investor Relations section of the company's website at synaptics.com. In addition to a copy of our earnings press release detailing our quarterly results, a supplemental slide presentation and a copy of these prepared remarks have been posted on our Investor Relations website. Today's discussion of financial results is presented on a GAAP financial basis, along with supplementary results on a non-GAAP basis, which excludes share-based compensation, acquisition-related costs and certain other noncash or recurring or nonrecurring items. All non-GAAP financial metrics discussed are reconciled to the most directly comparable GAAP financial measures in our earnings press release and supplemental materials available on our Investor Relations website. As a reminder, the matters we are discussing today in our prepared remarks, in our supplemental materials and in response to your questions may contain forward-looking statements. These forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. Although Synaptics believes the estimates and assumptions underlying these forward-looking statements to be reasonable, the statements are subject to a number of risks and uncertainties beyond our control. Synaptics cautions that actual results may differ materially from any future performance suggested in the company's forward-looking statements. Therefore, we refer you to the company's earnings release issued today and our current and periodic reports filed with the SEC, including our most recent annual report on Form 10-K and quarterly reports on Form 10-Q for important risk factors that could cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements speak only as the date hereof. Except as required by law, Synaptics expressly disclaims any obligation to update this forward-looking information. I will now turn the call over to Rahul. Rahul Patel: Thank you, Munjal. Good afternoon, everyone, and thank you for joining our fiscal third quarter 2026 earnings call. Fiscal third quarter marked our sixth consecutive quarter of double-digit year-over-year revenue growth, driven by 31% year-over-year increase in our core IoT products. We are seeing improving momentum and delivering consistent performance across the business. Our non-GAAP gross margin was above the midpoint of our guidance range and non-GAAP earnings per share of $1.09 was at the high end of the guidance and increased 21% year-over-year. Let me start by highlighting the accelerating adoption we are seeing in physical AI and Edge AI with customer engagements continuing to expand. Last quarter, we announced our first humanoid design with a leading OEM for our touch controller and interface solutions. Since then, we have sampled silicon to 3 additional OEMs and our robotics pipeline has grown to more than 35 customers globally, including a leading generative AI OEM. Customers are adopting our AI-enabled touch controllers for tactile sensing. Our capacitive sensing technology measures subtle changes in compressible layer to detect force, slip and proximity, enabling robots to handle objects, maintain grip and respond in real time. This capability extends beyond the hand to other contact surfaces, including the feet. These tactile controllers can pair with our Astra processors to aggregate sensor inputs and run AI locally, enabling real-time decision-making, improving response time and reducing the load on the robot central compute. In addition, our wireless portfolio, including Wi-Fi, Bluetooth and GPS GNSS, supports reliable connectivity as robots move and coordinate with one another and the network. Further, our interface technology enables high bandwidth transport within a robotic system. For example, one of our customers is using it to interconnect multiple displays in a humanoid. Our content opportunity in robotics is substantially higher than in our other markets. Synaptics' broad and differentiated portfolio across processing, connectivity, sensing and interface solutions uniquely positions us to address this opportunity. New use cases continue to emerge and our engagements are expanding with a growing set of customers. While still early, I am excited about this promising growth vector for Synaptics. This quarter, we also made solid progress in our partnership with Google, which continues to be a key driver of our Edge AI strategy. We launched next-generation Coralboard powered by our Astra SL2610 processor and featuring the industry's first implementation of Google's Coral NPU integrated with Synaptics' Torq NPU architecture. The Coralboard provides developers with a turnkey platform to move quickly from prototyping to production and bring generative AI directly onto the device. In the coming weeks, we and our partner will showcase Astra processor technology powering Google Gemma and other leading AI models at a high-profile industry event. At this event, we will also make the platform available to developers, system architects and OEMs looking to build real-world edge AI applications. Next, let me update you on the next generation of our Astra SR series microcontrollers, a semi-custom AI native platform targeting emerging wearable applications. We successfully taped out the SoC last month and expect to begin sampling in the fall. The platform includes Synaptics' PMIC and a microcontroller that integrates advanced power management, Google's Coral NPU, our Torq NPU and a flexible memory architecture to deliver high-performance, low-power Edge AI processing. For the initial variable application, our solution delivers up to 2 times battery life and reduces bill-of-materials by roughly 50%. Beyond this initial design, the SR-series represents a new class of AI-native microcontrollers that can extend across wearable platforms and into a broad range of Edge AI applications. Turning to design traction, we are securing Astra processor wins across multiple applications in various end markets. Notably, our processors are designed into a new class of medical devices that bring diagnostic imaging to a patient's home, extending access to healthcare in rural and underserved regions. This customer selected Astra for its price performance, design flexibility, ease of software and hardware integration, and for the ability to run AI models locally on the device. We also secured a win in industrial with a leading North American fleet management OEM, where our ultra-low power vision platform provides intelligent asset monitoring. Our pipeline continues to expand across consumer and industrial markets, with increasing traction in IoT hubs, gesture-driven streaming devices, industrial gateways, UAV navigation and positioning, and smart home systems. Our key differentiation lies in tightly integrating compute and connectivity into a solution-oriented, software developer friendly platform, designed to reduce system complexity while enabling scalable and high-performance Edge AI deployments. Finally, we had a successful launch of our Astra-enabled Connected MCU at Embedded World, where it received a Best in Show award in the Microcontrollers, Microprocessors & IP category. This device is the industry's first to integrate Wi-Fi 7 and Bluetooth 6.0 connectivity with Edge AI compute in a monolithic SoC, delivering a highly differentiated solution. Customers are particularly attracted to its ability to concurrently host Bluetooth and Wi-Fi stacks, as well as the host application, enabling greater integration and efficiency. In addition, the integrated NPU in this SoC allows customers to develop and deploy differentiated AI features. We are currently sampling the product with multiple customers across a range of applications, including industrial power, home appliances, and security cameras. Turning to Enterprise and Mobile Touch, demand from our enterprise customers continues to improve steadily. We remain focused on the premium tier of the market and will continue to closely monitor demand trends. In Mobile Touch, while some customers are navigating near-term challenges related to memory supply, we believe that we remain well positioned with some leading OEMs that are gaining share. We are currently shipping into the majority of flagship phones at a leading Korean OEM. We are also encouraged by our design wins in foldable smartphones and expect customers to launch new products in the second half of the calendar year. While still early, broader adoption of foldable smartphones by major OEMs has the potential to drive overall market growth. To summarize, we are gaining strong traction in Physical AI and expanding our presence across a broad set of Edge AI markets. We are executing on our product roadmap, delivering highly differentiated products and solutions, and deepening our engagement with customers and ecosystem partners. These efforts position Synaptics for long-term growth and value creation. I will now turn the call over to Ken to review our third quarter financial results and outlook for our fiscal 2026 fourth quarter. Ken Rizvi: Thank you, Rahul, and good afternoon, everyone. I will focus my remarks on our non-GAAP results which are reconciled to GAAP financial measures in the earnings release tables found in the investor relations section of our website. Now let me turn to our financial results for the third quarter of fiscal 2026. Revenue for fiscal Q3 was $294.2 million, above the midpoint of our guidance and up 10% on a year-over-year basis driven by strength in our Core IoT products. The revenue mix in the third quarter was 30% Core IoT, 57% Enterprise and Automotive and 13% Mobile Touch products. Core IoT product revenues increased 31% year-over-year, driven primarily by continued strength in our wireless connectivity products. Enterprise & Automotive product revenues were up 9% year-over-year as we are seeing a recovery in our enterprise portfolio. And Mobile Touch product revenues decreased 16% year-over year. Third quarter non-GAAP gross margin was 53.6%, slightly ahead of the mid-point of our guidance. Third quarter non-GAAP operating expenses were $104.6 million, better than the midpoint of our guidance. Our non-GAAP operating margin was 18.1%, up approximately 260 basis points year-over-year and non-GAAP net income in Q3 was $44.1 million. Non-GAAP EPS per diluted share came in toward the higher-end of our guidance at $1.09 per share, an increase of 21% on a year-over-year basis. Now let me turn to the balance sheet. We ended the fiscal third quarter with approximately $404 million in cash and cash equivalents, reflecting $39 million of share repurchases in Q3. Through April of 2026, we have completed $93 million of share repurchases this fiscal year. Cash flow from operations was $21.8 million in the third fiscal quarter. Capital expenditures for the third quarter were $11.9 million and depreciation for the quarter was $7.9 million. Receivables at the end of March were $162.5 million and the days of sales outstanding were 50 days, up from 39 days last quarter. Our ending inventory balance was $161.3 million and days of inventory were 106 days, compared to 101 days at the end of the last quarter. Now, turning to our fiscal 2026 fourth quarter guidance. For Q4, we expect revenues to be approximately $305 million at the mid-point, plus or minus $10 million. Our guidance for the fourth quarter reflects an expected revenue mix from Core IoT, Enterprise & Automotive, and Mobile Touch products of approximately 33%, 54%, and 13%, respectively. We expect our non-GAAP gross margin to be 53.5% at the mid-point, plus or minus 1% and non-GAAP operating expenses in the June quarter are expected to be $105 million at the midpoint of our guidance, plus or minus $2 million. We expect non-GAAP net interest and other expenses to be approximately $2 million and our non-GAAP tax rate to be in the range of 13% to 15% for the fourth quarter. Non-GAAP net income per diluted share is anticipated to be $1.20 per share at the mid-point plus or minus $0.15, on an estimated 40.4 million fully diluted shares. This wraps up our prepared remarks. I would like to turn the call over to the operator to start the Q&A session. Operator? Operator: [Operator Instructions] Our first question comes from the line of Ross Seymore with Deutsche Bank. Ross Seymore: A couple of questions. I guess the first one on the core IoT side of things. In the near term, it looked like it was a little weaker than you expected in the March quarter, but seems to be gaining that back in June. So in the near-term side, what's causing that volatility? And then perhaps more importantly, longer term, you rattled off a whole bunch of good wins and traction in the Astra platform. How should we think about the revenue contribution of that folding in into the second half of this year and into calendar year and into calendar '27 as well? Has that become a meaningful tailwind? And if so, when? Ken Rizvi: So Ross, maybe I'll take -- this is Ken. Thanks for the question. I'll take that first part, and then I'll turn it over to Rahul on the second piece. But on the first piece, if you look -- and if I just step back, Ross, right, for the year and for -- based on our guidance for Q4 for Core IoT, we're going to do north of $385 million for Core IoT at the midpoint. That grows by north of 40% on a year-over-year basis. And so there are always some movements quarter-to-quarter. But if I just step back, look at the business from a 30,000-foot view standpoint, we're seeing still very, very solid performance here throughout 2026 for Core IoT. And there will always be some movements here and there quarter-to-quarter. But in general, really very excited about the performance this year by the team. Rahul Patel: Ross, this is Rahul. Regarding the IoT ramp on Astra processors. Well, I think we have stated in the past that we anticipate meaningful ramp in calendar 2027, and that remains. A couple of things. I indicated on the prepared remarks that we have taped out our semi-custom solution targeted towards end product, that's with a very large OEM. That is anticipated to go into production in the first half of calendar '27 and in the end products sometime about now next year and ramp up very nicely in the second half of '27 as well. And regarding some of the design wins in robotics and physical AI, as you probably know, there's a lot of activity. There's a lot of market forecast. At this point, we are being very cautious in including those numbers in our plan for '27, largely because it's openly talked about as well. I think various research puts the numbers at very large quantities. However, in my opinion, it's still a greenfield. And so we're not taking a lot of that into our '27 plan. What I will reiterate something that was in the remarks as well, that the dollar content is substantially different, materially higher than what we have seen in end products like Synaptics in the past. And so I remain excited about the opportunity in physical AI. I am seeing the conviction in the larger customer base around the capabilities, IP, product and technology that Synaptics brings to some of these platforms by virtue of the acceleration that we are seeing in our engagement and design activity with our customers and how quickly some of these engagements are turning into us shipping silicon. I mean, in one situation, in that case, pilot runs in a couple of other situations, I would be specific, maybe 3, we've shipped samples. And so all of that is TBD in terms of material revenue, but Astra family of products and connectivity, definitely looking on track for '27. Ross Seymore: Perfect. And for my follow-up, just touching on kind of the PC-related and mobile-related side of things. Given the headwinds from the memory costs and all of that, and I fully realize you guys are at the premium end, so you might not be hit as hard. But how are you seeing your customers react to those pressures? Do you think that the market can still grow if we look kind of out over the next few quarters? Or is that something where they're going to eventually feel that pain as well and maybe it's a meaningful headwind? Rahul Patel: Well, I think let me respond in 2 parts, right? PC, we had a good quarter. And where we are in our fiscal Q4, the current quarter, we continue to see reasonable momentum in the demand for our products. However, like you indicated and much of the market is saying as well, right, there could be headwinds in the second half of '26. We haven't seen that just yet. But like with everybody else in the marketplace, we may not be immune to that as well if it comes about. What works, like you said, Ross, favorably for us is that our participation is in the enterprise class products and premium class products. And that potentially presents us with some form of cushion buffer because the affordability is a lot better in that class of products. But you are absolutely right. Like everybody is saying, there could be headwinds in the second half, and we may not be immune to it. Now the size and the impact may be a little different than what everybody is seeing. Regarding smartphones, as you know, there is also this challenge with memory, particularly identified in China, and we see that in our China-based smartphone shipments as a result in our touch products. However, we are gaining market share, and we're doing very well in a Korean OEM who has access to memory. And so we are a beneficiary in that situation. And so even in the Mobile Touch, I think we don't know when the memory situation recovery happens for the China OEMs. However, we are a beneficiary on the other hand, with the Korean OEM where we are gaining market share and they have access to memory. Operator: Our next question comes from the line of Kevin Cassidy with Rosenblatt Securities. Kevin Cassidy: Congratulations on the great results. And congratulations on all the new product and design activity. I just wonder if I could ask a little more about the robotics market, very exciting. But can you describe the attach rate you're getting, just kind of a range of if you had only the capacitive touch versus whether you had all your products through the connectivity products. What would be the range of the content in robotics? Rahul Patel: Yes. Kevin, thank you for the question. I'm really personally very excited about the opportunity for Synaptics in robotics. And think of robotics as from a tactile sensing point of view, as an implementation on the backs of analog design, some localized computation that ultimately transcends the biological sensory capabilities of a human hand to a level that presents tremendous amount of robustness in adverse conditions, tremendous amount of accuracy and dexterity and also the latency of inference basically is at a different level, right? In all these vectors, you see transcending the human hand behavior basically. And so if you kind of sum it up, that is right in the alley of what Synaptics technology is capable of delivering best-in-class touch capabilities that, again, is proven and embraced extremely well in the premium class of smartphone marketplace, our AI-native processing engines and also wireless connectivity. And so being specific to your question about silicon content, currently, majority of our shipments are concentrated on tactile sensing and bus interface technologies. And you can think of the silicon content in terms of few tens of dollars per platform, largely on backs of those 2 capabilities. We are seeing early engagements on Astra and wireless connectivity, and that is additive on top of that. And to be very clear, many platforms would have one or more capabilities from Synaptics in place. And so that's how we should think about it. And so the diversity of our product capabilities and our technology and the leadership capability in each of the categories that we are in, sensing, processing and connecting and interface is what is being appreciated in these platforms. Kevin Cassidy: Great. And maybe on the pipeline you have of 35 OEMs, how does that look geographically? Rahul Patel: It's highly concentrated in advanced stages of engagement in North America, some in China and early stages in Europe. Operator: Our next question comes from the line of Neil Young with Needham & Company. Neil Young: So within Astra, I wanted to ask about the end markets. Are there any particular end markets where customer traction is moving fastest today? And then as those designs move toward production, should we think about the initial ramp as being concentrated in a few larger programs? Or is this more diversified across many smaller edge AI deployments? Rahul Patel: Neil, this is Rahul. I have indicated in the past, and I think that's exactly how it's emerging in our current design activity. Consumer will ramp up first. Industrial will follow. We are seeing industrial design wins now taking shape. I described us getting into medical equipment as well. However, I think of this as equipment that would sit at the far end of the edge in people's homes. In industrial, I highlighted, I mean, one of the many designs, but the design around fleet management. Now industrial takes a lot more in terms of validation, hardening of the platform and ramping through various regulatory "checkpoints" basically. And so it is slower to ramp than consumer and longer to hold than consumer in terms of the revenue time lines. And so that's exactly what we are seeing in our plans. Regarding your question about is it going to be singles and doubles or there's going to be one big home run customer. Clearly, I think I've indicated we have a semi-custom design done for a very large OEM, who we are very closely partnering on multiple fronts from developing the IP around processing in our platforms for neural processing and many other things to engaging in building out the platform for the end product that is targeted for mass market consumer consumption in the first space. And so there are going to be singles and doubles, and there's going to be this big home run that will come into our calendar '27 revenue profile on Astra. Neil Young: Great. That's helpful. And then I wanted to ask about gross margin as core IoT continues to become a larger mix of the business and Astra-related products begin to ramp. Should we think about the current margin level as a reasonable baseline through FY '27? Or are there other factors that can come in? Maybe just talk about where you see that going. Ken Rizvi: Neil, it's Ken. I appreciate that. So we guide 1 quarter ahead, and you can see that margin profiles in that 53.5%, plus/minus 1% for our guide. We've been at this range. I would say behind the scenes, one of the things that we've been doing well and kudos to the operations team is like other semi players, we have seen cost increases, but we've been able to absorb those and maintain very healthy gross margins. On a longer-term basis, as we think about the core IoT business and specifically, as we think about the processing and processor capabilities, those should have a margin profile greater than the corporate average. And therefore, as that scales over time, that will help the overall mix of Synaptics. Operator: Our next question comes from the line of Krish Sankar with TD Cowen. Sreekrishnan Sankarnarayanan: First one, Ken, I had a question for you on revenues and gross margins. It seems like since early '24, your revenues have been growing roughly $10 million a quarter, and I understand it's hard to forecast. I'm just wondering, is there a hockey stick recovery ahead? Or is it going to be gradual? And on the gross margin side, I'm wondering if there's any leverage in the model from a gross margin drop-through standpoint since your gross margins have been remarkably stable around the 16.5% levels over the last several quarters despite revenues inching up slowly. And I have a follow-up for Rahul. Ken Rizvi: Perfect. Okay. Thanks for the question. So if you look at the revenues, I think one of the factors over the last several quarters has been just working through, right, from the COVID boom and coming through a more challenging inventory environment post-COVID, we've worked through that inventory levels. And so inventories in the channel, even for us have been very -- have leaned out. And now over the last couple of quarters, we've been shipping towards end demand and gaining traction, as you've seen on the core IoT piece over the last several quarters. So that should continue to fuel our growth as we think about the outer years. From a margin standpoint, a lot of it is dependent because we are fabless, it is dependent on the mix and in some cases, the mix within the mix. And so as I mentioned on my last -- the last question, one of the things the team has done a really fantastic job on the operations side is there have been headwinds in cost. We've done a great job maintaining that margin profile and absorbing it. I think on a longer-term basis, the mix and the mix of some of our products such as in the processor category, those are going to help fuel the long-term margins of the company. And so that's kind of where we are today. Sreekrishnan Sankarnarayanan: That's very helpful. And then a quick follow-up for Rahul. On the Astra SR series, when will it be deployed? And is Google just partnering with you? Or are they using other silicon designers, too? Rahul Patel: Krishna, thank you for the question. The SR series is our microcontroller -- AI-native microcontroller platform. It is targeting a mass market along with what we are doing for one large semi-custom customer on this program. So I'm not sure whether I'm answering your question, but your ask was very specific to a particular OEM, and I'm not at the liberty of giving you that or divulge into the name of the OEM at this point. Operator: Our next question comes from the line of Christopher Rolland with Susquehanna. Christopher Rolland: And perhaps following up on that last one. Without divulging any customer names or details, if you could update us on the semi-custom chip opportunity. I don't know if you're able to size that or not yet? And then have you received any interest from others for semi-custom chips as well? Rahul Patel: Chris, this is Rahul. That semi-custom -- I mean, I think there was a question from Neil earlier, and I indicated, I think that semi-custom is -- the way we look at semi-custom is one that delivers a home run right off the bat, right? And I think that is how you should think about semi-custom for us. The customer has got material skin in the game, and we will build a product that differentiates their platform and ultimately uniquely takes them to the marketplace across their entire portfolio of products in that class of products, right? And so I think -- we are also in multiple discussions on semi-custom designs. However, there's not much to share at this point. But going back to the portfolio, the IP capabilities that we present, clearly, both in physical AI and edge AI, there is strong customer interest to do semi-custom opportunity. We have a very clear set of OpEx envelope to work with, and we are very judicious in how we go through and evaluate those opportunities and work through them. But there is definitely a tremendous amount of interest in doing semi-custom with Synaptics. Christopher Rolland: Excellent. And I apologize, it's a busy day if questions were asked already. I know you had some details around your Astra products, but you have a pretty extensive road map of new products coming as well, whether it's like MCU or connectivity, different flavors like Wi-Fi 7, for example. I was wondering if you could update us as to not sampling, but revenue ramps for a few of these new products. And then lastly, in the Broadcom IP purchase, I think you had -- maybe it was UWB. There was a technology, I forgot exactly what it was. I think it was UWB, it might have been something else. But you weren't sure if you were going to pursue that and put R&D resources into that. Did you ever and it seems like maybe in robotics, there could be some functionality there. Just curious what you did with that. Rahul Patel: Yes. I think -- so 2 questions, I believe, you have. First one is the Astra revenue ramp. So we've guided this is going to be calendar '27 event. We'll start seeing the ramp towards the end of the year, calendar year and obviously, material as we progress through the year 2027. Regarding various products, we have -- right now in production, 3 Astra products and in multiple customer design engagements. One is in sample stage, which is our microcontroller with NPU or being AI native with Wi-Fi 7 Bluetooth all in a single die, and that is in sample stage. And then later this year, we will, in the fall, sample the semi-custom MCU with the Google Coral NPU embedded in it as well. And so that 3 or 4 products will ramp in calendar 2027, and that will be the Astra revenue in '27. I think you had a second question, I lost track of it. Christopher Rolland: Yes. There was a -- it was a UWB. Rahul Patel: Yes, with the UWB. Yes, we do have that IP in our portfolio. And we are not doing a whole lot with it right now. However, we are consistently evaluating opportunities. UWB presents an interesting use case outside of digital car key in locationing. And so that use case absolutely is something that we constantly evaluate and especially for indoor applications. Operator: Our next question comes from the line of Martin Yang with OpCo. Martin Yang: First question on your engagement with robotics customers. Do you have direct relationship with all those 35 OEMs? Or are you able to leverage certain distributors or channel partners to engage those robotics customers? Rahul Patel: Martin, this is Rahul. All our engagements are direct at this point. And in many situations, it's direct engineering to engineering engagement largely because this is a new frontier in what the end platforms are trying to accomplish. And the depth of technology, engagement, implementation details is not something that is ready to be consumed through traditional channels like distribution. And so we are very mindful of what we do. We also have a partner that we have worked with that can get into a broader marketplace. We've announced and we have indicated that on multiple marketing forums, the partner is Grinn. And we will try to bring up other partners where they can go engage with other customers that we may not be able to scale on our own, and they help us scale. So they are a scaling partner for us. However, a majority of the designs that I described in tactile sensing are direct engagement that tactile sensing and interface are direct engagements with Synaptics. Martin Yang: One more question on robotics. So can you maybe educate us on the advantage of capacitive approach versus other potential sensing solutions, maybe optical, maybe pressure-based. Are the robotics customers taking capacitive as the winning solution? Or are they at this stage, still evaluating different approaches for tactile sensing? Rahul Patel: Yes. I think it's a very good question. And so something I indicated earlier, the performance along the lines of creating equivalency or transcending biological sensory capabilities of what a typical hand does on the dimension of robustness, latency of inference, the accuracy, the grip, all of that working in adverse conditions is going to, at some point, evolve requiring multimodal implementation and inference capabilities, and that's going to require more than one sensing capability. However, all of that probably is a roadmap item on these platforms. Today, majority of them are seeing capacitive sensing in the capability that Synaptics is bringing to the forefront, the signal-to-noise ratio capabilities, the number of channels that we support, the level of accuracy, the latency of inference, the AI-enabled touch controlling implementations. I think those are the areas where Synaptics continues to excel in the eyes of customers when they bring capacitors touch sensing versus other sensing technologies in the platform. Operator: Our next question comes from the line of Peter Peng with JPMorgan. Peter Peng: You guys pointed out just the cross-selling opportunities in the humanoid with your products. Maybe can you point us to some example of other end applications that you guys are working on that you have the opportunity to also cross-sell with your multiple products? Rahul Patel: Yes. So I think, Peter, this is Rahul. No, robotics is a very broad category by itself. Humanoid is one big platform category within robotics. And in -- if you look at the dexterous hand, right, of a robot or a humanoid, you have the opportunity to combine our AI native processing capabilities along with our touch sensing capabilities and also wireless connectivity for peer-to-peer or robot-to-robot communication or robot to the network communication, right? And so I think you can see a lot of these ultimately lends to cross-selling of and pull-through of one product on the backs of the other product because we come in with a system-level solution sale, right? We come in with some pre-integrated software capabilities to the platform. Regarding other platforms in Edge AI, absolutely. Every time there is an Astra sale, it pulls through our connectivity, right? However, I would also highlight our connectivity gets situated on many non-Synaptics processing platforms as well, and that opens the door for us to kind of ultimately bring in Astra to pair up with our connectivity. And so there's a lot of cross-selling across the company in terms of end markets going on right now. Peter Peng: Got it. And then just on the core IoT, I think the June quarter kind of implies kind of in this 20-ish percent year-on-year growth. Is that kind of the rate that we should expect before that big ramp in the first half of 2027? Maybe any color on whether that's a sustainable growth rate or maybe we have to wait for the first half to see further acceleration? Ken Rizvi: Peter, it's Ken. Thanks for the question. So I think if you look at the last year, right, we've actually had very nice growth on a year-over-year basis overall. So based on the midpoint of the guide, if you look at the core IoT segment, should be north of $385 million or so and call it, 40% plus type of growth on a year-over-year basis. There will always be some ebbs and flows quarter-to-quarter. But the goal that we outlined previously was on a longer-term basis, can we drive that core IoT business to be north of that 25% range overall. And so obviously, quarter-to-quarter ebbs and flows. But if you just step back, look on a holistic basis, and you look at this year and even last year, we've had really good performance in that portfolio. Operator: This concludes our question-and-answer session. I would now like to turn it back to Rahul Patel for closing remarks. Rahul Patel: Before we close, I want to thank our global team for their continued focus and execution. Synaptics is making solid progress on strategic priorities and expanding its position in key growth areas. Thank you all for joining us today, and we appreciate your continued support. Have a great rest of the day. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Welcome to Inogen's First Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, May 7, 2026. I would now like to turn the call over to Lorna Williams, SVP of Investor Relations and Strategic Planning. Lorna Williams: Thank you all for participating in today's call. Joining me are President and CEO, Kevin Smith; and CFO, Jason Richardson. Earlier today, Inogen released financial results for the first quarter of 2026. The earnings release is available in the Investor Relations section of the company's website at investor.inogen.com, along with the supplemental financial package. During today's call, we will discuss non-GAAP financial measures that we believe provide useful supplemental information for investors. This information is not intended to be considered in isolation or as a substitute for GAAP financial information. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in today's earnings release and supplemental financial package, each of which is available in the Investor Relations section of our website. In addition, our discussion today will include forward-looking statements, including, but not limited to, expectations about our future financial and operating performance. We make these statements based on current expectations and reasonable assumptions. However, our actual results could differ due to risks and uncertainties. Please review our annual report and other SEC filings for a discussion of risk factors that could cause our actual results to differ materially than any forward-looking statements made today. Forward-looking statements made on today's call speak only as of today, and Inogen undertakes no obligation to update or revise these statements, except as required by law. With that, I will turn the call over to Inogen's President and CEO, Kevin Smith. Kevin Smith: Good afternoon, and thank you for joining our first quarter 2026 conference call. I want to begin by welcoming several new leaders to the Inogen team. These team additions reflect the ambition we have for the next chapter. Jason Richardson joined us as Chief Financial Officer this quarter. Jason has over 25 years of experience, mostly in large complex global medical device companies with significant leadership experience across finance and a track record of delivering results. He brings the operational depth that we need, has experience scaling med tech franchises and has respiratory industry experience, all directly relevant to what we are building. I'll let him speak to the quarter shortly. We also appointed Dominic Houlton as Chief Marketing Officer, reporting directly to me. As we operate across oxygen therapy, sleep and airway clearance, the work of building a coherent brand and a disciplined go-to-market approach across multiple disease states and channels has grown considerably in scope. Dom brings the commercial experience and strategic instincts that this moment calls for. And we announced the appointment of Vafa Jamali to our Board of Directors, which will become effective on June 5, 2026. Vafa's background spans revenue growth, commercial strategy and capital allocation. These perspectives will be valuable as we work to translate our portfolio expansion into durable financial performance. In connection with our upcoming annual meeting, the Board is asking for shareholder approval to declassify its members starting the process with the annual meeting in 2027. This is an important step to align our governance with the long-term interests of our shareholders. Turning to Q1 results. Q1 came in at $85.1 million in total revenue, representing 3.4% year-over-year growth ahead of our expectations. When we set guidance, we were transparent about what was shaping the quarter, continued strength in international, along with channel mix pressure as the U.S. market continues its structural conversion towards POCs. Those dynamics played out largely as anticipated with unit volumes growing 14% year-over-year, and our international business delivered double-digit performance. Taken together, the quarter reflects a business performing in line with our expectations and underlying fundamentals that remain healthy. U.S. sales were $34.7 million in the quarter. Today, we estimate roughly 60% of new long-term oxygen therapy patients start in a POC, up from under 40% just a few years ago. That shift benefits our B2B sales channel meaningfully, and we see it in our volume. It does, however, create a headwind in our direct-to-consumer and rental channel where patients historically came to us seeking an alternative to the oxygen tank their HME had provided. We are managing this transition with discipline. Our direct sales rep efficiency continues to improve. Demand for Inogen products is strong. We're investing deliberately to educate both patients and providers on the economic and clinical benefits of Inogen technology. Our Rove 4 and Rove 6 POCs carry an 8-year useful life versus the 5-year useful life of other POCs in the market, best-in-class serviceability and a growing body of outcomes data. That performance supports our premium positioning against pricing pressure. International sales were the clear standout in Q1. Revenue of $37.7 million represented 18% year-over-year growth. This result speaks to the quality of our commercial execution and the breadth of the opportunity ahead. Our teams have deepened relationships with key HME partners, secured important international tenders and continued expanding into new geographies, including Eastern Europe, Latin America and the Asia Pacific region. The global COPD market is large, under-penetrated and shifting steadily toward home-based care. We are well positioned and Q1 international performance is evidence of this. If the financial results reflect where we have been, the pipeline is where I want to spend most of my time because it tells you where we are going. When I joined Inogen, we were a portable oxygen concentrator company with a $400 million addressable market. Today, we operate across oxygen therapy, sleep therapy, airway clearance and digital health with an estimated combined total addressable market of over $3.4 billion. That expansion is the result of a deliberate strategy, identify adjacencies with patient overlap, enter with clinical evidence and leverage the commercial infrastructure and brand trust that we have built. Each new category we have entered follows that same logic. Now let me walk through the major milestones from this quarter. We launched the Aurora CPAP mask family in the United States this quarter, and the early read is highly encouraging. I want to be clear about why we entered this market and why we believe we can win. First, roughly 20% to 30% of our COPD patients have obstructive sleep apnea. These patients are managed by the same pulmonologists and respiratory therapists and are served by many of the same HMEs we work with every day. The channel relationships we have spent years building extend naturally into this market. What gives us particular confidence is the clinical work we completed before launch. We ran a 90-day in-home evaluation with experienced CPAP users. These individuals were already satisfied with their existing mask, yet they prefer the Aurora mask, particularly the Aurora full face mask, which was overwhelmingly favored. That is a meaningful bar to clear, and we did it. We will be presenting the full results of that study at Sleep 2026 in Baltimore this June, one of the premier sleep forums in sleep medicine. Presenting a peer-reviewed data set at this type of industry conference is how a new entrant like us builds credibility with clinicians and accelerates adoption through the HME channel. The early commercial feedback has been encouraging. HME partners and respiratory therapists have responded positively to the product and to the evidence behind it. We expect Aurora's revenue contribution to be more back half weighted as that momentum builds. We estimate the U.S. CPAP mask market at approximately $2.2 billion, growing at a high single-digit rate. So every point of market share represents roughly $20 million in potential annual revenue for Inogen We intend to earn a meaningful position in this market, and Aurora is the foundation for that. We also launched the Rove 6 portable oxygen concentrator in Brazil this quarter. This reflects the broader international expansion strategy we have been executing. We are entering new geographies with products designed for those markets, building on our established distribution relationships and extending Inogen's reach to patients who currently have limited access to high-quality portable oxygen therapy. Brazil is a meaningful market with a growing COPD patient population, and this launch continues the momentum we have built across Latin America over the past year. Simeox represents what I believe is one of the most exciting long-term opportunities in our portfolio. In this quarter, we crossed major milestones. We began patient enrollment in IMPACTS-200, our first reimbursement trial for Simeox. The trial is actively enrolling. We want to build the right evidence base to address CMS, private payers and health economic arguments for appropriate reimbursement levels. Let me remind everyone of the opportunity here. The U.S. opportunity for Simeox is an estimated $500 million TAM in non-cystic fibrosis bronchiectasis, growing at a high single-digit rate. The device carries an attractive gross margin profile and the disposable component creates a reoccurring revenue stream that makes the financial model increasingly predictable over time. And beyond the economics, Simeox addresses a patient population that is underserved. Existing OPEP devices are ineffective for a large share of bronchiectasis patients. Vest therapy works, but is bulky and not universally accessible. Simeox offers meaningful clinical differentiation and the data we are generating is designed to demonstrate that rigorously. These are the reasons why we are taking the time to do this right. Stepping back, the common thread across everything we discuss today is that the new Inogen is different from the Inogen of 3 years ago. We are a home respiratory care platform with a diversified portfolio and expanding addressable market with a commercial infrastructure and brand reputation that creates leverage as we scale each new product category. Strategically, we expect these investments in our pipeline to help drive our top line growth and advance our path to profitability. POC remains our core business and foundation. We believe we have the best durability, the longest useful life and the deepest evidence base in the category. And we are building out the clinical, commercial and connectivity capabilities to keep widening that competitive moat, but we are no longer constrained by that single market. And the new products we have launched are primarily in higher-growth markets with higher gross margin profile than our historical mix. Going forward, we have committed to at least one new product launch each year, and each launch will be held to the same standard. The trajectory we have seen gives us confidence that we are on the right path. And with that, I will turn the call over to Jason for his first earnings call as Inogen's CFO. Jason? Jason Richardson: Thank you, Kevin, and good afternoon, everyone. I'm excited to be here for my first earnings call as Inogen's CFO. I joined the company just one month ago, and I've been spending that time getting deeply into the business and getting to know the team and the opportunities ahead. What I have found reinforces why I joined. We have a strong foundation and brand, opportunities to grow and an organization that is leveraging the strength of the legacy team while building out new capabilities to support our strategy. With that, I'll turn to our first quarter performance and the outlook ahead. As Kevin mentioned, total revenue for the first quarter was $85.1 million, an increase of 3.4% from the prior year period. This exceeded our expectations. Total sales revenue for the quarter increased by 5.7% and was primarily driven by higher growth in international POCs and favorable foreign exchange rates, which more than offset lower U.S. sales. For the quarter, foreign exchange had a positive 460 basis point impact on total revenue. U.S. sales were $34.7 million, down 5% year-over-year, and international sales were $37.7 million, up 18% year-over-year and more than offsetting a strong performance in the first quarter of last year, including the impact of large stocking orders. U.S. rentals were $12.7 million, down 8% year-over-year. Both U.S. direct sales businesses were impacted by the continued channel mix shift and reduced patient counts Kevin described. Moving to adjusted gross margin in the first quarter was 44.7%, an increase of 30 basis points from 44.4% in the prior year period, primarily the result of cost improvements. Expanding gross margin over time is critical to our overall profitability goals, and we are pleased with the first quarter performance. Adjusted operating expenses for the first quarter of 2026 were $43 million, an increase of 5.1% from $40.9 million in the prior year period. Adjusted R&D expense in the quarter was $4.1 million, an increase of $0.9 million versus the prior year as we are investing in clinical evidence generation and new product development that we believe will differentiate Inogen over the long term. Adjusted SG&A in the quarter was $39 million, an increase of 3.1% versus the prior year, driven by commercial organization investment to support the new product launches and the timing of advertising spend. GAAP net loss for the first quarter of 2026 was $8.3 million compared to a GAAP net loss of $6.2 million in the prior year period. Adjusted net loss was $4 million compared to an adjusted net loss of $2.9 million in the prior year. And adjusted EBITDA was a negative $1.4 million in the first quarter compared to approximately breakeven in the prior year period. The increase in losses year-over-year is a direct result of the timing of planned incremental R&D and commercial investments mentioned earlier. Looking forward, we expect Q2 and Q3 to be our strongest quarters for profitability, in line with our historic top line seasonality, and we continue to expect adjusted EBITDA growth for the full year. Moving to cash. We ended the quarter with $111.5 million in cash, cash equivalents, marketable securities and restricted cash with 0 debt outstanding. During the quarter, we began execution of our stock repurchase program. We purchased approximately 298,000 shares of our common stock for consideration of nearly $1.9 million. We continue to believe our stock is undervalued relative to the fundamentals and the strategic opportunity in front of us. Returning capital to shareholders while also investing in growth is something we believe we are well positioned to do, and we intend to continue to do it thoughtfully over the course of the program. Now let me turn to our second quarter and full year 2026 outlook. We are reaffirming our 2026 revenue guidance of $366 million to $373 million, representing approximately 6% growth at the midpoint. That guidance reflects continued trends in our core POC business, a growing contribution from international sales, the scaling of Aurora and Voxi 5, particularly in the second half, partially offset by continued mix pressures in our D2C and rental channels. For the second quarter of 2026, we expect reported revenue in the range of $94 million to $97 million, reflecting approximately 3.5% growth at the midpoint of the range relative to the second quarter 2025 revenue. Regarding profitability, we remain committed to driving adjusted EBITDA improvement for the full year 2026, following the positive adjusted EBITDA achieved in 2025. With that, I will turn the call back to Kevin for closing remarks. Kevin Smith: Thank you, Jason. We're executing against the plan we laid out. We're launching new products into larger, higher-growth markets, building the clinical and commercial infrastructure to support them and managing the P&L with discipline while continuing to invest in the long term. We've also strengthened the organization with new leadership across finance, marketing, the Board and a commercial team that is focused on execution. I am optimistic about what the next few years hold for Inogen. To our shareholders, thank you for your continued support and confidence in us. We look forward to updating you throughout the year. Operator, please open the call for questions. Operator: [Operator Instructions] We'll take our first question from Anderson Schock with B. Riley Securities. Anderson Schock: Congrats on the quarter. So first, on the Rove 6 launch in Brazil, could you frame the size of the Brazilian COPD market and the current state of POC penetration? Is this largely an oxygen tank replacement opportunity? Or are you stepping into an established POC market? Kevin Smith: Anderson, this is Kevin. Thanks for the call. We have not quantified the size of the market in Brazil. It is a -- that's an emerging market opportunity for us. There is an existing population of tanks that in Brazil as well as POCs. There's other POCs that are in the market. So we're not the first entrant that is in there, but we are entering in, of course, as the premium brand in Brazil. We have partnerships that with local HMEs that exist also in other markets who are familiar with us and know how to position the Inogen brand. We're looking forward to the growth coming out of there, but this is one that will continue to develop over time with market access. Anderson Schock: Okay. Got it. And then net rental patients at the end of the first quarter had a steeper decline than the recent trends. Could you walk us through what drove the acceleration this quarter and how we should be thinking about this channel through the remainder of the year? Kevin Smith: Yes. When we look at the rental program, we talked about -- and I'm going to bucket this first if we step back and you think about the dynamics that are happening within the markets that we have been planning for and strategizing and optimizing the channels. But the shift that we see from -- within the U.S., which is where, of course, rental is from the oxygen tanks to the POCs has an impact on both the headwind on the DTC as well as the rental patients, which is also creating that tailwind for us within the B2B channels, allows us to have additional pull-through with other technology, the products with the Aurora masks, the Voxi 5 and eventually the Simeox. But that is one that is still under pressure as we go through the year, we do expect to see total U.S. back end of the year growth, which certainly we can talk through, but we'll see that pressure continue within the rental channel. Anderson Schock: Okay. Got it. And then how is early 2026 Voxi 5 has the ramp tracking against your expectations? And are you beginning to see pull-through benefits with HMEs that are bundling Voxi 5 alongside the POC? Kevin Smith: Yes, we are. We like the signs that we're seeing so far in the market. The feedback has been very good. We are seeing pull-through and attachment rates. So this is lining up with our expectations and supports the view that we have for this in the long term. Operator: And next, we'll move to Mike Matson with Needham & Company. Michael Matson: I guess I'll start with a couple of macro ones. So just wanted to get your take on the impact of kind of the elevated oil prices that we're seeing. Any material impact expected there? And then I wanted to see if you have any sales into the Middle East. I know you're selling in Europe, I didn't know if that included the Middle East. And if so, like how significant is that? Kevin Smith: Mike, thank you for the question. Again, I'll start and then Jason, if there's anything to add, please do. From the macro level with the impact on the oil, we're not seeing anything for ourselves that is outsized from the rest of the industry. Here, there are some implications, certainly where surcharges that happen with logistics. It's less of an impact for us than perhaps some others. We don't -- if this carries on, we may start to see more impact as the year goes through. But to date, it's not a significant piece. With -- when you also look at petroleum-based components and products, we think about resin material, we do have some of the material within our POCs. However, we do have supply agreements in place that protect us in the near term. We wouldn't expect to see an impact there unless this does carry on for beyond within a quarter, it's not a big deal. If we start seeing this carry on throughout the year, we may see additional impact from that. And then for the business in the Middle East, we do have business in the Middle East. The majority of our international business is still coming from the European markets. We are not impacted by this yet. We have been focused on making sure that we can continue to serve our patients, make sure that our team and partners are safe, which they all are. But so far, this hasn't been a negative impact. Jason, anything else there? Jason Richardson: No, I think that's right. And I think as we've even scenarioed kind of current prices from an oil standpoint, we feel like even because of the timing that Kevin mentioned, because of the limited freight that we have that we'd be able to -- we would expect to be able to offset it at current levels for 2026. Michael Matson: Okay. Got it. And then wondering if you could give us an update on the CPAP mask launch. How is that going? And what kind of feedback are you getting from customers? Kevin Smith: Yes, Mike, it's been very good for us. It's meeting and exceeding the expectations. And of course, it is -- the early stages introducing the Aurora mask to the market. Fortunately, we're able to come to the market with clinical data that supports patient preference and the quality of the mask that gives us a leg up as far as early adoption. But one of the things that we've liked so far is extremely high reorder rates from the customers that have started the process with Aurora, take the samples, start to get patients on them, place an order. We've seen those reorder rates coming in on a monthly basis at a very high level. So that tells us that it's sticky, and this is a good signal for us. Michael Matson: Okay. Got it. And then just looking at your adjusted net loss, if I'm remembering correctly when I glanced at the press release, but a lot of companies report tonight. But I think it was flat to maybe even down from last year on an adjusted basis. I know EBITDA was not the same, but can you maybe just talk about what's happening there and why you weren't getting more kind of leverage, I guess, or cost savings from an OpEx perspective or whatever? Jason Richardson: Yes, I'll take that one. I mean I think what -- first quarter, in particular, we accelerated some of our clinical evidence investments, particularly around Simeox. And we also had moved forward the timing of some advertising spend to try to generate some additional business over the back half of the year. But as we've mentioned before, we're managing OpEx to kind of make sure that we end up in a position of growing EBITDA over the course of the year. Michael Matson: Okay. Got it. And then the advertising, yes, go ahead, sorry. Jason Richardson: No, I was going to say the other thing I would highlight, though, is like we talked about in the prepared remarks, which is the gross margin expansion, which I think is really critical for us as we think about some of the mix pressures we see in the market. I think some of the other levers that we're pulling to improve margins, leverage the volume that we're seeing are really important to us moving forward. Michael Matson: Okay. Got it. The advertising spending that you mentioned, is that geared at the consumer business? Or is that geared at like the B2B side of things? Kevin Smith: Yes. The advertising spend is geared historically more towards the direct-to-consumer business, although it does benefit broadly across all of the markets, creating brand awareness. However, we have been revising that strategy, the channels, how we do that marketing and broadening that out to include both the HCPs, the HMEs. This is now a much more sophisticated marketing project going forward. And that's one of the benefits, too, that when we added Dominic here to the team, he brings a lot of that expertise and that savviness to the team here. Operator: And there are no further questions at this time. I would like to turn the floor back to Kevin Smith for closing remarks. Kevin Smith: So before we wrap up, I want to highlight one core theme that underpins our strategy, innovation, which is the engine driving our future growth. Early feedback on our new products, Aurora, Voxi, Simeox, it's all been positive. Confirming these innovations address key market needs. This progress stems from strategic investments in our pipeline, and we aim to launch one new product per year as part of our long-term plan. These efforts strengthen our position for broader reach and sustained growth. While we are still early in this journey, the momentum we are building today gives us real confidence and excitement about what lies ahead. And I would also like to formally recognize and express my gratitude to the entire Inogen team. Your dedication to patient care, consistent execution and collective contributions has been essential to our ongoing transformation. I value the energy and commitments you bring every day, and I'm proud of what we've built together. Thank you. Operator: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
Operator: Good day, everyone, and welcome to the Progyny Inc. Earnings Conference Call. [Operator Instructions] It is now my pleasure to hand the floor over to your host, James Hart. Sir, the floor is yours. James Hart: Thank you, Matt, and good afternoon, everyone. Welcome to our first quarter conference call. With me today are Pete Anevski, CEO of Progyny; and Mark Livingston, CFO. We will begin with some prepared remarks before we open the call for your questions. Before we begin, I'd like to remind you that our comments and responses to your questions today reflect management's views as of today only and will include statements related to our financial outlook for both the second quarter and full year 2026 and the assumptions and drivers underlying such guidance; the demand for our solutions, our expectations for our selling season for 2027 launches; anticipated employment levels of our clients in the industries that we serve, the timing of client decisions, our expected utilization rate and mix, the potential benefits of our solutions, our ability to acquire new clients and retain and upsell existing clients, our market opportunity and our business strategy, plans, goals and expectations concerning our market position, future operations and other financial and operating information, which are forward-looking statements under the federal securities law. Actual risks may differ materially from those contained in or implied by these forward-looking statements. due to risks and uncertainties associated with our business as well as other important factors. For a discussion of the material risks, uncertainties, assumptions and other important factors that could impact our actual results, please refer to our SEC filings and today's press release, both of which can be found on our Investor Relations website. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During the call, we will also refer to non-GAAP financial measures such as adjusted EBITDA. More information about these non-GAAP financial measures, including reconciliations with the most comparable GAAP measures are available in the press release, which is available at investors.progyny.com. I would now like to turn the call over to Pete. Peter Anevski: Thanks, Jamie. Thank you, everyone, for joining us today. We're pleased to report that we've had a good start to the year with record first quarter revenue coming in at the higher end of our expectations. And net income, earnings per share and adjusted EBITDA all above our guidance ranges. These results reflect that we continue to see healthy member engagement during the quarter with utilization trending to the higher end of our historical range and our continued discipline in managing the business, which yielded strong margins overall as well as healthy cash flow. In addition, we also made meaningful progress during the quarter in laying the foundation for future growth through our planned investments to expand the capabilities of the platform, enhance our already industry-leading member experience and extend our position as the solution of choice in women's health and family building. As the second quarter begins, engagement is pacing consistent with the typical seasonal patterns following the start of the year. Mark will take you through the guidance shortly, but we're pleased to issue ranges for Q2 that reflect sequential increases from Q1 across all the key results. We're also raising our full year expectations for adjusted EBITDA, net income and EPS as well. In short, we've begun 2026 on a strong positive note and are excited for the rest of the year ahead. Contributing to our excitement is the level of activity and energy we're seeing in the market. One example is at the recent Business Group on Health Conference, which is one of the most impactful events for the benefits industry, we had the honor of sharing the stage with one of our largest clients. During this joint session, our client discussed the results of a study they commissioned using a third party to analyze their claims data warehouse, which included all claims, not just family building from Progyny measuring the impact of our program over an 8-year period versus what they experienced prior to Progyny. The findings reaffirm what we've been reporting to this client regarding outcomes and value that we've been delivering since program inception. They showed that we increased the number of fertility-related pregnancies per year, doubled the pregnancy effectiveness of each treatment, decreased the multiples rate, lowered the miscarriage rate and more than half the preterm delivery rate. These results, in turn, lower the average cost across fertility and related pregnancies, cost per baby and their NICU costs. Clients put it best when they said, this is the kind of story they feel needs to be told as it achieves the trifecta of member experience, improved health outcomes and cost avoidance, all of which delivers hard ROI. As an aside, this type of analysis has also been performed by a handful of our other jumbo clients, independently analyzing their respective claims data warehouses, and they've all come to similar conclusions. Strong leadership in events like this, where HR leaders and decision-makers come together to share their experiences and help determine their priorities for the year ahead are just one aspect of our selling season calendar. This activity, amongst others, has the 2026 selling and renewal season off to a good start with the level of activity and overall engagement that we're seeing affirming how family building and women's health solutions remain a priority for every type of employer. Overall pipeline and the early build of new pipeline is substantially favorable versus a year ago, and early commitments are pacing ahead of this time last year. Additionally, on the renewal side, we've meaningfully derisked the season by securing early favorable notifications from some of our largest clients whose agreements were up for review this year. Consequently, the remaining renewal exposure measured in dollars on the book of business yet to be secured is at its lowest level at this point relative to prior years. Separately, regarding pipeline, we're encouraged by the activity with aggregators and other distribution partners for our Progyny Select offering. While the timing for its incremental contribution to pipeline will be later in the year due to normal buying patterns for these groups, we're pleased with the progress so far relative to our first year expectations around Select. Taking all of our pipeline activity together, we believe this once again demonstrates not only how important family building and women's health are to employers, but also highlights the market's recognition that our evidence-based solutions drive measurable value to employers through proven cost containment. Let me spend a few minutes walking you through the drivers of pipeline and overall activity. First, we're seeing good traction across our health plan partners overall and with Cigna in particular. You'll recall this is our first full season with Cigna as a partner. And as expected, we're seeing a good inflow of opportunities from that channel. Second, we're seeing a good contribution to our traditional demand generation activities where our opportunities remain distributed across greenfields and brownfields, companies looking to add the benefit for the first time or considering to switch from their existing provider, respectively. And lastly, we're seeing significant stronger activity from RFPs on business that's currently with stand-alone competitors. In fact, the activity there has thus far already outpaced what we saw across all of last year. Conversely, we're seeing fewer RFPs than we normally expect from our existing client base. And as previously mentioned, 2 of our largest clients who were up for review this year have already indicated their intention to continue with us. In short, we believe we are well positioned for the season ahead. We are excited about the activity we're seeing, and we look forward to reporting our progress in the coming quarters. We believe one of the reasons for this positive market activity is that employers are increasingly looking for cost-effective solutions that can address the large and growing portion of their workforce being impacted by infertility and who are in need of coverage and support in order to realize their family building and overall health and well-being goals. CDC recently reported that the number of births in the U.S. and the overall fertility rate have continued to decline, reaching record lows and extending the trends that began nearly 2 decades ago. Fortunately, if we peel back the layers of this data, we see something more insightful and certainly highly actionable. While the overall birth rate is declining, it's being driven entirely by women aged 29 and younger. On the other hand, birth rates amongst women aged 30 and over have continued to increase, such that women 30 and over now comprise nearly 53% of all births. This is the highest proportion ever for that age group. And I'll remind you that the population we serve in our family building solution is generally 30 to 42 years old with the average age of a woman going through IVF at 36. While all this data tells us is that society has increasingly chosen to defer family building to later in life. And while that may be the preferred path to parenthood for the clear majority of people today, there is a biological reality in that conception without the use of assisted reproductive technologies often becomes more difficult as we age and for many unaffordable. We believe this is a macro trend that employers simply can't afford to ignore. This is no less true even given the heightened focus on the state of the labor market, particularly as it relates to the potential for disruption from AI. As just one data point on that topic, the Wall Street Journal recently reported on a survey of 750 CFOs who concluded that the impact of AI is only expected to reduce their company's headcount by just 0.4% as compared to what it otherwise would have been for 2026. And that impact is largely expected at entry-level roles or clerical and administrative functions where the tax are more easily automated. This is all the more reason why having family building benefits in the company's overall benefit offering is critical. We recognize that investors are pricing into our valuation for potential for a negative impact on member engagement or on employer demand for our services. To be clear, we aren't seeing any signs of either. As we see it, these concerns are more rooted in what we've called headline risk as opposed to accurately reflecting a shift in market dynamics, which we don't believe will adversely impact our business. Before I turn things over to Mark, let me conclude by saying that we believe our results and outlook reflect that we are as well positioned as we've ever been for this opportunity. This is highlighted by 5 key areas: early sales commitments, our overall pipeline, the progress we're making with our channel partners, our derisking of the renewal season through the favorable notifications we've already received and the traction we're seeing with Progyny Select. We view all of this as evidence of the continuing macro tailwinds, and we believe we're in the best position ever to take advantage of those. Although some headwinds always exist, the outsized emphasis of what is seemingly anticipated in our current valuation runs contrary to what we see. We've seen this play out before throughout our history. When in past years, there were concerns at varying times regarding high inflation or tariffs or potential looming recession, general macro uncertainty and the loss of our largest client 2 years ago. Yet we continue to grow through all of the above, and we expect to continue to do so in the future. We recently completed our $200 million share repurchase program, and Mark will take you through those details shortly. Our Board is currently evaluating potential options for a new share repurchase program. We anticipate a decision around the end of May, and we expect to make an announcement at that time. Let me now turn the call over to Mark to walk you through the quarter. Mark? Mark Livingston: Thank you, Pete, and good afternoon, everyone. Before I begin, I'll note that the 8-K we filed a short while ago includes our usual slide presentation, which summarizes both the results in the quarter and highlights some of the longer-term trends that we believe are important in understanding the health and direction of the business. We've also posted that on our website. Rather than repeating what's covered by that material, I'll focus on the key themes that impacted both the quarter and how we think about the rest of 2026 and beyond. So let's begin. The first theme is that this quarter's results reflect once again that member engagement has remained healthy and at levels that were consistent with what we were seeing when we issued the guidance in February. The consistency we're seeing in overall engagement continues to demonstrate that members are pursuing the care and services they need in order to achieve their family building and overall well-being goals. As a result, first quarter revenue came in closer to the high end of our guidance range, reflecting an increase of 1.4% on a reported basis and more than 12% when excluding the contribution from a large former client who is under a transition of care agreement in the first quarter of 2025. As a reminder, the transition agreement pertaining to this client ended as of June 30, 2025. Accordingly, the second quarter that is now underway will be the last quarterly period where you have to take that into account when looking at our comparative results. The second theme is that we continue to maintain healthy margin performance even as we continue to invest to expand our product platform, enhance features for our members and lay the foundation for future growth. Gross margin expanded efficiencies we continue to realize in care management and service delivery as well as the anticipated reduction in stock compensation expense. And while adjusted EBITDA [Audio Gap] investments, our longer-term adjusted EBITDA margin measured on a [Audio Gap] even at a higher level of investment. Our first quarter CapEx was $6.3 million, reflecting a $3.5 million increase over the prior year period. I'll remind you that we were still ramping this investment program over the early part of 2025. And our third theme through our [Audio Gap] the flexibility to both invest in the business while also returning value to our shareholders. We generated approximately $46 million in operating cash flow, yielding over $200 million on a trailing 12-month basis, a level we've maintained for 5 consecutive quarters now. Through our ongoing focus on process improvement in revenue to cash management, we also continue to drive further improvements in DSO, which was 11 lower than the first quarter a year ago. This improvement occurred even with the customary build in DSO on a sequential basis from Q4 as we work to establish the payment flows with our newest clients who launched on January 1. As of March 31, we had total working capital of approximately $266 million, which includes $225 million in cash, cash equivalents and marketable securities. There are no borrowings against our $200 million revolving credit facility and no debt of any kind, and we have no planned use for the facility at this time. And the fourth and final theme is that during the quarter, we repurchased more than 5.5 million shares for approximately $160 million under our most recent share repurchase program, which began in November and provides us with up to $200 million overall. We've now completed that program through the repurchase of approximately 8.8 million shares in aggregate. Turning now to our expectations for the second quarter and the remainder of 2026. As the second quarter begins, member engagement is pacing consistently with the typical seasonal patterns following the start of the year. Although the unexpected variability in engagement that we previously experienced hasn't recurred since 2024, the assumptions we're making today, particularly at the low end of the ranges reflect the potential that further variability in activity and treatments could occur. To be clear, this is the same approach we've been for more than a year when setting our guidance ranges. The table at the back of today's press release also outlines our assumptions at both ends of the ranges. In terms of utilization, we're maintaining our full year assumption of 1.04% to 1.05%, which is consistent with our long-term historical ranges. We're also maintaining our assumption for ART cycle consumption per female unique at 0.93 at the low end of the range and 0.95 at the high end. For the second quarter, we're assuming the customary sequential increase, reflecting the ramping of member journeys. On the basis of these assumptions, we're projecting revenue of between $1.365 billion to $1.405 billion, reflecting growth of between 5.9% to 9%. If we exclude the $48.5 million in revenue from the client who is under a transition of care agreement over the first half of 2025, our full year revenue growth is projected to be between 10.1% to 13.3%. At these levels, we expect 2026 to be our eighth straight year of double-digit top line growth since we became a public company. With respect to profitability, we're increasing our full year adjusted EBITDA, net income and EPS expectations. For adjusted EBITDA, we expect a range of $232 million to $244 million with net income of $103.7 million to $112.3 million. This equates to $1.23 and $1.34 in earnings per diluted share and $1.98 and $2.09 of adjusted EPS on the basis of approximately 84 million fully diluted shares. As it relates to the second quarter, we expect between $342 million to $355 million in revenue, reflecting growth of 2.7% to 6.6%. Again, if we exclude the $17.2 million in revenue from the client under the transition agreement in the year ago quarter, our second quarter guidance reflects growth of 8.3% to 12.4%. On profitability, we expect between $58 million to $62 million in adjusted EBITDA in the quarter, along with net income of between $25.8 million to $28.7 million. This equates to $0.31 and $0.35 of earnings per diluted share or $0.50 and $0.53 of adjusted EPS on the basis of approximately 83 million fully diluted shares. At the midpoints of the ranges for both the quarter and the year, you can see that we are expecting a consistent adjusted EBITDA margin throughout the year at a level that is also consistent with our full year result from 2025, even with the investments we're making to grow the business. With that, we'd like to now open the call for questions. Operator, can you please provide the instructions? Operator: [Operator Instructions] Your first question is coming from Jailendra Singh from Truist Securities. Jailendra Singh: On a strong quarter. My first question is on the early sales activity commentary, very encouraging comments there. A few follow-ups. First, how are these early commitments split between not nows from last year who might have delayed versus employers looking at this benefit for the first time? And then you also called out, Pete, that you're seeing more RFPs from employers who are currently with their competitors. Are there 1 or 2 consistent themes that you're hearing from these employers that they are actually evaluating options and it is driving more pickup in this RFP activity from competitor clients? Peter Anevski: Regarding your first question, as always, early commitments, a higher proportion of them do come from not nows. But either way, it's positive overall activity and commitments to date versus last year, as we mentioned. And it relates to your second question, nothing really constructive that I can share relative to what we're hearing, normal sort of general reviews and general comments, but none that are constructive to share here. But I think the bigger, more important data point is the level of activity that we're seeing versus last year and really any other year relative to potential opportunities around solutions that are with current competitors. Jailendra Singh: Okay. And then my quick follow-up. Last quarter, you called out membership changes because of administrative changes. I know the number of eligible lives is less important metric for you guys to focus on. But given your experience last quarter, have you guys made any changes in the process over the last 2 to 3 months to make sure you get more regular updates from your clients and we don't get any more surprises like what we saw last quarter? Peter Anevski: Yes. We're getting regular updates. But what we're also doing is we're in the process of getting full eligibility files as opposed to just updates relative to numeric headcounts from our clients. We've already increased the level of eligibility files that we're getting from our clients over -- since year-end and expect to continue to do so throughout the year. And by year-end, we expect to have eligibility files from the significant majority of our clients. And so throughout the year, a combination of the periodic updates and having full eligibility files will help mitigate events like that again. Operator: Your next question is coming from Brian Tanquilut from Jefferies. Cameron Harbilas: On the quarter. This is Cameron on for Brian. I was just wondering if you could give me some more color on the increase you saw in revenues per ART Cycle. Can you walk us through kind of the moving pieces of this? Was this ancillary uptake rate? And do you expect this to persist throughout the year? Mark Livingston: Sure, Cameron. This is Mark. So typically, in the beginning of the year, you'll see a slightly higher rate of revenue -- overall revenue per ART Cycle because you have a higher proportion of clients, particularly for the new ones that are starting their journey. So they're in initial consultation phase. So there's revenue associated, but not ART Cycles. That was a little less evident last year because the revenue that was contributed from that large client that was under a transition of care program was more skewed towards ART Cycle activity just by the definition of how that transition of care program worked. And so what I would say is more instructive is looking back maybe a couple of few years to seeing how that sort of progresses through the year. Operator: Your next question is coming from Michael Cherny from Leerink. Ahmed Muhammad Rahat: This is Ahmed Muhammad on for Mike Cherny. Congrats on the great results. As we think about the investments that you're making in future growth, can you give us an update on what's sort of in the pipeline in terms of new products and maybe even some timing on that as well? And could you also give some color on what you're seeing and expecting in terms of upsells of new products, both this quarter and this year? Peter Anevski: Regarding your second question, it's a little early to comment on upsells, but simply to say that upsell activity is also positive. Other than that, it's early relative to any more color than that. As it relates to expectations around new products, the investments and capabilities are not necessarily new products, but additional capabilities for the existing products and/or expanded products that address the same areas for our global population. Ahmed Muhammad Rahat: Great. And just as a follow-up, what are you -- what's embedded in the guide in terms of expectations for upselling of new products for the rest of the year? Peter Anevski: The guidance -- everything in guidance is what's already committed. There are not -- we don't generally put in expectations of any material kind relative to upselling or new activity is how you should think about it. The upsell activity impact materially the following year. Operator: Your next question is coming from Scott Schoenhaus from KeyBanc. Scott Schoenhaus: Congrats on the quarter, the guidance. It seems like you're managing as best as you can the renewal process and seeing a great start to the selling season. So congrats on all fronts. My question is on utilization and your previous comments when you said this last selling season this year produced higher utilizing clients. I guess you're still seeing that, but what drove that utilization towards the higher end? Was it this new cohort? How are they progressing in April? I mean -- and so far in May, your comments were in line with seasonal activity. Is the new cohort seeing elevated utilization through the first 1.5 months -- month and 7 days of the quarter? And then I have a follow-up for Mark. I guess that's more of a question for Pete. Peter Anevski: Thanks, by the way, for the comment. So if you recall, when we talked about it, it's not -- it is the new cohort having higher than normal utilization as a cohort, but it's because of the fact that the sales in the cohort this year were weighted more towards higher contribution of certain industries, right? But overall, it's generally performing as expected. I wouldn't say it's higher or better or anything else like that, but as expected and as we've talked about. Scott Schoenhaus: Okay. Great. And my follow-up for Mark is, clearly, you beat on the bottom line here despite the investments. Maybe you can walk us through what further investments are needed throughout the rest of the year? And where you could potentially see upside to the margin guidance throughout the rest of the year because you did such a solid job on the first quarter. Mark Livingston: Yes. Look, I would say that we've contemplated -- even since February, we've contemplated the investments and phased them throughout the year. So I think they're already well factored in. Look, we had a good quarter, and we've had some puts and takes. Nothing that I'd sort of call out specifically. But obviously, the things that we felt were recurring, we've already now baked into the full year guide. We -- as you know, we've left -- we brought up the low end of the range a little bit. We've kept the high end of the range the same on the top line, but we've increased the EBITDA. And that's really just reflective of some of the efficiencies that we were able to gain in Q1 that we see recurring through the rest of the year. Operator: Your next question is coming from Sarah James from Cantor Fitzgerald. Sarah James: I'm wondering if a larger portion of this year's early pipeline sales are coming from clients that were not nows in past years, so people that you've been talking to for a while? And if so, why the uptick this year in the decision process to start benefits? Peter Anevski: So in general, always early commitments, a higher proportion of them come from not nows. This is no different. If you recall, some of the things we talked about last year was the pipeline build was later than normal. And as a result, that could be part of the contribution to early commitments. But either way, the early commitments are just one indication of the selling season. The overall positive activity and all the things I already mentioned that are driving it are, I think, how I look at the overall activity for the selling season, including the early commitments. Sarah James: Got it. And one more just on the general market. How do you see the mix of client demand between case rate versus back-end savings? Is the market trending in one direction? And would you ever consider a product model that has back-end savings? Peter Anevski: You talking about some sort of value-based care model and risk. Here's the way I think about it. We haven't needed to do that to win business. And the back-end savings are part of what drives our success in client retention. And so the current model, I think, has served us well, and we're not getting real pushback on it in terms of the current model versus a back-end savings sort of with risk and upside, et cetera, in it. So I don't have any plans to modify it. Mark Livingston: Yes. I'd just point out that in Pete's prepared comments, he highlighted the third-party study that was done by one of our largest long-standing clients. I think that was sort of the major takeaway of it is the savings are demonstrated by our current model. Operator: Your next question is coming from David Larsen from BTIG. David Larsen: Congratulations on the good quarter. Can you just remind me what the revenue growth would have been in 1Q, excluding that one major client from the year ago period, please? Mark Livingston: Yes, 12%. It's a little bit more than 12%. David Larsen: Okay. And then with regards to like growth in your existing clients, it's my sense that the cost of oil kind of affects everything. The stock market, broadly speaking, had pulled back significantly a couple of months ago at the end of last year, first quarter, it's now rallied back up. Are you seeing sort of positive signs from your existing client base in terms of adding employees, which would obviously potentially add to your life count in maybe the back half of '26 or into '27. Basically, did this Iran war cause the 400,000 lower count at the start of the year? And could it come back up now that things seem to be getting resolved? Peter Anevski: The Iran war, I don't believe has anything to do with the true-ups we reported before. And in general, we're seeing our existing client base from a lives perspective, stay relatively flat. And the good news is, as it relates to sort of everything costing more, as you said, we're not seeing any impact, including what we've seen so far in Q2. And as we all know, the war has been going on now for a couple of months, give or take. We're not seeing any impact on engagement or anything else like that as well. David Larsen: Okay. And then just any comments on Select? What's the market reception to Select? Peter Anevski: Sure. The market reception is positive. We are signing up aggregators and distributors. Reaction is positive. And we don't expect pull-through -- to be able to see pull-through on that until really end of the year when normally smaller employers make their buying decisions and their renewal period is. But nonetheless, so far, we're pleased with the activity and the reception. Operator: Your next question is coming from Allen Lutz from Bank of America. Unknown Analyst: This is [ Dev ] on for Allen. I just wanted to touch on kind of the market growth for ART Cycles. I think the latest data CDC put out, I'm not even sure if it's available since that team was maybe cannibalized, but it was about 10% CAGR for ART Cycles. Progyny is now moving kind of closer to that range, but obviously still appears to be taking share. I just would love to kind of get your view on what you think kind of the ART Cycle growth is for the market and how we should think about that over the medium term? And I have one follow-up. Peter Anevski: Yes. There's no data I've gotten that suggests that the growth rate has changed relative to what we saw over the last 10 years based on the most recent data that's available. So that's really all I can share is I'm not -- I don't have any other data besides what you're describing relative to growth. Some of the pharma manufacturers are reporting growth. They're not giving me exact percentages, but they're reporting growth. And so it continues to grow, but I can't comment by how much. Unknown Analyst: Okay. Great. No problem. And then start to harp on this, true-ups on the administrative side. But just curious what that came in like this quarter from what I understand is a quarterly process. Was that a positive this quarter? Just commentary and from what you're hearing from your employer clients around their -- the health of the employees and retention there? Mark Livingston: Yes. Look, we're basically at the same level like we've seen in most typical quarters, there's some that are up a little. There's some that are down a little, they've largely offset. And as I think Pete highlighted on an earlier question, we're doing a lot of work to gain actual eligibility files on a recurring basis from these clients, which should help us refine and avoid adjustments like that in the future. We've already have some coming in, so we have available to us. And as you said, we expect to have a majority of our clients providing eligibility funds on a regular basis by the end of this year. So all of that should go to helping. Just the last thing I'd point out is like the revenue growth is exactly what we expected. So I think as we've tried to highlight, I think, on our last call and since is that it's really not a driver per se of activity, but an indicator around it. And those adjustments haven't seemed to had any effect on our expectations around revenue. Operator: And our final question comes from Richard Close from Canaccord Genuity. John Granville Pinney: John Pinney on for Richard Close. Congrats on the quarter. So first, good to hear on the business group on health study. I guess I know it's early in the selling season, but just like qualitatively, is there anything about like the value proposition of your services that's like resonating more like this selling season or anything different than past selling seasons that you would comment on? Peter Anevski: I would say no. I would say I spoke more to the demand, even though the pacing of commitments is ahead also. It's more about demand than the pipeline. We're now in the normal process of articulating our capabilities, differentiating ourselves and also articulating the value that we deliver. So I would say nothing substantially different, but just emphasizing, as we always do, we not only manage for each individual member on a sponsor's behalf that goes through the program, good outcomes and favorable outcomes, but we also manage overall program cost containment, which is really important for sponsors as they review their alternatives. John Granville Pinney: All right. Just as one follow-up. non-GAAP gross profit or gross profit margin, very strong in the quarter. Anything particularly that's driving that? Is this level sustainable? Or is there going to be some coming back here the rest of the year? Mark Livingston: So a couple of key things. We've been highlighting that stock compensation expense will be coming down as some of the recognition period for older grants begins to expire. It really started last year in the middle of the fourth quarter. So that's a significant piece of that savings. But there is just recurring regular efficiency that we've been able to gain, which will recur. So both are recurring throughout the balance of the year. It's part of what's contributing to the improvement in adjusted EBITDA that we have now included in the guidance versus what we did a couple of months ago. Operator: Thank you. That concludes our Q&A session. I'll now hand the conference back to James Hart for closing remarks. Please go ahead. James Hart: Thank you, Matt, and thank you, everyone, for joining us this afternoon. We know it's a busy day for those we won't see next week at the conference. Please feel free to reach out to me at any time for any follow-ups. Thank you again. Operator: Thank you. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the JFrog First Quarter 2026 Financial Results Earnings Call. [Operator Instructions] I will now hand the conference over to Jeffrey Schreiner, Head of Investor Relations. Jeffrey, please go ahead. Jeffrey Schreiner: Thank you, Nicole. Good afternoon, and thank you for joining us as we review JFrog's first quarter 2026 financial results, which were announced following the market close today via press release. Leading the call today will be JFrog's CEO and Co-Founder, Shlomi Ben Haim; and Ed Grabscheid, JFrog's CFO. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance and including our outlook for the second quarter and full year of 2026. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our views only as of today and not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31, 2025, which is available on the Investor Relations section of our website and the earnings press release issued earlier today. Additional information will be made available in our Form 10-Q for the quarter ended March 31, 2026, and other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures, which are used as a measure of JFrog's performance, should be considered in addition to, not as a substitute for or in isolation from GAAP measures. Please refer to the tables in our earnings release for a reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog Investor Relations website for a limited time. With that, I'd like to turn the call over to JFrog's CEO, Shlomi Ben Haim. Shlomi? Shlomi Haim: Thank you, Jeff. Good afternoon, and thank you all for joining the call. We entered 2026 strong. Our first quarter performance reflects both the clarity of our strategy and the discipline in execution. Our continued focus on powering the world software through JFrog Artifactory as a system of record for trusted binaries, software packages and AI artifacts is resonating deeply with market demand. We are seeing growing adoption among the world's leading organizations and AI labs, which are choosing JFrog as they transform to adopt modern software supply chain practices. Across industries, geographies and deployment environments, whether cloud or on-prem, our customers are partnering with JFrog as their foundational platform while they navigate a complex transition of adding AI technologies and tools to their software supply chain. They tell us they are prioritizing AI adoption while simultaneously maintaining legacy pipelines and open source packages, all as they demand stronger security, governance and fast release cycles. We are working closely with our customers, the broader developer community and AI-native companies to support them through this period of change. Our Q1 results reflect this momentum with AI redefining the software supply chain and powering our continued expansion. In the first quarter, JFrog delivered total revenue of $154 million, representing 26% year-over-year growth. Cloud revenue grew 50% year-over-year, underscoring the accelerating shift towards our cloud-first platform. This performance was driven by continued strength across our core growth vectors, increasing consumption of our cloud services, rising demand for our software supply chain security solutions, higher ASP on new customer acquisitions and robust expansion within our existing customer base. We also saw continued momentum at the high end of our customer portfolio. The number of customers with annual spend exceeding $1 million grew to 80, up from 54 a year ago, representing 48% year-over-year growth. Customers spending more than $100,000 annually increased to 1,225 compared to 1,051 in the prior year, representing 17% year-over-year growth. These results reflect our alignment with the evolving needs of modern enterprises. Developers and increasingly AI agents are producing software at scale and speed. This surge in binaries fueled by AI is driving the need for a single trusted system of record to manage, secure, and govern these assets across the entire supply chain. On today's call, I will walk you through the quarter in detail, and Ed will follow with our updated outlook and additional financial insights. Now I will highlight the key drivers behind our performance this quarter. First, continued cloud growth, driven by increasing consumption and rising demand for a true system of record as a service, delivering scale and universality. Second, the sustained momentum in our security business as customers prioritize end-to-end protection and governance amid rising software supply chain attacks. And finally, I will highlight our ongoing innovation that leads to solid adoption of our platform and Enterprise Plus subscription growth. Let me start with our cloud business. As mentioned earlier, cloud revenue in Q1 grew 50% year-over-year, an exceptional result that reflects not one single driver, but a broader trend we have been observing over the past several quarters. As AI makes human to technology interaction nearly costless and source itself increasingly commoditized, binaries become king. Organizations are actively encouraging developers to utilize AI coding agents as well as explore agentic capabilities, causing software output to accelerate, resulting in more compiled codes, a true AI-fueled tsunami of binaries. Observing our customers' consumption trends, we noticed that this growth is not tied to one package type or a specific AI native workload. It is not a spike in usage or a onetime increase in open source caching. It is the result of a fundamental shift in how software is being generated, delivered and consumed across the software supply chain. We are seeing an acceleration in the volume of compiled software flowing through the JFrog platform. This trend, which began taking shape in 2025 is driven by 2 major forces. First, developers are being supercharged by AI coding agents. Simply put, the world is creating more software packages. In this AI mass adoption reality, we see organizations willing to accept budget overruns until they gain better clarity on long-term usage requirements and prior to increases in annual commitment. Second, as AI drives more software creation, it is also accelerating the flow of all open source components. Open source consumption by developers and AI agents is rising across nearly every software package we support. And as the ultimate Switzerland of binaries, JFrog sits at the center of this growth. Whether through on-demand increased usage momentum or annual commitments, we believe JFrog Cloud is positioned to benefit from these trends. Now to the continued momentum we are seeing in security. As we mentioned in previous calls, modern software supply chain security is moving beyond traditional DevSecOps and fragmented scanners. AI coding agents are increasingly securing, scanning and even fixing code rapidly at scale. And while still evolving, we see agents replacing human skills in code protection. We believe a trusted software supply chain requires a single authoritative system of record for all binaries and AI artifacts. Building on this foundation, we deliver protection and governance beyond traditional scanning, analyzing, tracking and proactively blocking risk at the point of entry or before distribution to production. As AI adoption accelerates in binary scale, the threat landscape is becoming more complex. Software supply chain attacks are rising, increasingly targeting open source creators and package maintainers. This dynamic drives the growing demand for a trusted control layer and stronger DevOps practices. In Q1, we again demonstrated that customers subscribed to JFrog Curation were effectively protected from recent software supply chain attacks. Curation serves as a critical control point at the gate, enforcing policies that ensure only trusted packages enter the system, keeping Artifactory clean. Once artifacts are sold, JFrog Xray and JFrog Advanced Security continuously secure and govern the binary flow, providing ongoing visibility and protection. In addition, as advanced AI models like OpenAI, GPT, cyber and Anthropic cloud become increasingly embedded in development workflows, we believe modern software supply chain security and governance are defined by 4 core pillars. First, a centralized system of record, a single source of truth across multi-agent environments; second, universal governance, consistent visibility and enforcement across all types of artifacts, whether consumed or generated. Third, predictable and deterministic protection, continuous policy-driven guardrails that prevent malicious or vulnerable components from progressing. And finally, comprehensive coverage, securing both newly generated assets and the extensive base of existing mission-critical legacy binaries. Our customers tell us they are accelerating software development and generating more binaries through the JFrog platform. As AI adoptions expand, JFrog provides a unified system of record to secure, govern and manage AI-generated open source or legacy binaries in one place. Our customers' adoption, Q1 results, sales pipeline and future road map innovation are aligned with these observations. Looking ahead, we expect security to remain a key growth driver for JFrog. This set the stage for an update on the innovation we introduced at our annual LEAP conference in New York this past March. LEAP is JFrog's top customers gathered by region scheduled globally during H1 every year. At LEAP New York, we demonstrated GA-ready solutions to concrete customers' need for a trusted infrastructure layer for software supply chain management in the AI era. We introduced the JFrog MCP Registry, the first enterprise-grade registry for MCP servers, extending our platform to support the growing AI ecosystem. As MCP adoption expands, customers need a centralized trusted way to manage, secure, and govern these new assets, which logically sits in Artifactory as a system of record. MCP is rapidly adopted next to agent skills based on AI ecosystem demands. In Q1, we expanded our platform for AI-driven development with the introduction of the JFrog Skills Registry, providing a centralized way to manage and govern reusable AI capabilities. In collaboration with NVIDIA, we announced the Skills Registry at GTC, enabling the governance and trust layer enterprises need to run agentic workflows securely and at scale. We further announced that JFrog Artifactory will serve as a registry for AI models and agent skills within NVIDIA AI-Q Blueprint, part of the NVIDIA Agent toolkit. The Vice President of Enterprise Partnerships at NVIDIA, Pat Lee noted, "security and governance are key to deploying AI agents in the enterprise. JFrog's Agent Skills Registry for NVIDIA NemoClaw supports security and control for deploying long-running agents to help scale enterprise productivity with powerful new AI tools. " JFrog unifies all artifact types, binaries, models, skills and MCP servers into a single platform governed by one framework, one set of policy and complete visibility and traceability in one place. These innovations, combined with a growing ecosystem of strategic partnerships are driving increased adoption across the enterprise, amplifying the value of our enterprise class subscriptions and accelerating its expansions within organizations. With that, I will hand it over to Ed for a detailed review of our Q1 financials and our updated outlook for Q2 and the full year 2026. Ed? Ed Grabscheid: Thank you, Shlomi, and good afternoon, everyone. We are pleased by the results of our first quarter, which exceeded the top end of our guidance range on every metric. It was a strong start to the year, highlighting our consistent strategic execution and ongoing operational discipline. During the first quarter, total revenues equaled $154 million, up 26% year-over-year. These results demonstrate the continued execution of our go-to-market strategy, fueled by our cloud revenues, ongoing demand for our security core products and growth in our Enterprise Plus subscription. Our first quarter cloud revenues grew to $78.9 million, up 50% year-over-year, now representing 51% of total revenues versus 43% in the prior year. Our outperformance in the cloud was driven by robust usage across our customer portfolio, which exceeded contractual minimum commitments. We strategically work towards converting this usage into higher annual commitments. During the first quarter, our self-managed or on-prem revenues were $75.1 million, up 8% year-over-year. We continue to proactively engage our on-prem customers to migrate DevSecOps workloads to our cloud or explore solutions better aligned with their specific use cases, including hybrid and fit-for-purpose deployments. In Q1, 58% of total revenues came from Enterprise Plus subscriptions, up from 55% in the prior year. Driven by the ongoing execution of our enterprise go-to-market strategy and broader customer adoption of the JFrog platform, revenue contribution from Enterprise Plus subscriptions grew 33% year-over-year in Q1 2026. Net dollar retention for the 4 trailing quarters was 120%, representing a year-over-year increase of 4 percentage points and 1 percentage point improvement sequentially. These results highlight the continued adoption of our security core products, increased cloud usage across a broad set of conventional software packages and AI workloads and conversion of customers with usage over minimum commitments into higher annual contracts. We continue to demonstrate that our customers view JFrog as a mission-critical system of record to their software supply chain with gross retention that equaled 97% as of the first quarter of 2026. Now I'll review the income statement in more detail. Gross profit in the quarter was $129 million, representing a gross margin of 83.8% versus 82.5% in the year ago period. We remain focused on cloud hosting cost optimization as we anticipate a larger share of our revenues being generated from the cloud. Given our expected increase in cloud revenue contribution to total revenue, we reiterate our annual gross margins to be in the range of 82% to 83% in 2026. Operating expenses in the first quarter were $96 million, equaling 62% of revenues. This compares to $79.7 million or 65% of revenues in the year ago period. Our operating profit in Q1 was $32.9 million or an operating margin of 21.4% compared to 17.4% operating margin in the first quarter of 2025. The continued balance between strategic investments and operational efficiency demonstrates our commitment to profitable growth. Cash flow from operations equaled $38.4 million in the first quarter. After taking into consideration CapEx requirements, our free cash flow reached $37.3 million or 24.2% margin compared to $28.1 million or 23% margin in the year ago period. Now turning to the balance sheet. We ended the first quarter with $741.2 million in cash and short-term investments compared to $704.4 million at the end of 2025. Given our strong balance sheet, consistent free cash flow generation and confidence in our strategy to execute on durable growth opportunities, JFrog announced in late February, our first-ever share repurchase authorization of up to $300 million in ordinary shares. As of March 31, 2026, our RPO totaled $574.9 million, a 36% increase year-over-year, highlighting the successful execution of our go-to-market strategy as customers continue to make larger multiyear commitments to our DevSecOps solutions. As a reminder, our RPO excludes any benefit from customers' usage over contractual minimum commitments. And now let's turn to our outlook and guidance for the second quarter and full year of 2026. As we enter the second quarter of 2026, we remain encouraged by the strength in our pipeline and emerging AI workload trends driving increased cloud usage. Even if cloud usage trends accelerate, our guidance philosophy will remain unchanged as we continue to derisk our largest deals due to timing uncertainties and any benefit from cloud usage above contractual commitments. Our outlook reflects growing contributions from our JFrog Security core products, ongoing adoption of our full platform and cloud growth driven from higher annual customer commitments. We are raising our estimated full year 2026 baseline cloud growth to be in the range of 33% to 35%. Given the anticipated contribution from our security core and increased baseline cloud growth assumptions, we now expect our net dollar retention floor to be 118% for 2026. Turning to operating expenses. We continue to prioritize investments in innovation across our platform. We remain committed to a disciplined spending philosophy and are confident in our ability to manage expenses and drive ongoing efficiency in line with prior execution. For Q2, we anticipate revenues to be in the range of $154 million and $156 million, with non-GAAP operating profit anticipated to be between $28 million and $30 million and non-GAAP earnings per diluted share of $0.23 to $0.25, assuming a share count of approximately 126 million shares. For the full year of 2026, we anticipate a revenue range of $628 million to $632 million, representing 18.5% year-over-year growth at the midpoint. Non-GAAP operating income is expected to be between $112 million and $116 million and a non-GAAP diluted earnings per share of $0.93 to $0.97, assuming a share count of approximately 128 million shares. Now I'll turn the call back to Shlomi for some closing remarks before we take your questions. Shlomi Haim: Thank you, Ed. AI is transitioning from experimentation to tangible revenue, and we are seeing stronger momentum across our business. Looking ahead, demand signals for JFrog remains strong, including the durable cloud growth driven by AI, which is accelerating usage. New logo ASP is rising and demand for our security solutions amid the increasing frequency of software supply chain attacks is growing. To my fellow frogs around the world, thank you. This quarter, you didn't just deliver, you rose above. No matter the circumstances, you kept pushing forward, navigating with resilience, innovating with purpose and try and thing where it matters most for our customers. Because of you, we don't just move forward, we live further. May the frog be with you. Operator, we are now ready for questions. Operator: Your first question comes from the line of Sanjit Singh with Morgan Stanley. Sanjit Singh: I had 2 questions for the team. I wanted to start with Ed first. Obviously, great cloud growth, great total revenue growth in Q1. When I look at the outperformance versus what the estimates were, it seems like you guys came in about $7 million above on Q1. Q2, you guys came in ahead by a couple of million bucks, so roughly $10 million. When you look at the raise for the full year, it's somewhat less than that. And so I just wanted just to sort of say maybe check any sort of revised assumptions about the second half ramp. That was sort of my first question. And then I had a more strategic one for Shlomi. Ed Grabscheid: It's a good question. We had a very strong quarter in Q1, as you highlighted, the growth in the cloud is 50%. And more importantly, we now see the mix in our cloud above 50%. We delivered 51% first time -- it's a milestone for JFrog, where we see more revenue coming from our cloud offering than we do from self-hosted. But we also are committed to our guidance philosophy, which we will only guide on those commitments. So while we saw the strength in Q1, much of that was being driven by usage over minimum commitments. We are deploying our sales organization, of course, to convert that into annual commitments. But until it becomes an annual commitment, it will not be part of our guidance, aligned with our philosophy. Sanjit Singh: That's very clear. And then Shlomi, the question for you is, it's a really interesting time, like some of our own field work on JFrog shows a real inflection in demand for the security side of the portfolio. It seems very clear to us. And I think you highlighted that in your script. At the same time, there's more of this longer-term structural debate on security overall and what the model logs will subsume. And there seems to be a take that seems like scanning, vulnerability management, vulnerability scanning, posture management, code security could be more of the purview of model logs longer term. And so to the extent that you guys have some exposure to those parts of security, I'd just love to get your latest thoughts on the long-term durability of those pieces of the security product portfolio. Shlomi Haim: Good question. So what we see in the market is kind of flooding of software supply chain attacks coming mainly around open source maintainers and the hackers are going after them. JFrog is positioned to secure our customers with that quite strongly. We called that in the script when we said that all the JFrog Curation customers were actually protected by those software supply chain attempt to be attacked. Moving forward, what's the real question? The real question is that can you really secure and govern the binaries, the artifacts, the outcome of AI. And what JFrog provides is not only a place that scans. Scanners are important, but the system of record of where you secure, manage, store, govern your artifact is actually more important because in a world of multi-agents that are all building and scanning and protecting and even fixing software, you still need to host it in a secure place. The second thing, you will have to protect yourself from the open source world that will still exist, the Python, the NPM, the Hugging Face, the Docker, which is JFrog is doing at the gate. And the third thing is how you combine security of the new outcomes coming from agents or multi-agents with the legacy that is now being built. You still need to manage dependencies with the binaries of yesterday that are still hosted and still regulated and still are on the servers in your production. The combination of the expertise that we built around binary security and not source code because this is a big confusion in the market. Coding agents are now securing source code replacing human beings. The combination that we built with that, including the moat around Artifactory, the system of record in a multi-agent world, including the open source on top of it and including the legacy, I think, gives JFrog customers the confidence to bet on that. This is also one of the things we called out, new logos are now buying JFrog with security, knowing that this is the future. Operator: Your next question comes from the line of Radi Sultan with UBS. Radi Sultan: Maybe just 2 quick ones. Shlomi, just on legacy code modernization. We've been hearing an uptick in JFrog getting pulled along in AI-driven legacy code modernization deals. So Shlomi, if you could just talk through like how big of an opportunity is legacy code modernization for JFrog? And where do you expect to see the biggest potential pull-throughs to your business? And then maybe just -- sorry, one more quick one for Ed. Could you speak to how impactful your AI native customers were to the cloud strength in Q1? Just want to get a sense of how broad-based the strength was. Shlomi Haim: Maybe I'll start, and Ed will take it from there. When we speak about legacy, we speak about legacy binary code, not source code. Basically, what you currently have in production is what we call legacy. What you have to regulate for the next 7 years, if you are a bank or the next 45 years, if you are an automaker, this is legacy. These are binaries that were built today or yesterday. And tomorrow, with coding agents, we still have dependencies that are in your servers in production. This means that those binaries need to be also first-level citizens in the system of record. Otherwise, how can you protect what is secured to be shipped. What was made yesterday and approved and governed by the organization need to still be maintained in the system of record. So it's a very important asset that our customers are protecting still while coding agents are building the new binaries that are also scan and protected by JFrog. Ed Grabscheid: And regarding the question on the native AI companies, we had a successful Q1 driven by a broad set of customers. So not only AI native customers, but traditional customers as well or non-AI native customers. You recall last year, we talked about $1 million land that we had with an AI native customer that renewed, and we're in continuous conversations with many of the large AI native companies, and we'll explain more update later. Shlomi Haim: Radi, if I may add to it, serving the AI labs is important, and we take pride of it, and we are very honored, but I think that once you become the power grid of this AI labs software supply chain, you learn much more in how you should serve the rest of the portfolio. And that's the big plus, not $1 million here, $1 million there, but mainly what we are building together with them as we power their software supply chain. Operator: Your next question comes from the line of Michael Cikos with Needham. Michael Cikos: Congratulations on the strong start to the year here. Shlomi, maybe for you. And one of the things we've been going through this earnings season which is still pretty quick on the heels of the SaaS apocalypse, which seems overinflated at this point. But one of the things we're seeing is the budget is there for strategic vendors. And so I'm wondering when you're going to speak with customers, is it fair to assume that this evolution of the Agentic stack or how AI is playing out is causing customers to rethink or the need to modernize their existing architecture. And as a result, JFrog is being pulled into that conversation and benefiting them with respect to cloud migrations. Can you talk to what the tempo of conversations you're seeing out there actually is like? And then I just had a quick follow-up for Ed. Shlomi Haim: So what is it that we hear from the market? What we hear from our customers is that every application to your point of SaaS companies, every technology that was built to have human interaction with technology is being question mark. Everything, every application, even source code, source code became cheap. Source code, as we mentioned in the script, source code is something that now you can do on an experimental level and you can do it 1,000x faster. But what happens when the machine language, the binaries need to be maintained, this is where they start to be a bit more cautious about how they plan the future. So for example, in order to enable AI, you need to use MCP servers. This is the interaction between machines and your solution. MCP servers are yet another binary. This is where -- to your point, this is where JFrog comes into the question, can JFrog become my MCP registry for all the MCP servers. The same thing happened with NVIDIA when they ask us about skills, skills for agents, yet another binary. Can JFrog become the Skills Registry? So all of what we are hearing is that how can I build a stronger, better, scalable, universal system of record to manage all of these binaries because in tomorrow's world, what matters would be the machine language, not sources, not human language, but 0 and 1. And this is what JFrog did for the past 17 years. Michael Cikos: And Ed, for a quick follow-up here, just trying to peel back layers of the onion as far as the strength in cloud that you guys saw. Is there any way to further qualify -- I don't know if you could talk to either the size of the cohort that drove the magnitude of that upside or how cloud over consumption trended through the quarter from a linearity perspective? Can you just put any finer parameters around that strength? Ed Grabscheid: It was a strong quarter from start to finish, Mike, to be honest with you. It was very broad-based. It wasn't concentrated on one geography or one industry. I will say that what you saw in terms of the cloud was represented in our increase in the cloud guide. So we were very happy. We're confident with what's happening right now in the cloud, and that's what gave us the ability to raise our guide from 30% to 32% to 33% to 35%. Operator: Your next question comes from the line of Miller Jump with Truist. William Miller Jump: Last year, you guys were talking about AI experimentation driving consumption beyond commitments. It sounds very different today from your prepared remarks. So can you just talk about the difference you see in the amount of binaries in your system reaching production now versus a year ago? And I would also say it sounds like there's still a number of customers that are maybe waiting to commit bigger. So what are you hearing in terms of their hesitancy? Shlomi Haim: Miller, this is an awesome, awesome question because basically, you're saying source code is being produced at a completely different pace, completely different volume. Everything produced source code now. It's not just human developers, but all the coding agents together with the human developers. So the big question is, we see binaries growing at the same time. So you can think about it as like the digital photography replacing film. Film was expensive. You would take one shot on sunset before you print it. And now assume that you can take 200 of them. And instead of one printing, instead of one posting to your social network, you will now have 5. Binaries are the asset that you will take to production. Source code became cheap, and now you can make more binaries that need to be immutable. They need to be tracked. They need to be governed. And you will see this growth in binaries and what you can take to production because of the change of AI. Same thing goes to governance. How do you make sure with the same metaphor, how can you make sure that the pictures that you posted on your social doesn't carry your home address at the background. This is what JFrog brings, not only dealing with the volume of new secure pictures, but also govern what goes out. Operator: Your next question comes from the line of Howard Ma with Guggenheim. Howard Ma: I have 2 questions. My first is, I'd like to better understand how exactly JFrog's revenue benefits from curation and advanced security. I believe there are a few parts. The first being you need tier upgrades where you have to be on Enterprise X and Plus to qualify for buying those products. And then as you make commitments, you obviously get that -- you get a commitment. And then there's over usage, I believe that's driven by increased traffic from attacks. So I just wanted to run that by you if those elements are correct. Shlomi Haim: Yes. So I'll start speaking about JFrog Curation and JFrog Advanced Security and JFrog Xray and Ed can speak about the over-usage and what we found. Well, listen, everything that comes from open source, whether pulled by agents, AI agents or by human developers is something that need to be protected before it steps into Artifactory, your single source of tools. When we built Curation, it was based on customers' request. They asked us to give them a firewall that will enforce policy of what comes in. That was in a completely different volume when it was made by humans pulling open source packages. Now when you have 1,000x faster pulling request for open source packages from public hubs, whether NPM, Docker, Hugging Face, Conda, PyPI, you know that you are subject to attack. And the attackers are also using coding agents. They also became more sophisticated. They're also going after the maintainers that they know that by an order of magnitude will be the malicious packages. So what Curation did very successfully, not only apply this firewall enforcing your policies, but also scale to this level of AI. And this is why our customers not only embrace Curation, but also increased the demand for it after every attack we saw since last quarter of '25, which I alluded to this quarter with MCP and Python and others. Regarding JFrog Event Security and JFrog Xray, once it is in, once it's inside your system of, once it's inside Artifactory, you need to still maintain the security of your software supply chain. You need to look for secrets that were exposed. You need to look for composition analysis. You need to look for dependency graph security. And this is what JFrog Advanced Security and Xray is doing. And then when you shift the production, you ship something that you can actually trust. Ed Grabscheid: And Howard, this is Ed. Regarding the monetization of Curation, the monetization is based off of seats. This is a common currency in security, and we monetize based off of the seats. So regarding the attacks and an increase in attacks that certainly drives a demand from our customer portfolio and new customers to take either an increased number of seats or adopt Curation, but it doesn't necessarily drive data consumption. Data consumption is being driven by packages coming in and out of the organization or going into production. So Curation itself is not driving the usage over minimum commits. Operator: Your next question comes from the line of Mark Cash with Raymond James. Mark Cash: Shlomi, maybe I wanted to build off a few previous questions and ask about NCP registry and AI catalog because there's a lot of companies saying don't provide the visibility and security for AI agents. So I guess where in the customer journey do organizations realize they need JFrog governance capabilities? Because what pain points are they seeing that others can't solve before coming to you? Shlomi Haim: What's happening now is that every software provider already provide an MCP server because we all know that if agents will not have an interaction with your software, that would be the end of your software usage. MCP servers are a binary code. No matter who provides that, it's a binary code. So our customers came to us and asked for MCP registry. As they trust MPM packages inside Artifactory or Python inside Artifactory or Docker containers inside Artifactory, they also want to have a list of MCP servers that they can put in an MCP registry, which is what we released this quarter. And then they can sell all of the AI agents or human developers, this is a safe place to take your MCP servers from. Same thing happened with Skills, which is a very growing trend when you use coding agents. And there is some kind of a movement now to CLI, which is the third technology. All of the above are binary code, all of the above are a natural expansion of our solution, and therefore, they are sourcing Artifactory. Operator: Your next question comes from the line of Jason Celino with KeyBanc Capital Markets. Jason Celino: The value proposition of Curation is quite compelling, right? And as you noted, these Curation customers were protected in Q1 from the software supply chain attacks that we saw in the news. It seems like a no-brainer to me and to most investors. But to the customer, what might be the alternative if they don't choose Curation or what factors are being considered that might be delaying that customer's decision? And given you are seeing this tremendous demand, do you have the capacity to kind of meet it? Shlomi Haim: Jason, I think it's clear that for a very long time, JFrog said we are betting on a world of automation, a world where machine will have to manage the asset. And therefore, we never shifted our focus from managing binaries. Every binary management tool is an alternative. So I think that, therefore, the strong differentiators that JFrog brings like universality, JFrog is the Switzerland of binaries. JFrog not only serves all the binary sites, but all the coding agents, human beings and other citizens that are using our solution. JFrog scale, we built 17 years of scalability. We went with the biggest organizations on the planet to scale to their level. And now we are even elevating it more because of AI. So scalability matters. JFrog is hybrid. We give you the freedom of choice of running it in the cloud, on every cloud and on-prem, if this is what you prefer if you are in a highly regulated environment. JFrog integrates with all your ecosystem tools when it comes to DevOps, DevSecOps, DevGovOps, which gives you also the freedom of choice and not getting into a vendor lock-in. So if they will come a solution that provides all of this in a universal way and go so well complementing the AI change in the world of machine language binary, that would be a threat of JFrog. I hope that we put the moat around what we built best, which is the system of record. Operator: Your next question comes from the line of Kingsley Crane with Canaccord. William Kingsley Crane: So on the Q4 call, you called out that the November NPM attacks had driven both immediate curation revenue as well as building pipeline. I'm just trying to get a sense of if there's more urgency around procuring Curation or Advanced Security versus some of these like larger software architectural decisions that could take multiple quarters. And I guess more specifically, just on Q1, like how much did Curation drive the upside in cloud in Q1? Shlomi Haim: Yes. Well, listen, Kingsley, every time that there is some kind of a software supply chain attack, we see a rise in the pipeline. And obviously, a lot of our customers are concerned, and that's an immediate impact. But what happened when it's happening every few weeks. This is what's happening now. It's happening every few weeks. And it used to be SolarWinds and then a year after Log4j and then year after something else. Now you refresh your browser, there is a software supply chain attack. And why? Because source code doesn't matter anymore. Source code scanning is something that used to be overappreciated. Now people understand that what needs to be protected is what's going to production. And the hackers, the attackers also understand that. So they go after the maintainer of the open source packages, and this is what you have to protect yourself from. Now will there be companies that will kind of react based on fear only? I think it's forever kind of the trade-off. But we see more and more responsibility on the customer side, knowing that the magnitude that they are looking at is completely different than what it used to be yesterday. Operator: Your next question comes from the line of Shrenik Kothari with Baird. Shrenik Kothari: So Shlomi, Ed, you have been careful in the past not to oversell AI as an immediate sort of revenue windfall and Ed's own words described 2025 more as an initial spark [ Danfire ]. And Shlomi, you drew a comparison now with the transition from like film to digital. So as once this higher-quality AI code with Opus, Codex is likely reaching more production, and we are hearing anecdotes about it, that definitely creates more valuable binaries for you to act as a system of record. Just where are customers today on that journey from that AI slop to production grade? And what specific indicators are you watching that would tell you that the fire has started or is going to start? Shlomi Haim: Yes. I think that what we see today is more in an experimental kind of mode. Everybody is trying everything. Not so long ago, we would speak about Copilot and Cursor and now everybody is speaking about Anthropic and Codex. And I think that a lot is being adopted on every organization means that as we used in this metaphor before, like it can take many more features. It doesn't cost you anything. But what we also see is that not even a single customer has a full autonomous process. This is not yet there. It's still a combination of human developers with coding agents. There is no coding agent that starts from scratch and push to production and maintain the production fully autonomous. So there is still some miles to do before AI will take over completely of the developers' position. But we start to see the collaboration between strong human developers and coding agents, and this is why there is the rise of the water on every front. Operator: Your next question comes from the line of Brad Reback with Stifel. Brad Reback: Shlomi, back to your comment during the prepared remarks about customers willing to, I'll say, absorb meaningful overages in the cloud. What do you think is the gating factor? Or why are they willing to do that and not commit and get a better rate? Shlomi Haim: Yes. There is a race of AI adoption in every company now. No matter if you are a small or medium business or if you are one of the largest banks in the world with 50,000 developers, it's coming from the Board. It's coming top down. The Board is asking about AI adoption, making sure that you are in the race and not kind of falling behind. So what we see now is that usage in the cloud is also part of this experiment. Now if you go to the CFO and you say, JFrog asked me to commit, the CFO will ask commit to what. And therefore, they give you -- they leave the meter on, they let you use more and even pay more. And now our key mission is to make sure that we convert this over usage into commitment to gain a win-win situation with our customers. It will come. It will just take a bit more time because of the predictability that is now missing. Operator: Your next question comes from the line of Lucky Schreiner with D.A. Davidson. Lucky Schreiner: Maybe a bit of a follow-up there. Previously, you've spoken to some customers preferring to buy JFrog on a self-managed basis, given the better visibility and cost controls around that. But I didn't get a sense of those trends from the prepared remarks today. So one, is that fair to say? And two, is there maybe any potential reason for a change in those trends? Shlomi Haim: We still see customers asking for the self-hosted solution or on-prem solution. It's split into 2 profiles. One is the big AI labs that are building their own data centers. They have enough money, they have enough capital. They don't want to share anything with the public cloud from whatever reason you can imagine. And they will take an on-prem solution and embed it into their software supply chain architecture. The second group that we see is a group of the highly regulated companies, government institutes or whatever organization that need to be highly regulated. And they will, for sure, do a lot of tests and experiments on an on-prem environment before they will go to the cloud or to FedRAMP. And at last, what we see are companies that are well established and kind of seasonal players at the on-prem environment. So they are not looking to have now 1 or 2 entities in their world playing in the cloud. They keep on extending their own on-prem. But as you can see in our numbers, it's not only part of our strategy to migrate our business to the cloud. And this quarter, we also announced first time that it crossed the 50% of total revenue. It's also a benefit that we keep in our pocket to become the only company that gives you a full hybrid solution with a full freedom of choice. Like no matter what you are, no matter who you are, we can give you the freedom to embed AI or to adopt AI in your environment. Operator: Your next question comes from the line of Jason Ader with William Blair. Jason Ader: I wanted to kind of revert to an earlier question, which was asked about the risk that the LLM guys encroach into the binary layer. And Shlomi, I was hoping you could talk about some of the announcements that the labs made during the quarter where they started to talk at least a little bit about binaries. It was too technical for me, honestly. So if you could help enlighten us and just talk about what they announced around binaries and why it's not something that you worry about? Shlomi Haim: Jason, let me start with the last sentence. I'm worried about everything. There's nothing that I'm not worried about. But I have the confidence that what we are building alongside the company is completing and being complementary to what the world is demanding. What you have heard is reverse engineering binaries, I guess that you refer to the OpenAI announcement about 5.4-Cyber. This is a way to kind of take the binaries themselves and reverse engineer it and to see what they were built from. That's not replacing JFrog solution because even if you are running kind of fast forward 2 years from now, when every organization would use OpenAI next to Anthropic, next to Cursor, next to Copilot, next to Gemini, I guess that we will all agree that even if you have this environment that they all build binaries, you need a governance tool that provides a universal solution to contain them all. The second thing, who will protect the open source. It's not reverse engineering the open source packages. It's what the agent speaks itself. So when you bring something from NPM or something from Docker, how do you make sure that what you brought into the organization past your firewall? How do you make sure that this is secure? The third thing is that this race is not just happening between the defenders and the vendors. This race is actually happening between the defenders and the attackers because the attackers will also use cloud and they will use products in order to build a more sophisticated malicious attack. So how can you make sure that the policies that you put to the gate are secure in your system of record? And last, what happened when one authority should take a decision of what's going to production? Will it be one of the coding agents? Will it be 2 of them? Will it be human being? Will it be the company policy? This is the infrastructure we provide. We are not the policymakers. We are the policy enforcers. And we help you to make sure that what goes to production kind of came out clean from the non-poison reservoir. So while we are seeing this happening, it's mostly focused on what I built as an agent, replacing human being, replacing human language to what I need to secure at the end and to govern and to trust. So that's how we see it now, and this is what our customers are telling us. Operator: Your next question comes from the line of Andrew Sherman with TD Cowen. Andrew Sherman: Shlomi, on the security side, we've got a lot of questions on how much of your revenue comes from Xray since the labs now have similar products. It'd be great if you could clear that up for people. How should we think about the contribution of that versus Advanced Security and Curation and just the main barrier to entry for the latter, the Curation and JAAS. Shlomi Haim: Xray was a part of our DevOps offering. And why is that? Because we don't think that Xray should standalone and start to do software composition analysis. We think that Xray should run over your Artifactory, making sure, for example, that your containers 4 years down are secured to be in Artifactory. Can other tools replace that? Yes. But if you get a start of your package using Artifactory built into Artifactory, why do you need another tool? The second thing that Xray brings is this understanding of what's coming out from the open source environment and to be able to break that in pieces and to secure that. Can it be something that brought from the outside like a point solutions tool on top of Artifactory? Yes. But what we see is that thousands of customers prefer to take it as part of their DevOps subscription with JFrog, knowing that this is a build-in solution on top of your system of record. Operator: Your final question comes from the line of Koji Ikeda with Bank of America. Koji Ikeda: When I look at cloud, the net new revenue added this quarter, I think, is the most ever in a quarter, let alone a first quarter. And so that absolutely implies customers are spending above commitment levels like never before. And so why is it -- or maybe the better question is, how long do customers typically take before they come to JFrog and start renegotiating their contracts for higher commitment levels, which presumably come with better volume discounts? Shlomi Haim: Yes. Regarding the why, I'll make it simple. We called it before. We will see more code means more binaries, means more JFrog. And JFrog is well known for being the binary people. Regarding how long it takes, we are actually -- we are not waiting, Koji. This is part of our practices, our enterprise sales practices changed something like 2 years ago. We are going to those customers with a better offer, with a better plan if they are committing. The question would be how long this experiment will be mature to be discussed as a commitment. And this is something that I'm sure that we will keep on following and provide you with more clarity of where the cloud goes. But if you look at the confidence in our guidance, we raised the cloud, although we see that a lot of it comes from usage over commitment, we raised the guide for the year because we know that this is not a trend, this is not a spike. It's a few quarters already that we see the growth in the cloud. Operator: This concludes the question-and-answer session. I will now turn the call back to Shlomi for closing remarks. Shlomi Haim: Everyone, thank you for your questions. Thank you for your trust, may the God be with you and may we have a great year. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Erin Rheaume: Good afternoon, and welcome to Lyft's First Quarter 2026 Earnings Call. As a reminder, this conference call is being recorded. On the call today, we have CEO, David Risher; and our CFO, Erin Brewer. Our full prepared remarks are available on the IR website, and we'll use this time to answer your questions. We'll make forward-looking statements on today's call, including statements relating to our business strategy and performance, partnerships, future financial and operating results, trends in our marketplace and guidance. These statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied during this call. These factors and risks are described in our earnings materials and in our recent SEC filings. All of the forward-looking statements that we make today's call are based on beliefs as of today, and we disclaim any obligation to update any forward-looking statements, except as required by law. Additionally, today, we're going to discuss customers. For rideshare in North America, there are generally 2 customers in every car, the driver is Lyft customer, and the rider is the driver's customer. We care about both. Our discussion today will also include non-GAAP financial measures, which are not a substitute for GAAP results. Reconciliation of our historical GAAP to non-GAAP results can be found in our earnings materials, which are available on our IR website. And with that, I'll pass the call to David. John Risher: Thank you, Erin. Hello, everyone. This Q1 represented another strong quarter for Lyft. We again delivered on our financial commitments and again had double-digit growth in active riders, gross bookings and adjusted EBITDA year-over-year, further setting ourselves up for a global hybrid AV future. Rideshare demand remained healthy. We saw double-digit rides growth around peak events like Valentine's Day, Super Bowl Sunday and St. Patrick's Day. Stepping back, our share of the U.S. rideshare market has grown from 3 years ago when I joined and has held above that point ever since, but an increase in Q1 over last quarter. And in March, we delivered our highest ever number of rides in a week. Taken together with our financial results, this continues to validate our thesis that customer obsession drives profitable growth. Looking globally, we're now operating in over 120 countries around the world and have further deepened our presence in London with our acquisition of Gett's U.K. business, which we just officially closed this week. And finally, we took significant steps forward with our partner, Waymo in Nashville for the construction of a state-of-the-art AV depot. We continue to be extremely bullish about AV's ability to expand our market and about our own capacity to operate them at industry-leading utilization levels, the ultimate driver of profitability. And with that, let me turn it over to Erin to take you through a few financial highlights. Erin Brewer: Thanks, David. The consistent execution David just described translated directly to strong financial results. In the first quarter, gross bookings were up 19% and adjusted EBITDA up 25% year-over-year. Over the last 12 months, we've generated a record $1.12 billion in free cash flow. And during Q1, we executed our largest quarterly share repurchase ever, totaling $300 million in the quarter. Looking forward, our guidance reflects continued momentum across the business. At the midpoint of our range, we expect gross bookings to accelerate to approximately 20% and adjusted EBITDA to expand by more than 30% year-over-year. And with that, we'll take your questions. Erin Rheaume: Let's dive into Q&A. [Operator Instructions] First question comes from Eric Sheridan with Goldman Sachs. Eric Sheridan: Okay. Great. Hopefully, you can hear me okay. I wanted to dive into the partnerships and how they continue to evolve. What are the key learnings as these partnerships continue to build in the momentum and build in their duration in terms of them as stimulants of increased frequency on your platform or stimulants of increased new rider growth on the platform more broadly. We'd love to get a better sense of color there. I appreciate it. John Risher: Sure. Eric, it's David. I'll take it. Maybe Erin will tag team on me a little bit here as well. So super good question. And I think I'm just going to maybe reset the table for one second because I think the role of partnerships continues to be incredibly important to our current business and will be incredibly important in our AV business. So how we perform as a partner, I think it's actually a good predictor and how our partners perform is a good predictor of the future. Okay. So to your question, we got a record number of rides this quarter from partnership tagged rides -- ride requests, so about 27%, I think. And that's a big deal. I think when we first started talking about this, we're at 20%, then 22%, then 25% and 27%. Why? Two reasons. Number one, we partner with great organizations that have huge TAMs, right? So if you look at some of our most recent ones, of course, DoorDash is still only about 1.5 years old. United is more recent. Even Southwest Airlines through their credit card program, these are enormous programs. And so they represent a huge opportunity for us to acquire new customers. Now those -- I'll come back to frequency in a second. Those customers are different, right? So for example, DoorDash customers tend to be very heavy users. And you can understand this, right? People eat 3 times a day, and they tend to take rides relatively more often than others. So you saw us obviously complete -- double down on that partnership by expanding that to Canada, okay? If you look at United Airlines. United Airlines is kind of a different buy, right? They tend to be more business customers. We out-index in some of United's big hubs, Chicago being a good example where we had great growth this past year. They tend to be airport rides, not surprisingly, which means higher bookings per ride, which tends to mean higher profits. So that's wonderful. How do we reward United customers? Well, we give them miles, which they've done for years now. I think we've got -- we're over 350 million rides -- excuse me, 350 miles awarded -- 350 million miles awarded right around there. That's a big deal. And then a couple of weeks ago, we announced Pay with Miles, which is amazing. I mean that's literally -- I don't know how many billions of miles or hundreds of millions maybe United has banked, but this allows United MileagePlus customers to pay with their miles on Lyft. And that's wonderful. It's an industry first and it deepens that relationship. So you put all these things together and you get sort of a portfolio. Some tend to drive frequency and new customer acquisition a little bit more. Some tend to drive other behaviors that we kind of like the airport rides and so forth. But super, super important. Maybe I'll talk about AV partners another time. I don't think that was the sort of core of your question, but that's -- we remain very committed to the sort of concept of sort of really developing the ecosystem and going deeper and deeper in the TAM, which is quite large. Erin Rheaume: Great. Next question will be Doug from JPMorgan. Neeraj Kookada: This is Neeraj on for Doug. So a couple of questions. One is on the SF commentary. I think you guys mentioned that you have continued to gain share and also saw a ride increase by 20% in the ODD. So just curious, given Uber has said their CP has gained -- that they have gained CP in the last 6 months as well. So just trying to understand the share dynamics there. Like are you gaining share from Waymo? Or like how does the share dynamics work there? And the next one was, are you -- have you started seeing any elasticity from the California insurance mandate? John Risher: Sure. Why don't I take the first half and then Erin you can take the second half. So broadly speaking, as we've said before, we think AVs are an incredible positive for rideshare. And really, it's because it's a great product. And therefore, you would expect over time, that's going to bring new people on to the -- sort of into the rideshare ecosystem. And when we look across sort of in aggregate, all of the regions where AVs are in the marketplace, we've effectively held share pretty steady. So that's kind of a good theme because a good indication because it means that as new riders are coming on, still the whole pie is growing. San Francisco is doing great. As we said, we actually had an increase -- we've had nice growth in San Francisco. These things are always multi-variable. We're also doing some marketing in San Francisco. So that is sort of a maybe confounding factor. But we like what we see in San Francisco. I will say, when I look at what the other guys say, they maybe pick 6 months for a particular reason, I'm not sure. But broadly speaking, I feel pretty good about our position in SF. Erin Brewer: Yes. I'm happy to comment on California. So on our previous earnings conference call, we talked about, obviously, the insurance reform in California that we expected to deliver great value to riders and to drivers. We further talked about how we expected that to translate into increasing demand over time and sort of gaining momentum in the back half of the year. I can sit here today and tell you that as we got into sort of February, March and even in here to the second quarter, we are seeing that growth begin in California. That growth in the first quarter outpaced other top regions. And so we're starting to see those effects. We obviously look forward to that momentum continuing for the balance of the year. Erin Rheaume: Our next question will be Nikhil from Bernstein. Nikhil Devnani: I wanted to ask about the rides growth and appreciate the call out in the letter. That's helpful. So the mid-single-digit North America volume, if I'm reading it right, it looks like Canada is growing much faster, almost 50%. So it would be helpful if you could maybe just outline what you saw in the U.S. business on a ride volume basis. And I guess the big picture factors that maybe weighed on that in the quarter. It seems like it's decelerated over the last few quarters. So just your perspective on what's happening there would be really helpful. John Risher: Yes, for sure. Nikhil -- so a couple of things. I mean the first thing I think was okay, let's just sort of maybe level set on the data and then talk about what we're seeing. So on the data, we grew both in the United States and in Canada, to be super clear. No question, Canada outgrew the U.S. I don't think it was quite to the degree you're talking about, but it was a very significant growth. I mean, we did grow something like 50% year-on-year in Canada, might get that a little bit wrong. Anyway, okay. So look, so North America, let's think about that and then the U.S. North America is a huge region, of course, super diverse, a lot of geographies and a lot of segments within those geographies. What we have seen is in Canada for sure, but also low-scale markets that we've been talking about for now, I don't know, 6 or 7 quarters, that's where we are seeing our sort of outsized growth for sure. Low-scale markets, again, you can sort of imagine those as maybe the Milwaukees of the world or maybe the Pittsburghs, whatever it might be. But sometimes second and third-tier cities or even more rural areas where there's a huge amount of TAM left and it is sort of underpenetrated. And then obviously, in some of the cities, particularly the largest cities where rideshare has been active for the longest, I would say the industry on average is seeing slightly lower rates of growth or at least did see this past quarter. And I think that's an industry thing, and it has a lot to do just with kind of S curves and being in markets for a long, long time. Okay. So once you look at that and you say, well, okay, how are you going to reaccelerate growth in some of those markets? And that's where some of the segments, I think, become so interesting. So you've heard us, of course, talk about Lyft Silver, which addresses older people who, by the way, take a lot of rides. And even on our platform, once they become Silver members, they take a lot more rides. Lyft Teen, still a very, very new product, huge opportunity there, one that obviously is sort of infinitely replenishing, you sort of might say. You look at the partnerships that we have in some major cities, DoorDash is a great, obviously, they've got both urban and suburban footprint, but anyway, they've got a nationwide footprint. If you look at United Airlines, they've got real hubs and some of those hubs are where we're seeing really good growth. We saw, for example, double-digit growth in both New York and in San Francisco. Part of that, of course, is also some marketing, right? We're now really leaning into this idea of Check Lyft. What we find and of course, national study show is that when people check both apps, they tend to save money. That's a very powerful message and frankly, one that favors us, both because of our pricing strategy and also if you're not even looking at our app, then how can you be saving money. So there's a lot of room left there to go. So when I kind of look across all those, I see a lot of vectors for growth. That's why we're saying our rides are going to -- overall, we're seeing acceleration in Q2 and beyond. And maybe I'll turn it over to Erin to talk a little bit about that and then maybe some other things as well. Erin Brewer: Sure. Yes, I'll offer a little bit of color, Nikhil. In our prepared remarks, we quantified the impact that we saw the weather in the first quarter had on our overall rides, roughly about 3 million rides. You can think about that as a little bit more than half of that being bike rides overall, obviously, given the severity of the weather in the Northeast. Beyond that, I think it's important to highlight a couple of seasonal factors, right? We always have a deceleration naturally in the bikes business, Q4 to Q1, same with FREENOW. Those both seasonally accelerate into the second quarter. So that, in addition to a number of the areas that David just mentioned, I talked about California. We've got a very healthy marketplace right now as well. Those are some of the underlying factors as we think about acceleration into Q2. And then maybe zooming out a little bit more broadly. Really nothing has changed as we think about our trajectory here in 2026 and our overall objective to deliver north of 1 billion rides for the full year. Erin Rheaume: Next question will be Ben from Deutsche. Benjamin Black: So the theme this quarter has been AI productivity and sort of the investments companies are making sort of into tokens, for instance. So I'm wondering how you think philosophically about sort of balancing the need to maintain your improving margin trajectory today versus growing talent and also investing in these tools to support productivity? And then secondly, I'd be curious to hear what you're seeing in the market this quarter that required you to increase incentives per ride by 17%. Can you maybe touch on that as well, please? John Risher: Sure. Again, we'll sort of tag team this. So I mean, maybe just state the obvious, I mean, AI is amazing. It's just -- it's rolling through our org just like every other org. It's at a lightning pace. I was looking at AI adoption recently just among the developers, our engineers. And just with a new tool, we have a strategic relationship with Claude, and a new tool has gotten to 80-some percent adoption over the course of whatever, 35 days, 45 days of AI, the cogeneration tool there. So anyway, amazing. Now how we think about it? I know you asked specifically about the cost of tokens and so forth. But just zooming out for a second, how we really think about it is AI builds capacity. It actually does 2 things. It builds capacity and it increases speed. So capacity and velocity. That's the way we think about it. And we see examples of this all across the organization. We've talked a couple of different times about becoming a more global org. Gosh, when you become a more global org, you have to do all kinds of things around data and privacy and security and systems integration and so forth. And truthfully, a lot of that is not particularly customer value add, but you just have to do it. And our team has just been crushing it. And a lot of the reasons they've been crushing it without having to hire a bunch of new people is we're relying on new AI tools that we've written internally or developed -- codeveloped with others and so forth that allows us to get things done. Same with customer-facing things. We'll talk about that maybe another time as kind of a whole separate topic. But broadly speaking, I'd say we run a pretty lean ship and what AI is allowing us to do is to move faster and to build capacity among our staff so that they can either be more productive or work on more things simultaneously, or what have you. Erin Brewer: Sure. I'll take the question on incentives and sort of start with our usual line about incentives in this business, which fall in 2 places in our P&L, the contra revenue line and sales and marketing lines are used dynamically in the marketplace to balance and optimize overall. Stepping back, that's why we always say that we are optimizing our P&L as we think about gross bookings, as we think about adjusted EBITDA. So I think that's important context. So let's kind of get into the details on the incentive line. If you think about contra revenue incentives overall, on a year-over-year basis, that's actually been a source of leverage. In the first quarter, we had our highest driver hours ever in the first quarter, very strong engagement overall. We talked a little bit in the prepared remarks about our most recent driver preference survey. Again, super strong results. So you see some leverage there in the contra revenue line. And then as I think about sales and marketing incentives, I think it's really important to chat about this from a P&L perspective. So if you look at our performance in the quarter, you see strong revenue growth. You see gross margins expanding year-over-year. I mentioned insurance being a point of leverage. So that's aided by that. We, of course, continue with our very disciplined fixed cost base. Why is all of that important to incentive? Because those are the things that can continue to allow us to invest when we see great return opportunities to invest in that rider incentive line. We do it very deliberately. We do it very focused on what the ROI is over the long term. And so some of that strong performance throughout our P&L gave us the opportunity to take advantage of some of those strong investment opportunities, especially at a time when the marketplace is performing so well. And we delivered across all of our financial commitments. So hopefully, that gives you a little bit of color about how we manage that piece in the quarter. Erin Rheaume: Next question is John Blackledge with TD Cowen. John, we're going to come back to you, okay? We're going to go to. I can hear somebody. Is that John? John Blackledge: Yes. Sorry. Sorry. First time Zoom. Could you talk about the strength in the high-value modes and how much runway there is for further penetration of total rides? And then second question, would you expect this kind of divergence between GB growth and rides volume growth to extend into the second half? Or will the gap close a bit as we get through the second half? John Risher: Yes, let's -- we'll tag team on that one again. So a lot of runway there. A lot of headroom maybe is a better way to say it. It's just -- this is an area where I would say Lyft may be underinvested for some period of time and now has completely made up for lost time, let's say. So we're really focusing on improving the quality of the cars, the types of drivers, some drivers who drive for black in high-value modes. So we call this the Black XL, even XXL, actually a new product for big families. Anyway, the types of drivers, we're sort of, let's say, shifting towards a more professional set of drivers there. Of course, TBR also operates in the very high-end kind of chauffeur service as well. So lots of growth there and lots of runway ahead, I would say. It's been an area that over the last couple of quarters, you've heard us talk about the acceleration, and we have big ambitions there because there's a lot of demand to fill with a high-quality product. Erin Brewer: Yes. And I'll take the one on gross bookings and rides growth rates. So if you think about the dynamic there in the first quarter, there's a couple of different components. Obviously, part of what you're seeing is this continuation of a very active shift toward higher-value modes. We've been talking about that for a few quarters. In the first quarter, that growth is up over 35% year-over-year. Obviously, adding in the FREENOW business, which carries a higher average gross bookings per ride is helpful. And then separately, but correspondingly, we continue to diversify the things that add to our gross bookings where there may not be a ride attach, things like ads and luxury, for example. And so those are some of the dynamics that are driving that. If you think about expectations for the second quarter, I do expect that delta between gross bookings growth and rides growth to narrow somewhat. You've got the significant seasonal expansion of the bikes business, I think, is probably one of the main underlying drivers. So it will narrow somewhat as you think about those trends from Q1 to Q2. Erin Rheaume: Okay. Now we really are going to take a question from Mike at MoffettNathanson. Michael Morton: Awesome. It was nice knowing that it was coming. Yes, I had time to prepare, but it was going to be the same questions anyways. Can we talk about pricing in the U.S. market? All intra-quarter, we get questions from clients about what the third-party data shows for industry pricing, kind of head scratching kind of ramp. And then when we see this reported number, I know that there's some FREENOW aspect on it, but can we maybe just simplify point like what year-over-year pricing is for like a Lyft standard ride? I know there's a premiumization aspect, but just to kind of level set that and any nuance around that would be really helpful. And then another question. I'd love to hear how you're feeling about your ad business. Maybe some updates on the run rate there and if anything has changed on your outlook for the future, if you're more optimistic or anything along those lines would be really great. Erin Brewer: David, do you want to start with the ads business, and then I'll talk about -- talk about pricing. John Risher: Erin and I are chuckling here at that. Yes, that sounds good. So okay, on ads. Ads, as we said, we've talked about ads for a while, I think, and talked about how we were super pleased with sort of the run rate, the exit rate from last year. I think the sort of big picture that we have on this is, gosh, there's a lot of opportunity. And the reason for it is advertisers are always looking for new ways to connect with customers. And in an increasingly virtualized world where people are spending more and more time on their phones, the big open question is not how do I do more virtual digital ads. I mean that is a fairly well solved problem in a sense. What's really interesting is how do you actually connect that to the physical world. And so if you look at some of the campaigns we've done, we talked about Sephora last time, we talked about a Charles Schwab ad campaign this time that I think in the prepared remarks. Actually, I think just today, we're doing something with McDonald's. You start to see some really interesting trends where people are really changing behavior as a result of being in cars when they're seeing ads in real time. Also bikes here in San Francisco, Gemini is all over the bike system here. So same sort of deal, of course, city across all of New York City. So a lot of opportunities there. And then when you start to look at the audience we have, which is a fairly large audience, talking about 50 million people plus, then the question is, well, how can you take that audience and extend that? And so we're doing something called audience extension, which allows us to sort of extend beyond sort of our 4 walls. How can you take some of that same data and extend that beyond just beyond the in-car experience to off-platform through Trade Desk and through other ad brokers. So there's just a lot of opportunity here. And the person -- I call her up from time to time, the person who runs our ad group, Suzie Reider joined us from YouTube a couple of years ago, where she had run their ad business for many years, really started it and then kind of grew it to something quite big. And we've got the same amount of conviction here. It may not be quite the same size as YouTube, that would be impressive. But certainly, we've got a lot of conviction that there's a lot of headroom ahead. Erin Brewer: Yes, Mike, and to talk about pricing, I appreciate the simplicity of your question, and I may somewhat frustrate you because as you know in following our business, it tends to be fairly complex, right? There are changes year-over-year as you think about the mix of our business in top markets or certain geographies, which are going to carry higher average pricing. We've obviously been growing very significantly in low-scale markets. So you've got some of that mix effect, which makes it probably not straightforward to give you the best answer. I would offer a couple of perspectives though. I think if you look over a number of years, this industry generally does see some amount of price increases if you think about longer-term trends over years. Maybe over the near term, what I can tell you is sequentially from Q4 to Q1, pretty stable overall. A couple of questions ago, one of the things I was trying to highlight as you think about our overall gross bookings and kind of the mix of that, it has evolved. It has evolved over time. So we've talked about the significant growth of higher value modes in that mix, the addition of FREENOW. We further talked about things like ads or our chauffeuring business, which contribute to gross bookings and have been growing obviously nicely, but don't carry the same rides component. So those are some of the areas. Sequentially, I would say, overall pricing pretty stable as we think about Q4 to Q1. So hopefully, that's some helpful color. Erin Rheaume: Up next, we have Ken with Wells Fargo. Kenneth Gawrelski: Can you hear me okay? Erin Rheaume: Yes. Kenneth Gawrelski: All right. Can you -- maybe can you help me a little bit strategically understand you've made several acquisitions, some in the kind of -- some are geographic diversification, but others just it's not strictly in the rideshare business. Could you talk a little bit about how you see them all coming together strategically? What are the key like points of synergy? What beyond geographic expansion to those assets -- why are they better together? Maybe I'll just put it that way simply. John Risher: Yes. Let me take a stab at that. So -- and maybe a little -- just a tiny bit of history, I guess. So we were not a particularly acquisitive company for a period of time. And I think there's a pretty obvious reason for why is because we were kind of just getting our base business going strong. Last year, we made our first significant acquisition, at least as long as I've been here with FREENOW. That was definitely a rideshare acquisition. Of course, it's a taxi-focused kind of core rather than what's called PHV in Europe. But it expanded our footprint, which is nice for geographic diversity into 9 new countries and allowed us, in that case, in particular, strategically also to build upon the government relations, the company that's been in the taxi business has had to have had for a long time, which is so important for AVs. So I would look at much of our acquisition activity in Europe as important for geographic diversity, but also for NAV future. You can see that with Gett as well, which just closed last or this week actually. Gett is a well-respected, largely B2B taxi service in London. As we mentioned kind of in the prepared remarks, between that and the FREENOW presence in London, we're on something north of 70%, maybe 80%, something like this of the taxis that have apps in their cars, now have a Lyft app in the car. So that's amazing because that allows us, obviously, access to a very, very important market. Europe is the biggest rideshare market, arguably one of the most interesting and important in the world. And again, if you think of our activity in London, there's a short-term issue there of kind of wanting to build volume in part because that's part of what we bring to the AV category as well as government relations. And again, Gett actually directly works with governments, and then we've got good relationships through FREENOW. So I would say those are sort of the things. Now TBR is the other acquisition that we've announced recently. Also in the rideshare space, they're quite different. That's really a chauffeur space, a very, very high end. And I think that speaks to -- so we talk about this as up and out, right? Out is kind of the overseas piece and up is how can we strengthen our position in kind of higher-end offerings. And it's wonderful to have a very, very top tier. Perhaps you may know TBR because often they kind of service non-deal road shows in the United States and abroad, 120 countries. Once you have a service level that is sort of marked at 10 out of 10, that frankly brings your whole company up. And so many companies, of course, are now making good money in the high end. So I think that's maybe the -- that touches on the significant ones. Erin Rheaume: Next question is going to be from Ross with Barclays. Ross Sandler: Great. So this is a good follow-on from that last answer. Can we just get an update on whether the FREENOW kind of like-for-like is growing? I think it was like flattish when you guys made that acquisition. I know we haven't anniversaried it, but is the business growing? And are there any like early proof points of U.S. Lyft enthusiasts going to Europe and kind of whatever adding to the FREENOW business that way? Any color there? Erin Brewer: So I'll start with the performance, and then David, do you want to talk about what we've got coming up on that -- on the rider side. So Ross, to answer your question directly, yes, the business is growing. We talked about when we bought the business having about a $1 billion overall annual run rate that we talked about that being on track. As we closed last year, we anticipate growth as we look into 2026. John Risher: And on the second part, there, we've just begun, but maybe I can give you kind of the arc of the project. So today, what happens very directly, if you're a Lyft user and you open up FREENOW app in London, you'll get a notification saying -- if you open up a Lyft app, I'm sorry, you get a notification saying our partner, FREENOW is delivering rides here in Europe. And so it's a fairly kind of basic integration just like that. And we do some other small things as well with Chase and some other things. Our vision for sure, and we can say now really by 2027 is that anywhere as a rider on the Lyft app, the sort of Lyft ecosystem, anywhere you are with that app and that we do business through FREENOW or others, you'll be able to open that app and be able to get a ride anywhere you want. So it will be a much, much more tightly integrated experience. That's happening over in 2027. And that's always been kind of the plan we started is step-by-step integration such that by 2027, we're able to debut that. Once that happens, of course, then you would expect the business -- the growth of the business to be much more significant as a result of that work. Erin Rheaume: Okay. Great. Next question is Chad with Oppenheimer. Charles Larkin: Could you maybe talk about the margin benefits of some of these higher-value rides as they become a larger share of overall rides and as well as like taxi expansion into more cities? Erin Brewer: Sure. I'll take the margin profile. David, do you want to talk about taxi expansion overall. So, absolutely, as you think about the higher value mode mix of rides, all the way up to and including TBR and chauffeuring that David was just describing, they absolutely bring a higher overall margin profile to the business. So the mix is not only helpful financially, but also gives riders a lot greater choice. And what we're seeing is when we -- when those are offered up, we are definitely seeing behavior where that trade-up will happen. And so it's both satisfying rider needs and desires at that point in time, but also obviously, increasing that mix is bringing in a healthier margin profile. John Risher: Yes. And I'm going to give a shout out to Lyft Black in particular and then zoom back out. It's actually our highest rated ride -- highest rated ride. So it is a great product. It's been a little bit under marketed over the years. But as I say, we both improved the quality of it, and you're starting to see maybe a little more uptake. If you're on the call and you haven't taken it, I highly recommend and go ahead and pay with your United miles. Okay. So -- and then the taxis, one of our strategic priorities this year, and we talk about our internal -- kind of our internal framework for it is expanding the platform. And you've seen some experiments we've done in a kind of small scale in St. Louis that I would say much more significant scale in L.A. over the other cities beyond that. It's great because taxis carry their own insurance. So that's got sort of an interesting slightly different financial profile than the typical rideshare, that's wonderful. And then, of course, taxis in Europe are a whole different thing, right? It's a much higher-end product, a very predictable product in many countries and has also higher bookings per ride typically just because of, again, the combination of regulation and it's seen as a little bit more of a luxury product than here in the U.S. So yes, when you look across our whole platform, it's -- I feel really good about our kind of building out a very strong foundation. But then ultimately, of course, will embrace AVs as well, and that's next, though. Erin Rheaume: Great. Next question will be Justin with KeyBanc. Miles Jakubiak: This is Miles on for Justin. I wanted to ask about loyalty. I was wondering if you could just provide an update. I know it's pretty early on Lyft Cash Rewards. And then maybe just a broader view. You mentioned wanting to do more in loyalty. So how that fits in with the strategy and then along with Lyft Pink and your existing offering there. And then maybe just continuing on international expansion, been pretty active in M&A in new geographies, obviously. But do you think this puts you in a position where you can start organically entering new markets now that you have more of a portfolio in places like Europe to bolster that expansion? John Risher: Sure. Miles, why don't I start with that one, and then we'll see if Erin has anything to add or maybe not on this one. Oh, wait, I just totally spaced on your question. My apologies. Erin Brewer: Loyalty. John Risher: Loyalty, yes, of course, of course. Okay. So right. So yes, loyalty. So we've made some real inroads in loyalty. This is an area again of the company where maybe we've been a little bit kind of silent because we've been getting some things together behind the scenes. But here's what's happened. So in the last -- I think it was last August, we really started to lean into loyalty for our business riders. So this is a really interesting program. So we have not really had a good business product for some period of time when it came to a loyalty product. And this was causing us some pain in the marketplace. And so what we did is we said, well, let's come out with the best program that there is for rideshare, full stop. And so here it is, super clear. It's free, okay? That's very important, and it's 6% back up to 8% back depending on your load. And then you also get point multipliers for United and Hilton and Alaska, if I'm not mistaken. And that's quite -- I'm going to say the free part one more time because it's quite important. We have a competitor out there that sells something else. And internally, we sometimes talk about it as selling a time bomb. Hate to say it that way, but you sell something for free and then a couple of months later, it starts to charge you. So we don't have that. We have a product that's a free product that gives you immediate rewards back for what we call our managed business rewards program. We've learned a ton there. It's been quite successful. I'm going to forget the exact statistics, but it's significant. Maybe I can kind of find it as I'm talking here, but it's been significant. It's grown very significantly and has some kind of interesting characteristics about how many more rides people take once they start to sign up. So that's kind of been the basis of it. And you also mentioned the cash rewards. That's something we're experimenting with on the consumer side. Super cool is still relatively small because it's definitely an experimentation mode. But what I think you can see is we're starting to put some energy in this area, and this is a bit of a stay tuned story, but something that we've got some good stuff to talk about in the future. Erin Brewer: Maybe I can add in some of the stats on business rewards overall. So if we think about sort of first-time rides on rewards eligible business profiles, that grew 59% year-over-year. And those rewards eligible riders are taking 25% more Lyft rides per month. So we're super excited about what we're seeing kind of in these early phases. That tells us a lot about that we've got a great -- a great product overall that people are finding value in it. They're taking more airport trips. So a little bit more on the stats. John Risher: And then I think you had a question, I know about kind of organic expansion maybe into new markets internationally. And I think that's probably one we're not going to talk too much about. Erin Rheaume: Okay. Next question, we have Shweta with Wolfe Research. Shweta Khajuria: Two quick ones for me, please. First, I'm sorry if I missed it, but did you quantify the impact of the fuel program on your P&L? If not, could we please get a sense of the impact? And then the second is how should we think about the partnership rights growth? So the 27% data point is great. Any sense on how that cohort of 27% of the rides, what that growth is versus the non-partnership rights? How does that compare? Erin Brewer: Shweta, I'll take the fuel question and then turn it over to David. So we talked in our prepared remarks and on this call, we're really proud just generally all the time about the way that we engage with our drivers, about the continued preference that they demonstrate for our platform. And I think that's important because we're super proud to have been really first out there with a relief program. I think it says a lot about who we are as a company overall. And what we did in this overall program is really take the approach of leaning in with our partners. We've got a great driver rewards program overall. It offers all kinds of benefits to partners. And so leaning in with our partners to provide relief here in terms of drivers can get almost $1 in savings across all the programs. That's really co-funded overall, if you think about the way that, that -- those benefits accrue. So while all of this is meaningful to drivers, certainly and material to them, it's not material to our overall financial profile nor do we expect it to be in the second quarter. John Risher: And then on the partnership side, there's not too much more I can say, but maybe just give a little bit of color. Maybe 2 ways to think about it. One is like different partners do provide different types of benefits to us as a business. On average, partners tend to be quite strong at bringing higher -- sort of higher bookings type rides on average. United, you can absolutely probably imagine why that would be true, same with Alaska, same with Hilton, same with Chase. And sometimes it's quite significant. So it's a sort of a new set of rider or a set of riders who are taking typically higher-priced rides, which tend to have higher margins and people tend to be quite loyal to those programs, and therefore, they take rides quite regularly. Then you have maybe more of a sort of volume strategy with DoorDash. I mean DoorDash is kind of the -- you might sort of think of it as the volume anchor because it's got such a large program, but it also -- DashPass, but also, as I mentioned, people eat quite a lot. And so therefore, that's an important piece of the puzzle. So -- and overall, as a portfolio, it tends to be quite a healthy part of our kind of our rider portfolio. So that just kind of gives you a sense of how we think about it, have different characteristics. But on average, really quite nice, typically on the booking side and frequency side. Erin Rheaume: And the last question is going to be with Rohit from ROTH Capital. Rohit Kulkarni: Can you hear me now? It said unmute. I hope you can hear me. John Risher: It's okay. Rohit Kulkarni: I had 2 questions. One on pricing and one on AVs. You talked about this Check Lyft messaging campaign. Are you seeing any kind of measurable changes in rider behavior since you launched it, perhaps improved conversion from price-sensitive shoppers? And kind of if you think and becomes a normalized kind of consumer behavior, is there a scenario that could lead to more structural pressure on industry pricing over time or perhaps there is more pricing power that both companies have? That's just first question. And second, on AVs, it feels like the 3 cities closer to launch, Nashville, Hamburg, London. Can you just level set how are you operating in or offering your services, be it the orchestration layer, data operations, depot management, perhaps talk through your capabilities across those 3 places. John Risher: Sure, Rohit. I'll take this, and these are big last questions, but let's do it. Okay. Yes. No, no problem at all. So okay, on pricing, let's talk about that for a second. So here's -- so okay, you asked about sort of results and then maybe kind of implications on the future. The results right now are great, promising, but it's still very early. These are -- it's quite an early campaign. You'll see us turn up the volume there, which is probably a good indication that we like what we see so far. This is a very, very price competitive -- already a very, very competitive marketplace. I don't think either company truthfully has a lot of room on the price side because if we did, we would have done it. We do it every day. Another way to say we do 3 million times a day. We try to offer the best price we possibly can. As Erin says, reliable competitive pricing is our strategy. So that is maybe not something I worry so much about. What I do think is true is customers who check both apps tend to do better. And there's that study out there that says in New York, they save $170. It's just true. The more people who kind of check both, I think the healthier the marketplace gets, keeps us both on our toes. So that's the way we think about it. We -- obviously, our position is kind of a nice one to be in because we offer a very competitive product. fast ETAs, in many cases, faster than the competition, good pricing, in many cases, less expensive, although good and not always than the competition. And so if more people check us out, then we can start to impress them with the quality of our service and so forth and so on. And now I can talk all about driver cancellation, how we've done a great job there and pickup times and so forth. So it kind of seems to be a very nice reinforcement once people -- once people get into our place. Yes. I'm going to turn it over to Erin, and then we'll come back on AVs. Erin Brewer: Yes. Maybe before you dive into AVs, Rohit, I think something interesting to point out, David mentioned early days. This campaign has been live in San Francisco and New York. These are 2 cities that also have a pretty heavy mix of premium mode. So in your question was the implication of sort of price-sensitive riders. And hopefully, what you gathered from David's answer, but I think it's really important in our observation in these early cities is that's not really the thing, right? The thing is just, hey, check as opposed to doing something maybe out of habit, just check. So I just wanted to clarify that. John Risher: Absolutely right. Super appreciate it. And by the way, everybody likes the deal. Everybody likes the deal. So -- and we see that up and down. On AVs, okay. So you mentioned a couple of areas where we're -- a couple of cities that we've talked specifically about. Let's give you a quick update on each. Maybe start with Nashville and go to London and go to Hamburg. So in Nashville, it's actually quite exciting. You see Waymo is on the road right now. Later this summer, we start to take over operations of that. Then we open up our whole kind of new center, this 80,000 square foot center, and then you'll be able to actually order a Waymo on the Lyft app in our hybrid marketplace there, which is really something we're very, very excited about. It's going great. I kind of characterize it. I guess what I would say there is we've been in a very nice position for the last 10 years. We've about 50,000 cars that we've had to manage through our FlexDrive subsidiary. Those 50,000 cars have driven literally billions of miles, billions of miles. And that has required an enormous amount of expertise or that has delivered to us an enormous amount of expertise on maintenance and availability and so forth. And we think we're industry-leading on the operations side. So when you look at the partner we have, in this case, Waymo, probably the world's -- not probably, inarguably, the world's leader in AV tech. And then you marry that with what we believe is the world's leader in fleet operations and efficient fleet operations, low-cost fleet operations, we really are very excited about what we see there. So that's kind of where Nashville is. And over the summer, you'll see that grow pretty quickly. Okay. In London, it's a different situation. In London, our partner is Baidu. Baidu, arguably the second sort of most advanced technology out there, certainly in terms of driver out, miles driven and so forth and so on. I was actually just in China a couple of weeks ago meeting with them, an incredible company. Their RT6 cars that just rolled off literally the docks, the same ones I was riding in Beijing and now in London. They're beginning mapping streets. It will take a while there. It takes a while when you add a new technology to city streets, there are regulators that you have to work with. And we're spending a lot of energy working with regulators on issues like data privacy, for example, very, very important, but I'm super proud of our team. and they've made incredible progress there. And then there's just the physics of the thing. And just as a quick story, in London, a lot of small streets that are 2-way and sort of how do you navigate a 2-way street with AVs where you can't signal to each other, you go first, you go first. So these things take time, but we've got an ODD that's beginning to get mapped out, and we're sort of beginning there. So a little bit earlier in the process just because it's -- but at the same time, very much on track. And then Hamburg, that's a different thing. Hamburg is really just we've established a partnership at the city level saying that we're going to be the AV provider there. We haven't given too much more detail on it. I won't do so today, but it just gives you a sense that things are going to roll out both in the U.S. and Europe in a number of different ways. So that's kind of where things stand. Okay. Listen, I think I'll wrap up. Yes, you're so welcome. Thank you, Rohit. And thank you all. Really appreciate you joining the call today, of course. Looking ahead, super excited about another strong year coming up as we continue to track towards our 2027 targets. Thanks for coming along on the ride with us. You take care, and we'll see you next time.
Operator: Good day, everyone, and welcome to the PDF Solutions, Inc. conference call to discuss its financial results for the first quarter conference call ending Tuesday, March 31, 2026. [Operator Instructions] As a reminder, this conference is being recorded. If you have not yet received a copy of the corresponding press release, it has been posted to PDF's website at www.pdf.com. Some of the statements that will be made in the course of this conference call are forward-looking, including statements regarding PDF's future financial results and performance, growth rates and demand for its solutions. PDF's actual results could differ materially. You should refer to the section entitled Risk Factors on Pages 16 through 30 of PDF's annual report on Form 10-K for the fiscal year ended December 31, 2025, and similar disclosures in subsequent SEC filings. The forward-looking statements and risks stated in this conference call are based on information available to PDF today. PDF assumes no obligation to update them. Now I'd like to introduce John Kibarian, PDF's President and Chief Executive Officer; and Adnan Raza, PDF's Chief Financial Officer. Mr. Kibarian, please go ahead. John Kibarian: Thank you for joining us on today's call. If you've not already seen our earnings press release and management report for the first quarter, please go to the Investors section of our website where each has been posted. For today's call, I will provide a summary of the past quarter, our perspective on the environment and outlook for the remainder of the year. The first quarter was a good start to the year as we made solid progress on our objective to position PDF Solutions as the leading commercial data analytics and mission-critical platform for the semiconductor industry. This was visible in the nature of the bookings, business activity and our product development during the quarter. From a bookings perspective, Exensio and Cimetrix products were particularly strong. Exensio's strength was primarily from larger deployments, including an enterprise-wide deployment for Exensio Test at a large IDM. Cimetrix booking strength came in part from our larger customers placing orders for runtime licenses in anticipation of additional machine shipments in future quarters. Total revenues were up 26% compared to Q1 of the prior year. Adnan will provide revenue details in his prepared remarks. We shipped 1 eProbe in the quarter and anticipate that machine to begin contributing to revenue in Q2. Our capital investments in eProbe was meaningful in the quarter as we build additional machines to support our goal of shipping 6 machines this year. Selling activity was very high across all aspects of the semiconductor industry, from hyperscalers to equipment vendors. We did see significant activity in our characterization and DFI business as customers look to develop advanced processes and products. We anticipate that this activity will result in strong bookings in this category as the year progresses. Development of our new AI-enabled Exensio analytics systems that we announced at our users' conference in December 2025 remained on track in Q1, and we anticipate beta release in the third quarter. Customer interest has been very high for this capability. In the quarter, we celebrated our first anniversary with secureWISE as a part of PDF Solutions. Our secureWISE system provides secure end-to-end remote access and monitoring for manufacturing equipment, enabling the equipment companies to provide better support and advanced services for the equipment installed at fabs all over the world. During the past year, we invested in R&D to improve the product and services, expanded the customer base to include fab owners, not just equipment makers and now we're expanding the network into the OSATs and fabless. As collaboration in the chip industry moves from being driven by humans to being led by AI, we believe that remote connectivity enabled by secureWISE will increasingly be important. Customer enthusiasm for our stewardship of secureWISE has been super. Overall, it was a strong start to the year, both in terms of our traction with the customers and our product development. Now let's turn to our perspective on the environment. I believe this is my 100th quarterly conference call with investors. And as I reflect on my tenure having the honor and opportunity to serve our stockholders, customers and employees, I realize that this is the most interesting time that I've ever seen for the industry and PDF in particular. I don't say that lightly. And in fact, I've never said that before. Over the years, we have experienced many semiconductor cycles. Each time we are told this one is different. I have little doubt that this cycle can overshoot like all the past ones. What is different this time is how AI is changing so dramatically the way engineering is being performed everywhere. A recent business trip in Asia this past quarter highlighted that for me. What I found interesting was that in 8 of the 9 customer meetings, the CEO attended, and he was very interested in learning how AI is being used in R&D and manufacturing across the industry from PDF's vantage point. The inference that I drew from this is that executives realize that AI is having the most profound effect on how companies operate and may result in the changing the nature of the industry and hence companies. These CEOs see PDF as a leader in bringing AI to manufacturing, and they want to understand our perspective on the transformation that is happening and our vision for manufacturing, product and test engineering and yield ramp as a result of AI. What this means for PDF is that this is the most interesting business environment we have experienced in our 25 years as a listed company. As the PDF platform transitions from a system used within the company to increasingly an AI and analytics platform used across the industry, we believe we can deliver and capture more value as we help our customers seize on the opportunities that our platform can provide them. This is resulting in deeper collaborations with our customers and ultimately can result in larger engagements with them. Given our progress in Q1, we reconfirm our total year-over-year revenue growth for this year to be consistent with our 20% long-term target. I want to thank all the PDF customers, employees and contractors for their efforts during the quarter. Now I'll turn the call over to Adnan, who will review finances and provide his perspective on our results. Adnan? Adnan Raza: Thank you, John. Good afternoon, everyone. Good to speak with you again today, and I hope all of you and your families are well. We're pleased to review the financial results for the first quarter of 2026. As mentioned, our earnings release and a management report are posted in the Investor Relations section of our website. Our Form 10-Q was also filed with the SEC today. Please note that all of the financial results we discuss in today's call are on a non-GAAP basis, and a reconciliation to GAAP financials is provided in the materials on our website. We are pleased with the results of Q1 with multiple large bookings during the quarter. We secured a double-digit million-dollar Exensio Test Operations booking to help our customer manage geographically distributed operations, an Exensio renewal with a large fabless customer for better analytics. And a booking for fab control software for a large fab customer in Asia. We ended the quarter with a backlog of $246 million, up 9% versus the same quarter of last year. Total revenue for the first quarter were $60.1 million, up 26% versus the same quarter of last year. Our platform revenue was $50.9 million for the quarter or up 36% versus the same quarter of last year, driven by strength in our leading edge solutions, Exensio software and one complete quarter of secureWISE revenues. Volume-based revenue for this quarter was $9.2 million or down 12% versus the same period of last year, primarily due to lower gain share. Our gross margin for the first quarter came in at 76% versus 77% last quarter, driven by a small increase in cost of revenue with a smaller revenue base as expected. Our operating margin for the first quarter came in at 25% versus 24% for the prior quarter and 18% for the same quarter a year ago. We are pleased that on a dollar basis, we generated approximately $15 million of operating profit this quarter, slightly higher than operating profit during last quarter and 75% higher than the $8.6 million operating profit in the same quarter of last year. We remain cognizant of our long-term target operating margin of 27% and continue to make meaningful progress towards that goal. Before we updated our long-term targets in December 2025, we had achieved our prior long-term targets set in 2023 within 2 years of setting those prior targets. As we reflect on our current target model of 27% operating margin and achievement of 24% during Q4 of 2025 and 25% for Q1 of 2026, we are happy to note that we are making faster progress towards our long-term target than the last time. Net income for the quarter totaled $12.6 million or $0.31 per share compared to $8.1 million or $0.21 per share in the same quarter a year ago or up 56% for net income and 48% for EPS on a year-over-year basis. We anticipate improvements in EPS as we approach the long-term model due to the scale the business is achieving as our costs to operate the business are rising slower than our revenues. Turning to the balance sheet. We ended the quarter with cash, cash equivalents and short-term investments of $31 million, compared to $42 million at the end of the prior quarter, with the change primarily driven by approximately $10 million used for CapEx needs related primarily to building eProbe systems and fulfilling the customer demand we have spoken about. Given the demand we are seeing, we expect to increase our CapEx spend for this year versus last year, balanced by customer collections such that we expect to grow our cash balance over the coming quarters, particularly the second half of the year. After the quarter closed, we also expanded our revolving credit facility and have $30 million of unused revolver credit facility now available for use by the company as needed. As we look to the rest of the year, we reiterate our expectation that 2026 revenue will grow year-over-year, consistent with our 20% long-term revenue growth target and that we will make meaningful progress towards our long-term target margin operating models of 27% with gross margin of 77%. With that, let me turn the call over to the operator for Q&A. Operator? Operator: [Operator Instructions] Our first question comes from the line of Blair Abernethy from Rosenblatt Securities. Blair Abernethy: Nice quarter. I just wanted to -- John, just maybe if you could give us a little more color on how you're doing with the eProbe, particularly around new customers. What's that pipeline looking like? And you said you're on track for about 6 shipments this year. How much of that is like net new customers? John Kibarian: We expect about 1/3 of them to end up at net new customers and the others to be repeat orders on existing customers. And maybe not all of them directly contributing to revenue this year, one of them may end up being -- will be a demo machine. So probably 5 of the 6 will be revenue generating, 1 will be demo, 2 will be at new customers. The other 4 should be at existing customers, at least as it looks now. Blair Abernethy: Okay. And looking ahead to 2027, I know, it's only May here, but how are you thinking about how the pipeline is developing for next year? John Kibarian: Yes, it's a great question. We do see quite a bit of interest. We are trying to build as many additional machines as we can, right? We've committed to 6. We are looking to do -- see what we can do about additionals. We do have interest to be able to ship additional demo machines and it is gated by our ability to -- how we look at executing. But what we don't get to this year, we will start serving next year. Blair Abernethy: Okay. Great. And then just on the secureWISE, how is that pipeline developing on that side of the business now that you've had it for a year? John Kibarian: Yes. So a couple of things have happened. First of all, as I mentioned in my prepared remarks, we started making -- providing service directly to the fabs. What we found was fabs also have people all around the world. And the security features that secureWISE provides, the ability to have a log of who was looking at what data when and what machine when auditable for a couple of years is very valuable even when it's within the same company. So starting last year, we started selling to the fabs. At our user conference, Intel talked about how they standardize on secureWISE. What that's also done has gotten a lot of the equipment vendors who -- when we bought the company, the largest equipment vendors of the world were the heaviest users of data for secureWISE and also the biggest customers because they had developed the most services, usually related to AI, that provided value by taking the data from the machines, analyzing it at headquarters and providing back updated models and value-added capabilities. But every equipment customer wants to be able to do that, company wants to be able to do that. And I think the Intel announcement gave a number of other equipment companies the realization that this was going to become more available. And so we've started picking up and have quite a deep pipeline to expand the business with, what I would say is, secureWISE classic, the business with equipment vendors. Also, we've been picking up more business with the fabs. And as I said in my prepared remarks more recently, as we look at the OSATs and the fabless and even the foundries as they go out to those facilities, we start getting interest in people connecting front-end to back-end as advanced packaging becomes more important, back-end packaging to the fabless as the testing and production is becoming more important. So we've got pilots ongoing to bring secureWISE out to that part of the community too, leveraging on the fact that we already had DEX services there, which was our own historical system, to many of the OSATs as well. So it's been a natural extension to bring the secureWISE additional capabilities it provides out to that part of the market. And now we're going into that. So that's kind of our big activity for the second year of our stewardship of the product. Operator: And our next question comes from the line of Clark Wright from D.A. Davidson. Clark Wright: Awesome. Well, I would just like to start maybe the question for Adnan here around the CapEx guidance that you provided with the step-up that we saw in 1Q. Could we maybe parse through if that's demand-driven, where you're seeing CapEx upfront in order to supply eProbe systems later this year? Or if there's anything that's more related to the long-term objectives of that business? Adnan Raza: Yes. I think as you have heard in our prior remarks and us confirming today, 1 out of the 6 machines that we targeted for this year getting shipped. If you look at our installed base that we've spoken about, 6 machines through the end of last year and then shipping 6 this year, that's a meaningful step-up that we're trying to get to this year. And that spend is to make sure that we are positioned well to meet that demand. Somewhat of it is, starting to think about the future, but it's mostly related to the current demand that we are needing to meet for this year. Clark Wright: Got it. And then additionally, last year, 53% of revenue came from the top 3 customers based on your disclosures in the 10-K. Can you provide any color on the conversations you're having right now? You referenced numerous times the points around demand and interest. How do you expect these large relationships to grow this year? And if there's any upside potential opportunities within that customer base? John Kibarian: Sure. Always our business, the largest bookings have -- it's an 80-20 rule, right? The top 20% drive a high percentage of the bookings volume typically. And we expect that again this year. You are correct that it is broadening in terms of the number of types of customers. Before we had secureWISE, very few of the equipment companies were in our top 20 list. Now we have equipment companies in the top 5 list, and that is growing quite meaningfully. Also, we see with what we're doing with Exensio, a lot of opportunity to expand in the, I would say, the core fabless and merchant semiconductor IDM list. So we do expect this year the bookings to broaden out. We do have a couple of customers that are very large -- significant customers that we do expect renewal bookings this year too. So the exact ratio, Clark, I'm not so sure about, but I think the volume of bookings this year will have a mix of maybe weighted a little bit more in terms of numbers of newer significant customers. In terms of dollars, probably the repeat customers may be some of the bigger dollar amounts. Clark Wright: Got it. That's helpful. And then one last thing, as I was going through the Q, I just wanted to kind of understand the margin implications. It looks like Gainshare and Advantest revenues were down year-over-year. And just trying to understand if the margins we see today would benefit from increased share there or if you're not expecting any additional Gainshare revenue going forward, at least on the growth side? John Kibarian: Yes. So the volume-based part of the business is at least in our control, how volumes -- how customers ship volumes, how much data they use and how much wafers they ship. And so that is relatively volatile. We don't put that in our backlog, right? Yet we know it's always going to be there. It does always -- when that's significant, it does really help with our gross margin. So Obviously, to achieve the 76% gross margin that we achieved this quarter, while that number was down, really speaks to the overall scale of the business overall and why our confidence and why we believe we can meet or exceed the 77% long-term target, maybe in shorter time than the typical 3-plus years that people would typically set for a long-term target and recognize we just set that target in December. So I mean, the way we looked at it was we know people will start -- we will be shipping. We will start seeing those volume-based numbers go back up. And as they come back up as well as the scale in the rest of the business, we do expect to meet and exceed our gross margin targets. Operator: Our next question comes from the line of Christian Schwab from Craig-Hallum. Benjamin Taxdahl: This is Ben Taxdahl on for Christian Schwab here. Great quarter. I just want to go back to those targets and tracking a little bit earlier than expected. I know you just mentioned it's early still, but I mean, could we kind of expect this getting to those targets to be a '27 event? Or could it be a little bit longer? John Kibarian: So if you look, you know, our 2023 targets were 20% revenue growth, 75% gross margin, 20% operating margin. And within 2 years by 2025, really just in Q4 of 2025, we exceeded all those numbers, I believe. It was the first year that we exceeded them. We then set new targets for, again, 20% revenue growth, but now on a much bigger base. 77% gross margin and 27% operating margin. So I think people were surprised at the big jump up in operating margin going from 20% to 27%, while gross margins were going from 75% to 77%. And that was in part because as we start getting scale, we felt that, the R&D leverage you start getting becomes significant. The G&A leverage you start getting becomes significant. And now if you look at the first couple of quarters, right, we're now at, let's say, 24%, 25% on that operating number. So we've made reasonable progress to that 27%. We're at 76%. So we've made some progress from 75% to 77%. We're starting to get there as well. And we do think we can get there sooner than the typical 3 years and probably sooner than we did the last time. How much sooner? We're not quite ready, Ben, to say how much sooner. We'll see how the remainder of the year progresses. But we're super confident that this will come in strong and quickly. It's not going to take us typical 3 years for a long-term model. Benjamin Taxdahl: Okay. Great. And then one question, one more on ePro. You talked about the 6 this year. How many -- I mean, where could that be in '27, '28? Or how big of an opportunity could this be over a multiyear period? A little bit more color on that. John Kibarian: Yes. It's a question that we're getting our own hands on. What I can tell you, Ben, is right now, the majority of the machines are subscribed, and we expect them to stay subscribed over that time period anyway. And what that means is that, it's not like a capital purchase where we have to go and start from zero every quarter. We build from that base. So our base exiting last year was 6 machines, but 5 of the 6 on a subscription. We expect to end this year with approximately double that on a subscription basis. So about 10 of the 12, one in demo and one that was purchased. So that means that we keep on building that foundation. If we can sustain a slight modest growth in the number of machines we ship each year, we can get substantially more revenue growth right, than that because they -- all of them -- all the previous machines are still -- or the majority of the previous machines are still contributing revenue. So we do believe as you look out over '27 and '28, even if all we do is maintain this level, it is -- the eProbe continues to be a very important part and growing part of the business. Now we think the total market for e-beam has been talked about by others, is the fastest-growing inspection product category in the front end because so many of the nature, so many of the defects are now 3-dimensional in nature, and e-beam is the most efficient way to look at 3D defects. And we feel we have a very unique capability there. So the overall market is quite substantial. Depending on who you listen to, it's on the order of $1 billion market. You'd have to flip that to a subscription market versus a perpetual market. So you might look at that a little bit differently if you model that on a subscription basis. But it would stack up over time. And it is a meaningful market. Operator: And our next question is a follow-up question from the line of Clark Wright from D.A. Davidson. Clark Wright: Hi there, just wanted to jump back in and just ask one on the leading-edge players and your relationships with those. I know during the Investor Day, that was a point of emphasis that you were making from a go-to-market perspective. Could you provide any update on the initiatives that you're putting in action in order to gain share with those fab players in the broader ecosystem? John Kibarian: Yes. Sure, Clark. I mean, a few things. I think the previous question that Ben had about the eProbe is a significant part of it. There's a big emphasis there. The eProbe tie-in to design is increasingly important for our customers. I'd like to understand exactly what the -- when the eProbe find things, exactly what about the design made that interacted with the process. So some AI capabilities that we're building into the eProbe for that. Customers love that because the eProbe has to grok the entire design, not just the layer it's looking at, but how that layer is connected to every other layer. Secondarily, in my prepared remarks, I talked a little bit about AI integration with Exensio and the releases that we're making this year. One of the targeted areas is the ability to interpret and understand the data coming off our test vehicles. Our test vehicles are the most -- in the industry, probably the most widely used and very detailed. And they have thousands of experiments in them. And of course, the engineer has to know how to go through and look through all of that. And obviously, you can see how AI could play a very important role there to find the critical signals, interpret that, tie it into layout. So the way that we're going back and showing customers why they want to do more with our vehicles and systems is in part that AI integration with the Exensio module that does -- called Exensio Characterization that does the interpretation of the CV data, the characterization vehicle data. Sorry, for all the PDF acronyms there. And so that is a big piece of what we're doing in terms of driving from a product innovation standpoint. And then lastly, of course, partnerships in the industry, collaborations are always places where our systems turn out to be very valuable because you're able to share data, share analytics, understand how to work together, whether that's secureWISE, the characterization vehicles, Exensio itself. These are all points of systems that we provide to customers that are looking to collaborate. In this environment, more and more collaboration is needed. And so it's a great selling environment for us for that capability on the leading edge. Operator: [Operator Instructions] At this time, there are no more questions. Ladies and gentlemen, this concludes the program. Thank you for joining us on today's call.
Operator: Good day, and welcome to Quest Resource's First Quarter of 2026 Earnings Conference Call. [Operator Instructions] Also, please be aware that today's call is being recorded. I would now like to turn the call over to Ryan Coleman with Investor Relations. Please go ahead. Ryan Coleman: Thank you, operator, and thank you, everyone, for joining us for Quest Resource's First Quarter 2026 Earnings Call. Before we begin, I'd like to remind everyone that this conference call may include predictions, estimates and other forward-looking statements regarding future events or future performance of the company. Use of words like anticipate, project, estimate, expect, intend, believe and other similar expressions are intended to identify those forward-looking statements. Such forward-looking statements are based on the company's current expectations, estimates, projections, beliefs and assumptions and involve significant risks and uncertainties. Actual events or the company's results could differ materially from those discussed in the forward-looking statements as a result of various factors, which are discussed in greater detail in the company's filings with the Securities and Exchange Commission. You are cautioned not to place undue reliance on such statements and to consult SEC filings for additional risks and uncertainties. The company's forward-looking statements are presented as of the date made, and the company undertakes no obligation to update such statements unless required to do so by law. In addition, this call may include industry and market data and other statistical information as well as the company's observations and views about industry conditions and developments. The data and information are based on the company's estimates, independent publications, government publications and reports by market research firms and other sources. Although Quest believes these sources are reliable and the data and other information are accurate, we caution that Quest does not independently verify the reliability of the sources or the accuracy of the information. Certain non-GAAP financial measures will also be disclosed during this call. These non-GAAP measures are used by management to make strategic decisions, forecast future results and evaluate the company's current performance. Management believes the presentation of these non-GAAP financial measures is useful to investors' understanding and assessment of the company's ongoing core operations and prospects for the future. Unless it is otherwise stated, it should be assumed that any financials discussed in this call will be on a non-GAAP basis. Full reconciliations of non-GAAP to GAAP financial measures are included in today's earnings release. With that, I'd like to turn the call over to Perry Moss, Chief Executive Officer. Perry Moss: Thanks, Ryan, and thanks, everyone, for joining this afternoon. Our first quarter marked a steady monthly sequential improvement in the business from the fourth quarter, which was consistent with the seasonal trend we typically observe, though slightly better than the prior year. Revenue from our industrial customers increased primarily due to seasonality, though we did see some incremental revenue from certain customers above the usual seasonal acceleration. However, the industrial portfolio as a whole remains challenged as a result of the softer manufacturing environment. Meanwhile, nonindustrial parts of the business performed largely in line or better than anticipated as our focus to diversify the business into sectors like restaurants, hospitality and retail helped to partially offset the lower industrial volumes. Notably, our performance improved from month-to-month throughout the quarter, and we ended the quarter with an encouraging trend. While it is far too early to determine the durability of this trend, we are cautiously optimistic given the exit rate of the quarter. This is tempered in part by recent geopolitical events as well as the risk of extended period of elevated fuel prices. As we continue to communicate, we are acutely focused on what we can control. We continue to demonstrate a firm grasp on the operations of the company as our operational excellence initiatives are delivering improved performance across the business from exception management, wallet share expansions, billing and collections and overall productivity and cost containment efforts. We're controlling costs very well and taking proactive measures to give ourselves incremental financial flexibility as macroeconomic conditions improve. We're very encouraged by our progress on each front and expect these initiatives to drive additional efficiencies going forward. These efforts also began to deliver important sales momentum during the second half of 2025, which included the launch of a significant expansion of an existing retail customer, the onboarding of a new full-service restaurant customer and expanded share of wallet wins with two major customers. While each of these wins were delivering incremental revenue since shortly after their announcement, the one-time costs associated with onboarding these clients had been masking their profitability contributions. I am pleased to report that each of these recent wins finished the first quarter as full contributors to our financial results as we have completed the onboarding period of one-time cost to execute the service change-outs to serve these new or expanded programs. Our new sales pipeline remains active, and we continue to engage with several exciting opportunities to add large national companies to our portfolio. While the overall macroeconomic environment continues to slow the overall decision-making process for many of these prospective customers, we are encouraged by the discussions we are having as the Quest value proposition continues to resonate with key prospective customers. We ended 2025 with better momentum, though saw opportunities get pushed into 2026. We remain very engaged with these prospects and believe that we will be able to successfully win and onboard our share of these potential customers as the macro backdrop improves and confidence returns. Just recently, we won a new contract with one of the largest franchisees in the quick service restaurant industry. This customer is a large national operator that carries plenty of white space for wallet share expansion as we execute effectively. It also marks another important win to diversify the business and will help to offset the seasonal fluctuations of our larger industrial customers. We onboarded this new customer on May 1 with minimal service change-outs. We also remain encouraged by the number and size of share of wallet opportunities with existing customers, which remains a central focus of ours. Last year, we heightened our focus on this sales channel and structured a more robust internal systems and processes to track, evaluate and pursue these opportunities. We are very happy with the early successes we've had, and we have broadened the number of waste streams that we're handling for some clients, adding new value-added services or have captured larger share of customer locations. Our growing pipeline of opportunities across both new sales and wallet share expansions leaves us confident that these initiatives will contribute to greater levels of organic growth for us going forward and be strong contributors to gross profit dollar growth as we continue to execute our land and expand strategy, and optimize service levels. We also continue to diversify the portfolio as we grow in nonindustrial end markets like retail, hospitality, grocery stores and expand into new markets like health care and more. Our technology and capabilities continue to be key differentiators for us and are driving improved customer service levels and vendor management practices. Our technology platform's ability to identify exceptions in vendor invoices is central to our value proposition of cost avoidance, cost reduction and improved service levels. The platform's ability to identify these exceptions continues to improve. And importantly, we have invested in automated no-touch capabilities to enable our team to effectively rectify these exceptions. Customer and vendor-facing advancements like these create real value and make it easier to do business with Quest, but also help to optimize our internal processes and overall profitability. Overall, macroeconomic conditions and a softer industrial environment continue to flow through to reduced volumes from our large industrial customers. However, we continue to make very encouraging progress streamlining our overall operations and growing in nonindustrial end markets. We remain as confident as ever that we are on very solid footing for when conditions improve and as our softer year-over-year revenue is a function of volume and not one of customer attrition. The operational improvements we've implemented over the past year will drive higher leverage when conditions normalize, and we are encouraged by the trend we finished the first quarter on and cautiously optimistic as we look out to Q2 and the rest of 2026. Looking ahead, our key priorities remain unchanged in 2026. We remain focused on growing the business with new and existing customers, driving margin improvements as we execute our operational excellence initiatives, continuing the development of our operating platform, improving cash generation and reducing our debt balance. With that, I'd like to turn the call over to Brett to review our first quarter financial results in greater detail. Brett? Brett Johnston: Thanks, Perry, and good afternoon, everyone. Revenue for the first quarter was $61.7 million, a 10% decrease from 1 year ago, but a sequential increase of 5% compared to the fourth quarter. The year-over-year decline was primarily driven by ongoing headwinds from certain clients in the industrial end market, which reduced revenue by approximately $4 million compared to the prior year. These headwinds are mostly confined to a few clients and are primarily related to lower waste volumes and services, which are directly tied to the client's lower production volumes. Notably, the year-ago period also included $3 million of revenue from our mall-related business, which was divested in the first quarter of 2025. Excluding these specific headwinds, the business continued to grow by approximately $2 million, mostly related to new clients and the expansion of client business or wallet share during the fourth quarter of 2025. This growth in business was partially offset by client attrition of $1.7 million, primarily related to a single client loss in the first quarter of 2025. While this growth was modest, it speaks to the efforts of the entire team to offset the impact of the industrial headwinds. It also speaks to what should be less noisy comparables year-over-year as we have now sunsetted the higher-than-normal attrition experienced in Q4 of 2024 and Q1 of 2025. As a reminder, this attrition was isolated and mostly related to customers that were acquired and absorbed into the incumbent waste solution. Since then, we have returned to normalized customer retention rates, which have been very sticky historically. On a sequential basis, the improvement was driven by higher seasonal volumes from our industrial customers and continued growth across much of our nonindustrial portfolio, with performance strengthening across the quarter. Moving on to gross profit. In the first quarter, gross profit dollars totaled $9.7 million, a decline of almost 12% compared to the prior year, but a sequential increase of 6%. This resulted in a gross margin of 15.7%. The declines in both gross profit and gross margin compared to the prior year were primarily isolated to the headwinds from the select industrial clients, which contributed to lower volumes as well as isolated margin pressure. These declines were slightly offset by both improved gross profit and gross margins across the remainder of the business as operating initiatives, maturing margins from new clients and wallet share expansions continue to take hold. The sequential improvement was in line with our expectations provided last quarter and representative of the seasonal improvement from industrial customers as well as the contribution of recently onboarded customer wins and share of wallet expansions as we have cleared the one-time costs associated with those launches. As we look ahead to Q2, we expect sequential growth in gross profit dollars as recent new business wins and wallet share expansions finished Q1 as full contributors to our financial results. Additionally, the new quick-service restaurant customer will launch in Q2 and is expected to begin ramping fairly quickly as it requires fewer associated service provider change-outs, which means minimal start-up costs and thus should contribute gross profit dollars more quickly than a typical new client win. While we expect to continue to experience some margin pressure in 2026, both in a challenged industrial volume environment as well as from the mix impact of our land and expand strategy we anticipate we will be able to help offset these pressures through optimizing service levels, growing our share of wallet with existing clients, optimizing the client wins from the previous years and continuing to drive operational improvements across the business. Moving on to SG&A, which was $8.4 million and better than our estimate for the quarter that we provided on the last call. Sequentially, SG&A grew 9%, driven mainly by the resumption of our bonus expense. Our operational excellence initiatives continue to deliver strong productivity and cost containment results, and we remain focused on maintaining this discipline going forward. To that, compared to the prior year, SG&A has decreased by $3 million, a 26% reduction year-over-year. Moving on to a review of the cash flows and balance sheet. We ended the quarter with $1.1 million in cash and approximately $63.4 million in net notes payable. As a reminder, in March, we refinanced our ABL with Texas Capital Bank to replace the prior ABL with PNC. Concurrently, we negotiated with Monroe Capital, who holds our term debt to provide both fixed charge and leverage covenant easements across 2026 and into 2027. Those combined efforts will provide ample cushion to operate in this challenging operating environment while we continue to focus on the execution and completion of our initiatives to drive additional efficiencies and operating leverage across the business, while also investing in driving growth through new clients and wallet share. Additionally, the new arrangement with Texas Capital Bank gives us more flexibility to use the excess availability on our ABL to make voluntary early payments on our high-interest term debt, which is currently about a 500 basis point spread between the two credit facilities. Accordingly, during the first quarter, we made a $2 million early payment on the Monroe term debt, which will reduce interest expense and should free up additional cash to allocate toward debt paydown. We anticipate executing similar early payments as appropriate throughout the year as we work to reduce our overall cost of debt and strengthen our balance sheet. Our operating cash flow in the quarter was slightly positive, roughly $200,000. This was a sharp improvement compared to the prior year despite lower revenue and gross profit dollars and was driven by the ongoing optimization of our billing and collections processes and our improved vendor payment processes, which both continue to drive improvements in our cash cycle. This progress was partially offset by some of the moving pieces of the ABL refinancing, which used a modest amount of cash at the time of the transaction. Our DSOs finished the quarter in the mid-70s, which was largely unchanged from the fourth quarter. Accounts receivable was up $3 million and in line with the sequential increase in revenues, but the overall trend in DSOs remains downward, falling from the 80s one year ago, and we continue to implement measures to improve our cash cycle. We remain committed to reducing DSOs going forward and believe we have incremental initiatives in our control to drive improvement. During the first quarter, we also reduced the number of working capital days to 11.5, roughly an 11-day improvement from a year ago. Our financial strategy remains focused on managing our cost structure, leveraging our operational excellence initiatives to drive cash flow and paying down debt. We also continue to seek ways to elevate our billing and collection practices and further optimize working capital. We expect these measures, along with our focus on continuous improvement to improve our cash cycle, strengthen our balance sheet and provide incremental financial flexibility as the operating landscape improves. With that, I'll turn the call back over to Perry for some closing comments before we open it up for Q&A. Perry? Perry Moss: Great. Thank you, Brett. Our first quarter saw improved performance from the fourth quarter with results getting better throughout the quarter. Some of this was the typical seasonal acceleration, but it was modestly better than the prior year. It is also clear that the business is benefiting from the team's strong execution, and it is evident in the numbers driven by the now fully onboarded recent new wins and wallet share expansions. It remains a difficult operating environment, but we are confident that we are better positioned to drive improved financial performance. We believe that with continued execution, we will be well on our way to delivering improved shareholder returns and achieving a valuation that is more reflective of inherent value of the business. With that, I'd like to turn the call over to our operator to move us to Q&A. Operator? Operator: [Operator Instructions] And our first question here will come from Aaron Spychalla with Craig-Hallum. Aaron Spychalla: First for us, on the new win in the QSR, congrats on that. Could you -- any details you can give on size, number of locations? You talked a little bit about white space for land and expand. So just curious on how many waste streams. And then it sounded like minimal service provider changes. So it sounds like that can ramp pretty quickly as well. Perry Moss: Yes, that's right, Aaron. So we -- as you know, we don't give specific details about these clients, but this is consistent with all of our new growth targets being 7 to 8 figure. So this is a 7-figure account. We landed a little over 50% of the portfolio. So there's plenty of room for continued expansion. This came from another asset-light provider. So they saw value in the Quest program over the program they were currently on. And early reports, the other award winner was also an asset-light company and some early indications are that our launch process and transition is much smoother than our competitor. So that leaves me optimistic that there's some growth potential there. And the material streams here are typical municipal solid waste and recyclables. Aaron Spychalla: And then on the share of wallet initiatives, is there a way to think about just potential growth you see there, whether it's penetration rates or average number of waste streams? It just -- it seems like you saw good success kind of coming out of the last year and are optimistic moving forward? Perry Moss: Yes. So as you know, we put some additional focus and discipline around our share of wallet beginning last year. And we don't really talk about all of the share of wallet wins that we've had. We've had several dozen of those wins, but some of them are not material enough to really mention. So the share of wallet that we typically talk about, again, fall into that same category as new business. So these are large opportunities to expand. We have, I would say, 5 or 6 opportunities with some of our largest customers to bring on a whole another segment of their business. And we're in very opportunistic discussions, I would say, with them. So we've got rolled out plans on how to implement this new business. So look, the business hasn't been sold yet, but the conversations are very positive, and I expect to see a lot more growth in the share of wallet sector. If you'll recall, because of the uncertainty in the general economy, we decided that instead of only focusing on new business, which we're still doing, we would put added emphasis on share of wallet because these are existing relationships. These are customers that already trust us. They already know that we execute. So it's an easier yes than with a new prospect. But I would tell you that we don't give the value of our pipelines. The new business pipeline is very robust. The share of wallet pipeline is about 50% of the size of the new business pipeline. So it's significant. Aaron Spychalla: And then just maybe one last one, how is -- what are you seeing on inflation across the commodity space on the business? Any impact to your customer decisions or your vendor network, just how you're managing that and thinking about that moving forward? Perry Moss: Yes. That's a really good question. Certainly, with the current fuel situation. We've got -- we kind of got out in front of this and started working with our vendors and our customers before this really fast ramp-up in fuel. We've got good protection in our contracts, where uncontrollable costs can be passed through. But one of the value propositions that we deliver to our customers is we always fight on their behalf. So instead of simply just taking on cost increases and passing them through, we do everything within our capabilities to push those off or to minimize them. But I would say that we haven't seen anything significant to affect the business so far. But we've been proactively working on plans should significant cost increases come through. But so far, so good. Operator: [Operator Instructions] Our next question will come from Gerry Sweeney with ROTH Capital. Gerard Sweeney: Do you ever disclose or even directionally how big the industrial business is for you guys in terms of revenue? Brett Johnston: No, Gerry, not directly. We've tried to do a good job over the last, I don't know, a year or so plus to call out the variance that's taking place with those select customers within the industrial group. As a reminder, the industrial group is larger than some of the variants than the clients that are driving the variances. We're only speaking to the select couple of clients that sit in an isolated industry market as the variance, but we haven't called that out largely. Gerard Sweeney: The reason I ask is, I mean, we're starting to see some data from like ISM that's turning positive for the first time in years. I think there's some freight data that's showing maybe some price increases indicating the real goods economy is there I'd say starting to expand a little bit. So these are maybe forward-looking indicators. So I'm just curious if you have any thoughts on that? Or are these -- some of these industrial clients, sort of, in their own little select world that may not be benefiting from what I'm talking about. Perry Moss: Yes. Gerry, I think the -- these few customers that Brett referenced, they're in a specific category of the industrial manufacturing sector that has really been pretty soft. I think we've said they operate in the bag sector. If we look at sequential volume increases from Q4, they were largely what we would expect. But if you compare the increase to last year, the increases that we realized in Q4 and this year were slightly better. So we are not predicting any significant increase in volume yet. We're cautiously optimistic. We did see some good trends, but we don't control the production. So volumes, if they continue to perform like they did, particularly in March, I think we'll see some nice trending. We've built this business over the last year to take every advantage of any tailwind that we can get. We just haven't had any. March, we may have had a little breeze, and I think we took advantage of it. So if those early indicators flow through to these specific customers in the bag sector, I think we'll benefit from that. Gerard Sweeney: Sure. I'm sure there's a lot more operating leverage there once some of the... Perry Moss: And, Gerry... Brett Johnston: I'd also remind you as well, one of the positives for us is from a year-over-year perspective, if you look back at when we started really talking about those struggles on the industrial side, it was in Q1 of last year. So from a year-over-year comparison, we're kind of sunsetting some of those challenges. We did see some additional reductions across last year, but the bulk of the decline in those clients came largely in Q4 of 2024 and even Q1 of 2025. So despite some continued pressure there, maybe we don't get back to the same volumes we had 1.5 years ago. But from a year-over-year comparison, it's not going to hold us back from showing growth. Gerard Sweeney: Switching gears, that QSR win, I think you talked a little bit about it, but I don't know if I caught all of it, but you said I think you had 50% of the portfolio. And it sounded like another asset-light company got the other 50% of the portfolio. I'm just wondering if that's sort of stores, locations or was it sort of service lines? And... Perry Moss: Yes, Gerry, that's a good question. Those represent locations. So, yes, I don't have that based on service lines. I would expect that it would probably be linear that we got a little over half the locations as well as a little over half of the service lines. Gerard Sweeney: Is that QSR in meat, fish or chicken? Perry Moss: The answer is yes. These are major brands that are very recognizable. And in fact, our in came from a referral from one of our corporate customers, who operate some of those brands and made the recommendation that this franchisee should look at our model, yes. Operator: And this concludes our question-and-answer session. I'd like to turn the conference back over to Perry Moss for any closing remarks. Perry Moss: Great. Thank you, operator. And thanks to all of you for joining this afternoon. We always appreciate your support, and continued support and interest in Quest, and we look forward to updating you all in the next quarter. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day, and welcome to the Strawberry Fields REIT LLC First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone keypad. I will now hand the call over to Jeffrey Bajtner, Chief Investment Officer. You may begin. Jeffrey Bajtner: Thank you, and welcome to Strawberry Fields REIT LLC’s Q1 2026 earnings call. I am the Chief Investment Officer, and joining me today on the call are Moishe Gubin, our Chairman and CEO, and Greg Flamion, our CFO. Earlier today, the company issued its Q1 2026 earnings results, which are available on the company’s investor relations website. Participants should be aware that this call is being recorded, and listeners are advised that any forward-looking statements made on today’s call are based on management’s current expectations, assumptions, and beliefs about Strawberry Fields REIT LLC’s business and the environment in which it operates. These statements may include projections regarding future financial performance, dividends, acquisitions, investments, returns, financing, and may reference other matters affecting the company’s business or the businesses of its tenants, including [inaudible]. Additionally, references will be made during the call to non-GAAP financial results. Investors are encouraged to review these non-GAAP financial measures, as well as explanations and reconciliations of these measures to the comparable GAAP results, included on the non-GAAP measure reconciliation page in our investor presentation. Now, onto discussing Strawberry Fields REIT LLC and our Q1 2026 performance. I wanted to start by sharing some key highlights for the quarter. During the quarter, the company collected 100% of its contractual rents. The company signed a term sheet for a corporate credit facility with availability of up to $300 million, comprised of a $100 million term loan and a $200 million revolving line of credit, both having initial three-year terms and two one-year extension options. Proceeds from the facility will be used to refinance our existing secured bank debt, and the remainder will be available to support acquisition growth. The rate on the facility will be SOFR plus 275. The company expects to close on the facility during Q2 2026. Deal-wise, while we did not close on any deals during the quarter, we were quite busy underwriting deals. As we have detailed in past presentations, we have our disciplined acquisition model of 10-cap acquisitions that we have been true to over time and expect to stay on this course for the foreseeable future. I am pleased to report that subsequent to quarter end, the company entered into contract for the acquisition of a hospital campus comprising a licensed 60-bed hospital, a licensed 99-bed nursing facility, and ancillary medical office buildings near Kansas City, Missouri. The purchase price will be $8.6 million, and the company expects to fund the acquisition from the balance sheet. The hospital campus will be added to an existing master lease of a tenant in Missouri with initial base rents of $0.86 million a year, subject to 3% annual rent increases. Yesterday, the Board of Directors approved the Q2 2026 dividend, which will be $0.17 per share and will be paid on June 30 to shareholders of record on June 16. Lastly, I would like to point out that Strawberry Fields REIT LLC remains the closest pure-play skilled nursing REIT in the market, with 91.5% of our facilities being skilled nursing facilities. Additionally, we have not changed our investment approach of all our investments being triple-net leases subject to annual rent increases. I would now like to have Greg Flamion, our Chief Financial Officer, discuss the quarter-end financials. Greg Flamion: Thank you, Jeff. Welcome, everyone, to the Strawberry Fields REIT LLC first quarter 2026 earnings call. Let us begin with a look at our balance sheet. Total assets are $880.1786 billion, an increase of $43.8 million, or 5.2%, compared to 03/31/2025. Our asset growth was driven primarily by recent real estate acquisitions, including $112 million of acquisitions completed in 2025. On the liabilities and equity side, increases were driven by financing activity associated with our acquisitions, along with the impact of foreign currency translation adjustments. Together, these factors contributed to overall growth in our debt balances. Equity declined, reflecting lower other comprehensive income driven again by foreign currency translation adjustments. Continuing now to the consolidated statement of income, 2026 revenue was $40 million, up $2.7 million compared to 03/31/2025. This represents a 7.1% increase driven by the timing and integration of properties acquired in 2025. While we experienced higher revenues, income growth was offset by higher depreciation and interest expense, which were driven by the new property acquisitions. General and administrative expenses were also higher due to professional fees, corporate salaries, and other operating expenses. These increases were offset by lower amortization expense. The results are year-to-date net income of $9.4 million, or $0.17 per share, compared to $6.9 million, or $0.13 per share, in Q1 2025. Finally, I would like to end my presentation with some financial highlights. Our 2026 projected AFFO is $75.4 million, representing an 11.4% compound annual growth rate. 2026 projected AFFO per share growth is 10.7%. The 2026 projected adjusted EBITDA is $128.1 million, representing a 13.5% compound annual growth rate. Our yield on leases is 14.2%. The company’s net debt to net asset ratio currently sits at 49%. As of March 31, 2026, our dividend was $0.16 per share, representing a 5.4% yield and an AFFO payout of 47.3%. The company recently increased the dividend for Q2 to $0.17 per share. This concludes the financial portion of the earnings call presentation. I will now turn it back over to Jeffrey Bajtner, who will walk us through additional portfolio highlights. Jeffrey Bajtner: Thank you, Greg. As it relates to our portfolio highlights, our portfolio currently has 143 facilities located in 10 states. This is comprised of 131 skilled nursing facilities, 10 assisted living facilities, and two long-term care acute hospitals. These 143 facilities equate to 15,602 licensed beds. The total value of our portfolio at acquisition is $1.1 billion. Our portfolio currently has 17 consultants advising the operators. The weighted average lease term is 7.1 years. I am proud to report that our tenants continue to do well, and their rent coverage is 2.1. The net debt to EBITDA of the portfolio is 5.6. We continue to collect 100% of our rents, and as I mentioned earlier in my remarks, our pipeline remains strong and is in excess of $325 million. With that, I would like to pass it on to Moishe Gubin, our Chairman and CEO, to continue the presentation. Moishe Gubin: Thank you, Jeff, and thank you, Greg. As they both have alluded to, we are on a nice trajectory in our business. This slide reflects the last five years and projection of 2026 AFFO growth, which gives you a cumulative growth rate of 11.4%. We are particularly proud of that. The next slide is base rent, and over a similar time frame shows a similar trajectory, a 13.4% growth rate. Our stock price over last year has seen highs, and we are currently trading too low, in my view, but we are up from how we ended the quarter, and that was right when the Iran situation started. Comparatively, between us and our peers, Strawberry Fields REIT LLC is right in the middle. We are 26% on our stock. If you would have bought the stock a year ago to March 31, 2026, it is a 26.4% return. Our trading multiples are still the laggard in the marketplace. I am still dumbfounded on why that is. We are at 9.5x when the average is around 14x or so, and CareTrust is leading the pack at 21.4x. Our AFFO payout ratio continues to be the lowest versus everybody else, and that is even with the increase of our dividend that we announced today. Our 47% payout ratio reflects that we find the best use of our money is staying within REIT standards and using the rest of the cash that we generate to grow our portfolio. Our dividend yield at March 31 at $0.16 was 4.9%. With the increase, that should be somewhere in the fives, maybe closer to six. Like Jeff said earlier, we remain the pure-play SNF REIT, and we are going to stick with that because that is really where our comfort zone is. We will continue doing exactly what we are doing and staying very disciplined. We have been preaching this for years and we will continue to do exactly what we do. In years where there are fewer deals, we will continue to stockpile cash, pay down debt, and save our money for when we get the deals. I think this year we will still meet our target of between $100 million and $150 million, maybe exceed it. It has been a slow start, but we expect this quarter to really pick up and then actually have a bunch of closings in the third quarter. The next slide shows the rent coverage from our tenants. That continues to grow. Every time we close on deals, we are starting every deal at a 1.25x coverage ratio, and so we are our own worst enemy where last year we closed $112 million or so in 19 properties. You take that and it weights us down, and as every quarter goes by, our tenants’ results improve. Our growth rate per share is beating everybody in the marketplace, and that is almost inverse to the payout ratio. We should continue to do that. Collectively, between the dividend yield and the AFFO per share growth, we are, at the end of the day, a better return than our peers, averaging out about a 16% return a year. The next slide is probably one of the most important slides, and that shows really the math of what we do. The projected 2026 AFFO is over $75 million. Again, this is before deals. This is not projecting anything out; this is just what we have running today. So $75 million, the payout ratio for that is 47%. Retained cash flow is close to $40 million. Then take that $40 million, and if we want to stay right now at 49% leverage, that basically gives us the ability to borrow about $50 million on that. So we could buy $90 million without changing our leverage at all. In reality, we have other cash sitting that we should be able to get more money out the door, and that is what we have done until now, and we expect that to continue. The next slide is one of the biggest focuses we have right now. We should be announcing in the next little bit that we intend on refinancing a good portion of the money that is maturing this year. We expect to refinance half of it in the next couple of weeks, then the other half probably sometime in August. Once 2026 ends, we should have maturities almost divided up equally over four or five years—laddered debt—ensuring that every year we have a year’s runway to refinance our debts. That should be really good for having a business that can perpetuate long term. It is interesting to note here, I made a mistake a few years ago and made many of the maturity dates right around the same time. It was intentional, but the one thing that I missed is that there was a prepayment penalty all the way to the end. To avoid paying prepayment penalties, we have gone down this road where now we have about five months left maturing on most of this debt, and we are going to refinance most of it soon, and the rest of it in a few months. The next slide shows how diversified our portfolio is. At this point, the only really large consultant or state is Indiana, which happens to be our best state. It is 25% of the portfolio and 25% of the base rent. Everything else is pretty even wedges in high single digits to middle double digits. For an investor that wants diversified risk, our portfolio is not subject to a bunch of single assets where if something goes wrong in one asset it would hurt us. Most of our stuff is in master leases, as most of you probably know, and if we had a problem in one specific state, we would be able to get through everything without there being anything really big as a risk. The next slide talks about where we are located. As you can tell, we have stayed mainly in the Midwest, and we will be announcing a deal for a new state in the Midwest in the next couple of weeks. Business is good. We are collecting all of our rents, and business is good. We have no issues. On our last slide for today, and after this, we will hand it off to the moderator to take questions from the audience. Looking at three months ended 03/31/2026 versus 2025, our net income went up $2.5 million, FFO up $2.7 million, and AFFO up about $22 million annualized. That is what it is all about—showing an expected about $75 million of annualized AFFO. The financials to the right show EBITDA. Same story: adding back depreciation, amortization, and interest to come up with EBITDA. We went up about $2.3 million, and adjusted EBITDA is a little less than $22 million. I am super proud of all this. With that, I will pass this back to the moderator to take your questions. Operator: Thank you. As a reminder, to ask a question, please press star 11 and wait for your name to be announced. Please stand by while we compile the queue. Our first question will come from the line of Rich Anderson with Cantor Fitzgerald. Your line is now open. Rich Anderson: Good morning, everyone. You mentioned the pipeline growing; last quarter it was $250 million, now it is $325 million. I am curious what the additions were, not just the $75 million, but in form. You did something this quarter with the hospital campus and some medical office. Will that be more of the mix of what you do going forward rather than pure-play skilled nursing? I am curious about your mindset along that line. Moishe Gubin: Rich, thank you for your question. Happy to hear your voice. Hope to see you at NAREIT. I would say we are going to stick with nursing homes. Most of our deals that we are close to getting offers accepted on are skilled nursing facilities, and a few of them are new states for us. The increase of the pipeline is deals that are just slow to get done. A lot of times people get disinterested, but we keep working it and following up—testament to Jeff here on the call. Lately it seems like deals are taking longer. We had a deal that we signed up and CareTrust came and stole it from us. That would have been a nice deal for us, and they offered like $25 million more than us, which is crazy because the other people had already accepted our offer. That being said, we do not want to change what we are doing. This hospital/MOB deal comes with a nursing home. We found value such that the purchase price we are paying means the hospital and the MOB are basically a throw-in, and the nursing home itself had more value than what we are paying. We feel we are getting a great deal, and our operator that is taking it from us is someone with experience in a physician practice. We feel it is going to be a nice addition to our portfolio. Jeffrey Bajtner: I would add to Moishe’s point that this number is almost like a living and breathing number. We evaluate the pipeline every week, and the only items that are really being included are deals that we think there is an opportunity to complete. Some deals have been sitting there over time, but also the SNF deal market has been picking up steam in the past month. We are looking at deals in new states and existing states, and we are excited to see what we can do the rest of this year. Rich Anderson: And then my second question: you mentioned CareTrust. How typical is it that you are running into REIT peers in competitive processes to get deals done? Is that an anomaly, or are you seeing some name-brand folks out there competing with you? Moishe Gubin: Historically, we never ran up against them. In the last year or two, as we try to do bigger deals—so that the marketplace may be more excited about our stock if we can announce bigger deals, all with the same metrics and the same 10-cap—when it gets to these bigger deals, that is where competitive bids are coming in. We lost one deal to Welltower and one deal to CareTrust, and that was after we basically had a handshake with the seller. You spend so much time on these things, and then someone else comes in and throws more money at it. We are just going to keep doing what we are doing. We are not changing our model to pay more. I love CareTrust and Dave, but we offer something on a personal level to a lot of sellers. We should be able to pull down these deals, and I would say hopefully it will be an anomaly that we lost a few deals to the bigger boys. Rich Anderson: Thanks for the honesty as always, Moishe. Moishe Gubin: Always, Rich. That is how I roll. Thank you. Operator: Our next question comes from the line of Analyst with Alliance Global Partners. Your line is now open. Analyst: Thank you. I wanted to ask about the acquisition pipeline. On the last earnings call you mentioned a target of $100 million to $150 million of acquisitions this year. Given that you had a slow start in Q1, are you still hoping to hit that target? Moishe Gubin: Yes, 100%. I am hopeful that the third quarter will close somewhere in the $90 million to $100 million range. I am hoping that in the fourth quarter we will have another $15 million to $30 million or $40 million unless something else pops up. Right now, it looks like everything is going to get loaded into third quarter and fourth quarter. We should hit $100 million easily and hopefully break $150 million. Analyst: For the third quarter $90 million to $100 million, are you looking at a portfolio? Moishe Gubin: We have a deal that we did not announce yet that should be in the $80 million range for a group of homes in a new state. Then we have this deal in Missouri that we have announced. We have another deal that we also did not announce that is going to add to a master lease in a state we are already in—that will be a $15 million deal. Between those three deals alone, you are looking at $107 million to $108 million. We have some other things: a portfolio elsewhere with a newish tenant of ours. If that deal hits, that will get us to about $145 million or $150 million. The good news is we will have our line of credit up and running by the end of this month. We are going to have a new bond issued next week or in the next two weeks in Israel to kick the can down the road on some of our debt. We will have availability between the line of credit and, without doing an ATM or a fundraise or taking on additional debt, based on our available borrowings—besides the cash on our books—we will have about $150 million or so of availability. We have the cash to be able to do all this stuff and keep ourselves in the same leverage band that we are in right now. We are at 49%, which is right in the middle of where we want to be. I think we are in a good spot. I would have liked to plan it out better for future years so we push stuff into first quarter, so when we come to the first quarter call, I could say we closed something. It sounds a little better than “we had a great quarter, made a lot of money, and collected 100% of our rents,” which also sounds good, by the way. It would just sound better if I could add a deal closing in the first quarter. Analyst: Thanks for those details. As a follow-up, in the earnings release you talked about investing some time in different processes within the company this quarter. Can you provide some color on what those processes were? Moishe Gubin: What we were referring to is the refinancing and cleaning up our debt. A lot of effort goes into a big portion of our debt that sits in Israeli bonds, which I am proud of. I like the relationship we have with the Israeli market. Our time and effort has been on creating a couple of new series in Israel to clean up the three series that mature this year. The other thing has been creating the line of credit with the bank, which all our peers have. We thought maybe investors look at our company and wonder if we have the dry powder to close on certain deals. We wanted to have these lines of credit so we can tell potential investors we have plenty of dry powder. Everyone who knows me and our business knows that there has not been a deal we made that we could not close, but maybe an investor who does not know us would not know that. Having the line lets us say we can draw on it and then go to the public to sell stock to pay down debt, and keep ourselves between 45% and 55% on the leverage side. That is what we have been working on outside of always looking at deals—cleaning up our debt stack and the fundamentals of our balance sheet so that going forward we will have a normal laddered debt maturity and a line of credit to use when we need to buy something. Analyst: Thanks for the details. That is all I had. Moishe Gubin: Thanks. Hopefully, we will see you at NAREIT as well. Operator: Thank you. Our next question comes from the line of Analyst with B. Riley Securities. Your line is now open. Analyst: Hi, everyone. Going back to the term loan, post closing, what is the appetite for swapping any of that for a fixed rate versus leaving draws on that floating? Moishe Gubin: That is an interesting question. I like it. Well done. You did not stump me; I just have not thought about it. In an interest rate environment that most people expect to remain stable to declining, rates are definitely not going up. Usually, in that environment, you do not want to lock and fix. I had not given it a thought, so maybe it is something I will think about. At this point, in a declining rate environment, it is probably not wise for me to fix. Historically, we relied on HUD being the exit for our debt, which is long-term 40-year money. Since COVID, the way HUD has been lending and our relationship with HUD has been stagnant. Historically, I did not have to think about where to place long-term debt and lock in a fixed rate. Now that has to be in the forefront. I think we are kind of hedged because of the declining rate environment, which is the prognosis. I could be wrong, but that is my thought. My background includes banking as well, and in the banking world, we are thinking stable to declining rates. I think I answered your question. Analyst: That is helpful color. It sounds like you are still in the market with potentially new Israeli bonds or at least refinancing the existing Israeli bonds. What does pricing look like today as you work through those, and how would you think about maturity dates and term on that debt? It sounds like you are going to break out the refinancing into a couple of different tranches. Moishe Gubin: We are towards the end of the process. It is about 4.5-year money, expiring at the end of 2030, and the pricing today is about 6.85%. You have to add a little bit in fees, but the actual interest rate will be about 6.85%. When we do the second tranche in August–September, that will expire around June 30, 2031. The idea, as a corrective measure from my mistake a few years ago, is that all of it will have a prepayment holiday for the last six months, so we can refinance earlier instead of close to the wire. On the bank side, the line of credit and term loan will have two one-year extensions at the end of them. During the first extension year, that will be the time we work on the replacement debt. That also ends in five years. We are kicking the can of 2026 money and part of 2028 money, ending up with half in 2030 and half in 2031. Then the maturities in 2027 we can start working on now to push to 2032, creating a rolling one-year-at-a-time maturity ladder. As we grow, that tranche will include additional new debt and we will keep pushing five years. My idea is to create processes so the business can be perpetuated long term, with normal maturities every year becoming a process—refinance this year’s batch, push it five years, and roll every year. Same with how we buy and how we do IR—clear, reliable, and credible processes. Analyst: Switching gears a bit, in terms of a potential acquisition in a new state, is that with an existing consultant relationship or a new one? What is the appetite for existing consultant relationships to grow in the current market? Moishe Gubin: Our relationships with our tenants are amazing. We do not have any negative communications or relationships. They are all fantastic—everybody is part of the family. From our current roster, we are growing with tenants in Oklahoma, Texas, and Missouri. In Ohio, over the years, we have not grown, though we love those tenants and just renewed—they have been tenants more than 10 years. The newer packages are with brand-new operators who are not new to me as people—some are borrowers at my bank, some are long-time industry relationships. We have two new relationships in two different states that we are starting with, God willing, between five and ten homes in each portfolio. Any deals that come along, we have commitments between our tenant and us to look in certain states. Of the 10 states we are in, there are five or six we want to grow in. Related party exposure has been diminishing and is down to 46% of the portfolio; we should be announcing something soon that will further dilute that down. Our relationships with our tenants are fantastic, and yes, we would grow with almost all of them if we could. Jeffrey Bajtner: I would add that 90% of our facilities are in master leases right now, and the best way to grow is once the table is set with that master lease, it is very easy to keep adding facilities. We have been doing that in Oklahoma and Missouri this past year. It has been very good to both us and the tenant. Analyst: I appreciate all that detail. That is it for me. Thank you very much. Moishe Gubin: Thank you. Operator: Our next question comes from the line of Mark Smith with Lake Street Capital Partners. Your line is now open. Mark Smith: Hey, guys. I wanted to go back to what you are seeing for deals. It sounds like a lot of work in Q1, but some just did not get across the finish line. Outside of competition, is there anything else that has made it harder to close on some of these? Moishe Gubin: No, absolutely not. We do not have any issues with cash. We do not have any issues regulatory-wise. I know there are some stories out there—Senator Warren and a couple of others—around the issue about healthcare REITs owning nursing homes, but that has really been a lot of talk. I actually called both senators’ offices to explain, and they did not have time or want to talk to me. There is nothing blocking us from doing deals other than competitive dynamics or price. If a deal does not underwrite, we remain very disciplined. We are not looking to risk our portfolio on a wish and a prayer. We stick to what makes sense, where the math is there, continue with our process, and do things the way we do them. It has worked and should continue to work. It was just a slow first quarter for us as far as portfolio growth. Mark Smith: On geographical expansion, it sounds like we will likely see a new state added soon, still in the Midwest. What is your appetite around more geographic expansion? Moishe Gubin: We got close on a couple deals in Georgia. If we found deals in Alabama, Mississippi, or South Carolina, that would be great. Where the deals and where we are growing now are both going to be Midwest—Texas, Oklahoma, maybe a little Tennessee, and always if we could find anything in Indiana. We have particularly not wanted to grow in Illinois for many years because when we started, we were top-heavy there. We want to maintain a diversified portfolio. I would love to grow in Iowa, Michigan, and Wisconsin if we can find the right deals. Mark Smith: Great. Thank you, guys. Moishe Gubin: You are welcome. Thank you. Operator: Our next question comes from the line of Analyst with Compass Point Research and Trading. Your line is now open. Analyst: Thank you. Good afternoon. Following up on the competition comments, you said a big deal that you announced is likely coming. Of the ones that you lost, what made them go with competitors? Anything specific you could manage in the future for these larger deals? Moishe Gubin: That deal we lost was a brokered deal. Different from a lot of our deals where we know the sellers and they specifically want to work with us. Brokers, rightfully, are looking for top dollar and get more commission if it is a bigger deal. On that deal, we spent time working with the broker—good people—but until the ink is dry, someone else can come in with a bigger dollar amount and the broker can call the client and say you can probably still get out and take a different deal. In that case, we did not know the seller at all, and at the last minute—11:59:58—a much higher offer came in and they took it. The only thing we could do differently is try to get to know the sellers earlier in the process. In our world, sellers we buy from are people we have known for 10–20 years. I do not think we could have done anything different there, other than give a little guilt trip to the broker to not pull a deal away at the last minute. Analyst: Do you have a sense of what cap rate that traded at? Moishe Gubin: The way I look at it, our portfolio is way undervalued because if everything would trade at an 8.5% cap that someone else is willing to buy at, if you reprice my whole portfolio at an 8.5% cap, you would say I have another couple hundred million dollars of equity. I think it traded at an 8.5% cap. Analyst: On the $255 million maturing through the remainder of this year, how much is going to be refinanced with the Israeli bond tranches versus the $300 million in bank financing? Moishe Gubin: If I commit to one thing, the pricing could go up, so I do not want to over-commit. My primary desire would be two Israeli bonds to replace the three Israeli bonds. We would do the bond we are doing next week, God willing, and assuming it is oversubscribed—as the last two were by about 50%—we would probably take the most we can and then pay down one of the other bond debts early. That locks in our currency for four to five years, which is a hedge. Today the shekel is strong versus the dollar. We have a sizable allowance for currency in our financials, and I do not want to realize that. If we kick the can four to five years on the currency, then I do not have to realize a loss that we have already expensed in OCI. So my desire is most likely to go to the Israeli market, assuming they remain competitive on pricing, which they should. Analyst: It looks like you could have 25–50 basis points of spread improvement depending on how you structure this. Is that fair? Moishe Gubin: Yes. We are going from an average rate between 9.1%, 6.9%, and 5.7%—the three tranches that have to get refinanced—to all being at about 6.75%–6.85%. If we do the commercial loan, we end up around 6.4%–6.5%. Either way, you are talking about at least a half-point improvement on a couple hundred million dollars of debt. Analyst: And then leaving you with $150 million of dry powder when all is said and done? Moishe Gubin: Yes, about $140–$150 million. I think it is a good spot to be in at the end of the day. Analyst: Agree. Thank you. Operator: I am not showing any further questions in the queue at this time. I will now turn the call back over to Jeff for any closing comments. Jeffrey Bajtner: Thank you so much. Thank you, everyone, for joining us. It is always a pleasure hearing everybody’s questions. If you have any further questions, please feel free to reach out to Moishe, myself, or Greg. I would also like to add, if anyone is interested in listening to the recording from yesterday’s annual shareholder meeting, it is up on our website, strawberryfieldsreitdeck.com. Once again, thank you, and have a wonderful weekend. Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to FIGS' First Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Tom Shaw, Senior Vice President of Investor Relations. Please go ahead. Tom Shaw: Good afternoon, and thank you for joining us to discuss FIGS' first quarter 2026 results, which we released this afternoon and can be found in our earnings press release and in the shareholder presentation posted to our Investor Relations website at ir.wearfigs.com. Presenting on today's call are Trina Spear, our Co-Founder and Chief Executive Officer; and Sarah Oughtred, our Chief Financial Officer. As a reminder, remarks on this call that do not concern past events are forward-looking statements. These may include predictions, expectations or estimates, including about future financial performance, market opportunity or business plans. Forward-looking statements involve risks and uncertainties, and actual results could differ materially. These and other risks are discussed in our SEC filings, including in the 10-Q we filed today. Do not place undue reliance on forward-looking statements, which speak only as of today, and we undertake no obligation to update. Finally, we will discuss certain non-GAAP metrics and key performance indicators, which we believe are useful supplemental measures for understanding our business. Definitions and reconciliations of these non-GAAP measures to the most comparable GAAP measures are included in the shareholder presentation. Now I would like to turn the call over to Trina. Catherine Spear: Thanks, Tom. Good afternoon, everyone, and thank you for joining us today. FIGS is off to an incredible start to the year, sustaining last year's strong momentum with broad-based strength across all aspects of our business. Net revenues exceeded expectations, growing 28% year-over-year, driven by accelerating active customer growth. We surpassed 3 million active customers for the first time in our history, an important milestone that reflects the growing resonance of our brand within the healthcare community. Strength was apparent across categories, styles and color, supporting success across all selling occasions during the quarter, including our business as usual days, new product launches and promotional events. Importantly, this performance was driven by continued strength in our core U.S. e-commerce business even as our market expansion drivers of international community hubs and teams continue to scale. Taken together, we believe this is a strong indication that our efforts are not only working but are sustainable. Bottom line results were also strong, demonstrating the power and resilience of our model. During the quarter, we were able to absorb unplanned fuel surcharges, continue to opportunistically invest across the business and still exceed our adjusted EBITDA margin expectations by 170 basis points. As we step back and look at the broader picture, we see our business thriving at the intersection of 3 powerful dynamics. First, our brand is differentiated and continues to gain strength through expansive product solutions, even more impactful marketing and a deeper level of connection with the healthcare community. This is what brand leadership looks like, and we are continuing to raise the bar. Second, we have built a more durable foundation for growth through operational excellence. Throughout 2025, we demonstrated greater discipline and efficiency across the organization, supporting our ability to react to market conditions and deliver top and bottom line upside. And we continue to see the benefits of that work coming through clearly while also layering in new initiatives that are enabling early success in 2026. Third, we are leveraging structural industry tailwinds that reinforce our long-term opportunity. Healthcare remains one of the most essential and resilient sectors of our economy with strong long term demand, driven by population trends and workforce needs. While advancements like AI have the potential to improve many of the administrative burdens that healthcare professionals face, the industry remains inherently hands-on and human. That dynamic continues to support the replenishment-driven nature of our category and the long-term opportunity for FIGS. Together, these dynamics are reinforcing our leadership position and giving us confidence in both near-term momentum and long-term opportunity. Let me spend some time on our year-to-date efforts and what to expect in the quarters ahead. Starting with product, which remains one of the most important ways we create and sustain our competitive moat. Our strong performance starts with the incredible momentum in our core scrubwear category, and we are highly focused on extending our leadership position by developing impactful new franchises across silhouette, fabrication and overall design. For example, we continue to lead the adoption of differentiated pant silhouettes. These trends have resonated broadly within apparel, and we have translated them authentically into our category. Importantly, we are delivering thoughtful head-to-toe coordination as these looks evolve, providing more complete and versatile solutions for healthcare professionals. At the same time, we are driving broader use cases through our fabrication strategy. Our FORMx fabric continues to gain traction with the fabric mix nearly doubling year-over-year and supported by strong demand across our ongoing expansion of color options. We are also excited about the continued rollout of our highly durable FIBREx fabrication, which we plan to spotlight more meaningfully in the second half of the year. Beyond scrubwear, we saw our strongest non-scrubwear growth in the past 3 years. This reflects our ongoing focus on building a true layering system and expanding our presence across the full range of needs for healthcare professionals. From underscrubs to outerwear to lab codes, we are approaching each category with clear strategies designed to solve real-world problems and elevate the experience. Collectively, these efforts are expanding the role FIGS plays in the daily lives of healthcare professionals and extending our leadership position. These efforts are continuing in Q2 as we deliver a new wave of product excitement to the market. This starts with color, always a powerful driver for the brand, we are increasingly coordinated and intentional in how we approach it. Our spring color drop in April performed exceptionally well, and we are particularly excited to then bring back espresso, the color that our community has been clear they're dying for. This demonstrates continued operational excellence as we are improving our ability to read trends and react quickly. This includes evolved supplier partnerships and new inventory planning tools that allow us to act more predictably and efficiently based on real-time demand signals. Beyond color, we introduced new maternity styles for the first time in 3 years, supported by a campaign featuring expecting healthcare professionals from our community. And finally, we continue to create excitement through unique collaborations. Ahead of May 4 and building excitement ahead of the next movie in the franchise, we introduced our latest Star Wars collection, building on our tradition of partnering with iconic cultural brands that resonate within our community. Turning to brand. We are continuing to set new standards in storytelling, connection and impact. Following our efforts at the Winter Olympics, we are excited to celebrate International Women's Month and debut our new Never Change campaign. This year, Long Anthem continues our important efforts to tell rich human stories that reflect the resilience, compassion and dedication of healthcare professionals. This platform builds on the success of last year's Where You Wear FIGS campaign, which set a high bar for authentic storytelling and community engagement. And we're seeing a powerful response here with the first chapter more than doubling last year's levels across impressions and engagement. We are also continuing to blend impactful digital storytelling with meaningful in real-life moments across key events in the healthcare community. Match Day in March is one of the most important milestones for medical students, where they learn the residency placement, a defining step in their healthcare journey. We are proud to expand our on-campus presence this year, including celebrations at Howard University, the University of Houston and McGill University in Toronto. These impactful moments serve to create authentic long-term brand relationships at the very start of healthcare careers. As we speak, we are in the midst of Nurses Week, a hallmark moment for our community that sits at the heart of all we do. Nurses show up day after day the way they always have with an unmatched ability to connect with people and provide the assistance they need. It is only fitting to celebrate their impact through our next chapter of our Never Change campaign. In addition, we are supporting the occasion with a strong product lineup and a range of activations during the week ahead, including an unforgettable branded experience in Chicago and our first Drinkware collaboration with Owala. Beyond storytelling and engagement, our brand is deeply rooted in advocacy and the impact we aspire to have on the healthcare community. This is not a separate initiative. It's embedded in everything we do. Our close connection with healthcare professionals gives us unique insight into the challenges they face, and we are committed to using our platform to drive meaningful change. We recently announced the Austin Humans Foundation, the first nonprofit dedicated to directly supporting healthcare professionals across the challenges that shape their careers. This initiative allows us to scale our efforts, accept outside contributions and provide grants directly to healthcare professionals who most need them. In Q1, we announced the Healthcare Human Act, the first federal bill developed from the ground up by FIGS. Only half of healthcare professionals feel fairly compensated, the lowest score of any industry, which perpetuates dangerous understaffing across the workforce. Our bill directly addresses this challenge by providing a federal tax credit of up to $6,000 per year to help address financial strain across the healthcare workforce. We were also encouraged to see the reauthorization of the Dr. Lorna Breen Act in Q1, an effort we helped drive over the last few years to strengthen mental health and well-being support for healthcare professionals. These are positive steps, but we know there's much more work to be done. In a few weeks, we are organizing our largest effort ever on Capitol Hill. As part of our new long-term partnership with Noah Wyle, we are excited to have him once again join us in D.C. to help move the needle on the policies that are most needed to transform the experience of being a healthcare professional. Noah has devoted his extraordinary career to shaping the real stories of healthcare professionals that makes them feel seen, and we could not be more excited to keep partnering with him in the years ahead. This is how we show up for our community, not just through product and storytelling, but through action that has real impact on the lives of healthcare professionals. Turning to our market expansion. We continue to see strong momentum and significant opportunity. In our international markets, strong execution and demand supporting double-digit growth across every region and drove overall international net revenue up 50% year-over-year. Our Go Deep efforts continue to generate strong results in key markets like France and Germany, where localized storytelling and targeted investments are resonating with healthcare professionals. At the same time, our Go Broad strategy remains a highly efficient way to expand our global footprint. In March, we opened 15 new markets across Europe, followed by an additional 12 markets in Asia Pacific in April. While these markets are small financially in the near term, they represent an important long-term opportunity to bring FIGS to more healthcare professionals around the world. As a result of these efforts, we are now present in 85 international markets, a significant increase from just 32 markets at the end of 2024. Community Hubs also continue to exceed our expectations and play an important role in our ecosystem. All 5 locations are performing well with our 2 comp stores in L.A. and Philly up significantly. In the near term, our focus is on optimizing our existing fleet, particularly the 3 locations that opened at the end of last year. This includes refining our product assortment, going deeper in core styles and sizes and enhancing the in-store experience. These efforts reinforce our belief that a physical presence serves as a powerful complement to our digital-first model. At the same time, we are investing in the talent and processes needed to support our next phase of growth. We remain on track to open 4 new community hubs in the back half of the year, doubling down on all the early wins across the channel while also applying key lessons to optimally serve the needs of our customers. We see a clear opportunity to increase our pace of expansion in the years ahead and are excited to continue scaling this channel. Finally, turning to Teams. We continue to make important progress in building this business for the long run. Our focus has been on strengthening relationships with existing accounts while also building a pipeline of higher impact opportunities. And we saw encouraging traction on both fronts during Q1. Building deeper relationships means we are evolving beyond just the transaction and taking a more proactive and collaborative approach to servicing needs. Feedback has been positive with these efforts, which we believe will be a key to driving strong long-term partnerships. At the same time, our pipeline of new accounts is building with strong interest across a wide range of institutions. We also took an important step forward with the launch of our Team store in March. Integrated into our e-commerce platform, this solution provides a more seamless and flexible ordering experience, helping to reduce friction for our customers. This is an important milestone, but just the beginning. We plan to continue enhancing the platform throughout the year with more robust features that will unlock a broader range of solutions and better serve the diverse needs of healthcare organizations. We are driving solid overall Teams growth today, but more importantly, we are positioning ourselves to unlock a significantly larger opportunity over time. In closing, we are incredibly encouraged by how we started the year. We are executing at a high level. Our brand continues to strengthen and the structural dynamics of our industry remain highly favorable. Our focus in serving the healthcare community is resolute, and we are thoughtfully investing across the organization to extend our efforts, build even more impact and continue to define and lead the category. This is driving our increased confidence in our performance this year, and we will be instrumental in supporting top and bottom line momentum over time. With that, I'll turn it over to Sarah to walk through our financial results and outlook. Sarah Oughtred: Thanks, Trina. Our better-than-planned first quarter results continued the powerful narrative coming out of 2025, where we strengthened the foundation of our business and advanced our work to scale our strategic pillars across product innovation, community engagement and market expansion. We believe these efforts are sustainable, unlocking growth opportunities and profitability over time, and we are excited to see our ongoing execution across these measures to start the year. Starting with the details of our Q1 performance. Net revenues increased 28% year-over-year to $159.9 million and outpaced our outlook, calling for growth in the low 20% range. Similar to last quarter, our performance was broad-based across categories, colors, geographies and channels. We were also pleased with the continued strength we are seeing in cross-selling occasions, including business as usual days and promotional events, both of which contributed upside to our plan during the period. We believe these are great indicators of the underlying strength in our business right now. As Trina highlighted, active customer growth accelerated to 12% year-over-year, surpassing 3 million total for the first time. This was supported by the ongoing strength we are seeing in both acquiring new customers and bringing customers back to the brand. Average order value increased 4% to $124, primarily driven by higher average unit retail due to pricing actions early in Q1 and favorable product mix. Notably, we saw less price elasticity than planned, which we believe underscores the ongoing value and relevance of our assortment. In addition to strong AOV, we think it is also important to note strong purchase frequency as customers are coming back and transacting more often. Growth across customers, order per customer frequency and AOV are a powerful combination and support gains in our trailing 12-month measure for net revenues per active customer. This measure strengthened again during the period, posting 6% growth to $220, which is the highest level recorded since Q4 2022. By category, scrubwear grew 27%, representing 79% of net revenues for the period. The theme of balanced growth was prevalent across the categories with success across both core and limited edition styles and colors. Growth was also supported by strategic inventory investments as we have sharpened our buys to ensure deeper positioning in core styles and to drive higher in-stocks. Wider leg pant options continue to be a great story, and we are driving depth across core and new options. FORMx has steadily gained traction as a great low-impact fabric solution and expanded color options sold through quickly at the beginning of the quarter. And our durable FIBREx fabrication debuted as part of the Winter Olympics collection, expanding our range of solutions for healthcare professionals. Non-scrubwear increased 31%, representing 21% of net revenues and posting the strongest growth in 3 years. Underscrubs and outerwear continue to drive strong growth as customers increasingly look to build head-to-toe wardrobes. We're also excited with how healthcare professionals are responding to our expanded range of accessories, including limited edition styles for events like Lunar New Year and the Olympics as well as expanded collections in bags and loungewear. We are excited to increase our focus and coordination across all these areas as we move forward. By geography, U.S. net revenues increased 24% to $131.6 million, while international net revenues increased 50% to $28.3 million. In the U.S., we are driving strong traffic and conversion to our business as we deliver a combination of great products and highly impactful brand moments. We are also sharpening how and where we deliver these stories to better engage healthcare professionals and drive marketing efficiency. At the same time, we are planning more functionality and resources to our digital platform to reduce friction and drive confidence in buying decisions. International growth was equally strong across both new and returning customers, underscoring our success in driving awareness, localizing the brand and scaling the opportunity. Notably, the overall growth contribution from our most recent go broad market expansion was minimal for the period, highlighting the strong performance across our more established markets. Considering geopolitical factors, growth rebounded strongly in Canada following last year's sentiment-driven softness, though did see sequentially slower yet still strong growth in the Middle East given the ongoing conflicts in the region. Gross margin for Q1 expanded modestly, up 10 basis points to 67.7% and in line with our outlook. We experienced sequentially higher tariff pressure during the period as expected as well as less favorable product mix. These headwinds were offset by positive impacts from pricing and our ongoing efficiency efforts. Our selling expense for Q1 was $36.4 million, representing 22.8% of net revenues compared to 26.2% last year. We continue to make significant progress optimizing our fulfillment center since the Q3 2024 opening and Q1 results demonstrate both meaningful fixed and variable cost leverage. Additionally, our outbound carrier diversification strategy continued to yield year-over-year savings despite recent parcel surcharges. Marketing expense for Q1 was $29.5 million, representing 18.4% of net revenues, up from 14.5% last year. As planned, the higher marketing rate largely reflects costs associated with our Winter Olympics campaign. Additionally, we opportunistically invested in several incremental areas, including the establishment of a formal partnership with Noah Wyle. Partially offsetting these investments and driving upside to plan, we experienced greater net revenue leverage and digital tax efficiencies. G&A for Q1 was $37.9 million, representing 23.7% of net revenues compared to 27.1% last year. The lower G&A rate was primarily due to net revenue leverage and lower stock-based compensation expense. Relative to plan, we did incur accelerated depreciation related to the earlier-than-planned timing of our headquarter move as we consolidate our location within our existing property. In total, our operating margin for Q1 was 2.8% compared to a loss of 0.2% last year, while our adjusted EBITDA for the period was 8.7% compared to 7.3% last year. Net income for the quarter totaled $6.3 million or diluted EPS of $0.03 compared to a net loss of $100,000 last year or breakeven diluted EPS. On our balance sheet, we finished the quarter with net cash, cash equivalents and short-term investments of $277 million. Inventory increased 6% year-over-year to $139.4 million. Improved supply and demand processes and discipline along with top line upside continues to support overall inventory efficiency even as we continue our focus on strategic buys across core goods. We remain on track with our target of reducing inventory days to approximately 200 by year-end. On the capital allocation side, share repurchases during the quarter under our ongoing repurchase program totaled approximately $8.8 million at a weighted average price of $15.38 per share, with approximately $43 million available for future repurchases under the program. Capital expenditures for the quarter were $2.4 million, primarily related to software capitalization and leasehold improvements with larger community hub-related outlays planned later in the year. Now turning to our outlook. Our outperformance in Q1 and the overall momentum across the business are driving greater confidence in our top and bottom line outlook. Importantly, this underscores the strength of our model as we are able to leverage improving demand to absorb unplanned costs, continue investing and expand profitability. Certain factors like tariffs and the extent of oil-related pressures require a flexible planning framework, but we believe we have appropriately factored in these dynamics with our increased guidance. Our full year 2026 net revenues are now expected to grow 14% to 16%, ahead of our prior outlook of 10% to 12% growth. This includes both our Q1 outperformance and greater confidence for the balance of the year, even as we embed prudent caution given some of the pressures and uncertainties consumers are facing. Our confidence is supported by the strong fundamentals of the healthcare industry as well as the trends we are seeing with active customer growth, the breadth of demand and growing brand engagement. For the second quarter, we are planning for net revenue growth to be up in the low 20% range year-over-year. This is a similar setup as we outlined last quarter, where quarter-to-date trends are strong, but we still have an important stretch ahead. For Q2, this includes this week's start to Nurses Week, a significant period for our brand and one where we are taking a more measured promotional approach relative to last year. Looking at the second half of the year, we would note that comparisons build each quarter, so we are still focused on driving growth against last year's blockbuster Q4. On to gross margin, where we continue to expect a modest full year improvement from the 66.5% level achieved in fiscal 2025. Tariffs remain a dynamic variable to forecast. Our prior outlook assumed 15% global tariffs for the balance of the year following the Supreme Court's ruling in February. However, since we made this assumption, only the Section 122 tariff of 10% has been in effect. Our updated outlook assumes this 10% rate remains in effect through the July 24 deadline while also continuing to reflect our original 15% rate assumption thereafter for the balance of the year. This results in slightly less tariff headwinds than we originally planned for the year. We are also factoring in new gross margin headwinds from higher inbound freight given the surge in oil prices as well as the tariff-related pause in our duty drawback program. These new pressures largely offset the more favorable tariff outlook and keep our gross margin outlook unchanged. Separately, we have taken the appropriate actions regarding refunds of what was paid under the IEEPA tariff, which equates to approximately $20 million. However, with our updated outlook, we have not embedded any of this benefit until we gain better clarity on how and when these refunds will be processed. Looking at the quarterly gross margin cadence, we expect Q2 to show a modest year-over-year decline from last year's 67% rate. This largely reflects the growing sequential impact of tariffs with the impact of average costing more than offsetting slightly lower rate assumptions. Given the comparisons in the second half of the year, we would expect a more meaningful year-over-year decline in Q3, followed by a large year-over-year improvement in Q4, ultimately yielding more consistent gross margin levels throughout the year. Shifting over to SG&A. We expect better net revenue leverage will be partially offset by several factors. In selling expenses, we continue to expect the benefit of efficiencies through our fulfillment center as we diversify our outbound carrier network. However, similar to inbound freight pressure, our outbound freight expenses are being negatively impacted by fuel costs. In marketing, while we expect leverage following the outsized Q1 Olympics investment, we have made strategic investments that were incremental to plan. And in G&A, our estimate for stock-based compensation has increased by nearly $2 million, primarily due to stock price appreciation. Again, this shows the strength of our financial model and how a highly leverageable structure can support both higher expenses and solid margin upside. Overall, we have increased our full year operating margin outlook from between 7.6% and 7.9% to an updated range of between 7.8% and 8%. We've also increased our full year adjusted EBITDA margin outlook from between 12.7% and 12.9% to between 13% and 13.2%. This includes an expected Q2 adjusted EBITDA margin of approximately 13.5%, up from the 12.9% in the prior year period. Below the operating line, we now expect the effective tax rate to be approximately 20%, down from our original 25% outlook and compared to 27.4% last year. The lower expected rate primarily reflects the excess tax benefit related to the magnitude of our recent stock price appreciation relative to incentive compensation grant prices. Before we open the call for Q&A, I would like to underscore our strong start to the year. We are well positioned to deliver against our updated outlook, leveraging top line momentum to support our growth initiatives while navigating a dynamic external environment. We remain focused on executing against our strategic pillars and are increasingly confident in our road map across product innovation, community engagement and market expansion in the quarters ahead. We are now happy to take your questions. Operator? Operator: [Operator Instructions] Your first question comes from the line of Brian Nagel with Oppenheimer. Brian Nagel: Nice quarter. Congratulations. The first question I want to ask, I mean, look, we see -- we obviously see the results. But I guess as you look at that, the top line momentum, just how your consumer is behaving here, was there anything that shifted from what we saw in the fourth quarter into the first quarter and then what we've seen so far in the second quarter? Is there any underlying dynamics shifting here? Catherine Spear: I think what you're seeing, Brian, is just an acceleration, a continued acceleration. We are really executing at the highest level. We're pairing creativity, excitement, innovation with operational excellence. And to your point, we're seeing that on both the top line and the bottom line. Q1, as you know, up 28% EBITDA margin, 170 basis points better than the guide, 140 basis points better than last year. And why is that? I think it's really 3 things. The first being our product. We're continuing to deliver the best product to meet every need of our healthcare professionals, head to toe across fabric, fit and function. On the marketing side, we're delivering campaigns that are continuously going viral. You saw that again yesterday with our Nurses Week campaign. I think real-time data over 7 million views across all platforms, incredibly engaging with nurses, but even broadly with all healthcare professionals, people -- our community is feeling seen, feeling heard, feeling understood, and that's what this brand has been all about since Day 1. And finally, our industry is incredibly attractive. We're selling replenishment-driven nondiscretionary seasonless products to healthcare professionals that are returning to us over and over again, and you're seeing our repeat frequency up considerably. And so I do think the momentum you're seeing is incredibly sustainable. I was just looking at the healthcare industry stats. The industry is projected to be the largest industry sector with the largest absolute job growth and the fastest growth rate. So that's really hard, being the largest and the fastest growing at the same time. That is what's happening with healthcare jobs. And you're seeing the headlines that all the employment gains are pretty much coming from healthcare. So we have a lot to be excited about. We surpassed 3 million customers at the end of the quarter, scrubwear. And this is, like I said, broad-based, scrubwear up 27%, non-scrubwear up 31% U.S. up 24%, international up 50%. And so we're going to keep executing, but really excited to see that it's the core business. It's the fundamental underlying nature of this business that's performing in addition to all of our growth levers, and that's all really exciting. Brian Nagel: The follow-up question I have just on the Teams business. I guess someone in the context of that answer. But as we think about the Teams business and the growth from here, is it going to be -- do you envision a grind higher in the size of the business? Or are there going to be -- do you foresee specific near-term steps where that business can start to step function higher? Catherine Spear: We're making considerable progress in terms of the Teams business, and we're really focusing on the technology and building the Teams store to serve every different type of healthcare institutions from universities to concierge clinics to hospitals and really understanding their needs and how we can show up for them and solve that with the technology and then also an incredible sales team. That's really not just engaging on that first sale, but also building that relationship over time. And so we've made considerable progress on that front. I think we're a bit away from that, and that's another growth lever to come. The business is growing. We're doing great, but much, much more to come as it relates to Teams. Operator: Your next question comes from the line of Rick Patel with Raymond James. Rakesh Patel: Congrats on the strong execution here. I was hoping you can unpack the increase in new customers in the U.S. So how much of the growth was driven by reactivating lapsed customers? And how many are completely new to the brand? And as you look ahead, where do you see the most opportunity? Sarah Oughtred: Yes. So within our active customer base growing to -- we're surpassing 3 million active customers now, which is awesome and seeing accelerated growth in that to 12%. And when we look across that customer base, this is the second quarter of double-digit new customer acquisition growth, and that growth is coming from both the U.S. and international. We saw an accelerated growth rate in our redirected customers, and we're also seeing improved performance in retention. So we're seeing growth and acceleration really across all 3 of those, which is continuing to give us proof points on this growth being sustainable and very broad-based. Rakesh Patel: Regarding the price increase you took earlier this year, you touched on demand being fairly inelastic, which is nice to hear. Given costs have continued to creep up here with freight, do you see room to expand price increases to more SKUs than you started the year with? And then on the flip side, any thoughts on just the promotional cadence here in 2Q and the back half? Sarah Oughtred: Great. So yes, we did take pricing in January on about 1/3 of our styles. We've continued to track elasticity, and we are seeing results that are more favorable than what we had assumed. I think that really speaks to our value proposition. And we've reflected how we're seeing that improvement in sales across our guide for the rest of the year, along with the momentum we're seeing in all other factors of our business. I think pricing is something that we took as this onetime, and we will continue to evaluate it from a point of view on what is the value proposition of that product and what is the appropriate pricing for it. But I think at this time, that was one big move that we made and nothing of the same extent in the near future. Operator: Your next question comes from the line of Adrienne Yih with Barclays. Adrienne Yih-Tennant: I guess my first question is -- can you talk about any potential kind of impact that you're seeing with your sourcing mostly in Jordan? And then kind of the derivative call on that is as oil has become an issue from your Southeast contract manufacturers, are you seeing any work in process or any of the kind of current invoices that are coming through, are they passing along those costs to you? Because I know that you don't use cotton, right? Most of your product is in that oil-based format. My final question is with the marketing that you did, it was obviously top of funnel. Can you talk about the efficacy of that on brand awareness, clearly on customer acquisition. But how should we think about sort of the kind of steady-state customer acquisition costs as we kind of flow off of that? Catherine Spear: So as you know, we have great partners in both Jordan and in Vietnam. As we've disclosed, our production was pretty evenly split between these 2 countries last year, driving the vast majority of our overall global supply. We're now a bit more weighted towards Vietnam with only a bit more than 1/3 of our production coming from Jordan. And as tariffs and other geopolitical events have really shocked the macro supply chain system, we've managed very well. We've navigated this with limited operational impact within our supply chain. And I'm proud to say that we've seen no meaningful disruption to date in terms of our production, our timing, our cadence of our launches. And so -- and to the extent there are short-term disruptions, we are well positioned to leverage our dual sourcing capabilities to manage them. In terms of raw materials, we've locked in our costing through the end of the year. And so we're not -- you're not going to see any pass-through from an oil perspective in terms of materials. We -- Sarah in her prepared remarks talked about the freight impact on that. And then in terms of the brand awareness in CAC, I think the best brands in the world are able to continuously see CAC gain because of the word-of-mouth dynamics, and we've talked about the word-of-mouth dynamics in our business. So why is it that we can invest so much in our brand? Why is it that we can create these game-changing viral campaigns that people absolutely love and grow so much affinity towards our brand? It is because we continuously get CAC gains in markets where we are more mature. And we take those gains as we continue to scale and we invest in new markets and we invest in top of funnel. And so we're continuously seeing that dynamic, and that is great because that is really a huge leading indicator of not just the next 1, 2, 3 quarters, it's really a leading indicator for the next 10 years, right? What we're seeing in terms of our search traffic, social engagement, impressions, we're up double, triple digits across the board. And so that gives us just so much confidence that our marketing engine is working, and we're going to continue to double down on it. Adrienne Yih-Tennant: Great. Sarah, a follow-up for you. So just a little clarification. The order value was up nicely, yet the product mix shift actually acted as the gross margin headwind. So can you just help us marry kind of those 2 things? Was the AOV largely from price increases and was it on core scrub? So kind of trying to bridge those 2 items. Sarah Oughtred: Sure, yes. So our AOV was up 4%. We did see the majority of that coming from AUR, which was driven by the price increase. It's also coming from mix shift into some of our higher price point items that consists of some of our wider leg pant options, our FORMx, which has steadily gained traction as well as FIBREx, those also have a bit of drag on margins. So as we shift more into those items, that does have an impact on to margin. And so that's how those 2 pieces connect together. Operator: Your next question comes from the line of Ashley Owens with KeyBanc Capital Markets. Ashley Owens: Congrats on the 3 million. So maybe on the 2Q cadence, you've called out colors several times that being important for you, Espresso came back but you're also taking that more measured promotional approach for Nurses Week. Just trying to see how we should be thinking about the puts and takes in that low 20s 3Q framework. Is Nurses Week still that potential source of upside for you? Or is the more measured approach a headwind versus last year? Sarah Oughtred: Yes. I would say that the trends that we've seen in Q1 are carrying through into Q2. And at the time of this recording, we're on Day 2 of Nurses Week. We are taking a bit of a more measured approach in terms of our offering, but it is still a very large promo for us, and we're excited and pleased with what we've seen for the 2 days to date. And so we know that that is a big event. It was ahead of us at the time that we are setting our guidance, and we think that the guide is a reflection of where we're at while also keeping in mind that as well as our promo that happens in June is still ahead of us. And also being aware of the Middle East impact and the effect on consumers. So pleased with our trends to date and pleased that we're able to guide in that low 20% range for the quarter. Catherine Spear: The last thing I'll just say on promotions. We continue to really be mindful of bringing down our promotional rate. If you look across the consumer landscape, we have one of the lowest promotional rates across the industry, and we continue to look to bring that down and we look to bring that down year-over-year for this year versus last. So it's all really exciting to be able to be performing the way we are with the promotional rate that we have. Ashley Owens: Just 2 quick follow-ups. Maybe first on non-scrubwear and the rebound you saw there. I know there were a few different categories called out. But just can you quantify how much of that 31% growth was Olympics-related product that rolls off? And then with international, I know you -- there's been a pretty broad rollout even into the first couple of months of this year so far. I understand that overall growth contribution is going to be minimal for now. But just any context you could provide on a typical revenue ramp for a go broad market in its first year? Or just how long do you expect until these new markets start to become material to the results? Sarah Oughtred: Great. So for on non-scrubwear, so in the quarter, we did have the launch of our Olympics product, which featured our FIBREx. And from a product perspective, that was a small assortment and really happy with how it performed, but it was very small as intended and lived for a short time over the duration of the event. So it's not driving any impact really that's meaningful for non-scrubwear. The 31% is a continuation of our efforts to expand within underscrubs, expand within our outerwear and continue to drive overall outfitting for our HCPs. So we do expect continued growth within non-scrubwear. Then to your question on international, yes, we've been really pleased with our go broad and go deep strategy. The 50% growth in Q1 after delivering 55% growth in Q4 is really great, and we're continuing to see that really the majority of that growth is being driven by our existing markets. So within Q1, we saw good strength and growth continuing to come from Mexico. We're now in our fourth year in Mexico. We saw really strong growth in Canada. There was some softness there last year. So great to see the double-digit growth in Canada and then continuing to see great growth in the EU driven by France and Germany. And so while our go- broad efforts have allowed us to open many new locations quite quickly, these are very small in the interim here, and we're really setting those up to continue to gain momentum and have a bigger impact probably in 2027 and beyond. Operator: Your next question comes from the line of Matt Koranda with ROTH Capital Partners. Joseph Reagor: It's Joseph on for Matt. Just wanted to see if you guys can talk about store expansion plans. I believe in your prepared remarks, you cited about 4 stores opening -- or 4 community hubs, excuse me, opening in the back half of '26. I guess, kind of what your recent openings inform you about the expansion as we look out maybe 1 to 2 years and obviously, in the back half of this year? Just any thoughts and anything we should be aware of as we're -- as you guys are ramping up into more community hubs. Catherine Spear: Yes. Thank you so much for the question. I am just so excited about community hubs, and I'm so excited about the 4 that we're going to be opening later this year. As you know, it's an incredible opportunity to be with our community, right? Where they are, where they work, where they live, they come in, they feel and touch and experience our product. They learn about our fabrications, they figure out their fit, they talk to our associates and are educated about the brand. Still about 40% of people walking in the door are new to the brand. So it's a really incredible way to bring new healthcare professionals into the fold. It's also a place where our healthcare professionals are learning about our layering system and learning and really deepening their love for us and our love for them, and that relationship is so important. So what are some of the learnings? I think we need bigger stores. I said last quarter, champagne problems, still champagne problems. If you have a 45-minute wait for a fitting room, that's not ideal. So we need more fitting rooms. We need larger spaces. We're looking at 2,500 to 3,000-ish square feet. We're optimizing the flow. We're optimizing the set wall. We're thinking through the branding elements and really making it the best experience for our community. And so a lot of learnings from Century City, Brittain House and our 3 latest openings from last year, Houston, Upper East Side, and the West Group in Chicago. Actually, we're doing a really cool event in Chicago for those of you who are there right now, the anti-Pizza Pizza party check it out. So just really, really great excitement, so many learnings that we're able to take and continue to build. And the economics from the 5 that we have are exceeding all expectations. So really, really exciting on all fronts. Joseph Reagor: Just as my follow-up, you guys mentioned healthcare being the biggest industry growing the fastest. Just anything you can unpack, I guess, as we're looking from March into April, any changes of behavior within that cohort? And then your thoughts on the resilience of this customer cohort that you guys are seeing in 1Q? Catherine Spear: Yes. I mean healthcare professionals, they are incredibly resilient. They're the most resilient people on the planet. But I know you mentioned in a different way, but I just love to say that. They are the most amazing people. And what I think what we're doing is something that we've always done is shown up for them with our product, with our marketing, right? How are we connecting with them in a deep way. And so there's still challenges in the industry. It's why we have such an incredible advocacy platform. It's why we built or built the foundation. It's why we're going to D.C. and having this incredible experience. For those of you who are in D.C. on May, oh my God, Todd is going to get so mad at me. I keep inviting people to our rally, but so I won't talk about that yet. But that's exciting. It's called Awesome Humans on the Hill. We've done that for a number of years now. And so -- there's still challenges in the industry. There's staffing shortages. There's stress in the system. But how do we continue to show up for our community that really this industry has just structurally -- structural advantages on a whole host of fronts. You need your uniform to go to work. You need to replenish your uniform. It's a nonseasonal industry. And so all of these dynamics are really fueling what we do in terms of our product and our marketing. Sarah Oughtred: I can add on some of the slices across the business in terms of how we look at the consumer. So when we look at our occupational data, we're seeing strong growth year-over-year across all of the occupations, but particularly encouraged by the growth that we're seeing in nurses and students. When we look across our spend quintiles, we're seeing stronger growth with our higher spend quintiles, which makes up the majority of spending. And this is our most engaged customer, really showing that our brand efforts to deepen brand love and engagement is working. And then I think something else that's relevant is when we look across the income cohorts, we've not seen a meaningful change across each of the different income sizes we look at and actually seeing slightly higher growth -- sorry, we're seeing some growth at the lower incomes. And I think this really speaks to the ongoing value proposition and strength of our brand. Operator: Your next question comes from the line of Bob Drbul with BTIG. Robert Drbul: Congratulations. I guess 2 questions that I have is can you just give us an update on your -- the sizing initiative, sizing and fit, how that's going? And I'd be curious in terms of like any metrics you could share on in-stocks, out of stocks, like the progress that you're making, those would be helpful. Catherine Spear: Yes. I mean, I think we've made incredible progress on our Fit initiative. We are on the other side of that, where when you come to FIGS across the layering system, if you are a particular size, that will fit you in a similar way across our product line, which is really exciting. And so I'm really excited to be on the other side of that. In terms of in-stock, our goal is to have all of our core product. We have about 15 core styles that core product needs to be in stock all year round so that you can get your uniform at any time. And then we drop -- as you know, we drop new styles and drop new colors, and that's actually aimed to sell out in a relatively short period of time. You want the latest color, the latest style, and that's what kind of drives you back. And so we have 2 parts of our merchandising strategy, the core always in stock and the drops kind of meant to kind of come and go. And so that's how we think about it. A great question, Bob. Operator: Your next question comes from the line of Dana Telsey with Telsey Group. Dana Telsey: Nice to see the progress. Trina, as you think about the product innovation and the newness that's driving demand, any call-outs of what we should be looking for, for the balance of the year? And is World Cup at all an activator for you? And then lastly, Sarah, on the puts and takes of the margins as we go through the balance of the year, anything on comparability that we should be watching for and the cadence? Catherine Spear: In terms of the innovation and the newness, we're continuing to bring just new silhouettes and new fabrications that are really resonating. You saw that. You're seeing that with our FORMx fabric. We launched FIBREx as part of our Olympics drop. We're bringing that back. It's an incredibly durable but lightweight fabrication that really has resonated with the community. And then you're seeing it just a variety of silhouettes and seeing that we really understand their needs, not just from a fabrication standpoint, although that's super important, but also from a -- like really understanding where are they putting their tools, where they -- what types of pockets are needed and the placement of those pockets. And understanding at a very detailed level, the needs enables us to bring true innovation to our community. Then in terms of the World Cup, that's something that we're looking at. No product plan as part of that, but obviously, an exciting time in the world and something that we always look to align ourselves with important cultural moments. So you'll see something from us on that front. Sarah Oughtred: For your question on margin, gross margin. So we expect full year gross margin to be up modestly year-over-year from the 66.5% level that we had in fiscal 2025 and many puts and takes. So we have the continued tariff pressure. We have also picked up added pressure on inbound freight due to rising fuel prices and also needed to take a pause in our duty drawback program. And then we have the impact of our pricing as well as cost mitigation and some of our operational efficiency efforts that helped to offset some of those pressures. So we did see Q1 up 10 basis points year-over-year. We've guided for Q2 to be down modestly year-over-year, and that's really due to the continued step-up of tariff pressure into the quarter. And then as we look at our other quarters, so for Q3 last year, the rate was quite high due to some favorability of our returns processing. And so we do expect a normalization of that. So we expect to see a decline in gross margin rate in Q3. And then recall, in Q4 last year, we had the onetime inventory write-off, and so we will be comping against that. So expect a larger year-over-year improvement in Q4, ultimately yielding more consistent gross margin levels throughout the year. Operator: Our last question comes from the line of Nathan Feather with Morgan Stanley. Nathaniel Feather: Congrats on the strong quarter. Two on my end. First, have you seen any difference in how consumers across income brackets are responding to kind of the increase in gas prices you've seen over the past few months? Second, on your fabrication strategy, encouraging to see the traction you've had here. I guess, as you think over the next 2, 3, 4 years, what's kind of the right number of fabrication? How much do you think about those as being incorporated into the core SKU count versus driven more for some of the kind of limited time exclusivity? Sarah Oughtred: Great. So in terms of the impact on our consumer, I mean, at this point, we've continued to see continued strength across all prices of how we look at our consumer, really small, probably noticed a bit of a pullback in our APAC region. They are more sensitive and seeing larger impact from the increase in fuel prices, but that does not have a meaningful impact on our overall performance. So we remain really resilient, and that is in the near term. So we have really thought about what could be a longer-term impact, and that informs partially how our guide is positioned for the rest of the year, just knowing that, that can be a pressure on spending for the consumer into the back half of the year. Catherine Spear: Yes. I think your question is around how we think about the future state of our assortment and fabric and what's core and what's limited edition. I think at the core of what we do, we're always innovating. And we have this incredible feedback loop with our community to understand what they want, when they want it. And so that informs how we create, how we create product for them. And it's a balance. It's a balance of the art and the science. We're reacting to trends a bit, but it's more -- we're a uniform company, right? We're a function company, not a fashion company. And so we're able to really test and learn and understand them and deliver what they need and then build a strategy and assortment around that. That goes to fabrics, silhouettes, color, all aspects of what we do and then across the layering system. And so I do believe that -- we've never been better positioned, right? We're leading this industry by miles. And so it's ours to continue to execute on. It's ours to continue to show up for this community and really define what this industry can be in the future, and that's what we're going to do. Operator: There are no further questions at this time. I will now turn the call back to Trina Spear for closing remarks. Catherine Spear: Thank you all for joining us. We'll see you soon. 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 Legacy Housing Corporation first quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. After the speakers’ remarks, you will then hear an automated message advising your hand is raised. To withdraw your question, please press 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Curtis Hodgson, Executive Chairman of the Board. Please go ahead. Curtis Hodgson: Good morning. This is Curtis Hodgson, Executive Chairman. I am here with Jon Langbert, our Chief Financial Officer. Thanks for joining our first quarter 2026 conference call. Jon will now read the safe harbor disclosure before we get started. Jon Langbert: Before we begin, I am reminding our listeners that management’s prepared remarks today will contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the safe harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from management’s current expectations. We refer you to a more detailed discussion of the risks and uncertainties in the company’s quarterly report on Form 10-Q filed yesterday with the Securities and Exchange Commission and in our most recent annual report on Form 10-K. Any projections as to the company’s future performance represent management’s estimates as of today’s call. Legacy Housing Corporation assumes no obligation to update these projections in the future unless otherwise required by applicable law. Curtis Hodgson: Thanks, Jon. I will turn the call back to Jon now to walk you through the quarter’s results, and then I will come back with some thoughts on the business and a few corporate updates. After that, we will open the call for questions and answers. Jon? Jon Langbert: Thanks, Curtis. Let us get to the numbers. Total net revenue for the quarter was $34.4 million, down 3.7% from $35.7 million a year ago. Despite the modest top-line decline, net income grew to $10.0 million from $10.3 million, and diluted EPS came in at $0.46, up from $0.41 in 2025. So revenue was a touch softer, but the bottom line was stronger, and I will walk through how we got there. Product sales were $21.6 million, down 11.3%. We shipped 312 units in the quarter versus 350 a year ago, with average revenue per unit essentially flat at roughly $69,100. The story underneath the headline number is really a mixed story. Inventory finance sales were down about $7.6 million, or 68%, as our dealers continue to work through existing inventory on their lots. That decline was largely offset by strength across our other channels. Retail store sales nearly doubled, up 81% to $6.1 million. Direct sales were up 80% to $2.7 million, and commercial sales to mobile home parks grew 12% to $7.6 million. The shift toward retail and direct selling reflects the strategy we have been executing, getting closer to the end consumer and expanding our company-owned distribution. Loan portfolio interest income was $11.3 million, up 6.2%, with essentially all of that growth coming from our consumer book. The consumer portfolio ended the quarter at $204.8 million, up modestly from year end. Mobile home park notes finished at $199.5 million, and dealer inventory finance receivables at $26.5 million. On the expense side, cost of product sales was down 13.1%, broadly in line with lower volumes, and SG&A came in at $5.8 million, down 8.3%. The SG&A decline reflects lower payroll, health benefit, and legal costs, partially offset by a higher loan loss provision and modestly higher property taxes. The net result is that even with revenue down a touch, we delivered net income growth of about 6% and EPS growth of around 12%, a function of slightly stronger gross margins, lower SG&A, and a lower effective tax rate. On taxes, our effective rate for the quarter was 16.1% versus 19.3% a year ago and the 21% statutory rate. The benefit reflects two items. First, the federal energy efficient home improvement credit known as Section 45L, which provides a per-home tax credit for manufacturers who build homes meeting specified energy efficiency standards, which we have qualified for on a substantial portion of our production. Second, a discount on transferable tax credits we purchased during the quarter. As a reminder, the Section 45L credit terminates on June 30, 2026, under last year’s tax legislation. We expect our effective rate to move closer to the statutory rate after that. The balance sheet remains in excellent shape. We ended the quarter with $14.1 million in cash, up from $8.5 million at year end, on $7.0 million of operating cash flow. Inventories rose to $50.4 million from $39.9 million at year end, primarily in finished goods. Curtis will speak more about the inventory build and the data center project driving it in a moment. Our $50 million Prosperity Bank revolver had less than $1 million drawn at quarter end, leaving roughly $49 million of available capacity, and we are in compliance with all our financial covenants. Total stockholders’ equity finished the quarter at $539.0 million, up from $528.6 million at year end. We repurchased about 31,000 shares for roughly $0.6 million during the quarter under our new $10.0 million authorization that the board approved in February, leaving approximately $9.4 million available for future repurchases through February 2029. The credit quality across our loan portfolios remains solid. At quarter end, more than 97% of both our consumer loans and our mobile home park notes were less than 30 days past due. We did increase loan loss reserves modestly in the quarter, reflecting continued portfolio growth and a slightly more conservative posture given the broader economic backdrop. With that, I will turn it back to Curtis. Curtis Hodgson: Thanks, Jon. Let me hit a few business topics: the operating environment, some specific business updates, and a couple of items that warrant a closer look from this quarter. The Q1 environment was a continuation of what I have spoken to in the past. Inflation picked up a little bit during the quarter, and the Fed is holding its benchmark rate steady, and 30-year mortgage rates are staying above 6%. Sustained higher borrowing costs continue to weigh on affordability, which affects our end consumers and particularly affects our park customers. They are just trying to make a return on their investment, and higher interest rates are making it more difficult to do so. Tariffs became a meaningful theme during this quarter, and they continue to affect our cost structure. The Supreme Court ruled in February that the emergency tariffs imposed in 2025 were not authorized, and U.S. Customs has begun winding down those duties. We are in the process of asking for a $0.683 million refund based on that Supreme Court decision. Meanwhile, the U.S. Trade Representative picked up new Section 301 investigations in March that could provide a different legal basis for tariffs going forward. And effective April 6, right after our quarter end, additional 232 duties were imposed on things like aluminum, steel, and copper, which do affect our cost structure. The bottom line is combined effective tariff rates on most Chinese-origin goods are still meaningful, and we are still absorbing real input cost pressures. A few other specific items. On retail and dealer activity, the shift toward retail at our own company stores we have been talking about is really showing up this quarter, and I think it will continue to improve. Our retail sales are up 81% year over year. Part of that increase came from buying AmeriCasa last year, which sells our homes, but it also sells three other brands at that location. Across our 14 company-owned retail locations—we call it Heritage Housing, our Tiny House Outlet, and AmeriCasa—direct access to end consumers continues to be a meaningful part of our strategy. On our finance division, the loan portfolios continue to perform very well. Consumer loan portfolio interest grew, credit quality is over 97% across all of our portfolios, and we have not seen any deterioration that would require us to change our reserving posture beyond the modest increases that we have been making. On capital allocation, we restarted share repurchases this quarter under the new $10.0 million authorization, and with our stock continuing to trade near book value, we view buybacks as a sensible use of our capital alongside reinvestment in the business. Let me talk a minute about the workforce housing orders that for the last two calls I have mentioned. During this quarter, we received nonrefundable deposits of about $8.0 million from customers for large workforce housing orders. We started production on those orders in the first quarter, but had not made any deliveries from those orders in the first quarter. Now that we are in the second quarter, I expect 200 to 300 units to be delivered on those fairly high-margin orders for which we have deposits in place, and we should recognize substantially all of these workforce housing orders in calendar year 2026. Another topic I would like to spend a minute on is the AmeriCasa litigation. We filed a lawsuit in March. Our claim is related to misrepresentations and omissions made in that acquisition. We are early in the litigation. I am not exactly sure where it will end up, but the litigation was necessary because the acquisition we made last year was not panning out as we expected, and I think it is because things were either not disclosed or erroneously disclosed during the due diligence period. The litigation is not really material to our consolidated financial position, our liquidity, or our operations. We will continue to evaluate the facts and circumstances regarding that acquisition, and I just want everybody to know that it is not going to be the savior to the company; on the other hand, it is not going to be very deleterious either. One other item that is worth flagging. In 2024, we came to an agreement with borrowers under which we received clear title to [inaudible] home communities and a new $48.6 million short-term promissory note bearing interest at 7.9%. This note matures in July 2026. We have been in contact with the borrower, and they have now made all required payments under that bridge loan. We are talking about taking a partial payment and renewing it; we are talking about what possible lending we are willing to do on a going-forward basis. We still believe that there will not be any negative effect from this note, but we are in the process of negotiating, and you never know how it might turn out. A couple of other closing thoughts that are really short. Q1 was a solid quarter, especially in light of the management transition that happened in the fourth quarter. Net income was up over 6%, and on a diluted earnings per share basis, it was up 12%, somewhat because of our share repurchases and somewhat by the exit of executives that no longer have stock options. Our balance sheet is in great shape: $14 million of cash, essentially no debt, $539 million of stockholders’ equity, and an undrawn revolver. People look at us and say, my gosh, you have a clean balance sheet. We also are a one-entity company, no subsidiaries, and I think that is a very attractive place to be. The workforce housing orders are encouraging, especially here in Texas. The strength in our retail and direct sales reflects the strategy that we have been pursuing. Loan portfolios continue to be stable and a growing earnings engine. Georgia continues to be a big question mark. We have managed to keep it running, but we do not have any workforce housing orders yet in Georgia, so we are relying on the old-fashioned selling to dealers and selling to parks and selling through our company stores. That does not have enough volume to keep us running at profitable production. As I have said before, Legacy Housing Corporation has never had a quarterly loss in our entire history. 2026 has kept that streak going, as will Q2. We are conservatively capitalized, focused on long-term value creation, confident in our ability to weather some near-term volatility while positioning for long-term growth as housing affordability becomes more and more important to U.S. consumers and policymakers, especially while interest rates remain at 6% or above. Operator, that concludes our prepared remarks. Please open the line for questions and answers. Operator: We will now open the call for questions. Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star 11 again. Our first question comes from Alexander Rygiel of Texas Capital Securities. Your line is open. Alexander Rygiel: Good afternoon, Curtis and Jon. Great to hear from you both. I always appreciate your broader perspective on the economy and broader housing market trends. I am curious, in your views, how you think that has changed over the last three months? Curtis Hodgson: On the 10,000-foot view, Alex, our demographics are not all that healthy. For the first year in history last year, we had more people moving out of the country than moving into the country, and our birth rate is below two. So on a 10,000-foot view, we do not need a lot of new bedrooms. We already have all we need. Growth is basically geographically very particular. We have growth in states like Texas and Florida, and we do not have growth in states like Indiana and Ohio. Fortunately, we do business south of the Mason-Dixon line, and we still have a growing demographic in the states that we do business. As an aside, Kenny and I got in this business in 1980, and from 1980 to 1982—you young men that were not living through it have read the history books—that was the highest interest rate environment in the history of our company, where the prime rate of interest got all the way, I believe, to 18%. Those were very good years in the mobile home business because high interest rates lock consumers out of traditional site-built housing. Buying the $0.5 million house at a 10% mortgage rate is prohibitive to almost anybody in this economy, which brings them down, just as it did in 1980–1982, to things that we sell. So higher interest rates are not a bad fact to the manufactured housing industry. If anything, they are a good fact. But we still struggle on where you are going to put them. We do not have a lot of vacant spaces in big cities. We do not have very many mobile home parks coming online, although, as you know, we are trying to do things in Texas, but we do not have a good answer to where we could put them. Lots of headwinds. And the industry itself has not grown in filling that void, and it has not grown on providing a neighborhood solution as the traditional homebuilders have, of which I know you follow many of them. So even now that we have what should be tailwinds, we have not done a very good job as an industry of imitating the site-built housing people and selling community solutions as opposed to, say, a Jim Walters solution—for those of you that are my age—where we are just providing a house and somebody else has to put in the garage, somebody else has to put in the landscape, somebody else has to put in the premises and the fence. We basically are providing part of the solution but not all the solution, whereas when you follow your site builders, they are solving almost all of the neighborhood problems. We are trying to morph into that with our huge development outside Boston, which has got a lot of good news this week, if anybody was paying attention. Within four miles of our location, we have thousands of jobs that have just been announced in the future. So that particular location I am very confident of, and we have made very little progress on other land holdings. I know I went above and beyond answering your question, but at least I did answer your question. Anything else, Alex? Alexander Rygiel: Yes, that was very helpful. Historically, the company has seen some positive seasonality after tax season. Since we are past that, can you comment on demand in April and early May? Curtis Hodgson: Sure. I do not know that we can stomach much more demand in Texas with all our orders we already have in place. We are probably already out to August or September. We would have to find somebody to move in the line to take more orders. We did get a little seasonality bump in Georgia that let us turn the spigot back on, but we do not have much backlog in Georgia. Without the data centers and without the oilfield boom—which Georgia does not participate in hardly at all at either of those—the good old-fashioned mobile home business, the street dealers and the parks, is rather tepid. I do not mind going on record on this. I think followers of my peer group have already figured it out based on the punishment that they gave the stock prices this week. I did notice before the call that our stock was actually up on what I consider fair but not great reports. We are in good shape as a company, and our next two quarters should be pretty doggone impressive based on houses already built in that backyard that we are starting to ship to these major customers in Texas. To answer your question, in summary, traditional demand is not great, but nontraditional demand like data centers and oilfield is as good as I have seen it ever since Rita/Katrina in 2005. So a lot of good news, but a little bit of bad news. Alexander Rygiel: One last question: as it relates to the workforce housing order that you have—that is fantastic—but turning the page, how do future prospects look, and when might we hear about other big orders into this market? Curtis Hodgson: In Texas, we are working several big orders—huge orders—and none of them have turned into deposits yet, but we are working that angle. The big seven companies that are involved in data centers are making a multitrillion-dollar commitment to this space. Compared to, say, the stimulus that was given to the economy after COVID by the U.S. government, in size the stimulus that these seven are giving the economy is comparable to the stimulus that the U.S. government gave a few years back in COVID, which was significant stimulus. So let us take a data center manufacturer. He is putting on his balance sheet an asset, but he is putting on my balance sheet income—as well as everybody in the construction business in this region. The fact that income is going to be up for everybody in this region is a pretty remarkable amount of stimulus. There is a little bit of that going on on a nationwide basis, including Georgia, and even on a worldwide basis. But in our market—Texas and Louisiana—there is so much data center business that is actually going to happen, by these seven companies investing mega capital, I think we are good probably all the way through 2027 and maybe beyond that. So business is good in Texas. That is all I can tell you. Alexander Rygiel: Good to hear. Thank you very much. Operator: Thank you. As a reminder, if you have a question, please press 11. Our next question comes from Mark Smith of Lake Street. Your line is open. Mark Smith: Hi, guys. I wanted to ask for a little more detail, if you can, Curtis, on this workforce housing deal—any more insight you can give us on the size and maybe the timing of revenue recognition as we work through the year? Curtis Hodgson: I would guess that we already have somewhere around 600 units with deposits in this category out of Texas, which was about half of our entire production last year in Texas, maybe even more than half. The orders actually started in December, but they were not ready for the houses. We needed the order, so we built them anyway. Of the 600, at least half of them will be shipped in Q2, with the remaining being shipped in Q3 and Q4. To Alex’s question, Mark, I tipped my hand and said we are in the process of taking even more orders. Think of the double whammy we have here, Mark. We have data centers all over the state of Texas, and we have West Texas crude selling at nearly $100 a barrel, which we have historically always gotten orders from whenever there is a boom in the oilfield. I do not know if you can tell me when the Iran war is going to be over or what is going to happen to oil prices; I might have a different opinion. But if this $90 to $100 a barrel holds, we are not only going to have lots of orders for data centers, we are going to have lots of orders for the Permian Basin as well, and it will lift all boats. Every manufacturer is going to get a benefit. We are not uniquely qualified—there are 34 operating plants in the state of Texas—but we are all going to rise together. We will not need independent dealers like we have in the past. We will not even need our own company stores. We will keep growing them, but I would rather build a past sale to Google than create too much inventory in my company stores in a rather tepid retail business. The theme remains the same, and if you have been following these calls—because I know you have been on them, Mark—all I am doing is backing up what I already predicted two calls ago with real numbers. We are in good shape for a long time. It will blossom in Q3 and Q4, and it is going to show up beginning in Q2. We may have three of the best quarters coming up in front of us, but I do not like to overpromise and underdeliver. You have known me for eight or nine years, and you know that I am pretty conservative in these projections. But I know what is in the pack, and it would be nonsensical for me not to reveal it. We are going to have good three quarters. Mark Smith: That is helpful. The other one was SG&A—there was a pretty impressive cut in SG&A this quarter, and I know there have been changes there. Can you talk about the sustainability of SG&A—are there further cuts, or with the orders coming in, are there areas you need to add? Curtis Hodgson: I wish this was a video call because you would see a picture of me with a machete. I have just begun to cut SG&A, and everybody is supportive of that. We basically have $500 million worth of money invested in paper. That does not take any SG&A, or hardly any. I am tired of SG&A growing in the company when the rest of the company is not growing, so I would expect to see further declines in SG&A. I do not know how much we can get it down to because, as Jon correctly pointed out, SG&A is not just sales, general, and administrative; it includes things like warranty and reserves and provisions for loan losses. But from a pure people-and-expense perspective—the S, the G, and the A—I would expect further declines. I do not know what our auditors are going to require for loan provisions that I think are nonsensical, and I do not know what skeletons are going to come up in the warranty department from yesteryear because we built some stuff that has been a legal issue. Part of our SG&A is still going to go down while part of it may not. I would expect maybe a 10% reduction by the end of the year in SG&A. Mark Smith: You spoke earlier about inflationary pressures and tariffs. Do you think your SG&A cuts are enough to make up for inflationary pressures, and is there anywhere you can pull on COGS to get product cost down? Curtis Hodgson: I have to go back to 2010–2030. The problem in the industry is all of the major manufacturers have been trying to build a cheaper product, and any time they can take $10 out, they consider it a triumph. The natural result is the product loses desirability—it does not have basic features, like medicine cabinets. We have taken a different tack. We are going to not build the cheapest one if possible and build to the middle of the market, and just recently we began to prove that theory out at the retail level with our company stores. We are not going to fight a war over who can sell the cheapest one for the lowest margin, because that is a recipe for failure. We are going to abandon that philosophy and concentrate on the middle market. This market needs to do more like site-built housing and turn into more of a turnkey solution to housing and get off the idea that the buyer has to buy his own medicine cabinet, if you know what I mean. Mark Smith: With changes in immigration and your own workforce, are you seeing pressure on labor and your ability to hit new production goals? Curtis Hodgson: As the younger generation would say, 100%. Deportations have hurt our sales to the Spanish market, and I think that is unfortunate, but it is okay. The interesting fact is our retail portfolio—which is 70% Hispanic—is behaving incredibly well, so we have not experienced a big uptick in repossessions. A little bit—I would say we are now repossessing at roughly 4% per year, but that is the historical norm in this industry. When we were repossessing at only 2% per year, it was because there was this quantum leap in prices during COVID and everybody was right side up in what they owed on their mobile home. Those increases in prices ended four years ago. In the four years since, we have had no substantial increase in prices in this industry, so for the loans made then in 2022, 2023, 2024, and 2025, we have consumers that are not well covered by the value of their mobile home, and I think that is the reason why repossessions are increasing back to historical norms. Deportations are not affecting our loan portfolio, but they are affecting the sentiment of people and whether they want to buy a mobile home with this threat that some family member may be deported and they do not want to go back home with them. It has affected who we sell to at retail and how we sell to them, but it has not affected our portfolio. I think that does answer your question. Correct? Mark Smith: That does. Thank you. Operator: Thank you. I am showing no further questions at this time. I would like to turn it back to Curtis Hodgson for closing remarks. Curtis Hodgson: Sure. Thanks, everybody, who joined the call today. I appreciate your interest in our company. That ends the call from my perspective. Operator: This concludes today’s conference call. Thank you for participating, and you may now disconnect.
Operator: Hello, everyone. Thank you for joining us and welcome to the American Healthcare REIT, Inc. Q1 2026 Earnings Conference Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Alan Peterson, Vice President of Investor Relations and Finance. Alan, please go ahead. Alan Peterson: Good morning. Thank you for joining us for American Healthcare REIT, Inc.’s first quarter 2026 earnings conference call. With me today are Jeffrey Hanson, Chairman and Interim CEO and President; Gabriel Willhite, Chief Operating Officer; Stefan K. Oh, Chief Investment Officer; and Brian S. Peay, Chief Financial Officer. On today's call, Jeffrey Hanson, Gabriel Willhite, Stefan K. Oh, and Brian S. Peay will provide high-level commentary discussing our operational results, financial position, our increased 2026 guidance, and other recent news relating to American Healthcare REIT, Inc. Following these remarks, we will conduct a question and answer session. Please be advised that this call will include forward-looking statements. All statements made during this call other than statements of historical fact are forward-looking statements and are subject to numerous risks and uncertainties that could cause results to differ materially from those projected in these statements. Therefore, you should exercise caution in interpreting and relying on them. I refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results, financial condition, and prospects. All forward-looking statements speak only as of today, 05/08/2026, or such other dates as may otherwise be specified. We assume no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During the call, we will discuss certain non-GAAP financial measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Reconciliations of non-GAAP financial measures discussed on this call to the most directly comparable measures calculated in accordance with GAAP are included in our earnings release, supplemental information package, and our filings with the SEC. You can find these documents as well as an audio webcast replay of this conference call on the Investor Relations section of our website at americanhealthcarereit.com. With that, I will turn the call over to our Chairman, Interim CEO, and President, Jeffrey Hanson. Jeffrey Hanson: Thanks, Alan, and good morning, everyone. Before the team gets into the quarter, I want to provide a brief update on Danny Prosky, our CEO and President. As you know, he experienced a health event in February and he continues to recover at home. We are very pleased to share that he underwent the only important medical procedure that was part of his treatment and recovery plan a couple of weeks ago. It went exceedingly well, and he is in good spirits and making strong progress at home. I would also note that during the entirety of this interim period, he has remained fully engaged in each of our board meetings virtually, and he and I speak regularly each week on the business front. Although we do not have a definitive timeline for his reentry, given the recent procedure we do expect to have that clarity soon and look forward to sharing the details with you in the near term. In the meantime, AHR is advancing with full momentum, and I want to be clear about what that looks like from where I sit. As most of you already know, I served as Chairman and CEO of our predecessor companies, so stepping into this seat is not a transition into unfamiliar territory. To the contrary, it is a return to a business, a strategy, and a team that I know intimately and have significant track record with. Gabriel Willhite, Stefan K. Oh, Brian S. Peay, and the broader leadership team are executing at a high level, and my role has been to lead alongside them day to day and full time since Danny’s event, making sure that we continue to operate with the discipline and ambition that you expect of AHR. The results you will hear this morning reflect that fact. Q1 was another exceptionally strong quarter across core metrics: double-digit same-store NOI growth for the ninth consecutive quarter, efficient capital formation and accretive deployment, an even further strengthened balance sheet, and raised full-year guidance. Rather than isolated data points, these represent the output of a strategy that we have forged together over time and a team that is executing consistently. What gives me the greatest confidence, though, is what lies beneath these numbers. AHR exists to deliver higher-quality care and superior resident and patient outcomes while also striving to be the most sought-after and trusted capital partner for some of the best operators in the space. This mission is not a slogan. It is the operating logic that AHR fully embraces and that our people live each and every day through our strategic operating partnerships. When we get our operator relationships right, underwrite with discipline, and structure capital to support long-term performance rather than short-term optics, financial results naturally follow. Q1 is another quarter of evidence that this approach is not only effective, but that it is effective at scale. With that, I will turn it over to Gabriel and the rest of the team to walk through our operating performance. Gabriel? Gabriel Willhite: Thanks, Jeffrey. Q1 2026 was another strong quarter for AHR's operating portfolio. We delivered total portfolio same-store NOI growth of 12.1%, our ninth consecutive quarter of double-digit total portfolio same-store NOI growth. That kind of sustained consistency reflects the confluence of three key things: the enduring strength of the fundamentals underpinning long-term care, the quality of our regional operating partners, and the durability of our platform. Let me say a word about the strength of those fundamentals because I think it is important context for everything you are going to hear today. Long-term care demand is being driven by a demographic wave that is still in the early stages. The 80+ population, the core consumer of long-term care ranging from independent living to skilled nursing, is growing at an accelerating rate as baby boomers age. Meanwhile, new supply growth across senior housing remains near historic lows. The economics of new construction do not pencil for most developers today, and that dynamic has not changed recently. What you get from that combination—surging demand meeting constrained supply—is a compelling operating environment our operators are experiencing right now: occupancy surpassing prior high-water marks with potential for stabilized occupancies to settle well beyond 90%, sustained rate growth, and expanding margins. We believe this trend will continue well into the next decade. Now into the quarter, our ISHC segment, also known as Trilogy, delivered same-store NOI growth of 14.5% with same-store occupancy averaging 91.2%, up roughly 220 basis points year over year. Same-store revenue growth of 6.9% was driven by both rate and occupancy improvements. A big driver of rate growth has been the continued improvement in quality mix, which now stands at 75.5% of resident days on a same-store basis, up roughly 60 basis points from a year ago, and up 200 basis points on a total portfolio basis. This shift directly reflects Trilogy's continuing focus on alignment with payor sources, especially Medicare Advantage plans, that value quality outcomes and are committed to paying a rate necessary to deliver high-quality care, which, of course, is the hallmark of Trilogy's business. Trilogy's clinical reputation is what earns its strong census, and we continue to invest in maintaining and expanding it. I am proud to report that as a result of Trilogy's consistent use of the various levers at its disposal, Trilogy's same-store NOI margins have now eclipsed 20% for the first time since COVID. Congratulations to the Trilogy team for surpassing another important milestone. Turning to SHOP, same-store NOI increased 19.7% for the first quarter. Same-store occupancy averaged 88.6%, up roughly 255 basis points year over year, and same-store NOI margin expanded approximately 215 basis points to 20.6%. Performance in the SHOP same-store pool reflects our approach to bottom-line optimization—more specifically, the utilization of various levers available which enable us to continuously calibrate financial performance through dynamic revenue and expense management in our operating portfolio. Early in the year, that meant building a strong occupancy foundation to combat what I view as regular seasonality pressures in our high-acuity portfolio and positioning the portfolio to capture incremental demand as the selling season really gains momentum. As move-in activity accelerates in the spring and into the summer, we are highly focused on managing street rates while taking a more measured, resident-focused approach to in-place pricing. This ability to adjust in real time—market by market, asset by asset, by acuity level, and even unit by unit—is absolutely central to how we seek to sustain NOI growth above historic averages over the next several years without compromising high-quality care and outcome standards that take precedence. The operating leverage in this portfolio continues to build. As occupancy continues to push higher, each incremental dollar of revenue flows through at a disproportionately higher margin. Combined with the structural demand tailwinds I described earlier, we remain highly confident in our ability to deliver sustained double-digit NOI growth through 2026. I want to close by thanking each of our operating partners as well as our AHR asset management teams for their unwavering commitment to the residents and communities they serve—Trilogy Health Services, Senior Solutions Management Group, Great Lakes Management, Compass Senior Living, Heritage Senior Living, Cogir Senior Living, Priority Life Care, Heritage Communities, and WellQuest Living. Your work is the foundation of everything we are able to report today. Thank you. With that, I will turn it over to Stefan. Stefan K. Oh: Thanks, Gabriel. Q1 2026 was a productive quarter for our investments team, and I am pleased to say the volume and quality of what we are seeing in the market has only increased as we move through the year. Year to date, we have closed $249.2 million of new acquisitions, all within our SHOP segment. Approximately $162.8 million of those acquisitions closed during the first quarter. This includes the five previously announced communities in California and Missouri for approximately $117.5 million and two additional properties in Kansas that closed after our last earnings call totaling approximately $45.3 million. Subsequent to quarter end, we closed on six more SHOP assets in Georgia and South Carolina for approximately $86.4 million, deepening our Southeast presence with one of our trusted regional operators. Every deal we do starts the same way: with a relationship. Before we spend time underwriting any asset, we have underwritten the operator first—their commitment to resident care, how they run their buildings, and how their teams have performed under varying circumstances over time. In parallel, we build a deep understanding of the market before we invest capital. That operator-first approach means that a lot of our activity comes through off-market or limited-process channels where we have a genuine informational advantage. Our trust in the operator drives our confidence to pursue opportunities alongside them, informed by real insight into execution, consistency, and alignment. This depth of conviction is simply not available to everyone underwriting the same asset in a broadly marketed process, and it is a meaningful competitive advantage in how we price risk and project returns. Our underwriting process is equally deliberate—we look at market demographics, operator expertise, acuity mix, asset age, the holistic long-term cash flow profile, and the competitive set, not simply initial yield. The goal is not near-term accretion for its own sake; it is building a portfolio of assets that will generate durable, compounding NOI growth for years to come. We are highly selective, and that selectivity has served us well. What gives us added confidence heading into the back half of this year is what we are seeing from the 2025 investments we closed. Across a number of our acquisitions completed last year, performance is already tracking ahead of our initial underwriting. That is a direct reflection of how we approach every deal from day one. The asset management plan is developed with our operating partners since they are touring and underwriting the deal alongside us. So by the time we take ownership, that plan is already in motion, and our partners are executing against it. Seeing those early results come in above expectations reinforces our conviction in both the process and the operators we are deploying capital with, and it informs how we underwrite and structure new investments today. In addition to the approximately $250 million we have closed to date, we have a pipeline of over $650 million of awarded deals that have yet to close. We expect to close these well before the end of 2026 and feel very good about the quality and composition of what is in front of us. On development, our in-process pipeline totals approximately $173.9 million in expected cost, of which approximately $52.4 million has been funded to date. These are predominantly Trilogy campus expansions and independent living villa projects. They are capital-efficient growth opportunities layered onto existing operational platforms that should extend our earnings runway at attractive yields with limited market risk. In summary, we remain well positioned with capital available to execute quickly and efficiently, a growing network of trusted operators, and a pipeline that gives us real confidence in continued accretive deployment through the balance of this year at the very least. With that, I will turn it over to Brian. Brian S. Peay: Thanks, Stefan. Q1 2026 was another quarter of strong financial performance, and I am happy to report that these results support an increase to our full-year 2026 guidance. For the first quarter, we reported normalized funds from operations, or NFFO, of $0.50 per diluted share, representing 31.6% growth compared to $0.38 per diluted share in Q1 2025. These results were driven primarily by the continued double-digit total portfolio same-store NOI growth, supplemented by accretion from the $950 million of acquisitions completed in 2025 that are now contributing to earnings. Our proactive, hands-on asset management approach has continued to deliver solid financial performance at the start of 2026, and the strength of Q1 gives us confidence in raising our same-store NOI growth guidance for the full year to a range of 9% to 12%. At the segment level, our current full-year 2026 same-store NOI growth guidance is as follows: 11% to 15% growth at Trilogy; 15% to 19% growth in SHOP; 0% to 2% growth in outpatient medical; and a range of 2% to 3% growth in our triple-net lease property segment. Turning to the balance sheet, our net debt to annualized EBITDA improved to 3.0x as of 03/31/2026, down from 3.4x at the end of 2025, as strong EBITDA growth continues to improve our already attractive leverage profile. On the capital markets front, during the first quarter and the first few days of the second quarter, we entered into forward sale agreements under our ATM program to sell approximately 8.1 million shares for $412.7 million in gross proceeds. As of today, we maintain unsettled forward agreements under our ATM program representing approximately $527.4 million in gross proceeds, assuming full physical settlement. With well over $1 billion available on our existing program, we will continue to utilize this tool opportunistically depending on how the stock is trading. I also want to highlight the credit facility amendment completed subsequent to quarter end. We increased our unsecured revolving credit facility capacity from $600 million to $800 million, we extended the maturity to April 2030, and we have two six-month extension options. As of today, there are zero amounts outstanding on the revolver. Between our forward sale agreements and the increased available capacity on our line of credit, we have meaningfully de-risked the execution of our external growth plans, which include the over $650 million Stefan described. This should provide us with the ability to deploy capital at scale throughout 2026. Combined, the strong organic and external growth is prompting us to increase our full-year 2026 NFFO per share guidance to a range of $2.30 to $2.09 per share, up $0.04 at the midpoint and would now reflect 20% growth in NFFO per share over 2025. As always, our guidance includes only those transactions and capital markets activity that have been completed as of today. We are entering the rest of the year from a position of strength—growing earnings, continuing to improve our already attractive leverage, creating ample liquidity, and fostering relationships with operators that continue to deliver strong performance. We remain focused on executing our mission of facilitating high-quality care and health outcomes for residents while creating long-term value for our shareholders. And with that, operator, we would like to open the line for questions. Operator: We will now open the call for questions. Please limit yourself to one question and a follow-up, two total. You will be allowed to re-queue if you wish. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Farrell Granath from Bank of America. Farrell, please go ahead. Farrell Granath: My first one is in regards to the same-store NOI growth guidance within your segments. We know that the Trilogy, or Integrated Health Campus, guidance was increased, but SHOP remained unchanged, and especially that all segments outperformed the midpoints of your guidance this quarter. Can you give a little more color on how you are thinking about that pacing through the rest of the year, or generally if there is any baked-in conservatism? Brian S. Peay: Sure. Good morning, or afternoon as it is. Trilogy had such a strong quarter that we felt a lot of conviction they were going to continue to exceed. If we did not raise guidance, then the rest of the year would have looked relatively flat compared to the first quarter. So that was a no-brainer. On the SHOP side, we still have tremendous conviction in the space. We love our operator base, and we believe they can continue to deliver. If you look at the supplemental and go into the SHOP portfolio, what you will notice is that sequentially from Q4 2025 to Q1 2026, there was a pretty significant uptick. Same-store SHOP NOI increased by a little over 9.3%. That is part of the reason why it gave us pause. It is only the first quarter, but we have tremendous conviction about their ability to continue to perform. Farrell Granath: Thank you. And then my follow-up question is in regards to your sources of capital. I know you just ran through a little bit on the lowering of your leverage as well as the ATM that you have outstanding. Can you walk me through how you think about sourcing of capital and uses when you are thinking about your acquisition pipeline going forward? Brian S. Peay: Yes. REITs are an interesting vehicle—required to pay out 90% of your taxable income, it is really difficult to maintain a lot of retained earnings. Having said that, our board has decided on a dividend policy that is allowing us to retain a not inconsequential amount of earnings. That is the cheapest form of equity that we can source, so that is first and foremost. Second, we have dedicated ourselves to a disposition program. Over time, we have been selling smaller, less strategic, lower-growth assets. That is a nice source of funds for us to utilize for external growth, for debt paydowns, and for whatever else might come up. Beyond that, on the equity side, we have been a user of the ATM in the past, based on the stock price, and I think we will, again, based on stock price, utilize the ATM in the future. It is an incredibly efficient vehicle for raising capital, and when you can do it on a forward basis, you can do it in a non-dilutive way. Obviously, our use of those funds—we are doing it in an immediately accretive, but more importantly, a long-term accretive fashion. I did leave out the line of credit. We are happy at 3.0x debt to EBITDA. There is nothing bad that happens to us to the extent that number continues to go lower; it really just creates dry powder. As long as we can continue to hit the earnings growth that we have projected, we do have $800 million of capacity. In thinking about those as alternatives, I do not think you are going to see us run the debt up very much at all. We are committed to running the company with essentially investment-grade ratios because we know that it is going to help the equity trade at its best possible multiple. Operator: Your next question comes from the line of Austin Wurschmidt from KeyBanc Capital Markets. Austin, please go ahead. Austin Wurschmidt: Great, thanks. Gabriel, the Trilogy portfolio this quarter saw very strong sequential NOI pickup from all the levers that you have spoken about in past quarters. I think it was even better sequential growth versus what you saw last year, which was really strong. Recognizing there are a lot of moving pieces and some seasonality in this business, does that sequential strength carry momentum into the spring and summer, or is that not necessarily the right way to think about the business? Gabriel Willhite: I think that is a great way to think about the business, Austin. One thing I will point out—in 2025, many things went right for Trilogy, most of which are repeatable, and a few were one-time. For example, we talked about the Medicare Advantage strategy and trying to find different ways to optimize our partners on that front. In March 2025, we signed a new contract with a partner that was substantially higher and opened up more residents to Trilogy facilities, so it had a strong impact on 2025 earnings. That would be a bit of a headwind in 2026. Counterbalancing that is exactly what you are talking about, which is coming into the year with higher occupancy than we had last year at Trilogy. That higher occupancy unlocks the ability to not only push rate on very full buildings within the Trilogy ecosystem—some with private-pay occupancies near 100%—but it also helps us continue to work on the Medicare Advantage strategy, prioritizing partners that are willing to pay for the quality of care that Trilogy delivers. There are a lot of different Medicare Advantage plans you could have a contract with. Some are looking for the low-cost provider; others realize the best way for the plan to make money is to provide the highest quality of care to the resident to get them healthy faster. That is exactly what Trilogy brings to the table. I am still a big believer in Trilogy. They are one of the best operators I have ever seen. If there are ways to pull different levers to continue to push on NOI, they will figure out a way to do it. And we have the right, unique alignment with our management contract with them that will reward them for their outperformance with AHR stock, like we have talked about in the past as well. Austin Wurschmidt: That is helpful. It leads into my follow-up question: you highlighted NOI margins are now back above 20% for the first time since COVID. Given the higher occupancy today and the ability to push rate on the private-pay side of the business, what sort of medium- or longer-term opportunity set do you see to drive margins across the Trilogy portfolio? Gabriel Willhite: We did 134 basis points of margin expansion last year—that was a pretty good mark for them. In some ways, it could get trickier in 2026 as you push further ahead, because the Medicare growth rate is decelerating a little bit. That number is triggered off inflation, and as inflation comes down, that number comes down as well. One other thing I have not talked about yet is the development pipeline at Trilogy. Currently, if you look at what we have disclosed in our supplemental, you will see that it skews toward IL and senior housing. Those businesses have higher margins, and as we lean into those product types and try to expand on the AL and IL side of their business, I think you will see margin expansion as a result of asset mix shifting to more private pay as well. Austin Wurschmidt: Helpful. Thanks for the time. Operator: Your next question comes from the line of Michael Carroll from RBC Capital Markets. Michael, please go ahead. Michael Carroll: Gabriel, I wanted to continue on that line of questioning, specifically talking about Trilogy's expansion plans in Wisconsin. I noticed the development that recently broke ground was in Wisconsin. Should we think about the growth that Trilogy is going to pursue in that new state as largely happening via development? Gabriel Willhite: I think that is probably the base case, Michael. What we would like to do is get to a spot where the best operators have a regional presence. Regional presence matters because they can get a regional director to oversee multiple different facilities, and there are synergies from sharing employees and creating an upward path for employees within your campuses. We would love to see a concentration of Trilogy campuses in Wisconsin where we can utilize the benefits of that kind of regional strategy that has worked so well for Trilogy in the past. It is hard for Trilogy to find acquisition opportunities that allow them to run their integrated model, and we do not want to move away from the integrated model. Maybe 75% of Trilogy's assets are purpose-built for their business. It is one of the reasons why they outperform: there are operational and care synergies that come from having AL, IL, and SNF under one roof. If you have a Trilogy prototype that has been value-engineered over several iterations, it is just easier to do that. So I think that is the base case. We are always looking for creative solutions. The Portage campus that is in our supplemental is one of those interesting opportunities. It was a defunct assisted living building that went dark. It was a 50-unit building, which is really hard to operate. We bought it, and instead of building ground up, we added on the necessary skilled nursing component. It was a really smart way to lower the total development cost, and it is going to be a good deal for us because of it. I think we will continue to look for those opportunities, but the base case is the Trilogy prototypes. Jeffrey Hanson: Michael, keep in mind also, the state where Trilogy has the most concentration is Indiana. They may have 7 thousand to 8 thousand beds in Indiana. The total addressable market in Indiana is far larger than that, so they can continue to grow in Indiana and in all of the other states they are in, in addition to Wisconsin. Michael Carroll: That is helpful. Sticking with Wisconsin a little bit, how many assets do you really need to get that regional scale, and how many developments in Wisconsin are you willing to pursue at a time? Should we think about that as one a year, or can Trilogy pursue more if they like the success they are having and try to build that necessary scale right away? Gabriel Willhite: We are evaluating all those things right now. To your first question about how many you want for a regional concentration, I think you want to be in the five to six-plus range. We are committed to what we have said in the past—three to four new campuses a year with Trilogy. That is currently a mix of Wisconsin and its other existing markets. Partially because of the CON requirements—those widen the moat for Trilogy and create a competitive advantage. These are CON states; you need the licenses in Wisconsin. That is something we need to manage through to make sure that we get the license in the counties we want to be in as well. So I think it will be incremental within the Wisconsin market as we augment it with markets Trilogy has already identified in the states they currently operate in. Michael Carroll: Great, thanks. Appreciate it. Operator: Your next question comes from the line of Seth Bergey with Citi. Seth, go ahead. Seth Bergey: Hey, thanks for taking my question. I wanted to dive into the $650 million pipeline a little bit more—geographically where those assets are located and whether those are primarily with existing operators? And then the third point would be whether your underwriting yields have changed at all given it seems there are more players entering the senior living space. Stefan K. Oh: Hey, good morning, Seth. Deal activity right now is very high. Our pipeline is in great shape. We have closed $250 million so far this year and have another ~$650 million that has been awarded. It is almost exclusively in SHOP. We are not surprised to see other people showing a lot of interest in this space—it is attractive and still in the early stages of extended demand growth. We are in an advantageous position. About half of our deals are coming on an off-market basis. We have been able to raise capital that allows us to compete on the targeted assets we really want to buy, and we have a good reputation as a buyer. If you look at the composition of our deals—higher quality, newer—primarily with existing operators that we already have in our portfolio today. One hundred percent of what we have closed so far has been with existing operators. Our pipeline is probably a mix of about 80% existing and 20% new. We continue to look in all the major regions where our operators are already located. That is our primary focus: growing in the areas where they have expertise. The team has done a great job of identifying, sourcing, and underwriting with our partners on these acquisitions, and I think we are going to be very pleased as we close these throughout the year. Seth Bergey: Thanks. And then thinking about the supply and demand picture, where are you acquiring at a discount to replacement cost, and how high do rates need to move before you start to see new supply come in on the SHOP side? Stefan K. Oh: We are still buying below replacement cost. Construction, although there is not a whole lot of it, continues to come in at higher amounts—the cost to build continues to grow. We have been fortunate to continue to find deals below replacement cost, even in primary markets where we see high barriers to entry. Pricing continues to be within our bandwidth. We are still seeing stabilized yields in the 7s, and that is through continued disciplined underwriting. Our previous underwriting is proving out, and that gives us more confidence going forward. Gabriel Willhite: One thing I would add to that, Seth—AHR has been in the SHOP business for a long time and through cycles. On the supply side, the things Stefan is targeting are areas where we think there is more runway before supply really picks up. That is why you do not see us focused on Florida, which is a great state for senior housing but one where we have seen it become overbuilt quickly. The pipeline he is building takes into account when supply may start ramping, and it is built to have a longer runway. Seth Bergey: Okay. Thank you so much. Operator: Our next question comes from the line of Ronald Kamdem with Morgan Stanley. Ronald, please go ahead. Ronald Kamdem: Hey, great. I want to go back to Trilogy. You are always optimizing for revenue, but thinking about the occupancy trajectory and the incremental margins that are coming through, how much more upside do you think you have at this point and how is that playing out? Gabriel Willhite: On a few different fronts, Trilogy still has a lot of meat on the bone. From the occupancy perspective, even at what I think are market-leading levels, we are still seeing occupancy grow—especially strong in the senior housing space. Typically, this is a downtime of the year with seasonality, so it is nice to see that Trilogy has been able to hold steady and had a really great year of occupancy growth last year. I think that is going to continue. When people understand there is a market reputation for being the place that takes care of your family the best, you are going to be a preferred provider. The other thing they have really figured out is that quality will carry the day from a rate perspective as well. If you appreciate the quality of care above all other things, you are willing to pay for that quality and experience because it costs a little more to deliver that. Trilogy is leaning into the revenue management side through a proprietary software program they developed over years that prices units dynamically on a daily basis, based on market demand, market prices, leasing, and unit attributes. They are far in front of where many other senior housing operators are, by and large, and that will be a significant tailwind for revenue. The real question is the velocity of those things—it is hard to predict how quickly occupancy will continue to build when you are at higher levels and how much rate growth will continue over the next year. I have extreme confidence both will be higher by the end of the year than they are now, but the rate of change is hard to speculate on. Ronald Kamdem: Great, and then my follow-up—during the quarter there was a lot of talk about the CMS proposed rate. The preliminary rate came out at 2.4%. How did you and Trilogy react to that? Does that change anything for the business plan, not only near term but longer term, if that rate continues to trail inflation? Gabriel Willhite: This is where people are often the most uninformed on Trilogy’s business, so I am glad you asked. Most people assume that skilled nursing rates will just grow at an inflationary rate and you are stuck with it. If you have followed Trilogy for the last several years, you have seen that is not true. Their skilled nursing rate, if you look at our supplemental, is growing at 5% a year—ahead of inflation and significantly ahead for a couple of reasons. One, a big component of their skilled nursing is private pay. Those rates move much like private-pay senior housing, and Trilogy has control over those rates, so I would expect them to outpace inflation. Even though Medicare Advantage contracts typically price off of the Medicare rate increases, Trilogy has been able to select MA plans and manage those relationships in a way where they are generating rate growth of 6.6% last quarter—well above inflation and the Medicare rate—because they are being more selective about who they partner with. As occupancy grows, it creates the opportunity to be even more selective. They have sophisticated systems for managing that entire process, which comes with scale, experience, and great leadership. The 2.4% was not a surprise. That is more like a floor than a ceiling, and I fully expect Trilogy to manage all of their opportunities for maximizing revenue growth within skilled nursing to push it beyond 2.4%. Ronald Kamdem: Helpful. Thank you. Operator: Your next question comes from the line of Juan Sanabria from BMO. Juan, go ahead. Juan Sanabria: I wanted to ask about the SHOP RevPOR growth—looks a little below where you were trending last year. Was there an impact from the typical seasonality with some discounts in the first quarter that may have impacted growth, and how should we think about RevPOR trending for the balance of the year? Gabriel Willhite: The biggest reason for the deceleration in RevPOR growth is that we changed the same-store universe, which happens once a year for us. If you looked at our 2025 same store, the RevPOR growth there would be high 4s—more in line with what we are expecting and managing toward. The reason it is lower in the current same store is that we have shifted some non-stabilized assets into the same store. Those assets have incredible NOI growth, but the strategy has always been build occupancy first and grow rate second. As they are building occupancy, they are a meaningful component of the NOI growth on a same-store basis, and we think it is a great way for us to add value and grow NOI. The second thing is that it would be an oversimplification of a complex operating business to look at one number like RevPOR without the context of the expense side. We are managing toward NOI growth—taking many different things into account to deliver the most NOI growth. For example, we asked our operators to focus on reducing the referral fees we pay for move-ins. That helps on the expense side, and if you pass a little of those savings on to residents, it may be a headwind for RevPOR. But it still grows NOI and expands margin. It is exactly what we did: we reduced referral fees by over 20% in our portfolio year over year. As occupancies push higher, you need to look at a variety of things to optimize NOI, and that is what we are asking our operators to do. Juan Sanabria: Great, thank you. Earlier in the call, you noted sources and uses to fund acquisitions, including dispositions. There seems to be a very strong bid across the spectrum for different asset types within health care, including medical office. Have you thought about potentially selling assets more quickly or at a larger scale—assuming you have the ability to redeploy those proceeds—to take advantage of the bid, or maybe explore joint venture opportunities? Brian S. Peay: Juan, my guess is you are talking about our outpatient medical portfolio. Everything else is such a tiny piece—our triple net is less than 6% and shrinking every day. We are well aware of the value embedded in our outpatient medical segment. All the fundamentals that make the long-term care business really positive are equally true for outpatient medical: older, aging America; more doctor visits; more things happening in an outpatient setting than in hospitals; and a lack of new supply. Having said that, we have not added to our outpatient medical—we have not even underwritten an outpatient medical building in years. It continues to shrink as a piece of our portfolio. We have sold over a third of the assets in the outpatient medical segment—smaller, slower-growth assets. We have another handful of buildings we are continuing to expose to the market, and we expect to sell those. Beyond that, we are pretty happy with our portfolio. It is a nice balance. We loved having outpatient medical buildings during the pandemic—the occupancy in that segment was higher at the end of 2021 than it was at the beginning of 2021. As of now, we are committed to a diversified strategy of health care investments. But everything we are buying is SHOP, and we are selling a little more outpatient medical, so that is going to become a smaller and smaller piece of the total. Juan Sanabria: Thank you. Operator: Your next question comes from the line of Alec Feygin with Baird. Alec, please go ahead. Alec Feygin: Thanks for taking my question. On the development strategy, is Trilogy or AHR the bigger driver of identifying where and when to start new projects? Gabriel Willhite: Within the development pipeline at Trilogy, it is collaborative, but the Trilogy team is really driving the identification of opportunities—bringing them to us to collaborate and then deciding which to pursue. The development pipeline at Trilogy for new campuses is probably 30 markets deep within its current footprint. How do we decide which three or four to pursue a year? We have to marry a few different things: land availability significant enough to build out an entire campus and allow room for expansion (including villas), and where we have access to bed licenses. There is some magic to that as well. Because Trilogy has scale, there is almost a bed-license bank they can pull from within their ownership universe to move licenses from one campus to the next or slide licenses from one county to the next. Those rules are complex and hard to navigate, and it is hard to find the licenses to do it. That is a big advantage for Trilogy that I do not think people fully appreciate. We are going to continue to be incremental in the new campuses we add. The opportunity set is really deep, and it is a multi-year development pipeline that is essentially exclusive to us, so that is going to continue for the foreseeable future. Brian S. Peay: And as you can imagine, we are going to help decide what makes the most sense for us as far as the commitment to development, the dollars we are putting out, and the yields we are going to demand in return for that. Alec Feygin: Thank you for all that. Switching gears—beyond the three to four developments for Trilogy, what is the appetite with other operators to do development funding? If not now, what would you need to see in order to pursue those opportunities in the future? Gabriel Willhite: It is something we are looking at. We have not hit go on any new developments with other operators right now. First, we are looking at our existing portfolio and taking a page from the Trilogy playbook—seeing where we have excess land in high-demand, high-occupancy assets, and expanding our existing SHOP buildings. The IRRs on those investments are the highest in our entire portfolio; the limitation is the dollars are not unlimited and not a major amount either. We are doing that, and we are actually using Trilogy’s development capabilities to help us manage those processes—a great example of platform synergies working for our collective benefit. With other new ground-up developments, we are thinking about how we can expand our existing relationships, use our operating partners that have development experience, and potentially grow their presence in their current markets. We have not found the perfect opportunity to do that yet, but I think we are getting closer. The holdup is that we are buying things below replacement cost, and that will be the holdup until that shifts. We know the demographics will continue to be strong and that supply is not enough to keep up with demand over the next five to ten years—we will hit max occupancy at some point. The question is when do you really want to start developing to meet that opportunity when you have other opportunities in front of you that are below replacement cost? It is hard to say yes to that. Alec Feygin: Yeah, that is great color. Thank you for the time. Operator: Your next question comes from the line of Michael Stroyeck from Green Street. Michael, please go ahead. Michael Stroyeck: Thanks, and good morning. Within Trilogy, expense growth saw a pretty nice deceleration in 1Q versus recent quarters. Were there any one-timers that may have impacted expenses during the quarter—anything worth calling out that may have driven that deceleration? Gabriel Willhite: No, it is more of a broad focus on expense management. This was in response to decelerating Medicare reimbursement, us understanding that was coming and getting out in front of it to manage expenses. When I say “us,” I mean really the Trilogy team. We made some significant investments last year, and I think this year we will see expense management really work for them and help expand margin further. No one-timers. Michael Stroyeck: Understood. And going back to a point you made on CONs—As SNF occupancy continues to trend higher, have you seen any states relax certificate-of-need rules or any indication we could see an acceleration in supply growth across any of your markets? Gabriel Willhite: No. In fact, that is exactly why I say Trilogy has the most durable competitive moat in our entire portfolio. If you look at skilled nursing development, beds as a percentage of inventory being added is negative and has been for several years—more beds are coming offline than online. If any are coming online, I would speculate almost all are coming from Trilogy. So the supply side on that part of the business is not going to be a problem. That is where there is the absolute longest runway in our portfolio. It is really hard to develop SNF because most existing buildings are focused on Medicaid, with an average Medicaid mix of 60% to 70%, which makes it hard to pencil from a development perspective. It works at Trilogy because they have the integrated campus, great hospital relationships, and a disproportionate amount of residents on Medicare and Medicare Advantage plans, which are higher-reimbursement sources. That is really hard to replicate if you are not an experienced operator with regional concentration. Operator: Your next question comes from the line of Michael Goldsmith with UBS. Michael, please go ahead. Michael Goldsmith: Good afternoon. Thanks a lot for taking my questions. On the last call, you indicated that the non-same-store pools for both Trilogy and SHOP actually grow faster than the same store, but that could be lumpy. How should we think about the NOI growth in the non-same-store pools for Trilogy and SHOP relative to the same-store pools? Brian S. Peay: Anecdotally, that is not a bad supposition. If you unpack the type of asset we have been targeting, these are assets that are going to have a tremendous amount of internal growth. So when we finally put them into the same-store pool, you are going to see dramatic same-store earnings growth. For example, in 2025 we bought a building that was 74% occupied from a developer who had cycled through operators and then self-operated. We bought it in a market where we have a trusted operator running buildings for us at 95%+ occupancy. We have tremendous conviction in their ability to grow that asset. Not every asset is like that, but that is the type we have been targeting, and there is upside. So it is fair to say the non-same-store is going to grow faster than the same store. Michael Goldsmith: Got it. Some of your peers have reported that U.S. SHOP has gotten more competitive. Given AHR does not disclose initial yield, are you seeing more cap-rate compression to start the year? And can you share the timing on that $650 million pipeline? Stefan K. Oh: On timing, a majority of what we have in the $650 million pipeline will close by the end of this quarter, with the remainder closing in the third quarter. As far as pricing, it is fair to say that cap rates have moved generally 25 to 50 basis points over the last year, but it is very deal specific. We are buying a mix of light value-add and stabilized assets. We are focused on long-term cash-flow durability—what is the projection over several years, not just the first year. That has been consistent throughout. We have still been able to find deals that make a lot of sense for us, and there are many other deals we continue to look at. Michael Goldsmith: And while I have you, can you walk through what was the driver of the G&A guidance increase? Brian S. Peay: Sure. It is not a bad thing—in fact, I think it is a positive. The real increase in G&A is tied to stock-based compensation. Two buckets. First, last year investors approved our ability to reward our operators for outperformance with incentive compensation in the form of AHR stock, which gives us best-in-class alignment. We did grant some shares, and those grants are now showing up in the numbers. Second, stock-based comp goes up when the stock price goes up, and we have been in the blessed position of having the stock price go up. So the G&A guide went up. Michael Goldsmith: Thank you very much. Good luck in the next quarter. Operator: There are no further questions at this time. I will now turn the call back to Jeffrey Hanson, Chairman and Interim CEO, for closing remarks. Jeffrey Hanson: Thank you, operator, and thank you, everybody, for investing your time and for your continued support and confidence in the company. I know Danny is attending the call this morning as well, and he is looking forward to reconnecting with all of you directly as soon as he is able. With that, we will conclude the call, and have a great weekend. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, and welcome to Westrock Coffee Company's First Quarter 2026 Earnings Conference Call. My name is Rory. I'll be coordinating your call today. Following prepared remarks, we will open up the call to your questions. Instructions will be given at that time. I'll now hand the call over to Jauan Arnold with Westrock Coffee. Jauan Arnold: Thank you, and welcome to Westrock Coffee Company's First Quarter 2026 Earnings Conference Call. Today's call is being recorded. With us are Mr. Scott Ford, Co-Founder and Chief Executive Officer; and Mr. Chris Pledger, Chief Financial Officer. By now, everyone should have access to the company's first quarter earnings release issued earlier today. This information is available on the Investor Relations section of Westrock Coffee Company's website at investors.westrockcoffee.com. Certain comments made on this call include forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs concerning future events and are subject to several risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release and other filings with the SEC for a more detailed discussion of the risk factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Also, discussions during the call will use some non-GAAP financial measures as we describe business performance. The SEC filings as well as the earnings press release provide reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. And with that, it's my pleasure to turn the call over to Scott Ford, our Co-Founder and Chief Executive Officer. Scott Ford: Thank you, Jauan. Good afternoon, everyone. Thanks for joining us. I am pleased to report that our first quarter of '26 delivered strong results across every dimension of our business, marking our fourth consecutive quarter of year-over-year consolidated adjusted EBITDA growth and what I believe is the most important inflection point in Westrock Coffee's history. For the first time, we are reporting results as a fully operational integrated beverage platform with construction behind us, all lines running and the full enterprise now generating operating income. On the numbers, Q1 consolidated adjusted EBITDA was $26 million, more than tripling year-over-year. Net sales were $308.8 million, up 44%. We went from a $13 million operating loss in Q1 of last year to a $3.2 million operating profit this quarter, and our secured net leverage ratio improved to 3.45x, down 40 basis points from year-end. Chris will take you through the details, but the trajectory speaks for itself. The real story this quarter is what's happening commercially. The platform we spent 3 years building is now attracting exactly the kind of demand we envisioned. Brands coming to us not for a single SKU, but for a full spectrum beverage partnership across multiple categories. At Conway, all 5 production lines are fully operational, cans, glass, multi-serve bottles, and bulk extract. With capital expenditure projects now complete, Conway has swung to operating cash flow positive. As volumes continue to build through the balance of this year and next, we expect the facility to become an increasingly meaningful contributor to segment profitability. Commercially, we are continuing to make progress with current and new potential brand partners across the product portfolio from tea and lemonade-based refreshers to coffee RTD beverages to packaged coffee to single-serve cups, with energy drinks, high-protein drinks, and seltzers in various stages of product development and commercialization. In single-serve specifically, you'll recall the departure of a large customer in Q4 of '25 due to industry consolidation. That disruption is now fully behind us. We are seeing strong inbound interest from multiple customers, and we expect some of this volume to begin arriving in late '26 with full replacement targeted by the end of '27. On Palantir, our partnership continues to deepen, and I am convinced this relationship remains underappreciated by the market. Their foundry operating system is empowering completely new ways of work. From improving efficiencies in our manufacturing, logistics, planning, procurement to the automation of workflows throughout the company, we continue to believe that the upside to this body of work is well beyond anything approaching historical normality from traditional system upgrade efforts. We are reaffirming our '26 consolidated adjusted EBITDA outlook of $90 million to $100 million. Q1's 2026 beat plan and posted strong year-over-year growth. The pipeline is the healthiest by far that it's ever been and momentum is building. To close, the prior 3 years were about building the platform. This year is about leveraging it. We're generating operating income. We're deleveraging our balance sheet. Conway is contributing, and we have a deep pipeline of customers who want to produce with us across an expanding array of categories. This is the business model working. I want to thank our entire team from the plant floors in Concord, Conway, Collins, and Clark, to our sourcing offices around the world to our systems and corporate teams. These results are theirs. I also want to thank our shareholders who had the vision to invest in what we were building and the conviction to hold their shares through 3 years of heavy investment to get here. We appreciate your patience, and we intend to keep rewarding it. We are one of the very few platforms in North America that can formulate, fill, and ship across cans, glass, bottles and single-serve formats from a single integrated footprint and brand owners are increasingly coming to us precisely because of that. With that, I'll turn it over to Chris Pledger, our CFO, for the financial details. Chris? Thomas Pledger: Thank you, Scott, and good afternoon, everyone. As Scott noted, we just completed the first quarter in which our Conway extract and RTD facility is fully operational and contributing at scale, and the results speak for themselves. Consolidated net sales increased 44% to approximately $309 million. Our reported net loss of $8.5 million narrowed significantly from the $27.2 million net loss incurred in the first quarter of 2025, and we went from an operating loss of $13.1 million in the first quarter of last year to a $3.2 million operating profit this quarter. This improvement reflects operating leverage now visible in every line of the P&L as Conway start-up costs diminish and volume scales. And finally, consolidated adjusted EBITDA was $26 million, which reflects another record quarter for Westrock, increasing over 3x compared to consolidated adjusted EBITDA generated in the first quarter of 2025. In Beverage Solutions, first quarter segment adjusted EBITDA was $23.3 million, up 143% versus 2025. This result includes a one-time gain of approximately $4.6 million, which represents the final payment we received under the single-serve cup contract with a customer who was acquired by a competitor earlier this year. But even excluding this item, Beverage Solutions adjusted EBITDA was approximately $18.6 million, which is up 95% versus the first quarter of 2025. Growth in Beverage Solutions was driven by the continued ramp of our RTD can, glass and multi-serve bottle production lines in Conway, a 31% increase in single-serve cup volumes across both existing and new brand partners, 4% growth in our packaged coffee business and improved fixed cost absorption across the manufacturing footprint. Our SS&T segment delivered segment adjusted EBITDA of $6.5 million in the first quarter compared to $1.9 million in the first quarter of 2025. SS&T continues to be a strategic capability for the platform, enabling us to offer brand owners verified traceable supply at the scale modern beverage platforms require. Capital expenditures for the quarter were approximately $7 million compared to over $41 million of CapEx for the first quarter of 2025. As I mentioned on our last call, we expect a downward trajectory in the capital intensity of the business now that Conway is fully commercialized. That trajectory from $160 million in 2024 to $89 million in 2025 to an expected $30 million in 2026 represents a structural shift in the capital profile of the company. Maintenance capital is now our baseline as our investment phase is behind us. At quarter end, we had approximately $63 million of unrestricted cash and revolver availability under our Beverage Solutions credit facility, and we remain in full compliance with our credit agreement. We ended the first quarter with Beverage Solutions net secured leverage of 3.45x, down from 3.85x at year-end, which is in line with our expectations and meaningfully ahead of our covenant requirements. And importantly, we remain on track to be free cash flow positive in the second half of this year. Our first quarter results demonstrate the earnings power of the platform as we continue to grow into the capacity we've built. We continue to convert our commercial pipeline at pace and the fact that capacity is now installed, and operating has materially shortened our sales cycle with new brand partners. Our focus is squarely on commercializing the installed capacity we've built and converting our pipeline into long-term partnerships. With that, we'd be happy to open the line for questions. Operator: [Operator Instructions] Our first question comes from the line of Eric Des Lauriers of Craig-Hallum Group. Eric Des Lauriers: Congrats on the amazing execution over the past several years and the progress, especially seen in Q1 here, a great job. So, my first question here, it seems like, I mean, pretty much everything is going in the right direction for you guys. All the comments are positive in terms of all the lines being produced. You have more volumes coming online throughout the year. So, my real question here is just kind of on the potential variability around timing of the ramp in those volumes. Is there much, if any, variability in that? Or is that all pretty much squared away and sort of spoken for at this point? Just kind of wondering the ability for things to ramp either faster or slower this year than currently anticipated. Scott Ford: First of all, thank you for your very gracious comment. I think -- Eric, this is Scott. I think that the forecast that we've given for '26 and then the plans that we're working on '27 are for the most part at this juncture contracted in. So that doesn't mean everything will land right when we think it will land. But our confidence that we'll be able to make it at the margin that we expect is very high now that we've been running the plant and running several of these lines for 12 to 18 months. We've got our per unit economics right. We run those at scale. We know where those land. So, we're actually pretty comfortable with the trajectory that we've got. And then we've got -- we do have one interesting thing beyond just the contracts that are in and the conversations that we're having. We are seeing on the potential upside, which is -- I'm not trying to sell you on that it will happen. But we are seeing a number of brands coming around and taking a look at multiple products, and we are seeing engagement to close and commitment for production in 4- to 6-month windows as opposed to 2- to 4-year windows since Conway turned on and people could actually come walk through it, have us make a sample of their product, have us tweak it, et cetera, et cetera. And then it's something about the fact they can walk through it and see it has changed the pace at which brands are closing with us. So, I would say we've got some upside to that. And I think you see more of that in '27, certainly at this point than '26. Chris, what else would you... Thomas Pledger: No, I think that's exactly right. I think that in terms of what we have locked in for '26, I think there's some potential upside to that, but it's largely contracted and pulling through the system as we expect. '27, there's the best sales pipeline that we've had. So, I expect to continue to be able to grow through the year, and we'll see that in our '27 numbers. Eric Des Lauriers: Awesome. That's very helpful. I appreciate that. And no real surprises there but certainly encouraging on the expedited pace of brands closing. It's nice to hear. On to the Palantir commentary, I would say this is like this, at least from my perspective, is a bit more of like a qualitative thing for me. Certainly, nice to hear, and we'll sort of like await more results there. It's tough for me to sort of predict that. So, I'm wondering if you can help us understand, as we look out to '28, '29, et cetera, where might we see the impact of this Palantir relationship progressing? Would this be on -- you mentioned procurement and operations. I mean I'm kind of just imagining improved margins overall. But is there anything else that we should sort of be on the lookout for over the next couple of years as this Palantir relationship potentially has increasing impact? Scott Ford: Super question. Let me take a run at it this way. And I was not the first person to the party on Palantir and what they could mean for our business. That came out of another group of people here in the business that did the research on it, started working on it 3 years ago, and I have been a follower, not a leader on this. But I have -- there's nothing like a convert or spreading the word. And as a bit of a somewhat reluctant convert, if you will, the more that we dig into this, the more I realize that the -- what I read and what we see talked about in the AI world and what Palantir's operating system actually is, I can barely recognize the reality of what they're doing on the ground with the talk that goes on around AI. I don't know any -- so you're talking to a guy who's not on social media, doesn't know anything about it, doesn't care to know anything about it. I was full-grown when that came out. I skipped all of that. I thought AI and the chatbot and having conversations with an AI system was of the same ilk. When I see though, is the reality that Palantir creates a walled garden, if you will, where every piece of data in our network across all the systems and all of the handoffs and all of the spreadsheets and all of the memos and the hundreds of hours a week that we spend as individuals trying to explain and connect information from one system to another to another to then even be able to guess what our profitability is, let alone audit it. Palantir's Foundry system contains all of that information and drains the need for all of those systems and all of that activity. We're talking tens of millions of dollars of benefit over the next 3 to 5 years annually in a business our size at only $1.3 billion run rate. I don't think the world is even writing about the impact of -- it's a little bit like when Microsoft came out. You all are probably too young. I remember when it came out. I remember an operating system that brought about a cohesive desktop experience where you could get to a financial analysis and you could get to a word document and you could get to e-mail. That was unheard of. Well, it rebuilt the office in the enterprise -- rebuilt office work across the world. I'm not so sure that the Foundry system isn't going to rebuild in the same fashion, the commercial systems of corporations around the world over the next 10 to 15 years. And we, I was a doubter, and I may be the biggest believer walking at this juncture. Operator: Our next question comes from the line of Sarang Vora at Telsey Advisory Group. Sarang Vora: Congratulations on a great quarter. My question is on the plant utilization, capacity utilization. I mean the demand is just very, very strong. The '26 pipeline seems full. '27, you're already taking orders. I'm curious if you can share color on where the plant or capacity utilization is today and how it ramps up in like '27? And is there room for '28? I'm just curious to know like number of shifts. Any color you can share on how the plant or the capacity is being utilized? Scott Ford: Yes. At a high level, Sarang, as we said last quarter, we are not going to break that kind of detail out. Our competitors don't break it out. And I don't think it behooves -- it's not going to change the story for a Westrock investor to know the percentage utilization of a specific line versus quarter-over-quarter. So, we broke that out during the construction phase so people can see where we are. I will say this: We have well in excess of an additional $100 million of EBITDA for sale in lines that we have capacity to sell against right now. So, whether that takes us 6 months, 12 months, or 18 months, then we could expand it from there with small incremental CapEx additions within the footprint that we've built and that we have rebuilt in the plants that we've got running today. Sarang Vora: No, that's great. That's exactly what I was trying to ask because we do get asked about like what is the long-term potential coming out of Conway. And one way or the other, I feel like you answered the potential of that business. So that was good to hear. The second question we get a lot is on the coffee prices. And I understand the dynamics that you do end up passing the increases as well as the decreases to the customer. But can you walk us through how the lower coffee prices over '26 and maybe '27 kind of reflects on part of your businesses? Thomas Pledger: Yes. Sarang, this is Chris. I think from -- in '25, I mean, '25 was sort of, I guess, we experienced in the coffee business, historically high C price throughout '25. That coffee still continues to flow through our P&L, although as prices have come down towards the back part of last year and into the first part of this year, we're starting to get lower cost coffee that comes through. And that's a passthrough for us, as we've talked about on prior calls. And what that ends up doing is that it will end up -- your net sales will be higher because you've got a higher cost of coffee flowing through your P&L and your gross profit -- dollar gross profit will stay the same on an apples-to-apples basis. And so, while your margins might compress, your absolute dollar growth happens on a dollar basis. And so, when we -- that's when we talk about look at the year-over-year growth in gross profit, look at the year-over-year growth in adjusted EBITDA on a dollar basis to really see the earnings power of the business. If you look at this year, gross profit in the first quarter of this year was $46 million. That's a 57% increase year-over-year. That's the value of the platform that we've created, cutting out the noise of a C price movement year-over-year. Sarang Vora: That's great. And my final question is on the outlook. Can you share any puts and takes we should be mindful of? Very strong first quarter, you didn't raise the annual. But I'm just curious to know anything that we should be mindful that you're watching in terms of guidance, like higher gas prices. I know historically, they have impacted your business or the consumer, the lower end or the gas station consumer. So just curious to know like anything we should be mindful or watchful as we look out at the guidance for the year? Thomas Pledger: You kind of answered your own question. I will say the first quarter was exceptionally strong, and it held up strong through all of our different -- our customer segments. As you have continued high gas prices, that's going to affect things like C-store channels and travel center customers. But the way we're built now where we've grown our retail packaging, we've grown our at-home consumption or products targeted towards at-home consumption. We are much better positioned to withstand volatility that results from a C-store channel because of high gas prices than we were when we kind of went through this 2 to 3 years ago. And so that's certainly something that we watch. Obviously, $6 gas is nobody's friend when it comes to selling products, whether it's coffee or anything else you might find in an away-from-home environment. But we'll continue to watch that, but we like where we are and how we've diversified risks around the business, and we expect to continue to be able to deliver as we have. Operator: [Operator Instructions] I'm showing no further questions at this time. I would now like to turn the call back to Scott Ford for closing remarks. Scott Ford: All right. Well, fellas, thanks for hopping on. We appreciate it. Super proud of the team's effort. I'm really appreciative of the shareholder base that has stayed with us. About 70% of the shares are held by people that believed in the story of what we were doing, who were willing to put the money up to see construction go into this industry. We are excited about the fact that the construction phase is complete. I'm really appreciative of the shareholders who stayed with us. We've got about 30% of the float outstanding that's short. I know that not everybody is with us on this, but that's okay. Life works its way through. But we are looking forward to a good remaining portion of the year. And then we think '27 is looking actually terrific because the volumes we're booking now are starting to be placed in '27. And we kind of outkicked our coverage in terms of what we expected. We're going to do some work through the back part of this year to make sure we get a good number on it. But things are going really well as we come out of construction and into filling the plants. And I just want to say thank you to everybody who has stayed with us through the thick and the thin of construction phase. And all have a great evening. Thanks so much. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Greetings, and welcome to the Codexis Report 2026 Q1 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Georgia Erbez, Chief Financial Officer and Chief Business Officer. Please go ahead. Georgia Erbez: Thank you, operator. With me today are Dr. Alison Moore, Codexis' President and Chief Executive Officer; and Britton Jimenez, Senior Vice President, Sales and Marketing. During this call, management will be making a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including our guidance for 2026 revenue, anticipated milestones, including product launches, facility expansions, technical milestones and public announcements related thereto as well as our strategies and prospects for revenue growth and successful execution of current and future programs and partnerships. To the extent that the statements contained in this call are not descriptions of historical facts regarding Codexis, they are forward-looking statements reflecting the beliefs and expectations of management as of the statement date, May 7, 2026. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond Codexis' control and that could materially affect actual results. Additional information about factors that could materially affect actual results can be found in Codexis' filings with the Securities and Exchange Commission. Codexis expressly disclaims any intent or obligation to update these forward-looking statements, except as required by law. Now I'll turn the call over to Alison. Alison Moore: Thank you, Georgia, and thanks, everyone, for joining. While it's been a short 8 weeks since our last call, we've accomplished a lot at Codexis. We are pleased to report another strong quarter and are busy preparing for the TIDES Conference next week, where we will present important new data on our ECO Synthesis technology. Codexis generates manufacturing solutions using biocatalytic enzymes. Over the last 3 years, we have developed the ECO Synthesis manufacturing platform for the production of RNA medicine, specifically siRNA, and we are now focused on bringing this to the market. The standard approach of using solid phase organic synthesis for siRNA manufacturing is complex, solvent-intensive and challenging to scale. Currently, siRNA pipelines are expanding from rare diseases to large population indications, which will create a significant manufacturing bottleneck in the next 3 years. ECO Synthesis has the potential to alleviate production constraints by delivering greater scalability and higher product quality with the added benefit of dramatically improving environmental impact. Last year, we achieved a number of important milestones in platform performance and industry engagement, which generated tangible interest from our customers. In 2026, the potential impact of our platform is well understood. Across the industry, we are seeing increased interest in enzymatic production solutions. Our goal is to position Codexis as the leading manufacturing technology innovator. We are operationalizing our platform through scaling, improving process control and by our platform's unique capability of delivering superior siRNA product. A new feature of our ECO Synthesis platform is the ability to generate siRNA with specific stereochemical control. Stereoisomers exist at both ends of most siRNA molecules and are made of the same atoms but are arranged differently in 3-dimensional space. As a reminder, drug developers have little influence over stereochemistry today as existing chemical manufacturing methods produce random mixtures that can vary in terms of therapeutic potency and purity. Our engineered enzymes used in ECO Synthesis can deliver product with specific stereoisomer configurations. These stereopure molecules confer overall improved product quality and have the potential to deliver improved potency. We continue to explore the biological impact of this control and believe it could be a tremendous asset to those customers who seek ways to improve their products. Our small molecule biocatalysis business remains an important part of Codexis and provides support for the investments we are making in ECO Synthesis. We supply uniquely designed enzymes for 13 branded commercial pharmaceutical products. This portfolio continues to grow with the recent approval of islatravir, a part of an important new combination treatment for HIV. Codexis partnered with Merck, who carried out groundbreaking process chemistry, substituting a 16-step chemical synthesis with a biocatalytic cascade. This achieved a Green Chemistry Award in 2025. We are supplying enzymes for this commercial product and are proud to participate in the supply chain for HIV patients. We are making remarkable progress at Codexis and momentum is increasing in 2026. We are proud of the advances we are making to further enhance the utility of the ECO Synthesis platform. We look forward to showing our customers and investors additional tangible proof of value of the technology. Now to update you on our commercial activities and progress, let me turn it over to Britton. Britton Jimenez: Thanks, Alison. Our ECO Synthesis manufacturing platform continues to mature into a thriving and successful business. Most importantly, it is a platform capable of broadly supporting product development for the most important growing modality in the genomic medicine space. The number of RNA medicines in development is growing at an estimated rate of at least 10% per year with over 100 candidates in clinical trials and more than 400 in preclinical development. Current production technologies will not be able to keep up with future demand. For example, there are 4 drugs in late-stage clinical development for cardiovascular indications. A 2% to 3% market penetration of one of these therapeutics into a 25 million addressable patient population will require more oligonucleotide production than the entire rare disease portfolio combined. The impact of these powerful new therapies may not reach their full potential if they cannot be produced reliably, efficiently and scale and at scale. As innovators and CDMOs search for ways to expand capacity, the importance of new production technologies is rapidly accelerating, and this market is currently estimated to be at $2 billion. For our ECO Synthesis platform, we have over 50 opportunities in our sales pipeline with 40 individual companies demonstrating strong continued interest in our technology. The valuation work with our CDMO partners is progressing and long-term commercial discussions are also moving forward. The industry knows there needs to be a change, and we intend to be the best option for both drug innovators and CDMOs. In connection with what Alison mentioned before, our customers are interested in exploring how stereoisomer control can be incorporated into their products. We believe this new capability can improve product purity and potency for therapeutics. We are excited to add this approach to our ECO Synthesis portfolio. In advance of the TIDES USA meeting, we completed exciting new data on stereochemistry. This groundbreaking presentation will underscore the breadth of our leadership in enzymatic technology. During TIDES, we will host a roundtable discussion with industry experts focused on stereochemistry and the value it can bring to next-generation RNA medicines. We will have additional presentations on environmental sustainability and the performance of highly engineered ligases. Turning to our small molecule biocatalysis business. It remains stable and profitable. We continue to support 13 commercially approved products that are dependent on our enzymes. As we mentioned on a previous update call, we have a number of projects in clinical development. In the last 6 months, we have had data readouts on 3 studies, 2 of which were positive and one of which received FDA approval last month. We are assisting our customers with preparation for commercial launch for both programs. Our pipeline remains robust with 11 programs still in Phase III clinical development and data readouts expected on 4 clinical trials in the next 12 months. We are excited for our prospects in 2026 and beyond. The next 3 years represent a critical window to increase global oligonucleotide production capacity. The industry must confront the challenge of scaling from manufacturing less than 1 metric ton of oligonucleotide therapeutics annually to 10x to 50x that in the next decade. There isn't a more important time for enzymatic production approaches to be deployed in global production infrastructure, and we are driving the ECO Synthesis platform toward this opportunity. With that, I will now turn the call over to Georgia for a discussion of our financial results for the first quarter. Georgia Erbez: Thanks, Britton. Good afternoon, everyone. Today, I will provide a brief overview of our financial results here on the call and invite you to review our 10-Q filed today for a more detailed discussion. Total revenues were $15.2 million for the first quarter of 2026 compared to $7.5 million in the first quarter of 2025. The increase was primarily due to revenue from the Merck technology transfer agreement executed in the fourth quarter of 2025, which has now been fully recognized. Product gross margin was 71% for the first quarter of 2026, which compares to 55% for the first quarter of 2025. For the first quarter of 2026, the increase was primarily driven by product mix and sales declines in several low-margin products that were replaced with more profitable product sales. We continue to expect 2026 annual gross margins to be comparable to the annual levels we reported in 2025. Research and development expenses for the first quarter of 2026 were $11.4 million compared to $12.9 million in the first quarter of 2025, largely driven by lower allocable costs that were partially offset by higher employee-related costs and higher use of outside services. Selling, general and administrative expenses were $9.8 million in the first quarter of 2026 compared to $12.4 million in the prior year period. The decrease was primarily due to lower employee-related costs due to lower headcount, lower stock-based compensation expenses and lower consultant fees and outside services. Net loss for the first quarter of 2026 was $8.7 million compared to the loss of $20.7 million for the first quarter of 2025. We are fully engaged in our project to retrofit our new GMP plant and located in Hayward, California that was leased in 2025. We are currently in the detailed design phase and are preparing to apply for a building permit in the second quarter. Construction is planned to get underway in the second half of the year, and we expect to be fully operational by the end of 2027. Together with our Redwood City headquarters, this marks a continued step forward in how we support development, scale-up and manufacturing our customers' products. We reiterate our revenue guidance and expect 2026 revenue in the range of $72 million to $76 million. Like the quarterly trends we saw last year, we expect 2026 revenue to be more heavily weighted towards the second half of 2026 versus the first half. Codexis ended the first quarter with $65.1 million in cash, cash equivalents and short-term investments, which compares to $78.2 million at the end of 2025. We expect our current cash will be sufficient to fund our planned operations and capital expenditures through the end of 2027. As a reminder, our financial guidance and cash runway include the expenses associated with the build-out of our GMP facility. With that, I will now turn the call back over to Alison. Alison Moore: Thank you, Georgia, and thank you, Britton. Our proprietary ECO Synthesis platform technology has the potential to radically alter the landscape of oligonucleotide manufacturing. The next step for Codexis is to deploy the technology into our customers' pipelines. We are working hard to achieve this goal in 2026. For investors, we want to show proof of success. We can do this by signing broader and higher value types of contracts as well as innovative licensing deals. We will also be focused on financial performance by meeting our revenue targets while being mindful of our expenses. We will continue to innovate in the field of RNA medicines using our skills and experience in biocatalytic enzymes. Our presentations at the TIDES USA meeting next week in Boston will showcase our newest innovation. We are continuing to scale up our ECO Synthesis manufacturing platform, and we are making progress towards achieving 0.5 kilogram scale by the end of this year. I believe 2026 could be the year when ECO Synthesis is no longer viewed as just an alternative production technology, but the technology of choice for our customers' RNA medicines. We are excited by our prospects and proud of the dedication and achievements of our employees who have been instrumental in making the ECO Synthesis technology a reality. Now we'd be happy to take your questions. Operator? Operator: [Operator Instructions]. The first question comes from Allison Bratzel with Piper Sandler. Peter Spanogiannopoulos: This is Peter Spanogiannopoulos on for Allison. I was wondering if you can give us a preview of what to expect from the upcoming stereochemistry data that will be presented at TIDES. Then as a follow-up, I'm wondering when we can expect to see some data demonstrating that this stereo control translates to improved efficacy. Alison Moore: Thanks for the question, Peter. Yes, we're very excited to show our data next week. What we are going to show for the first time demonstrates stereo control at both the 3 prime and the 5 prime end of the siRNA molecule. This has not been shown before, and we will show data describing how we achieve that and the product quality of the product. We are currently working on generating data associated with the potential for improved activity. We have some data already and shortly, we are going to have more. I would also point out that there is some extremely nice published literature that has already demonstrated the opportunity of stereo control in siRNA medicine. That stereo control confers improved stability related to intracellular nuclease activity. Even mechanistically, there's a hypothesis about why there ought to be the opportunity of improved potency. As I said, we have those data in the works, and we will definitely be sharing those when we have them also. Operator: The next question comes from Kristen Kluska with Cantor Fitzgerald. Unknown Analyst: This is Ian on the line for Kristin. Could you speak at a high level about the risks that are involved in scaling the platform from 100-gram scale to like 500 gram by year-end? Now that you're operating at 100 gram, what aspects of the scale-up process do you believe have been derisked versus what remains to be proven? Alison Moore: Thank you for the question. We have a very skilled and experienced process development team here at Codexis that we have built over the last 3 years that have expertise both in traditional oligonucleotide synthesis who -- some of whom are enzymeologists and some of whom are what I would call more classic process development individuals. Together, they're working really well on stepping through the scale changes, which are often 5x to 10x scale changes every time we scale the process. I think you may be aware, we started with a very lab scale process. Now we are at a scale where we can certainly deliver material for preclinical development and very shortly approaching the ability to deliver kilo scale. I mentioned that our goal is to achieve half kilo scale by the end of the year. Twofold from there will be much more straightforward. The kinds of challenges that we're meeting during scale-up are what, I would call, normal process development challenges. Those are often the challenges of control of temperature, flow rates, etc., as we start to use larger and larger equipment. We are learning a lot about how to scale the process. I think that is part of the secret sauce that manufacturing technology companies start to accumulate. We continue to deliver products of higher and higher quality actually, and that's what matters at the end of the day. Operator: The next question comes from Matt Hewitt with Craig-Hallum. Matthew Hewitt: Congratulations on the strong start to the year. Maybe first up, regarding the Merck enzyme, I'm just curious, historically, those have been talked or discussed as being kind of $5 million to $10 million in annual revenues. I'm just curious where this one kind of fits into that and how we should be thinking about the ramp of that specific product this year? Georgia Erbez: It's a brand-new approval for us, and we are very excited by this. We are working with Merck right now as we work through their demand for the product moving forward. We hope to have more information for you in future calls. Right now, we're working with them on their supply chain and their demand on manufacturing moving forward. Stay tuned, and we'll hopefully have some more information for you in future calls. Matthew Hewitt: Then maybe separately, the ongoing engagement that you have with the FDA regarding the ECO Synthesis platform, maybe an update on how those conversations are progressing? What will be the ultimate outcome from those discussions? Does it allow for faster approval with potential partnerships down the line? Or just explain what this will ultimately lead to? Alison Moore: Thanks, Matt. That's a great question. We're actually right now working on a briefing for our next interaction with the agency, which we are planning for in approximately a quarter. Codexis was accepted into the emerging technologies program in 2024. We have been engaged with the agency around the ECO Synthesis manufacturing platform in various conversations since then. The upcoming conversation that we will be having is an ongoing part of that program. In addition to the emerging technologies program, we are working to put together the foundational information that is required to make a submission towards an Advanced Manufacturing Technologies designation. It's called the AMT designation. If and when we achieve that designation, that does enable faster timing on review times and the potential for accelerated approval. Operator: The next question comes from Matt Stanton with Jefferies. Matthew Stanton: Maybe one on the CDMO partnership side. It sounds like the goal is to commence another strategic partnership by the end of '26, which is good to see. Would love to just get an update on the 3 existing CDMO partnerships you have now that it's been a few quarters, any proof points, learnings, next steps? How do you think about some of those original partnerships being able to engage more meaningfully towards contracts, revenue, things like that over time? Britton Jimenez: Yes. Absolutely. The partnerships we have with the CDMOs that we've announced are going fantastic. The engagement with the different CDMOs around our technology, then getting a better understanding of our technology, how it works, how it scales, like I said, have just been fantastic. Everyone's been extremely pleased with the results of that. Because of the great work of the teams on both here within Codexis and within those partnerships, that has allowed for us to advance our commercial discussions. We're in progress of those discussions. Everything is looking very, very positively. We're looking forward to what lies ahead of us because we do believe there's a great path in front of us. As for other potential CDMO partners, absolutely, we're always evaluating the marketplace because we want to ensure that the availability of our technology is out there for our customers, the drug innovators to be able to get access to the technology. It's an exciting time. These partners are critical to our strategy. It opens the doors and allows for bigger and better opportunities for us because it's another pathway for us. Great things going there. Matthew Stanton: Then maybe just on the broader pipeline. It sounds like a lot of progress. You talked about a licensing deal with a major pharma company, hopefully in the back half of '26 year. Just any more flavor you can provide? Is that kind of one that you're working on, you think hits? Do you have a couple of opportunities and you're assuming one of them comes through? Would love just a little more color on that. Then anything you can provide in terms of the scope or shape of what that could look like? Is it early-stage work? Is there any chance that you could be looking at running in parallel on clinical pipeline programs? Just any more flavor in terms of the pipeline there and what that could look like over time? Britton Jimenez: Yes. There's definitely a lot of conversations happening around that. There's multiple opportunities that sit in front of us with bigger and broader partnerships. Those discussions have very different flavors to them because each of those organizations are looking at our technology in different ways. I'd say the discussions are ongoing. They're looking positive. I can't get into a lot of details around this right now just because of the types of conversations we're having. No, we're very optimistic about this. The excitement around this technology and the data that we're presenting just further enhances the value out there in the marketplace. I'd say great conversations, but still more to come here in the future. Operator: [Operator Instructions]. The next question comes from Brendan Smith with Cowen and Company. Brendan Smith: I just wanted to ask in terms of the sales funnel. Obviously, a lot of breadth here, but could you give a little more color on breakdown of out of those 40 companies, what's the mix between like large pharma, larger biotech and emerging biotech? Then maybe in terms of the 55 programs, could you just speak to which are maybe further along than others relative to each other? Britton Jimenez: Yes. No problem. Regarding the organizations, the funnel is very, very healthy. Why I say that is our conversations cover across that entire spectrum that you mentioned. We're talking to some of the largest drug innovators in the RNAi space. We're talking down to some cell companies. The size and shape is very different, which is fantastic because it gives us diversification within the platform, the technologies. We're derisking the conversations. We're not in one just specific market segment, which is great. Now of course, in those conversations, like I mentioned, those organizations have different ideas on how they want to engage with us using our ECO Synthesis platform. Each of those conversations are unique and a little different on what we're trying to accomplish. In regards to the programs, again, there is no one size fit all. People are talking to us about everything from very early-stage assets to clinical assets to commercial assets and everything in between. I can't sit here and say we only talk about one thing because there is a very good diversification within our conversations, which is really exciting. Brendan Smith: I guess a large part of the thesis, obviously, has been the broader demand outstripping existing supply. Maybe with this technical differentiation, are you viewing even some smaller indications and maybe more niche programs as potential opportunities from an asset differentiation standpoint? Are there any other ways that you view are technically feasible beyond just this upcoming TIDES presentation, which we're looking forward to? Alison Moore: Yes. As Britton just stated, at the moment -- so just to be clear, we have existing work and existing contracts with some very large pharmaceutical companies and with innovator and stealth companies for the ECO Synthesis manufacturing platform. We are very open to what folks might like to use the platform for at the moment. Since we're really just starting to show the data and show real evidence of the product quality associated with the opportunity of stereo control, I expect that we probably will get some more inbound interest there. We certainly will be interested to work with a variety of customers there. We don't have unlimited bandwidth. Actually, just right at the moment, we are working on improving productivity and throughput so that we can make sure that we have the right kind of velocity and capacity to meet those customers' demands. I suppose, maybe, Brandon, your question is, at the end of the day, if there would be a high-volume client or a client with high volume potential, we would prioritize that client. Operator: Thank you. At this time, I would like to turn it back to Alison Moore for closing remarks. Alison Moore: Thank you, everyone, for joining us today, and we will certainly be looking forward to seeing some of you at upcoming investor conferences. If at any time you have additional questions, please feel free to contact us. I hope you have a good afternoon and evening. Thank you. Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation, and have a great day.