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Operator: Hello, everyone. Thank you for joining us, and welcome to Bumble Inc. First Quarter 2026 Financial Results 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 Will Taveras, Head of Investor Relations. Please go ahead. Will Taveras: Thank you for joining us to discuss Bumble Inc.'s first quarter 2026 financial results. With me today are Bumble Inc.'s Founder and CEO, Whitney Wolfe Herd, and CFO, Kevin Cook. Before we begin, I would like to remind everyone that certain statements made on this call today are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties and reflect our current expectations based on our beliefs, assumptions, and information currently available to us. Although we believe these expectations are reasonable, we undertake no obligation to revise any statement to reflect changes that occur after this call. Descriptions of factors and risks that could cause actual results to differ materially from these forward-looking statements are discussed in more detail in today's earnings press release and our periodic filings with the SEC. During the call, we will also refer to certain non-GAAP financial measures. These non-GAAP measures should be considered in addition to, and not as a substitute for or in isolation from, our GAAP results. Reconciliations to the most comparable GAAP measures are available in our earnings press release, which is available on the Investor Relations section of our website at ir.bumble.com. With that, I will turn the call over to Whitney. Whitney Wolfe Herd: Hello, everyone, and thank you for joining us today. This is a period of real transformation at Bumble Inc. Over the past few quarters, we have executed a deliberate reset of our member base. We made a clear choice to prioritize quality over quantity, focusing on well-intentioned, engaged members. That decision reduced overall scale but meaningfully improved the health of our ecosystem. Importantly, this quality reset was not isolated. It was the first step in a broader strategy to reestablish Bumble Inc. as the brand that sets the pace for innovation in our category. We focused first on strengthening the underlying supply of our platform, because scale without quality degrades the experience and stifles the outcome people are seeking: high-quality, relevant connections. At the same time, we continued rebuilding our technology and product platform to better serve our member demand for real dates and in-real-life connection. These moves required short-term trade-offs, but they were deliberate and necessary. Now, with healthier supply and stabilization in our member base, we are entering the next phase: activation. This phase is anchored by two innovation initiatives. First, the introduction of our new technology platform. Second, the launch of a fully reimagined experience for Bumble members, including a new interaction model and profile system. The new Bumble platform and experience will roll out over the balance of the year, beginning with the first stage of the new tech platform in the coming weeks. Our direct member engagement and our research, including our work with author and professor Dr. Arthur Brooks, reinforce a key insight: the biggest friction in dating today is not discovery; it is the gap between online interaction and real-world connection. People get stuck in that in-between. This is a central challenge faced by every scaled dating app. Everything we are building is designed to close that gap and drive real in-person dates between high-quality connections. Accelerating each member's progression toward finding that connection and getting out on a date is our priority. We have been doing foundational work on this problem ahead of introducing our new platform and reimagined experience. We have improved profiles, strengthened intent signaling, enhanced safety, and built more dynamic onboarding. These changes have helped members show up better, even within the limits of our legacy systems. We are also continuing to improve the current Bumble experience by addressing core member pain points, improving recommendations, and enhancing usability. Early tests are showing promising results, including improvements in matching behavior and monetization trends, but results are expected to be relatively limited on the legacy tech stack. We have more to do here in the months ahead. What comes next will go much further. The innovation starts with our technology platform. As we shared last quarter, we have been actively rebuilding our new cloud-native, AI-enabled tech stack. This modern platform will allow us to move faster, iterate more efficiently, and begin to unlock entirely new product experiences. Today, making meaningful changes to our recommendation engine or introducing new features can take months. This has been a real constraint on the rate of innovation. Our new tech platform is expected to eliminate this constraint. As the platform rebuild nears completion, we are ramping development of the next-generation Bumble Date application, a merging of the new back end and the reimagined member experience, launching in select markets in Q4 of this year. Between now and then, elements of our new technology platform will begin powering a parallel roadmap of incremental improvements in the existing product. With our new app experience, the opportunity is not just to improve the current interaction model but to evolve beyond it. We are designing a system that shortens the distance between intent and outcome, eliminating the friction caused by multiple steps between interest and connection. Clearer signals drive more mutual engagement and faster progression toward in-real-life connection. Early reactions to this new model have been very positive. Our AI layer, Bee, is expected to play a key role in the reimagined experience. Testing Bee in onboarding new members has been especially encouraging—not just in Bee's effectiveness, but in members' willingness to engage deeply and share richer context about who they are and what they are looking for. Bee’s ability to capture more signal and process information quickly improves our understanding of each member and will strengthen our recommendation engine. Onboarding is just the first step in how Bee will be used in the new experience. We also expect Bee to help facilitate connection and to suggest and plan real dates, among other roles. Bee is a great example of what we can accomplish on the new modern tech stack and how AI will be an important catalyst for our business. It is important to note that we built Bee separately from the legacy system. I have said a lot here. Let me summarize. First, demand for love and human connection is as vital as ever before. We have done the heavy lifting to reset our business with healthy supply that is ready to engage. We are giving members the tools to show up authentically as their best selves. Next is our new platform, which will accelerate product innovation. Right behind that will be an entirely transformed Bumble experience, which dramatically reduces friction and gets members to in-real-life connection faster. We believe this is our path to deliver what daters are seeking today. This is the path to restoring revenue growth, and we are already at work building the monetization model behind it. That is the core of the Bumble app transformation, but it is only part of the picture. Beyond dating, we are also investing in broader connection, which we see as both a critical need in the world and a competitive advantage for us. We have expanded groups on Bumble BFF and are seeing strong early traction with total group joins nearly doubling between December and March. This success is driven by Gen Z women, who comprise the largest cohort on the platform, highlighting our opportunity with this core demographic. Overall, more than 80% of BFF members are women, reinforcing the durability of our overall brand. We will continue to expand on group connection and in-real-life meetings for platonic purposes through BFF. But we are also bullish on the opportunity of romance beyond one-to-one in terms of how people come together and meet for love. We are testing new ways to bring people together for both platonic and romantic purposes, including a new product beta launching next month, which we are super excited about. Across all of these efforts, our approach remains consistent: test, learn, iterate, and do it quickly. We are data-driven, member-obsessed, and more passionate about the opportunity and problem we are solving than ever before. In terms of timing, members will first experience the rollout of our new platform, delivering a faster and more reliable experience starting in the coming weeks from a back-end standpoint. From there, we expect to introduce the initial features of our new interaction model and profile. This is our big bang. It will start to roll out to select markets in Q4, backed by a 360 marketing campaign. Then we will continue to refine the experience into 2027, including adding features like group dating and expanded access to Bee. Ahead of our upcoming unveil, we are continuing to deliver innovations in the current Bumble experience that help members show up better, more confident, and ready to engage. Not all of these improvements will be immediately visible to members. The critical signal enhancements they enable will drive more relevant connections on the back end, and the UI/UX will be on our modernized back end, which will enable the rollout of our transformed experience later this year. As we execute this transformation, we remain disciplined. We delivered a strong Q1 compared to our expectations, and we are managing our cost structure carefully while continuing to invest in product, technology, and selective marketing. Of note, we have reduced our performance marketing spend to less than 50% of pre–quality reset levels. We are starting to see the benefit of organic marketing again, including positive word of mouth, now that we have improved the member base quality. Despite tech limitations, we have been able to drive meaningful improvement, which we believe signals the opportunity ahead with a modern tech stack in place. To close, we have been hard at work rebuilding our foundation. Now we are focused on translating that into a meaningfully better product experience, which members will start seeing in the coming months. We cannot wait to reignite our brand, product, and mission as we transform Bumble Inc. and our category. We look forward to sharing more in the months ahead. Thank you so much for your time, and now I will turn it over to Kevin. Kevin Cook: Thank you, Whitney, and hello, everyone. In the first quarter, we delivered results in line with our expectations as we move past our quality reset to focus on product and technology innovation. As Whitney noted, we are seeing signs of stabilization in our member base as we enter the next phase of activation. I will review our quarterly results before turning to our outlook. Unless otherwise noted, my comments are on a non-GAAP basis, and comparisons are year over year. Total revenue for the first quarter was $212 million compared to $247 million in the year-ago period. Foreign currency exchange rates contributed $9 million to revenue in the quarter. The loss of revenue from Fruitz and Official equated to approximately one percentage point of headwind in the quarter. Bumble app revenue was $173 million compared to $202 million a year ago. Foreign currency exchange rates contributed $6 million to Bumble app revenue. Adjusted EBITDA was $83 million, representing a margin of 39%, compared to $64 million and 26% in the prior-year period. Higher adjusted EBITDA despite the year-over-year revenue decline is a function of how we have executed through our reset period, most notably with more intensive operating discipline and thoughtful marketing spend. Selling and marketing expense was approximately $20 million, or 12% of revenue, compared to approximately $60 million, or 24% of revenue, in the prior-year period. In addition to the reduced overall spend, we have increased our focus on lower-cost and higher-return organic and targeted marketing channels. This strategy brings us back to our historical marketing strengths and, we believe, also supports long-term brand health. Product development expense was approximately $25 million, or 12% of revenue, compared to approximately $24 million and 10% in the prior-year period. Our product development spending is focused on core product innovation and platform modernization. General and administrative expense was approximately $24 million, or 11% of revenue, compared to approximately $26 million, or 10% of revenue, in the prior-year period. I will now turn to the balance sheet and cash flows. For the quarter, we generated $77 million in operating cash flow, $74 million of which converted into free cash flow. We ended the quarter with $246 million of cash and cash equivalents and continue to generate substantial cash flow while maintaining a strong liquidity position. In April, we completed the refinancing of our term loan as had been previously announced. Consistent with our plans to continue deleveraging, we paid down $114 million of debt in connection with the transaction. Pro forma for the refinancing, we had $150 million of cash and cash equivalents at the end of April. Turning to the outlook, as we move beyond the quality reset, our focus is now on activating our higher-quality member base through product innovation and improved member experience. This transition will unfold over the balance of the year as we introduce our new tech platform and accelerate the introduction of new member experiences. While this work will take time to be reflected in our financials, we believe it best positions us to drive more durable engagement and monetization. For the second quarter, we expect total revenue in the range of $205 million to $213 million, including Bumble app revenue of $168 million to $174 million, and adjusted EBITDA of $65 million to $70 million, representing a margin of approximately 32% at the midpoint. As we move through 2026, we expect revenue headwinds to moderate as the most acute effects of the quality reset dissipate and we transition from stabilizing to rebuilding the member base. Adjusted EBITDA margins are expected to normalize over the remainder of 2026 as we increase investment in technology and talent to modernize our platform and drive product innovation. We also plan to increase marketing spend to support our innovation initiatives, organic member growth, and brand strength. In closing, we have made meaningful progress on our transformation and are now focused on executing the next phase of the business. Preparing a healthier, more engaged member base with a modernized platform will enable faster product innovation and more effective revenue generation over time. Operator, let us take some questions, please. Operator: Thank you. We will now open the call for questions. Please limit yourself to one question and one follow-up. 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, and if you are muted locally, please remember to unmute your device. Your first question comes from the line of Eric James Sheridan from Goldman Sachs. Your line is open. Please go ahead. Eric James Sheridan: Thanks so much for taking the questions. Whitney, I want to come back to some of the comments you made in the prepared remarks and go a little bit deeper. When you think about the tech stack and how it will iterate going forward, I wanted to ask a two-parter. One, should we be thinking about the velocity of innovation and your speed in terms of going to market that will result from that as we continue to monitor the business from the outside in? And two, what do you think about your opportunity around personalization, and how much of it will be either AI-driven or non–AI-driven when you think about what the tech stack might enable you to do in the years ahead? Thanks so much. Whitney Wolfe Herd: Hey. Thank you, Eric. Great to hear from you. I will take this piece by piece. I think before we talk about the actual incredible opportunity we have ahead with this new tech stack, I want to double down on a couple of the prepared remarks I had around what we have been dealing with. We have had extraordinary tech debt. What do I mean by this? We have, frankly, not been able to make the changes that both our members are wanting, needing, and demanding, and that we have wanted to roll out. All of the results you have seen to date are done on the back end of a very legacy system, which really does inhibit the second part of your question—the personalization of the experience. So let us talk about velocity, my favorite word. Velocity is going to go up in such a way with this new tech stack. As an example, if we wanted to make a change to the recommendation engine right now—which is the algorithm, essentially—it could take us months. It is extremely clunky, cumbersome, and difficult to navigate. On this new tech stack, we are talking about being able to put tests in immediately. We can be monitoring in real time. We can have A/B tests going at levels we have never been able to access before, and, frankly, we can make changes in a matter of days or weeks versus months, or even, frankly, years. When you really start to wrap your head around the opportunity there, I think you can understand why I am personally so excited about this new system finally hitting members’ back ends in the coming weeks. Let us talk about personalization. This is the name of the game. What is the one reason why people come to a product like ours, particularly Bumble? They are not coming for entertainment or to use it like a social media platform. They are coming to meet people. If you want to meet someone, you have to be shown people you want to see and that you want to meet. With this new system and this next-gen recommendation engine—which goes side by side with the new tech infrastructure—we will be able to personalize the system in ways that we have just, frankly, never had access to. It is not lack of innovation, roadmap, or talent; it has been lack of technical capability. So you will see extreme personalization. Turning to the last part of your question—AI or not AI—no, it is a hybrid. I think it is important to end with a quick moment on how I look at AI for this business. AI should never replace human authenticity or human connection. I have been saying this for a long time, but I certainly hope the rest of the world is starting to see it the way I am, in the sense that human connection is starting to matter more now than ever before, and real, authentic human connection. For those of you that have been following and watching people fall in love with AI bots, this is not the future we want for ourselves or the next generation. This is why I am at work. I am giving it my all to make sure that we can bring people closer to in-real-life, face-to-face, human, meaningful relationships and connections. We will leverage AI to enable that, but we will not use AI to replace that. I hope that answers the question. I could talk about this for six hours, but I want to give other folks an opportunity to jump in. Thank you again, Eric, for your question. Operator: Your next question comes from the line of Shweta Khajuria from Wolfe Research. Please go ahead. Shweta Khajuria: Okay. Thank you for taking my question, and thanks for the commentary in your prepared remarks, Whitney. As we think about the timeline, could you please talk to what gives you confidence post the activation phase of the renewed tech platform in 2026 into 2027? You will start seeing potentially marked improvements in the refreshed tech platform. Could you point to what you saw in your tests that gives you that confidence, and what should we be looking for starting in Q4 into next year? Thank you. Whitney Wolfe Herd: Thanks, Shweta. It is great to hear from you. Let us talk about these different workstreams. I want to be very clear that the back-end tech rebuild is different from the forward-facing, member-facing interaction model and profile redesign. These are two separate things that will converge into each other; however, one comes before the other—that is the back-end technology migration, enablement, and rebuild. That is coming in the coming weeks for select members and will start to roll out globally and more broadly over the weeks and months following. That is the enabler of everything. That is where we can go in and make algorithmic improvements. We can start to make matching and recommendation economics better for folks and really make sure that you are seeing who you want to see. Now, very importantly, that is the back end that will start to enable everything. But very importantly, I fundamentally believe—and I feel that I am a trusted source here because I have been on the front line of this industry from its mobile explosion inception—that the interaction model is outdated, not just for us, but for the industry at large. I believe it is time to leapfrog anything that currently exists and help people break through these areas of friction where these cliffs exist. Right now, to get somebody from first sight to first date is extremely difficult. There are so many areas of drop-off where that mutuality of needing to like each other, needing to chat, needing to keep the conversations going on this double-sided format—it is quite difficult to get you to a date. Frankly, Shweta, we are a dating app. We are not a matching app or a swiping app, but have we really been behaving like that? That is the impetus of the new interaction model. We have listened to our members. We have been in the trenches with them. I personally have been on the front lines of research and deep in the data. That forward-facing, member-touching interface transition and profile redesign is what you will start to see in a major market in Q4, and then, of course, rolling out more broadly through the end of Q4 and early into 2027. To answer your precise question—when do we start to see a rebound in the numbers you are all looking for? The answer is very simple: when our technology and our next-gen recommendation engine can help better connect people more compatibly, show people who they want to see, and then get them out on great dates. That is where the magic happens. Every single thing we are doing—I am spending every waking hour of my life right now—in service of that one goal: get people out on great dates. I hope that this starts to answer your question, and thank you again for taking the time. Operator: Your next question comes from the line of Nathaniel Jay Feather from Morgan Stanley. Please go ahead. Nathaniel Jay Feather: Hey, everyone. Thanks so much for the question. I am thinking a little bit more about that pipeline from discovery to getting out on dates. What do you feel are the current real pinch points that cause people to maybe have a match but not convert that into an in-person connection, and what can actually solve that problem? You know, is there any issue from the perspective of a lot of people having different state or preference dynamics, local markets, etc.? Are there ways that you can solve those? That is the first part of the question. And second, we see really strong performance on gross margin. Can you give an update on what you are seeing in terms of direct payment adoption, and how should we think about the uplift that is driving these? Thank you. Whitney Wolfe Herd: Thanks, Nathan, for the question. I will take the first half and kick the second part to Kevin. The reality is you are right—everyone has different dating preferences. But the one thing everybody can agree on at this point is that everyone is exhausted from this passive model of just low-effort likes, low-effort interest with very little follow-through. Frankly, the industry at large—and us included—has made it too easy to express low-intent interest. We are turning that on its head. I cannot say much more. I really believe that this is going to be category-defining, and we want to keep it close to the chest. What we will tell you is the early testing has come back remarkably positive. There is very little concern that this is not the right direction. To your point, every market is culturally different, and preferences are different. We have no issue with being really agile and making sure that we test our way into the appropriate sequencing and rollout strategy to make sure that those nuances are accounted for. Listen, I am now 36. I have been doing this since I was 22. I cannot tell you how much this is needed right now for people to really feel reinvigorated with finding love. There are a few frank realities: we are on our phones more than we have ever been before—much more so than when I started this company. The need for human connection and love is greater right now than ever. We are more disconnected. Everything is working in our favor. The only thing that has been going wrong is our ability to execute on product innovation, and that is simply due to legacy tech debt. We are working extraordinarily hard. The teams are incredible, and they are so close to getting us to a place where we can finally innovate and deliver a modern product to our members so that they can continue to make meaningful connections in the real world. Kevin Cook: The improvement in gross margin is primarily a function of increased adoption of alternative billing methods and therefore reduction in aggregator fees. You are right to point out that we had very strong gross margin in the quarter—about 300 basis points higher than the prior-year period—and we continue to see strong adoption of our Apple Pay program, for example, in the U.S. That program is slightly ahead of expectation, and we expect alternative billing to be a tailwind to margin throughout 2026. Operator: Your next question comes from the line of Andrew Jordan Marok from Raymond James. Your line is currently opening. One moment. Please go ahead. Raj (for Andrew Marok): Hi. This is Raj dialing in for Andrew Marok. Thank you for taking our question. As it relates to the post-reset disclosures made today, could you update us through March and April and explain how the curves for registrations, retention, MAUs, and payer penetration trended from October until now, given that October was the first month dubbed as the post–quality reset? Which metric should best predict payer recovery going forward? Kevin Cook: Yeah. Hey, Ron. Thanks for the question. The disclosures were provided specifically as a way for us to meet a contractual obligation to prospective lenders to cleanse data that we shared with them in connection with the refinancing. That information is all for the periods provided. You can see them outlined in the specific disclosure on the website. They are all reflected in our current financials. They are out of date, stale, and have no import in terms of the business today. The only thing I can share is that the business has stabilized with respect to KPI performance. In particular, on registrations, I think you see highlighted there the steps that we took—quite intentionally—to bring the member base down to what we viewed as a healthier, higher-quality ecosystem from which, now, we can build. That is all I have for you on that. Operator: Next question comes from the line of Ken G. from Wells Fargo. Please go ahead. Ken G.: Thank you so much. As you look out a couple of years and success as you transition the business, can you talk about how you could see the financial profile of the business relative to the 2022–2024 time frame? The tech debt that built up in the past—you obviously want that to not recur. Could you talk about any changes we might see to the financial profile of the business as you get back to growth in 2027–2028? Kevin Cook: Hey, Ken. So apologies—you broke up a bit, but I believe I got the question. You are right to point out two key things. First, in the time frame you referenced, it was a marketing-led business, not a product- and technology-led business as it has been since Whitney returned as CEO. What you will continue to see is a much more efficient marketing spend. Marketing should never return to the levels that you observed in 2024 and 2025. Marketing is used in support of and as a tool to enhance product—contributing to new product introduction, launch, and, of course, to some degree, brand. You will see a higher overall rate of technology and product development spend. We are in a period of investment now. You see us beginning to gently increase product development expense to deliver all of the innovation that Whitney described and that is expected for the second half of the year. Overall, with steady revenue or revenue growth, there is substantial operating margin in the business. You should expect to see continued adjusted EBITDA margin expansion—again, so long as revenue is stable or increasing. Let me know if that answers the question. Ken G.: Yes. Thank you. Operator: At this time, there are no further questions. This concludes today's call. Thank you all for attending. You may now disconnect.
Operator: Greetings, and welcome to Jacobs Solutions Inc.'s fiscal second quarter 2026 earnings conference call and webcast. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. I would now like to turn the conference over to Bert Subin, Senior Vice President, Investor Relations. Thank you. You may begin. Bert Subin: [inaudible] Robert V. Pragada: Solid year-over-year margin expansion and continued robust sales activity. I will quickly highlight a few key takeaways. First, adjusted EPS grew 22% to $1.75 supported by 9% organic net revenue growth, outpacing the 8% growth rate in Q1, and 70 basis points of year-over-year margin expansion. Second, our backlog grew 22% to $27 billion, setting another new record, with a trailing 12-month book-to-bill of 1.4x on gross revenue and 1.2x on net revenue. And third, we completed the acquisition of PA Consulting, which we celebrated together by ringing the closing bell at the New York Stock Exchange in March. In summary, we are exiting Q2 with significant momentum, and the strong first half of the year gives us confidence to increase our FY 2026 outlook for the second time in two quarters, which Venk will walk through shortly. Turning to slide four, we provide a detailed overview of the quarter. We are very pleased with Q2 results as strong operating performance, paired with our lower share count, drove the fifth straight quarter of double-digit growth in adjusted EPS. During Q2, we also delivered another quarterly book-to-bill above 1.0x with both gross and net coming in at 1.2x. The addition of the net revenue book-to-bill metric will provide useful context for our investors and analysts and reinforces the strength in our bookings over the last 12 months. Turning to slide five, I would like to highlight a few notable project awards from the second quarter. But before I do that, I want to recognize a major achievement. Jacobs Solutions Inc. has been ranked the number one design firm by Engineering News-Record in their newly released 2026 Top 500 report, marking the seventh time in the last eight years we have held this ranking. Our strong organic growth profile helped us earn this honor, and I want to thank our 47 thousand colleagues for delivering leading solutions to our clients every single day. Now moving on to Q2 awards. In Water and Environmental, Jacobs Solutions Inc. was selected by the San Francisco Public Utilities Commission to deliver the Southeast Wastewater Treatment Plant, a landmark investment in environmental protection for the San Francisco Bay. The project will upgrade San Francisco's largest wastewater facility, positioning the plant as the first major discharger to proactively meet new nitrogen limits for the Bay. This highlights another significant award in one of our fastest growing sectors, and positions Jacobs Solutions Inc. for similar regulatory-driven investments emerging across Northern California, the Pacific Northwest, and the Great Lakes. Also within Water and Environmental, Jacobs Solutions Inc. and PA have secured a two-year economics and policy consultancy contract with Ofwat, the UK water regulator. The engagement brings together industry-leading expertise across water regulation as well as financial, technical, and strategic consulting. Our solution will be delivered to support pricing, performance oversight, and policy development tied to substantial investment across the AMP8 cycle and beyond. In Life Sciences and Advanced Manufacturing, we had multiple wins with hyperscalers and other data center customers spanning the full project lifecycle—from advisory, design, program management, and digital solutions, to full EPCM. This includes our recently released data center digital twin developed using the NVIDIA Omniverse DSX Blueprint. Our strategic partnership with NVIDIA continues to gain momentum as we work to expedite the delivery of AI factories with compute load requirements rising substantially. Last year at our Investor Day, we laid out a roadmap for how we believe our data center business would evolve, and the combination of our deep domain expertise, our full asset lifecycle model, and the expansion of AI investment has accelerated that journey. We grew our data center business by more than 100% year-over-year in Q2, and we see very strong runway to build on that success in the second half of the year. And it is more than the data center sector. We are seeing rising demand in semiconductors, water, and energy and power as the technology and infrastructure go hand in hand. This is bolstering total revenue growth, with our backlog and pipeline indicating the investment cycle is still in the early stages. Moving on to Critical Infrastructure, Jacobs Solutions Inc. was selected as lead designer at Dallas Fort Worth International Airport as part of the Terminal F expansion. The project involves existing bridge span operations essential to allow for up to 16 additional gates and support the airport's growing demand. Combining bridge design expertise with the unique challenge of maintaining operability of the Skylink people mover during all phases of construction, we are modernizing the infrastructure while keeping passengers moving. Jacobs Solutions Inc. is ranked as Engineering News-Record’s number one firm in aviation, a sector where we continue to see significant growth in demand for terminal upgrades and new builds. In summary, we continue to build on our industry leadership in sectors like wastewater, aviation, and data centers, securing key awards that position us for growth in the second half of the year and into FY 2027. Now I will turn the call over to Venk to review our financials in further detail. Venkatesh R. Nathamuni: Thank you, Bob, and good afternoon, everyone. Please turn to slide six where I will walk through our results for Q2. Gross revenue increased 27% year-over-year, and adjusted net revenue, which excludes pass-through revenue, grew by 9%. These both represent the highest consolidated growth rates for the company since the separation of our government services business in 2024. Q2 adjusted EBITDA was $327 million, growing more than 14%, with our margin coming in at 14.1%, up 70 basis points year-over-year driven by good operating discipline. This resulted in adjusted EPS rising 22% year-over-year. Consolidated backlog was also up 22% year-over-year to a record $27 billion, with a trailing 12-month book-to-bill at 1.4x. Book-to-bill was strong again in Q2, driven by good awards activity across our end markets. Additionally, on a year-over-year basis, net revenue and gross profit in backlog increased 12% and 15%, respectively, during Q2. We are demonstrating faster organic growth in the business today, and our strong bookings position us well as we look out to fiscal year 2027. As you have seen since the separation of our government services business in fiscal year 2024, our earnings quality has been improving. However, as a result of the PA transaction, which we have previously communicated, there was a wider than normal spread between GAAP and adjusted EPS in Q2, and we anticipate a more normal differential between GAAP and adjusted EPS in Q3 and beyond. Regarding our performance by end market, please turn to slide seven. At a high level, we continue to see strong growth rates in Life Sciences and Advanced Manufacturing as well as in Critical Infrastructure. Focusing on Life Sciences and Advanced Manufacturing, net revenue grew 12% in Q2, our highest growth rate since we began reporting end markets in late 2024. Combining acceleration in advanced manufacturing with continued solid performance in the life sciences sector has resulted in a double-digit top line increase for the end market, and we expect revenue growth will likely exceed Q2’s level in the second half of the year. Shifting to Critical Infrastructure, net revenue increased 9% over Q2 2025. Critical Infrastructure continues to be led by strong growth in the transportation sector, where our rail, aviation, and ports businesses grew double digits, as well as in the energy and power sector on the heels of high demand for transmission and distribution services. Net revenue growth in our Water and Environmental end market came in at 2% as strength in water, which continued to grow in line with our target, was offset by softness in the environmental sector. Performance for our environmental business is on track to show meaningful year-over-year improvement as we reach Q4. In summary, we saw diversified strength across our end markets during Q2. Moving now to slide eight, I will provide a brief overview of our segment financials. In Q2, I&AF operating profit increased 11% year-over-year, or just over 8% on a constant currency basis. PA Consulting operating profit increased 19% as revenue grew 17% and operating margin came in strong at 22%. On a constant currency basis, operating profit grew 12%. PA has seen demand tailwinds from national security and public sector work in the UK. The business is well positioned to help advise on European defense strategy as well as implement digital solutions across the entire region. Combined with Jacobs Solutions Inc.’s proven history of delivering complex manufacturing and national security infrastructure, we see a compelling opportunity to augment growth in the sector. Focusing on the second half of the year, we believe PA will continue to grow revenue high single digits on a constant currency basis. Now moving on to slide nine, we provide an overview of cash generation and our balance sheet. For Q2, we had an adjusted free cash outflow of $272 million, partly as a function of a favorable Q1 cash timing item that reversed in Q2. This brings our first half adjusted free cash flow to $93 million, a solid increase over fiscal year 2025. I just want to note we are highlighting an adjusted free cash flow figure as we have to account for a portion of the PA transaction proceeds in operating cash under US GAAP reporting guidelines. These entries impacted Q2 reported free cash flow by approximately $233 million and will impact Q3 reported free cash flow by just over $100 million. It is important to keep in mind these amounts were already included as part of the upfront consideration paid in connection with the transaction. Focusing on capital returns, we remained aggressive repurchasers of our shares during Q2 to take advantage of the value of our stock. Consequently, our total repurchases in the first half of the year were $472 million, which puts us ahead of our annual target of returning at least 60% of free cash flow back to our shareholders. Our balance sheet is in good shape following the acquisition of PA Consulting, with net leverage of 2.1x ending the quarter, and we plan to return to below 2.0x by year end. Additionally, our weighted average interest rate has declined to around 5% following the successful refinancing of our debt stack and issuance of new bonds to fund the acquisition. Net leverage is roughly half a turn above our target range, but the increase in EBITDA from the full inclusion of PA as well as our strong outlook for cash generation positions us to lower our net leverage ratio back toward 1.5x during fiscal year 2027. Please turn to slide 10 for our updated fiscal year 2026 outlook. Inclusive of our acquisition of PA Consulting, we are increasing our forecast for adjusted net revenue growth, adjusted EBITDA margin, and adjusted EPS relative to our guidance from last quarter. We are increasing our FY 2026 organic net revenue growth range to 8% to 10.5% year-over-year, adjusted EBITDA margin range to 14.6% to 14.9%, and adjusted EPS range to $7.10 to $7.35. We continue to anticipate adjusted free cash flow margin will range from 7% to 8.5%. Notably, our outlook for FY 2026 now implies 18% year-over-year growth in adjusted EPS at the midpoint. As it pertains to Q3, we expect our adjusted EBITDA margin to be approximately 15% with year-over-year net revenue growth of approximately 7.5%. This implies a margin above 16% in Q4 on double-digit top line growth inclusive of the extra week we will have this year during that quarter. Additionally, we expect our adjusted effective tax rate will be in the 27% to 28% range in Q3 and in Q4. We have good line of sight to achieving our updated fiscal year 2026 targets, and we are pleased to be trending well ahead of our initial outlook for the year. Now turn to slide number 11 for a few updates to our fiscal year 2029 targets. We are reaffirming our range of 6% to 8% organic growth on a five-year compounded annual growth rate basis for net revenue. Combining our fiscal year 2025 result and the midpoint of our fiscal year 2026 guidance, we would be ahead of the midpoint in the first two years. Adding this to our central positioning in the buildout of AI infrastructure, and the potential for growing revenue synergies with PA, leads us to believe we will meet or exceed a 7% compounded annual growth rate. As it pertains to adjusted EBITDA margin, we are increasing our target 100 basis points to 17%+ for fiscal year 2029. This is due to the implementation of gross margin and G&A initiatives that are well underway as well as the acquisition of the remaining stake in PA Consulting, where we currently see opportunity for at least $20 million in annual cost synergies. This implies at least 75 basis points of identified annual margin improvement from fiscal year 2027 through fiscal year 2029, in addition to the 200 basis points we are expecting to deliver over the course of fiscal year 2025 and fiscal year 2026. And lastly, our high-margin expectation and working capital management give us confidence we can now reach or exceed an 11% free cash flow margin, also up 100 basis points from our prior target. At our forecasted growth rate, that implies $1.2 billion to $1.3 billion of annual free cash generation by fiscal year 2029. We are off to a great start just about one-third of the way through our strategy cycle. With that, I will turn the call back over to Bob. Robert V. Pragada: Thank you, Venk. In closing, we are tracking very well heading into the second half of the fiscal year, with strong Q2 performance enabling us to increase our full-year outlook for the second consecutive quarter. We are seeing momentum in our growth rate, margin, and bookings trajectory, all of which give us confidence in our outlook. Operator, open the call for questions. Operator: We will now open the call for questions. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. Please pick up your handset when asking a question. 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 Steven Fisher with UBS. Your line is open. Please go ahead. Steven Fisher: Thanks. Good afternoon, and congrats on the quarter. I just want to ask you at a high level, how much of the raise is driven operationally by, say, better-than-expected demand or operational performance versus bringing the rest of PA Consulting in? We had done some calculations that maybe it would be about a $0.10 to $0.20 increase from PA Consulting. Maybe our math was off. But just curious how much was operational and, if so, where within the segment did you see that upside? Robert V. Pragada: Yes. So, Steve, maybe I will start and then I will hand it over to Venk. At a high level, it is purely based on our operational performance. The drive we are seeing in our bookings and how that is translating into our run rate drove the top line. Venkatesh R. Nathamuni: Yes. Thanks, Steve, for the comment. As Bob mentioned, pretty solid performance on the I&AF side of the business. We got a little bit of a tailwind from PA from an FX perspective, but the bulk of our operational performance is driven by the I&AF section. In addition, from a margin perspective—and I alluded to this in my prepared remarks—a lot of operating discipline in terms of keeping tight controls and, in conjunction with some of the margin improvement that you saw, that is what drove the true outperformance. Steven Fisher: Okay. That is very helpful. And then just talking about AI and digital enablement, can you give us an update on what the customer receptivity has been in the past few months to your digital tools and anything AI-enabled? And to what extent are you seeing incrementally more margin opportunities coming from that and when might we see some of that coming through more materially? Robert V. Pragada: Yes. Steve, thanks for asking the question. AI is absolutely driving our business in what is going on with the AI infrastructure buildout. We are seriously at an inflection point, and it is accelerating our entire business. I will quantify what that means. Within the data center space, which right now represents between 3% to 4% of our overall business, that is growing at 100% year-over-year. Now the AI ecosystem—which would include all the way from the beginning to the chips, through the power and energy requirements, and then how that is feeding the data center world—represents, in its entirety with our diversified offering, between 10% to 11% of our overall business, and that is growing in excess of 40%. So you are talking about a significant part of our business that is growing at a very fast rate, all centered around the AI infrastructure build. Then it is having an indirect effect on AI in drug discovery and what is happening with sectors that would not traditionally be affiliated with AI. We are well positioned in the AI CapEx and AI infrastructure world, and our enablement internally is helping us become more efficient and deliver to that demand. Thank you. Operator: Your next question comes from the line of Sabahat Khan with RBC Capital Markets. Your line is open. Please go ahead. Sabahat Khan: Thanks, and good afternoon. Extending the line of questioning that Steve started, one of the themes we are discussing a lot is the visibility to these types of projects for suppliers and vendors like yourself. Can you talk about demand? It sounds like it is growing at a very high clip, but what is the line of sight to projects? Is it six months, 12 months, multiple years? Please talk to us about near- to medium-term visibility in that end market specifically. Thanks. Robert V. Pragada: Yes. Saba, just to clarify, specifically around the AI infrastructure build, or are you talking broadly across all of our end markets? Sabahat Khan: More specifically the data center and the 100% clip you talked about—the growth in that end market. Robert V. Pragada: Absolutely. Let me quantify it first, Saba. Our AI infrastructure pipeline—the data center component of that—has gone up 400% year-over-year. We have visibility well through 2027, going into 2028. Our long-term, relationship-based client model is gaining share of that client spend. These are the top hyperscalers as well as now the neo-cloud providers that are being supported. What is backing that visibility is our relationship with NVIDIA—our work on the digital twin, the work we are doing around the plan of record, and then as that is evolving with the next-generation chip. Now we are talking about Rubin, and we are in the middle of developing that plan of record. It is tying us back into these AI players, so the visibility is strong. Sabahat Khan: Great. And then maybe just a question for Venk. On the balance sheet side, assuming you are at 2.1x, just above your targeted year-end range, can you help us think through the likelihood of buybacks? Is it going to be more opportunistic, and how are you thinking about broader capital allocation given the free cash flow and the leverage for the rest of the year? Thanks. Venkatesh R. Nathamuni: Yes, Saba. As we highlighted during the press announcement, we did take on some debt to fund the acquisition. We are about 2.1x, but we have a clear plan to delever pretty quickly, and we said we will be below 2.0x by the end of fiscal year 2026, which is just a quarter and a half away. We have also been very aggressive in terms of our share repurchases. We are big believers in the value of our stock and will continue to maintain the share repurchase activity. We will modulate the quantum based on market conditions, but our goals are to continue to reduce our leverage—as I said, we can get to 1.5x in fiscal 2027—as well as repurchases of our stock. One thing to note is that our second half tends to be very seasonally strong from a free cash flow perspective. We are expecting $600 million to $700 million of free cash flow in 2H, so that helps us delever fairly quickly. We have a lot of optionality and the ability to do both the buyback as well as delever without straining the balance sheet. Sabahat Khan: Thanks very much. Venkatesh R. Nathamuni: You are welcome. Operator: Your next question comes from the line of Michael Dudas with Vertical Research. Your line is open. Please go ahead. Michael Stephan Dudas: Good afternoon, gentlemen. Hey, Bob, you have had five years of insight into what 100% ownership of PA Consulting means for Jacobs Solutions Inc. What areas should we look for over the next six to 12 months that might show up and help not only bookings, or be more lifecycle-driven, or maybe even better on the margin front as you move through the plan of the combined company? Robert V. Pragada: Yes, Mike. I would probably segregate it into two parts. One is a capability set that we have been working on over the course of that runway of five years together and the relationship we have had. And then second, applying that to the adjacencies where we have already got a track record by end market. On capabilities, over the last five years we have really built out our digital capability set. This spans everything from software developers through to digital platforms and digital products that are enabling innovation within our clients’ businesses, as well as our own. Together, we have nearly 2 thousand digital experts, and we are integrating that as one company platform. For end markets, in Europe we are seeing activity in national security and the public sector. In the US, energy and utilities, and transport. In Europe, with a more independent defense posture, PA’s deep entrenchment—not just with the UK MOD, but also now with sovereign nations in Europe building up their own defense posture—is turning into defense infrastructure. That asset lifecycle is something that we are primed as a combined entity to deliver, as well as increased digitization enablement in government where PA is in the middle of it. In the US, it is really around energy and utilities and transport—end-to-end from transport advisory through to delivering complex programs and projects. With the combined digital capability and driving that in energy and utilities, again driven by the AI infrastructure we just talked about, we are excited about the future. Michael Stephan Dudas: My follow-up: Critical Infrastructure is showing very strong growth this quarter. It has been chugging along quite well and probably gets lost in the headlines given all the data center and advanced facilities work. Do you continue to see very solid opportunities in the second half and into 2027? And any additional thoughts on IIJA 2.0 and whether your clients are concerned about potential issues if there is a delay with Congress and changes? Robert V. Pragada: Mike, I will separate that into two as well. We are proud about the Critical Infrastructure piece. That is being driven by two primary areas. One is global transportation. We are seeing strong high single-digit, and in certain geographies double-digit, growth within transportation. That is around continued buildout of the aviation sector as well as ports and maritime, which is a strong subsector for us. These have long-tail design-and-build cycles, and we are really starting to see the fruits of that. Second, in the US, on IIJA and what happens with the election this year—we have modeled every scenario. In each scenario, we see at a minimum a continuing resolution, which would be good for us. Then what happens on the extension of IIJA—whether there is a new bill—looks promising, but it is too early to speculate. Even on a continuing resolution, these are long-tail programs, and we are only about 50% outlaid on the current IIJA. So things continue to look solid. Thank you, Michael. Operator: Your next question comes from the line of Adam Bubes with Goldman Sachs. Your line is open. Please go ahead. Adam Bubes: Hi. Good afternoon. Can you help us parse out the new, more universal guidance? Is there a way to frame what incremental EBITDA in the new guide is coming from the acquired stake in PA Consulting and how much of the incremental EBITDA uplift is underlying? Venkatesh R. Nathamuni: I will take that, Adam. I will separate it into fiscal year 2026 guidance and the fiscal year 2029 targets. In fiscal year 2026, we increased our adjusted EBITDA margin range from 14.6% to 14.9%. That is primarily driven by the full consolidation of PA, but there are additional measures and initiatives we are putting in place that drive margin expansion. On fiscal year 2029, it is not just the PA consolidation but also multiple identified initiatives in terms of gross margin drivers, how we engage with the commercial model, and the increased use of AI, and our global business and global delivery model. The vast majority comes from operational improvements across both the commercial model and delivery, and that is progressing well. We are also making a commitment to continue to drive operating leverage such that we will grow OpEx at a substantially lower rate than revenue. It is not one thing—it is a multitude of tools we have to drive continued margin expansion. Adam Bubes: Great. And can you update us on how you expect your AI-integrated offerings to evolve over the next 12 to 16 months? Any incremental investments or opportunities on that side? Robert V. Pragada: Adam, on incremental investments, we do not see the need. We have been investing in digital enablement for the better part of seven years. I do not see us needing to make a huge investment to continue on our current trajectory. The way it is evolving is that it is being pulled from the market with the acceleration we are seeing in our end markets. What we are doing for our clients and for ourselves is in full gear and accelerating. Again, AI infrastructure—which is the virtuous cycle—is driving that, and we are centrally positioned for that entire buildout. Adam Bubes: Great. Thanks so much. Operator: Your next question comes from the line of Analyst with KeyBanc Capital Markets. Your line is open. Please go ahead. Analyst: Great. Thank you so much. Bob, can you give us an update on the Middle East and what you are seeing there in terms of activity levels, and how your folks are handling the situation? Robert V. Pragada: First and foremost, we have been acutely focused on the safety of our people. From the beginning until now, every single day we have crisis management teams stood up and are doing not just daily, but hourly, check-ins on our people, and they continue to be extremely resilient. Second, we have been very deliberate and vocal about focusing on time-based, mission-critical programs and projects in the Middle East—predominantly in Saudi and in the Emirates. Those have continued, centered around transportation as well as water and time-based venues, and those have not stopped. I would characterize it as minimal disruption, and the team has been extremely resilient in delivering, including from the confines of their own home. Just today, we went back into a work-from-home scenario. The backbone of this, as Venk has talked about several times before, is our global delivery model. We are delivering services for our clients not only with folks in-country and in-region, but also from around the world. That has really been highlighted and has served as a strength. Analyst: Great. That is super helpful. And then I know we have talked about data centers on this call, but can you tell us what you are seeing in life sciences and advanced pharmaceuticals, and if there is any appetite to reshore even further back to the US? Robert V. Pragada: Absolutely. The life sciences business is, in real-time pipeline, up 81% year-over-year. A lot of in-flight pursuits where we have been in the early stages are soon to be going into the field. That business—into the field in the US—remains strong, and we are now starting to see a bit of a build going on in Europe as well. It goes through different phases, so some of that reshoring activity that started a year or two ago will start to mature in the field over the course of the next few quarters. Analyst: Thank you so much. Operator: Your next question comes from the line of Jamie Cook with Truist Securities. Your line is open. Please go ahead. Jamie Cook: Hi. Good evening, and congrats on a nice quarter. Venk, I am looking at the EBITDA margin trajectory implied in the back half of the guidance. I think you said Q3 approximately 15%, Q4 approximately 16%. Understanding it is PA Consulting and maybe an extra week, but structurally there seems to be margin improvement. Given where the margins are implied in the back half, what is the setup for fiscal year 2027? It does not seem like the Street is factoring in margins implied in the back half. Are we missing the margin opportunity potential? Thank you. Venkatesh R. Nathamuni: Jamie, thanks for the question. As you pointed out, we guided for 15% in Q3, which would represent about a 90 basis point sequential improvement, which is pretty good. That would imply 16%+ in Q4. As I have talked about, we are investing in some programs that are margin-accretive in Q4. We have identified them and are ramping those investments for delivery in Q4. The fact that we have executed on that gives us good visibility to 16%+ in Q4. We feel pretty good about the margin trajectory. Looking beyond Q4, there is still substantial margin improvement ahead of us. To put things in context, fiscal 2025 and 2026 together would deliver about 200 basis points of margin expansion, and then we are guiding for another 75 basis points per year. Some of the other margin drivers apart from gross margin initiatives include global delivery and mix. As we combine PA Consulting and Jacobs Solutions Inc., the opportunity to deliver on the entirety of the asset lifecycle, and the fact that PA margins are substantially higher, gives us the option to upsell those margins as well. Lots of room to continue to execute on margins, and we feel pretty good about our guidance. Thank you. Operator: Your next question comes from the line of Jerry Revich with Wells Fargo. Your line is open. Please go ahead. Jerry Revich: Yes. Hi. Good evening. Nice to see the really strong bookings performance. Do you have the resources on hand, from a capacity standpoint, to ramp up to potentially double-digit organic growth—the extra week notwithstanding in the fourth quarter? And if you do get to that level of growth, what are the implications for additional margin beyond what you laid out? Robert V. Pragada: Absolutely. The short answer is yes, we do have the capacity. This goes to what we have been talking about and highlighted in our strategy—the global delivery model. Year-over-year, the growth in what we call global delivery is well into the double digits. Our ability to access talented labor delivering at a very high level has been very strong. Our resourcing to meet what is in our backlog, coupled with the progress on those programs and engagements, is strong, and it is driving the margins. So it is yes on the margin front as well. Jerry Revich: Super. And then on reshoring, one area where we are seeing significant progress is in semis, and the industry group is talking about a return to 2024 highs of CapEx for semis into next year. Is that consistent with the opportunities you see? Is there potential for additional projects to move forward beyond what the group is looking for in 2027? Robert V. Pragada: Jerry, yes and yes. We are seeing that investment in the semi sector, and we see that cycle transcending well into 2027. What is important is what is driving it, and it goes back to the earlier comments around the AI infrastructure. Where we are positioned right now on high-bandwidth memory manufacturing facilities is putting us on the front end of what then translates into the utility sector and eventually into the compute load in the data centers. Seeing it across that ecosystem is what is driving our business right now. The relationships we have with high-bandwidth memory manufacturers, as well as ASIC and other logic providers, are coming through. Jerry Revich: Thank you. Operator: Your next question comes from the line of Andrew John Wittmann with Baird. Your line is open. Please go ahead. Andrew John Wittmann: Thanks for taking my questions. On the longer-term margin outlook—the 75 basis points a year—you have talked about the various areas: commercial models, global delivery, etc. Are those out-year drivers any different from the ones you have been realizing over the last two very strong years? And are the benefits in those out years going to come from basic blocking and tackling, or do you have to launch new initiatives to achieve those things? In other words, is that going to cost you cash to implement changes? Venkatesh R. Nathamuni: Thanks, Andy. The margin trajectory—200 basis points over fiscal 2025 and 2026, and then 75 basis points per year thereafter—is a combination of several things that are well underway. In the first year, I would characterize it as mostly driven by operating line benefits from the separation of the CMS and C&I business and rightsizing. Everything thereafter has been driven by specific initiatives—gross margin actions, the global delivery model increasing in pace, scope, and scale, and operating leverage. On the enterprise side, how we run functions like finance and legal, deploying AI, is also driving margin expansion. On CapEx, our investments have been about 1% of revenue, and we are reallocating capital—traditionally in SaaS software—now more to AI-based tools. That is giving us productivity improvements without having to raise our CapEx numbers. Andrew John Wittmann: Thanks for that. For my follow-up, you alluded in your prepared remarks to the unusually high level of transaction costs. I am guessing some of the consideration you paid for PA was required to be recognized as operating cash rather than investing cash—that is probably most of it. Was there anything else in there? And because you mentioned there will be a fiscal third-quarter cash outflow in addition to the substantial cash outflow recognized this quarter, does that mean the exclusions next quarter might be relatively high as well? I know you commented it was mostly contained in the second quarter, but I am trying to get a sense of the balance of the year and then that “nirvana state,” hopefully in Q4, where these kinds of exclusions will not be as apparent. Venkatesh R. Nathamuni: Andy, you are exactly right. The accounting treatment necessitated that part of the consideration be included in cash flow from operations as opposed to investing or financing, and that is why you saw the exclusion. Roughly $235 million of it was compensation expense acceleration for the vesting of shares. In Q3, we called out about $101 million to $105 million of employee benefit trust payments, and then we are done. Even with Q3, that is already imputed in the P&L, so it is only a cash flow item in Q3. One other point: over the last couple of years, we have been steadily decreasing our restructuring cost, and we are on track to be substantially lower in fiscal 2026 compared to fiscal 2025. Andrew John Wittmann: Great. Thanks for that. Operator: Your next question comes from the line of Natalia Bach with Citi. Your line is open. Please go ahead. Natalia Bach: Hi. Good evening. Congrats on a nice quarter. Now that PA is 100% under Jacobs Solutions Inc., can you frame for us the potential for sales synergies accelerating? Robert V. Pragada: Very high. We had certain elements—mostly UK regulations around conflict of interest—affecting visibility into each other’s sales pipelines. The way I described the joint opportunities before—expanding the shaded area of the Venn diagram—now that restriction is gone. The pipeline has really increased with joint go-to-market opportunities. The innovation and delivery across the entirety of the asset lifecycle, which we did collaboratively when we had the majority, will also accelerate. It will increase the operating TAM. The main areas: defense infrastructure and national security in Europe, and in the US, transportation and energy and utilities—again feeding the AI infrastructure. Natalia Bach: Got it. Much appreciated. And then on the cost synergy side, any low hanging fruit opportunities in the near term? Venkatesh R. Nathamuni: Yes. In terms of cost synergies, when we closed the transaction a few weeks back, we announced roughly £12 million to £15 million of synergies. We have now identified specific opportunities from a cost perspective and see at least $20 million in annual cost synergies as we scale through fiscal 2027. Operator: There are no further questions at this time. I will now turn the call back to Bert. Bert Subin: Thank you, Kara. I know we got cut off in the beginning—we lost about a minute due to audio challenges. I want to mention that I refer you to slide two of the presentation for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. I apologize for the technical difficulties. I will now pass it over to Bob for some closing remarks. Robert V. Pragada: Thanks, Bert, and thank you, everyone, for joining our earnings call. We look forward to engaging with many of you over the coming days and weeks. Have a good evening, good day, and good morning, depending on where you are joining from. Thanks, everyone. Operator: This concludes today’s call. You may disconnect.
Operator: Ladies and gentlemen, good afternoon. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve Group First Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the conference over to Erik Randerson, Senior Vice President of Investor Relations. You may begin. Erik Randerson: Good afternoon, everyone, and thanks for joining us to discuss Revolve Group, Inc.'s first quarter 2026 results. Before we begin, I would like to mention that we have posted a presentation containing Q1 2026 financial highlights on our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements including statements related to our future growth, inventory balance, our key priorities and business initiatives, industry trends, our marketing events and their expected impact, our physical retail stores, our own brand expansion, our use of AI, our partnerships, and our outlook for net sales, gross margin, operating expenses, and effective tax rate. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption “Risk Factors” and elsewhere in our filings with the Securities and Exchange Commission, including without limitation, our Annual Report on Form 10-K for the year ended December 31, 2025, and our subsequent Quarterly Reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information including Adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions because we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information presented and prepared in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures, as well as the definitions of each measure, their limitations, and our rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Michael Karanikolas and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we will open the call for your questions. With that, I will turn it over to Michael Karanikolas. Michael Karanikolas: Hello, everyone, and thanks for joining us today. Outstanding execution by our team within a dynamic operating environment led to strong first quarter results and continued market share gains, highlighted by our net sales increasing 16% year over year, our highest growth rate in nearly four years. This growth acceleration, particularly in the current environment, is evidence that our investments in brand, technology and AI, site experience, and category diversification are paying off. In addition to our strong top line growth, diluted earnings per share increased 25% year over year despite a several-million-dollar increase in marketing investments year over year to support our growth initiatives, including the launch of Revolve Los Angeles, our first ever namesake label that we are incredibly excited about. And we generated $49 million in operating cash flow, significantly strengthening our pristine balance sheet with cash and cash equivalents increasing to $336 million at quarter end. Our core underlying business metrics illustrate our increased engagement and deepening connection with next generation consumers. Year-over-year growth in active customers accelerated in Q1 and we are generating increased revenue per active customer, fueled by our success in capturing a greater share of the consumer's wallet and a lower product return rate year over year. Beyond the numbers, I am most excited about our visible progress in longer term initiatives, such as international expansion and advancing our use of AI technology, that have become key contributors to our momentum and reinforce my confidence that we will continue to drive profitable growth in the future. Continuing with our longer term initiatives, Michael will talk about the exciting new chapter for our own brands assortment with Revolve Los Angeles, as well as an important new milestone in our physical retail expansion. We view each of these initiatives as potential game changers for our business over the long term. Our ability to invest in and execute on many exciting initiatives simultaneously underscores that our strong cash flow and balance sheet are key competitive advantages, particularly at a time when many peers with weaker financials are stuck playing defense. With that as an introduction, I will step back and provide a brief recap of our Q1 results before reviewing the progress on our longer term initiatives. Net sales for the quarter were $343 million, an increase of 16% year over year, a more than five-point sequential improvement from our 10% year-over-year growth rate in 2025. Gains were broad based as year-over-year growth rates improved across REVOLVE, FORWARD, domestic, and international compared to the year-over-year growth rates in the fourth quarter, with double-digit growth across the board. Also notable is that our dresses category net sales accelerated by 13 points compared to 2025 performance and we delivered even stronger growth in fashion apparel, validating the momentum behind our category diversification strategy. The strong start to the year puts us on a good path to our goal of double-digit revenue growth in 2026. By segment, REVOLVE net sales increased 15%, FORWARD net sales increased 17% year over year. These were our highest growth rates since 2022. By territory, domestic net sales increased 15%, and international net sales grew 20% year over year in the first quarter. We achieved these outstanding international results despite a meaningful slowdown in the Middle East that has continued into the second quarter amidst significant geopolitical uncertainty. Shifting to our bottom line results, net income was $14 million and diluted earnings per share was $0.20, an increase of 25% year over year. Adjusted EBITDA was $21 million, an increase of 9% year over year, all while investing in a number of meaningful growth initiatives including investments to position the new Revolve Los Angeles assortment for long term success. Most exciting is that our profitable growth once again converted very strongly to cash flow. Our business generated a $33 million increase in cash and cash equivalents in the first quarter alone, even while investing $11 million in January for a synergistic minority investment. Now I will conclude by recapping our progress against our longer term strategic priorities and growth vectors. We have many exciting initiatives underway, and the team has done a great job executing to position us to deliver meaningful value for shareholders over the long term. First, we continue to efficiently invest to expand our brand awareness, grow our customer base, and strengthen our connection with the next generation consumer. I could not be more excited about our recent brand wins that Michael will talk about in his remarks, ranging from the impactful and well received launch of Revolve Los Angeles to an incredible and efficient Revolve Festival held last month attended by countless A-listers. The recent launch of GrowGood Beauty, developed in partnership with Cardi B, also serves as a powerful demonstration of our brand building capabilities, one that exceeded our highest expectations, amassing several billion impressions and 140,000 Instagram followers within days of the official launch. Second, we continue to successfully expand our international penetration, highlighted by 20% growth outside of the U.S. in the first quarter. It was the thirteenth straight quarter that international growth has outpaced the U.S., and we are still very early in our journey. I am particularly excited about a strong growth resurgence in Mexico following our launch of elevated service levels and impactful new marketing playbooks in recent months. In fact, new customers in Mexico increased more than 80% year over year in the first quarter, contributing to our improved growth in active customers. Third, our first quarter results provide further confirmation that our investments to capture market share in the luxury segment are paying off. FORWARD net sales grew 17% year over year, our highest growth rate in four years, and FORWARD gross profit increased 36% year over year. Notably, at a time when the world's largest multi-brand luxury retailer is closing most of its store locations, we are rapidly expanding our customer base, attracting coveted new brand partners, and having particular success in generating increased sales from high value customers. Finally, we continue to leverage AI to drive growth and efficiency across the company, including to further elevate the shopping experience and drive higher conversion. I am pleased to report that we have successfully tested and recently launched into production our internally developed generative AI feature discussed last quarter that surfaces contextually relevant questions and answers about our products. This new feature is now live on our REVOLVE mobile channel for our vast assortment of dresses and delivering meaningful gains. The conversion lift was so compelling that our team is already hard at work to expand our A/B testing to include additional channels and product categories, consistent with our efforts to continuously raise the bar on the customer experience. Also notable, we used generative AI to significantly assist in the creation of marketing collateral for the incredibly successful launch of GrowGood Beauty that Michael will talk about in his remarks. Another great example of how we are able to leverage our data-driven culture and AI technology innovations to drive revenue and efficiency throughout the company. To wrap up, I would like to thank our passionate and innovative Revolve colleagues for their incredible efforts in driving strong results in the first quarter while also advancing our exciting longer term initiatives that further strengthen our foundation for future profitable growth. It is gratifying to see our team so energized by these growth opportunities, such as physical retail, international, and AI expansion, which we believe give us the opportunity to accelerate our market share gains. The current momentum in the business and the great progress on our initiatives reinforce my confidence in our ability to drive profitable growth in 2026 and beyond. Now over to Michael. Michael Mente: Thanks, Mike, and hello, everyone. We delivered an outstanding first quarter with strength across geographies, segments, and categories. It is gratifying to see the strong results from the investments we have been making over the recent quarters. Our top line is accelerating, brand heat is building, and customer connection is strengthening. We believe this momentum in the business illustrates our core competitive advantages that position us for continued success over the long term: our technology- and data-driven DNA and proprietary technology infrastructure, our operational excellence and agility, and our powerful brands and connection with the next generation consumer. With that as an introduction, I will focus my remarks on some of the strategic areas we are investing in and that we are especially excited about: the launch of our first ever REVOLVE label, our ninth annual Revolve Festival, physical retail expansion, and our joint venture with Cardi B. First, Revolve Los Angeles. For years, Mike and I have talked about launching a Revolve namesake label. Over the past 23 years, we have diligently focused on building Revolve as a brand — a true brand beyond just a fashion retailer. With this focus and disciplined investment, we have earned the trust and loyalty from millions of Revolve consumers, resulting in incredible brand power. We are truly unique as a multi-brand retailer that consumers completely trust to provide fashion discovery. As background, our customers rarely search for a specific brand on REVOLVE. In fact, less than 10% of products added to shopping carts on REVOLVE originate from a brand page. Instead, our community views REVOLVE as their preferred destination to discover what is new and on trend from our edits of more than 1.6 thousand brands, which is very different from other retail destinations. On countless occasions, I have met customers who are excited to share that they are wearing REVOLVE. They cannot remember which brand they are wearing, but know they bought it on REVOLVE. With that as context, we could not be more excited to leverage our brand strength, design talent, and operational excellence to provide our customers with a true REVOLVE label. In March, we introduced Revolve Los Angeles, our first ever namesake label, that features elevated apparel and eveningwear to fill a genuine gap in the market. It aligns with our expansion into physical retail, allowing customers to engage with our brand in real life and in a more permanent, meaningful way. We believe this new collection could expand our market opportunity and create a halo effect on the entire business. Revolve Los Angeles is just the beginning of a new REVOLVE-branded assortment that will extend across categories and price points over time. Since we see incredible potential for this initiative, we are investing incremental brand marketing dollars to drive its success. We have invested in elevated print, billboard, YouTube, and connected TV brand advertising featuring Revolve Los Angeles brand ambassador Bella Hadid, who perfectly embodies the brand's quintessential Los Angeles energy. We estimate that the impactful campaign has already generated more than 200 million impressions, creating one of the most powerful brand moments in our 23-year history. REVOLVE and FORWARD also sponsored the ultra-exclusive and prestigious Vanity Fair Oscar after party, where Amelia Gray impressed in a striking black gown from Revolve Los Angeles. These longer term investments are already creating favorable awareness and moving the needle. During March, consumer interest in the “Revolve” search term increased more than 40% year over year, according to Google Trends. We are also continuing to see strength in REVOLVE mobile app downloads, which increased by more than 50% year over year in March. This is particularly exciting considering that our mobile app converts at a much higher rate and app customers have the highest expected lifetime value by a wide margin. Second, Revolve Festival. On April 11, we hosted our ninth annual Revolve Festival in Coachella Valley, an exclusive experience where everything we are known for comes to life, blending fashion, community, and culture. Every year, we push ourselves to create something more immersive, more unexpected, and more iconic than the last. Our team met the challenge and again raised the bar, delivering an incredible lineup featuring Don Toliver, Kehlani, and Mustard that captivated the crowd of A-listers and kept the energy buzzing throughout. Built for the next generation of fashion consumers, Revolve Festival ensures that our brand stays connected and strong with the trend-setting young consumers who define what is next. In true REVOLVE fashion, our event transforms every detail into a story worth sharing on social media, with curated photo moments and immersive brand activations that put REVOLVE and FORWARD looks at the center of the cultural conversation. Our brand-elevating event delivered an incredible experience to our community of celebrities, brands, content creators, partners, and fans attending what one editor called the real main stage of the weekend. The impressive range of A-listers in attendance included Teyana Taylor, who looked stunning in a futuristic gown from our Revolve Los Angeles label; BLACKPINK members Jennie and Lisa; Emma Roberts; Gabriette; Becky G; members of Cat's Eye; Damson Idris; Charli and Dixie D'Amelio; members of Bini; Dwyane Wade; Paige Bueckers; Cameron Brink; Tyga; Big Sean; Thomas Doherty; Shaun White; Wiz Khalifa; Rachel Zoe; Victoria Justice; Ty Dolla $ign; Alandra Carthan; Leah Kateb; and Dylan Efron. The proof of our success is in the incredible numbers. REVOLVE generated the highest earned media value among all brands during both weekends of the Coachella Music Festival, even though our Revolve Festival was only held during the first weekend, according to CreatorIQ, an influencer marketing analytics firm. As icing on the cake, the top performing post during the entire Coachella Festival generated nearly $25 million in earned media value for REVOLVE, according to Meltwater, a media intelligence firm. Third, physical retail. We remain very excited about the growth opportunity in physical retail over the long term. As we approach its two-year anniversary, our Aspen store continues to achieve great progress on the top line and conversion gains year over year. We are especially pleased with our recent performance considering that Aspen tourism has declined year over year in recent months, coinciding with well below average snow conditions during the ski season. Our investments in the team, operations, and retail technology platform are clearly paying off and further raising the bar on our go-to-market retail strategy. While our Los Angeles store at The Grove is just getting started, several of the early metrics are encouraging. The owned brand mix of net sales at The Grove in Los Angeles is meaningfully higher than online and improving month over month. Also very exciting, even in our LA roots where the REVOLVE brand has the highest consumer awareness, we are seeing a measurable lift in ecommerce sales in the local community surrounding The Grove. This illustrates the halo effect synergies between retail stores and our core ecommerce operations and further validates physical retail as a key growth strategy for increasing brand awareness, acquiring new customers, and expanding our market share, as stores generate over 60% of global retail spend on apparel and footwear. With these positive signals and the momentum of our brands bolstering our confidence, I am thrilled to share that we have signed a lease for an incredible retail store location in Miami. We expect to open our doors by year end in what has become one of our strongest U.S. markets. At a recent Miami event held for our VIP clients, our vibrant community of local customers were beyond excited to learn we were opening a store nearby. Before I close, I will provide an update on our joint venture with Grammy Award-winning performer and global style icon, Cardi B. The partnership leverages our strong operational, brand-building, and marketing expertise with Cardi's powerful brand, trend-setting fashion and beauty inspiration, and a global audience that extends well beyond our current core target demographic. We recently launched the GrowGood Beauty assortment of hair care products with Cardi, and early results have exceeded expectations. In fact, every product sold out in less than an hour during a March presale event and sold out again in less than an hour when we officially launched the GrowGood brand in April. Cardi's and our teams did a great job driving awareness leading up to the launch, promoting GrowGood on impactful social channels, during Cardi's sold-out tour of 30 cities across North America and at Revolve Festival. The brand was also prominently featured during Cardi's appearances on the Today Show, The Tonight Show Starring Jimmy Fallon, and in press features including WWD, Allure, Essence, Marie Claire, and People. Most striking is GrowGood's rapid ascent to over 640 thousand Instagram followers in a matter of weeks. But compared to Cardi's 164 million Instagram followers, the gap underscores the brand's extraordinary untapped potential as we look ahead. The market response has been exceptional, and we are moving aggressively to scale on the back of that early demand. We are just getting started and are very excited to build on this early momentum. Wrapping up, our continued profitable growth and strong balance sheet are strategic advantages that give us the capacity to invest for long term success from a position of strength. With the acceleration in the business, it is clear that our investments are working, setting us up for our next phase of growth. We have incredible momentum, and I am more excited than ever about our many initiatives underway that we believe will enable us to gain further market share in 2026 and beyond. I will turn it over to Jesse for a discussion of the financials. Jesse Timmermans: Thanks, Michael, and hello, everyone. I am very proud of our first quarter results, highlighted by strong double-digit growth in net sales and earnings per share, and meaningful cash flow generation that further solidifies our balance sheet. I will start by recapping our first quarter results and then close with updates on recent trends in the business and guidance for the balance of the year. Starting with the first quarter results, net sales were $343 million, a year-over-year increase of 16% and a more than five-point improvement from our net sales growth in 2025. REVOLVE segment net sales increased 15% and FORWARD segment net sales increased 17% year over year in the first quarter. By territory, domestic net sales increased 15% and international net sales increased 20% year over year. Growth in trailing twelve-month active customers accelerated to 8% year over year, increasing to 2.9 million. Contributing to the strong top line was 12% growth in total orders placed year over year to 2.6 million. Average order value was $298, an increase of 1% year over year. The increase was driven by growth in average selling price, or ASP, that was partially offset by lower units per order. Consolidated gross margin was 52.7%, an increase of 68 basis points year over year that primarily reflects meaningful margin expansion in our FORWARD segment. The slight margin decline year over year in our REVOLVE segment primarily reflects a slightly lower mix of full-price net sales compared to 2025, partially offset by shallower markdowns and an increased mix of owned brand net sales year over year. Now moving on to operating expenses. Fulfillment costs were 3.1% of net sales, outperforming our guidance and a slight decrease year over year. Selling and distribution costs were 16.8% of net sales, outperforming our guidance by 30 basis points and a slight decrease year over year. Contributing to the better-than-expected result was a decrease in our return rate year over year, partially offset by higher shipping costs. Our marketing investment grew to 15.8% of net sales, an increase of 152 basis points year over year. Consistent with our guidance, we meaningfully increased our marketing investments to support exciting growth initiatives such as the launch of our Revolve Los Angeles label. For the second straight quarter, we achieved operating leverage year over year in general and administrative expenses. All while making meaningful investments in various growth initiatives. In dollar terms, G&A expense of $42 million exceeded our guidance. Most of the overage, however, reflects costs that are excluded from Adjusted EBITDA, including nearly $700 thousand in non-routine costs that were not factored in our outlook, and higher-than-anticipated stock-based compensation expense as our business momentum drove an increase in equity compensation tied to performance objectives. To align our interests with shareholders, a meaningful portion of our equity grants are performance based with vesting tied to achievement of long term targets. Below the operating line, other income increased to $2.7 million from $900 thousand a year ago. Our tax rate was 25% in the first quarter, a decrease of approximately one percentage point from the prior year. Net income was $14 million, and diluted earnings per share was $0.20, an increase of 25% year over year. Adjusted EBITDA was $21 million, an increase of 9% year over year. Moving on to the balance sheet and cash flow statement. We generated $49 million in net cash provided by operating activities and $45 million in free cash flow, an increase of 95% year over year, respectively. The healthy cash flow generation has further strengthened our balance sheet and liquidity. As of March 31, 2026, our balance of total cash and cash equivalents increased by $33 million, or 11%, in just three months compared to year end 2025, and we continue to have no debt. Inventory at March 31, 2026 was $245 million, an increase of 15% year over year, broadly consistent with our 16% net sales growth for the first quarter. Now let me update you on some recent trends in the business since the first quarter ended and provide some direction on our outlook to help in your modeling of the business for the balance of the year. Starting from the top, we are off to an encouraging start with net sales through the month of April 2026 increasing by approximately 14% year over year. For modeling purposes, I want to point out that we face more difficult prior-year comparisons for the rest of the second quarter, as net sales in April 2025 were softer than normal due to peak tariff uncertainty before rebounding into the low double-digit growth territory for the months of May and June 2025. Shifting to gross margin, we expect gross margin in the second quarter of 2026 of between 54.1%–54.6%, which implies an increase of 25 basis points year over year at the midpoint of the range. For the full year 2026, we now expect gross margin of between 53.5%–54.0%, which also implies a year-over-year increase of around 25 basis points at the midpoint of the range. The slight decrease from our prior full-year guidance reflects the first quarter results and slightly lower trending of full-price mix of net sales year over year. Fulfillment: We expect fulfillment as a percentage of net sales of approximately 3.2% for the second quarter of 2026, consistent with 2025. For the full year 2026, we continue to expect fulfillment costs of between 3.2%–3.4% of net sales. Selling and distribution: We expect selling and distribution costs as a percentage of net sales of approximately 17.5% for the second quarter of 2026, an increase of approximately 10 basis points year over year. For the full year, we continue to expect selling and distribution costs of between 17.1%–17.3% of net sales. Marketing: We expect our marketing investment to be approximately 15.7% of net sales in the second quarter, and between 15.3%–15.8% for the full year 2026, unchanged from our prior guidance. General and administrative: We expect G&A expense of approximately $43 million in the second quarter of 2026 and now expect G&A expense of between $164 million and $168 million for the full year 2026. Approximately half of the increase from our prior G&A outlook is due to increased performance-based equity compensation expense resulting from our business momentum. We are also increasing our investments in the Cardi B joint venture to capitalize on the incredible recent launch of GrowGood Beauty that we believe has tremendous upside potential. And lastly, we continue to expect our effective tax rate to be around 24% to 26% for the full year 2026. To recap, I am very excited about our strong momentum and confident in the promising growth initiatives we are investing behind and that we believe position us well for continued profitable growth and market share gains in the years ahead. We will now open the call for questions. Operator: And, again, if you would like to ask a question, press star and then the number one on your telephone keypad. And our first question comes from the line of Anna Andreeva with Piper Sandler. Your line is open. Analyst: Great. Thank you so much for taking our question, and congrats on a nice brand momentum. Jesse Timmermans: Yeah, thanks, Anna. I think you hit all of the points. First of all, for the second quarter, we are factoring in a consistent trend on what we have been seeing for the full-price mix. Second, to your point, we are seeing higher input costs both on the freight side and also on materials for those petroleum-based products that are impacting margin, and that has a bigger impact on REVOLVE than it does on FORWARD given the owned brand mix on REVOLVE. Those are the big drivers when it comes to the forecast looking forward. For tariffs, we are factoring in the current tariff rate, which is the incremental 10%. That said, as we have talked about before, we have been really successful in mitigating the vast majority of tariffs. We do not see that as a significant driver one way or another. And just stepping back, really happy with the overall results on margin with the 70-basis-point increase year on year, and particularly on the FORWARD side, which increased almost six points. So overall good results, and we are just seeing some of that increased input cost pressure. Michael Karanikolas: On your follow-up regarding the high value consumer, we think the opportunity in the high value customer segment is very large for us over time, not just at FORWARD, but also at REVOLVE. REVOLVE is a premium price point, and a lot of our top FORWARD shoppers shop significantly on REVOLVE as well. We are seeing strength across both websites with that high value consumer. We do not release a specific mix percentage publicly, and of course it depends where we put the cutoff, but we are seeing that as a real area of strength in our business. Operator: And our next question comes from the line of Rick Patel with Raymond James. Your line is open. Analyst: Thanks for taking my question. I would love any color on monthly cadence through the quarter, what you are seeing thus far in Q2, and how to think about operating expense leverage as we move through the year. Jesse Timmermans: Thanks, Rick. On the monthly cadence, as you recall, we were plus 16% for the first seven weeks of the year, and we closed at plus 16%, and that was on tempered comps. So really great progress as we moved through the quarter, and we had some really great marketing activities — Revolve Los Angeles, for example. Really pleased with the cadence of the growth throughout the first quarter. On the go forward for April, we are seeing some pressure, specifically in the Middle East regions as a result of the geopolitical uncertainty there. That definitely has an impact. That started in March, and it is continuing to have an impact in April, and likely, as you have heard, some consumer confidence and sentiment impact building as a result of that conflict. On operating expenses and leverage, we are investing in a number of growth initiatives, so that is a big driver in the Q1 results and for the full year. If you take marketing, for example, up 150 basis points year on year, that was largely due to the growth initiatives we have been driving — Revolve Los Angeles, GrowGood, etc. That impacts G&A as well. It is really impressive that we got 60 basis points of G&A leverage while investing. If you pull those growth initiatives specifically out of G&A, G&A would have been up kind of mid-single digits, call it, so we would have had more than a point of leverage on G&A. For the year, at the high end of the G&A range, it would be plus 7%, so anything north of that on revenue we would get leverage on that line item. The other line items are largely variable. In marketing, we are continuing to invest, so that will be an investment point for this year, and as we look ahead to future years, that marketing will balance out after this initial investment year. Operator: And our next question comes from the line of Peter McGoldrick with Stifel. Your line is open. Analyst: Thanks. Can you elaborate on early learnings and strategy for Revolve Los Angeles and any color on full-price mix trends? Michael Mente: On the Revolve Los Angeles brand, given the strong, beloved nature of the REVOLVE brand itself, having the REVOLVE brand will be a very powerful owned brand. This allows us to focus and attack with a strong halo that drives product sales in those zones, but also gives greater awareness and affinity for the overall REVOLVE brand, which should halo into all other categories. REVOLVE LA is really the beginning of multiple REVOLVE-oriented brands that allow us to touch a range of categories that we currently are not active in. That is very important for us over the course of the next 12 to 24 months. We will be attacking very high-margin categories that will be a whole new white space for us. This is a multiyear roadmap. If you fast forward two to three years from now, you will see this is going to be the next chapter for our business. We are super excited about this, and everything is going perfectly according to plan with that first launch. Jesse Timmermans: On the full-price mix, it fluctuates month to month and quarter to quarter, so I would not put too much weight toward any significant shift. There could be some consumer sentiment and confidence impacting that, but over time we have driven that up, and although it is down year on year, over the past few years it is meaningfully higher than it was in the pre-COVID era. It is still in a very healthy zone. We saw a double-digit increase in full-price sales and a really healthy increase in full-price customers. At this point, we feel good about the inventory composition and the mix, although it was lower year on year and a little bit lower than our expectations. Operator: And our next question comes from the line of Michael Binetti with Evercore. Your line is open. Analyst: Hey, guys. Could you expand on input cost pressures you are seeing and how returns initiatives are trending? Jesse Timmermans: Thanks, Michael. On input costs, on the product side we are seeing it both in freight and in product — any petroleum-based products are seeing increased cost, and that is just starting, so that impacts the go-forward guidance on gross margin. It is more of an impact on REVOLVE, as I mentioned, given the owned brand mix there has a more direct impact than the third parties where we are marking up. We are also seeing higher freight costs within selling and distribution. We have done a really good job managing fuel surcharges and rates with the carriers, but there have still been increased surcharges, especially international, that we are battling against right now. Offsetting that, return rate was down nicely in the first quarter — 80 basis points — on top of a 280-basis-point reduction in Q1 2025. Even sequentially, historically we see an increase from Q4 to Q1 around 150 basis points, and this year the sequential increase was half of that. We do have a number of initiatives still in play, with a couple more rolling out around the middle of this year. We will continue to work on it and try to drive that down in the right ways without impacting the experience. Operator: Our next question comes from the line of Nathan Feather with Morgan Stanley. Your line is open. Analyst: Thanks for taking the question. Could you update us on GrowGood scaling plans and any future categories with Cardi? Michael Mente: On GrowGood, the current limitation is really inventory. We have a big wave of inventory coming sequentially over the next few months, so we will definitely see a sales ramp-up there. Sales velocity is so fast that predictability will be interesting to see over time, but we have nothing but the highest momentum we have ever had for a product or a brand. We also have an extremely exciting roadmap for the GrowGood brand in product introductions and beyond. Cardi has been nothing but the best partner — as locked in as possible — so we could not be more excited. There will be an apparel brand planned for the future, which we will not get into too many details yet, but that is extremely exciting as well. It hits a zone that is a complete white space in our universe, so we are excited to do something very special there as well. Operator: Great. Thank you. And our next question comes from the line of Oliver Chen with TD Securities. Your line is open. Analyst: Hi. This is Julie Shalansky on for Oliver Chen. I am curious if you could walk us through the main drivers of the improvement in the return rates from this quarter, and how you think about that evolving as categories like beauty and owned brands continue to scale. Second, how much of the 1Q step-up in marketing is recurring infrastructure versus one-time costs for Revolve LA? Michael Karanikolas: With regard to the return rates, there are a couple of factors at play. Certainly, there are things we have been working on over the longer term to get return rates down, including some preexisting initiatives that we were able to step up in a bigger way during the quarter. You will also have some fluctuation quarter to quarter in the return rate number, just like the gross margin number, depending on category mix shift and other factors, and that played a bit of a role. On marketing expenses, I would not say there is any structural change in marketing, but to the extent that we have exciting things to launch that we think could be big growth drivers for many years to come — such as Revolve Los Angeles, which is incredibly strategic, and GrowGood, which is quite exciting as well — we are going to make sure we fuel those initiatives with the proper marketing support, and we think it will deliver nice returns. Operator: And our next question comes from the line of Janine Stichter with B. Your line is open. Analyst: Thanks so much. How are you thinking about sustaining growth from here, and any notable consumer behavior callouts? Michael Karanikolas: We have seen really nice execution the past couple of quarters in terms of delivering growth numbers, and it is certainly our intention and expectation that should continue. REVOLVE itself has huge continued opportunity in just the REVOLVE core. Our brand awareness is still relatively low compared to much larger premium brands, and we are still adding active customers at a good rate with a lot of new areas of marketing we are investing into. Category expansion is a strong driver for us. International expansion has been strong, with 13 consecutive quarters of international outpacing the U.S., and we saw strong growth internationally across pretty much every major region in Q1 despite some weakness in the Middle East. On top of that, you have physical retail, which is completely untapped for the brand and can have a huge impact on our overall TAM and revenue; Revolve LA, which opens things up from both a marketing and product category perspective; and brand partnership opportunities like GrowGood, which had an incredible launch and can be substantial in value and revenue. The core growth algorithm has a ton of upside, and we have huge opportunities on top of it, and I think we are positioned very well. Jesse Timmermans: From a consumer lens, nothing significant to call out outside of the obvious Middle East impact. We also talked about the high value customers continuing to really perform, especially on the FORWARD side, so it is more of the same. Operator: Our next question comes from the line of Simeon Siegel with Guggenheim. Your line is open. Analyst: Hey, everyone. Could you provide more detail on the $11 million minority investment and trends in AOV? Michael Karanikolas: On the $11 million minority investment, first and foremost we will be disciplined and opportunistic. In this case, we found a brand that we felt was very strategic for us in terms of the category it operated in, and we felt like it was an incredible brand with an incredible team behind it, with investment terms that made a lot of sense. Those are the sorts of opportunities we are looking for. We are really excited about the partnership and hopeful it will work out quite well. Jesse Timmermans: On AOV, it was up 1%. It was up across both REVOLVE and FORWARD. We saw a higher increase in average selling price partially offset by units per order. Looking ahead, we saw a similar trend in April, and we would expect flat to slight increase in AOV for the balance of the year. Operator: And our next question comes from the line of Dylan Carden with William Blair. Your line is open. Analyst: Thanks. How should we think about the marketing cadence versus revenue and the mix of performance versus brand? Jesse Timmermans: We had the marketing plans in place ahead of that revenue growth, and the revenue growth came through very well for us, so we are really happy with the way that played out. I would not say that we are taking excess revenue and investing it back into marketing, but when we see something working, we will continue to invest, so you could see that going forward. Most of the step-up was to support these initiatives, and it impacted both performance and brand. As we discussed in the prepared remarks, we made investments in billboard placements, connected TV, and other areas that we typically have not done in the past but have been playing out very well with a really good ROI on those incremental investments. Michael Karanikolas: On beauty, the GrowGood launch and sales did not hit the GAAP numbers for the first quarter because any sales that occurred in the first quarter were all presale. Beauty as a whole saw strong growth excluding the GrowGood launch, which was incredible, and that is really just a continuation of a trend we have seen for a number of years now, and of course we think that business has a lot more room to grow. Operator: And our next question comes from the line of Jay Sole with UBS. Your line is open. Analyst: Thanks for taking the question. Any key learnings from retail stores so far and thoughts on locations and owned brands in-store? Michael Mente: On retail, probably the most notable thing is that our customer loves our owned brands. We are pushing the limit there and pushing further. Owned brands perform better on their own for shelf space and rack space, so we will continue to ramp there. This insight has helped us invest more into owned brands, launch Revolve Los Angeles, and expand into categories that we have not historically been active in because they were more suited for physical retail versus ecommerce. Those two coming together over the long term will be incredibly powerful. Thus far, we feel quite confident on our choice of locations. We want to be very disciplined about locations that we feel are extremely de-risked. Our Miami location in Aventura is one where we are 100% positive that we will get our customer. Michael Karanikolas: On AI, there is a whole host of areas where it is impacting the business in a very positive way, enabling revenue growth and our ability to go after opportunities quickly and make better decisions. Recent launches include the new generative AI Q&A section on portions of our website. We saw really strong performance there, and it was launched only on dresses and only on a subsegment of our property, so there is a lot of room to expand and roll out. We also used AI to accelerate our ability to produce high-quality marketing collateral quickly — we mentioned that with GrowGood, but it is true across the business. AI virtual styling tools we have discussed on previous calls are seeing strong consumer reception and are not fully rolled out yet. Across the business, we are developing better internal tools and algorithms to make better decisions. You have seen a lot of gross margin gains through the years in terms of full-price/markdown ratios and margins on markdowns. We have incredible internal tools for reporting that can unlock quicker decision making. Over a multiyear period, we have rolled out AI search enhancements and improvements to merchandise and personalization algorithms — it is really impactful across the entire business. Operator: And as a reminder, it is star one if you would like to ask a question. And our next question comes from the line of Matt Koranda with ROTH Capital. Your line is open. Analyst: Hi, everyone. Could you talk about full-price mix volatility and any updates on active customer growth drivers? Michael Karanikolas: Regarding the lower mix of full-price sales, these percentages will fluctuate quarter to quarter. Over longer periods of time, we have driven that percentage up significantly, and it is extremely favorable versus a lot of the competition in multi-brand retail. It is important to note that we manage it largely algorithmically. There can be product mix shifts that affect the full-price/markdown ratio from quarter to quarter and some shifts in consumer behavior, but overall we think it is in a very healthy place. The combined business had gross margin gains for the quarter, so nothing particular of note to call out with regards to the fluctuations. Jesse Timmermans: On active customers, that plus 8% was driven by both new customers and existing customers. We saw orders per active and revenue per active go up, which shows really good engagement from existing customers. On new customers, growth was across the board: REVOLVE, FORWARD, domestic, international, full price, and markdown. It all goes back to the execution and the investments we have been making over the past few quarters, and specifically this quarter we were very active in marketing, and Revolve Los Angeles creates a nice halo effect for the entire business. Operator: And our final question comes from the line of Ashley Owens with KeyBanc Capital Markets. Your line is open. Analyst: Thanks for squeezing me in. Any additional detail on international performance and tariff refunds timing? Michael Karanikolas: On international, we saw broad strength. Every major region was up year over year, so it was not any particular one region driving growth, including the Middle East, which was up for Q1. If you pull the quarter apart, March was down for the Middle East and that continued through April, but as a whole, we saw strong growth across the board. Mexico is an outlier contributor — we are having incredible growth there as a result of service enhancements and new marketing initiatives. We are really pleased with that region, and it drove a very significant portion of overall international growth, but again, all major regions were up year over year. Jesse Timmermans: On tariff refunds, the team was very on top of this. The refund application process started on April 20, and they filed everything within a day or two of that. Claims have been filed, and we are starting to receive responses. Timing is TBD — we have heard 60 to 90 days — but there is some tiering, so we do not think we will see it all in one fell swoop. It is not included in the guidance, so that would be upside, but timing is TBD. Operator: And that concludes our question and answer session. I will now turn the call back over to management for closing remarks. Michael Mente: Thank you for joining this quarter, and a big thanks to our team for the hard work and focus. It is very clear to me that our multiyear strategic plans and investments are going exactly as planned. Continued focused execution quarter after quarter will undoubtedly result in phenomenal results. Michael Karanikolas: Excited for the next quarter ahead and the many years ahead. Thank you.
Operator: Good day, everyone. My name is Kehaylani, I will be your conference operator today. At this time, I would like to welcome you to the Q1 2026 Rapid7, Inc. Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, and if you have joined by the webinar, please use the raise hand icon which can be found at the bottom of your webinar application. At this time, I would like to turn the call over to Matt Wells, Vice President of Investor Relations. Matt Wells: Thank you, operator, and good afternoon, everyone. We appreciate you joining us. Today, we will be discussing Rapid7, Inc.'s first quarter fiscal 2026 financial results. We have distributed our earnings press release over the wire, and it can be accessed on our investor relations website. With me on the call today are Corey Thomas, our CEO, and Rafe Brown, our CFO. As a reminder, all participants are in a listen-only mode, and a question and answer session will follow our opening remarks. Before I hand the call over to Corey, I want to note that certain statements made during this conference call may be considered forward-looking under federal securities laws. Such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include our outlook for the second quarter and fiscal year 2026, any assumptions for fiscal periods beyond that period, and our positioning, strategy, business plan, operational improvements, and growth drivers. These forward-looking statements are based on our current expectations and beliefs and information currently available to us. While we believe any forward-looking statements we make are reasonable, actual results could differ materially due to a number of risks and uncertainties including those contained in our filings with the SEC. Reported results should not be considered as indicative of future performance. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events, or otherwise, except to the extent required by applicable law. Further information on these forward-looking statements and risk factors are included in the filings we make with the SEC, including the section titled “Cautionary Language Concerning Forward-Looking Statements” in our earnings press release. Additionally, over the course of this call, we will use non-GAAP measures to describe our performance. Please review our earnings press release and filings with the SEC for a rationale behind the use of non-GAAP measures and for a full reconciliation of these GAAP to non-GAAP metrics. These documents, in addition to a replay of this call, will be available on the Rapid7, Inc. Investor Relations website. And with that, I would like to turn the call over to Corey. Corey Thomas: Thank you, Matt, and welcome to everyone joining Rapid7, Inc.'s first quarter 2026 earnings call. Let me start by sharing insights from the influx of conversations we have been having with customers as they navigate the rapidly evolving cyber landscape. CIOs and CISOs are telling us the same thing in different ways. Advances from frontier models have fundamentally accelerated the threat environment and outpaced operating models built to defend against it. Vulnerabilities can now be discovered and exploited autonomously, and attackers are moving at machine speed. This fundamentally rewrites the value equation in security. The premium is no longer on detecting threats faster after they emerge; it shifts to preemptive exposure management, autonomous detection, and remediation at scale, closing the windows attackers exploit before they can be exploited at all. This is precisely the environment that plays to our strengths, and that is why our investments in the AI SOC and preemptive security operations are resonating so strongly with customers. The shift we are enabling from reactive to preemptive, from human scale to machine scale, is not a marketing reframe. It is the only viable path forward for teams that need to anticipate where attackers will move next, prioritize the exposures that actually matter, and respond at the speed of modern attacks. Customers are looking for a partner who can unify their data, apply AI with the right context, drive remediation at scale, and translate all of it into measurable outcomes. That is exactly where we are focused. The core platform we are building across detection and response and exposure management is becoming the foundation customers turn to as they modernize for this new threat reality. By unifying exposure and inspection on the Command platform, and combining AI-driven operations with the depth of expertise that we have built over 25 years, we are giving customers a single, coherent way to reduce risk, disrupt attackers, and build durable cyber resilience. The opportunity in front of us has never been clearer, and our conviction in this strategy has never been higher. Turning to the first quarter, I am pleased to report that Rapid7, Inc. delivered outperformance against all guided metrics. ARR of $832 million and revenue of $210 million were driven by sustained growth in our detection and response business, offset by trends in other parts of our business, particularly our non-core standalone offerings. Non-GAAP operating income of $24 million exceeded our guidance and helped drive strong free cash flow of $33 million. Our quarterly results reflect a greater focus on balancing strategic investment and driving scale in the business. In detection and response, ARR growth of approximately 7% was driven by strength in our MDR business. Our approach to delivering AI-enabled SOC, combined with deep services expertise, continues to receive strong market validation, and this quarter we added a new Fortune 500 customer in a seven-figure ARR deal. In exposure management, we will continue to simplify the migration process of upgrading our large vulnerability management base into the Exposure Command platform. Our approach to a unified AI-driven exposure platform continues to resonate with new and existing customers. In this quarter, a large Fortune 500 customer consolidated on Rapid7, Inc. as their exposure platform of choice in a competitive deal cycle. In the quarter, we acquired Kensile Security, an agentic platform built to run security operations autonomously and at machine speed. This is a direct accelerant to our AI SOC vision. Data mesh shifts customers away from a per-alert investigation model to a system-driven one. Coverage scales with the environment, not headcount. This unlocks two things: a meaningful tailwind for MDR growth and a path to higher contribution margins through software-driven efficiency. Most importantly, Kinzo opens the door to the full MDR market. Rapid7, Inc. is evolving into a preemptive, agentic security platform that accelerates the entire SOC, delivered either as a managed service or a self-managed platform. By combining deep MDR expertise with exposure-driven visibility into vulnerabilities and attacker behavior, Rapid7, Inc. enables organizations to detect, investigate, and stop threats earlier. We also continue to innovate on our Exposure Command platform, delivering two major capabilities: runtime validation for cloud environments and data security posture management to strengthen proactive exposure reduction across hybrid environments. In plain terms, we no longer just tell customers what their vulnerabilities are. We tell them which ones are actively being exploited in their environment. Runtime validation determines what attackers can actually reach in production, and DSPM maps where the high-value data lives and who has access to it. Together, they collapse the noise and surface the small set of exposures that actually matter. These steps accelerate the playbook we shared with you in February: strategically investing in our AI-enabled SOC to deliver preemptive security infrastructure while also deploying expert talent towards high-value customer engagements that AI cannot replicate. Turning to customer wins in the quarter, Rapid7, Inc. continues to be the partner of choice for global organizations securing complex on-prem, cloud, and hybrid environments. The go-to-market changes Alan, our chief commercial officer, put in place at the start of the year are beginning to bear fruit. We are running a sharper, more focused organization, and productivity has improved. While it is still early, the operating discipline we committed to in February is beginning to take hold, and we believe that as an organization we can continue to drive efficiencies over the middle term. In this quarter alone, a Fortune 500 mining company with global operations selected Rapid7, Inc. as its MDR provider of choice in a seven-figure deal. This was a long, competitive sales cycle in which our SIEM and detection and response capabilities stood out to their security leaders. Rapid7, Inc.'s history managing cloud, hybrid, and on-prem environments and strong technical knowledge helped cement this decision. After years of only covering a portion of its environment, a global Fortune 500 aviation manufacturer expanded with Rapid7, Inc. as their preferred global exposure management provider in a large six-figure deal. Capabilities of our Command platform combined with our in-house technical talent were resonant points during the expansion process. And lastly, a leading health services provider selected Rapid7, Inc. as their MDR provider of choice in a large six-figure deal. Previously, subsidiaries of the organization used disparate tools and lacked unified coverage. Rapid7, Inc.'s ability to address challenges at a regional and local level, in addition to unified coverage across ecosystems, stood out to security leaders at the organization. Now, before I pass the call to Rafe, I want to dive deeper into the implications that the unprecedented shift to frontier models brings to the security landscape. I want to be clear that this market shift is a long-term tailwind for us, not a threat. Vulnerability discovery has been accelerating and commoditizing for years, driven by advances in AI coding and reasoning, and frontier models like Anthropic’s Methos and Google’s Big Sleep have made that trajectory undeniable. Methos surfaced more than 2,000 previously unknown vulnerabilities in seven weeks. That is a new baseline. But here is the part of the story that headlines miss. Methos commoditized vulnerability identification—finding bugs in code. It does not commoditize the operational reality of managing those vulnerabilities across complex enterprise environments. It does not commoditize detection and response. It does not commoditize exposure management. If anything, it makes it all the more essential because the volume and velocity of findings every enterprise has to act on is about to increase dramatically. The value is migrating in three directions, and Rapid7, Inc. is at the intersection of each trend. First, remediation at scale. The Command platform provides the granular visibility and tracking required to manage thousands of findings across hybrid environments. Combined with our SOAR capabilities and Kenzo’s agentic AI, we are moving from traditional patch management towards AI-native remediation—identifying flaws and deploying fixes autonomously. Second, detection and response. A faster discovery cycle on the attacker side means a faster response cycle on the defender side. Kenzo accelerates our MDR service from AI-assisted workflows to autonomous, machine-speed investigation. Detection is no longer the bottleneck; it becomes a precursor to near-instantaneous response. And third, preemptive exposure management. Our March releases of runtime validation and data security posture management move Exposure Command from continuous assessment to continuous validation, telling customers which exposures are actually exploitable in their environment against their sensitive data, given their identity surface. This is the shift the market is describing, and it is the shift that Rapid7, Inc. has been building toward. More vulnerabilities found means more demand for an operational platform that turns findings into outcomes. To close, this is a moment of real change in our industry. We have the data foundation. We now have a step-change AI capability accelerated by Kenzo. And we have the expertise customers do not get from a model alone. The team is executing with urgency. The operating discipline is taking hold, and the work we are doing this year sets up share gains we expect to deliver over the medium term. With that, I would like to pass the call to Rafe to discuss Q1 results in more detail and our updated 2026 guidance. Rafe, over to you. Rafe Brown: Thank you, Corey, and good afternoon, everyone. As a quick reminder, unless otherwise noted, all numbers except revenue and balance sheet items mentioned during my remarks today are non-GAAP. Please refer to our earnings release and SEC filings for additional details regarding the presentation of our results and guidance metrics. In 2026, I am pleased to report that we exceeded guidance across all guided metrics. We finished the first quarter with total ARR of $832 million. But let me add a bit more color. I have now been at Rapid7, Inc. for five months, making this a good opportunity to step back and share some of my observations, which I think will also help you better understand our underlying mix of businesses, as well as the rationale for the strategy we are pursuing. A key takeaway is that while many people think of Rapid7, Inc. as a VM and DNR provider, that categorization of our business is incomplete. I believe that the business should be thought of in two distinct groupings. First, our core platform solutions group, comprised of our detection and response solutions, which includes MDR, and our exposure management business, which includes VM and Exposure Command. These core platform solutions constitute more than 80% of our total ARR and have been the sustained growth driver in our business in recent years. As you know, we have different underlying trajectories within core platform solutions, led by our strong MDR business and work underway to return the exposure management business to growth. These core platform solutions are where our business is focused. As such, the performance of our core platform solutions is the clearest indicator of the ongoing transformation within Rapid7, Inc., and they are the solutions where we are concentrating product development and go-to-market resources. The remainder of our business mix, or second grouping, consists of standalone non-platform offerings. As customers have shifted towards platform-based offerings over the past few years, these standalone non-platform products have declined on a year-over-year basis. While they remain profitable and we continue to support our customers using these products, standalone non-platform offerings are not central to our strategy. As a result, their declines have been the driver of the sequential net ARR declines we have witnessed in recent periods. With the benefit of that context and framing, let me unpack our Q1 ARR performance. Our core platform solutions, now totaling over 80% of our overall ARR as I shared moments ago, grew approximately 2% on a year-over-year basis, led by our strongest offer in the group—our detection and response business—which, at approximately 55% of total ARR, grew approximately 7% on a year-over-year basis. While DNR growth was partially offset by our exposure management business within these core platform solutions, we remain pleased to see ongoing momentum in our more holistic Exposure Command offerings, driven by both new customers and customers migrating to this new platform. We are not where we want to be across all elements of our core platform solutions, but re-accelerating the growth of these core platform solutions is the focus of our strategy, and where we are placing our bets, as you heard Corey describe in detail earlier. In contrast, our non-platform products declined in the quarter, driving the sequential decline we saw in total ARR. As we plan for the remainder of 2026 and beyond, we see opportunities to optimize margins for these standalone, non-platform solutions as we take steps to improve the alignment of our investment resources toward growing core platform solutions. Returning now to other important metrics, total revenue of $209.7 million declined 0.3% year over year. Within this, product revenue of $204 million was flat year over year and services revenue declined slightly. We finished the quarter with over 11,500 customers and an average ARR per customer of approximately $72,000. Turning to first quarter profitability, total non-GAAP gross margins of 72% were down approximately 280 basis points year over year, consistent with our expectations, driven by improved staffing in our global security operation centers. We reported non-GAAP operating income of $24.4 million, or a margin of 11.7%, favorable to our guidance. This upside to profitability drove non-GAAP earnings of $0.36 per diluted share. Free cash flow totaled $33.4 million in the first quarter, driven by strong collections. From a balance sheet perspective, we ended the first quarter with $670 million in cash, cash equivalents, and short-term investments. In addition to these resources, we have a $200 million undrawn revolver in place. Our cash and investment balances, undrawn credit facility, and continued free cash flow generation give us confidence in our ability to settle our March 2027 convertible debt upon maturity as well as fund ongoing operations. This brings us to second quarter 2026 guidance. We expect to end the second quarter with ARR of approximately $820 million. On a sequential basis, we expect ending ARR for our core platform solutions—DNR and exposure management—will be approximately flat quarter on quarter, with an expected sequential ARR decline in our non-core standalone, non-platform offerings. For the second quarter, we expect total revenue in the range of $207 million to $209 million, or down approximately 2.9% at the midpoint on a year-over-year basis. Non-GAAP operating income is expected to be in the range of $24 million to $26 million, or a margin of 12% at the midpoint. Non-GAAP earnings per diluted share are expected in the range of $0.33 to $0.36 on approximately 78.3 million fully diluted shares. Updating our full year fiscal 2026 guidance, we expect total revenue in the range of $836 million to $842 million, a year-on-year decline of approximately 2.4% at the midpoint. We are raising non-GAAP operating income guidance to a range of $112 million to $118 million, or a full year non-GAAP operating margin of 13.7% at the midpoint. As previously highlighted, the business exited 2025 with a higher expense run rate, reflecting 2025 investments across people, technology, and our India global capability center. By closely managing ongoing investments, we expect non-GAAP operating margins to improve to the mid-teens as 2026 progresses, and we remain focused on continuing to improve operating margins in 2027. Non-GAAP earnings per share are expected to be in the range of $1.52 to $1.60 per share on approximately 79.4 million fully diluted shares. We expect 2026 free cash flow in the range of $125 million to $135 million for the full year, flat with prior year performance at the midpoint and a free cash flow margin of approximately 15.5%. In conclusion, there is a tremendous opportunity for cybersecurity companies who can help their customers respond at the incredible pace of new vulnerabilities and increasing attacks. Rapid7, Inc.'s core platform offerings of detection and response and exposure management are uniquely positioned to help companies navigate these threats, which we believe presents a long-term growth opportunity for our business. And with that, I would like to turn the call over to the operator for Q&A. Operator: If you have joined by the webinar, please use the raise hand icon which can be found at the bottom of your webinar application. When you are called on, please unmute your line and ask your question. We kindly ask that you limit yourself to one question and one follow-up. Our first question comes from Michael Cikos with Needham. Please unmute your line to ask your question. Michael Cikos: Hey, guys. Thanks for taking the questions here. Can you hear me okay? Operator: Yes, we hear you just fine. Michael Cikos: Terrific, thank you again. I just wanted to start out with the guidance we have here for the ARR, and thanks for splitting out the core versus the non-core. Could you help us think about that core business? Where are we specifically with exposure management in helping that business start to see growth versus some of the headwinds we have seen in recent quarters? Corey Thomas: Yes. Rafe and I can tag-team it. On exposure management, we are happy that we are seeing stabilization. I would not say that it is a growth driver, to be clear. It is not, but we are seeing the stabilization and improvements that we would expect, and we see good leading indicators that that business is set up to improve. But it is nothing that we can claim success or improvement on. We are still working through the upgrade cycle in a noisy environment. We are optimistic that the backdrop of what is happening in AI gets customers refocused back on the need to take exposure management seriously as a priority, because there was lots of noise before about all the things people could focus on. We are certainly heartened by the early conversations, but that is not something that we will translate directly into a forecast or guide at this stage. Michael Cikos: Understood. And for the guide here, again, I know we are navigating the core versus the non-core ARR components. If I am just looking at the guide we have here on the ARR for Q2—and I know you guys are only guiding a quarter out at this point—it is less than what consensus had been thinking about here. Can you give us a flavor for what the shape of the rest of the year looks like, or any other things we should be mindful of as we navigate the next couple of quarters since we are only getting that ARR data point from a guidance standpoint on a quarterly basis? Corey Thomas: We are only guiding the quarter right now, and as Rafe says, we want to make sure that you have the transparency as we go through it. The one thing I will comment on is, clearly in the first half of the year, we are seeing the non-core—which I have talked about before—decelerating off at a faster rate. Our core is still a net positive contributor. As that plays out, we will see how that plays out and whether we see the acceleration in exposure and the impact of DNR. I would just say, to give you revenue guidance, we feel very good about that. We have lots of confidence in all the measures that we guide on. We will keep you updated as we go along, but we are not doing any further breakouts right now. Michael Cikos: Thank you. I will leave it there. Matt Wells: Thank you. Appreciate it. Operator: Our next question comes from Matthew Hedberg with RBC. Please unmute to ask your question. Analyst: Hey, guys. This is Mike Richards on for Matt. Appreciate you taking the question. It made a ton of sense when you were talking about the changes with Methos and the other frontier models and how that can act as a tailwind for Rapid7, Inc. But I was wondering about how these changes are impacting customers. Is there confusion in the market around frontier models and vulnerability discovery and what that means versus exposure management, or do they get it? Any details you can provide on what the customers are thinking right now? Corey Thomas: It is a great question. Number one, I think there is probably more confusion with investors than there is with security experts, which we understand, which is why I wanted to clarify it in my prepared remarks. Most customers—there are two classes of things that are going on. Customers that have the expertise on staff are expecting a lot more scale of vulnerabilities and confusion. What we are hearing from them is the need to really focus on exploitability, understanding what is in the environment, focus on understanding reachability—what is happening—and then remediation and organization management at scale, which requires an understanding of the attack surface. These are all things that we are focused on. We are accelerating our efforts to make it easier for customers to understand which vulnerabilities matter most, because there is going to be a lot of real things and a lot of noise. As things surge for customers, they are remediating and addressing the most important things as quickly as possible. What we have seen so far with customers is that those that are in the know understand it and are focused on it, and they are asking us how we can help them actually manage the complexity of having a lot more to manage. There will be a lot more real stuff to address, and there is going to be a lot more noise too. There are also a lot of customers that are less mature in their cycle, and the word vulnerability is vulnerability, but the knowledge does get out there. They will have to respond. They will not be able to remediate everything all at once, and so they too will have to understand it. The tricky part for an investor is that “vulnerability”—whether you do discovery or scanning or vulnerabilities in code—sounds the same, but they are very different. Code-level vulnerabilities are very different than vulnerability management, which is very different than exposure management. Exposure management is about addressing the things that are actually exploitable and the vulnerabilities that actually lead to compromise, and doing that at scale across the environment. There are differences, but using the word vulnerability can cause nuance and confusion. Analyst: I appreciate it. That is helpful. Yes, that is super helpful. And just as a quick follow-up, maybe taking a step back from a macro perspective, are you seeing any change in customer behavior as it relates to geopolitical uncertainty or even AI budgets crowding out, as we have heard of more and more enterprises running up on their AI budgets and that impacting other areas of enterprise software spend? Corey Thomas: Everyone is trying to figure out what is the right way to budget and plan for it. That is an obvious thing that organizations all over the world are trying to figure out—what is the right AI strategy, how do I budget for it, how do I plan for it, and how do I deal with the leapfrogging that happens from time to time? Universally, this is a year where, more than ever, we are seeing customers looking for how they can start showing real benefits and new outcomes from the technology. It is moving from pilots to delivery. That is what makes me excited about the investment we have made organically and with Kinzo. Customers are in the “show me” stage, looking for how we can help them scale their security operations. I hardly know any customers that are getting a lot more people allocated to the teams, so they are looking for technology and services to scale their security operations, and that is where we are focused. Thanks again for your questions. Operator: Thank you. Our next question comes from Joseph Gallo with Jefferies. Please unmute to ask your question. Joseph Gallo: Hey, guys. Thanks for the question. I want to ask one high-level one and one explicit about Q2. High level, you are investing in areas of growth—MDR, go to market, integrating AI. How should we think about the trade-off between stabilizing ARR growth and maintaining gross margins going forward? Any guardrails that we can think through? Corey Thomas: Our team has a very clear mandate: we have to scale margins. We feel that we have the right setup for that. If you think about our MDR business, which is our fast-growing business that historically has had less contribution margins at scale than some of our other businesses, that is also a business where we expect gross margins to expand. That was a big part of Kenzo’s thesis—that we can deliver better service with better efficiency and better cost leverage. We are excited by that. Delivering our customers a better experience and doing it more efficiently is good for our investors too. Both myself and the management team have a mandate that we have to expand margins over time, but we are willing to make tactical investments to make sure we are doing it the right way. It was absolutely the right thing to do this year, as we saw the tsunami of cyber risk hitting customers, to make sure that we were properly staffed in our MDR environment to manage and respond, and to deliver a great quality of service, which leads to long-term retention and expansion. We know that we can do more AI automation to handle some of those soft services over time. We feel very good that we made the right decision to make sure customers are set up well, and we are managing the business to expand margins over time. Rafe Brown: I would just call out, as we mentioned in our remarks, we continue to expect to see bottom-line margins improving as we go across 2026. When we do planning, we roll it out and look at carryforward numbers to make sure we are very conscious of run rates going into the next year. In 2025, we saw some investment, and we knew that would impact year-over-year comparisons in the first part of the year, but you will start to see the benefits of that and see those improving margins even here in 2026 as we move to the back half of the year. Joseph Gallo: That is very clear and really helpful. Maybe just a follow-up. I want to understand exactly what our takeaway should be with your Q2 ARR guide. Q1 declined $8 million quarter over quarter. You are guiding to another decline of $12 million. Is that 20% of the non-core business? Is that churn getting worse? Is it lower expected new business for the 80% of the business that is growing? We are one month into Q2, so I am curious what you are seeing in Q2 that indicates that new ARR might be a little bit worse than you saw in Q1. Corey Thomas: In Q1, even though we expect other, or the non-core, to churn—and it is not a core area of focus or investment—when we see acceleration, we take a more cautious outlook. We definitely saw acceleration of the churn in Q1 in the standalone non-core businesses, and we are taking an appropriately thoughtful viewpoint as we go into Q2. I also do not want to predict that we are going to overcompensate for that by acceleration of core. That is the primary driver and takeaway now. That is part of why Rafe gave the commentary. Rafe Brown: That is exactly right. We wanted to share that color on what is going on, because it is important for everyone to see where our core business is, how it has been growing, and have that clarity. That is going to be the long-term future for the organization, and those products will be the ones that we are taking to customers on a regular basis. We hope by breaking that out, that illuminates exactly what is going on. Joseph Gallo: It is extremely helpful. Thank you very much for that. Thanks. Thank you very much. Operator: Our next question is from Adam Tindle with Raymond James. Please unmute to ask your question. Adam Tindle: Okay, thanks. Good afternoon. I just want to continue on the topic of core versus non-core. If I rewind back, Corey, I know the strategy was to really create a lot of synergy between the platform historically. As we fast forward to today and have one piece of the business that is understandably non-regrettable churn or in decline, how are you managing the impact on core while non-core churns? I imagine there is some customer overlap. Why would churn in the non-core piece potentially not impact core? What are you doing to mitigate that potential risk? Corey Thomas: It is exactly the right question. Whenever you have dynamics—and just to remind you, non-core includes things that are lower on the priority list and some legacy standalone stuff—you hit the core point. As you manage these things, what we have to do well is help customers scale their security operations, and the core of that is the preemptive platform with exposure management and detection and response, and how we weave that together. There is a subset— not all customers are overlapping. We have a healthy amount of standalone customers. For customers that are overlapping, their experience matters deeply, and our teams are actively working to make sure that we deliver those customers the right experience. In the world of rapid innovation at the pace of AI, we are rapidly rolling out new services that address their need, and we are expanding their scope and their experience with us. If you look at some of the announcements we have been making, we have been picking up our pace of innovation, our pace of things that we are communicating to the market, and our pace of what we are providing customers as far as their existing subscriptions. Our view is, if we do that well and keep delivering on that, we are adding more strategic value in areas that matter more, and therefore we can continue to focus on those areas. These types of transitions have to be managed well, and it is something that we are focused on. Adam Tindle: Rafe, maybe just a quick follow-up. You talked about the silver lining being profitability. I think you mentioned mid-teens operating margin in fiscal 2026 and that you expect to continue to improve in fiscal 2027. It is uncommon that we see platforms undergoing growth pressure that are still able to scale and not experience lack of leverage on the downside. What are the drivers in terms of your confidence in margins in mid-teens and continuing to improve in fiscal 2027, and any parameters you would like to set so we can understand what “continue to improve” in fiscal 2027 might mean? Rafe Brown: What is giving us confidence as we go through 2026 is, first of all, recall that there was a great deal of investment across people and technology last year, including opening up the India center. All of those things happened in 2025. Especially in the early parts of the year, the year-over-year comparisons bear the brunt of that cost uptick. A lot of that work was in place to help build efficiencies in our organization, giving us locations where we can get great productivity at an affordable rate. Having SOCs around the world on a global basis is important to our customers, but also important to our efficient operations. As we get people ramped up and get that part of the business locked in, that is offering efficiencies for us. We are also being very careful in 2026 about cost management across the board. We want to deliver on the commitment we have made on margins, so we are being cautious about where we spend. Some of this plays out when we talk about core versus non-core—being clear about where we should invest to drive long-term growth versus where we need to be more moderate in how we manage those costs. All of that together is driving what we are planning for 2026 and giving us confidence as we look at those run rates as we leave this year into next. Thank you. Operator: Our next question comes from Jonathan Ho with William Blair. Please unmute and ask your question. Jonathan Ho: Hi, good afternoon. I wanted to dig a little bit into the emergence of the Methos models. How do we think about the broader opportunity set around MDR and CTEM evolving with that AI landscape, and how does your product specifically need to change to address the emerging landscape? Corey Thomas: Great question, Jonathan. I think you have to first understand what is changing for customers in order to understand the work we are doing that is valuable and the work we need to do differently. Customers are going to see an influx of zero-days. They are going to see a much larger volume of vulnerabilities. They are going to see more exploitable vulnerabilities, but the amount of vulnerabilities they see are not all going to be exploitable. Their ability to figure out what really matters is going to be key. Their ability to manage remediation at scale in tighter time frames matters. If you could do remediation in months before, then figuring out which stuff matters and managing the remediation in days, weeks, and months as appropriate is critical. We have a massive remediation backlog overall. The pace of exploiting vulnerabilities is increasing, and dwell time is shrinking. People will have to go from detection quickly to active response. That is another significant change. Customers will be dealing with speed, scale, and the need to respond quickly without breaking things. Where does that go? Rapid7, Inc. has a long history of focusing on exploitability, and our security researchers are accelerating and moving our models and upgrading those to deal with the increasing insertion and speed to discern what is exploitable from what is not. As we built out our overall exposure management framework, we believe that vulnerabilities are not the core thing that matter in themselves. It is the intersection of vulnerabilities, how devices and networks and technology are configured, as well as the controls in the environment. After all, that is what exploitability is—it is reachability combined with what controls are in place and what is configured, combined with what is vulnerable. We understand that better than most organizations. The last piece we invested in is Kenzo, which is the detection accelerator. We are upping the visibility and the ability to quickly process what is exploited in the environment. We are accelerating investments in remediation management to help customers track and manage remediation across the environment. We were already bringing forth Kinzo for instantaneous detection, but we are also investing heavily in leveraging our understanding of both the configuration surface and the control surface to help customers understand the best interdiction or immediate intervention options they have to contain attacks. They will have to respond in the moment, and sometimes a forward remediation is not available. Those are the things that are changing for the customer, the things we are investing in, and the things we are accelerating and changing in our technology. Jonathan Ho: Thank you. I will keep it to one. Operator: Next question is from Eric Heath with KeyBanc. Please unmute to ask your question. Eric Michael Heath: Alright, thanks for taking the question. Maybe one for Corey and one for Rafe, if I may. Corey, Glasswing has been out for about a month and it feels like there is a lot of urgency out there. What impact have you seen thus far in Q2 in the pipeline? And then for Rafe, very much appreciate the color on the platform growth and the guidance. Any specificity you can give on how net new ARR in Q1 was for core platform, and how we should think about the exit rate for the non-core platform products as we exit 2026? Corey Thomas: I have hit on it partially before. With Glasswing, there are two things. There is a small cohort of our customers who have seen it and accessed it, and they want insights into how we help them deal with the truly exploitable ones and also the volume and the noise. That feedback and engagement is driving some of the strategy I talked about earlier. Then there are those on the outside trying to figure it out, and they are looking for perspective about how much this changes their technology strategy. Do they have to put all new projects on hold and do remediation for the next six months? If so, what type of remediation? They are in a necessity mindset. We are still in the early days because many organizations do not know the magnitude of the impact specifically for them. Rafe Brown: To add a bit more color on the first quarter, we were really pleased with the sales organization and their hard work in Q1. You will recall that we had a new leader—Alan joined late last year. He made a few changes on the team, even as we started this quarter, and the team executed well. Productivity increased across the quarter. We saw good execution on a lot of operational details that are important to running a sales organization. That translates into our core platform solutions, where within core, the detection and response business—which is now 55% of total ARR, a little more color than we have shared in past quarters—grew at 7% on a year-over-year basis. That is new, net of any churn we had in the quarter. Combined with exposure management solutions, that whole core solution group was growing at 2%. Good execution on the top line, good work from the product team helping our customers, and execution all around ensured that core numbers were growing in the first quarter. Operator: The next question is from Srinivas Guthari with Baird. Please unmute to ask your question. Analyst: Thanks a lot for taking my question. A follow-up to Jonathan’s, and Corey, thanks for the color on how the value will shift towards remediation at scale and exposure validation. In terms of monetization and timing, how does that show up in practice in this post-frontier AI model world—in terms of MDR, urgency for Exposure Command upgrades, runtime validation, and the broader platform? Corey Thomas: Our current plans—this is probably a double using baseball parlance—are for this to be a catalyst to help move the priority of exposure management back to the forefront, which significantly helps with the VM upgrade initiative and focus. That is our focus. We are not looking to charge incrementally for it. We think we have a monetization plan that is already attached to it. Seeing the VM-to-Exposure Command acceleration in the upgrade program is where we expect to see the monetization. We are accelerating some things along with that strategy where we focus and tighten how you manage remediation at scale, how you assess exposures from both a control and a configuration standpoint, and how you do active response. On the MDR side, the thing I am talking to most customers about is how they enable active response and do more automation and more AI-driven response across their portfolio. Customers are getting comfortable with that. Our goal is to lead that discussion with trust. That is an expansion area, an investment area, and a potential monetization area, though it is a bit too early. It is one of the biggest incremental areas where we are recalibrating resources: how we shift active response to machine speed while ensuring we can do that safely based on our knowledge of the overall attack surface, the control surface, and the configuration surface. Analyst: Very helpful. Thanks a lot, Corey. And just a follow-up, Rafe—you talked about prudence in the non-core guide and more confidence in the core platform growing. In terms of the go-to-market changes that have been put in place bearing fruit, can you unpack what is happening in the plumbing? Is there a healthier mix of more singles and doubles now? Is the channel-sourced pipeline more efficient? Is there a better upgrade motion? Corey Thomas: The big one is that Alan has really tightened the focus on selling the core, which is DNR, Exposure, and the Command platform integrated capability. When you have a strategy, you are not selling all over the place. We have a tighter focus there. We are seeing tighter pipeline builds in those areas and more focused, consistent execution. The biggest thing is that as we set targets, we hit the targets. We all want to see acceleration and faster growth, but we have confidence in the trends of how we are seeing business performance start to shift. We want everything to go faster, but we have confidence in both the management and the visibility that gives us confidence about how we see the year standing now. Operator: Our next question is from Mina Marshall with Morgan Stanley. Please unmute to ask your question. Analyst: Hi, this is Abhishek Merli on for Mina Marshall. Thanks for taking the question, and congrats on the quarter. I wanted to touch on Kenzo Security and where that product sits in the roadmap in the context of AI-driven investigation. What capabilities have already been incorporated into customer workflows versus what remains in development? Should we think of it as improving productivity or customer-facing remediation? Any further details on that? Corey Thomas: Kenzo was excellent. Their data mesh and their model were extraordinary at doing investigations at scale. It was an alert processing engine that allowed you to process alerts from all over the environment. We are in the act of integrating it right now. It is not a done integration. The team has come in; we are integrating it and will be rolling it out to customers starting in the next couple of months and then through the rest of this year. The core of what Kenzo does is an AI platform for processing alerts and doing high-quality investigations at scale. Typically, an analyst gets an alert, has to make sure it is not duplicated—over time, SIEMs did not do a good job of this; DNR systems like Rapid7, Inc.’s did a good job with deduplication. Then you have to collect knowledge and context to figure out whether it is real or false. Once you have a sense of whether it was real, you have to do another level of investigation to figure out how bad it was in the environment and what you need to contain and remediate. That took hours and days. Kenzo is excellent at doing that in massive volume and at machine speed, with better efficacy rates. We are taking it in, applying the model, and extending the model to hit not just alerts but a much wider range of data sources as we go forward. The other part we are adding in at Rapid7, Inc. is that, because we have deep knowledge of the environment, we have a wider range of response options available. That is new development work in progress, so I will not get too far ahead, but customers need to know how they can respond at speed and scale. Some of that will be used in our technology and some in third-party technology, but we have to have the brain to know which controls and systems to leverage at scale—whether existing controls or new startups—based on our knowledge of the environment. Operator: Our next question is from Adam Borg with Stifel. Please go ahead. Adam Borg: Thanks for fitting me in, and I will just stick to one. Corey, you talked at length about how the frontier models are driving increased vulnerability identification, but that is really where the tailwinds begin for you. Investors may be a little more confused on their role over time. What is preventing these frontier models from moving from identification of vulnerabilities toward exploitability, reachability, prioritization, and remediation that you talked about? They seem to be talking about moving in that direction. Any way you could talk about the moats that a vendor like yourself has to prevent that from occurring would be helpful. Thanks. Corey Thomas: There are three different moats that matter. First, this is not versus the frontier models—we leverage frontier models inside Rapid7, Inc. Anyone who is not leveraging frontier models is not going to be relevant. This is about where the use cases matter. If anyone has used frontier models at any scale, you know you have to discern the cost of the activity you are doing. Someone can scan and do exploitability analysis in the environment, but they are paying a lot more than what you get for the same information in a core vulnerability management system. Frontier models are not designed to do that efficiently now. Could they build specialized software to do that? Potentially, yes, but then you are building the product and you have to operate it at scale and cost. As someone who has tested these systems, you can run up a lot of money doing what you think is a straightforward scan. Second, it is not whether something is vulnerable; it is whether it is actually exploitable in the environment. Exploitability means you have to understand not just the vulnerability—you have to understand the configuration of the complete environment and the controls and how they intersect. That is specialized knowledge and data we have optimized around. We understand what is exploitable, what is reachable, and how that is configurable in the overall environment. Third, when you get to taking action and responding in the environment, I do not think anyone wants a frontier model running rampant making configuration changes for active defense and active response in their environment. Models are updated all the time, and by many of the authors’ own admission, that is not how most people will trust security to be handled. For autonomous response, you need the knowledge base and you need the trust. We are building active response on a system of trust and knowledge. That is a big deal because you do not want your active response being too clever. If you give the keys to systems that can make any type of change in the environment, minor errors can cause catastrophe. Most CISOs and IT people know that. They are looking for things that do the mission well and cost effectively. We are adopters of the technology, but it is important to understand the constraints too. Adam Borg: Incredibly helpful. I really appreciate it. Operator: Last question comes from Gray Powell with BTIG. Please unmute to ask your question. Gray Powell: Thank you very much. Can you hear me? Operator: Yes. Gray Powell: Excellent. Thank you for taking the question. I think you hit on this before, but I want to circle back on the non-core products and how we should think about that trendline stabilizing over the next 12 months. If I am doing the math correctly, in ballpark terms, I would assume that non-core is maybe a little over $150 million in ARR. Q2 guidance implies that it is down about $10 million. Is there a level where we should think about that number stabilizing? And they are existing customers, so why is there not an opportunity to upsell them on the platform? Is there a conversion opportunity there? Rafe Brown: Thank you for the question. The best way to think about it is we are trying to build out robust platforms that are attractive to our customers. Some of our customers have platform offerings but may have also bought something standalone. That is part of the equation. As Corey mentioned, it is very important that we take care of these customers and that their whole experience with Rapid7, Inc. is very important. We think there is also an opportunity for those who may not have a platform solution to migrate onto one of our platforms. We are looking for technologies that we can integrate in and make that platform richer. That is our number one focus around those customers. I wanted to break that out because this trend has been going on behind the scenes for some time over the last few quarters, where you will see those standalone non-core offerings are where we have had more of the challenges on the renewal front. What we are calling out is that we are focused on building attractive platforms with robust technology. That creates an upgrade path for many of our customers and allows us to focus on meeting the demands of the present market. Gray Powell: Understood. Okay. Thank you very much. Analyst: Thank you very much. Operator: Thank you, everyone, for joining. This concludes today’s call. You may now disconnect.
Operator: Good day, everyone. Welcome to Kosmos Energy First Quarter 2026 Conference Call. As a reminder, today's call is being recorded at this time. I would like to turn the call over to Jamie Buckland, Vice President of Investor Relations. Jamie Buckland: Thank you, operator, and thanks to everyone for joining us today. This morning, we issued our first quarter 2026 earnings release. This release and the slide presentation to accompany today's call are available on the Investors page of our website. Joining me on the call today to go through the materials are Andrew Inglis, Chairman and CEO; and Neal Shah, CFO. During today's presentation, we will make forward-looking statements that refer to our estimates, plans and expectations. Actual results and outcomes could differ materially due to factors we note in this presentation and in our U.K. and SEC filings. Please refer to our annual report, stock exchange announcement and SEC filings for more details. These documents are available on our website. And at this time, I will turn the call over to Andrew. Andrew Inglis: Thanks, Jamie, and good morning and afternoon to everyone. Thank you for joining us today for our first quarter 2026 results call. I'll start today's call by reviewing progress against the four goals for 2026 that we laid out with our full year results in March. I'd then like to spend some time talking about the current market dynamics and how Kosmos is uniquely positioned to benefit by being priced of premium benchmarks before focusing on each business unit and the operational progress we've made year-to-date. I'll then hand over to Neal to talk about the financials before I wrap up with closing remarks. We'll then open up the call for Q&A. Starting on Slide 3. Two months ago, we released our full year 2025 results, and I focused on four key objectives for Kosmos in 2026, which is shown on the slide. This year, we are targeting production growth from our core assets, continued progress in cost reduction with a particular focus this year on operating costs having made significant reductions in CapEx and overhead last year, meaningful net debt reduction, and advancement of our high-quality growth portfolio with minimal CapEx this year. I'm pleased to say we're making excellent progress against all these goals. Compared to the same quarter last year, production is up around 25% and absolute operating costs are down around 22%. In addition, we've reduced net debt by around 7% from year-end 2025. I'll go into more detail on each as we move through the slides. Starting with production on Slide 4. With the ramp-up of GTA and Jubilee production, we posted record quarterly production in the first quarter, as can be seen on the top chart on the slide. This record production has come at a time when we've seen record high pricing and also record high differentials. The dark blue line on the left axis of the bottom chart shows Dated Brent pricing year-to-date. Dated Brent is the benchmark used for pricing our Ghana cargoes. In times of market tightness, Dated Brent can trade at a premium to Brent futures, reflecting the strong near-term demand for the barrels in the physical market. Dated Brent hit an all-time record high in early April and has continued to trade at a premium to Brent futures. Also worth noting are the differentials we see on those barrels. The barrels we sell typically include a differential, which is either a discount or premium to the benchmark such as Dated Brent. That discount or premium depends on factors such as crude quality, location and regional market conditions. The red line on the chart shows an illustrative differential for West African crude year-to-date. Through January and February, those differentials were slightly negative but started to grow through March into April as the Middle East conflict continued. While the data on the chart is illustrative, we've seen those differentials rise to a meaningful premium through this period of market tightness. Turning to Slide 5. This slide looks at how our barrels are priced in different geographies and the time lag we see between production and revenue. Our three core production hubs, Ghana, GTA and the Gulf of America, are all priced of premium benchmarks. In fact, across the U.S. E&P sector, Kosmos is one of the most exposed companies to international prices as a percentage of sales. Around 50% of our production, primarily Ghana is priced off Dated Brent, the dark blue line on the chart. Since the Middle East conflict broke out, the Dated Brent premium over WTI has more than tripled. Ghana cargos are typically priced off an average 5- or 10-day period before or after the cargo loading. Our March Jubilee cargo had already been hedged, so we didn't benefit from the rise in prices seen in the month, but we do have a growing amount of unhedged production as we move through the year that should capture additional upside. In the Gulf of America, we sell most of our barrels against Heavy Louisiana Sweet or HLS, which generally trades at a small premium to WTI, the red line on the chart. Production in the Gulf is typically sold on a 1-month trailing average, so we'll start to see the benefits of higher prices as we move into the second quarter. On GTA, the gas production is priced off ICE Brent, the green line on the chart, which also generally trades at a premium to U.S. prices. Production is priced at a 3-month historical average price, so we'll start to see the full benefit of higher prices in 2Q. However, the lag effect also means we'll continue to see firmer GTA pricing beyond any future price declines. So, in summary, we've seen record production, record prices and record differentials. But given the pricing structure we have in our various sales contracts, we won't see the benefit of higher prices that started in late 1Q until the second and third quarters. I'd now like to talk about each of our business units in more detail. Turning to Slide 6, which looks at the progress we're making in Ghana. This is a slide we've used for the last two quarters and has been updated for recent activity. As the operator discussed in our full year results last week, the 2025-'26 drilling campaign continues to perform strongly. The J74 well came online in early 2026, followed by the J75 well at the end of the quarter. Both wells are performing in line with expectations and gross Jubilee production for the first quarter was around 70,000 barrels of oil per day. The plots on the chart have been updated slightly since last quarter and reflect the partnership's decision to enhance efficiency by drilling a series of wells before completing them simultaneously. This means there will be a gap in new production additions during the second quarter with 2Q production expected in the mid-70s. Three new producer wells are due online in relatively quick succession in June and July as previously communicated by the operator. Each of these wells has been drilled and completion operations start shortly. Based on the logging results, these 3 wells should drive a material uplift in production of around 20,000 barrels of oil per day gross in aggregate before some natural decline is expected in the fourth quarter as the drilling campaign concludes. Year-to-date performance and the upcoming activity set continues to support the upper end of our 70,000 to 80,000 barrels a day gross oil production guidance for Jubilee this year. Looking at the bottom right of the slide, we're pleased to see the operator announce their refinancing earlier in the year, which was accompanied by a commitment to drill in '27 and '28. The partnership is aligned on securing a rig for a program of up to 10 wells, with drilling targeted to restart around mid-2027. As we previously discussed, this regular drilling program is key to sustaining the improved performance we've seen from Jubilee this year. Also worth noting is the value creation from the current drilling program, with well paybacks in a mid-cycle price environment of around six months, and a lot shorter in the current environment. Turning to Slide 7. GTA has continued to perform strongly this year, with around 2.85 million tons per annum, equivalent gross produced in the first quarter, in excess of the floating LNG nameplate capacity of 2.7 million tons per annum. 9.5 gross LNG cargos were lifted during the quarter, in line with guidance. For the year ahead, our gross cargo guidance of 32 to 36 LNG cargos is unchanged. One gross condensate cargo was lifted in the quarter, which went to BP. The second and third condensate cargos later in the year, including one this quarter, are expected to be assigned to Kosmos and the NOCs. Due to some seasonality that we flagged in the past, daily LNG production is expected to fall from higher winter levels as the sea and air temperatures warm up through the summer months. Volumes should then pick up again later in the year as cooler temperatures return. On costs, we remain on track to deliver our 50% reduction target for OpEx per mmbtu this year and see scope for further cost reductions in 2027. On the Phase 1 expansion, which should materially enhance project returns, there's been good progress on the ground in Senegal year-to-date. Approximately 50% of the land has been cleared for the onshore section of the northern segment of the pipeline, with the remaining 50% expected to be done this quarter. This northern segment will connect to the 250-megawatt Gandon power station being built near Saint-Louis. The onshore pipelines are expected to be exported from China in May, with arrival in Senegal scheduled around middle of the year. The West African Development Bank has been appointed as the mandated lead arranger to raise approximately $270 million to finance the infrastructure. The Board of Directors of the bank approved at the end of March, the first tranche of around $90 million. Turning to Slide 8. Production in our Gulf of America business unit for the first quarter was in line with expectations, with continued solid performance from our Odd Job and Kodiak fields. In April, the Winterfell-2 well was shut in pending a future intervention, and full-year Gulf of America production is now expected toward the lower end of our guidance. On the growth side of the business, we were pleased to take the final investment decision on the Kosmos-operated Tiberius project alongside our 50-50 partner, Oxy. With an expected development cost of around $10 per barrel and operating and transport costs of around $20 per barrel for the first phase, this is a low-cost, high-margin development. The first phase will be a single well tie-back that will produce into Oxy's nearby Lucius platform. CapEx is planned largely to be spent in 2027 and 2028, with first oil expected in the second half of 2028. We have commenced a farm-out process to reduce our working interest to around a third. As mentioned with our full-year results in March, we recently entered into a strategic exploration alliance with Shell in the Gulf of America and exchanged interests across multiple blocks across the North Pole play, which houses several material exploration prospects. We expect to drill the first of these, Tiberius, in the first half of 2027. Tiberius is targeting around 200 million barrels of oil equivalent gross resource. I'll now turn to Neal to take you through the financials. Neal Shah: Thanks, Andy. Turning now to Slide 9, which looks at the financials for the first quarter in detail. Production year-on-year was around 25% higher, driven by both GTA ramp-up and new wells coming online at Jubilee, resulting in record production of 75,000 BOE per day for the quarter. Realized price was slightly lower year-on-year, reflecting the changing production mix, with more gas volumes from GTA. As Andy mentioned earlier, due to the lag in pricing, we don't expect to see the full benefit of higher prices until the second and third quarters this year. OpEx of just under $20 per BOE was in line with our guidance and marks a decrease year-on-year of 47%, reflecting the continued progress we're making this year in reducing costs, having focused on CapEx ad overheads last year. Most of the other line items came in within our previous guidance ranges, except tax, which was impacted by the large mark-to-market change in derivatives. Looking ahead to Q2, we have included the usual guidance in the appendix to the slides. Q2 production is expected to be slightly lower than 1Q, largely due to seasonality on GTA we talked about, and lower Gulf of America production on the back of Winterfell-2. In Ghana, we're guiding to three to four cargos in Q2, which also includes a TEN cargo in the quarter. This also drives higher Q2 OpEx as a result of the accrued TEN FPSO lease payments prior to the agreement to purchase the vessel. OpEx is expected to normalize in the third and fourth quarters. One jubilee cargo is expected at the very end of the quarter, which is the reason for the three or four cargo range for Q2. For the full year, guidance remains unchanged. One area that we continue to monitor is tax as we incorporate higher oil prices into our actuals, and we will provide further updates through the year. Just a reminder that we only pay cash tax in Ghana at the moment, given net operating losses in the US and cost recovery at GTA. Turning to Slide 10. We've had a busy start to the year on the financing side, completing several important objectives that set us up well for the year ahead. In January, we completed a $350 million Nordic bond and repurchased $250 million of 2027 notes with the proceeds. We also paid down $100 million of the bank facility with the remainder of the proceeds. In March, we took advantage of the strong share price rally this year to raise around $200 million of equity, which was also used to accelerate our debt paydown. The company exited the quarter, with around $500 million of liquidity, post these transactions, with additional liquidity to be created from the EG sale and from free cash flow going forward. On the reserve-based lending bank facility, the banks approved a covenant waiver through the mid-year, and we are already seeing leverage drop sharply on the back of the equity raise and strong operational progress. We expect this to continue as we start to see the full benefits of higher production and higher pricing coming in over the coming months. The lending banks have also approved the sale of our producing assets in Equatorial Guinea, which we expect to close around the middle of the year, with the proceeds used to further pay down the facility. On hedging, we continue to be active, targeting more hedges in 2027 at higher floors and higher ceilings than our existing 2027 hedges. Last week, we were pleased to see Fitch upgrade our corporate rating to B-, a positive move to reflect the progress we have been making so far in 2026, but discussion ongoing with S&P as well. Despite the higher pricing we have seen so far in 2026, our capital allocation for the year remains unchanged. We remain focused on increasing our financial resilience and utilizing our free cash flow to accelerate debt paydown with deleveraging. With that, I will hand it over to Andy Andrew Inglis: Thanks, Neal. Turning now to Slide 11 to conclude today's presentation. As I said in my opening remarks, we have four key objectives for 2026: grow production, lower costs, reduce debt, and advance our quality growth portfolio with minimal CapEx in 2026. This slide highlights the targets we've set against those objectives. On production, we now expect to complete the sale of EG around the middle of the year, making that adjustment for the second half, we still feel we can achieve production growth close to that 15% target. On costs, based on year-to-date performance so far, we feel confident that we can meet and potentially exceed our 20% operating cost reduction target. So, in aggregate, we're on track to deliver a reduction of around 35% in operating cost for BOE year-on-year. On debt with the EG sale, equity raise and higher pricing, we're doubling our debt reduction target from 10% to around 20% by year-end and have made significant progress already. And we are advancing our growth portfolio with Tiberius FID, progress on GTA expansion and the exploration alliance with Shell in the Gulf of America. We look forward to delivering on these objectives to support long-term value creation for our investors. Thank you. And I'd now like to turn the call over to the operator to open the session for questions. Operator? Operator: [Operator Instructions] Our first question comes from the line of Charles Meade with Johnson Rice. Charles Meade: I want to ask the first question on Jubilee. The OBN seismic shoot that you guys did at the end of the year last year, is that, are the results or insights from that, are those already informing this '26 drilling program? Or is that something where we're really going to see more of the benefit in the '27, '28 program? Andrew Inglis: Charles, no, the OBN is really going to have an impact on the '27, '28 program, yes. So, the '26 program, though, is leveraging the 4D NAS that we shot ahead of the OBN. And so, we've got the product from that, and that did influence the selection of the '26 drilling program, which is going well. So, I think the objective then is to build the results from the early products of the OBN and then the later products of the OBN into the '27 program, match that with the NAS. And so, you're getting a continuous upgrade in the quality of the seismic and therefore, the opportunity to derisk the future drilling programs. And as I said in my remarks, the, we're seeing the impact of a continuous drilling program on Jubilee in '26. Carrying that through into '27, '28 is clearly important. And these are economically good wells. In my remarks, I talked about a 6-month payback in a mid-cycle price environment. Clearly, we're doing better than that. So, a lot of, as you know, there's a lot of opportunity in Jubilee and the seismic upgrade through the 4D NAS and then the follow-on of the OBN is continuing to make a difference. Charles Meade: Right. That's what I was aiming to get at. And then the follow-up on Tiberius in the Gulf of Mexico. I think you have a point in your slide that you expect a farm-out proceeds to cover any '26 CapEx? That maybe in broad strokes, it seems to me that the farm-out proceeds to you will be on the same order of magnitude as what the dry hole cost, proportion of dry hole cost would have been. And so, it doesn't look like there's a big premium that you're looking for on this farm-out, but maybe you can tell me if that's the right read. Andrew Inglis: Yes. Obviously, I don't want to disadvantage ourselves in the process that's ongoing at the moment. Look, I think it's a great time to be in the farm-out. We clearly have a project that's underway. FID has been taken, strong alignment between ourselves and Oxy. And therefore, there's been significant interest in the opportunity. So, we're obviously looking to maximize the farm-out proceeds, and we may do a little better than we'd anticipated. Operator: And your next question comes from the line of Lydia Gould with Goldman Sachs. Lydia Gould: You target a 20% reduction in operating costs this year. Could you expand on some of the key strategic initiatives that are in place across the portfolio to meet this target, particularly at GTA? Andrew Inglis: Yes. Lydia, yes, look, it's a combination. And I think I want to emphasize the fact that we've used the opportunity to high-grade the portfolio and address some of our highest cost assets. And those highest cost assets were in Equatorial Guinea, where clearly, we are selling the asset. And also, it was on TEN because of the lease cost on the FPSO. So those, both of those are making a significant difference. Then on top of that, there is an ongoing reduction in GTA. There's an absolute reduction in operating costs as you take out some of the additional costs that were in last year because of the start-up process. But clearly, you're seeing a big impact on the per BOE number or MMBTU number because of the ramp-up in production. But the combination of those sort of ongoing processes and the asset high-grading delivers that 20% reduction in absolute operating costs that we're seeing in '26 versus '25. And I think there's ongoing opportunity. We haven't stopped there. I think there's ongoing opportunity in Ghana in '27 as you look at the ability then to sort of, you'll have the operator than having the operations of both FPSO. I think there's opportunity to create synergies there. And then there are different operating models in Mauritania and Senegal for GTA, which are being explored by BP. So, I think this is just the start of a journey of continuing to drive cost down and the big step in '26 comes from that underlying activity, but also the high grading of the portfolio. Operator: And your next question comes from the line of David Round with Stifel. David Round: A key theme in recent years has been around this cost reduction and capping CapEx actually specifically. I'm just interested in whether this commodity backdrop makes that harder to achieve and how you're thinking more generally about CapEx in '27 and beyond, please? Andrew Inglis: Yes. David, yes, good questions. We go through price cycles, yes. And I think you do see some tightening. I think it's very hard to predict today what the long-term effect is on the inflationary environment. I think it's too early to say that. But I think the things that we're doing now are just not about smarter procurement, if you like. It's about underlying changes in how you do activity. And I think that means that the cost reductions that we're targeting and the ongoing cost reductions we would target in Ghana and GTA are about changing the way you do business. Therefore, the activity changes, therefore, the cost comes down. So I think those are enduring. I don't think they sort of are simply about the procurement cycle you're in. And clearly, the high grading of the portfolio is independent of that. So I think that opportunity remains, and I don't think the magnitude may vary a little, but the opportunity remains. And then I think on CapEx, we've clearly targeted CapEx hard in both '25, '26. I think that we're focused again on ensuring that we're being very, very rigorous about the allocation of capital. I think we've been clear around the growth opportunities that we're pursuing. It is Tiberius. It is the GTA expansion, trailblazer exploration. In a timing sense of the spend flowing through, I think Tiberius is relatively low spend in '27. The biggest spend is really in '28, probably if it's $100 million on Tiberius net, it's probably 1/3, 2/3 in that sense. The GTA, it's probably overall for Phase 1 plus there really isn't any expenditure on the facilities. You can move from 430 to 630 production through the FPSO with no spend. Therefore, it's about the additional wells that will sustain the portfolio beyond the end of the decade. And therefore, the spend for that will really be in '28, '29. So we take all of that, I don't think you'll see a significant, it's early days yet, but the capital for '27 is going to be pretty tight, maybe a little higher than today for '26, maybe around $400 million. But underneath that, you've got the sustaining CapEx that we're spending today in drilling in Ghana and the Gulf. That will sort of be pretty similar in '27. And then you've got a little more growth CapEx. But that allows you then though to continue to move forward these high-quality prospects. David Round: Okay. That's very clear. A very quick follow-up then, actually, if I might. Can you just remind us if there is a specific leverage target, please? Andrew Inglis: I'll pass it over to Neal. Neal Shah: Yes. And so David, we've always talked about getting to sort of 1.5x in a normalized oil price environment. And again, I think what you'll see this year is we said we'll take off around 20% of the debt. We started this year at $3 billion, which we get into sort of the mid-2s. And then with higher oil prices, you can continue to flex that down. And then the EBITDAX of the business jumps quite largely. So last year, we did something in the $500 million to $600 million range, which should be north of $1 billion this year in terms of where we get to. And so that leverage ratio compresses quite quickly. But I think, again, from, Andy said, the capital has continued to stay a bit tight in '27, but that allows us to advance the projects and at the same time, generate free cash flow to pay down the debt. So the goal is to do both at the same time and get leverage, what we'd like to see is sort of the net debt fall below $2 billion first in terms of a milestone. So we'll make a good dent in that progress this year. And again, we're seeking to sort of maximize every dollar in terms of debt paydown. Operator: [Operator Instructions] And our next question comes from the line of Bob Brackett with Bernstein Research. Bob Brackett: I'd like to talk a bit about Senegal and GTA. You mentioned the Phase 1 plus, which I expect is a 300 million cubic feet a day gas pipeline that brings ultimately molecules up to that Gandon Power Station. Can you talk about how to think about the unit economics? You mentioned it's reducing OpEx. How do we think about the volume? Is it your 27%? And how do we think about price? Andrew Inglis: Yes, Bob, good questions. I think that the first thing is it's somewhere that the expansion of GTA, I sort of think about it being sort of $200 million rather than $300 million, yes. You can go from today, we're pushing about 430 million standard cubic feet through the FPSO. You can get to 630 million without actually spending any capital on it. If you want to go up higher than that, there is an increased demand. There are incremental spend on capital to get there, relatively modest. But if you think about the first wave being sort of $200 million, the first piece of that domestically, piece of it will be used in Mauritania, a piece of it will be used in Senegal. The first piece in Senegal will flow to the Gandon Power Station, as you said. Then the RGS, which is the pipeline company in Senegal, we'll continue to build that pipeline south from Saint-Louis to Dakar. There's actually four phases. You can look online and see what they're doing and ultimately allows you to build out that sort of power station infrastructure down towards Dakar. So it's going to be a phased process that will start to build through '27, '28, '29 and to the end of the decade. So actually, in terms of unit economics, the capital spend for us is very low, sort of de minimis is the way to think about it for that 200 million standard cubic feet. There is capital spend to sustain the profile at the back end of the decade, which is associated with more wells to keep you at that sort of 630 million, 650 million standard cubic feet. But ultimately, it is a very low-cost expansion. And therefore, the margin that you're getting from it is high. You're almost, from an operating cost perspective, there is no FLNG lease. And therefore, your margin on those versus the export is higher. Neal Shah: And again, I think the easy way to think about it, Bob, is just, again, we've said sort of Phase I OpEx is around sort of $5 to $6 per MMBTU. That's fixed cost essentially. The costs don't change with the expansion on the operating cost. And therefore, you get a sort of multiplying effect in terms of reducing that to sort of the sub four type area. So again, I think every incremental molecule helps bring down that breakeven even faster. Andrew Inglis: And then for the domestic gas, you're not paying the FLNG cost, which is part of that sort of $4. Bob Brackett: A follow-up, please. I'm seeing mixed messages in the press around Yakaar-Teranga. Can you give us an update on what's happening there? Andrew Inglis: Yes. I don't think it's sort of mixed messages, Bob. I think that the key message out of it is around the importance of domestic gas for Senegal's growth, relatively large population, growing population, reducing the cost of power, electricity is a key priority for the government. And therefore, their goal is to ensure that they can advance those projects and do that in a timely way. But at Kosmos, it was about saying we want to invest in GTA. We want to enable that source of domestic gas to be our focus. And therefore, we did relinquish Yakaar-Teranga. The government has picked it up. Petrosen, I believe, will lead that development, and it will be another source of gas for the country. But given the scale of the economic growth, I think, that can be seen basically from population growth, then it needs all the gas that the country needs all the gas that it can take. Mauritania is a slightly smaller population. So the pull for domestic gas will be lower and can be fed by GTA. So this is good for both countries. ?And clearly world events today are all about how do you create security and affordability and the extension now of both GTA and Yakaar-Teranga will enable Senegal to achieve those goals and we are fully supportive of it. Operator: Our next question comes from the line of Mark Wilson with Jefferies. Mark Wilson: I got a question from an investor to start off with. It's probably more for Neal. Just wondering about the derivative cash losses in Q1 and what we should expect in 2026. And obviously, this speaks to this maximizing of deleverage. Andrew Inglis: So yes, the cash derivatives, Neal? Neal Shah: Yes. Yes, it's clearly a large mark-to-market change. And again, we came into the year with an asset of about $50 million, and then there's a $250 million market-to-market loss, just given we got payout in January and February on those hedges, and then clearly, the market moved. From a cash perspective, it cost us about $30 million and not a ton of cash, actually. But clearly, the implied shift in the forward curve has an impact on the derivative side. Our hedges are largely sort of yes, focused on sort of the first half of this year. So we talked about we have 6 million barrels left for the rest of the year, about half of that matures in Q2, and the other half over the second half of the year. And so there's a larger exposure in Q2 and then sort of less, and then that sort of steps down again in Q3 and Q4. And so again, it will ultimately depend on sort of what the actual realized Dated Brent price is. But we feel okay with our exposure on '26 and have really been working on adding some additional downside protection in '27. And so again, I think we're good in terms of where we are. We'll have more physical exposure from a pricing perspective, as we talked about in the call in 2Q. And so there's a bigger, call it, unhedged volume that we'll be able to realize in the second quarter, with more physical volume being sold versus the hedges. So again, I think Q2 is sort of shaping up quite nicely, and then the hedging exposure comes down at least more access to the upside from the physical sale. Mark Wilson: Okay. And Andy, a slightly bigger picture question. I'm just wondering what contact you've had with, if at all, with the new management setup at BP, given Tortue is performing so well. I'm just wondering if there's any commentary you could give there. Andrew Inglis: No. Look, things change, and they don't change. For us, clearly, and for BP, ensuring that GTA runs both efficiently from a cost perspective, but equally well from a production perspective. We deliver on the cargo forecast, et cetera. So that's all going well, Mark. And we sort of see no change. Clearly, Meg, the new CEO, has significant experience of Senegal from her experience at Woodside with Sangomar. So as we bring, it's great, somebody who has deep industry knowledge and very specific knowledge actually of the, of that Pacific geography. So the real sort of answer is, as you'd expect is that we're focused on the operational side at the moment and ensuring that we deliver on the targets we've set. And actually, that's exactly what we're doing. Mark Wilson: Okay. And then just one last point, just checking on the Jubilee guidance. Is there any scheduled downtime on the vessel in the rest of the year, maintenance or anything? Andrew Inglis: I think you've asked that question before. You do like that question. The honest answer is no, okay? So none in '26 and '27. I think that's what the operator told you last time. So, no, the answer is no scheduled maintenance. And look, if I go to the essence of your question, right, are we comfortable with our guidance? The answer is sort of yes. And why? As we started the year, we were unclear about forecasting yet. But of course, now, sort of getting close to the middle of May, you have a lot of extra information. The field started the year at, we ended the year '25, at 57,000 barrels of oil per day. We've stabilized it. We've added two wells. It's delivered at 70,000 barrels of oil per day. year-to-date. So very strong performance with two wells added. We have now drilled three wells. We have all of the logging information, pressure data, et cetera. So, we're confident we're adding wells that will add an additional 20,000. So, you built a base of 70,000, and you add another 20,000. And you can see on our plot, which we showed in the presentation, the resulting production profile. So, I think to the point really, to add is, look, we're further down the process. We've clearly delivered strongly in the first 4 or 5 months of the year. We've got additional data from the wells that we've drilled, and we're now starting that completion process. So, I think as every month goes by, we're more confident that we can deliver on the guidance that we've given with no shutdowns in '26. Operator: And your next question comes from the line of Stella Cridge with Barclays. Stella Cridge: I just wondered if I could ask you for a bit more color or comments on how you're thinking about the debt profile going forward. You have taken many actions year-to-date to address many different parts of the capital structure. The RBL discussions, you said, are going to commence around a bit midyear. Could you give us any sense of what you think the lenders will be looking for there? Would it be sort of the visibility around Jubilee, for instance, in this supportive oil price environment? Neal Shah: No, I'm happy to do that. And then if you have another question, we can follow up. But yes, like I said, we've been quite busy on the financing front. And again, what we wanted to accomplish is pretty clear in terms of clearing out the near-term maturities and bolstering liquidity, sort of stabilizing the ratings and continuing to reduce the absolute amount of debt. So again, as I say, we're well on track to deliver all of that. We've cleared the '26s and most of the '27s at this point. Liquidity is $500 million and growing. And we're on our way down on the debt paydown to get into the low 2s from a leverage standpoint by the end of the year. So again, I think all that's on track. And that leaves sort of, as you referenced, sort of the next financing objective for us to work on is the extension of the RBL. Just to recall, this would be the sixth RBL extension that we've gone through or that I've been through here at Kosmos. And so again, normally, it's a 7-year facility, it doesn't amortize for 3 years, and then you end up extending the tenure every 3 years. And so, I met with the banks recently. Again, they continue to be really supportive. They are looking for Jubilee performance to continue to improve. But again, I think that process is well underway, as Andy noted. And otherwise, again, I think they want to see the same thing that our creditors and equity holders want to see, which is for us to bring the leverage down. So as we execute the plan, again, I feel pretty good about going into that process in the middle of this year. And then that will basically kick, the ultimate maturity from sort of '29 to sort of the 32, 33 time frame. Stella Cridge: And just want to ask, I thought it was very interesting in the report that they were talking about potentially you're trying to get down into the $800 million to refinance a smaller amount in the RBL. Is that something you could comment on as well? Neal Shah: Yes. And so we exited 1Q with about $1 billion drawn on the facility, with the EG proceeds coming in around $150-ish million free cash flow. Again, I think naturally, the RBL will reduce into that range from a drawn perspective. From a total facility size perspective, though, which is what will generally extend, I wouldn't expect much change. We were at a sort of $1.3 billion facility size. We probably don't need that much just because we're bringing down, the absolute amount of both bonds and bank within the capital structure. So maybe it's 1.25-ish in terms of facility size. I wouldn't expect the size to change dramatically, although again, I think the bigger focus on our side is just reducing, the actual drawn amount. Operator: Since there are no further questions at this time, I would like to bring the call to a close. Thanks to everyone for joining today. You may disconnect your lines at this time.
Operator: Good morning, everyone, and welcome to the Knife River Corporation First Quarter Results Conference Call. [Operator Instructions] Also, today's call is being recorded. At this time, I would like to hand things over to Dara Dierks, VP of Investor Relations. Please go ahead, ma'am. Dara Dierks: Good morning, everyone, and thank you for joining Knife River Corporation's First Quarter Results Conference Call. With me today are President and Chief Executive Officer, Brian Gray; and Chief Financial Officer, Nathan Ring. A question-and-answer session will follow their prepared remarks. Today's discussion will contain forward-looking statements about future operational and financial expectations. Actual results may differ materially from those projected in today's forward-looking statements. For further detail, please refer to today's earnings release and the risk factors disclosed in our most recent filings with the SEC, which are available on our website and the SEC website. Except as required by law, we undertake no obligation to update our forward-looking statements. During this presentation, we will make reference to certain non-GAAP information. These non-GAAP measures are defined and reconciled to the most directly comparable GAAP measure in today's earnings release and investor presentation. These materials are also available on our website. I would now like to turn the call over to Brian. Brian Gray: Thank you, Dara. Good morning, everyone, and thank you for joining us. We had a strong start to the year, and I look forward to discussing our first quarter in more detail. Also today, we'll spend some time highlighting key components of our growth strategy and what we see ahead in 2026. Starting with our first quarter results. I'm pleased to report we improved revenue by 16% and adjusted EBITDA by 16% year-over-year, while expanding adjusted EBITDA margins by 290 basis points. We saw increased activity in our markets, which helped drive double-digit volume growth across our product lines. Combined with our efforts to lower costs and optimize pricing, we realized margin growth for aggregates, ready-mix and asphalt. On the contracting services side, revenues were up, and we have secured record quarter backlog of $1.2 billion. We are just now entering the start of our construction season, and we're doing so from a position of strength. Lastly, we completed 3 aggregates-based acquisitions during the quarter. We expanded into Utah with a platform operation in Salt Lake City, and we strengthened our footprint in Montana. I'll talk more about our acquisition opportunities in a few minutes. We are growing. Our competitive edge initiatives are working, and we believe we are well positioned for another successful year. We're excited about 2026, and we're confident in our ability to deliver continued growth. Supporting that confidence is a clear improvement strategy that we believe makes us the employer, supplier, acquirer and investment of choice. Turning to Slide 4 in the deck, you can see the 4 pillars of Knife River's growth strategy. First is our midsized higher-growth markets. Second is vertical integration. Third is the opportunity for self-help to improve margins. And fourth is our Life at Knife culture and relentless drive for excellence. We recently conducted a perception survey that provided a lot of encouraging feedback, including that investors value our strategy and want to learn more about it. Today, I will spend more time discussing 2 aspects of our strategy, our markets and vertical integration. Starting with our unique footprint, we believe our strong position in midsized, higher-growth markets presents a competitive advantage. Over the past decade, population growth in Knife River states has outpaced that of non-Knife River states, and this trend is expected to accelerate. From 2025 through 2050, our states are projected to grow 2x faster than that of non-Knife River states. More people equates to more demand in our markets on essentials like transportation, housing, water and energy infrastructure. You can see that demand already this year, as our states are investing in road and bridge infrastructure faster than other states. Collectively, DOT budgets in Knife River states increased approximately 15% this year compared to flat in non-Knife River states. With this strong funding environment and clear need to continue repairing the nation's roads, we expect state and federal infrastructure funding to continue increasing over the long term. This represents a significant opportunity as Knife River states collectively include over 3 million lane miles of roads. That is almost 40% of all U.S. lane miles. Further, roads in our states are exposed to harsh conditions. As a result, they require routine maintenance, creating ongoing demand. In addition to public infrastructure, heavy materials demand across our markets is supported by a diverse set of structural drivers. Some of these drivers include energy projects, military spending and data center development. We believe midsized markets like ours present an increasingly attractive opportunity for data center growth. We have some of the lowest cost industrial power in the country, greater availability of land and water and attractive livability and affordability to support an expanding workforce. Over the last 2 decades, GDP in Knife River states has grown at roughly twice the pace of non-Knife River states, highlighting a proven track record of outperformance and a strong foundation for continued growth. Lastly, an important reason we like our markets is our position within them. Nearly 90% of our aggregates volume comes from markets where we have a leading position. This scale, in addition to our aggregates reserves and vertical integration gives us a competitive advantage and enables better purchasing, pricing and reliable supply chain. To put our unique footprint into context, we thought it would be helpful to take a closer look at our 3 geographic operating segments and how they support our overall strategy. Starting with the West on Slide 6. This segment includes California, Oregon, Washington, Alaska and Hawaii. Over the next 25 years, this market is expected to grow its population by approximately 12%, which we believe will support sustained infrastructure investment and commercial activity. In 2026, state DOT budgets across the segment are approximately $34 billion, reflecting a 13% year-over-year increase. In addition to population growth and robust funding for public infrastructure, the West benefits from military spending, the build-out of data centers and other market-specific growth opportunities. We are a preferred materials vendor for a data center and hyperscaler that is active in this region, and we continue to work with them on a number of ongoing developments. Also throughout the Pacific Northwest, we are a premier supplier of prestressed concrete products, including the data center projects for multiple repeat customers. In Hawaii, we are currently working on a large Navy project at Pearl Harbor, and the state is also seeing increased private investments on Maui and Oahu. In Alaska, we continue to see elevated levels of military and airport investments. We are supplying materials up to the North Slope, where energy and mining-related projects are driving our optimism for growth in Alaska. Taken together, increased federal spending and improving economic activity across the West underpin our confidence in long-term demand in this segment. Turning to the Mountain segment. This includes Idaho, Montana, Wyoming and our recently added operations in Utah. This segment benefits from some of the strongest demographic trends in the country with population expected to grow 26% by 2050. These states are among the most desirable places to live in the U.S., supported by strong inbound migration and in the case of Utah, one of the highest growth rates in the nation. This growth drives long-term demand fundamentals. Mountain has long been a leading asphalt paving market for us, and this segment also represents one of our strongest commercial construction profiles. It benefits from significant investment in wind and solar, data center development and military infrastructure, along with advanced manufacturing growth. In Idaho's Treasure Valley, large-scale semiconductor investments are helping establish Boise as an emerging technology hub. With our strong footprint and local capabilities, we are well positioned to support these growth projects. Finally, turning to our Central segment. This includes Iowa, Minnesota, North Dakota, South Dakota and Texas. This segment is also benefiting from strong population growth with our states expected to grow 21% over the next 25 years. Texas, North Dakota and South Dakota rank in the top 10 in birth rates in the nation. This sustained expansion is driving broad-based growth across private and public markets. From an infrastructure standpoint, the Central segment has a large and expanding public funding footprint. For 2026, total state DOT budgets across the region are approximately $31 billion, a 16% increase from last year. In North Dakota, the state's construction budget for 2026 is more than double that it was in 2025. With our strong operating presence, we are well positioned to capture increased opportunities. Meanwhile, Texas also represents an exciting opportunity within Knife River. Our operations are strategically positioned within the Texas triangle, giving us strong exposure to the high-growth markets between Dallas, Houston and San Antonio. Our triangle within the triangle enables us to serve some of the fastest-growing midsized markets in the nation. Development in these high-growth corridors is accelerating, and infrastructure demand is expanding beyond established urban boundaries. Overall, the Central segment combines strong demographic tailwinds with a well-funded infrastructure pipeline. It has attractive growth opportunities across energy, commercial and transportation sectors. We expect the region to remain an important contributor to our long-term value creation. The final point I'll make about our markets today is that we see substantial runway for growth through M&A. These markets are still highly fragmented with vertically integrated family-owned businesses, creating hundreds of potential opportunities at attractive multiples. Knife River has completed nearly 100 acquisitions. We are well known, well respected and trusted. When a family-owned business decides it wants to sell, they often contact us first. They value our people-first culture and our commitment to the communities where we live and operate. We believe this combination of culture, credibility and capabilities makes us the acquirer of choice. We are well positioned to continue expanding our distinct footprint through disciplined value-accretive acquisitions. Moving from our markets to vertical integration, this is another part of our strategy that makes Knife River unique. We believe our aggregates-based end-to-end operating model drives value creation. First, it enhances our financial performance by being a profit multiplier. This is achieved in 2 significant ways. One, we are able to capture higher margins on the pull-through of upstream materials to our construction projects. And two, being vertically integrated creates meaningful synergies across business units, including equipment utilization, overhead absorption and labor efficiencies, all of which contribute to industry-leading margins on our downstream product lines. Our balanced mix of aggregates, ready-mix, asphalt, liquid asphalt and contracting services also supports resiliency across economic cycles. It enhances our ability to flex between public and private work and gives us more opportunities to provide our products and services. For our customers, vertical integration represents a one-stop shop that translates into greater supply chain reliability, improved coordination at the job site and more consistent execution across multiple projects. Moving to Slide 11. You can see how vertical integration also gives us more opportunities to win profitable work. On any given construction project, we can have over a dozen distinct pathways to capture profit. This can be as a general contractor or as a subcontractor that performs asphalt paving, site development, grading or other construction services or it can be by supplying materials directly to ourselves, to the project owner, to another prime contractor or to a competing producer of downstream materials. Every one of these entry points gives us another chance to compete and another way to create value. Vertical integration also gives us flexibility to adapt to our markets and position ourselves where we have the most opportunity for growth, both organic and through M&A. On the organic growth side, we can expand our market position by adding complementary products and services to an existing footprint. In Texas, for example, we greenfield our Honey Creek quarry near Austin a few years ago as a means of providing high-quality aggregates to our downstream product lines and to third parties. Today, that investment makes it possible for us to support our newly expanded asphalt plant in Bryan, where we have added capacity to serve a large paving job on Highway 6. Honey Creek is also providing materials for our recently acquired Texcrete ready-mix operation in College Station, allowing us to expand our operations in this dynamic market. On the acquisition side, being vertically integrated also gives us more opportunity as we aren't limited to a single product line to grow. While our M&A strategy will continue to be focused on aggregates-based opportunities, we have a healthy acquisition pipeline that includes all product lines, including aggregates, ready-mix, asphalt, prestressed concrete and contracting businesses that we believe would enhance our portfolio and support long-term growth. Thank you for letting me provide more detail on our strategy, in particular, why we're confident in the markets where we operate and the advantage of the vertical integration. Next, I'll quickly recap the quarter results for our segments. Starting with the West, the segment benefited during the quarter from higher private market activity, which drove increased aggregate volumes. For the third straight quarter, Oregon continued its recovery, meeting our expectations for the start of the year. We expect this trend to continue and believe the segment is well positioned for ongoing growth. Performance in the Mountain segment benefited from higher available backlog, better weather and solid execution. The team delivered improved cost discipline across all product lines while optimizing material pricing. In addition to strong organic performance, the Mountain segment completed 3 acquisitions during the quarter, Morgan Asphalt in the Salt Lake City market and both Sparrow Enterprises and Donaldson Brothers Ready-Mix in Montana. Performance in the Central segment reflected impacts from acquisitions completed in 2025. The addition of Texcrete helped the region nearly double its ready-mix volumes. These benefits were partially offset by 2 additional months of expected seasonal losses at Strata in January and February. During the quarter, we continue to make meaningful progress on strengthening operational execution, and we ended the second quarter with strong backlog, positioning the business for further growth as the year progresses. Lastly, turning to Energy Services. Favorable market conditions in our Western states supported higher sales volume and improved fixed cost absorption during the quarter. We also continue to capture synergies by merging our West Coast operations and ended the quarter with a 40% improvement in EBITDA. All in all, we had a strong performance in the first quarter and continue to be well positioned for growth in 2026. With that, I'll turn the call over to Nathan to walk through our product line financial results. Nathan Ring: Thank you, Brian. As mentioned earlier, we are off to a good start and very pleased with the momentum carried forward from last year. That was evident in our product lines as we achieved volume, revenue and gross profit improvement in aggregates, ready-mix and asphalt. Starting with aggregates, our 26% volume growth, coupled with price increases and cost controls, drove strong margin improvement. Oregon led the way on volumes with an increase in third-party sales related to more commercial, industrial and residential construction. Mountain also positively contributed to our volume increase with continued favorable weather providing the opportunity to work on record backlog, creating pull-through demand of aggregates. Importantly, we also reduced our per unit production costs by more than 10%, a direct result of process improvements and last year's investments in our operations. As reported, pricing was up 1% compared to last year due to geographic mix. The Mountain region had nearly 70% higher aggregates revenue than last year, had pricing and costs meaningfully lower than other regions. Normalizing for geographic mix, pricing was up 4.1%. We remain confident in our full year guidance of mid-single-digit pricing improvement on an as-reported basis and at least 200 basis points of aggregate margin expansion. Ready-mix saw a 33% increase in volumes for the quarter. The acquisition of Texcrete was the largest contributor to this increase with our Texas operations more than doubling their first quarter volumes. Consolidated pricing and margins were up for the quarter as the price/cost spread continues to improve for ready-mix. We see these contributions continuing into this year with expected full year volumes up mid-teens over last year. Turning to asphalt. Activity levels were positive with volumes increasing 42% year-over-year. As a reminder, the first quarter accounts for less than 5% of full year volumes, so the majority of our work is yet to come. We continue to maintain our guidance of mid-single-digit volume growth. Contracting services delivered higher revenues during the quarter with contributions coming from all segments. Central saw the largest increase, led by our Texas and North Dakota operations. Margins were down for the quarter, but similar to asphalt, the first quarter historically represents a small portion of annual contracting services revenue. Therefore, project timing, type of work and geographic mix can have a disproportionate impact on first quarter margins. Turning to backlog. First quarter levels were strong at approximately $1.2 billion, with about 75% expected to be completed in 2026, providing good visibility into future activity. As we work through our backlog, we continue to expect higher gross margins in contracting services in 2026, supported by increased self-performed asphalt paving. This type of work can drive margin gain through successful project execution and the bonuses that get paid to contractors for quality performance. In addition, the increased asphalt paving in our backlog also provides the benefit of pulling through our higher-margin upstream materials, positively impacting product line gross margins. We are excited about the year ahead, and we'll continue our focus on cost controls across our business. Regarding energy costs, we are utilizing a number of mitigating activities in our materials and services product lines, including the prepurchase of diesel, energy escalation clauses in construction contracts and fuel surcharge clauses in material deliveries. These efforts, along with dynamic pricing, help reduce the potential impact associated with oil prices and position us well to maintain our margins. Moving to SG&A. We continue to expect the full year to be comparable with 2025 as a percent of revenue and then begin trending lower in future years as we scale and fully capture synergies from recent acquisitions. Switching to capital allocation. We are committed to our disciplined approach, including maintaining fixed assets, improving operations and growing the business. In the first quarter, we spent $42 million on maintenance and improvement CapEx, largely on the replacement of construction equipment and plant improvements. Additionally, we spent $209 million on growth initiatives, including $174 million on the 3 acquisitions mentioned earlier and $35 million on aggregate expansions and greenfield projects. We continue to maintain our focus on having a strong balance sheet with capacity available to support these growth initiatives and future investments. Keep in mind that as we enter the second quarter, we will reach the peak of our annual borrowing needs as we build working capital for the construction season. As we look to the full year, we expect to end 2026 with no borrowing on our revolving credit facility of $500 million and have cash on hand, resulting in an anticipated net leverage near our long-term target of 2.5x. Turning to our guidance. As we have indicated in the past, we generally do not make revisions until the construction season gets into full swing. Therefore, we are reaffirming the guidance we presented in February. Based on our good start to 2026 as well as the addition of 3 aggregates-based acquisitions, we are confident in our guidance and currently expect 2026 to trend toward the upper half of our revenue and adjusted EBITDA ranges for the year. With that, I'll now turn the call over to Brian for closing remarks. Brian Gray: Thank you, Nathan. We are off to a strong start this year, building on the momentum we established in the second half of 2025. We are just now entering the construction season, and we are doing so with record backlog and a proven growth strategy. We are meeting increased demand across our unique growing markets with disciplined cost control, pricing optimization and the benefits of vertical integration. Our competitive edge initiatives are driving real improvements. Our acquisition strategy continues to enhance our results, and our teams are performing at a high level. I'd like to thank our 7,400 team members for their commitment to working safely and advancing our growth efforts. We believe the progress we're making today positions Knife River to generate profitable growth in 2026 and well beyond. We are excited about the opportunities ahead, and we are focused on creating value for our shareholders. Thank you for your time today, and we'll now open the call for questions. Operator: [Operator Instructions] We'll take the first question from Trey Grooms, Stephens. Trey Grooms: Congrats on a great start to the year. So I guess, Brian, maybe to begin, can you talk about some of the puts and takes around the aggregates pricing in the quarter? You mentioned some pretty significant mix headwinds there. But if you could maybe go into a little more detail, is it geographic, product? Is it both? And then kind of reiterating that mid-single-digit pricing guide for the year on reported ASP. Can you talk about maybe the trajectory there and how we should be thinking about how you kind of get to that mid-singles for the year given the tougher start out of the gate? Brian Gray: No, I'd be happy to, Trey. I'm actually very pleased at where we're at and what I'm seeing with pricing and the impact it's having on our overall margins in the aggregates group. So we reported just slightly 1% -- prices were up about 1% for the quarter. And as you know, our average selling price, it includes freight, it includes delivery and includes other revenues. And so if you just normalize just for one thing, which is the segment mix, our average selling price would be up 4.1%. So when I talk about geographic mix, I mean, we have 3 geographic regions that sell aggregates, the West, the Mountain and the Central. In the Mountain region, because it was favorable weather and the amount of backlog they've got there, aggregate revenues for the quarter in the Mountain region were up 70 -- almost 70%, 69%. And in the Mountain region, their cost structure is much lower than it is in the other regions, therefore, has a much lower pricing structure as well. And the reason that is, is that the downstream operations, the ready-mix plants, the asphalt plants, they are sitting on our aggregate reserves, and we have very little to -- practically no materials transfer in that mountain region compared to other regions like the Central, we're railing materials to aggregate yards and to downstream product lines. We're doing that in North Dakota. We do that some in Oregon by barge and rail. And so the cost structure in those other regions is bigger than it is in the mountain. And so because they have such a lower cost structure, their prices are also lower. And when you sell 70% more in the quarter, that alone would bring our average selling price up if you just make that one adjustment to 4.1%. The other thing that we do in the Mountain region is the type of work that we do there, they consume and utilize a lot more unprocessed materials. They literally -- they use about 2x annually the amount of pit run or bar run for large heavy civil fill type of projects. That also has an impact in product mix. And so, I look at our sales dashboards frequently, and I can tell you and reassure you that what I see for the same product coming out of the same plant that I'm very comfortable guiding to mid-single digits. Frankly, we saw mid-single digits this quarter if you make those adjustments. Trey Grooms: Yes. Okay. Got it. That's all very helpful. As my follow-up, with the 200 basis points of margin improvement in ags that you're targeting, especially with the diesel headwinds is particularly impressive. So any additional color on how you're kind of navigating these higher costs? And what gives you the confidence to reiterate that 200 basis points of margin improvement, especially given how much diesel inflation we've seen? Brian Gray: Yes. It's really the continuation of the good work that our PIT Crews are doing and some of the benefits that we're now beginning to realize weighs into this initiative with our PIT Crews. We enjoyed -- our gross profit margins in aggregates was up 390 basis points for the quarter. And we didn't really begin to see those energy headwinds until later in the quarter, really in March. But as Nathan mentioned in his prepared remarks, I mean, we have had existing mitigation practices in place for years, and those practices are working. The fuel surcharges that we charge on materials delivery, we've got the escalation clauses in construction contracts, which also can come back and help us on aggregates. And so where we don't have protection, Trey, we do a good job at doing some fixed forward contracts on diesel. And probably the most important tool that we've got in our toolbox, and this is relatively new for a big part of our company, that's dynamic pricing. And so we are able -- we don't need to wait for a midyear increase to come out. We are literally pricing diesel costs, current diesel costs into our current bids going out on a daily basis. And so -- we do feel comfortable. To put it all into perspective, the amount of diesel that we use in a year, a full year is about 20 million to 25 million gallons of diesel. And that diesel is used primarily in 2 different ways. One is for on-road vehicle deliveries or vehicles. That's about 50% of that. And the other 50% is used in the yellow iron, either at the aggregate sites or out on construction projects. And if you take a look at all of that, we feel like we are protected through one of our mitigation practices on about 80% of that diesel. And so that kind of maybe helps you put it into context of the potential exposure we have on a full year. Operator: The next question today comes from Kathryn Thompson, Thompson Research Group. Kathryn Thompson: I wanted to shift gears and focus on M&A. And if you could clarify the -- how we should think about the contribution and cadence of the recently acquired companies that you've announced? Brian Gray: Yes, Kathryn, we're very excited about the 3 acquisitions we completed in the first quarter. They were all aggregates-based operations. They had downstream materials. And in the case of Morgan Asphalt, it came with the services downstream opportunities as well. All 3 of those deals are very -- they look very similar to how we've done deals in the past. They were negotiated deals directly with the owners and that we were able to negotiate high single-digit multiples on those 3 acquisitions. And so, if you look at that contribution on a full year, that would suggest it was towards the upper half of our current guidance. I want to just touch a little bit on the importance and how excited we are on the Morgan Asphalt operation in Salt Lake City, Utah. This is not a new market for us. We've done work in Utah out of our Boise, Idaho group for years. We've been looking very closely for an opportunity to enter that market with an aggregates-based platform operation that we can continue to build from. And Morgan Asphalt fit that bill through a key, very good cultural fit, very strong reserve position, with a team that is very good at asphalt paving. And so, very excited about all 3 acquisitions. Really the most meaningful, the largest of the 3 would be the Morgan Asphalt opportunity in Salt Lake City. Kathryn Thompson: Okay. And then following up on that, maybe [indiscernible] about how these play into your kind of the profit multiplier thesis that you discussed and how this -- how we should think about that going forward? And also what reasonably should we expect in terms of synergies, either be from cost or from revenue? Brian Gray: Yes. So I mentioned the profit multiplier in my prepared remarks as it relates to vertical integration. And so I'll use 2 examples on that. Texcrete, the operations that we bought late last year, down in College Station, Texas and in that area, more than doubled our ready-mix volumes for the quarter out of Texas. They were purchasing a lot of third-party aggregates before we purchased -- acquired that company. And because we're vertically integrated in Texas, we now are able to rail materials into College Station and self-supply that, which is just an opportunity to, again, earn more profit on that acquisition through the profit multiplier by being vertically integrated. Morgan is probably even a better example of that. Morgan comes with a very high-quality, strategically positioned reserve. We will bid materials on any kind of DOT type of project. We'll bid aggregates to subcontractors. We will self-perform and use those own aggregates. We'll sell aggregates to other non -- to other producing competitors downstream. And so we have an opportunity to win work on the aggregate side. But most likely, we're going to sell those aggregates to ourselves and to another profit center, which is our asphalt -- our hot mix asphalt plant. And then we will sell that hot mix asphalt to, again, either ourselves or to a competitor on the job and allow them to go do the paving themselves. But likely, we would self-perform that work as a subcontractor or as a prime contractor. And so that being vertically integrated really does allow us to have multiple opportunities to earn profit. On the synergies, I'll let Nathan touch on the synergies from the acquisitions. Nathan Ring: Kathryn, good to hear from you. We've probably talked about this a little bit in the past as we bring in these operations, and there's multiple ways in which we can get synergies as they become a part of Knife River. First, we've talked about purchase price power, and that can relate to cement, oil, equipment. And so as they become part of Knife River, become part of a larger organization, they get to take a part of that or advantage of that. The other is on the operational side. These are good companies. We're proud to bring them into Knife River, exciting for us. But just like with Knife River, we have PIT Crew out there that are looking to make Knife River better. And as these acquisitions come in, there's an opportunity for us to share the Knife River PIT Crew, the EDGE initiatives with them and improve their operational efficiencies as well. And then the last thing I did mention it in my prepared remarks, as they come on board and bring their SG&A, I talked about us last year building our SG&A to grow the company. And as we grow, as we build the scale, we see an opportunity for synergies combining the 2 companies on the back office side of the equation as well. So I think there's a number of things we look at when they come in throughout the first year, sometimes within the first week as they become part of Knife River that we can capture some of these synergies. Operator: Up next is Garik Shmois from Loop Capital. Garik Shmois: I was hoping you could provide an update on where you stand on dynamic pricing, where you think you are within your different regions. And I asked that just because of the higher oil-based costs that are coming through and certainly one of the levers that you have to offset. Just curious as to the ability to push through additional pricing in some of the regions that have lagged in the past? Brian Gray: Yes, Garik, our commercial excellence teams have done a fantastic job of training and implementing dynamic pricing through all of our legacy operations. And so we are in the later innings at this point in time, which is coming to be a very good benefit with the current energy situation that we're able to price not just aggregates, but also ready-mix and asphalt at current cost structures and provide daily pricing out for those materials. And so we have a number of different dashboards that we're currently using and technology that helps our sales teams manage through that process. Where we don't have full implementation of dynamic pricing would be in our recently acquired companies. And as we've talked about in the past, we honor their current quotes. And in anything that's new, we quickly get them on track to start utilizing the dynamic pricing. And we're currently doing the training as it relates to dynamic pricing with those recently acquired companies. But that would be the only place right now that we have some limited exposure. Garik Shmois: Great. That's helpful. Follow-up question is just on the comment you made that you expect to be at the upper half of revenue and EBITDA guidance for the year. I just want to clarify, is that solely because of the acquisitions that you spoke to earlier? Or is there anything organically that you're pointing to that's tracking towards the mid-to-upper end of the range that's giving you confidence right now? Brian Gray: Yes, there's a number of things that give me confidence in that upper half of the range. I mean -- and the acquisitions certainly are part of that. But our volumes and our backlog right now, I really like the position that we're in. The record backlog of $1.2 billion, up 25% from last year, and that backlog has a lot of asphalt paving in it. And with that comes the ability to pull through higher-margin upstream materials. So, that gives me a lot of -- good confidence. That's a very visible contracted work that we've got that we'll be outperforming that work this summer. And so that gives me good confidence. And then frankly, I just -- I continue to see traction that we're getting with our PIT Crew. You saw some of that early in this first quarter, even though our volumes are very low relative to the full year. We can't dismiss the work that the PIT Crews are having in all of our product lines. So that gives me good confidence on that upper half of our current range. Operator: Your next question is from Timna Tanners, Wells Fargo. Timna Tanners: I wanted to follow up on the discussion just now of the dynamic pricing and also the ability to have energy escalation. Do you have a sense of -- in your discussions with customers that how this compares with some of the competitors and how they're handling energy costs? Just curious if there'll be any challenges if some of the peers are taking a different tactic? Brian Gray: Yes, Timna, as you know, a lot of our competitors and our unique markets are some of -- more family-owned operations. We have some overlap with some of the larger national peers. But a lot of our competitors are local, regional-based family-owned operations that also have margin expectations. And I can tell you that I believe that we've pre-purchased and managed our energy costs better than our local competitors and that they, too, are going to need to do something. And so, I think most of them are passing along their fuel costs through similar fuel surcharges on delivered materials. And so I think it's -- I don't think we are out of the norm when it comes to fuel surcharges and collecting that compared to our competitors. Timna Tanners: Okay. Helpful. And then if I could follow up on the M&A strategy, clearly off to a strong start and in line with the comments on not expecting an extended revolver by the end of the year. What does that mean for further M&A this year? What do you think you have the bandwidth for as we look out for the rest of the year? Brian Gray: I'll let Nathan take that. I'll just preface it with, our pipeline is strong. And we mentioned the pipeline 3 months ago that it looks to be similar to last year's type of pipeline. And so we're off to a good start this year and we feel like we certainly have opportunities in the pipeline and that Nathan has a balance sheet that also allows us to continue to grow. So, I'll let you talk about that, Nathan. Nathan Ring: Yes. Thanks, Brian. Timna, just as he said, I mean, we do focus on maintaining that strong balance sheet so that we do have the bandwidth and the cash flows coming from our operations, which are strong as well. So, first, just what I'll reiterate here is that we have about $190 million, almost $200 million of available liquidity when you look at our revolver. That's important from the standpoint that allows us to react quickly if an opportunity does come up. The other thing is not to forget the cash flows that we get from our operations. We have about a 2/3 conversion rate, which means from EBITDA to cash flow from operations, we convert about 2/3 of that to cash flows from operations, which we put to work in the company. The thing that I stated in the prepared remarks that's probably important for your bandwidth question is our balance sheet capacity or net leverage. I indicated on the call there that as we get towards the end of the year and pay down that revolver, have those cash flows comes in, we think we're going to be at or below that net leverage of 2.5x. That creates bandwidth for us because as I talked about before, Timna, for a short duration for the right deal, we'd be willing to be close to near 3x for a while. And so we do have the liquidity, the cash coming in from operations and the bandwidth on the balance sheet to continue to support the -- our growth program that Brian talked about. So I think we're in a good position. Operator: Your next question is from Ivan Yi, Wolfe Research. Ivan Yi: First, what was the organic or mix-adjusted aggregates volume growth in 1Q? And I get that you don't normally adjust guidance after the first quarter. But after such a strong growth in 1Q, why not raise the full year aggregates volume guidance at all? Are you sensing any weakness at all or is it just conservatism? Brian Gray: No, I think we're being prudent. We still have 90% of our construction season in front of us. And so it's very early. And so, unless we saw something just jump off of the page, Ivan, I mean, you're going to see us most likely after the first quarter continue to reaffirm that guidance. I like where we're at with the volumes and what we're seeing in the markets. And that volume increase, in particular, on aggregates, over 1 million tons of aggregate volumes, which is up 26% for the quarter. Half of that came from legacy and the other half came from operations that we acquired in the last -- since this time last year. In other words, Texcrete and Strata's 2 months of operations that were new to us, 2 months of Strata and then the Texcrete acquisition, which is ready-mix, but because we're self-supplying those aggregates, that was very positive for us. And so, about half of that increase is coming from legacy operations, the other half from Texcrete and Strata specifically. And we'll continue to update you as the year progresses on that -- on the volumes. Ivan Yi: Great. Very helpful. And then my follow-up, we've seen several states declared gas tax holidays and there's proposed legislation for federal suspension of the gas tax through October. What impact would this have on future infrastructure spending? And how material would this be to you all? Brian Gray: Ivan, you broke up a little bit at the very beginning of that question, and it was pretty low. I couldn't hear it exactly. So could you repeat the beginning of that? Ivan Yi: Yes. Just on the gas tax holidays that have been mentioned about, how material of a headwind would that be if the reduction in infrastructure spending that would come with that? Brian Gray: Yes. I think with -- I would say that's immaterial, and that's not something that we're concerned about. We've got record backlog, $1.2 billion, 25% up over last year. We continue to look at the strong DOT budgets, up 15% year-over-year in our markets. And with that comes the bid letting schedules, and what I'm seeing at the local state level, really no concerns around the gas tax holidays. Operator: [Operator Instructions] Up next is Garrett Greenblatt from JPMorgan. Garrett Samuel Greenblatt: I was wondering if we could just dive a little more into the regional disparity between aggregates, how aggregate margins in each region trend or if you rather grow in gross profit per ton? And then maybe the organic pricing growth per region that got you to the underlying 4.1% consolidated? Brian Gray: Yes. I'll start with -- at a high level, and I'll let Nathan add if there's any other additional detail. But, Garrett, what I'd tell you is that if you -- I talked about the differences in our cost structure and our pricing structure as it relates to transferring materials around and having rail yards, redistribution aggregate sales yards, having downstream plants sitting either on the site or off-site where you have to rail or barge. That does change our cost structure, therefore, creating a different pricing structure as well. But if you actually look at the margins over the last 2 years for each one of those regions, they're very similar. They're not that different. And so they're doing a good job. Even though they may have lower pricing, what we look at, obviously, is the price/cost spread. And I think that we're pretty close in each region. Now each state is different, and that's going to depend on the market positions that we've got, the type of materials that we're selling and the amount of market share that we have, just different things have changed there by each state. But generally speaking, if you look at the last 2 or 3 years, for aggregate margins specifically, they're very similar in all 3 different states. Nathan, is there anything that you want to add to that? Nathan Ring: You mentioned the most important thing, Brian, is that over the course of the year, they're comparable. I would just remind folks that at the beginning of the year, there can be some differences in margin: West, you have more activity; Mountains had a good first quarter here, so that's improved their margins; Central is still in the early season and not getting started. So if you were looking at just the first quarter here, you might see some differences, but it's more important to look at it the way that Brian shared from that full year margin perspective. Garrett Samuel Greenblatt: Great. And then can you talk a little bit more of the margin contraction in contracting services and how we should think about that trending for the rest of the year? Brian Gray: Yes. Nathan, do you want to take that one? Nathan Ring: Yes, there is a couple of things with that. I mean, first of all, just for the first quarter and I'm starting to sound too similar here, but I mean, it is just similar. I mean, for contracting services margin in the first quarter, it's about 10% of our full year revenue. So you can have some -- like I said in my prepared remarks, you can have some geographic mix. You can have, for example, this year, we did do some more revenue in the Central, but that is the first part of the year, like as it pertains to Strata, where that revenue is not enough to cover some of the overhead or indirect costs. So that's what you've got going on in the first quarter. As you look to the full year, it's just important to remember that we are saying that our contracting services margins will be higher. And we talked about this back in February that a lot of that has to do with -- we're anticipating more paving work in 2026 than we had in 2025. Now that can start off at the beginning of the year that you're getting moved, you're getting ready. But as that work progresses through the year, we start to see improvement in margins related to our performance, very good at paving. Two, we see it in terms of incentives that come along with the project and bonuses. So, as we do more paving work in the year than we did last year, we anticipate those margins to increase because of that. And then like we talked about, the add-on benefit that Brian talked about in our prepared remarks with the profit multiplier that, that has pull-through demand to have liquid asphalt, asphalt, aggregates. And so we look forward to what it will also do for the upstream product lines as well. Operator: The next question is from Rohit Seth from B. Riley Securities. Rohit Seth: Can you provide us an update on the Oregon DOT issue? Brian Gray: Yes. Fortunately, Rohit, that situation, I believe, is stable. So we have baked into our current guidance that the measure that's being voted on in Oregon on May 19, most likely is going to fail. I think everyone is expecting that. And -- but the good thing is the DOT already has an existing budget, and it's 2% lower than it was year-over-year, but that's the total budget. The construction budget is actually up a little bit. And so we have taken all those things into consideration into our current guidance that Oregon stabilize and looks to be broadly in line with last year's results. Rohit Seth: Okay. Great. And then on the EBITDA guidance, could you maybe provide a cadence for the year, second quarter, third quarter, fourth quarter, given what's going on with the energy shock, I just want to understand your expectation for 2Q. Brian Gray: Yes, I'll let Nathan take that one. Nathan Ring: Yes. I can give you an idea of, from a seasonality perspective, how we look at each quarter from a revenue basis, which I think will help you with your modeling. And so like we've talked about a few times this morning, the first quarter, generally around 10% of revenues. Second quarter, we get into maybe about 25%. And then as we all know, the third quarter is where we see a higher amount of our revenues and then fourth quarter, depending on how long fourth quarter goes, that will be the higher part. So the latter half of the year would be where we see the higher portion of revenues. So that's kind of the breakout or anything else with seasonality. Rohit, does that help kind of give you an idea of how -- the cadence of the year? Rohit Seth: That was on revenue, but does EBITDA follow the same sort of... Nathan Ring: Yes. For the most part, other than -- I mean, the first -- there are some peculiarities, right? In the first quarter, we do experience a seasonal loss. And so then you would anticipate as you get to that third quarter, you would anticipate a higher amount of EBITDA coming as that's the main part of the season for us. Brian Gray: Yes. Because a lot of our backlog is asphalt paving, that work is typically done in the summer months. And when you start to close out those jobs is when you would get paid those job site incentives and quality bonuses, which often would come late in the third quarter or the fourth quarter. So that would impact EBITDA positively without necessarily the revenue to go in line with that later in the year. So I can -- that would be the only nuance as it relates to EBITDA, I think, for contracting services. Operator: And everyone, at this time, there are no further questions. I'd like to hand the call back to Mr. Brian Gray for any additional or closing remarks. Brian Gray: I appreciate everyone joining us today. We're very excited about the year ahead, and we look forward to speaking with you guys again in the next quarter. Thank you. Operator: Once again, everyone, that does conclude today's conference. We would like to thank you all for your participation. You may now disconnect.
Operator: Good afternoon, and welcome to the MasterBrand, Inc. First Quarter 2026 Earnings Conference Call. During the company's prepared remarks, all participants will be in a listen-only mode. Following management's closing remarks, callers are invited to participate in a question and answer session. Please note that this conference call is being recorded. I would now like to turn the call over to Henry Harrison, Senior Director of Corporate Financial Planning and Analysis. Henry Harrison: Thank you, and good afternoon. We appreciate you joining us for today's call. With me on the call today are R. David Banyard, President and Chief Executive Officer of MasterBrand, Inc., and Andrea H. Simon, Executive Vice President and Chief Financial Officer. We issued a press release earlier this afternoon disclosing our first quarter 2026 financial results. This document is available on the Investors section of our website at masterframe.com. I would like to remind you that this call will include forward-looking statements, neither our prepared remarks nor the associated question and answer session. These forward-looking statements are based on current expectations and market outlook and are subject to certain risks and uncertainties that may cause actual results to differ materially from those currently anticipated. Additional information regarding these factors appears in the section entitled Forward-Looking Statements in the press release we issued today. More information about risks can be found in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our full year 2025 Form 10-K and updated as necessary in our subsequent 2026 Form 10-Q, which are available at sec.gov and at masterbrand.com. The forward-looking statements in this call speak only as of today, and the company does not undertake any obligation to update or revise any of these statements except as required by law. Today's discussion includes certain non-GAAP financial measures. Please refer to the reconciliation tables in the press release issued earlier this afternoon. They are also available at sec.gov and at masterbrand.com. Our prepared remarks today will include a business update from R. David Banyard, followed by a discussion of our first quarter 2026 financial results from Andrea H. Simon, along with our second quarter 2026 financial outlook. Finally, Dave will make some closing remarks before we host a question and answer session. With that, I will now turn the call over to R. David Banyard. R. David Banyard: Our first quarter results reflect the disciplined execution of our near-term priorities against a challenging backdrop. Despite persistent demand softness and ongoing macroeconomic uncertainty, we delivered net sales and adjusted EBITDA in line with our expectations. We continue to advance our tariff mitigation efforts, fully executed our previously announced $30 million cost actions, and remain focused on the actions within our control as we navigate near-term headwinds and position MasterBrand, Inc. to emerge stronger when the market recovers. In the first quarter, we generated net sales of $618 million, a 6.4% decrease compared to the same period last year. Our performance reflected a mid-single-digit year-over-year market decline and a slower pace of housing completions, partially offset by the continued flow-through of previously implemented pricing actions. Adjusted EBITDA for the quarter was $28 million compared to $67 million in the prior-year period, and adjusted EBITDA margin was 4.5%. The lower margin was primarily driven by lower volume and the related unfavorable fixed cost leverage, as well as unfavorable product mix across channels, as consumers continue to shift toward value products and forego features in made-to-order categories. At current volume levels, these mix dynamics carry an outsized impact on margins, as reduced fixed cost absorption amplifies the effect of even modest product mix shifts. Compounding these pressures, weather-related disruptions during the quarter resulted in more down days than typical across certain facilities, driving unplanned production downtime that created additional drag on our fixed cost absorption. These headwinds were partially offset by previously announced pricing actions, operational tariff mitigation efforts that progressed ahead of schedule, and savings from our ongoing cost reduction initiatives. As is typical for our first quarter, free cash flow reflected seasonal working capital outflows. This, in combination with our net loss position, resulted in free cash outflow of $146 million compared to a $41 million outflow in the same period last year. Looking ahead, we expect these dynamics to normalize as we move through the year, and we continue to expect free cash flow for the full year to exceed net income. Turning to our end markets, demand remained pressured through the first quarter as affordability concerns, elevated interest rates, and cautious consumer sentiment continued to constrain activity across both new construction and repair and remodel markets. The ongoing conflict in the Middle East introduced an additional headwind to consumer confidence late in the quarter and further contributed to broader market volatility. In new construction, U.S. single-family new construction was down mid- to high-single digits in the quarter, as weak consumer sentiment and elevated mortgage rates continued to weigh on buyer activity. To stimulate sales, builders sustained elevated incentive and rate buy-down programs. The market also continued to work through a reset in the spec and quick-move-in inventory cycle, with completed spec inventory down meaningfully year over year. Adding to these headwinds, housing starts outpaced completions on a seasonally adjusted basis for the first time since 2024. This dynamic creates an outsized near-term impact on our business, as cabinets are typically purchased later in the construction cycle closer to completion. Against this backdrop, MasterBrand, Inc.'s results largely track broader market trends while outperforming on a completions basis. Looking ahead, we expect new construction demand to remain under pressure as mortgage rates stay elevated and affordability challenges persist. In repair and remodel, demand remained soft through the first quarter, as low existing home turnover and weak consumer confidence continued to suppress larger discretionary remodel activity. Consumer sentiment toward large household purchases fell to 40-year lows during the quarter, and while rising home prices have supported homeowner equity, this has not yet translated into meaningful remodel spending. Housing turnover remains structurally constrained as well, driven in part by the significant share of homeowners locked into sub-4% mortgages, limiting the remodel activity that typically accompanies a home sale. Where there is remodel activity, we continue to observe trade-down behavior across our portfolio, with consumers gravitating toward lower-priced options. Reflecting this environment, our R&R business declined mid-single digits, consistent with the broader market. Looking ahead, we expect consumer sentiment to remain the primary driver of R&R demand, and affordability constraints and low housing turnover to remain the primary headwinds. In Canada, first-quarter conditions remained challenging, mirroring the trends in the U.S. Our Canadian business declined low single digits, consistent with the broader market. With the Bank of Canada holding rates steady, we expect these dynamics to continue weighing on the market through 2026. Stepping back, we continue to view 2026 as a transitional year, with end-market demand softness persisting across both new construction and repair and remodel. Affordability pressures, low consumer confidence, and the complex and evolving trade environment remain primary headwinds. The Federal Reserve is expected to hold rates steady through 2026 amid persistent inflation concerns, limiting the rate relief that would foster a meaningful improvement in housing activity. Additionally, the ongoing conflict in the Middle East introduces further layers of consumer uncertainty and outlook volatility that are difficult to size at this stage. While the near-term outlook remains challenging, we remain confident in the underlying long-term fundamentals that we believe will ultimately drive a recovery across our end markets. The approximately 3 million homes underbuilt, the millennial generation entering prime home-buying years, an aging housing stock primed for remodel activity, and rising home equity levels all support our expectation that pent-up demand remains intact. We continue to manage the business responsibly through this period, and while we do not expect the market to begin to recover until 2027, we are focused on ensuring MasterBrand, Inc. is well positioned to capitalize when conditions do improve. Turning to the trade environment, since our last call, the trade landscape has continued to evolve. Following the Supreme Court's ruling that invalidated tariffs imposed under the International Emergency Economic Powers Act, a 10% global tariff was implemented, which effectively returns us to a similar tariff environment as under the reciprocal tariff regime. This tariff is time-limited and is set to expire in late July, at which point we anticipate further changes to the tariff landscape. While wood and wood product tariffs remain the primary driver of our overall tariff exposure, tariffs continue to stack across categories, and the broader environment remains highly volatile and fluid. We are actively monitoring further developments and remain prepared to adjust our mitigation strategy as the landscape continues to evolve. In the first quarter, gross tariff costs were approximately $25 million, and I am pleased to share that our teams executed exceptionally well against these headwinds, delivering mitigation efforts that exceeded our expectations for the quarter. This outperformance was driven primarily by the speed and effectiveness of our supply chain actions, including sourcing flexibility initiatives and supplier engagement efforts that progressed ahead of schedule. While supply chain actions were the primary driver of our first-quarter mitigation performance, pricing remains an important and necessary component of our overall mitigation strategy, and we will continue to lean on both levers as we move through the year. We continue to monitor the potential indirect impact of tariffs on consumer demand and housing affordability, which remain inherently difficult to size. Operationally, our teams navigated a challenging first quarter, managing through demand volatility while working to maintain service levels across our network. We took further actions to align our cost structure with current demand conditions, including targeted line and shift adjustments and workforce actions across our manufacturing network, as well as a facility closure consistent with our ongoing Supreme integration efforts. On the Supreme integration, we remain on track to achieve our target of $28 million in annual run-rate cost synergies by year three post-close. We continue to identify additional opportunities to expand the benefits of the merger over time as end markets recover. During the first quarter, we also fully executed our broader $30 million cost savings initiative, with benefits expected to phase in over the remainder of the year. Our continuous improvement efforts delivered strong results in the quarter, with notable contributions across our manufacturing network and standout performance from several of our key facilities. Our teams continue to make progress on core efficiency gains using daily management practices, standard work processes, and operating discipline. These efforts contributed meaningfully to our financial performance in the quarter, offsetting material, personnel, and utility inflation. We are encouraged by the impact of our continuous improvement system, and we remain confident in its ability to drive further gains throughout the year. Turning to our pending merger with American Woodmark, our teams continue to make meaningful progress on integration planning and readiness, ensuring we are well positioned to move quickly and capture value following close while maintaining the customer service levels and operational continuity our customers expect. We continue to expect approximately $90 million in annual run-rate cost synergies by the end of year three post-close, based on the assumptions underlying our analysis at the time of announcement. Following close, we plan to assess these estimates in the context of the current operating environment and provide updated guidance as appropriate. We remain confident in the strategic and financial merits of the merger and are progressing through the regulatory review process. As disclosed in our 8-Ks filed on April 22, we now expect the transaction to close in 2026. Finally, turning to capital allocation, we remain disciplined in our approach to capital deployment, prioritizing investments that support our operational execution, integration activities, and long-term value creation. Capital expenditures in the quarter were in line with our expectations, and our balance sheet and liquidity position remained healthy. We expect our leverage ratio to remain elevated in the near term, primarily reflecting lower trailing twelve-month adjusted EBITDA and the current demand environment. Andrea H. Simon will provide additional details in her remarks. In closing, the first quarter unfolded largely as we expected: a challenging environment defined by persistent demand softness, a complex trade landscape, and cautious consumer sentiment. While these conditions are not without difficulty, I am proud of the way our teams have responded—executing our mitigation strategy ahead of schedule, advancing our cost savings initiatives, and maintaining focus on the operational and strategic priorities that will position MasterBrand, Inc. for the recovery ahead. With a clear line of sight to the long-term drivers of demand across our end markets, we remain confident the actions we are taking today are building a stronger, more resilient MasterBrand, Inc. I will now turn the call over to Andrea H. Simon for a detailed review of our financial results and outlook. Andrea H. Simon: Thanks, Dave, and good afternoon, everyone. I will start with a review of our first quarter financial results. Then I will share more details on our guidance for 2026 and provide some thoughts on the full year. As a reminder, we provide formal guidance on a quarterly basis. Any commentary we make about the full year reflects our current expectations and assumptions and is directional in nature rather than formal guidance. Now turning to our first quarter results, net sales were $618 million, a 6.4% decrease compared to $660.3 million in the same period last year, reflecting continued softness across our addressable market and a slower pace of housing completions. Anticipated flow-through of prior pricing was outweighed by unfavorable channel and product mix. Gross profit was $156.6 million compared to $202.2 million in the same period last year. Gross profit margin was 25.3%, down 530 basis points year over year, primarily reflecting lower volume and the related unfavorable fixed cost leverage and unfavorable product mix. Material, personnel, fuel, and utility inflation combined with the impact of tariffs contributed to overall margin pressure. These headwinds were partially offset by continuous improvement initiatives and targeted tariff mitigation actions. As Dave mentioned, gross tariff exposure in the quarter was approximately $25 million. Our mitigation efforts performed better than we initially anticipated, driven by the timing and effectiveness of operational actions taken across the business—a reflection of the strong execution from our teams. While we are pleased with this progress, tariff costs continue to flow through the business, and we have more work to do, particularly as pricing actions remain a necessary and important component of our go-forward mitigation strategy. The more pronounced headwinds in the quarter came from product mix and continued trade-down activity across certain categories versus historical norms, which reflect broader market conditions. Taken together, these factors have created a challenging operating environment, but we believe we are managing through it thoughtfully. SG&A expenses totaled $155.9 million in the first quarter compared to $154 million in the same period last year, with a year-over-year increase primarily driven by acquisition-related costs associated with our pending merger with American Woodmark and higher outbound freight expenses reflecting rising fuel costs. Importantly, excluding acquisition-related costs, SG&A decreased year over year. As Dave mentioned, we took a number of structural SG&A cost reduction actions during the quarter. While it takes time for the impact of these measures to fully flow through our results, we expect our SG&A-to-net sales ratio, excluding deal and restructuring costs, to improve in 2026 as these benefits phase in. Interest expense declined to $18.4 million from $19.4 million in the same period last year as we continued to pay down our debt over the last twelve months. Net loss was $15.4 million in the first quarter compared to net income of $13.3 million in the same period last year. Net income margin was negative 2.5% compared to positive 2% in the prior year, reflecting lower gross profit and higher deal-related SG&A expenses, partially offset by the initial benefits of cost actions taken in the quarter. Adjusted EBITDA was $28 million compared to $67.1 million in the prior-year period. Adjusted EBITDA margin was 4.5%, a decline of 570 basis points year over year, primarily due to lower gross margins, partially offset by reduced SG&A expenses, excluding deal-related costs, reflecting the cost actions implemented during the quarter. Diluted loss per share was $0.12 in the first quarter based on 127.5 million diluted shares outstanding. This compares to earnings per share of $0.10 in 2025, which was based on 130.7 million diluted shares outstanding. Adjusted diluted earnings per share were $0.60 in the current quarter compared to adjusted earnings per share of $0.18 in the prior-year period. Turning to the balance sheet, we ended the quarter with $138.4 million of cash on hand and $332.3 million of liquidity available under our revolving credit facility. Net debt at the end of the first quarter was $946.5 million, resulting in a net debt to adjusted EBITDA leverage ratio of 3.7 times. While net debt remained approximately flat year over year, our leverage ratio reflects the impact of lower trailing twelve-month adjusted EBITDA in this challenging demand environment. During the quarter, we proactively amended our existing credit agreement to provide additional flexibility related to our leverage and interest coverage covenants as we navigate the current environment and work toward the planned closing of the American Woodmark transaction. We continue to prioritize debt reduction with available cash, consistent with our track record. Net cash used in operating activities was $133 million for 2026 compared to $31.4 million in 2025, driven by lower net income, less favorable movements in working capital, and an increase in our income tax receivable. Capital expenditures for the first quarter were $13.2 million compared to $9.8 million in 2025, in line with our expectations. As is typical for our first quarter, free cash flow reflected seasonal working capital outflows of $146.2 million compared to outflows of $41.2 million in the same period last year. The year-over-year variance was primarily driven by lower net income, less favorable working capital movements due to timing, and an increase in our income tax receivable. We did not repurchase any shares during the quarter. Our merger agreement with American Woodmark restricts share repurchase activity until the transaction closes. Turning to our outlook, our second-quarter outlook reflects the current uncertainty of the demand environment driven by ongoing affordability concerns, recent geopolitical tensions, and the uncertain trade environment. The outlook incorporates tariffs currently in effect but does not reflect potential implications from other proposed or future trade policy changes. Further, our outlook does not reflect any anticipated financial benefits from the pending merger with American Woodmark, nor does it include expected transaction or integration-related costs. For the second quarter, our end markets are expected to be down mid- to high-single digits year over year. Despite the market backdrop, we expect a meaningful sequential performance improvement in net sales versus the first quarter, driven by several factors that give us confidence in the outlook. Net sales are expected to benefit from normal seasonal volume uplift coupled with an anticipated modest improvement in product mix, in addition to the further flow-through from previously implemented pricing actions, including tariff-related pricing. Taken together, these dynamics are expected to position us broadly in line with our end markets on a year-over-year basis in the second quarter. Against that backdrop, we expect second-quarter 2026 net sales to be down mid- to high-single digits versus the prior year. As I mentioned, to help manage near-term pressure on profitability, we took decisive action on our $30 million cost reduction to align our cost structure with current demand levels. We completed key implementation steps in the first quarter and expect the full benefit will phase in over the course of 2026. We believe these steps, in combination with our tariff mitigation strategy, will help offset margin pressures, preserve liquidity, and position MasterBrand, Inc. to remain resilient through this period of elevated uncertainty. Given these considerations, we expect second-quarter adjusted EBITDA to be in the range of $51 million to $61 million, representing an adjusted EBITDA margin of 7.8% to 8.8%. We expect second-quarter adjusted diluted earnings per share of $0.03 to $0.13. The wider adjusted diluted earnings per share guidance range for the second quarter reflects a higher-than-normal degree of uncertainty due to potential variability in the effective tax rate. Against low pretax income, the impact of non-deal-related expenses relating to the pending merger with American Woodmark, as well as other potential discrete tax items, is amplified. As a result, the actual effective tax rate and the adjusted diluted earnings per share may differ materially from the guidance provided. Looking at the full year, we continue to expect our addressable market in 2026 to be down mid-single digits year over year with continued variability across end markets. We continue to expect decremental margins to remain elevated through 2026, driven by year-over-year volume declines, mix, and the timing of tariff mitigation. We anticipate that our decrementals will improve in the second half of the year as our tariff mitigation and cost rationalization actions phase in further. For the full year, we also continue to expect interest expense to be flat to down as we continue to pay down our outstanding debt. Our effective tax rate is expected to be elevated and variable relative to the prior year, primarily reflecting the previously mentioned impact of non-deductible deal-related expenses relating to the pending merger with American Woodmark. Additionally, we continue to expect free cash flow for 2026 to be in excess of net income for the year. Finally, despite recent changes and based on the trade policies currently in effect, we continue to estimate our unmitigated gross tariff exposure for the full year at approximately 5% to 6% of 2026 net sales. Additionally, we continue to expect to offset 100% of tariff dollar costs on a run-rate basis exiting 2026 through our mitigation efforts, which will take time to fully materialize. We will continue to monitor the evolving trade environment while executing our comprehensive mitigation strategy and providing quarterly updates as conditions evolve. In closing, while near-term conditions remain challenging—the industry continues to navigate an extended period of softer demand and a complicated tariff environment—we are managing the business with discipline and purpose. We are executing against our cost reduction and mitigation initiatives, maintaining financial flexibility, and making meaningful progress on the integration planning work that is designed to allow us to move quickly following the close of the pending American Woodmark transaction. These are the right priorities for this moment, and we believe the actions we are taking today are building a more resilient and capable MasterBrand, Inc. Now I would like to turn the call back to Dave. R. David Banyard: Thanks, Andy. While the first quarter brought its share of challenges, our confidence in the long-term outlook for our business remains unchanged. Affordability pressures, cautious consumer sentiment, and volatility in the trade environment are shaping near-term outcomes, but they do not change the underlying demand drivers that we believe will fuel a meaningful recovery. Over time, we expect macroeconomic and trade conditions to normalize and demand to recover, with the broader market beginning to improve in 2027. What we are navigating today is a direct reflection of the current market environment, not of our operating model or the underlying strength of the business. Our priorities are clear, and our strategy is built for exactly these kinds of cycles—designed to carry us through periods of uncertainty and position us to win when conditions improve. We are executing our mitigation strategies, progressing toward the close of our pending merger with American Woodmark, and managing the business with the discipline and accountability that defines the MasterBrand, Inc. way. With our strong portfolio, resilient operating model, and a team that has demonstrated its ability to execute through adversity, we believe we are well positioned to capitalize on the eventual market recovery and deliver long-term value for our shareholders. We will now open the call for questions. Operator: We will now be conducting a question and answer session. You may press 2 if you would like to remove your question from the queue before pressing the star keys. Our first question is from McClaran Thomas Hayes with Zelman & Associates. Please proceed with your question. McClaran Thomas Hayes: Hey, good evening, guys. It looks like your outlook for the market in the second quarter is similar to the environment you saw in the first quarter—down mid- to high-single digits. But rates are a bit higher; it seems like there is more uncertainty now than there was a few months ago. Does that kind of market outlook tell us that, at this point, you have not necessarily seen any impact to your consumer, whether that is in order trends or foot traffic patterns? And then on pricing, can you help give us some more detail on how pricing trended in the first quarter relative to the fourth quarter? Did it accelerate or stay in a similar range? Also, do you anticipate needing additional pricing, given some of the cost inflation we have seen over the past few months that I imagine might be impacting paints and stains, at a minimum, in your business? R. David Banyard: I think our outlook is a little bit tilted down. We were saying mid- to high-single digits down; it is more of a weight on new construction than R&R. R&R is down, so it is hard to tell over a long period of time how far down is down, but it feels steady in this current mode. New construction has been very choppy. The March starts number was a little higher than we expected, which is good, but that market with the reset they are doing of eliminating spec homes makes our business a bit more choppy. We are going into it with that in mind, and the spring selling season has generally shaped up how we thought it would. It is reflected in our Q1. In terms of a material difference in behavior over the last month or two, we have not necessarily seen that. It is not getting better; it is just moving the way it was prior to that. On pricing, the bigger impact is directly on fuel and logistics, but there is pressure in a number of different spots. We have been executing on our plan for pricing throughout the year. As we have highlighted plenty of times in the past, it takes time for that price to get into the market, so we are continuing to execute on that. We are looking at other options with fuel. Obviously, that is the one that everybody sees every day, and it has come up significantly over the past month. We are continuing to look at that and using the mechanisms that we have—the typical mechanism you would have for something like that that is near-term volatile—and we will monitor how that plays out over the coming months with the situation in the Middle East. Operator: Our next question is from Garik Shmois with Loop Capital Markets. Please proceed with your question. Garik Shmois: Hi, thanks. Wondering if you could speak to your view on product mix improving as you go into the second quarter. I would love to get a little bit more color on that. And then my follow-up is on incremental margins. You mentioned they are expected to improve in the second half of the year. Should we think about incrementals improving related to a sequential improvement quarter on quarter in the second half of the year, or should we think about incrementals on a year-on-year basis? Any more detail on what kind of level of improvement on incrementals is possible? R. David Banyard: We are continuing to see the general trade-down behavior. When you go into the spring selling season with more volume, you tend to see a slightly better mix in all channels. That is what is driving that. Generally speaking, the overall market, on a year-over-year basis, will continue to be in a trade-down mode, which again offsets any benefit that we are getting from price to some extent. Price/mix has been a challenge for us, and we are working on how to upsell more. Some of those efforts we are going to see in the second quarter, but the consumer is under pressure, and you have to meet them where they are. With higher volume, we tend to see a slightly better mix, and that is what we are anticipating. On incrementals, we are not really giving full-year guidance at the moment, Garik, but when we talk about improvement, we are talking year over year. You are seeing sequential improvement from Q1 to Q2, which is normal seasonality. Volume is the issue we have. When you go from lower volume in Q1 into higher volume in Q2, you see pretty good flow-through, and that is the challenge we face on a year-over-year basis throughout the year. Because of the mitigation on tariffs as we go through the year, we will see better decrementals. We see the market being down for the full year, so I would anticipate revenue to be down through the year, but we expect those decrementals on a year-over-year basis, quarter by quarter, to improve. Operator: If you would like to ask a question, please press 1 on your telephone keypad. Our next question is from Steven Ramsey with Thompson Research Group. Please proceed with your question. Steven Ramsey: Hi, good evening. Thanks for taking my questions. I wanted to hear a bit more on the pricing actions that you are taking in response to tariffs and rising fuel costs. First, do you feel like the pricing that you are taking and that you are seeing from competitors is near parity with one another, or is anyone using this time to maybe take less price to gain some share? And then, connected to this, on price actions on fuel, you have not taken any so far, so just to clarify, the margin guide for the second quarter does not include that you might take actions for rising fuel costs. Okay. That is helpful. And then on the gross tariff cost—$25 million in the first quarter, about 4% of sales and a little bit lower than the full-year outlook for the gross tariff cost as a percentage of sales—do you expect that you get into that 5% to 6% zone in the second quarter and it sustains? I know there are a lot of moving parts, but it is definitely good to see a little bit better to start the year. R. David Banyard: I will answer the last part first, and that is incorrect—we have taken some action already on rising fuel costs. For competitive reasons, I would rather not go into the details of how we do that, but suffice to say, we have short-term mechanisms that we use for volatile commodity inputs like fuel. In terms of the market, it is a very competitive market. You have to meet the consumer where they are, and that involves a number of different aspects of what you are trying to bring to the consumer. That is why you see a lot of trade-down in our mix, because we have a lot of different alternatives we can bring to the consumer and customer. It is more competitive now than it has been. The market is still very fragmented, and we are leaning into that, but we also understand the cost burden that we are facing, so it is a dual approach. On gross tariff cost, it is a combination of things. Part of mitigating tariffs is coming up with ways to not have to pay them, and that is part of it. The mix of our portfolio is pretty broad, and there are different impacts from tariffs. I would not necessarily look at the first-quarter percentage as the run rate moving forward; it is why we reiterated that it is 5% to 6%, because that is what we think it will be. Also, the tariffs have changed slightly. We want to make sure the changes are understood to not be material in terms of the different impact to our P&L. Lower volume in Q1 also yields a lower dollar tariff number as part of that. Operator: This now concludes our question and answer session. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines and have a wonderful day.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Harley-Davidson 2026 First Quarter Investor and Analyst Conference Call. Please be advised that today's conference call is being recorded. I would now like to hand the call over to Shawn Collins. Thank you. Please go ahead. Shawn Collins: Thank you. Good morning. This is Shawn Collins, the Director of Investor Relations at Harley-Davidson. You can access the slides supporting today's call on the Internet at the Harley-Davidson Investor Relations website. As you might expect, our comments will include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters we have noted in today's earnings release and in our latest filings with the SEC. Joining me for this morning's call are Harley-Davidson Chief Executive Officer, Artie Starrs; and Chief Financial and Commercial Officer, Jonathan Root. With that, let me turn it over to Harley-Davidson CEO, Artie Starrs. Arthur Starrs: Thank you, Shawn, and good morning, everyone, and thank you for joining us today for our Q1 2026 financial results as well as an introduction to our new strategic plan, which we're calling "Back to the Bricks". I'll begin with an overview of our Q1 performance. Jonathan will then provide additional financial commentary before we turn to our strategy. Before I get into it, I'd like to take a moment to acknowledge our deeply committed and passionate Harley-Davidson employees who work tirelessly to bring Harley-Davidson alive across the world. Thank you, Team HD. Starting with retail sales, we're pleased with our performance this quarter. North America delivered a 14% increase versus the prior year, contributing to global retail sales growth of 8% in what remains a challenging consumer environment. These results reflect the impact of the actions we've taken to drive demand and improve execution. As noted on the Q4 earnings call, dealer health and inventory levels remain a key focus for the company. During the quarter, we reduced global inventory by 22% year-over-year as we continued to prioritize dealer inventory sell-through and aligning wholesale shipments with retail demand. We'll share more detail on this in our strategy discussion. Strengthening dealer relationships has also remained a priority. We recognize the critical role our dealer network plays in the Harley-Davidson ecosystem, and we're encouraged by the renewed sense of partnership and momentum across the network. This will be an important driver as we move forward into our next chapter. During the quarter, we also formally reopened our Juneau Avenue headquarters in Milwaukee, Wisconsin, affectionately referred to by our Harley-Davidson community as the Bricks, with our employees at headquarters returning to the office for the first time since 2020. Finally, we've been encouraged by the early reception to our new marketing platform, RIDE. I'll speak more about the brand platform and the value we believe it will bring as part of our strategy presentation. With that, I'll turn it over to Jonathan. Jonathan Root: Thank you, Artie, and good morning to all. I plan to start on Page 4 of the presentation, where I will briefly summarize the financial results for the first quarter. Subsequently, I will go into further detail on each business segment. Let me start with our consolidated financial results for the first quarter of 2026. Consolidated revenue in the first quarter was down 12%, driven primarily by HDFS revenue being down 54% as it moved into a new capital-light model after the closing of the HDFS transaction, where we sold a significant part of the retail loan book and agreed to a forward flow in which we expect to sell approximately 2/3 of future originations. Consolidated operating income in the first quarter came in at $23 million compared to operating income of $160 million in Q1 of 2025. This was driven by a significant year-over-year decline in operating income at both HDMC and HDFS as we expected. The operating loss at LiveWire was $18 million, which was in line with our expectations and $2 million favorable to a year ago. In Q1, earnings per share was $0.22, which compares to $1.07 in Q1 of 2025. Now turning to Page 5 and HDMC retail performance. In Q1, North American retail sales of new motorcycles were up 14% versus prior year with approximately 24,000 motorcycles sold. In Q1, retail sales of new motorcycles outside of North America were down 4% versus prior year with approximately 10,000 motorcycles sold, resulting in Q1 global retail sales of new motorcycles being up 8% versus the prior year with a total of approximately 34,000 motorcycles retailed. While we are relatively pleased with the start to the year, particularly in the U.S., we remain mindful of the global consumer discretionary landscape, which remains uneven. We are aware that pricing continues to be on the top of customers' minds given the current global setup that includes inflationary pressures, interest rates that continue to run above recent historical lows and global geopolitical uncertainty. In North America, Q1 retail sales were up 14%, where U.S. retail sales were up 16% and Canada retail sales were down 8%. Results were driven by continued strength in our Touring and Trike models as consumers reacted well to our new 2026 motorcycle launch and targeted customer incentives. This translated into a significant market share gain with Harley-Davidson reaching 38% of the U.S. 601 CC+ market, up 2 percentage points year-over-year. Dealer inventory in North America declined 21% year-over-year, reflecting a more balanced setup as we enter the main riding season. In EMEA, Q1 retail sales posted a modest decline of 3%. In the quarter, performance reflected a subdued economic environment in Europe, although supported with early model year 2026 product momentum across the continent as evidenced by the quick sell-through of new units that began arriving later in Q1. The Rev Max platform continued to outperform the broader portfolio, led by Adventure Touring, which showed strong growth year-over-year. In addition, from a market share standpoint, we moved from 2% to 4% of share in the European market in Q1. In Asia Pacific, Q1 retail sales declined by 9%. In the quarter, we experienced modest declines in the core portfolio, including Touring, Trike and Softail, reflecting broad-based pressure across Japan, Australia and China, partially offset by positive results in our noncore motorcycle portfolio with strength in Adventure Touring. In Latin America, Q1 retail sales delivered another strong quarter with retail up 21%, where both Brazil, our largest Latin American market and Mexico were up, while other Latin American countries were down modestly year-over-year. Touring and Trike were the standout categories in the market. Dealer inventory at the end of Q1 of '26 was down 22% versus the end of Q1 of '25. Specifically, North American dealer inventory was down 21% and dealer inventory outside of North America was down 23%. This has allowed Harley-Davidson dealers to start the upcoming 2026 riding season with a largely appropriate setup. In addition, the quality of dealer inventory is healthier today than 1 year ago as it is more current from a model year standpoint. At the end of Q1, North America dealer inventory was comprised of approximately 2/3 of current model year 2026 motorcycles. In comparison, in the prior year period, a little less than 1/2 of all dealer inventory was current model year. We expect this improvement in healthy dealer inventory to pay dividends in future periods and believe it sets Harley-Davidson and our dealers up for greater success. Before we get into revenue, let's conclude with some information on wholesale shipments. From a wholesale shipment perspective, in Q1 of 2026, we delivered approximately 37,300 units compared to 38,600 units in Q1 of 2025, which is down 3% year-over-year. As we are now beginning the prime riding season in North America, we have recently heard from dealers that they could benefit from more inventory with regard to particular places, models and trim levels. This is a good sign, and we expect to ship more units on a year-over-year basis in Q2 and Q4, while running lower in Q3 in comparison to the prior year period. We expect this will get us to a more even shipment cadence across the quarters in comparison to what we have delivered in recent years. Now turning to Page 6 and HDMC revenue performance. In Q1, HDMC revenue decreased by 2%, coming in at $1.1 billion. We point out that from a business line standpoint, motorcycles came in at $836 million, D&A plus apparel came in at $200 million and licensing and other came in at $20 million. The drivers of overall revenue at HDMC included lower volume or shipments and lower net pricing and incentive spend. These were partially offset by favorable foreign currency. Now turning to Page 7 and HDMC margin performance. In Q1, HDMC gross profit came in at 25.3%, which compares to 29.1% in the prior year. The year-over-year decrease was driven by the unfavorable impacts of increased tariff costs of $45 million in Q1, which will be covered in more detail on the next slide, net pricing and incentive spend due to effective sell-through of prior model year dealer inventory. Product mix, lower volumes and higher-than-expected supply management costs as we work through a unique supplier situation. These were partially offset by the positive effects of tariff recoveries, settlement from prior years and favorable foreign exchange. In Q1, operating expenses totaled $248 million, which was $49 million higher compared to prior year. This falls into 2 broad buckets. The first piece is a restructuring expense of $15 million, driven by costs incurred related to strategic changes, including the company's decision to eliminate certain roles, resulting in onetime employee termination benefits and other restructuring charges. The second piece consists of $34 million of additional costs in the quarter, specifically due to higher warranty spend due to select product recalls, select people costs primarily related to executive team changes on a year-over-year basis, increased marketing spend as the marketing development fund matures and limited other discrete expenses to operate the business. In Q1, HDMC had operating income of $19 million, which compares to operating income of $116 million in the prior year period. Turning to Slide 8. In 2026, the overall global tariff regulatory environment continues to evolve. There are a number of factors at play in this space, including the potential for increased tariff recoveries, evolution in the application of IEEPA Section 122 and updates to Section 232 steel and aluminum tariffs. In Q1, we saw the most significant year-over-year impact in tariffs we expect to experience this year. This is a result of the increased tariff levels, which were initially put in place beginning in Q2 of 2025. In Q1 of ' 26, the cost of new or increased tariffs was $45 million. As tariff policy changes, there are lags associated with the various tariff levels as these adjustments work their way through our parts inventory imported prior to the current Section 232 pronouncement. We continue to pursue mitigation actions where possible and pursue tariff recoveries when applicable. We note that recent U.S. administration tariff regulation announced in early April included an exemption on certain motorcycles and for parts and accessories for the use in the manufacturing of motorcycles. We would note that Harley-Davidson is a business very centered in and around the United States. 3 of our 4 manufacturing centers are U.S.-based and 100% of our U.S. core product is manufactured in the U.S. This change will serve in helping mitigate the impact to tariffs to Harley-Davidson and enable us to strengthen our commitment to U.S. manufacturing. At this point in time, we expect the cost of increased tariffs to be in a range of $75 million to $90 million for the full year 2026, which is favorable to what we guided to in our prior quarter. From a cadence perspective, our expected tariff amount will decrease consecutively as we work our way across the remaining quarters in 2026. Turning to HDFS on Page 9. At Harley-Davidson Financial Services, Q1 revenue came in at $112 million, a decrease of 54%, driven by lower interest income due to the decline in retail receivables related to the sale of loan assets as part of the new HDFS transaction. Other income within HDFS revenue was favorable year-over-year due primarily to new servicing fees, investment income and new gains on third-party loan sales. HDFS operating income was $22 million, representing an operating income margin of 19.9%. On the expense side, interest expense and the provision for credit loss expense were both significantly lower, which was due to the decreased size of the retail loan portfolio and related debt on a year-over-year basis and as expected, with the change in strategy associated with the HDFS transaction. The HDFS team continues to manage expenses prudently with operating expenses decreasing by $1 million versus prior year. Turning to Page 10. In Q1, HDFS' annualized retail credit loss ratio on managed loans was 3.6%, which compares to 3.8% in the year ago period. We are pleased with HDFS loan origination activities as total retail loan originations in Q1 were up 14%, coming in at $671 million in Q1. Total gross financing receivables were $2.5 billion at the end of Q1, where retail receivables were $1.3 billion and commercial receivables were $1.2 billion. Now turning to Slide 11 for the LiveWire segment. For the first quarter of 2026, LiveWire revenue increased 87% over prior year, driven by increases in electric motorcycle and basic brand electric balance bike units. Consolidated operating loss decreased by 11%, resulting from improved gross profit and lower selling, administrative and engineering expenses. In turn, this drove an improvement of over 25% in net cash used by operating activities in Q1 of '26 compared to Q1 of '25. For 2026, LiveWire's focus is heavily geared around the imminent launch of its S4 Honcho products, in particular, continued network expansion, cost savings and improvements and product innovation and development focused on products that will be profitable and positive drivers of cash flow. Now turning to Slide 12, wrapping up with consolidated Harley-Davidson, Inc. financial results. We had net cash use of $228 million from operating activities in Q1, which compares to $142 million of operating cash in the prior year period. Operating cash flow was lower than the prior year due to reduced cash inflows at HDMC on lower wholesale shipments. Also at HDFS, the operating cash flow decreased due to reduced interest income and due to new originations of retail finance receivables under the forward flow arrangement that were classified as held for sale, which is classified as an operating activity under U.S. GAAP. As a result, the originations to be sold to our strategic partners or outflows reduced cash flow from operations as there were no comparative retail finance receivable originations classified as held for sale in the first quarter of the prior year. This was partially offset by the inflows from the proceeds from the sale of retail finance receivables classified as held for sale. This will remain a distinct year-over-year item as we move through 2026 as a result of the HDFS transaction, which concluded throughout the second half of 2025. Total cash and cash equivalents ended Q1 of 2026 at $1.8 billion compared to $1.9 billion a year ago. As part of our share buyback strategy, in Q4 of 2025, we entered into an accelerated share repurchase agreement to repurchase $200 million of shares of the company's common stock. As part of the ASR agreement, we received $160 million or 80% of the notional worth of shares or 6.3 million shares delivered to us before December 31, 2025, with the remainder expected to be delivered in early 2026. On February 12, 2026, our ASR was concluded, and we received an additional 3.1 million shares on February 13, 2026. These shares had a value of $64.7 million, considering the share price during the ASR's performance period. Beyond the ASR, the company also repurchased another 3.5 million shares on a discretionary basis for $63.3 million in the first quarter of 2026. Therefore, in Q1, we repurchased a total of 6.6 million shares worth $128 million on a discretionary basis. We note that since our Q2 of 2024 earnings announcement, where we also announced a plan to repurchase $1 billion worth of our shares through 2026 that we have repurchased a total of 26.8 million shares. That is a total value of $726 million of Harley-Davidson shares purchased. We are pleased with the performance and have decided to conclude reporting on this program as we look forward to aligning our capital allocation approach with the updated strategy that Artie and I will walk through shortly. Share buybacks remain an important part of our capital allocation strategy, and you will hear more on this, including a refreshed and updated approach to capital return to shareholders. As we enter the main riding season, we remain pleased with our dealer inventory levels and leading market share position in the U.S. new model year '26 motorcycle launch, including the new limited touring motorcycles and the all-new redesigned Trike models. We are also pleased with the reception to a number of new, more affordable motorcycles, which have a focus on critical price points to help stoke demand. While we are not changing our financial guidance, we would note that our optimism on the year has increased. This is due in large part to our retail results in North America, and we are also pleased with the early action of our cost reduction work. For the full year 2026, the company reaffirms its guidance and continues to expect at HDMC retail units of 130,000 to 135,000 and wholesale units of 130,000 to 135,000. We believe that global dealer inventory levels are healthy, and therefore, we expect retail and wholesale to have a largely one-to-one relationship in 2026. In line with my earlier comments versus prior year, we expect shipments to be higher in Q2, relatively flat in Q3 and then up again in Q4. At the same time, we continue to expect production units at HDMC to be lower than wholesale units shipped in 2026 as we work to prudently manage overall company inventory levels. For 2026, we expect this will have a deleverage impact, which will put pressure on operating leverage and operating margin, but we expect to come into alignment by next year. In addition, we still expect to face a greater overall cost for incremental tariffs in 2026 compared to 2025 and which we covered in detail previously. As a reminder, in full year 2025, we incurred a cost of $67 million in new or increased tariffs. And in 2026, we forecast a cost of between $75 million to $90 million of new or increased tariffs based upon current tariff levels and versus the '24 baseline. This is an update to the prior range we provided of $75 million to $105 million. At HDMC, we expect operating income of positive $10 million to a loss of $40 million. At HDFS, we expect operating income of $45 million to $60 million. As a reminder, the new business model at HDFS, given the HDFS transaction, where Harley-Davidson Financial Services now employs a capital-light derisked business model and has a significantly changed financial earnings profile relative to before the transaction. For LiveWire, we are forecasting an operating loss in the range of $70 million to $80 million. And with that, I'll turn it back to Artie to cover our strategic plan. Arthur Starrs: Now turning to our strategic plan for Harley-Davidson. On behalf of our Harley-Davidson community, Jonathan and I are excited to introduce our Back to the Bricks plan, designed to reignite brand enthusiasm with riders around the world while driving profitable growth for our dealers and shareholders. It is grounded in the work we've done since October. We've spent significant time assessing the business, engaging deeply with dealers and riders and most recently through a global roadshow where we connected directly with the majority of our dealer network and all of our global dealer advisory councils. The Back to the Bricks plan will restore Harley-Davidson and position the company for growth. First, we are intensely focused on leveraging Harley-Davidson's competitive advantages, specifically brand, diversified revenue channels and most notably, P&A and financing products and our dealer network. Second, we are leaning into a true win-win model with our dealer network. Our dealers are not only our retail channel, but the frontline builders of our rider community. They are the true source of strength and a competitive advantage. When our dealers win, the enterprise wins and so do our shareholders. Third, we have already taken immediate actions to recapture share by better serving the large and community of riders where Harley-Davidson has a clear right to win. Fourth, we're doing this from a position of strength and plan to leverage our balance sheet, bolstered by cost and restructuring actions to enable both investment in the business and returns to shareholders. We are executing against a clear path to strong and growing free cash flow and EBITDA margin. And lastly, we brought on some great leadership talent to support the business as we enter this new chapter for the company. Moving to Slide 3. There are really 3 things that define Harley-Davidson. First, we are a 123-year young brand that designs and manufactures the best motorcycles in the world, combining iconic design, precision engineering and a look, sound and feel that is unmistakably Harley-Davidson. Second, through our best-in-class dealer network, we serve a global community across segments we've helped define over decades. Our riders show up in powerful ways through HOG chapters, rallies, events and by giving back to their local communities. And third, maybe most importantly, is the culture of riding. Since starting at the company, I've spent time with riders and dealers at events, rallies and swap meets and what stands out is the emotional connection. Riders talk about their motorcycles, their rides and their community in deeply personal ways. For them, riding isn't just about getting somewhere. It's about the experience itself. The ride is the destination. Turning to Slide 4. We're in the midst of a bold restoration of the business to drive value for shareholders. What's clear is that our heritage remains a powerful advantage, not something to preserve, but something to build from. It starts with our portfolio. Taking a step back over the last several years, we leaned heavily into touring and electric. Going forward, we are shifting to a more rider-centric portfolio, one that is more accessible, more customizable and better aligned to the needs of the full spectrum of our riders. Touring will always remain our core. We're building clear pathways into the brand that support long-term touring growth while also addressing other riding occasions and styles. Importantly, we can do this using our existing platforms, moving from too many of too few to a more balanced lineup. We're also adopting an enterprise profitability model, recognizing that our success is directly tied to the success of our dealers. When dealers win, we win. By aligning Harley-Davidson and dealer economics, we can create more value for riders, stronger profitability for dealers and more dependable cash flow for shareholders. I'll come back to this in more detail shortly. Another key pillar is parts and accessories. Customization is at the heart of Harley-Davidson. It's how riders make each bike their own, what we often think of as freedom for the soul or more personally, freedom for your soul. We're reestablishing parts and accessories as a core growth driver, one where we have a clear right to win and in alignment with dealers as this is an important component of their profitability. We're also reinforcing motor clothes and apparel, growing from the core of the brand. On promotions, as inventory has normalized, we are shifting to a more targeted and disciplined approach, one that supports volume while protecting margins. An expanded portfolio will play an important role here as well. From an investment standpoint, we continue to see upside in existing platforms, particularly within touring, but our near-term focus is on executing better with the platforms we already have rather than introducing entirely new ones. By leveraging our existing platforms and powertrain to bring new motorcycles to market, we are operating with a more capital-efficient model. Finally, we've taken important steps to refocus our brand around our community as reflected in the launch of the RIDE marketing platform. Taken together, we believe these actions position us to revitalize the business by leaning into what has always made Harley-Davidson strong and executing with greater clarity and discipline. As you can see on Slide 5, we've experienced a decline in retail volumes, and that's had a direct and meaningful impact on both company and dealer performance. At the core of this is a loss of relevancy with riders, most notably with the exit of iconic motorcycles like the Sportster, which limited accessibility and contributed to lower volumes. Additionally, we are excited to introduce Sprint, the perfect entry for many to the Harley-Davidson brand. At the same time, as volumes declined, our cost base remained largely fixed, putting pressure on margins and driving a greater reliance on broad-based promotions, particularly on higher-priced motorcycles. And importantly, lower throughput has had a direct impact on our dealers, reducing traffic, compressing profitability and limiting the performance of key revenue streams like parts and accessories and service. All of this reinforces a critical point. Restoring profitable volume is central to improving overall performance. And that's exactly what our strategy is designed to address, making the brand more accessible through a combination of portfolio changes, more targeted pricing and promotions and improved operational execution. Moving to Slide 6. While recent performance has been impacted, the underlying market opportunity remains significant. We see meaningful white space in existing markets, areas where Harley-Davidson has strong legacy equity and a clear right to win. Across new motorcycles, used motorcycles, parts and accessories and apparel, there is share of wallet that we were capturing as recently as 2019 that we are no longer capturing today. That creates a very direct opportunity to regain market share and do so in segments where our brand is already strong. Importantly, this strategy is not about entering new categories where we lack a competitive advantage. It's about doubling down on the categories we know, where we have credibility, scale and deep rider connection. We believe this positions us to regain lost share while driving meaningful volume growth over time. Now turning to our strengths on Slide 7. The foundation of Harley-Davidson is its legacy, an unparalleled brand with unique American heritage as recognized recently by USA Today as part of their 50 iconic brands that shaped America Series, underpinned by a best-in-class dealer experience, deeply committed riders and craftsmanship that delivers something truly unique. When I first joined the company, those advantages were immediately clear. And as we've looked more closely at the data, they've only become more compelling. We are one of the most recognized and esteemed brands in the category, and in many ways, we help define it. Our dealer network is a true competitive advantage, consistently delivering a best-in-class customer experience and serving as the frontline of our brand. Our riders have an incredible affinity for Harley-Davidson. They don't just buy our products, they live our brand. It's a level of loyalty and engagement that is difficult to replicate. And all of this is anchored in superior craftsmanship and quality that continues to resonate strongly with our riders. Taken together, these strengths provide a powerful foundation as we execute our plan and move the business forward. Now turning to our strategic road map on Slide 8. Against the backdrop we've just discussed, we've developed a plan for the next several years that unfolds in 3 clear phases. First is the reset. This phase is already underway and focused on taking cost out, rightsizing dealer inventory, strengthening our dealer relationships and rolling out the ride marketing platform. We're making progress across all these areas, and today, we'll provide an update on that momentum. Second is the growth phase. Beginning next year, you'll see a more expanded and balanced portfolio designed around what riders want while leveraging the full life cycle of the motorcycle to unlock additional revenue streams. Parts and accessories will play a much larger role, both in dealerships and as a core revenue driver. At the same time, we're refining our promotional approach to be more targeted, driving traffic and volume while preserving profitability. And third is the acceleration of value creation. As the portfolio becomes more accessible and better aligned to needs of our full spectrum of riders, we see opportunity to deepen ridership engagement. This includes greater participation in the used motorcycle ecosystem as well as further driving adjacent areas like apparel and licensing. With the foundation established in the first 2 phases, we believe we are well positioned to drive more sustainable enterprise growth and wider economic enterprise benefits. Turning to Slide 9. What are we doing right now? We've already begun putting this plan into action, and we're encouraged by the early momentum. As part of Phase 1, our actions on cost and inventory have been swift and effective. We've moved quickly to reduce headcount and take cost out of cost of goods sales, creating room to reinvest in key growth areas like parts and accessories. As we've previously outlined, we expect to deliver at least $150 million in annual run rate cost savings that will impact 2027 and beyond versus 2025 levels. At the same time, we've made meaningful progress on inventory. Global retail inventory is now at a much healthier level, down significantly, 22% year-over-year. But we still see opportunity to improve assortment and allocation at the dealer level. Importantly, these actions are starting to translate into results. We're seeing sales momentum return with retail growth and market share gains, including an 8% increase in global retail sales in Q1 2026. Now turning to our dealers on Slide 10. The Harley-Davidson dealer network is a clear competitive advantage, and our strategy is intentionally designed to support and strengthen their profitability. I firmly believe this company will go only as far as our dealers take us. That's why dealer profitability is a central pillar of our plan. Since joining, I've spent a significant amount of time with dealers, along with the broader leadership team, listening and learning directly from them on the ground. Our focus is on earning their trust and ensuring they're confident and excited about the path forward. We've already taken action through inventory rightsizing, better alignment on promotions and structural improvements to dealer programs, and we're not done. There are additional actions ahead that we expect to further strengthen dealer economics. Our objective is clear, to materially improve dealer profitability over time, supporting a stronger, more stable network and enabling long-term growth. As shown on the slide, we are targeting a meaningful step-up in dealer profitability over the next several years. Moving to Slide 11. It's important to understand the role dealers play in the Harley-Davidson ecosystem. Dealer profitability is nonnegotiable and ultimately a win for shareholders. At the core, brick-and-mortar economics and frontline enthusiasm are directly linked. When our dealers are profitable, they can invest in their business, delivering a better rider experience at the point of interaction with our brand. Stronger dealer economics also reduced the need for discounting and OEM promotional support, helping preserve the premium positioning and long-term health of the brand. Dealers are not just our primary sales channel. They are a powerful marketing engine, building the brand in local communities at scale. When they are successful, we unlock the ability to invest more in rider growth through initiatives like Riding Academy, HOG engagement and events that deepen connection to the brand. And importantly, healthy dealer profitability attracts capital, bringing more investment into the network and supporting long-term rider-centric growth. Moving to Slide 12. I want to spend a moment on the lens through which we're now viewing growth and profitability. We've done significant work to better understand how we make money as one enterprise, Harley-Davidson and our dealers together. What's clear is that focusing solely on wholesale and retail motorcycle margins is an incomplete view. A motorcycle generates value over its entire life cycle across parts and accessories, service, finance and insurance and ultimately, the used market. And importantly, Harley-Davidson and our dealers participate in that value at different points in time across multiple revenue streams. So going forward, we're managing the business against this broader enterprise economic model. By increasing new motorcycle volumes, we not only drive profit at the point of sale, we also expand the base of motorcycles in the market, which fuels downstream revenue across all of these channels. We believe this will create a more stable, diversified and sustainable earnings profile over time. It also changes how we think about the portfolio. We intend to bring motorcycles to market in a way that supports the full enterprise profit model, not just the economics of an individual launch or motorcycle. We expect this to reduce pressure on any single product and lead to more balanced performance across cycles. And importantly, the portfolio changes we're making, particularly around accessibility and customization play directly into this model by supporting higher volumes and stronger life cycle value. Over time, we plan for this to become a compounding growth engine. The return of Sportster and the introduction of new models like Sprint are great examples of how this approach will create value across the system. We're really excited to announce that our iconic Harley-Davidson Sportster will be returning in 2027. This has been the most requested motorcycle from both our riders and our dealers, and we're bringing it back better than ever. Sportster is a perfect embodiment of Back to the Bricks, and it fits naturally within our enterprise economic model. For context, Sportster has historically been a middle-weight, highly customizable motorcycle with an air-cooled powertrain and accessible starting price point, making it an important entry to the Harley-Davidson brand. While it was discontinued in 2022, it has remained incredibly strong in the used market, often retaining value at or above original MSRP, which speaks to its enduring appeal. With its accessibility, we expect Sportster to drive higher volumes. And with its customization potential, we expect strong attachment to parts and accessories as riders personalize their motorcycles. Beyond the motorcycle itself, Sportster also creates opportunity across apparel, licensing and the broader rider ecosystem. Importantly, it demonstrates how our strategy generates value across the full life cycle from the initial sale to entry into the used market. Taken together, Sportster is a critical part of our plan to restore volume, strengthen our portfolio and drive long-term enterprise value. We look forward to sharing more specifics later this year. Additionally, we're excited to bring Sprint to market beginning in the back half of 2026. This lightweight, customizable and accessible motorcycle provides a great entry to the brand for many riders. We are excited to be returning to a space that we haven't been in since the 1960s, and we believe that the Sprint will provide a great starting point for riders to enter the brand as they progress through the portfolio. Over the coming periods, we will be providing more detail on how this aligns with our portfolio planning and lifetime value creation. Moving to Slide 15 and zooming out to a broader view of the portfolio, we are taking deliberate steps to realign the portfolio, making it more rider-centric and better positioned to replicate the value creation cycle we just discussed across more models. Over the past few years, pricing and portfolio decisions reduced accessibility for some riders, which contributed to lower volumes and ultimately pressure on profitability. We're addressing that directly. Going forward, you'll see a more balanced lineup across price points while still maintaining our premium positioning. We're also expanding the use of blank canvas motorcycles, which we know is a key differentiator for Harley-Davidson, giving riders more opportunity to personalize their motorcycles through genuine parts and accessories. These changes are informed by deep analysis of the used market, direct dealer engagement and what we've learned from recent promotional activity. Importantly, we see clear gaps in the portfolio that we can address efficiently without starting from scratch. We're leveraging our existing platforms in powertrain, where we see significant room for growth, allowing us to expand the lineup without incremental capital investment. Taken together, this positions us to deliver what riders want, improve accessibility and drive stronger volume and life cycle value across the portfolio. Now turning to parts and accessories on Slide 16. This is one of our most important revenue channels and a significant growth opportunity. We believe there is a potential to drive 20% to 30% sales growth over time. We also recognize that we've underinvested in this area in recent years. Customization is at the core of the Harley-Davidson experience and a key driver of dealer profitability. No two Harley-Davidson motorcycles on the road are the same, and that's exactly how riders want it. So we've laid out a clear road map to rebuild our leadership in parts and accessories, leveraging our dealer network and existing manufacturing and supply chain capabilities. That starts with expanding our assortment, including reinstating approximately 30% of SKUs that were previously eliminated. We're also refocusing on core categories where Harley-Davidson has historically been strong, like seats, exhaust, lighting, windshields and handle bars and pairing that with an increased emphasis on blank canvas motorcycles that are designed for personalization. Importantly, we're integrating parts and accessories into the motorcycle launch process, ensuring availability at launch, supported by HDFS financing and aligned dealer incentives. As we execute this, we expect stronger dealer performance, increased attachment rates and ultimately, both revenue growth and margin expansion over time. Turning to Slide 17. We're also refining our approach to promotions. Historically, our promotional activity has been broader and less targeted. More recently, we used promotions to help reset elevated dealer inventory, which, while necessary, put pressure on profitability. Now with inventory at healthier levels, we're shifting to a more disciplined and targeted approach, focused on driving traffic and conversion at a lower cost. An important enabler of this is our expanding portfolio, which allows for more value-based messaging across a broader range of products rather than relying on heavy discounting on a narrower mix. We're also strengthening our capabilities with recent hires who bring deep experience in performance marketing in automotive retail. And the launch of our marketing development fund in 2025 is a key step in better aligning scale with more effective localized dealer messaging. Together, these efforts are improving how we manage incentive spend, driving more predictable growth while recognizing that many riders don't require heavy promotion to convert. The result is a more efficient model, which we believe will support volume recovery while protecting margins. Now turning to our marketing approach on Slide 18. Last month, we launched our new brand platform, RIDE, which really brings everything together. It's built on a simple but powerful insight, joy and swagger. At its core, RIDE celebrates the experience of riding and most importantly, our riders themselves. They and their motorcycles are the stars of the show. This reflects a broader shift in how we show up as a brand. We're moving toward more authentic, rider-focused storytelling that reinforces the community and culture at the heart of Harley-Davidson. We're also reallocating our marketing investments, moving away from a heavier e-commerce spend and toward top-of-funnel brand-building efforts to drive awareness and engagement. You may have even seen us recently on Wheel of Fortune. At the same time, we're making better use of tools like the marketing development fund while upgrading our digital platforms and programs to support both global scale and local activation. And perhaps most importantly, the power of RIDE is that it gives us a single unified voice while still allowing flexibility for riders and dealers around the world to bring the brand to life in their own way. It connects all aspects of Harley-Davidson, from product to community to marketing under one cohesive platform. And as you can see on the slide, it creates a clear and flexible framework for how we bring the brand to life across riders, dealers and markets around the world. Over time, we expect this to drive stronger engagement, deeper relevance and ultimately, growth. Now I'll hand it over to Jonathan to take you through the financial section. Jonathan, over to you. Jonathan Root: Thanks, Artie. Now turning to our financials on Slide 21. All of the facets of the strategy we've just laid out support our financial growth trajectory over the next few years. We believe we have a clear path to achieving $350 million plus EBITDA in 2027. The path to get there is clear and execution-driven, anchored by roughly $150 million in fixed cost reduction, better alignment between wholesale and retail volumes, the full impact of Sportster and Sprint, targeted expansion in high-margin parts and accessories and more effective disciplined promotions. Beyond 2027, the story doesn't stop. We expect continued strong growth driven by further cost absorption, a broader P&A and motorcycle portfolio, incremental product improvements and smarter incentive execution. The bottom line is this is a structural step change in profitability with clear levers and meaningful upside ahead. Now on Slide 22, we'll take a closer look at how we get there. This bridge outlines the key initiatives that will drive EBITDA improvement. In the near term, the focus will be on cost reduction and operating leverage, which we see as the primary drivers of performance. With these actions already underway, we have a clear line of sight to achieving $350 million or more. Beyond 2027, drivers for continued growth will include, but not be limited to, improvements in motorcycle margins and volume, supported by growth in parts and accessories. Turning to our medium-term targets on Slide 23. We expect to return to sustainable growth across key metrics. We expect to achieve mid-single-digit retail unit growth over the medium term. As Artie discussed, this return to growth will be driven by the significant actions we are taking across our business. Furthermore, we expect the momentum in retail units and other enabling actions to drive mid-single-digit growth in P&A and A&L. Combined with the ongoing inventory rightsizing, we expect this return to growth to have a significant impact on dealer health. From a margin standpoint, we expect to drive significant improvement in gross margins approaching 30%, while operating expenses as a percentage of sales decreased to less than 20% from the 25% in 2025. Over the midterm, we expect CapEx to remain broadly in line with recent expenditure levels. In totality, we expect to deliver attractive top line growth and drive towards a 10% to 12% EBITDA margin over the medium term. These targets reflect a more balanced and resilient business model underpinned by the Back to Brick strategy. I'll now touch briefly on HDFS on Slide 24. We believe that the business remains a highly strategic asset. Following the transaction, we have transitioned to a more capital-light model while maintaining HDFS' role in supporting motorcycle sales and dealer financing. We recently held a call to discuss the HDFS business in greater detail, but at a high level, we expect HDFS to see improved returns while reducing capital intensity. We expect to continue to strengthen HDFS' leading position in powersports and intend to expand our high-value finance and insurance product suite with optimized offers supporting motorcycle sales. In connection with our enhanced P&A offerings, HDFS plans to leverage additional financing to drive P&A sales. Lastly, we are also better training dealers to maintain the best-in-class penetration rate of HDFS. With all this in mind, we are targeting $125 million to $150 million in operating income for the business by 2029. Turning to capital allocation on Slide 25. Our priorities remain consistent. We will reinvest in the business where we see opportunities to drive growth across the key initiatives of our strategy. We also remain committed to returning capital to our shareholders through share buybacks and dividends. Additionally, we remain open to opportunistic value-additive M&A. And with that, I'll hand it back to Artie. Arthur Starrs: Thank you, Jonathan. To conclude, Harley-Davidson is built on a strong foundation, an iconic brand, a deeply loyal rider base and a differentiated dealer network. We're excited about the path forward. Our dealers are energized, and we're seeing real enthusiasm from the rider community around Back to the Bricks. This strategy is intentionally grounded in our core strengths, and we're doubling down on what makes Harley-Davidson unique, especially our dealer network. Importantly, execution is already underway, and we're seeing early signs that our actions are delivering results. We're doing this from a position of strength with a solid financial foundation to support both investment in the business and returns to shareholders. And we have the right team in place, energized and equipped with the experience needed to deliver on this plan. We remain committed to working closely with our dealers every step of the way to create value for our riders and ultimately for our shareholders. Thank you for your time this morning. And with that, we'll take your questions. Operator: [Operator Instructions] We'll take our first question from today, and that is from the line of Robin Farley from UBS. Robin Farley: Great. Two questions, if I may. First is just wondering what medium term is, 2029 medium term, just to kind of put a finer point on thinking about the targets. And then the other question is a little bit trickier with tariffs. Some of the bridge to your 2027 EBITDA is from, I guess, lower tariffs lumped in with some other things. And so if you could just help us think about that what you're expecting, what's factored in, in terms of tariff refunds into that? And your full year '26 guide was unchanged, but tariffs seem a little better. So maybe there's an offset there. And then just -- I don't know if the manufacturing for Sprint, if there -- if you're assuming tariffs on that, that's going to be outside the U.S. and potentially tariffs. So I know that's a lot of tariffs balled up into one, but just whatever you want to address. Arthur Starrs: Great. Robin, thank you. It's Artie. I appreciate the questions. I'll take the first one, and then I'll let Jonathan handle the tariff specifics. When we say medium term, we mean 3 to 5 years. So hopefully, that helps. And on the tariff piece, Jonathan? Jonathan Root: Yes. So from a -- so thank you, Robin. From a tariff standpoint, I think when you look at our 2026 estimate, we obviously have a midpoint of $83 million. On that, if you look within the first quarter, we had $45 million in tariffs that were paid. That leaves $38 million, again, just using the midpoint for simplicity for the balance of the year. Our viewpoint is that, that tariff amount will consecutively decrease by quarter as we benefit from the current tariff structure that we laid out on our slides. So in effective Q2 as we got into April, there were some changes from an overall tariff philosophy perspective that were put out there. You see the benefits of those. Obviously, that sort of accrues over time. We think that, that sets us up for 2027. We're not providing '27 guidance at this point. But a 2027 that is arguably more attractive than where we are from a 2026 perspective. So you can infer and use some of your own judgment on where that lands. From a tariff refund perspective, there's obviously a tremendous number of companies, large and small, across the United States that are working on tariff refund and approach to tariff refund right now. Obviously, we will be working and following all of the guidelines that we need to from a tariff refund perspective, but a little difficult for us to talk through some of the specifics on timing and when all of those dollars will hit throughout the year. We certainly have a little bit of benefit baked into our expectations, but it's not a tremendous driver for us. It's really more as we look what are the current tariff rules that are in place, how do we think that will accrue and you see the benefit that we've put in place from a guide perspective versus what we originally guided to for 2026. Operator: Our next question comes from the line of James Hardiman with Citigroup. James Hardiman: So 2 questions on sort of the Back to Bricks opportunity. I guess, first, when we talk to investors, the 1,000-pound gorilla, fair or not, is sort of the demographic backdrop, right? Specifically lower popularity of motorcycling, if you think about younger generations, maybe relative to their baby boomer counterparts. Artie, obviously, that's something that you've had to consider. How does the Back to the Bricks address that? Obviously, you've got some market share recapture goals that are pretty aggressive. Is there any concern that market share gains could be offset by category declines if those demographic headwinds persist? And I did have a follow-up if we could. Arthur Starrs: Sure. James, thanks for your question. I think the biggest thing in this strategy Back to the Bricks is we're prioritizing rider needs in a rider-centric portfolio. So we specifically called out 2 examples of how we're doing that. The Sportster, one of our most iconic motorcycles as recently as 5, 6 years ago, the market for that motorcycle is 35,000 to 40,000 plus on a global basis. Our riders and many younger riders and our dealers have expressed it is the #1 universal request from the Motor Company to deliver on a great Harley-Davidson Sportster and what we're talking about today is the 883. And so when I look at the demographics, how young people have always entered our brand over 123 years, it has been motorcycles like the Sportster. And over the last 30 or 40 years, the Sportster has been a critical entry point to the brand. The second motorcycle is the Sprint. We have not had a motorcycle like the Sprint in some time. We see it filling an important need in Riding Academy. As someone who recently went through Riding Academy, being able to get on a motorcycle and then buy that same or a similar motorcycle is a gap in our current portfolio, which we're extremely enthusiastic about what the Sprint is going to do. And I'd remind you that the number of M designations, at least in the United States right now, is quite strong, as strong as it's been. And we see the opportunity for us as we present the brand, as you look at the marketing campaign, this concept of joy and swagger is something that we believe is and will resonate with young people. It's core to bringing young people into the brand over many, many years, which the brand had done successfully. So I'm quite optimistic. And the portfolio of motorcycles we're bringing forward, I think, addresses this well. James Hardiman: That's great. And it's a great sort of dovetail into sort of my follow-up question. Obviously, as we think about your medium-term targets of mid-single-digit retail growth, most specifically. I think if investors felt comfortable with that number alone, this would probably be a $40 or $50 stock, right? But help us understand that target while factoring in the return of Sportster and the introduction of Sprint. How much of that retail growth is coming from those items? I'm just trying to understand sort of the organic versus the inorganic contributors to that mid-single-digit retail growth. Can you get to a place where the organic piece is also growing at a nice clip? Arthur Starrs: Sure. So thanks for the question. The Sportster is an important part, and Sprint obviously complements it as well. I referenced the volumes on Sportster historically. I'll go back to -- we feel that if we meet our riders where they're at, we can grow at these levels and beyond. I'm not going to give a specific number in terms of how much Sportster constitutes the amount of growth, but just based on historical numbers of Sportsters that have sold and a projected number of Sprint, we believe that a significant portion of the growth will come from there. In addition to that, this concept of decontented or blank canvas motorcycles that we referenced in the presentation is something our dealers have been asking for. And it does a couple of things. Number one is it leverages existing platforms and powertrains that we have and provides more accessibility across Touring and Softail, which is extremely exciting. And I'll remind everybody that some of these things where in Q4, we took action with things like our Solo introduction, they're already working. So some of the retail success that we saw in Q1, we've effectuated in these plans. So I'm very enthusiastic about growth in both cruising and touring with a more distributed and accessible portfolio of motorcycles. Sportster is a big part of it. And given what's sold historically in Sportster, I'm quite confident and what's happening in the used marketplace on Sportster, if you look up in some of the used market channels, it's extremely exciting to see residuals maintain, and it's difficult to get your hands on an 883 right now, which means there's a real need. Jonathan Root: James, the one piece that I would add too is, as you refer back to what was in the strategy deck, there's a page in there that talks through the multiyear view of motorcycle and the ancillary revenue streams. And so as you listen to Artie talk through changes to the portfolio, some of the kind of early wins that we've been seeing with Solo models and some of the benefits that our price point focus is beginning to drive, that obviously has showed up in the first quarter from a retail standpoint. So inside of Q1, we've demonstrated the benefit to the approach that has been laid out. And then from an overall strategy standpoint, as we think through a life cycle and lifetime view, we can really envision people moving through the portfolio. We can see the benefit that accrues to both Harley-Davidson and our dealers that aligns with what Artie talked through, and that's what gives us so much confidence in where we're going with the midterm targets and what's been laid out there. Operator: Our next question is from the line of Joe Altobello with Raymond James. Joseph Altobello: A couple of questions on the category expansion here. You talked about Sportster, talked about Sprint. It sounds like those are smaller bikes. Are there other sort of subcategories that you're looking to expand into as well just beyond smaller CC engines? And then the second question, there's a reason why Sportster was discontinued, right? It was hard to make money. So how has the economics of that bike changed? Arthur Starrs: Great question, Joe. Thank you. Let me take the second one first. So our team has done an extraordinary job over the last couple of years working on this project. And we have the cost at a place that we're extremely comfortable against the expected MSRP that we referenced. More importantly is this enterprise profitability model that has been just a fantastic way for us to communicate with our dealers. And when you think about the value that a motorcycle like Sportster brings to bear, it's very exciting when you look at the parts and accessories relevancy and opportunity. When you look at the service revenue that it brings through our dealerships, when you look at the used market that it feeds and maintains such strong residual values. So we're comfortable with the profitability of the motorcycle itself. However, we're extremely excited about how it juices the economics for the overall enterprise. To your first question, as it relates to other additions inside the portfolio, you can expect to see in the slide in the materials that references some of the current holes in the portfolio. Those are examples of where our dealers via our riders have specifically asked for motorcycles from us that they expect -- they expect from us and have gotten in the past. Some of these include maybe a little bit more content and many of them include less content. But once again, within existing families and with existing platforms and powertrains. And I can't give much more detail than that. I will share one tease with you, which you may have seen on social media, which you can expect from us to continue to do, and that's to get feedback from riders at the Mama Tried Show here in Milwaukee, subsequently at Daytona and then the MotoGP race in Austin, we teased a modern expression of our iconic Cafe Racer, and it's gotten extraordinary buzz and feedback from our riding community. And I think that would be the type of motorcycle that is still large in terms of large displacement powertrain that you can expect us to get feedback from riders, and you might see that from us in the market, but we're very excited about the response to it. Joseph Altobello: That's very helpful, Artie. And if I could just quickly follow up on that. The U.S. market for you has outpaced international for quite some time. Is the Sportster, is the Sprint part of that strategy to grow your international business? Arthur Starrs: The Sportster is #1 request from global dealers. If you walked into our dealership in Shanghai, if you walked into our dealership in Louisville, Kentucky, if you walked into a dealership in Frankfurt, Germany, and you asked the dealer or sales team lead in those dealerships, "What can Harley-Davidson do for you?" You would hear, "Bring back the Sportster." So yes, but it's global truth in terms of the enthusiasm around that bike. Operator: Our next question is from the line of Andrew Didora with Bank of America. Andrew Didora: Just kind of change gears a little bit onto HDFS, Jonathan, the $125 million to $150 million op income target. I guess what kind of -- I know the business has changed here. I guess what kind of receivables balance do you kind of anticipate growing to over through that time frame? And then more importantly, the revenue breakdown of HDFS, how should we think about maybe just interest income contribution versus the more kind of fee-based services income as the segment grows? Jonathan Root: Okay. Andrew, thank you for your question. So I'll start with a little session that we put out a couple of weeks ago on HDFS that really walked through that business, the different revenue streams of that business in a little bit more detail than obviously what we've covered here in earnings. That's probably a good refresher in terms of where that business goes as we move forward and what we're seeing. Obviously, from a revenue stream perspective in terms of where we are, we have -- we did at the end of last year, sell off the back book as we've covered. And then on a go-forward basis, we continue to service those loans. So important that we are continuing to make sure that we are retaining the customer focus on the interaction and then a lot that we think we can do as we think through how we move those customers through the portfolio over time in the way that we're marketing to them. On a near-term basis, we obviously will make sure that for any originations that we have from this point going forward, we retain 1/3 of those originations on our balance sheet and then 2/3 we have the ability to sell off to our partners. We continue to service all of those loans. So over time, the fee income associated with servicing is something that continues to grow. We also retain the revenue streams fully relative to protection products. We also retain the revenue streams fully relative to card products and what we do from a card perspective. And then we also fully retain everything from a wholesale and commercial loan standpoint. So dial in or tune into the recording that's available on our IR website that will walk through that in more detail. A couple of other pieces that I would call out from an HDFS standpoint. We're really pleased with what we're seeing on our managed annualized retail credit losses. So we have a page inside of the Q1 deck that highlights the year-over-year improvement in credit losses. So pretty excited that we have Q1 '26 kind of back below where we were not only in Q1 of '25, but Q1 of '24. So overall, I think the dynamics of the business are performing pretty well. We obviously have provided the $125 million to $150 million guide with the viewpoint that, that is a more capital-light model versus the way that we've run historically. So while the operating income is at a different level, we're really excited about the return that, that generates for our shareholders and obviously frees up a lot of capital for us to remain committed to the shareholder priorities that we put out there from a capital allocation standpoint. So I hope that helps. Andrew Didora: Okay. And then I know, Jonathan, you mentioned in your prepared remarks like interested in opportunistic M&A. Just curious kind of what could that entail? Is that more on manufacturing capability or brand side? Just curious there. Arthur Starrs: Yes, Andrew, it's Artie. I think we would look at any M&A as something that would accelerate the core areas of growth that we've laid out in the strategy. So anything that could drive dealer profitability would certainly be of interest. Parts and accessories would certainly be on the table. It was listed as the third thing right now. So it's not a top priority for us. But we do want to call out that anything that would make us stronger and allow us to drive the strategy faster, we would consider. Operator: Our next question is from the line of Molly Baum with Morgan Stanley. Molly Baum: I kind of wanted to ask maybe 1 or 2 about the affordability dynamics right now for your customers. You made a comment in the prepared remarks about how many buyers aren't requiring or don't require having promotions to convert. So can you maybe talk about [ U.S. ] specific for motorcycle buyers at present and what you were seeing from a promotional standpoint in 1Q and maybe even right after you cleared through some of the heavy inventory levels? And then just how you're thinking about affordability more broadly in the current environment and going forward? Arthur Starrs: Yes. Thanks, Molly. Yes. On affordability, I really look at it as accessibility. So it's certainly price is a part of it, but also meeting riders where they're at and filling their needs with our portfolio. So when we look at Q1, we were pleased certainly with how the promotions restored the dealer network to healthier inventory levels, and that was focused on model year '25 Touring. But we were also pleased with motorcycle sales that weren't promoted. And it demonstrated to us in some of the maybe more modest tweaks we made with the '26 launch in action in Q4. And going forward, having more options available to riders is important, certainly is price, but also features and benefits. The phrase I'm using internally is we've had too many of too few models on dealer floors. And by using and leveraging existing powertrain, existing platforms, we can have a much broader assortment of motorcycles to present across certainly Sprint and Sportster are good examples, but even within legacy cruising and touring. And what excites me about this is we're going to be more nimble as it relates to promotional activity. If you think about the promotions in Q1, we had a challenge. We actioned it on model year '25 Touring. But going forward, we will have more diversity within the Touring lineup where we can be a bit more surgical and segmented on which motorcycles we may have to promote at various points in time and maintain healthier margins on the balance, so to speak. It's something dealers have asked for, and we're going to be delivering on that as part of our go-forward plans. Molly Baum: Great. And maybe if I could ask one follow-up on the dealer profitability piece. You've talked a little bit about last quarter about some immediate changes you made with the fuel facility model adjustments, changes to e-commerce strategy. Can you kind of talk about how much of the doubling profitability by '26, doubling again by '29? How much of that is kind of improving the cost base, getting excess inventory out of the system versus how much is structural from these strategy changes that you're making? Arthur Starrs: What we put in place in Q4 and what is in place currently, we believe is appropriate. There's always the chance that there's small adjustments that we would align with our dealers on. But the Back to the Bricks plan and the targets that we put forward do not contemplate a change in the structural arrangement with our dealers. We -- the e-commerce strategy that we made tweaks to in Q4 as part of the go-forward plans, we instituted a marketing development fund, which is in place right now. So there's no structural change that -- no material structural change that's contemplated in driving the profitability. It's inventory. It's the right motorcycles at the right time with a rider-centric portfolio and certainly leaning into this marketing campaign, we think it's going to pay a lot of dividends. Jonathan Root: Yes. I think, Molly, the piece is worth adding on the dealer profitability side of the equation, too, is that obviously, volume and throughput makes a pretty meaningful change in their bottom line. So as we think through the -- again, going back to the strategy and the page that we built out that really helps you envision all of the different revenue streams for both Harley-Davidson and our dealers, that's a pretty important page to envision the way that we're running the business as we move forward. And so through that, the targets that we have on the mid-single-digit growth rates that you're seeing are really, really important for us and the benefits that accrue to our shareholders, and they are equally important for our dealers. And then in addition, as you see us really double down on our growth surrounding P&A, not only do you see P&A benefits from an overall revenue and margin standpoint. But inside of the dealer side of the equation, it does also drive some really nice service growth. So we're pretty excited about the way that we actually get our dealers back to something that we think is a much healthier and much better way to run their business. Operator: Our next question is from the line of Tristan Thomas-Martin with BMO Capital Markets. Tristan Thomas-Martin: I just want to kind of circle back to 2 questions that were asked previously. First, just in terms of the Sprint, my understanding is it's being built overseas. So how do kind of recent tariff changes regarding imports potentially impact pricing on that? And then have you -- did you provide a breakdown of your medium-term retail CAGR like your expectations for U.S. versus global markets? Arthur Starrs: Sure, Tristan. I'll take -- I guess I'll take both of those. As it relates to Sprint, we're finalizing the specific production plans. We did call out that Sportster -- U.S. Sportsters will be made in York, in our York, Pennsylvania facility. And obviously, we're pleased with the revised guidance that we put forward on tariffs for '26. And we do contemplate based on current expectations that we have some favorability in tariffs going into '27 across the portfolio. And I'm sorry, the second question was CAGR. In terms of CAGR on U.S. versus international, we're not breaking that out. I will tell you that there's not a material change U.S. versus international, primarily because the motorcycles that we're talking about here and the rebalancing of the portfolio and filling in the holes are similar globally. So we generally have the same portfolio around the world right now. As I mentioned, the dealer request and enthusiasm around Sportster in particular, and motorcycles that are raw blank canvas and allow for parts and accessories, genuine parts and accessories additions to them are globally wanted. And so we don't have, I'd say, a material difference in the growth trajectory by market. Tristan Thomas-Martin: Okay. And just one follow-up on kind of the aftermarket plan. I'm not sure if I'm reading between the lines correctly. But are you -- is there going to be more focus on dealership kind of aftermarket add-ons versus factory aftermarket or kind of factory add-ons? Arthur Starrs: You mean parts and accessories in our dealerships and customization at the dealership level? Yes. Yes. So what we're saying is we expect to have more motorcycles in the portfolio that are maybe more approachable from a price perspective and have less accessories on them. And then our dealerships would be equipped with the P&A to personalize them for the riders, which is consistent with what the brand has done over many, many years. So it's frankly leaning into a legacy strength where P&A has maybe not been as focus for us with many of our motorcycles, in particular, large touring motorcycles, having a fair amount of content. Operator: Our next question is from the line of David MacGregor with Longbow Research. David S. MacGregor: I guess the question is on LiveWire and just the role that LiveWire plays in this product portfolio and vision. And just if it is sort of something you can start considering staying with, just how we should think -- thinking maybe that 3- to 5-year outlook you've expressed earlier, just the use of cash for that business over the next 3 to 5 years? Arthur Starrs: Yes, David, thank you. This is Artie. The first thing I'll say is we're excited about the LiveWire team's efforts this year and the pending launch of the Honcho Bike, which is, I think, an interesting and exciting addition to the portfolio, and we'll be monitoring that closely rest of the year to see how that does, but we're very excited to see how that comes to market. I'll repeat what I shared on previous earnings as it relates to LiveWire. We funded the loan in the back half of 2025. And that's our outstanding capital commitment, and we don't have intentions to fund the business directly from Harley-Davidson at this point in time. David S. MacGregor: Is there a way that you can influence demand? I mean you're talking about creating a higher level of interest back to James questions with demographics and -- and I'm just wondering if there's a way that you can shape demand as well on the electric front or you feel like there's steps you could take to maybe create a higher level of engagement. Arthur Starrs: Yes. We're focused on this Back to the Bricks plan and driving dealer profitability and getting the portfolio in a place that we think riders want from us. Karim and his team are focused on the electric side of the house at this time. Jonathan Root: Yes. And David, one piece that I would add, David, on the kind of demand influence is that through what you would have seen with what we delivered in Q1. We certainly believe that when we get the right alignment on marketing, promo and kind of how we run that. We can drive traffic to dealers, and we can drive higher close rates. You heard Artie talk about, I think one piece that always sticks with me from an Artie perspective is too many of too few, and you heard him reference that earlier on the call today. When we think through where the portfolio is going and some of the pieces that we have the ability to drive, we're really excited as the product portfolio becomes a little bit more nuanced in terms of what we're putting into market, we can lean into a lot of the strategies that we've really demonstrated some good success with and do that in a much more targeted way. So pretty excited about where we're going from the midterm as we think about both what we've demonstrated within Q4 of last year, Q1 of this year and then with what we've lined up from a strategy perspective, where we're going. So excited to see the kind of demonstrated ability that we've put in market so far and how that aligns with the strategy that's built out. David S. MacGregor: Do you have goals in place for building dealer support for LiveWire? Jonathan Root: The LiveWire team is certainly working on their approach to how they manage their dealer relationship. Operator: Our next question is from the line of Brandon Rolle with Loop Capital. Brandon Roll?: First, just on the dealer profitability improvement. Would you be able to size the headwind from maybe a more standardized rebate program to HDMC margins? Arthur Starrs: Thanks, Brandon. You're talking about H-D1 Rewards and the holdback? Brandon Roll?: Yes. I think under the previous management team, they had kind of made the rebate program or rewards program a little more difficult to pull back some margin into the company. So it seems like that's going back out to dealers. And I was wondering if you're able to size the headwind, if any, to HDMC margins. Arthur Starrs: Yes. I would characterize the headwind as modest over a medium-term period. The previous holdback was variable. So it was based on sales targets, and this is fixed. I wouldn't characterize it as -- it's not the primary driver of the profitability improvements that we're experiencing or forecasting. It's a small amount on a year-over-year basis, but it's not the primary amount. The larger impact which I heard consistently from our North American dealers, both in the fall and again on a recent road show was the predictability was so important. Predictability of having the fixed holdback was critical in terms of staffing levels, being able to project cash flow throughout the year. And I think it's just an example of us understanding our dealers' businesses and respecting what they need to run their business well and service our riders well. And so I'm pleased where we are and where we are today is precisely what we've modeled going forward. Brandon Roll?: Okay. Great. And just one last one. On your U.S. dealer network, how do you feel about the current size of the network? Obviously, there's been a lot of dealer consolidation over the last few years. Do you feel like the dealer network at the right size? Or are you going to continue to kind of, I guess, move away from inefficient dealers and I guess, not shrink the dealer network, but maybe make it stronger? Arthur Starrs: We're always looking for ways to make the dealer network stronger, and we love the fact that we have individual maybe smaller dealer owners, dealer principals in certain markets, and we also feel privileged to have some larger entities that own groups of dealerships. And I think the strength of our brand is a balance of both. One of the amazing things about Harley-Davidson dealerships is we have dealerships along these iconic rides where families, in some cases, have owned these dealerships for decades, in some cases, 70, 80, 90 years and extremely proud of that. And at the same time, we had recent acquirers in the market where some of our largest and some of our most profitable dealer owners are getting bigger in the system. And I love them all. We're committed to having a healthy dealer network, and we're not precious about size. We're precious about dealers that are enthusiastic about our brand and serve riders well. Operator: Ladies and gentlemen, we have time for a final question from the line of Jaime Katz with Morningstar. Jaime Katz: I will make it quick. I guess most of the profit improvement that you guys have, a lot of it looks like it's coming from leverage within SG&A. But can you talk a little bit more specifically about the top opportunities that are being targeted for cost reduction this year? Just so we can get a better idea of where that low-hanging fruit is coming from? Arthur Starrs: Jamie, thank you for your question. Yes. So it's obviously a balance of some headcount and then obviously some non-headcount-related costs and then also some cost of goods-related actions our teams are -- have done a fantastic job in Q1 at identifying areas. We've obviously done a significant amount of both competitive benchmarking, but also what's the right thing for Harley-Davidson and ensuring that we can grow going forward. We're not going to provide detail beyond that at this time, but we're very confident in the targets that we put forward and specifically the $150 million plus that we've earmarked for '27 and beyond. Jaime Katz: Okay. And then just quickly, I know there was some gross margin impact by pricing and mix. Is there any way to think about how those are trending over the remainder of the year just sort of from where you stand today? Arthur Starrs: Yes, Jamie, I'll let Jonathan take that one. Jonathan Root: Okay. Thank you, Jamie. So as we look at pricing and mix and sort of compare that to Q1 relative stability, I think, as we look through Q2, Q3 and Q4. You did hear in the Q1 financial comments a little bit more information relative to timing. So take a listen to that call in terms of how we talked about year-over-year quarters and what you see there. So from an overall pricing mix perspective, pretty flat to kind of a little bit of favorability in the balance of the year. As we look at what's coming, we're pretty excited about what we're going to be introducing, and you'll see some of the impacts from that. Please take a listen to what we talked about from a timing standpoint. That will be important as you're thinking through what our trajectory is going to look like for the year. And then you will see a little bit less of an impact from incentive-related activity. So as we've talked about, we were pretty aggressive in what we did from a Q1 standpoint. We're really pleased with where we landed dealer inventory. And so we think that really set us up for a very successful balance of the year. And hopefully, that sort of helps address your question. Operator: Thank you for your questions. And ladies and gentlemen, that will close down our Q&A session for today. Artie, I'd like to turn it back over to you for any closing comments. Arthur Starrs: Well, thank you, everybody. I appreciate you participating in today's call. And hopefully, you can tell how enthusiastic our team is, and I am in particular, about our path forward, and we look forward to updating you on our progress, and we'll talk to you at next earnings. Thank you. Jonathan Root: Thank you.
Operator: Good day, and thank you for standing by. Welcome to Veracyte, Inc. first quarter 2026 financial results webcast 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 11 on your telephone. You will then hear an automated message advising you 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 first speaker today, Unknown Speaker, director of investor relations. Unknown Speaker: Good afternoon, everyone, and thank you for joining us today to review Veracyte, Inc.’s first quarter 2026 financial results. Joining me on the call are Marc Stapley, our Chief Executive Officer, and Rebecca Chambers, our Chief Financial Officer. John Leite, our Chief Commercial Officer, will also be available for Q&A. Earlier this afternoon, we issued a press release detailing our first quarter financial results, and we posted an accompanying presentation in the Investors section of our website. Before we begin, I would like to remind you that statements we make during this call will include forward-looking statements as defined under applicable securities laws. Forward-looking statements are subject to risks and uncertainties and the company can give no assurance they will prove to be correct. Additionally, we are not under any obligation to provide further updates on our business trends or our performance during the quarter. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Veracyte, Inc. files with the Securities and Exchange Commission, including the most recent Forms 10-Q and 10-K. In addition, this call will include certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP financial measures are included in today’s earnings release accessible from the Investors section of Veracyte, Inc.’s website. I am also pleased to highlight Veracyte, Inc.’s newly updated website, which makes it easier to access information on our test portfolio, including a publication search tool to help navigate our extensive and growing clinical evidence base. I will now turn the call over to Marc Stapley, Veracyte, Inc.’s CEO. Marc Stapley: Thank you, and thank you all for joining us today. We had an excellent start to 2026. In the first quarter, we delivered strong double-digit revenue and volume growth, exceeded our profitability expectations, and continued advancing key catalysts that position us well for long-term growth. This quarter highlights years of disciplined execution that have transformed Veracyte, Inc. into a stronger, more focused, scalable company. Five years ago, we set out to make Decipher a commercial success, grow our core franchises, expand operations, enhance clinical evidence, and build a strong pipeline. We revitalized the franchise, made Decipher the top prostate cancer gene expression test, increased lab capacity threefold, improved turnaround time and the no-result rate, and surpassed the 25% adjusted EBITDA margin. Today, Veracyte, Inc. is a diversified, profitable company with a unique platform, multiple growth drivers, expanding clinical evidence, and strong clinician relationships, all achieved through consistent strategic execution. Now we believe we are approaching an inflection point that will shape the next five years for Veracyte, Inc. We are on the cusp of our two most significant product launches since Afirma: first, Prosigna LDT, supported by the OPTIMA trial with a key presentation at ASCO in June; and second, TruMRD launching initially in muscle-invasive bladder cancer. Together, these launches will expand our addressable market, extend our platform into new clinical settings, and position us for what we expect will be an even more transformative next five years for Veracyte, Inc. and the industry. I will spend time discussing both of these growth catalysts shortly. But first, turning to our core business. Starting with Decipher. Since our acquisition in early 2021, the business has delivered consistent growth of more than 20% quarter after quarter. That momentum continued in the first quarter as we delivered approximately 28,000 tests, representing 24% year-over-year volume growth. This strong performance was driven by continued expansion in ordering providers and orders per physician, and it reflects Decipher’s differentiated position as the only gene expression test supported by high-quality clinical evidence and inclusion in NCCN guidelines. Advantages continue to drive adoption across the full spectrum of prostate cancer risk. Over the last few quarters, we have seen particularly strong traction in advanced disease, where we believe there remains significant opportunity for Decipher. In the first quarter, we delivered nearly 30% growth across high-risk categories, including radical prostatectomy, biochemical recurrence, and metastatic disease. As we see more evidence supporting the use of Decipher in advanced disease, we expect to see continued growth over time. For example, we are excited about upcoming results from the ENZIMET Phase 3 trial, which will assess Decipher’s ability to identify metastatic patients who benefit from triplet therapy. Those data will be featured in an oral presentation at ASCO later this month. ENZIMET is one part of a broader evidence pipeline that continues to advance. Four Phase 3 trials evaluating Decipher Prostate in treatment intensification and de-intensification have now completed enrollment, including the GUIDANCE trial, which reached that milestone in the first quarter meaningfully ahead of schedule. GUIDANCE includes more than 2,000 patients and is designed to evaluate how the Decipher score can function as an integral biomarker to guide treatment decisions for men with unfavorable intermediate-risk prostate cancer. PREDICT-RT has a similar goal in high-risk disease. These studies move beyond prognostic validation to prospectively demonstrate real-world clinical utility informing treatment choices. We believe they can support high-level evidence standards for guideline inclusion and coverage. While advanced disease is a compelling growth factor, we also continue to see physicians leveraging Decipher in the low-risk setting. Since launch, we have delivered results for more than 80,000 patients in this population, creating a substantial real-world evidence database that continues to inform clinical utility. We believe there is a long runway to expand Decipher’s role in active surveillance, supported by a growing body of evidence. Recent data published in European Urology Oncology demonstrated Decipher’s ability to stratify risk among patients undergoing active surveillance, and we were encouraged to see enrollment completed in G-MAJOR, a large prospective Phase 3 randomized study evaluating how gene expression classifiers can inform active surveillance decisions. Taken together, these achievements and our robust pipeline of ongoing studies reflect more than a decade of sustained investment in evidence generation and position us for a steady cadence of high-quality data readouts over the coming years. As our evidence base expands, we are also enhancing our clinical offerings. Through evidence generated using our Decipher GRID research-use-only database, we are incorporating additional predictive biomarkers, including PAM50, PTEN, and others. Over time, we plan to add select biomarkers to the Decipher clinical report to further support informed decision-making in high-risk and advanced prostate disease. We are also advancing complementary initiatives in digital pathology and AI-powered analysis, which we view as complementary to molecular profiling. As previously shared, we have been scanning our Decipher database and are close to digitizing all historical slides for U.S. patients—more than 350,000 images. We plan to leverage this extensive dataset together with whole-transcriptome data in collaborations with leading academic centers to better define where these technologies can add value in clinical practice. Across recent urology conferences, we have seen the field shifting toward biology-driven treatment strategies for bladder cancer, with Decipher Bladder emerging as a natural extension of our platform. This momentum will be on display at the upcoming AUA annual meeting, where six studies will be presented highlighting our Decipher Bladder portfolio’s ability to advance personalized care in bladder cancer, including insights generated from our GRID research-use-only database. These presentations build on the strong Decipher Bladder data shared at ASCO GU and support the early but growing adoption we are seeing in the field. Overall, we are very pleased with Decipher’s start to the year. We believe the franchise is well positioned with unmatched scale, depth of evidence, and commercial reach in urology. With only one in three men with prostate cancer in the U.S. currently benefiting from the insights that Decipher offers across the spectrum of disease, we believe it can continue to be a durable long-term growth engine, and we see meaningful extensibility into bladder disease as an incremental growth driver in the coming years. Turning to Afirma. We delivered approximately 17,200 tests in the first quarter, representing 12% year-over-year volume growth. This reflects both solid demand across our customer base and strong execution on operational initiatives that improve patient access to actionable results. As we have discussed previously, we completed the full transition to our V2 transcriptome workflow in the fourth quarter, establishing a more scalable and cost-effective platform. Importantly, this transition has also enhanced our ability to deliver definitive results for a broader set of patients, including historically challenging low-input RNA samples. That momentum continued in Q1, with our no-result rate improving both sequentially and year over year. As a result, more patients and physicians received actionable Afirma results to guide clinical decision-making, contributing approximately 400 basis points to our volume growth in the quarter. Encouragingly, we saw healthy new account wins, increased utilization, and a high number of ordering providers in the quarter, reflecting strong engagement and the effectiveness of our strategy. We remain focused on expanding the already robust clinical evidence foundation supporting Afirma. Through our Afirma GRID research-use-only database, we continue to generate a steady cadence of new data and incorporate additional molecular signatures into the latest version of GRID. We believe this growing dataset increasingly reinforces the Afirma GRID as a critical research-use-only tool to advance the understanding of thyroid nodules and thyroid cancer. Importantly, our commitment to evidence-backed research translates into real-world clinical and economic impact. A recent independent study analyzing Medicare payment data from 2016 to 2023 found that increased adoption of Afirma was associated with a meaningful reduction in thyroid surgery rates among Medicare beneficiaries. These findings highlight how Afirma test results help physicians confidently rule out surgery when unwarranted, supporting better-informed treatment decisions, reducing overall health care costs, and helping patients avoid unnecessary surgery and its long-term consequences. The study also reinforced Afirma’s position as the leading molecular test for indeterminate thyroid nodules. Taken together, Afirma’s improving operational performance, expanding clinical evidence, and demonstrated real-world impact give us confidence in the franchise’s ability to sustain healthy growth in 2026 and beyond. We believe our Afirma test remains well positioned to deliver value for patients, physicians, and payers while serving as a stable and durable growth engine within our portfolio. Building on the momentum across our core franchises, Prosigna LDT represents one of two major upcoming product launches that we believe mark an important next phase of growth. Prosigna is built on the well-established and scientifically validated PAM50 signature and provides deeper insights into the biological classification of breast cancer. By reporting the risk of recurrence using intrinsic subtype and a score to estimate the 10-year probability of distant recurrence, Prosigna is designed to inform treatment decisions at a critical point in a patient’s care journey. We see a significant opportunity in the U.S. market, where approximately 225,000 breast cancer patients are diagnosed annually with early-stage hormone receptor–positive disease and are eligible for Prosigna testing. This is a large, clinically meaningful population where improved biological insight has the potential to enhance outcomes and help avoid unnecessary treatment. Clinical evidence will be a key driver of adoption, as it always is. We look forward to the upcoming presentation of results from OPTIMA, a large Phase 3 randomized prospective trial enrolling approximately 4,500 patients. I am pleased to share that this presentation has now been confirmed on the agenda for ASCO later this month. If positive, we believe these results could be practice changing and further strengthen Prosigna’s already robust clinical foundation, and beyond OPTIMA there are additional studies underway that we expect will continue to expand the evidence base and support share gains over time. We remain on track to commercially launch Prosigna LDT by midyear. In preparation, we are scaling our commercial and medical science liaison teams and deepening engagement with key opinion leaders. Our second major upcoming launch is TruMRD, a whole-genome sequencing–based MRD platform and a key step in expanding into minimal residual disease. We remain on track to launch TruMRD in MIBC by the end of the second quarter and plan to leverage the strength of the Decipher brand and our established commercial channels in urology and radiation oncology, where we believe 70% of patients with MIBC are seen. Our initial focus will be on recurrence monitoring in patients who have completed curative-intent therapy, representing the majority of patients treated in this setting. We believe the initial TruMRD test launch addresses a significant unmet clinical need and represents an important proof point for our broader platform as we enter the large and growing MRD market. Early data and strong engagement from leading academic institutions reinforce our confidence that our TruMRD platform’s differentiated whole-genome approach positions us well to drive adoption and capture meaningful share over time. The TruMRD platform is highly scalable, with applications well beyond bladder cancer. We are building an expanding body of clinical evidence with several studies completed across bladder, colorectal, and lung cancer, as well as additional indications. Our pipeline continues to grow with more than 10 studies currently in testing or analysis, 12 in contracting, and 29 in active planning spanning muscle-invasive and non–muscle-invasive bladder cancer, breast, lung, colorectal, prostate, and kidney cancer, as well as immunotherapy treatment response. We are also seeing growing external validation of this approach. At the recent American Association for Cancer Research Annual Meeting in San Diego, we hosted a Spotlight Theater focused on the clinical utility of the TruMRD platform for tumor-informed ctDNA analysis. The session was well attended, underscoring the strong and growing interest in our differentiated approach to MRD. Investigators presented previously shared data from multiple large clinical trials, including TOMBOLA, Umbrella, and NEOBLAST. As a reminder, NEOBLAST is the first prospective interventional study utilizing TruMRD results and is designed to assess the feasibility of active surveillance in bladder cancer patients with negative ctDNA. As we expand our portfolio and advance our pipeline, we are also investing in the leadership and organizational capabilities required to support our next phase of growth. I am pleased to welcome Dr. Kevin Haas, who recently joined Veracyte, Inc. as our Chief Development and Technology Officer. Kevin brings deep expertise in product innovation, development, and software, with a strong track record of translating complex science into clinically impactful solutions. His leadership will be instrumental as we continue to advance our product roadmap and extend our reach to more clinicians and patients globally. I would also like to welcome Tracy Ward, our new Chief Human Resources Officer, who will play an important role as we scale the organization and help us to grow our culture and people—key ingredients to our success. In closing, we believe Veracyte, Inc. is well positioned with a long runway to deliver durable double-digit growth through execution of our long-term strategy. None of this would be possible without the execution of our team, and I am proud of what they have accomplished as we reach more patients than ever before. With that, I will now turn the call over to Rebecca to review our first quarter financial results and walk you through our outlook for 2026. Rebecca Chambers: Thanks, Marc. The first quarter was a very strong start to the year and reflects the disciplined execution and scale we have built over the past several years. We delivered total revenue of $139.1 million, representing 21% year-over-year growth. Total volume increased to approximately 47,600 tests, up 17% compared to the same period in 2025, and we generated $35.2 million of cash from operations, ending the quarter with $439.1 million in cash, cash equivalents, and short-term investments. Testing revenue for the quarter was $135.1 million, an increase of 26% year over year, driven by Decipher and Afirma growth of 30% and 21%, respectively. Total testing volume was approximately 45,200 tests, representing 19% growth year over year. Testing ASP was $2,980, up 6% compared to the prior year and inclusive of approximately $4 million of prior-period collections, or PPCs. Excluding PPCs, normalized ASP increased 3% to $2,900, driven by continued strong collections. Turning to gross margin and operating expenses, I will focus on our non-GAAP results. Non-GAAP gross margin was 75.7%, up 350 basis points year over year, driven by strength in our testing business and an improved business mix. Testing gross margin increased 230 basis points to 70.4%, reflecting operational efficiencies from our V2 transcriptome workflow and higher prior-period collections in the quarter as well. Non-GAAP operating expenses increased 7% year over year to $64.6 million. With the addition of our new Chief Development and Technology Officer, certain IT expenses associated with software development and project management, previously reported in G&A, have been moved directly into R&D as they are fully dedicated to our product development objectives. As a result, R&D expense increased $8.5 million year over year to $24.1 million, driven by our organizational changes and clinical investment, partially offset by a reduction of allocated expenses. Sales and marketing expense increased $2.2 million to $24.7 million, reflecting hiring and investments in our existing portfolio and preparation for the upcoming launches of Prosigna LDT and TruMRD in MIBC. G&A expense decreased $6.6 million to $15.8 million, primarily due to the organizational changes previously mentioned. From a profitability standpoint, we delivered GAAP net income of $28.7 million in the quarter. Adjusted EBITDA was $42.8 million, or 30.8% of revenue, up 73% year over year and well above our long-term target of 25%. This level of profitability underscores the operating leverage we have built over the last five years and provides the flexibility to continue investing in our growth drivers while generating meaningful cash. Turning to our 2026 outlook, we are raising full-year total revenue guidance to a range of $582 million to $592 million, representing 13% to 14% year-over-year growth, compared to our prior range of $570 million to $582 million. This reflects expected testing revenue growth of 16% to 18%, excluding the contribution of new tests, with Decipher revenue growth of approximately 20% and Afirma revenue growth in the high single-digit to low double-digit range, benefiting from improvements in our no-result rate. As a reminder, our guidance excludes any potential prior-period collections in future quarters. Given the strong start to the year, we are also increasing our full-year adjusted EBITDA guidance to greater than 26%. This outlook reflects our updated revenue expectations and continued investment to support our growth initiatives throughout the year. As always, while we plan expenses on an annual basis, adjusted EBITDA may fluctuate quarter to quarter due to the timing of investments and PPC variability. In closing, the financial performance we delivered this quarter reflects the significant transformation Marc described—five years of disciplined execution that have created a much more scalable, profitable, and resilient business. As we approach the next inflection point with multiple important product launches ahead, we are well positioned to build on this momentum, further strengthen our financial foundation, and continue expanding our impact. Most importantly, we remain focused on supporting more patients across their cancer care journey while creating long-term shareholder value. We will now open the call for questions. Operator, please open the line. Operator: Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Puneet Souda of Leerink Partners. Your line is now open. Marc Stapley: Thanks, Puneet. Happy to take that, and then Rebecca will address the financial impact. To remind everyone, the benefit on the no-result rate is coming from our transition of the entire Afirma workflow to the new V2 transcriptome. That was a staged launch in Q4 with a full launch by the end of the quarter, and now we are seeing our first quarter of full benefit from that. It has frankly exceeded our expectations in terms of how much better that assay is at recovering samples that previously would have been lost. Most importantly, beyond the financial impact, there is a real patient and physician impact from being able to provide a result and an answer more often than we were previously. I could not be happier or more proud of our team for executing this long and complex project. The great benefit is that the same platform is now available for our other tests, and the next test to use it after Afirma will be our Prosigna test. Rebecca will cover the financial impact. Rebecca Chambers: Thanks for the question, Puneet. During the quarter, the improvement contributed approximately 400 basis points to volume growth. I think that is about as good as it is going to get. It is above our expectations from our original guide for Afirma. If you recall, that original guide included a no-result rate improvement expectation of 0% to 2% for that mid- to high-single-digit Afirma revenue growth guide. We have now updated it to high single digits to low double digits, and that includes a 2% to 3% assumption. Two reasons why that assumption is below what we saw in the fourth quarter: one, no-result rates tend to worsen over the summer months with heat-related RNA degradation; and two, we have a comp from the fourth quarter of 2025 as we started to transition and see the benefit. For those two reasons, for the full year we are now expecting a 2% to 3% benefit from the no-result rate improvement. That flows through at essentially 100%. And, again, a huge benefit to patients and a huge thank you to the team. We are excited to launch Prosigna on the backbone of the new transcriptome as well. Operator: Thank you. Our next question comes from the line of Unknown Analyst of Jefferies. Your line is now open. Unknown Analyst: A couple from me. First, for the momentum in testing revenue, how should we think about the exit velocity of this business heading into the launch of new products? I know you are not baking that into the revenue guidance raise, but in terms of growth in the back half of the year. And second, the competitive moat for Decipher—how is the sales team positioning Decipher against newer, potentially lower-cost pathology or AI-based competitors? Marc Stapley: I am happy to address both. On new product introductions and momentum, as we have said, we are not including Prosigna and TruMRD in our guide for this year. We are going to manage those launches for customer and patient impact, and then scale as we see interest and our ability to operationalize in the lab. In terms of the ramp, it is hard to call a specific analog. For Prosigna, we are launching into a market that is very well penetrated. We do not have to educate physicians on why molecular diagnostics make sense for this population; we need to demonstrate, on the back of strong evidence, why Prosigna is a better test for patients. That implies a different ramp and strategy than a greenfield launch. For TruMRD, while people call it a competitive market, it is still fairly underpenetrated at this point, and there is still a lot of education to do, particularly in the muscle-invasive bladder cancer setting. On the competitive moat around Decipher, it is the same as we have always said. Whether you are talking about digital pathology/AI or other molecular diagnostics, we have generated so much evidence for Decipher over more than a decade—and remember, most of these studies had to start years ago to read out in this disease state—that it creates a substantial competitive moat. Specifically for digital pathology/AI, it is a recent approach. It is in the marketplace, but customers are quite skeptical, especially when they see discordant results, which have been demonstrated repeatedly. Our answer is to scan every slide we have—about 350,000—and make those images, along with GRID transcriptomes, available to the community to do the appropriate research, and to demonstrate the utility of that technology alongside molecular diagnostics. Physicians typically do not trade one thing for another; more information is better, as long as it is clinically proven. John, anything to add? John Leite: The only thing I would add is that on the pricing side, I have not seen pricing alone motivate a physician. All the other things would have to be true first, and then pricing would be a very late consideration in terms of driving the adoption or selection of a test. Operator: Our next question comes from the line of Douglas Schenkel of Wolfe Research. Your line is now open. Douglas Schenkel: Afternoon, and thank you for taking my questions. First, on Decipher: this is the 15th consecutive quarter of 20% plus volume growth. The market is about 33% penetrated. Incidence growth is around 6% per year. As we sit here today, how do you think about the multiyear sustainability of 20% growth, and can you disaggregate what will drive it—deeper penetration of existing accounts, opening up new practices, and/or share capture? Second, on OPTIMA and the upcoming ASCO readout in June: what is “good enough” to lean in aggressively on the launch in the back half, and if things go well, OPTIMA enrolled patients with up to nine nodes while Oncotype is approved for up to three nodes. How do you think about TAM expansion and potentially a differentiated label and reimbursement? Marc Stapley: Thanks, Doug. On Decipher growth, thanks for calling out the sustained trend. Decipher has been on a very steady volume growth trajectory. Over time, we have penetrated more risk categories and the denominator has grown, yet volume growth has remained consistently strong. Given that we are only about a third penetrated, two-thirds of men dealing with prostate cancer are not getting the benefit of the insights that Decipher provides. With the level of evidence and NCCN guidelines supporting the test across low, intermediate, high/very high, metastatic, biochemical recurrence, and post–radical prostatectomy with evidence now, every one of those categories should, over time, be getting a genomic test. That is why I think we continue to see growth. I am not guiding to whether it will be 20% in the future, but in terms of volume I do not see a reason for it to slow across categories. Intermediate is the largest and continues to penetrate, and, as I noted, we saw about 30% year-over-year growth in Q1 in high-risk categories. We also have multiple studies reading out over the next few years that cover low-risk and surveillance as well. There is a steady drumbeat of evidence around Decipher that keeps it going, and we are quite excited about the ENZIMET trial for the metastatic population at ASCO as well. On OPTIMA, John, do you want to take that? John Leite: Certainly. Thanks, Doug. Unfortunately, the bar is quite high. OPTIMA will require a positive outcome on the primary endpoint—a demonstration of noninferiority against the control—for the predictive claim. We have said all along we believe we need that data to merit Level 1A evidence that would drive, we hope, inclusion in the guidelines so that we can, at a minimum, be on par with the product on the market today, and then differentiate with the latest clinical utility data and performance of the test. Marc Stapley: Thanks, John. Doug, I also think nodal status is important, and more than that, the breadth of what OPTIMA addressed, including premenopausal and postmenopausal populations. It is a very well-designed study, and our launch approach depends on it reading out appropriately and favorably. We hope that will be the case on May 30, which is Saturday at the end of the month. Rebecca Chambers: Importantly, our hiring is going quite well. We are building the team, and with a positive OPTIMA readout, guideline inclusion, publication—all of that—we would turn to be more aggressive. I would think that would be an “exiting the year” sort of decision, and we are excited about the opportunity for Prosigna to be a multiyear growth driver for the company. Operator: Our next question comes from the line of Subbu Nambi of Guggenheim. Your line is now open. Subbu Nambi: You are raising guidance by a few million more than the beat, and the guidance still does not include the impact of new tests. It sounds like most of the raise is for Afirma as you reiterated your Decipher revenue growth outlook of approximately 20%. Any additional details you can share as to what you are expecting now for Decipher volume and ASP? Rebecca Chambers: Thanks, Subbu. You are absolutely right. We raised guidance by the beat and then a little bit more at the midpoint for the raise in Afirma. Decipher is trending as expected—plus or minus a day of volume at any point in time is kind of what we expect, and this quarter was no different. It was a good quarter, but the outlook for the rest of the year is around that 20% guide we had coming into the year. In prior years, we had a really big step-up sequentially in the second quarter for Decipher given the timing of guidelines. This year, guideline timing was in the back half of the prior year, and that is one factor we have taken into account on a sequential basis. Competitively, we remain incredibly strong. ASP, as I cited, was up meaningfully ex-PPC, and the trends of the business are very strong. The guidance raise reflects those trends as well as the fact that we only have one quarter under our belt. Subbu Nambi: Thank you. And as you think about your commercial indications for TruMRD beyond MIBC, you mentioned studies have been completed in MIBC, CRC, and lung, and ongoing studies in other indications. Can you help us understand where you are in selecting the next indication and your strategic priorities? Marc Stapley: As I mentioned, we have a lot of studies in progress, and that keeps growing. We have a regular strategic planning process, and our next huddle on that is in July. We will continue to advance our thinking there. In the meantime, our priority remains launching our MIBC product, securing reimbursement coverage, and starting to penetrate the muscle-invasive bladder cancer opportunity. No new updates on the next launch and timing. Typically, we do not pre-announce the exact order because R&D can change, and we do not want changes in sequencing to be misinterpreted. It is all driven by the evidence and timing of the evidence coming through. Operator: Thank you. Our next question comes from the line of Mason Owen Carrico of Stephens Inc. Your line is now open. Mason Owen Carrico: In terms of Prosigna LDT, if the OPTIMA study reads out in June, do you think it can be published before the NCCN breast cancer panel meeting, which I think is in August, so that it could be included in that review? Marc Stapley: I do not think so. John may have more to add, but that might be a bit too optimistic. The publication might come out before then, but whether it influences the guidelines, we just do not know. If you look at our past history in other indications, we have not needed guidelines to get good traction; guidelines have been an additional catalyst further down the road. John? John Leite: You answered appropriately. We just do not know. If the publication comes out early enough, it is possible—with a high enough impact—that NCCN would consider late-breaking data and have a sufficiently robust discussion to perhaps include it in the guidelines, but that is speculative. It is not outside the realm of possibilities, but we do not know what they may or may not do. Mason Owen Carrico: Were Decipher volumes impacted at all in the quarter by weather? If so, could you quantify that impact? Rebecca Chambers: The weather was slightly worse than the prior year, but most of the impact was caught up during the quarter as we exceeded our expectations. We have always said plus or minus a day of volume—which tends to be 400 to 500 samples—can fall on either side of a quarter. We were pleased with the performance of the Decipher franchise during the first quarter despite challenging weather. Operator: Thank you. Our next question comes from the line of Kyle Mikson of Canaccord Genuity. Your line is now open. Kyle Mikson: On Afirma, can you talk about prior-period collections for that test specifically and how you think about visibility and ASP upside for that test? It seems like volume growth could be relatively steady, so pricing might be the one variable. Rebecca Chambers: The guide of high single digits to low double digits includes the Q1 prior-period collections. Q1 prior-period collections for Afirma were about half of the total $4 million of PPCs, which is more than usual. We do not assume prior-period collections in our guide going forward. Ex–prior period, Afirma ASP was up around 100 basis points, and Decipher was up above that to get to the blended average of 3%. I do not think there is as much room on Afirma, given how long it has been on the market and the 280 million covered lives. There is more ASP upside in Decipher over a multiyear period, and that, ex-PPCs, is what manifested during the quarter. Kyle Mikson: You have been profitable for a while, you have a strong cash position, and outstanding EBITDA margins. How do you think about capital allocation going forward, and with respect to M&A, what would be attractive attributes in a potential target? Is a large TAM important? Nearing reimbursement critical? Marc Stapley: No real change in philosophy. We are always active in the market and look at everything, but we are discerning. We have an oncology-based, data-driven strategy. Opportunities that fit that strategy make the most sense. That does not mean we would not consider tuck-ins or technology plays that help advance the strategy. With our financial profile—strong, consistent revenue growth and strong profitability—we think carefully about anything that would be dilutive and take that into account accordingly. Operator: Our next question comes from the line of Keith Hinton of Freedom Capital Markets. Your line is now open. Are you there, Keith? I am showing no further questions at this time. Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
Operator: At which time, you will be given instructions for the question and answer session. Also as a reminder, this conference is being recorded. With that, I would now like to turn the call over to Ryan Flaim, Director of Investor Relations. Ryan, you may begin. Welcome, everyone. We appreciate you joining us. Ryan Flaim: Joining me today are Klaviyo, Inc. cofounder and co-CEO, Andrew Bialecki, co-CEO Chano Fernandez, and CFO, Amanda Whalen. Andrew, Chano, and Amanda will first share their views on the quarter and then we will open up the line for your questions. Our commentary today will include non-GAAP measures. Reconciliations to the most directly comparable GAAP measures can be found in today's earnings press release and supplemental materials, which can be found on our Investor Relations website. Additionally, some of our comments today contain forward-looking statements that are subject to risks, uncertainties, and assumptions, which could change. Should any of these risks materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. A description of these risk factors, uncertainties, assumptions, and other factors that could affect our financial results are included in our filings with the SEC. We do not undertake any responsibility to update these forward-looking statements, except as required by law. Andrew, that concludes my introduction. We are ready to begin. Andrew Bialecki: Thanks, everyone, and welcome. We have entered the era of agents and infrastructure, at least so far as software is concerned, and our first quarter showed what that means for Klaviyo, Inc. Before I cover our results and highlight a few specific observations, I would like to take a few minutes to remind everyone of the opportunity AI presents and how we are taking advantage of it. Our strategy is centered on helping businesses grow by maximizing their most important asset, their relationships with their consumers. The businesses that win are the ones that deliver stunning personalized experiences at scale. That has been the goal of everything we have built at Klaviyo, Inc. for the last decade. The reality is that creating those experiences through deep personalization, engaging media, meeting customers where they want to be met, and optimizing those experiences automatically is still not easy. Our work over the last decade has been building the infrastructure to make that possible, what we call the B2C CRM. As we built it, we felt a growing gap between what our infrastructure is capable of and how businesses are actually using it. This capability overhang means businesses are missing opportunities with their consumers and, in turn, leaving real dollars and greater success on the table. AI agents are allowing us to close that gap and are revealing enormous latent demand for intelligence to design, deliver, and optimize consumer experiences. Our agents are going further, finding new opportunities for the businesses we serve, and contributing back to product direction. They are already among our most advanced users of our data and experience infrastructure, pushing the limits of what is possible and giving feedback for what to build next. We are entering a positive loop where agents use our infrastructure to build stunning consumer experiences that generate data and feedback that improves the infrastructure, which in turn makes agents smarter and more capable. The cycle repeats. Together, agents and the infrastructure we provide are the autonomous B2C CRM. We believe every consumer business will run on it, and every consumer experience will be driven by it. Our agents and infrastructure get better with increased data, scale, and usage. Our infrastructure sees almost 4 billion daily events and signals across 8 billion consumer profiles. Ingesting, storing, and indexing these signals in real time gives every business running on Klaviyo, Inc. a real-time data feed on how consumers and businesses are interacting with each other and, critically, gives businesses and the agents they run context on what will delight consumers. The laws of consumer behavior shift in real time. Our customers and the agents they deploy use our real-time view of consumers as context to deliver stunning, highly performing experiences. Agents make it even easier to infuse this context into experiences for the benefit of consumers and businesses alike. Let us look at our first quarter results to show what this looks like in practice. Revenue increased 28% year over year to $358 million, with strong momentum across enterprise, international, and our B2C CRM platform. Non-GAAP operating margin increased to over 16%, the highest in our history. More than 196 thousand brands are on our platform. We closed the largest number of multi-million dollar ARR deals ever, and our largest customers once again grew their revenue, known as GMV, roughly two times faster than the broader market. Our investments in AI are not limited to the agents and infrastructure we build, but extend to how we operate and deliver Klaviyo, Inc. Annualized revenue per full-time employee in Q1 was over $600 thousand, up more than 25% year over year. As an example, we are committing and shipping code at nearly double the rate per engineer from a year ago. As a result, we shipped more than 75 features in the first quarter, including private preview of our next-generation marketing analytics agent, Composer; increased intelligence and channel capabilities for Customer Agent; and deeper partnerships and product integrations with Google, Anthropic, Shopify, and Canva. I would like to share a bit more on our agent products and how we are seeing customers use them, starting with Composer. Composer is our next-generation agent for marketing and analysis, and is an entirely redesigned agent harness. It builds from the learnings of how customers are using our first-generation Marketing Agent. Marketing Agent’s functionality was more narrowly scoped to content marketing and campaign creation. Composer takes advantage of the advances in underlying LLMs’ abilities to reason and use tools. Composer’s scope is dramatically expanded. It can reason over your data, take actions across consumer experiences, and learn from those experiments. The private preview we introduced in March includes the ability to autonomously query and analyze consumer and marketing data and create marketing campaigns and automations across all services, with support for creating and optimizing Customer Agent coming soon. On top of this, we built Composer to be extensible, so customers and partners can build sub-agents and system connectors it can use, and make them available wherever users work, not just the Klaviyo, Inc. interface. Because this is such a significant step forward, we are being deliberate about quality, both in Composer’s analysis and its creative decision-making. The bar is high. We are committed to meeting it. Similar to how AI coding represented a shift from engineers focusing on how software is created to what software to create, we have seen a similar trend with Composer where users are buying marketing by focusing on what they want to achieve and create, letting Composer do the research and initial creation, then iterating with Composer on the insights and perfecting its outputs. The proof points are very exciting. Take one beauty brand in our preview. Composer audited their marketing, found automations that had been broken for years, fixed them live, and surfaced half a dozen other opportunities their team had never gotten to across creative, discounting strategy, and personalization. That pattern is repeating across our enterprise users in the preview. Teams are using Composer to audit, source opportunities, and implement in a single session. One of the most recognized apparel brands in the U.S. saw a 40%+ increase in top-performing flow revenue following a single session. Hydro Flask used Composer to find misconfigured targeting that had been preventing a campaign from sending, and Composer fixed it with them live. A prominent personal finance company mapped and prioritized more than 1 thousand flows across 13 business units in a single session, giving their team a clear picture of where to focus first. This is why global brands are telling us that Composer solves the biggest pain point they have and is the best agentic marketing solution they have seen on the market in the past year. Because Composer runs securely inside Klaviyo, Inc.’s data perimeter, it already addresses the data privacy concerns that typically slow enterprise AI adoption. For one enterprise fashion brand, it was the first marketing AI tool to clear their security team’s review because Composer runs inside Klaviyo, Inc.’s trusted environment. Composer is the future of how businesses will use Klaviyo, Inc. to understand their consumers and create stunning experiences for them. We are very excited to open it up to more of our customers and partners in the coming weeks. Turning to Customer Agent, and similar to Composer, we have taken advantage of the improvements in underlying LLM intelligence and tool use to allow businesses to create more tailored, highly performing agents their consumers can interact with. The experience and abilities of Customer Agent built on Klaviyo, Inc. can now be entirely customized with our Custom Skills launch last week. Customer Agent now runs across text, WhatsApp, email, RCS, and web chat, and we are adding voice and multilingual support. Adoption continues to grow month over month, and the experiences Customer Agent delivers are showing real results. Digitally native fashion brand Naked Wardrobe resolved 84% of conversations through Customer Agent and AI and saw a 28% increase in average order value, helping consumers own their style and buy on their time, including many instances of consumers shopping and chatting at 2 AM when customer support would have otherwise been offline. Finally, underneath our agents is our data infrastructure capable of training, serving, and optimizing personalization, machine learning, and AI models. These models do not require direct tuning from users. They learn from usage, and they improve the platform automatically. This unlocks true one-to-one personalization: the right content for every consumer at every interaction, delivered across every channel and agent we operate. These models and the features that leverage them were used by nearly two-thirds of our customers in the first quarter, and usage is driving outcomes. As an example, customers using our personalized send-time models saw a 35% lift in click-through rates—more engaged consumers and higher revenue driven by infrastructure that gets smarter the more it is used. We believe this is the year marketing and analysis agents like Composer and always-on agents like Customer Agent become standard and ubiquitous. We built for that deliberately, meeting customers in the tools they already use—an open garden, not a walled one—and to accelerate that, we have deepened integrations and expanded partnerships across the AI ecosystem. In February, we deepened our integration with Google by launching RCS to all customers, and we opened up beta access to Google Search and Ads products that connect discovery directly to Customer Agent experiences over RCS. A consumer can now see an ad, tap it, and then immediately have an immersive conversation with a brand powered by Customer Agent. Google delivers the reach, Klaviyo, Inc. stores the consumer relationship, and delivers the personalized experience. We have extended access to our infrastructure and agents via expanded MCP connectors and applications with Claude, ChatGPT, and Canva. MCP usage of Klaviyo, Inc. continues to expand rapidly, increasing more than 10% week over week in Q1, and top users of MCP are querying more consumer data and building more marketing campaigns than their peers, with 16% more platform usage relative to those that do not use MCP. Businesses are connecting more data to Klaviyo, Inc., centralizing it, and taking advantage of the increased accessibility. Consumer event volume from the hundreds of apps in our marketplace is up 44% year on year. As an example, AS Beauty, home to Laura Geller and other brands and one of our largest customers, runs a complete omnichannel program on Klaviyo, Inc., including greatly expanding their text messaging program this quarter. Their team queries Klaviyo, Inc. data in Claude, models campaign performance, and makes faster decisions. Their KAV, or Klaviyo, Inc. attributed value, is up 20% over the past two years. A senior leader there recently described Klaviyo, Inc. as an indispensable pillar of their business—an infrastructure that they and their brands rely upon. None of this happens without our customers and partners pushing us, and Klaviyo, Inc. is delivering. We are grateful for both. I would like to finish by providing an update on our leadership team. First, Q1 was Chano’s and my first full quarter together as co-CEOs, and it has been a terrific partnership. We have so much in common, including a relentless drive to deliver, and highly complementary skills. Second, as we announced in a press release earlier today, after almost four years as our CFO, Amanda has made the personal decision to step down from her role at Klaviyo, Inc. in the coming months, spend more time with her family, and then pursue the next phase of her career. I want to take a moment to recognize what Amanda has meant to Klaviyo, Inc. She was instrumental in building the team that took us through the IPO and helped us scale into a multiproduct, global, AI-native business. Amanda will continue to lead our finance organization through August 21, 2026, and will remain in an advisory capacity through November 2026 to support a smooth transition. We initiated a search for our next CFO, who will build on our strong financial foundation and momentum. Beyond what she has helped us build, she has been a terrific strategic partner and a trusted adviser to me and many others across Klaviyo, Inc. We wish her the absolute best, Amanda, on behalf of the entire Klaviyo, Inc. team, thank you. Amanda Whalen: Thank you. Chano Fernandez: And with that, Jono. Thanks, Andrew. I want to echo your words on Amanda and the impact she has had across Klaviyo, Inc. We have confidence in the team and transition plan, and we are grateful Amanda will continue to provide leadership and support in the months ahead. Turning to the quarter, the core business is strong, and the opportunity in front of us is large. Enterprise, international, and platform consolidation each have real momentum right now. AI accelerates all three. Let me walk you through what we are seeing and how we are executing. Starting with enterprise, net new customers in the $50 thousand+ ARR cohort were notably higher than Q1 2025. We closed one of our largest deals ever—an expansion bringing a single customer's contract to over $6 million ARR. The problem I hear consistently in enterprise is fragmentation. Customer data, marketing execution, and service are spread across too many systems. Fragmentation costs revenue, where the resonance is consolidation onto one data model and one execution layer, with AI that operates with full customer context across the entire lifecycle. That is what Klaviyo, Inc. does. The wins in Q1 reflect that. Alis and Bolivia are migrating to Klaviyo, Inc. to unify online behavior, purchase history, and store-associated interactions in one system. Weber Grills replaced a legacy platform with Klaviyo, Inc. globally across the U.S., APAC, and EMEA. Expansion activity was also strong as customers standardized more of their workflows on our platform. Take Patagonia, a long-time email customer that came to us with two things on their mind: improving the customer experience and migrating off of a fragmented text messaging setup creating redundant messaging across channels. We showed them a clear technical plan and a credible commercial case. But the reason they chose Klaviyo, Inc. was anchored in where we are going together—RCS omnichannel journeys that support both commerce and advocacy. Patagonia is not a brand that wants to send more messages. They want to send the right ones. Finally, we were proud that this quarter, the Forrester Wave named Klaviyo, Inc. a Strong Performer, and recognized us with the highest customer satisfaction score among all vendors evaluated. We have enterprise credibility validated by a name enterprises trust, alongside proof the pipeline is converting. International revenue outside the Americas grew 39% year over year in Q1, and five of our top 10 largest new customers are from EMEA. What we are seeing in EMEA is not just growth. It is the same platform priorities driving our largest U.S. enterprise deals: unification, real-time data, and AI across channels. Allsense is a great example. The flagship UK fashion retailer replaced legacy technology in a multiyear deal, with both the global digital director and chief technology and transformation officers as champions of the move. The rationale was speed to execution, the ability to unlock WhatsApp as a new audience channel, and the future opportunity to consolidate email and other channels on a single platform. They shared that this move reflects their desire to move toward a more agile way of working that will significantly reduce the hours spent on day-to-day CRM activities. We also worked with a hobby and a fast-growing Nordic charm retailer selling across multiple international markets, winning a competitive deal that came down to speed, flexibility, and the strength of our native integrations with platforms like Shopify. We continue to deepen the product capabilities our international customers want. Local-aware catalogs are a good example. Shopify merchants with country-specific catalogs can now run fully synchronized multi-market data automatically across every region they operate in. For many global brands, that is a requirement. Now Klaviyo, Inc. delivers it. That same pattern—complex, multi-market operations consolidating onto Klaviyo, Inc.—is showing up in categories well beyond ecommerce goods. Legends Global is a flagship win in ticketing and live events. They are bringing their global portfolio of more than 260 venues and attractions onto Klaviyo, Inc., integrating ticketing and venue systems, syncing data through our warehouse capabilities, and giving the U.S. and UK teams a single platform to activate and execute across every market they operate in. Our partner ecosystem is deepening that reach further. In hospitality, the Thanx integration brings restaurants’ loyalty into a single workflow, and with our Integration Objects feature, now GA, operators on cloud-based Guesty and Mews can trigger a pre-stay reminder the moment a reservation is made. We are building the go-to-market foundation to match the opportunity. Consistency in how we sell, how we deploy, and how we support customers at scale—the data is clear. When customers unify on Klaviyo, Inc. across email, text, analytics, and service, outcomes compound. Our cross-sell motion is executing against that. One thing worth calling out on text messaging because it speaks directly to how we approach the market: carrier fees have risen meaningfully across the industry over the past 12 months, and most platforms passed those costs through immediately. We chose to absorb them, a decision that reflects our commitment to customers first. This also gave us a real pricing advantage this quarter, and we leaned into it. But our competitive position is more durable than price. Text in Klaviyo, Inc. runs on the same unified profile as email, WhatsApp, and every other channel, and that is what drives long-term share gains. Going forward, we will be thoughtful and intentional about any future cost pass-throughs while continuing to negotiate the most competitive text message rates. In closing, Q1 showed a business with strong fundamentals, growing enterprise relevance, and international momentum that is structural. We are investing where the opportunity is biggest, improving the execution foundation to capture it, and staying focused on delivering outcomes for customers. The road ahead is significant, and we are ready for it. With that, I will turn it over to Amanda. Amanda Whalen: Thanks, Chano and AB. Q1 was proof not just of what Klaviyo, Inc. can do, but of how our business model works when each part reinforces the others. The growth engines we have been building—multi-product adoption, enterprise momentum, and international expansion—reinforced each other this quarter. AI accelerated all of them. The results showed up exactly where we expected to see them: in revenue, in margin, in customer retention, and in the expanding value customers are generating from our platform. Revenue grew 28% year over year to $358 million, ahead of our expectations. We delivered our strongest non-GAAP operating margin and our first quarter of positive GAAP operating margin since going public. NRR was 110%, up two points year over year, meaning our customers are not just staying, they are growing with us. Customers are also earning more from every message, with KAV—or the revenue that customers generate from Klaviyo, Inc.—per message up approximately 8% year over year. That is how our model is designed to work—tangible evidence of how we are building more valuable customer relationships that help our customers, and in turn our business, grow. Turning to our growth engines. First, multi-product adoption grew as more brands sought out the strategic advantage of consolidating onto a single platform. Service remains on the steepest adoption curve in our company’s history. All of this matters for future growth because multiproduct customers retain better and generate more value per profile over time. Second, enterprise momentum continued in Q1, with our $50 thousand+ ARR customers growing 38% year over year, to 4 thousand 175 customers. This is reflective of a broader structural shift as leading brands modernize and consolidate their tech stacks. These are complex multichannel relationships choosing Klaviyo, Inc. as their long-term platform because we unify data, intelligence, and action in one place. Third, international was again a highlight, with revenue outside of the Americas up 39% year over year. Notably, revenue for EMEA outside of the UK was up 51%, marking the sixth consecutive quarter of growth above 50% in that region. Let us now turn to AI. Across each of our growth engines, AI is increasing both velocity and yield—helping customers do more, faster, and with better results. Automated flows generate 10 times more revenue per message than campaigns, and that acceleration is important because it flows directly into our model. As customers generate more value, we grow as well. Agents also represent a net new revenue opportunity. Customer Agent is already contributing, and we expect that to grow as we expand channels and capabilities. Composer is early, but the value signals so far are strong. Higher intelligence drives higher value, and higher value drives revenue. Turning to the P&L. Non-GAAP operating income was $59 million in Q1, representing a 16% non-GAAP operating margin. That is nearly 500 basis points of expansion year over year and our strongest margin since going public. GAAP profitability was driven by improved non-GAAP operating margin as well as a two percentage point reduction in stock-based compensation year over year. Non-GAAP gross margin was 76%. This reflects our continued success with text messaging cross-sell, offset in part by infrastructure efficiencies. Non-GAAP operating expenses were 59% of revenue, down 560 basis points year on year. Sales and marketing, in particular, saw meaningful leverage. This reflects two things: first, operational efficiencies enabled by AI that we are building into the business; and second, the absence of the B2C CRM marketing investment that we made in Q1 last year. Free cash flow was $19 million, a 5% margin. This reflects normal seasonality and the timing of annual bonus payments, consistent with what we saw in Q1 last year. Our trailing twelve-month free cash flow margin was 16%, spotlighting the strong cash generation potential of the business. In March, our Board authorized a $500 million share repurchase program. This authorization reflects our Board’s and management’s confidence in the durability of our strategy, the scale of the opportunity ahead, and our conviction that Klaviyo, Inc. reflects an attractive long-term investment. As a component of that program, we immediately entered a $100 million accelerated share repurchase, which was completed in April. We continue to execute on the remaining authorization. Our model is efficient enough that we can invest aggressively in growing the platform—in AI and agents, in international, in enterprise—and simultaneously return capital to shareholders. Turning to guidance. We are confident in the trajectory and setup for the remainder of the year. We outperformed Q1 expectations by approximately $10 million. Based on that performance and the broad momentum we are seeing, we are raising our full-year 2026 revenue guidance by $13 million at the midpoint. This reflects our conviction in what is ahead. We now project revenue between $1.514 billion and $1.522 billion, representing 23% year-on-year growth. We are also raising our full-year 2026 non-GAAP operating income guidance to a range of $222 million to $228 million, a non-GAAP operating margin of approximately 14.5% to 15%. The model continues to support reinvestment and growth while delivering expanded profitability. This guidance assumes that we continue to absorb the majority of carrier fee increases. As Chano described, thus far, we have made the strategic decision to absorb these fees rather than passing them directly to customers. Over the course of the year, we will continue to be intentional in our approach, striking a balance that is strong and smart for both our business and our customers. For Q2, we expect revenue of $359 million to $363 million, representing growth of approximately 23% to 24%, and non-GAAP operating income of $47.5 million to $50.5 million, or a non-GAAP operating margin of 13% to 14%. As you are building your models for the balance of the year, I would like to call out a few items. With regards to revenue, we expect our sequential step-up in revenue from Q3 to Q4 to be similar to last year. We also expect higher operating margins in our fourth quarter this year compared to Q2 and Q3, driven by timing of investments as well as compounding effects of AI efficiencies. As we said last quarter, with scale, we have improved our forecasting visibility, which means we are guiding with greater precision. Our guidance philosophy remains consistent. Our goal is to share the best visibility we have and numbers that we are confident in delivering. Our guidance reflects both that increased precision and our confidence in the business. Before we open the line to questions, I want to say a few words about the transition that we announced today. Klaviyo, Inc. has never been stronger than where we are today. There is significant opportunity ahead for us, strong momentum across the business, and a clear path to continue growing rapidly while expanding profitability. We also have an exceptional team in place, and I have always believed the right moment to take the next step is when the work is in great hands. AB and Chano, thank you for your partnership. Importantly, I am not going anywhere just yet. I will remain CFO through August 2026 before transitioning into an advisory role through November 2026. It has been a privilege to be a part of Klaviyo, Inc., and I will be cheering this team on every step of the way. In closing, here is what we hope you will take away from Q1. We beat and raised. We expanded operating margin to the strongest level since our IPO. We returned $100 million to shareholders while continuing to invest in the platform. The businesses we serve grew, and their engagement with Klaviyo, Inc. is deepening. This is exactly what our model is built to do, and AI is making all of it faster. We are confident in our trajectory. The platform is getting stronger, and the results are following. With that, we will open the line up for questions. Operator: At this time, if you would like to ask a question, please click on the Raise Hand. We ask that you limit yourself to one question. When it is your turn, you will receive a message on your screen from the host allowing you to talk, and then you will hear your name called. Please accept, unmute your audio, and ask your question. We will wait one moment for the queue to form. Our first question is from Samad Samana from Jefferies. Please unmute your line and ask your question. Samad Samana: Hi. Good evening, and thanks for taking my question. So I am going to pack a two-parter into this. First, on the product side, just as I think about Composer adoption, what are you seeing on customers that typically lead new product adoption, and how do you expect that product to accelerate the AI adoption flywheel? And just in case you mute me, Amanda, great to work with you and I continue to look forward to working with you until the transition. Second, on guiding with more precision—does that mean that the Q2 guide should be closer to the pin? We had a slightly smaller beat in Q1. Was that already a philosophy that started when you guided for Q1? Help us get better context there. Thank you so much. Andrew Bialecki: Awesome. Thanks for the question. I will do the Composer one and pass over to Amanda on guidance. We launched this private preview in March, and we are very excited about the results we have seen so far. For context, our Composer agent is really a combination of a bunch of sub-agents that do various tasks. You can think about two big groupings. One, it will actually do marketing creation—it can create marketing campaigns, automations, templates, and creative content. Two, it will do analysis—it will look at your customers, who they are, help you with cohorting, understand behaviors, as well as look back over previous marketing campaign performance and help you figure out what to do next. We have introduced this to a wide range of customers. Some are power users; some are entrepreneurs just starting out, so we can get a feel for their usage patterns. Universally, the feedback has been very positive. We talk about this as our next-generation agent building off of the success of our Marketing Agent last fall, and we have dramatically expanded its scope. You can think of this as version two—or n+1—of our agent. We are getting very good at building marketing creative and content that is on-brand. This is both a function of improvements in the underlying LLMs as well as technology we have built at Klaviyo, Inc. to harness those agents and keep them in the direction that brands want them. We have an unfair advantage because we can teach our agent to pattern match off of past campaigns, which makes it better at maintaining the brand and feel you want. On the analytics side, we have seen incredible results. We have customers running daily or weekly reviews of their marketing and how their customers are behaving. So far we have only given them the ability to run that ad hoc, where they log in and execute those queries. In the near future, it is not hard to see customers scheduling these to run and alert them of issues. Couple that with the creation part of our agents, and they will be able to automatically take action. In some cases, we expect our agent will automatically decide to run new campaigns or make modifications for optimizations. The path to value is very clear because as we run incremental campaigns and make improvements, we can measure the results. Customers see it and feel it. Pricing, packaging, and monetization are also very clear, and we are using this private preview to work through that. We have never been more excited about the intelligence and agent capabilities we can build on top of the infrastructure that is Klaviyo, Inc.’s marketing and data platform. Amanda, I will turn it to you for guidance. Amanda Whalen: Thanks, Samad, and I am looking forward to staying in touch with you as well. On the question on guidance, we are closer to the pin this quarter by design. As we committed to you last quarter, we spoke about guiding with greater and greater accuracy that comes with the benefits of greater precision and greater visibility that we see from scale. The tighter beat reflects that improved ability to forecast the business. If you take a step back and look at Q1, it was incredibly strong. We saw 28% revenue growth, we saw our highest operating margin since the time of the IPO, we had our first quarter of GAAP profitability, and we saw real strength in core metrics like NRR of 110% and greater-than-$50 thousand customers up 38%. Overall, it was an incredibly strong Q1 that gives us confidence looking forward and gave us confidence to raise the outlook for the rest of the year by $13 million, which is even greater than the beat that we had for Q1. It reflects both our increased precision and the confidence and momentum we have in the business. Operator: Thank you. Our next question is from DJ Hynes from Canaccord Genuity. Please unmute your line and ask your question. DJ Hynes: Hey, thank you, guys. AB, I would love to hear how your agency partners are embracing the innovation that Klaviyo, Inc. is delivering. On the one hand, you are giving them incredibly powerful tools to do their jobs better. On the other hand, if the autonomous vision takes shape, you are kind of putting them out of work. How do you balance that dynamic, and what are you hearing from those folks? Andrew Bialecki: Yeah. I mentioned in our opening remarks this capability overhang—basically, what you can do with Klaviyo, Inc. and the infrastructure that we built is actually a lot more than our customers and businesses are taking advantage of. Our agencies have always helped close that gap. Now, with our agents—Composer, which optimizes how you understand your customers and marketing, and Customer Agent, which is more consumer-facing—agencies are accelerating the adoption of both. With Composer, it makes it easier to take advantage of everything you can do with Klaviyo, Inc., with the data and the marketing and messaging primitives that we give you. Agencies are able to take on more clients as a result because they get more leverage from Composer. I have had many conversations where folks said they are changing their ratios of the kinds of projects they can take on because of Klaviyo, Inc.’s ease of use and the agentic capabilities we are offering. I have also talked to dozens of agencies that are establishing new practices around our Customer Agent. Our Customer Agent is a whole new surface—the digital representative for your business. It can do customer support, help with sales conversations, marketing conversations—it can run the gamut. Because it is connected back to our data platform, it has a real-time view of who that end consumer is. It can do much better than more generic AI agents at matching up to what a consumer is looking for. You see that show up in product recommendation stats. Driving adoption takes know-how. Setting up agents is not something a lot of customers have expertise around. We are building product to help, including agents that will train up agents. But many businesses have nuance in how they want experiences to work. Agencies are helping bridge that gap and drive adoption. We have done a bunch of work to help them set up their own practices so they can set up Customer Agents for our customers and help drive adoption. Our agency network is in great shape, and they are excited to help usher both of our agents to our almost 200 thousand customers. Chano Fernandez: 200 thousand customers—yep. Hey, DJ, this is Chano speaking. Hope you are well. Just to give you an example, I talked to one of our agency partners that is building a custom order-editing skill connected via an API that is handling the full post-purchase experience without a human in the loop. That has created significant automation and increased productivity for them. We are all very excited. Operator: Thank you. Our next question is from Rob Oliver from Baird. Please unmute your line and ask your question. Rob Oliver: Thank you. Can you guys hear me okay? Operator: We have got you. Rob Oliver: Great, thanks. First of all, Amanda, wish you all the best—it has been a pleasure working with you. My question is for Chano. Coming into this year, there was a lot of excitement around the enterprise opportunity—moving upmarket and legacy replacements. You guys called out at least one really large win in the quarter. I would love to hear some color from you on what you are seeing within that installed base. How are sales cycles? How is the legacy replacement trend relative to where it was when we all gathered last fall in Boston? Any update on partner contribution would also be helpful. Thank you very much. Chano Fernandez: Thank you so much, Rob, for your question. First, the data. We doubled the number of customers over $1 million ARR last year, and again in Q1 2026. Amanda commented on the number of customers over $50 thousand growing 38% year on year. We talked today about an expansion to more than $6 million ARR, and we talked about other customers like Patagonia that have been long-term email customers now adding text because they see fragmentation and the value of a unified platform bringing customer experiences together. That all presents a terrific opportunity for us. Even with this growth raise, the beginning of the year is very exciting because we are playing more into the enterprise. That will play more toward larger quarters, especially at the end of the year, with Q4 being much bigger. The team is doing a very good job focusing on discipline—how we are building the pipeline and how we are doing qualification on deals—getting much more meaningful in terms of enterprise cadences. If you ask how I feel about the opportunity versus back in the autumn, I am even more excited because I can see it tangibly. We are still in the early innings and have a lot of work ahead, but the opportunity is massive. This can be a significant reacceleration engine for Klaviyo, Inc. It will not pan out in one quarter or two, but the growth levels we are seeing should have significant impact down the road—and that is not too far away. Creating those customer cases and experiences brings much more confidence that we are a player. In terms of partners, as you know, we announced Accenture and are working with them closely, of course with other partners as well, with a clear target list, activities, and progress. I expect we will see some of those wins during the next few months. On some of the wins we have already announced, there has been support from partners, whether they influenced the deal or sourced the deal. Either way, it is good for us. I am very excited about enterprise being a game changer for this company. Of course, we want to keep the healthy business that is our bread and butter—the entrepreneur, SMB, and lower segments. They are doing very well if you look at the increase in net new logos and the dynamics in that segment. Operator: Our next question is from Raimo Lenschow from Barclays. Please unmute your line and ask your question. Raimo Lenschow: Thank you, and all the best from me as well, Amanda. The question I have—people asked me about the carrier fee that you mentioned. I think some of your competitors are altering that. Can you talk a little bit about the impact it would have on potential revenue and profitability? Thank you. Amanda Whalen: Sure, thanks so much, Raimo. These are carrier fees. When you are in the text messaging business, there are carrier fees from the big telco carriers that generally, for many of our competitors, are a pass-through. Our primary operating principle is to operate with our customers with consistency, transparency, and trust, helping to make their business more predictable. Thus far, we have taken the strategic choice not to pass through those carrier fees. They vary by carrier, and it has been building over the last year or so, with some announcements even as recently as last week. We wanted to provide predictability for our customers. It certainly helps on price, and Chano and the team are leaning in on how we show customers that value. But the reason we win is not price; it is primarily because of the value we create and the benefits from consolidation. As these grow, we will keep making thoughtful choices over time. I will not say we will continue to absorb them forever, but we are going to be strong, choiceful, and intentional about how, when, and in what manner we do that. That intention is built into the outlook for the back half of the year, both the increasing penetration of the text messaging business as well as this choice we are making on carrier fees. Operator: Thank you. Our next question is from Terry Tillman from Truist Securities. Please unmute your line and ask your question. Terry, if you can hear us, please unmute your line and ask your question. Operator: Okay, great. If Terry, you want to hop back in the queue, we can move on to the next question and we will pull you up again. Operator: Thank you. Our next question is from BTIG. Please unmute your line and ask your question. Analyst: Hey, awesome, thank you so much. One of the value propositions of Composer is around the velocity of campaigns. How should we think about Composer from a standalone SKU perspective versus Composer allowing customers to accelerate their email and messaging volumes? And then, does that play into your decision to not pass through the SMS carrier fees? Thank you. Andrew Bialecki: Great, thanks. When we think about Composer, ultimately what we are providing is intelligence, delivered in the form factor of tokens. Customers are using it to review who their customers are, the effectiveness of their marketing, and then figure out what to do next. Those sessions—those reviews—are incredibly valuable. They are generating thousands, even hundreds of thousands of dollars in incremental revenue and sales. The pricing people get is similar to if you were to hire someone or value your own time, except we provide that intelligence via tokens much more efficiently. We can go much deeper because our agents have access to internal benchmarks and best practices that are not publicly available. That intelligence is an entirely new revenue stream. Think about the activities people are doing in and around Klaviyo, Inc.—storing information, logging in to understand cohorts and behavioral trends, creating marketing, and reviewing that marketing. Composer monetizes that intelligence layer. In terms of impact on overall platform usage, yes, we are seeing incremental use. As we have opened up the underlying Klaviyo, Inc. infrastructure to third-party agents or LLM clients like ChatGPT, Claude, and Gemini via MCP, users who have integrated MCP and are best users are doing 16% more marketing—more campaigns and more automations—and querying into their data more frequently. That is the easy version of the trend because it still requires people to prompt on their own. With our agent, you will be able to set it in synchronous mode—chatting with it—or asynchronous/recurring mode—“run every day.” We think that will drive even more usage. There is a lot of latent opportunity to do better marketing and deliver better customer experiences, and Composer is the conduit to do that. People see the value and are willing to pay for it. It will have a halo effect in two dimensions. One, it will increase messaging volume because messaging will be better—creative, content, personalization. Two, Klaviyo, Inc. indexes on the number of relationships a business has. We help businesses grow more of those relationships and improve quality. When marketers are strapped for time, there are cohorts that do not get the right experience. Agents do not have that problem. They can tirelessly optimize for every single consumer. We expect the number of consumer relationships will grow and churn will go down because quality goes up. Amanda Whalen: For the second half of your question on carrier fees, it is very separate from Composer. As we discussed, carrier fees are about the choice and balance we are making between customer predictability and trust and maintaining our overall margins. If you look at our Q1 gross margins, you can see that compared to last year, we absorbed the carrier fees, saw significant growth in our text messaging business, and were able to hold our gross margins relatively steady. That shows our ability to deliver on both priorities at once. Our priorities for the back half of the year are to grow our gross profit dollars—continuing to grow revenue and gross profit dollars—while expanding our operating margin. We committed to increasing operating margins by at least a point this year, and we raised both operating income dollars and operating margin in our guidance in reflection of that strength. Chano Fernandez: I would not take the decision to not pass through carrier fees as why we are winning. It is an intentional decision to be customer-first and provide pricing stability now. We will be intentional about if and when we decide to pass through in the future. We are winning because of the value of our offering and the unified data platform we provide. We will evaluate pricing down the road. The aim is not to compete on price. The decision was important to provide stability to our customers and is reflected in the highest customer satisfaction as highlighted in the Forrester Wave. Happy customers renew and buy more from you. Operator: Thank you. Our next question is from Sitikantha Panigrahi from Mizuho. Please unmute your line and ask your question. Sitikantha Panigrahi: Great. Can you hear me? Okay, great. Amanda, it is a pleasure working with you—wish you good luck. I want to dig into the NRR at 110%, up two points year over year but flat sequentially. In prior calls, you talked about key drivers like core email, SMS, and then cross-sell and profile enforcement. Has the profile enforcement benefit already lapsed, so what keeps NRR at this or above this level? What are the next drivers that will push NRR higher in the back half of this year? Amanda Whalen: Thank you, Siti. It is a great question. The largest driver of NRR is customer behavior and the way customers are leaning into Klaviyo, Inc.—to automate more, send more, and increasingly use flows, which generate 10 times more revenue per message compared to a static campaign. As customers see that value, they lean in and use Klaviyo, Inc. more. If you break down NRR, the first and largest driver is expansion of customers’ usage of our existing products. The second driver is cross-sell. We have increasing and strong momentum there as well. Customers see the value of consolidating onto a single platform, which not only simplifies operations but makes for a better customer journey and drives better relationships. There is a little impact in NRR from lapping the price and profile enforcement from last year. Over the course of this year, you will see some impact from that lapping, but you will also see positive contribution from improvements in expansion and cross-sell. Operator: Thank you. Our next question is from Goldman Sachs. Please unmute your line and ask your question. Analyst: Thank you for taking my question. I understand the lighter beat was by design, but I think the sequential growth in the first quarter was still a bit lighter versus prior first quarters. Given Klaviyo, Inc. has outsized exposure to retail and ecommerce, is this potentially a result of the business becoming more seasonal over time as it scales, or is there a better way to think about that? Thank you. Amanda Whalen: I think it is maybe a little bit inverse to that. Because we have gone to profile enforcement, we still do see seasonality—Q4 is our customers’ biggest time of the year, and we are there for them—but with profile enforcement, we see a little bit less seasonality than in the past. The remaining seasonality primarily comes from our text messaging business and some expansion in email. In Q1, we saw strength across many parts of the business. International grew 39% year on year. Enterprise momentum is increasing, and those enterprise relationships tend to be steadier multiyear contracts. A great example is AllSaints, which signed a three-year contract. Those are going to be less variable across the year. All of these areas of strength contributed to a great Q1 and a strong outlook for the year. Operator: Thank you. Our final question is from Scott Berg from Needham and Company. Please unmute your line and ask your question. Scott Berg: Hi, everyone. Thanks for taking my question. Nice quarter here. I want to ask about the state of marketing budgets overall from what you are seeing with customers, through an interesting lens since you sell to a lot of different-sized customers. Your results suggest the marketing space seems to be on fire right now, at least from a demand perspective, especially relative to the rest of enterprise software that is growing 40% to 50% slower than Klaviyo, Inc. Why? What in the environment is driving the spend, or what are you seeing that has customers saying, “I have got to do this now, and in a big way”? Andrew Bialecki: Thanks, Scott. I can give you three trends we are seeing. First, unlike most enterprise software, we are focused on revenue generation. If you can help grow top line and profits, there is insatiable appetite to spend more, and we see that constantly. Second, consolidation—within marketing and also across marketing, data and analytics products, and now service (Customer Hub on the website). People want to merge those budgets. It is not just about total cost of ownership; it is because combining the data we have with marketing channels yields better performance, and that makes a big difference. Those trends are evergreen and durable and big contributors to our growth. Third, there is a lot of demand for intelligence applied to this combined B2C CRM infrastructure we offer. People know there are ideas they cannot see or projects they cannot execute on, and they want to use intelligence to execute efficiently, create profitability, and increase revenues. Chano Fernandez: I would only add personalization and the breadth of understanding that we provide via customer profiles—communicating at the right time, with the right channel, with the right message—is really powerful in our platform. Customers are leveraging that and seeing results through Klaviyo, Inc. attributed revenue. Our customers’ GMV grew more than double the rest of the market. Another trend is productivity—the opportunity to do much more with less headcount. Creating targeted campaigns and, at the same time, having Customer Agents that can communicate and put a great face to their business is a terrific capability they are leveraging. The increased revenue impact and ROI they are seeing, plus this technology shift where Klaviyo, Inc. is at the center, is what is driving it. Scott Berg: Excellent. Thanks for taking my question. Operator: This concludes today’s call. Thank you for joining us. You may now disconnect.
Operator: Good afternoon, everyone, and welcome to the webcast of Alphatec Holdings, Inc.'s First Quarter Financial Results. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to non-GAAP or adjusted measures. Reconciliation of these measures to U.S. GAAP can be found in the supplemental financial tables included in today's press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Sell-side analysts planning to ask a question must be registered through the dedicated analyst link included in today's materials. If you have not yet registered, please do so now to be included in the Q&A queue. Leading today's call will be Alphatec Holdings, Inc.'s Chairman and CEO, Patrick S. Miles, and CFO, J. Todd Koning. I will now turn the call over to Patrick S. Miles. Patrick S. Miles: Thanks, Paige. Appreciate it. Welcome to the Q1 2026 financial results call from Alphatec Holdings, Inc. There will be some forward-looking statements, so please review at your leisure. With that, let me start simple. The business is working and it is scaling. We did $192 million in Q1, which was short of our internal expectation, primarily due to a shortfall in EOS sales performance. Surgical revenue was up 17%, mostly in line with consensus. What matters most is what is fueling that growth. Cases up 21%, surgeons up 23%. That is not only a utilization story, it is an adoption story. We are adding surgeons, they are doing more with us. We have created a durable growth model. EOS revenue was $14 million for the quarter. As stated, this was short of our quarterly goal, and we have taken steps to bolster the team in sales, downstream marketing, and EOS support. However, the important thing we are seeing is EOS Insight is evolving into more than a product; look, a platform. Growth and adoption of our EOS Insight platform is creating significant momentum. EOS has enabled us to gain access to prestigious institutions; a hunting license within those institutions is increasingly paying off for us. We generated $21 million of EBITDA and, yes, used $11 million of cash, but that was a function of timing and intent. We are leaning into and investing in what is working. When you step back, Alphatec Holdings, Inc. has become a compounding engine. More surgeons, more cases, and more platform pull-through. We are still just at the beginning of what we know we can do. With that, I will turn it over to Todd. J. Todd Koning: Well, thank you, Pat, and good afternoon, everyone. I will start with first quarter 2026 revenue. Total revenue was $192 million, up 14% year over year, with surgical revenue of $178 million growing 17%. Sequentially, surgical revenue declined 6%, which was more pronounced than we have historically seen, primarily due to lower revenue-per-procedure contribution. Our strong year-over-year growth continues to be driven by the core elements of our model, which are 21% procedural volume growth, driven by 23% growth in new surgeon users, and continued revenue-per-procedure expansion within our individual procedures. The consistent trends in net new surgeon additions and strong case volume, both above 20% again this quarter, speak to the ongoing momentum and durability in our surgical business. Revenue per case declined approximately 3% year over year, driven primarily by mix impacts. In the U.S., we saw a higher mix of cervical procedures, which have a lower average revenue per case. In addition, our strong international growth contributed mix pressure, and finally, our overall biologics attachment rate was lower than expected. Importantly and consistent with prior periods, we are seeing strength in core individual procedural ASPs for lateral, ALIF, and cervical, which were up 2%, 4%, and 8%, respectively, year over year. Turning to EOS, revenue was $14 million, down $3 million year over year, as the number of system deliveries were lower than the prior-year period, resulting in lower revenue recognition for the quarter. These results were below our expectations for the quarter, and we have taken steps to address this by strengthening our sales team and downstream marketing function. The installed base of global EOS units increased by 7% year over year. In the U.S., the EOS Edge installed base is a prerequisite for EOS Insight adoption; Edge installed base grew 39% year over year, and the amount of EOS Insight accounts more than doubled. We continue to see strong utilization trends in these EOS Edge accounts and increasing evidence of implant pull-through following EOS Insight adoption. Implant volumes at EOS Insight accounts are increasing meaningfully post go-live, reinforcing the long-term strategic and financial value of the platform. Turning to the P&L, gross margin for the quarter was 71.6%, representing over 120 basis points of improvement year over year. This expansion was driven by continued asset efficiency improvements and temporary mix benefit from lower-than-expected EOS revenue. Operating expenses grew approximately 6% year over year, well below the revenue growth, reflecting continued operating leverage in the business and disciplined management of expenses. First quarter non-GAAP R&D was $14 million, or 7% of revenue, up slightly year over year as we continue to invest in innovation and launch new procedural solutions. Non-GAAP SG&A was $118 million, which grew 6% and was 62% of revenue, improving by 420 basis points year over year, primarily driven by improvements in our variable selling costs and slower depreciation growth. As a result of continued top-line revenue growth and disciplined management of expenses, we continued to see margin expansion and profitability improvements. Adjusted EBITDA was $21 million in the first quarter, representing 11% of revenue and growing 97% year over year. Importantly, we delivered 45% drop-through on incremental revenue, demonstrating the scalability of the business model. Overall, we continue to see meaningful operating leverage, consistent margin expansion, and improving profitability aligned with our long-term plan. Turning now to the balance sheet. We ended the quarter with approximately $140 million in cash. Free cash used for the quarter was approximately $11 million, at the favorable end of our expected range. Our cash flow profile continues to reflect positive operating cash flow, with operating cash flow generating cash for the fourth consecutive quarter while continuing to invest in instruments and inventory to support growth. Notably, we invested approximately $33 million in inventory and instruments this past quarter to support the demand we are seeing from our 20% plus growth in surgeon adoption and the corresponding growth in our sales team. Our consistent profitable growth, strong cash generation, and increasingly attractive EBITDA profile, now exceeding $100 million on a trailing twelve-month basis, have positioned us to mature our capital structure. As a result of our strong operating performance and continued progression to a more scaled and profitable financial profile, we announced today we recently entered into a new Term Loan A and revolving credit facility led by JPMorgan and TD Cowen. This new bank facility, which replaces our previous term loan and asset-backed revolver, simplifies our capital structure, extends maturities to 2031, and reduces interest expense by more than $6 million annually. We estimate this new facility will save the company as much as $35 million in interest over the life of the facility. At close, the new loan has a rate of SOFR plus 275 basis points. The new facility matures in May 2031. We are very pleased with the bank syndicate we partnered with in this new facility. This transaction reflects the continued maturation of the business and the continued improvement of our capital structure and credit profile. Turning to the revenue outlook. We now expect total revenue for full year 2026 of approximately $882 million, representing 15% growth year over year. This includes surgical revenue of approximately $805 million, unchanged from our prior guidance, representing 17% growth, or a $118 million increase year over year. We expect surgical case volume growth in the high teens and average revenue per case to be flat for the full year. We now expect EOS revenue of approximately $77 million, reflecting updated expectations for our EOS business. We take guidance very seriously, and this update reflects our current outlook and a clear, realistic view of near-term performance while reinforcing our confidence in the long-term opportunity. Importantly, we are maintaining our surgical revenue, reflecting continued confidence in the underlying demand and growth drivers of the business. To recap our financial outlook, we expect revenue to grow 15% to $882 million for the full year. We continue to expect adjusted EBITDA of approximately $134 million even with the reduced revenue expectations, which reflects the confidence we have in our profitability progression. This is a 15% margin, representing approximately 35% drop-through on the incremental revenue dollar year over year. For free cash flow, we continue to expect at least $20 million in free cash flow for the full year, with second quarter expectations for free cash flow to approximate zero. We recognize that adjusting our guidance is a significant decision, and we believe that the updated guidance appropriately reflects our current outlook as we remain laser focused on delivering the profitable sales growth implied in our 2026 guide. To put our first quarter financial performance in perspective, we drove 14% overall revenue growth and 17% surgical revenue growth at an annualized scale of approximately $800 million, with strong operating leverage translating into significant profitability expansion, while making material improvements to our balance sheet. While the quarter did not live up to our growth expectations, we are confident in our ability to continue to grow at multiples of the market, translating that into profitability and cash flow. With that, I will turn the call back to Pat. Patrick S. Miles: Thanks, Todd. Our strategy has not changed because we know it works. Start with clinical distinction. If it does not matter in the OR, it does not matter. If it makes surgery better in the OR, it matters to us greatly. This is how we have built the best procedural approaches in our industry. Second is surgeon adoption. Do not sell products. We develop approaches that improve surgery, elevate workflows, and build trust. We know this philosophy is effective because our surgeon demand remains very high. Third is the sales engine. We are continually assembling and improving upon a sales force that is disciplined, aligned, energized, and built to scale. Put that together, and it is very straightforward. Do something clinically meaningful, surgeons adopt, and we scale it. We are not focused on widgets or, as we like to say, the currency of our business. We assemble procedures from the ground up. Everything you see here is designed to work together. That is what has driven and will continue to drive our model. Do not sell one thing, be it a screw, a plate, implant, or a rod. We offer procedural approaches that make surgery better. And better procedures over time lead to expanded indications, greater complexity, and increased revenue. While we call that a convoyed sales effect, it is really just a result of designing procedures the right way leading to better patient outcomes. We start in lateral for a reason, because it is where we have the greatest collection of know-how and where we most distinguish. The surgery works. It is reproducible, efficient, and surgeons feel comfortable with it very quickly. I was in a case last Friday, L4-5 spondy. Fifteen minutes in, disk height was restored, and under an hour, the case was done with minimal blood loss and morbidity. That same case used to take four hours and was a very different experience—far less reproducible for the surgeon, far less predictable for the patient. PTP has profoundly improved surgery, for both surgeon and patient. That is what creates confidence. And once surgeons experience reproducible success in lateral, they do not stay with just that procedure. They expand their utility into cervical, TLIF, posterior fixation—across the board. Our growth is not dependent on just adding incremental surgeons; it is expanding indications for procedures they adopt and moving them to other approaches, which is what happens after they trust you. That is what the model is really about, and that is how it compounds. EOS continues to be a big deal for us. And while installation timing was a challenge in the quarter, the EOS experience is playing out exactly as we expected. First, EOS Edge gets us in the door with leading institutions that were hard to impossible for us to access previously—places like Duke, NYU, HSS, Northwestern, University of Virginia, University of Maryland, just to name a few. EOS becomes part of the workflow: pre-surgical planning, intraoperative reconciliation, and follow-up. It starts driving the case volume—Insight, patient-specific rods, alignment—and over time, it builds something more valuable than any one product. It is data generation. That is the moat. We are already seeing EOS impact—about 30% revenue lift per surgeon after Insight adoption. So EOS is not just additive; it is multiplicative. What is happening with Insight right now is important. We are moving from imaging to intelligence—3D alignment, patient-specific planning—starting to predict outcomes, not just react to them. And every case makes the system better. That is how this compounds. We are creating a true structured data advantage. At the core of this is our ability to take EOS imaging and convert it into quantitative, actionable intelligence. It is becoming smarter, more predictive, and more embedded into clinical decision-making. That is how you build clinical distinction. This is where owning the image and translating it into data matters. Valence is early, but it is doing exactly what we need it to do. It fits seamlessly into the surgical workflow, does not get in the way. The footprint is very small, actually makes the case cleaner. And that is everything. If it disrupts the surgeon's workflow, it does not get used. We are seeing strong utility, positive surgeon feedback, and real usage. And the same pattern we have seen before: it works, surgeons trust it, it grows. How this is playing out. Japan looks very familiar—in a good way. We are leading with lateral, building early confidence, and seeing surgeons engage. I have seen it firsthand. I was in the OR a couple of weeks ago, and the surgery was methodical, predictable, and reproducible. This is the same pattern. They adopt, they do more, they expand. It is early, but it is exactly what we wanted to see. In closing, when I think about Alphatec Holdings, Inc., it is pretty straightforward. We are focused 100% in spine. We built real leadership in lateral. We are doing the same thing in deformity with EOS. We put the infrastructure in place to scale. Most importantly, we are growing and becoming more profitable at the same time. We have established a system and ecosystem that builds upon itself. Last point: why people are coming here—surgeons and reps—because we care about what they care about. No push widgets. We give them procedures, and increasingly information, that improves predictability and patient outcomes. That drives surgeon interest and adoption, leading to more cases. That in turn attracts sales agents and builds careers. And that is why Alphatec Holdings, Inc. is the preferred destination in spine. We will now open the call for questions. Operator: As a reminder, sell-side analysts planning to ask a question must be registered through the dedicated analyst link included in today's materials. If you have not yet registered, please do so now to be included in the Q&A queue. If you would like to ask a question, please follow the instructions from your conferencing system. To withdraw your question, press 1 again. We will now open the floor for questions. In consideration of others, please limit yourself to one question. Our first question comes from the line of Mathew Blackman with TD Cowen. Your line is open. Please go ahead. Mathew Blackman: Thank you. In the context of the 2027 LRP, do you feel confident reaffirming the $1 billion revenue target? Consensus is about 4% to 5% higher than that. Given how Q1 shook out and the new 2026 guide, there is a big step-up implied to get to 2027, particularly versus consensus. Your level of comfort today with that 2027 LRP revenue number and any comment on where consensus sits would be helpful. Thank you. J. Todd Koning: Matt, given the fact that we have adjusted our guidance to reflect current expectations around EOS, I would tell you the guide on EOS reflects very near-term execution issues that we believe we have addressed through adding incremental sales talent and downstream marketing resources. We fundamentally believe that addresses the issues. Our guidance suggests we expect to exit this year more in line with what our original guide assumed, and therefore we believe we are on track to accomplish the goals we laid out in the context of our long-range plan. Operator: Our next question comes from the line of Analyst with JPMorgan. Your line is open. Please go ahead. Analyst: Thanks for the question. On the trajectory and specifically the pricing per case headwind you saw this quarter, volumes picked back up to 20% plus, but it sounds like the price-per-case headwind could stick around as cervical and some faster-growing businesses continue to put pressure on that. Is that the right way to think about it—continued revenue-per-case headwinds offset by volume growth this year? And then a follow-up on your ability to reiterate adjusted EBITDA given potential needs to invest in EOS Insight—how do you balance potential increased investment and driving revenue growth? J. Todd Koning: Yes, that understanding is correct. Our guidance implies high-teens volume growth with flattish revenue per procedure for the year. The decline this quarter was largely mix—strong cervical procedures, which have a lower revenue-per-procedure contribution, and strong international performance, which also has a lower revenue-per-procedure profile. Third, we had lower biologics attachment. We believe upcoming product launches and improved execution will help there. As you model the balance of the year, we are thinking flat revenue per procedure year over year. Patrick S. Miles: I would just add, where we make investments, we get a response. In lateral, ASP grew as intended. While mix impacted the overall average, where we are distinguishing ourselves, we are prospering. J. Todd Koning: That is a good point. As noted, lateral grew 2% revenue per procedure, ALIF 4%, and cervical 8% year over year. We have made significant investments in those areas. Patrick S. Miles: On EBITDA versus investment needs, the infrastructure is in place. With 39% year-over-year growth in the EOS Edge base, the opportunity to exploit that base is very evident. The challenge has been installation timing and construction-related buildouts that make installations choppy, and revenue recognition reflects installations. I do not see a new investment requirement to grow. We are growing about 30% per surgeon in accounts that have EOS. The thesis is intact. I am thrilled with the demand profile where systems and EOS Insight are installed. This is quarter-by-quarter lumpiness in a long-term execution story, and I am totally thrilled about the EOS business in general—irritated by lumpiness, but no new investment profile required. Operator: Our next question comes from the line of Matthew Stephan Miksic with Barclays. Your line is open. Please go ahead. Matthew Stephan Miksic: Thanks. On surgical, results came in a bit lighter than expected. Was there any phasing in Q1—new territories catching up, difficult comps, regional impacts, weather—that impacted results? And any color on sequential performance from here to reach the full-year number? Patrick S. Miles: The most comforting part is that momentum where we most distinguish continues to be profoundly robust. Surgeon additions up over 20% speaks to a business in demand. It was kind of a goofy quarter. We are seeing strength right out of the gate in Q2. This is quarter-by-quarter lumpiness. J. Todd Koning: To add specifics, there was weather in late January—FedEx was restrained for almost an entire week, and the Northeast had two storms. There is weather every year, but there was likely more this year than normal. We also exited March a bit softer than expected, largely due to less growth in traditional posterior open procedures and lower biologics attachment. The good news is a sequential improvement in April, which gives us confidence into Q2 and the typical Q1-to-Q2 seasonality. Structurally, deformity season starts in late May into June, which should help. We have invested in sets and inventory to support increased demand. We hang our hat on strong surgeon adoption and volumetric components of the business. Matthew Stephan Miksic: One follow-up. Instrument investment is up year over year and faster than doctor growth. Is that a leading indicator, and what does it suggest for coming quarters? Patrick S. Miles: The volume of people adopting our lateral portfolio is growing quickly. The frustrating part is that conventional short-segment open surgery, where we are not profoundly different, seems flat, and biologics impact was not great. TheraDaptive cannot come fast enough. The procedural strategy is well adopted, EOS is working as planned, and we clearly distinguish in lateral. Where we are not different, we do not outperform. J. Todd Koning: I would add the continuing growing contribution from international, both as a surgeon adoption story and a revenue contributor, as we grow through the year. Operator: Our next question comes from the line of Analyst with Piper Sandler. Your line is open. Please go ahead. Analyst: Good afternoon. On the cadence for the rest of the year for EOS, it sounds like most of the work is done—realigning the sales team, new reps, additional marketing resources. It will take time for new reps to ramp. When do you anticipate the EOS franchise getting back on track? J. Todd Koning: Our expectation is that EOS contributes in a more full way in the second half. We think overall growth in Q2 should be similar to Q1 at about 14%, and our guide implies approximately 17% overall revenue growth in the second half as EOS contributes more meaningfully. Patrick S. Miles: The cadence of adding surgical sales reps has been totally consistent, with talent coming from all players. That has not slowed. The focal frustration is around EOS placements. We must continue to improve as a capital equipment provider. Missing by a few units can impact a quarter’s revenue, but it does not impede belief in the field. Once in place, utility expands. Operator: Our next question comes from the line of David Joshua Saxon with Needham. Your line is open. Please go ahead. David Joshua Saxon: Great. First, to clarify, when you said “14” for the second quarter, was that $14 million for EOS or 14% overall growth? And then my question: on revenue per case in guidance, what is embedded for U.S. case mix and biologics attachment? If cervical remains strong and biologics does not change, what is the risk to flat revenue per case? J. Todd Koning: The “14” comment referred to 14% overall growth. On revenue per case, we expect continued strong cervical contribution to the overall business, as we have seen. We saw about a 38% biologics attachment rate; we would expect that to go up a couple of points, driven by greater salesforce execution and entering deformity season, where cases tend to be longer constructs with higher biologics utilization. That is how we constructed the revenue-per-procedure math for the balance of the year. Operator: Our next question comes from the line of Caitlin Roberts with Canaccord Genuity. Your line is open. Please go ahead. Caitlin Roberts: Turning back to EOS, you noted the weakness was execution-related. Any more color on that specifically and whether any of the weakness related to capital environment or facility appetite? Do those hurdles translate into Valence and Navigation? Patrick S. Miles: EOS issues do not bleed into Valence. One challenge with EOS has always been structural buildout—the construction required due to unit size. More EOS units that require more buildout lowers predictability of installation timing, and revenue recognition follows installation. We are improving on sales, downstream marketing, and support, especially aligning on installation timing. Those challenges are execution-related and have nothing to do with Valence. On capital appetite generally, it is tough to read across. We are irritated over lack of execution—committed to a number of units and did not fulfill. The demand profile is phenomenal and the thesis is great; construction and installation are the issues. This is an execution flaw, not a thesis issue. Operator: Our next question comes from the line of Analyst with Stifel. Your line is open. Please go ahead. Analyst: Thanks. On the 2026 surgical outlook, surgical was up 17% in the quarter, full-year guidance is also 17%. Comps get more difficult, March was below expectations, April came back. What gives you confidence maintaining the surgical outlook when you decelerated again in Q1 and guidance implies reacceleration? Are there incremental drivers? Patrick S. Miles: Confidence comes from the demand profile around procedures that most distinguish us and the volume of surgeons continuing to join. Historical growth in surgeon count and their utilization gives us confidence. Looking at the mix, what we were losing was more conventional stuff. Q2 and Q3 are the conventional “fest,” with more long reconstruction. EOS impact gives us confidence. So even as comps get harder, when the procedural mix and surgeon additions are as expected, we feel very good. J. Todd Koning: Fair question. March was not as good as expected, but April rebounded and gives us a good platform into Q2. Deformity season is a structural step-up from Q1 to Q2. We have invested in small stature sets and patient positioners to fulfill that demand in Q2 and Q3. We expect to drive increased biologics attachment through focused sales execution. International contribution continues to improve. For all these reasons, we believe the path from Q1 to Q2 and onward is intact. Total surgeon adoption at 20% plus remains a great leading indicator. Operator: Our next question comes from the line of Analyst with Wells Fargo. Your line is open. Please go ahead. Analyst: Thanks. On Valence, would you discuss placements to date and what early pull-through numbers look like? Patrick S. Miles: We are not going to speak to specific numbers. This year is about maximizing experience and ensuring the product is perfect. It is doing everything we expected. There is an in-field camera that is hugely elegant, letting the surgeon control room elements. It is not a huge piece of capital. It has been utilized mostly in PTP and is trending above the targets we provided for the year. We are bullish on the clinical impact and the seamless workflow. Integrating best-in-class neurophysiology with an elegant, effective workflow will increase PTP users. It is going as planned. Operator: Our next question comes from the line of Analyst with Freedom Capital Markets. Your line is open. Please go ahead. Analyst: Good afternoon. Two questions. First, revenue per procedure appears down approximately 4% year over year, perhaps the first down year since at least 2021. What are the key drivers in 2026 and in the out years? Second, in 2025, growth in surgeon users was in line with procedure growth, implying procedures per surgeon around flat. Where are you today in terms of penetration with active U.S. spine surgeons, and how should we think about breadth versus depth going forward? J. Todd Koning: On revenue per procedure, the drivers this quarter were mix—strong growth in cervical, which carries a lower revenue-per-procedure profile, and strong performance outside the U.S., which also has a lower revenue-per-procedure profile—plus lower biologics attachment. Importantly, when you look at our anterior column, lateral revenue per procedure grew 2%, ALIF 4%, and cervical 8%. Our ability to capture revenue opportunity in a procedure continues to expand, which supports the investment thesis. On penetration and utilization, we saw another strong quarter of surgeon adoption. If you go back to 2022, we have seen average utilization per surgeon in the U.S. grow about 3% a year. That average is pulled down by strong waves of new adopters. We continue to feel good about that, and strong demand from new surgeons has historically translated into procedural adoption. We expect that to continue throughout the year. Analyst: Where your EOS Insight platform serves as a door knocker and a driver for surgeon pull-through, does that case still hold? And does it make sense to rethink some of the hardware monetization model? Patrick S. Miles: Sean, it does not make me think we should rethink anything; it makes me enthusiastic about what we are doing. Imagine from where we have come—Alphatec Holdings, Inc. getting access to institutions like HSS, NYU, Duke, Northwestern, University of Virginia, University of Maryland. It is unbelievable access that EOS has given us. Probably the thing I am most disappointed in myself about is enabling you to understand the uniqueness of this informatics tool. There is nobody in the business with a tool that provides a preoperative image, a plan integrated into the intraoperative experience, and then a postoperative evaluation—it is all the same image. That provides a structured dataset. Your ability to translate a structured dataset is unlike anything anybody else has, and it is all automated. The nemesis of spine surgery historically has been a lack of data. Having a structured dataset that automatically fuels information into a depot we can translate to mitigate variables is transformative. We have talked about revision rates in spine and how mitigating variables is the route to greater predictability. Missing a few installations and suggesting we rethink the thesis is not even a consideration. At the American Association of Neurological Surgeons, the big players are Medtronic, Globus, and ourselves; the most promising player is Alphatec Holdings, Inc. Translating this tool—five years from now it will be the father, son, deed. Any inference that there is any blinking on the thesis is misdirected. We are committed to this at the size of Texas. Missing a few EOS construction timelines and having people question us is, frankly, [inaudible]. Appreciate the question. Operator: We have reached the end of the question and answer session. I will now hand the call back to Patrick S. Miles for closing remarks. Patrick S. Miles: Just a quick comment. I want to thank everybody for dialing in. I have never been more bullish and enthusiastic about the build of Alphatec Holdings, Inc. I am thrilled about the volume of people coming here from competitive companies to support the effort. Our best days are in front of us. The strategic thesis is the right one. We are going to be the data source in this business. I want to share my enthusiasm for where we are and look forward to discussions as the year progresses because we will continue to prosper as we have for the last eight years. Thanks very much for your interest and we look forward to more. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Hello, and welcome to Solventum Corporation's first quarter fiscal year 2026 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, please press 1 on your telephone keypad. I would now like to turn the conference over to Amy Wakeham, Senior Vice President of Investor Relations, Finance, and Communications. You may begin. Amy Wakeham: Thank you. Good afternoon, and welcome to Solventum Corporation's first quarter fiscal year 2026 earnings call. Joining me on today's call are Chief Executive Officer, Bryan Hanson, and Chief Financial Officer, Wayde McMillan. A replay of today's earnings call will be available later today in the Investor Relations section of our corporate website. The earnings press release and presentation are both available there now. During today's call, our discussion and any comments we make will be on a non-GAAP basis unless they are specifically called out as GAAP. The non-GAAP information discussed is not intended to be considered in isolation or as a substitute for the reported GAAP financial information. Please review the supporting schedules in today's earnings press release to reconcile the non-GAAP measures with the GAAP reported numbers. Our discussion on today's call will include forward-looking statements including, but not limited to, expectations about our future financial and operating performance. These statements are made based on reasonable assumptions; however, our actual results could differ. Please review our SEC filings for a complete discussion of the risk factors that could cause our actual results to differ materially from any forward-looking statements made today. Following our prepared remarks, we will hold a Q&A session. For this portion of today's call, please limit yourself to one question and one related follow-up. If you have additional questions, you can rejoin the call queue. And with that, I would now like to hand the call over to Bryan. Bryan Hanson: All right. Great, and thanks, Amy, and to all of our shareholders and everyone else following the Solventum Corporation story, I just want to say thanks and welcome to our first quarter 2026 earnings call. I am going to start by addressing our Solvers around the world because I am pretty sure that a few of them are listening in today. I just want to say thank you, and thank you once again for delivering on your commitments in our fast-paced transformation environment. I know it is not easy with the amount of change, but the results that we are sharing today just do not happen without you and your hard work. I am extremely proud of not just your dedication but the results that you continue to deliver. This team's ability to drive outcomes while navigating ongoing separation efforts, ERP implementations, and acquisitions and divestitures is a testament to the strong talent we have in the organization. It is a testament to you, and it is a testament to the culture that we have already built. So again, to our global team members, thank you very much for making it happen. Now let us get into it. We delivered first quarter results ahead of our plan and ahead of expectations. Organic sales growth and EPS both exceeded our plan, again reflecting very strong execution across the organization and the momentum that we have already built. We saw solid performance across all segments driven by strong commercial execution and new product launches, and thanks to positive volume, mix, and continued progress in our savings initiatives, we also achieved better-than-expected performance on margins as well. This is a clear reflection of the discipline and rigor we have built into how we manage this business. Q1 is a clear indication that we are well on our way to delivering our 2026 guidance and, importantly, our go-forward LRP objectives. Our transformation journey is working; we have rebuilt our commercial engine with clearer accountability, needed specialization, and stronger leadership, and now innovation is reinforcing the commercial momentum that we have built. We expect to have close to 20 new products launched over the next two years, and as you would expect, a meaningful portion of them will be within our growth driver areas. This will be additional fuel for that new and enhanced commercial team. On operational efficiency and the separation from 3M, we have made meaningful progress on our ERP cutovers as well as the overall separation process, and I can tell you that the team continues to execute against these milestones with purpose. That said, we cannot wait to get to 2027 and put the majority of the separation work behind us. We expect the resources and bandwidth we free up to create significant value, and that is exactly what our Transform for the Future program is designed to capture. As a reminder, our Transform for the Future program is a multiyear $500 million savings program. It is our way of proactively reshaping our operating structure while freeing up resources to invest for the long term. We are streamlining systems, increasing automation, and optimizing our global footprint while repositioning spend toward the highest-return areas of our business. This program is already paying dividends and will deliver more meaningfully in 2027 and beyond. On our portfolio optimization program, we have moved rapidly with clear proof points of our ability to execute, ranging from SKU rationalization to the sale of the P&F business to the acquisition of Acera. And we are just getting started. We see portfolio optimization as a perpetual lever for value creation here at Solventum Corporation. As we said in our original Investor Day, we will continually assess our businesses for strategic and financial fit, and when we determine that someone else can offer more value for a business we divest, or we see another path to increase shareholder value, we will act decisively just like we did with the purification and filtration business. Relative to our SKU rationalization, we are more than halfway through this process and expect to finish by the end of this year. Our separation of P&F is on track and progressing well, and Acera—although it is early—the performance reinforces our ability to identify, close, and effectively integrate attractive assets in our space. In fact, Acera is another great proof point that portfolio optimization is not just a strategic priority; it is a value creation lever that we absolutely know how to pull. We targeted the right asset, a fast-growth business aligned to our existing call points and, as a result, immediately beneficial to our combined commercial teams. Importantly, we see Acera as just the beginning. We have a target-rich environment for additional tuck-in acquisitions and a balance sheet that gives us the flexibility to pursue them while also returning capital to shareholders. As you probably remember, we have board approval for up to $1 billion in share buybacks, and given the substantial value we see in our shares and the quality of our business, one should expect that we will accelerate execution of that approval. Moving to our three operating segments, I will start with MedSurg, which is our largest business. We continue to see strong underlying performance in our growth driver areas. Negative pressure wound therapy was led by ongoing demand for traditional and single-use therapy, continued expansion of our VAC Peel & Place dressing, and our specialized sales force. With Acera, it opens the door to the fast-growth acute care synthetic tissue space and really slots perfectly into our advanced wound care infrastructure. We are early in integration, but the thesis is playing out. The team is executing, the product portfolio is resonating with our customers, and we expect Acera to be a meaningful contributor to reported growth as the year progresses. In our infection prevention and surgical solutions business, Tegaderm CHG remains a consistent performer as our team successfully upsells this important clinical solution, and we are encouraged by the adoption of the recent Attest sterilization product launches as well. Both of these areas are benefiting from our specialized sales teams. In Dental Solutions, we are building on the momentum we saw in 2025. Our Clarity brand relaunch, Filtek EasyMatch, and Clarity Aligners Pro Clear are resonating with our customers and benefiting again from a more specialized sales team. As we exited 2025, this team made significant strides in improving backorders, and our customers are noticing. I want to thank our supply chain and the dental teams for making it happen. Moving to our Health Information Systems business, we continue to benefit from the strength of our revenue cycle management sub-business. Inside RCM, our autonomous coding offering continues to gain traction in both outpatient and inpatient settings. Our international expansion is providing a strong tailwind as well. Relative to AI and autonomous coding, I will reiterate what I said on our last call. We see AI as a helpful tool to deliver better outcomes when it comes to autonomous coding, but what differentiates the outcomes is the data, the rules, and the rigor behind them. We are differentially able to leverage AI thanks to our unique ability to efficiently and effectively train it. We built deep rules and algorithms designed to assure accurate and compliant reimbursement coding, and this, combined with our vast datasets and proprietary workflows, allows us to more effectively train and maximize AI and, ultimately, deliver autonomous coding that our customers can trust. The economics of autonomous coding are compelling. Our customers benefit by improving productivity, eliminating FTE cost infrastructure, and improving revenue capture thanks to increased accuracy. That is a powerful value proposition: reduce cost, improve productivity, and capture more revenue. Shifting gears to tariffs, we continue to expect the annual headwinds to be in the range of $100 million to $120 million. From the very beginning, our supply chain teams have been actively working on mitigation strategies since we first saw tariff headwinds emerge. Our Transform for the Future program gives us additional firepower to offset these headwinds, and as a result, we have committed to expanding operating margins 50 to 100 basis points in 2026, and we absolutely intend to do so. Zooming out, going into Q1, we had people ask whether we could maintain the momentum we saw in 2025. We did triple our comparable annual sales growth in 2025, but that was before the full benefits of our recent product launches, our pipeline innovation, and the commercial enhancements that we made in 2025. For our full year 2026 expectations, excluding SKU exits, we represent continued progress on that ramp. As I have said in the past and will say again, it is not a question of whether we get to our LRP targets of 4% to 5% organic sales growth; it is a question of when. To summarize the key messages: number one, our underlying commercial momentum is real and continuing, and our new product pipeline will be the fuel that momentum needs to continue from here. Number two, our operational programs—the Transform for the Future program, programmatic supply chain savings, and the separation progress—give us additional confidence in the margin expansion story for the full year and beyond. Number three, we have moved with speed and, importantly, impact on portfolio optimization, but we are not finished. We will continue to actively shape this portfolio for the long term. Number four, the ramp toward our long-range plan is happening, it is real, and it is happening faster than most people thought possible. I will now turn the call over to Wayde to walk through our financial details, and then we will open it up to questions. Wayde, go ahead. Wayde McMillan: Thanks, Bryan. We are off to a great start in 2026, delivering first quarter results that were ahead of our plan and expectations on both sales and earnings. As usual, I will begin with an update on separation progress and portfolio actions, then walk through the quarter, and conclude with a review of the full-year outlook. Our separation from 3M continues to progress; we have exited approximately 50% of the transition service agreements and are on pace to exit over 90% by the end of 2026. We have also migrated approximately 75% of over 1,200 system applications, which captures the recent and successful ERP cutover in Asia Pacific, including China. We are now looking ahead to our next wave of ERP cutovers, which includes the U.S. and Canada, planned for Q3. There was also meaningful progress across our facilities with the move of our Saint Paul, Minnesota facility from the legacy 3M campus to our new standalone facility in Eagan, Minnesota, and we achieved a meaningful milestone with the completion of our site migration activities covering several hundred sites around the globe. We also finished a strategic expansion of our manufacturing facility in South Dakota, which enhances our supply chain's flexibility to support existing product growth and new product launches. With further work to streamline our distribution centers, we are now down to 54 worldwide. Regarding recent portfolio activities, we continue to make progress on the P&F divestiture, with a majority of transition service agreements to be completed in 2027, and the Acera integration efforts are tracking to plan while maintaining strong momentum of the commercial team. Now turning to our first quarter results. Starting with top-line performance, sales of $2 billion increased 2.1% on an organic basis compared to prior year and decreased 3% on a reported basis. Foreign currency was a 270 basis point benefit to reported growth, while the net impact of acquisitions and divestitures was a 780 basis point headwind to reported growth. Growth in the quarter was driven by stronger-than-expected performance across all segments, primarily from volume, while pricing remained within the expected range. Our SKU rationalization remains on track with a 100 basis point impact in the quarter, tracking in line with our full-year expectation. Organic growth on a normalized basis would have been approximately 4% when taking into consideration separation-related timing benefits that accelerated sales volume of approximately 70 basis points from Q2 into Q1, along with the difficult year-over-year comparison and SKU headwinds, all before the contribution of Acera, which would have added another approximately 40 basis points. Moving to the segments, MedSurg delivered $1.2 billion in sales, an increase of 1.2% on an organic basis. Within MedSurg, Advanced Wound Care grew 2.1%. Negative pressure wound therapy performance was driven by strong brand, new product launches, and commercial enhancements. Acera contributed $28 million to reported sales, which is reflected in the Advanced Wound Care business. Infection Prevention and Surgical Solutions grew 0.6%, reflecting improved commercial alignment and continued customer demand, as well as the separation-related timing benefits previously mentioned. As a reminder, IPSS growth in the prior year was just over 8%, as the primary beneficiary of order timing related to customers buying ahead of ERP and distribution center moves and SKU exits. Our Dental Solutions segment delivered $354 million in sales, an increase of 3.4% on an organic basis. Growth was driven by innovation as well as separation-related timing benefits. Core restoratives led overall performance, driven by strong underlying demand and commercial execution leveraging new product launches. Our Health Information Systems had another strong result with $342 million in sales, an increase of 4.7% on an organic basis, driven by strength across revenue cycle management and performance management solutions, offset by expected double-digit declines in clinician productivity solutions. Combined with strong customer retention, the pipeline activity and backlog conversion continue to support confidence in our sales growth. From an operational standpoint, we made further progress in supply chain execution during the quarter. Backorders across the portfolio continued to improve, reflecting improved manufacturing performance and the benefits of ERP and distribution actions. Looking down the P&L, even in the face of tariffs and inflation, our gross margins of 56.4% improved 80 basis points over prior year, driven by favorable programmatic savings, portfolio moves, as well as sales leverage and mix. We were above our expectations as typical first quarter seasonality was more than offset by benefits from additional sales, favorable mix, and higher programmatic savings. Operating expenses decreased versus prior year although were 100 basis points higher as a percentage of sales. This reflects the impact of portfolio moves, partially offset by the benefit of our savings programs, including Transform for the Future, outpacing investments. In total, we delivered adjusted operating income of $392 million, or an operating margin of 19.5%. Similar to last year and consistent with our expectations for a sequential seasonal decrease, operational improvements mostly offset the impact of tariffs and inflation. Net interest expense decreased year over year primarily due to a lower average debt balance following the paydown of debt in our third quarter 2025 using proceeds from the [inaudible]. Our tax rate of 20.4% was within our full-year guidance range expectations. Altogether, we delivered earnings per share of $1.48, or 11% growth, ahead of expectations. Shifting to our balance sheet, we ended the quarter with $561 million in cash and equivalents and net debt of $4.5 billion. From a free cash flow perspective, we finished ahead of our expectations mainly due to timing within the year. We had several expected demands on cash flow in Q1, including higher separation costs and tax payments related to the P&F divestiture, as well as normal seasonality for annual compensation and expense timing. Like last year, we expect Q1 to be the lowest quarter of the year. Looking ahead, free cash flow will improve, with Q4 representing the strongest quarter due to step-down of separation-related costs, timing of tax and interest payments, and the outlook for improved operating results as we exit 2026. On our fourth quarter earnings call, we indicated the separation costs and P&F divestiture transient headwinds will mostly complete in 2026, and we continue to expect significant improvement in 2027. We also started the first quarter of our share repurchase program and repurchased approximately 923,000 shares for total consideration of $67 million for the three months ended March 2026. Our balance sheet strength is well positioned for us to execute our balanced capital plan, inclusive of share repurchases and tuck-in acquisitions. Regarding our full-year 2026 outlook, we delivered a solid first quarter performance benefiting from commercial execution, increased contributions from innovation, and portfolio moves. Our confidence in underlying growth and operating performance continues to increase, and we are off to a great start with important ERP and separation milestones still to go while navigating an elevated macro headwind environment. As a result, we are maintaining our full-year organic sales growth and free cash flow guidance as provided on our fourth quarter call, and following the better-than-expected start to the year, we now estimate that our earnings per share will be toward the high end of our initial $6.40 to $6.60 range. We also want to provide some added insights about sales phasing as it relates to the last large ERP cutover, which is planned for the U.S. in Q3. We estimate over $100 million of sales timing benefit in Q2 that we expect will reverse in 2026, mostly in Q3. The additional sales phasing is an important part of our mitigation, and we will update you on our Q2 and subsequent calls on the eventual impact. Turning back to the full year, we continue to estimate a foreign exchange benefit of approximately 100 basis points on sales growth, and we are holding operating margin in the range of 21% to 21.5%, an increase of 50 to 100 basis points over prior year despite significant headwinds from tariffs annualizing and inflationary impacts. There is no change to our tax rate of 19.5% to 20.5%. In summary, we delivered a strong start to 2026. Business momentum is improving, the work in the portfolio is having a positive impact, and our execution is creating a clearer path to margin expansion and cash conversion. We will now open the call for questions. Operator: Thank you. If you would like to ask a question, please press 1 on your telephone keypad. If you would like to withdraw your question, simply press 1 again. As a reminder, please limit yourself to one question and one follow-up. Your first question comes from Brett Adam Fishbin with KeyBanc Capital Markets. Your line is open. Brett Adam Fishbin: Hey, thank you so much for taking the questions. I wanted to start with the phasing commentary around the ERP event. Could you flesh out where you expect to see the benefit relative to the different segments in Q2 from a modeling perspective? Wayde McMillan: Sure. Hey, Brett. As we called out in the prepared remarks, we are estimating over $100 million of additional sales in Q2 as we work with our customers and distributors to advance orders before we begin our Q3 cutover of ERPs in the U.S. and Canada. This will mostly impact IPSS and Dental, to your question. This is a key mitigation strategy to ease the number of orders and shipments in Q3 as we ramp up on new ERP functionality. Keep in mind, the U.S. is a very different region in that the majority of our sales go through distribution, and this helps mitigate any challenges with ERP cutovers with advanced orders into the distributors. Importantly, when we eventually report Q2, we will provide the amount of orders shipped in advance and then adjust our second half accordingly. As we have shared previously, it is difficult to predict advanced orders and volume. Therefore, we are giving you a heads-up here on magnitude, not precision. The key is we are not adjusting our full-year guide. We expect all Q2 advanced orders will be offset in 2026, mostly in Q3, and the good news is that we are nearing the end of our heavy lift on ERPs from 3M. This will be the last large cutover, and we plan to be done with ERPs and 90% of the TSAs by the end of the year. Bryan Hanson: I might just draft off of that too. It sounds a little messy—it is big numbers—but we feel pretty confident on this one. We are lucky because it is the biggest region we have in the ERP cutover, and we feel like the mitigation efforts are fantastic. It puts us in a really nice position to have almost all of our business run through distribution in the U.S., and because we can stock up those distributors, even if we have a challenge, we can cover our customers and continue to recognize revenue, which is great. In addition, this is our last one, so the team has gotten pretty good here. We have a tuned-up team and a really strong contingency program. Brett Adam Fishbin: Thanks, that is super clear. A quick related follow-up: thinking about Q2 and that $100 million benefit, on an underlying basis, is there any reason to think that the ex-ERP benefit run rate would not be somewhere within the 2% to 3% current guidance range? Wayde McMillan: That is the intent of calling out the heads-up on this advanced ordering. We do think it will be a larger magnitude than we experienced last year. We are not giving quarterly guidance, but you should assume that given the strong performance in Q1, we should continue that momentum in and through the rest of the year. Bryan Hanson: Good way to look at it. Thanks, Brett. Operator: Your next question comes from David Roman with Goldman Sachs. Your line is open. David Roman: Thank you. Good afternoon, everyone. In your prepared remarks, you talked mostly about the contribution to revenue growth coming from volume and mix versus price. Can you give us more flavor on the volume versus mix contribution, and what you are seeing from a new product launch perspective year to date? Bryan Hanson: I will start with the new product launches. As I referenced in my prepared remarks, one of the biggest catalysts we have right now is the commercial enhancements, but now we are feeding that commercial machine with some really nice product launches. I talked about those, and they are definitely helping us, with more coming—about 20 new products over the next two years. It is a combination of the enhanced commercial organization, the focus we have in growth drivers, and we are peppering in some really nice product launches as well. Wayde McMillan: On volume, mix, and price, the way to think about it is our price continues to be in that plus/minus 1% range. That means the majority of our growth is volume-based, with a significant contribution from volume and a modest positive mix. David Roman: Very helpful. As a follow-up, this is the first quarter you initiated the share repurchase program, and it was another quarter with macro-related volatility. How did you think about deploying the buyback in the quarter? Were there competing considerations for capital that drove the amount to be where it was, or should we expect this to ramp over the course of the year? Wayde McMillan: We are very happy to have our share repurchase program kicked off in Q1. We have multiple layers to it. The first layer is to repurchase shares to offset dilution of stock-based comp and to hold our share count flat. Then we also have an opportunity to buy if we see value in the shares, and we certainly see a lot of value in the stock where it has been trading more recently. We will balance that with our M&A plan. It is a balanced plan for us—when we launched the authorization program, we also launched the first acquisition of Acera. We will continue looking at tuck-in acquisitions where we can drive value, and we will also be looking at our share repurchase program with a minimum of anti-dilution and being opportunistic where we see value. Operator: Your next question comes from Ryan Zimmerman with BTIG. Your line is open. Ryan Zimmerman: Good afternoon, and thanks for taking the question. Following up on the ERP cutover dynamics: you called out about a 70 basis point impact from some order pull forward. As you think about what occurred in Asia with the ERP cutover, what did you see in terms of impact when you did that cutover that informs the U.S. plan? And how much of that 70 basis points was reflective of preparation for the Asia ERP cutover? Wayde McMillan: Great questions. Our primary objective is always to ensure product availability for our customers. The good news is we had a very successful ERP cutover in Asia Pacific, including multiple countries plus China, and that is in the rearview mirror now. We started with Europe, moved to Asia Pacific, and now we are moving to the U.S. The 70 basis points we called out was related to volume purchased ahead of mostly SKU exits and some of the separation work we are doing, not necessarily ERPs. There is a little ERP element, but given that the U.S. ERP cutovers are not until Q3, the majority of that is other separation activity. Think about countries where we have a couple of months without registrations as we cut registrations over from 3M to Solventum Corporation, so we shipped some advanced orders to keep customers stocked as we transition. To clarify, the 70 basis points in the quarter is volume we would have normally seen in Q2 that moved into Q1. Ryan Zimmerman: Understood. Looking at margins, gross margins came in well ahead of consensus. I do not believe there is any refund activity in there. Your comments suggest you are still holding the line on tariff assumptions for the year. Where is your head at on tariff refunds or potential changes in tariff rates through the year? Wayde McMillan: On gross margin, we had a benefit from sales and mix as well as higher programmatic savings. We normally expect some seasonality headwinds in Q1; we saw those, but they were more than offset, which drove the 80 basis points of margin expansion. We also benefited from portfolio moves—the P&F divestiture and the Acera acquisition are both accretive to gross margins. On tariffs, it is a fluid situation. We are monitoring and managing it closely, but without clarity at this point, we are holding our estimate in the $100 million to $120 million range for the year. Our Q1 came in at the high end of that range on a quarterly basis. We have not booked any potential refunds in our results yet; like most companies, we are in process on refunds, but nothing has been recognized. Bryan Hanson: On the gross margin side, since it came up, maybe you can provide any color for the rest of the year, Wayde? Wayde McMillan: Yes, thanks. We do expect the rest of the year to be slightly below Q1. We think closer to 56% gross margin is a good estimate for the coming quarters. So, strong Q1 a little above 56%; for the rest of the year, just under 56% would be a good estimate. Operator: Your next question comes from Jason M. Bednar with Piper Sandler. Your line is open. Jason M. Bednar: Hey, good afternoon. I am going to layer onto the ERP cutover topic from a different angle. You sound confident around the planning. What does this big U.S. ERP change mean for your OpEx savings plans? When do you begin realizing cost savings from this switch—later this year, early next year? And is that wrapped into your restructuring cost savings program, or are these distinct items? Bryan Hanson: Maybe I will quickly say on the mitigation plan, I want to call out the team because everyone is working really hard on the ERP cutovers. It is a very large cross-functional group that is just flat out right now. The mitigation process we have gone through is probably the best I have ever seen, so I feel very confident coming into Q3. On whether this opens up margin opportunity, Wayde? Wayde McMillan: The primary objective here is separation from 3M. Because we were in a separation situation, there was not a lot of preplanning around ERP cutovers to drive OpEx benefits immediately. So OpEx does not benefit significantly from the ERP cutovers at this time. However, Transform for the Future is designed to pick up on the systems we have and drive savings going forward—system benefits, automation, efficiencies—hand in glove with the rest of the Transform for the Future work, including structural areas. On operating expenses this year, we had $740 million of OpEx in Q1, which is lower in dollars but higher as a percentage of sales. Some of that was due to seasonality—higher compensation-related and other timing of expenses in Q1. We expect operating expenses to step down from Q1 into Q2, Q3, and Q4, which helps us increase operating margins as we move through the year. Jason M. Bednar: Thanks for the extra modeling color. As a follow-up, Bryan, you mentioned almost 20 new products over the next couple of years. Can you break out by segment, cadence of launch activity, contribution to growth, and whether these are brand-new products versus relaunches? Bryan Hanson: You remembered exactly—almost 20. It is mainly new products. There are some relaunches in certain areas where we will do capacity expansion to meet demand and then relaunch globally, but the large majority are new products across each of our businesses. The cadence is steady and will accelerate through the two years, but it is not back-end loaded—nice cadence this year and the same next year. They are dedicated to our growth driver areas, with some outside of that, and span each of our businesses. We think about the portfolio as singles, doubles, and triples—not relying on one home run—so it reduces risk. The combined portfolio launches on a cadence that is digestible for the organization and gives the new commercial team the fuel they need to hit our LRP targets and, hopefully, beyond. Operator: Your next question comes from Travis Lee Steed with Bank of America. Your line is open. Travis Lee Steed: Thanks for taking the question, and congrats on the good quarter. Following up on the portfolio comments in the prepared remarks: do you have any signs that someone else might be willing to pay a higher value than public investors are valuing parts of the business at? And on timing, is there anything that might slow that down, or could something happen fairly quickly? Any other color on the portfolio side? Bryan Hanson: We expected interest here because we are leaning in on this as a vector of value creation. The good news is where we are from a perspective—after a spin, there are considerations outside of typical transaction factors, and the further the spin gets in the rearview mirror, the more flexibility we have. That itself indicates where we are. Then it is the simple formula you mentioned. I do not want to lean one direction or the other, but when others view our businesses as either strategically more relevant to them or financially attractive, we will pay attention. We will unlock shareholder value whether via transaction or other methods. On timeline, I do not want to set expectations. We are constantly looking at this the right way—both exits and additions. Acera is a great example of exactly the type of deal we are looking for on the add side: great growth, squarely in our business, lower risk because we know the space, and synergistic with our commercial infrastructure. Expect more of that, and we can do those while also returning cash to shareholders. We feel in a good position. Operator: Your next question comes from Rick White with Stifel. Your line is open. Rick White: Hi, good afternoon, Bryan and Wayde, and nice to see another excellent quarter here. It is hard to resist coming back to the second quarter. Consensus is a shade over $2 billion for Q2 coming into the call. Do you feel like that adequately reflects a reasonable midpoint given all the puts and takes? Wayde McMillan: It is worth coming back to this dynamic. We are not commenting on quarterly guidance, but number one, nothing changes for the total year—our guidance stays the same. Our recommendation would be: do not change your Q2 models. When we get to Q2, we are going to overachieve because of a certain amount of advanced ordering. It could be higher or lower than $100 million. When that number lands in Q2, we will call it out and then give you a clear read-through of our numbers without that advanced ordering, and we will take that same amount out of the second half, mostly in Q3. It is great that we have a higher amount of product through distribution in the U.S.; it gives us a nice mitigation strategy for the ERPs here. Bryan Hanson: If you think about it, you can expect Q2, on a normalized basis and not guiding to it, to be in the range of the growth guidance we have given, and then on top of that, Q2 is going to come in substantially higher due to the phasing. We just do not want you to try to model the phasing precisely because it will be wrong. When we get to Q2, we will give you the actuals, and as Wayde said, we will provide the information to help with your models in Q3 and Q4. Rick White: Understood. Talking about Q2 EPS then—you nudged your range toward the upper end. If consensus is $1.65 for Q2, leave it alone even with Acera contributing more, more new product, more cost reduction, and the extra $100 million revenue and leverage? Conceptually, what do we do with that? Wayde McMillan: If we set aside the phasing and look at the business: yes, we should see improvement in EPS in Q2 because Q1 is our lowest operating margin quarter, and we had a very tough comp in sales in Q1. In Q2, we should see good sales growth, higher operating margins, and that should drive improved EPS. Bringing phasing back in, if you just do the math on an extra $100 million of sales, we are not increasing investments tied to that phasing, so you will see a clear drop-through in gross margin and EPS. We will wait to see the precise mix and the exact amount—higher or lower than $100 million—but as a simple view, about 5% extra sales with roughly 30% drop-through on EPS. Again, I would not recommend precision there; it is a large magnitude, but not finalized. Net: Q2 looks like another strong quarter with improved EPS, plus additional drop-through from phasing. Rick White: Shifting to Health Information Systems, can you approximate your current mix of full AI autonomous coding versus primarily traditional computer-assisted coding? If not revenue, maybe from a customer adoption standpoint? Bryan Hanson: Great question. The good news is our team’s confidence is increasing in how much coding can eventually be fully autonomous—now talking 80% to 90% of all coding, inpatient and outpatient. In practice, it takes time to implement, so today there is a definite mix—some customers using autonomous in certain aspects, others not yet, and we continue to proliferate. A good view we can share: during the current strategic plan period, our assumption—given our progress and the trust customers have in our capabilities—is that we could get close to 50% of our customers moving over to autonomous coding. Within those hospitals and systems, we will continue to increase the percentage of coding that is autonomous over time, expanding from initial swim lanes. The value proposition—FTE infrastructure reductions, faster productivity and speed to reimbursement, and improved revenue capture from fewer mistakes—is compelling. We are moving rapidly but safely given the compliance and revenue implications. Operator: And your last question is a follow-up from David Roman with Goldman Sachs. Your line is open. David Roman: Thank you. I hate to come back to the Q2 dynamic, but there is confusion. Is the message to leave Q2 the same, you will beat Q2 and then lower the back half to right-size that? Or is the message that, on an underlying basis, Q2 would improve and there will be some unknown upside that may or may not come out of the back half? Wayde McMillan: We debated whether to give a heads-up for over $100 million of phasing or just wait for Q2. We thought the heads-up would be more helpful. To restate: our recommendation is do not change your Q2 models. Whatever the advanced orders are in Q2, we will take the mirror image out of the second half, mostly in Q3. If you want a simple approach, do not change anything now. When Q2 happens, we will disclose the phasing amount, and we will mirror that out of the second half. Separately, we do see momentum in the business. We expect our growth rate to strengthen off the tough Q1 comp and our operating margin to improve seasonally off Q1, which should support EPS improvement irrespective of phasing. David Roman: Very helpful. Lastly, when all is said and done, you would expect 2026 growth to improve versus 2025 and continue to put you on a trajectory toward the LRP targets you issued? Wayde McMillan: Absolutely. We expect improvement across all segments on an underlying basis. They all have growth drivers, commercial improvements, and innovation improvements. Dental had a significant improvement in the second half last year in backorders, so you have to look at Dental on an underlying basis without that tough comp, but otherwise, yes—improvement across 2026 for all three businesses, keeping us on track toward the LRP. Bryan Hanson: I think that was the last question. Before I pass it to Amy to close us out, I want to publicly compliment our team and make sure they get credit. Almost 100% of the LTE and 60% of our XLT are new to the organization, and we made those changes with very little disruption. We completed our first global restructuring—the Solventum Way—with over $100 million in savings, putting a structure in place to drive our new culture. We created a new mission and value system, and 90% of team members understand it and are energized by it. We scored above benchmark on our first global employee survey despite a challenging, changing environment. We completely revamped our R&D team and process. We increased our accounting depth and moved R&D from 2% to the mid-teens, significantly increasing pipeline value. We identified our primary markets and growth drivers and specialized over a thousand reps globally to drive those growth drivers—a significant commercial change. We completed more than half of our complex separation from 3M, including multiple and concurrent ERP cutovers, plus concurrent manufacturing and distribution center changes, closures, and openings. We implemented a multiyear SKU rationalization program. We sold and began separating our P&F business for $4 billion, which is one of the best multiples in the sector. We paid down half the original $8 billion debt we had at spin. We acquired and began integrating Acera. We announced and started implementing a $1 billion share repurchase program. We kicked off a multiyear global cost savings program aimed at $500 million of savings. All of that while this team has tripled comparable sales growth from our starting point. This is not possible without a deeply connected and experienced team. To our global team members: thank you. Amy Wakeham: Thank you, Bryan. Thank you, everyone, for listening, and to our analysts for your questions. As a reminder, if you have any follow-ups or need anything else, please contact the Investor Relations team directly. This concludes our first quarter fiscal year 2026 conference call. Operator: Thank you. The conference has now concluded.
Operator: Greetings and welcome to the Bright Horizons Family Solutions Inc. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer will follow the formal presentation. Should you require operator assistance, please press 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Michael Flanagan, Group Vice President, Strategic Finance. Please go ahead. Michael Flanagan: Thank you, Stacy, and welcome to Bright Horizons Family Solutions Inc.'s first quarter earnings call. Before we begin, please note that today's call is being webcast and a recording will be available on the Investor Relations section of our website, investors.brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance, and outlook, are subject to the Safe Harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are disclosed in detail in our earnings release, our 2025 Form 10-K, and other SEC filings. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statements. Today, we will also refer to non-GAAP financial measures, which are detailed and reconciled to their GAAP counterparts in our earnings release, which is available on the IR section of our website at investors.brighthorizons.com. Along with today's earnings release, we have posted an updated investor presentation to our website, which we will reference during tonight's call. Joining me on the call are our Chief Executive Officer, Stephen Kramer, and our Chief Financial Officer, Elizabeth J. Boland. Stephen will start by reviewing our results and provide an update on the business, and Elizabeth will follow with a more detailed review of the numbers before we open up to your questions. With that, let me turn the call over to Stephen. Stephen Kramer: Thanks, Mike, and good evening, everyone. 2026 is off to a positive start. Revenue grew 7% in the first quarter, in line with our expectations, and earnings came in slightly ahead, reflecting continued execution across our business segments. In Q1, we delivered double-digit revenue growth in Backup, expanded operating margins in Full Service, and made progress on transforming our Education Advisory business. Taken together, these results reflect the diversity and strength of our model and the enduring demand from working families and learners for the services that we provide, along with the employers who support them. Before I get into the segment results for the quarter, I want to take a different approach tonight and start by addressing the thoughtful questions we have received from analysts and investors in recent quarters. Specifically, I want to take a few minutes to highlight how our strategy post-COVID is focused on delivering long-term growth and earnings performance, while increasing our impact on those we serve. Bright Horizons Family Solutions Inc.'s unique business model centers around working with employers to deliver high-quality solutions that support client employees across critical life and career stages, while delivering a compelling ROI for our employer clients. Over time, we have expanded our education and care offerings and more recently have sharpened our focus on the integration of our full suite of services for the benefit of our clients and their employees. To that end, we have taken steps to unify our go-to-market strategy, executed by a singular salesforce and integrated account management team, and underpinned by new resources and tools. In parallel, we are developing a fully connected continuum of service delivered through both our owned assets and trusted partners. To make that work at scale, we are strengthening our foundational capabilities—specifically, a common client-employee credit model across our offerings, an integrated CRM and consumer data platform, and ultimately a more consistent and seamless customer experience. As Mike mentioned, alongside tonight's earnings release, we have included an updated investor deck that outlines our client-centric business model, our competitive advantages, and illustrates the scope of the growth opportunity. As one example, I will use Backup Care, our largest segment by earnings contribution. Using slides 12 through 15 in our new investor presentation, I will walk through the growth framework: penetration within existing clients, expansion of our care and education ecosystem, and winning new logos. Starting with penetration on slide 12, user penetration is less than 5% across our client base, which highlights a significant opportunity ahead. The latent demand is substantial—more than four in five working U.S. adults have at least one care need that our Backup Care offering addresses. Over the last several years, we have thoughtfully listened to clients and broadened our capabilities to include an even wider range of care types, increasing relevance across employee populations. This in turn enables our employer partners to meet their strategic objectives of fewer vendors delivering broader and deeper value, directly aligned with our approach. We also break down penetration by industry and illustrate the dispersion within each sector on slide 13. The takeaway is clear: penetration is low across all industries, and even within the same sector there is wide variation, demonstrating that the opportunity is less about maturity and more about how the benefit is deployed within each client. To highlight one example, healthcare—the median client penetration is below 2%, which increases to more than 7% at the 95th percentile, and exceeds 10% among our most highly utilized healthcare clients. Next, on slide 14, we illustrate that a key driver of growing utilization is the breadth of our care network. We have built an ecosystem that spans traditional child care centers, in-home care providers, school-age programs, academic tutoring, pet care, and elder care, through a mix of owned assets and a vetted network of partners. Expanding that network helps us to meet more employee needs, which supports adoption and retention among both new and existing users. Finally, turning to slide 15, new logos are another meaningful growth channel in Backup. We estimate that 90%+ of the SMB market remains unvended today, and roughly half of the Fortune 500 does not have a Backup Care solution in place. What positions us exceptionally well to capitalize on this opportunity is our ability to deliver high-quality care across care types, geographies, and employee needs, with flexibility, scale, and trust that are difficult to replicate. We believe this advantage becomes even more important as employer adoption continues to grow. I highlighted Backup Care as the example because it reflects the broader playbook across Bright Horizons Family Solutions Inc.: drive deeper client and user adoption, expand the range of needs we can serve, and deliver a more connected experience for families. By way of a real-time example, we put this strategy into action this past week at our On the Horizon Summit. We hosted more than 100 clients, including HR and benefits leaders from Bank of America, Comcast, and Cone Health, to name a few. The discussion encompassed the future of employer-sponsored education and care and modern ways to deliver a unified experience for employees and their families. We received tremendous feedback from clients about the event and the innovations that we introduced. We look forward to sharing more over time. At this point, I would like to turn back to our first quarter segment results. In Backup Care, revenue increased 12.5% to $145 million in the quarter, and adjusted operating margins were 18%, both in line with our expectations. Growth was driven by continued expansion in unique users, with solid use across all care types. Looking ahead to the summer months and peak utilization for school-age programs, we are encouraged by continued user growth and the visibility of use through early reservations for the second and third quarters. Turning to Full Service, revenue grew 6% to $541 million, in line with our expectations. Growth was driven by a combination of tuition increases and a tailwind from foreign exchange, partially offset by center closures as we continue to rationalize the portfolio. We opened two centers in the first quarter, one in the Netherlands and our third location for Toyota here in the United States. Occupancy averaged in the mid-60% range in Q1, improving sequentially from the fourth quarter and the prior year. Enrollment growth in centers opened for the last year was modestly positive in the first quarter. This included approximately 100 basis points of headwind from our Australia operations, where we experienced an elevated enrollment decline in this group of 78 centers. In contrast to our other geographies, our Australia portfolio's occupancy has drifted lower in the years following the pandemic, and this quarter the enrollment contraction was much more significant than prior years' school-year transition cycle. With the broader Australian ECE industry also experiencing meaningful weakness in 2026, we expect a more challenged enrollment picture and overall performance profile as we look to the rest of the year. More broadly, we remain encouraged by the sequential improvement in occupancy across our network of centers, the continued recovery across our middle and lower cohorts, and the improved operating margin we drove this quarter, despite a headwind from Australia. Our focus remains on expanding our enrollment with improved consumer experience and quality value, achieving improved operating leverage and operating efficiency, and rationalizing the center portfolio where appropriate. As previewed on our call in February, we closed 24 centers this quarter as we continue to position our portfolio to serve employees of our client partners and working parents where they live and work. Our Education Advisory business delivered revenue of $27 million in the quarter, an increase of 2% over the prior year. Notable new client launches in the quarter included NXP Semiconductors, Visa, and Huntington Bank. We continue to be focused on driving participant growth and use across our College Coach and EdAssist services. To close, our Q1 results demonstrate solid demand and execution across the business. We remain encouraged by the progress we are making in our core operations while maintaining financial and operational discipline. As such, we are reaffirming our 2026 full-year revenue guidance range of $3.075 billion to $3.125 billion and our adjusted EPS guidance range of $4.90 to $5.10 per share. With that, I will turn the call over to Elizabeth, who will dive into the quarterly numbers and share more details around our outlook. Elizabeth J. Boland: Thanks, Stephen, and hello to everyone who has joined the call. I will start with our financial highlights. Revenue in the first quarter was $712 million, representing 7% growth year over year and in line with our expectations. Adjusted operating income of $65 million increased 4% over the prior-year quarter and represented 9.1% of revenue. Adjusted EBITDA of $96 million also grew 4% and came in at 13.4% of revenue. Adjusted EPS of $0.82 per share rose 6% over the prior-year quarter and finished slightly ahead of our guidance set at $0.75 to $0.80. Taking a closer look at each of our three business lines, Backup revenue grew 12.5% in the first quarter to $145 million. Increased users and expanded use within existing clients continues to drive the majority of the growth, and Q1 marked the 16th consecutive quarter of double-digit top-line growth. Adjusted operating margins were 18% in the quarter, which we expect at this time of year when use is seasonally lower. As we move into the higher-use quarters over the rest of the year, we gain operating leverage, and we continue to expect to see margins achieve our full-year target of 28% to 30%. Turning to Full Service, revenue of $541 million expanded 6% over the prior-year quarter, driven primarily by tuition increases, enrollment gains, and a tailwind from foreign exchange, which were all partially offset by an approximately 250 basis point headwind from the impact of closed centers over the past year and, to a lesser extent, enrollment declines in Australia. During the quarter, we had net closures of 22, resulting in a center count at quarter end of 988 centers. As Stephen mentioned, enrollment in centers open for the last year was modestly positive in the first quarter, although it would have increased roughly 100 basis points without the enrollment contraction we experienced in Australia. Occupancy averaged in the mid-60% range, increasing from both the fourth quarter of 2025 and the prior-year period. With respect to center cohorts we have discussed on prior calls, we also continue to see improvement over the prior year. Our top-performing cohort—that is, centers that are above 70% occupancy—improved from 47% of these centers in 2025 to 48% in 2026. More notably, our bottom cohort—centers below 40% occupancy—has now fallen below 10% of these centers, improving from 13% in the prior year to 8% this quarter, reflecting both enrollment progress and the results of our focus on closing underperforming centers. Adjusted operating income of $37 million in Full Service increased $4 million over the prior year and represented 6.8% of revenue, an expansion of 30 basis points. Tuition increases ahead of average wage costs and continued progress in our UK operations drove the margin expansion. That said, reported margin improvement was meaningfully constrained by the enrollment and operating challenges in Australia. Excluding the effect of Australia, margin expansion would have been more than 50 basis points over the prior year. Given the current operating performance and outlook for the rest of this year, we expect Australia to remain a larger headwind to reported margin performance than we had originally expected. Our Education Advisory segment had revenue of $27 million, an increase of 2% from the prior-year quarter, with adjusted operating margins of 9%, which were broadly consistent with the prior-year quarter. Interest expense rose to $12 million in Q1, up from $10 million in the prior-year quarter due to higher average interest rates as well as higher average borrowings on elevated share repurchases in the quarter. The structural effective tax rate on adjusted net income was 27.5%, consistent with 2025. Turning to the cash flow statement, we generated $108 million in cash from operations and made fixed asset investments of $20 million, resulting in free cash flow of $88 million. Over the last 12 months, free cash flow was $276 million, representing a 106% conversion relative to adjusted net income. As mentioned, in Q1 we opportunistically repurchased $225 million of stock, funding the buybacks with free cash flow and incremental revolver borrowings. As of the end of the quarter, $577 million remains on the new repurchase authorization that we announced in March. Lastly, we ended Q1 with $133 million of cash and a leverage ratio of 1.9x net debt to adjusted EBITDA. Now moving on to our 2026 outlook. We are reaffirming our full-year guidance for revenue in the range of $3.075 billion to $3.125 billion and adjusted EPS to be in the range of $4.90 to $5.10. Our guidance does not include the effects of any additional share repurchases on either interest expense or on the share count. If we look at a segment level, in Full Service, we expect reported revenue to grow in the range of 2.5% to 3.5% on enrollment gains and tuition increases, offset by approximately 200 basis points of headwind from net center closings and approximately 100 basis points from reduced expected performance in our Australia operations. In Backup Care, we now expect reported revenue to increase 12% to 14%, driven by the continued expansion of use. Lastly, in Education Advisory, we expect to grow in the mid-single digits. On the full-year guidance, we are now estimating full-year interest expense of $50 million to $52 million and an adjusted effective tax rate of 28% to 28.5%, up approximately 100 basis points from our prior guide. As we look specifically to Q2, our outlook is for total top-line growth in the range of 5.25% to 6.5%. Breaking that down by segments, that would be Full Service reported revenue growth of 2.5% to 3.5%, Backup growth of 15% to 17%, and Education Advisory in the low single digits. In terms of earnings for Q2, we are expecting adjusted EPS in the range of $1.17 to $1.22. So with that, Stacy, we are ready to go to Q&A. Operator: Thank you. We will now be conducting a question and answer session. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be... Your first question comes from Jeffrey P. Meuler with Baird. Please go ahead. Analyst: Yes, thank you. I think you raised the Backup Care annual revenue guidance. Correct me if I am wrong, but was that driven by the early Backup Care reservations for Q2 or Q3, and how much visibility at this point do you have into summer usage? Stephen Kramer: Sure. Thank you for the question, Jeff. We did raise the guidance—the previous guidance was 11% to 13% for the year and now we are at 12% to 14% for the year. It is really based on our conviction around the momentum that we have around active users as well as their use patterns. As you rightly noted, we have a large swath of our clients that have extended window reservations going into the summer, and so we do have good visibility around those reservations. Based on our historical trends, we believed that it was prudent to increase the guidance. Analyst: Got it. And then help us understand the fundamental issue in Australia—if it is supply-demand or immigration or affordability and alternatives. What is the issue, and is there any reason to think it is cyclical versus the front end of a more structural headwind? Stephen Kramer: Sure. I am happy to talk a little bit about Australia. We entered that market back in 2022, and we were attracted to it given the third-party funding support that existed; in the case of Australia, that support was government-related. At the time, we had the opportunity to acquire a high-quality leader in Only About Children. At that time, they enjoyed, and we enjoyed, high occupancy rates, and in fact the sector in general enjoyed high occupancy rates. The challenge we were looking to ameliorate at that time was really around the workforce and labor—specifically around quantity of labor as well as costs. We expected that would ameliorate over time. That has not ameliorated as well as expected, and enrollment since 2022 has been on a slow degradation path over that period. Different from other geographies, we saw pretty steady increases in supply in the post-COVID period. In that market there was an acceleration of supply that came into the market, and saturation rates of childcare got higher, especially in the key markets in which we operate. Then turning to Q1, the enrollment degradation was sharper than we would have expected. It is certainly a time of year in Australia where families typically transition to school and new enrollments backfill, but we did not see the level of new starters. We really do see these dynamics as different from other geographies in which we operate. Operator: Next question, Andrew Steinerman with J.P. Morgan. Please go ahead. Analyst: Hi. You are keeping the guide for the year, but Australia was worse. Backup was bumped up. Is there any other part of your non-Australia business that is performing better than expected, which overall as a portfolio is keeping you in line with your targeted range? And if you could just mention how big Australia is. Elizabeth J. Boland: Sure. We had a pretty significant share repurchase cadence in Q1, and so that is adding a tailwind to the earnings results. Although with the offset, we do have a bit higher interest expense because of the financing of it in the near term, but it will continue to be accretive over time. This year, it would be contributing in the high single digits—call it about $0.08—net of the interest expense that we have incurred. Another factor is that because the position in Australia is loss-making, we have a non-deductibility of those losses, so it has a more amplified effect in the year. Compared to our previous guide, it is close to $0.20 of an impact just from Australia between the operations and the tax impact. Analyst: And besides Backup being bumped up in the guided range, is there anything else outside of Australia that is coming in better than anticipated now that you are a quarter into the year? Elizabeth J. Boland: The share repurchase is adding about $0.08 or so. Operator: Next question, Jeffrey Marc Silber with BMO Capital Markets. Please go ahead. Analyst: Thank you so much. You mentioned the Backup Care margins tend to be a little bit softer in the first quarter, but they were still down on a year-over-year basis. Is there something specific that happened this quarter relative to last year? Elizabeth J. Boland: No, not really. It is somewhat mix dependent, Jeff. It is a relatively low-use quarter, and so it is dependent on more days out and school vacation weeks rather than the intensity of school-age care that we see over the summer. Depending on the center versus in-home mix, different care types, and the mix of the provider network, it comes down to that mix. Analyst: If I could shift over to Full Service, I know it is a bit early, but can we get any color on how sign-ups are for the fall enrollment period? Stephen Kramer: It is fair to say that we are seeing a similar cadence to how we closed out last year. As we look through this year, we see the opportunity to enroll at a similar rate as we saw in the second half of last year. We see that in terms of completed tours, which for us is a really important indicator, and in terms of forward bookings. We feel good about that outlook. Operator: Next question, Toni Michele Kaplan with Morgan Stanley. Please proceed. Analyst: Thanks so much. You were expecting a bunch of closures in the beginning of the year, and we did see that in the numbers. Are you still expecting that 25 to 30 net to be the decrease in centers for the full year? And when you are opening new centers, when is the best time to open them, just trying to understand the seasonality? Elizabeth J. Boland: If we could control the timetable of the opening, we would certainly be opening early or mid-year to be ready for the fall season. Opening in July or August so you can enroll for the fall is probably the optimal time, but it ends up being center construction cycles governing more of that opening cadence. The next best time would be opening right before the New Year turns over because that is often when families are enrolling. We do think that we will be in that neighborhood of 25 to 30 net reduction of centers for the full year, despite the outsized first quarter, because we do have some openings already done this quarter and more in the pipeline. We have the closures pretty well circled up; that is the quantity we are looking at. Analyst: Got it. And on Backup, you showed user penetration under 5%. Do you attribute that to employees not being aware of the programs? What are the ways you can drive that higher? Stephen Kramer: The employee benefit space is noisy. Employers offer a lot, and employees' ability to understand all that they have on offer is challenged in that environment. To stand out, we have repositioned our account management team against our client base to build deeper partnerships, create more opportunities for us to drive awareness within the client base, and have our account management team partner more closely with our marketing apparatus to ensure we are getting good communication and messaging out so that people receive the information at times when they might naturally need the service. A lot of what we have talked about is personalization—really trying to get messaging that is personalized to the individual, highlighting needs they may have and how we can help solve those needs. Operator: Next question, George Tong with Goldman Sachs. Please go ahead. Analyst: Hi, thanks. You are focused on a unified approach to client engagement and service adoption. Are there additional steps with the salesforce or sales process you still have to implement to fully realize this vision? Stephen Kramer: We have taken several recent actions that are being deployed now and will start to have impact over the coming quarters and years. First, we separated our enterprise approach from our geographic approach. We now have individuals squarely focused on the largest and most complex sales opportunities—both new logos and within our existing client base—and another group focused on the best opportunities outside of enterprise within geographic territories. Second, we have deployed new sales training and tools to enable effectiveness against a unified message. We used to have individuals selling individual products; now our singular unified sales team will go out and talk about the full set of Bright Horizons Family Solutions Inc. offerings and then tailor the solution to the needs of individual clients. We are also unifying at the user level—helping employees at clients that offer more than one service to understand and value services across what were silos within Bright Horizons Family Solutions Inc. For example, cross-pollinating College Coach users to leverage tutoring, and tutoring users to take advantage of College Coach. Analyst: On Backup Care, you have seen 16 consecutive quarters of double-digit growth. Are you ready to update your longer-term target for Backup Care growth? Stephen Kramer: Yes. Please see slide 28, where we update the Backup Care building block within our growth algorithm. We are calling for a longer-term growth algorithm of 11% to 13%, which is an upgrade from what you will have seen historically. Operator: Your next question comes from Joshua K. Chan with UBS. Please proceed. Analyst: On the Backup Care penetration slide, what in your mind causes the difference in penetration? The slide suggests industry is a factor, but is tenure or geographic location also a driver—what causes some employers to have higher versus lower penetration? Stephen Kramer: Between industries, part of the differential comes down to employee demographics and work style. In financial services and professional services, where we tend to have the strongest penetration, when there is a breakdown in care arrangements, employees really need and value replacement care, which leads to higher utilization. In industrials, such as manufacturing plants or other traditionally male-dominated industries, we have seen less take-up. More interesting is the variation within industries. There is significant disparity between the least and most penetrated clients in sectors with otherwise similar traits. We are studying our most highly utilized clients and our least utilized clients, and through changes in account management and alignment with marketing, we believe we can help less penetrated clients look more like the highly penetrated ones and continue to extend growth among the leaders. Analyst: On the Full Service side, you outlined 4.5% to 6.5% growth over the long term. What underpins that—tuition, center openings, enrollment? Elizabeth J. Boland: Over time, the building blocks are price increases, enrollment, and unit growth. As we return to at least neutral net openings—hopefully next year—and then positive, the ramp-up of new centers and modest enrollment gains would contribute, along with roughly 3% to 4% price increases. Operator: Next question, Faiza Alwy with Deutsche Bank. Please go ahead. Analyst: On Full Service margins, could you help frame the impact from Australia to margin specifically? Do you still expect to see 25 to 50 basis points this year, and are there any offsets to the impact from Australia? Relatedly, on the long-term building blocks, you have a 9% to 10% target—when do you expect to get there? Elizabeth J. Boland: We had guided to 25 to 50 basis points of margin expansion for the year. Given the headwind of revenue degradation—around 100 basis points of enrollment impact, roughly $20 million—the margin degradation is even more than that. We now have an element of flat margin growth or so this year, but it would be 25 to 50 basis points without the effect of Australia. Standing alone, Australia has a full-year revenue profile around $140 million, with losses in the $20 million to $25 million range in total. It is about a 150 basis point overall headwind to the Full Service business. Including the tax impact, Australia is close to $0.40 of overall headwind to earnings performance. On the long-term 9% to 10% target, we ended last year at 5.5%. With a 150 basis point headwind from Australia and our ability to gain 25 to 50 basis points a year as we continue to gain enrollment, we would be at about 7% all else equal. We also have a number of centers we have closed that carry some tail costs as we work to exit leases—call it another 50 basis points—that will taper in the next couple of years. With continued improvement, operating leverage, and efficiency from enrollment gains, and further portfolio rationalization, we are within striking distance. We see this in our best-performing centers, though some outliers are currently a severe headwind on the reported margin. Analyst: Understood. Quick follow-up: Are you seeing any benefits in client conversations from the 45F EoBDA impact that increased the annual cap for tax credits? Stephen Kramer: 45F has not had much of an impact in terms of the conversation or adoption by our client base. It can be an interesting talking point and a way into new client conversations, but it is not moving the needle in getting clients over the line or being adopted by current clients. Operator: Next question, Stephanie Benjamin Moore with Jefferies. Please go ahead. Analyst: Circling back to Backup Care, can you talk about how many of your clients use more than one service within Backup Care and how adoption varies across the services? Stephen Kramer: Historically, Backup Care was defined around providing care in-center and then extended to in-home. Over time, we have extended to include school-age programs, elder care, academic tutoring, and pet care. Almost universally, our clients offer in-center and in-home for both children and aging adults. We have a strong majority take-up for academic tutoring. The lowest adopted offering is pet care, although from a user perspective it is quite popular. So, broadly, all offer in-center and in-home for adult and child, most offer tutoring, and to a lesser extent pet care. Analyst: And on the UK business, a lot of progress has been made over the last year. How should we think about improvement in operating income and general performance there? Elizabeth J. Boland: The UK business has been on a journey and we are pleased to see both sequential and year-over-year progress. As a reminder, last year the UK turned the corner and was positive from an operating income contribution standpoint, though still a headwind to overall Full Service margins in the low single digits versus the 5.5% overall. This year, with enrollment gains and continued operating execution, performance continues to improve. It is still a little bit of a headwind relative to the overall average, but it is a big contributor to the turnaround, just at a slightly lower pace than in 2025. Stephen Kramer: Wonderful. Well, thank you all very much for joining us on the call, and wishing you a great night. Michael Flanagan: Thanks, everyone. Operator: This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 DENTSPLY SIRONA Inc. Earnings Conference Call. 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. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Wade Moody. Please go ahead. Wade Moody: Thank you, operator, and good afternoon, everyone. Welcome to the DENTSPLY SIRONA Inc. First Quarter 2026 Earnings Call. Joining me for today's call are Daniel T. Scavilla and chief executive officer and Michael Pomeroy, interim chief financial officer. I would like to remind you that an earnings press release and slide presentation related to the call are available on the Investors section of our website at www.dentsplysirona.com. Before we begin, please take a moment to read the forward-looking statements in our earnings press release. During today's call, we may make certain forward-looking statements that reflect our current views about future performance and financial results. We base these statements on certain assumptions and expectations on future events that are subject to risks and uncertainties. Our most recently filed Form 10-K and any updated information in subsequent Form 10-Q or other SEC filings list some of the most important risk factors that could cause actual results to differ from our predictions. On today's call, our remarks will be based on non-GAAP financial results. We believe that non-GAAP financial measures offer investors valuable additional insights into our business' financial performance, enable the comparison of financial results between periods where certain items may vary independently of business performance, and enhance transparency regarding key metrics utilized by management in operating our business. Please refer to our press release for the reconciliation between GAAP and non-GAAP results. Comparisons provided are to the prior year quarter unless otherwise noted. A webcast replay of today's call will be available on the Investors section of the company's website following the call. And with that, I will now turn the call over to Dan. Daniel T. Scavilla: Thanks, Wade, and good afternoon, everyone. Q1 marked the start of executing the DENTSPLY SIRONA Inc. return to growth action plan. Our results reflect a business in transition, and do not yet capture the actions underway intended to drive sustained profitable growth. We are strengthening execution, investing in key growth areas, positioning the company for improved long-term performance. From my perspective, we are where we expected to be at this early stage. We are executing the plan as intended and remain focused on improving speed and accountability. As I said last quarter, we are going deeper, moving faster, and being bolder to improve our business while placing the customer at the center of all we do. That mindset is taking hold across the organization. Near-term performance is still being affected by external pressures and the timing of our investments, while the underlying market remains stable. We are monitoring geopolitical and macro factors closely while making strong progress on the areas within our control. Regardless of market conditions, we will remain focused on executing our plan and improving our performance over time. We are engaging with our customers more, accelerating innovation, and optimizing our cost structure. These actions are already gaining momentum and are expected to contribute more meaningfully as the year progresses. During the quarter, we advanced our commercial restructuring in the U.S., expanded clinical education and sales force training, and continued to drive innovation across the portfolio while implementing a restructuring to redirect funds to fuel commercial and innovation growth. We are also seeing early encouraging traction with our distribution partners and I will share more detail on that shortly. We remain confident in our strategy, and are maintaining our full-year 2026 outlook. On today's call, Michael will review our first quarter 2026 financial performance and key drivers. I will then provide an update on our strategic progress, including the actions we are taking to support the five pillars of our return to growth action plan. With that, I will turn the call over to Michael. Michael Pomeroy: Thanks a lot, Dan, and good afternoon, and thank you all for joining us. As Dan noted, first quarter results are in line with what we anticipated at this stage as we execute on our plan to continuously lean down our OpEx structure and drive sustained profitable growth. Before we begin, we announced today a change to external reporting for our regions from U.S., Europe, and Rest of World to Americas, EMEA, and APAC. This update creates a more efficient reporting structure and better reflects how we manage and evaluate the business internally. The results being reported today reflect this change. A recast of prior comparative regional information has been provided along with today's press release. Let's move to Q1 results on Slide 4. Our first quarter revenue was $880 million, representing an as-reported sales increase of 0.1% over the prior quarter. On a constant currency basis, sales declined 6.7%, based in part on the impact from Byte and a strong Q1 2025 treatment center sales comparison not repeated in 2026. Adjusting for these one-time headwinds, Q1 2026 sales on a constant currency basis were down 4.5%. On a constant currency basis, sales highlights in the quarter included double-digit growth for EDS and APAC, favorable SureSmile performance in EMEA, and growth in Wellspect Healthcare. These improvements were offset by declines in EDS outside of APAC, CTS, and OIS. Adjusted EBITDA margins declined 430 basis points, resulting from a 560 basis points decline in gross profit, driven by lower volumes, sales mix, and tariff impacts. While OpEx experienced a headwind on an as-reported basis, from a constant currency perspective, OpEx was down $20 million, reflecting benefits from our return to growth OpEx restructuring and overall cost control management. In line with what we communicated in our last earnings call, we increased our spend in R&D year over year as we support the return to growth action plan and invest in bringing innovation to market. Adjusted EPS in the quarter was $0.27. In the first quarter, operating cash flow was $40 million compared to $7 million in the prior year quarter. The year-over-year increase is primarily attributable to improvements in working capital with lower accounts receivable. This is an early sign of progress as we focus on improving working capital over the balance of the year. We finished the quarter with cash and cash equivalents of $190 million. Our Q1 net debt to EBITDA ratio was 3.3x. During the quarter, we retired $79 million of debt. We continue to prioritize debt reduction over time and remain committed to maintaining investment grade credit metrics. Let's now turn to the first quarter segment performance on Slide 5. Starting with CTS, constant currency sales declined 2.9%. We saw a high single-digit decline in E&I, as declines in imaging equipment and treatment centers were driven by a tougher comparison versus the prior year quarter. When adjusting out the one-time institutional installation, CTS was flat in constant currency. Our global CAD/CAM business was flat year over year, with growth in APAC offset by a decline in EMEA, which was driven by softness in the Middle East and Central Europe, partially offset by double-digit growth in the UK, Spain, Turkey, and Denmark. We saw increased demand for mills in the U.S., along with bright spots in APAC. Overall, U.S. distributor levels for CAD/CAM and imaging products remain below historical averages. They are a trend we expect to continue. Turning to [inaudible], sales declined 7.2%, driven by lower volumes in Americas and EMEA, partially offset by growth across all three product categories in APAC. Moving to OIS, sales in constant currency declined 13.5%. Adjusting for the year-over-year impact from Byte, OIS declined 7.6%. IPS declined high single digits in the quarter, driven by lower implant volume across all three regions. SureSmile, our clear aligner offering, declined low single digits in the quarter, with a high single-digit decline in the U.S., partially offset by 11% growth in EMEA. Wrapping up with Wellspect Healthcare, constant currency sales increased 3.4%, led by 4% growth in EMEA and the continued strength of new product and execution of the business. Now let's move to Slide 6 to discuss our outlook for 2026. As Dan shared earlier, we are maintaining our 2026 outlook for net sales of $3.5 billion to $3.6 billion and an adjusted EPS in the range of $1.40 to $1.50. With the uncertainty and fluidity of the current macro and geopolitical environment, we are applying a thoughtful, risk-aware approach to our guidance while remaining focused on executing initiatives to drive sustainable growth. With that, I will turn the call back to Dan. Daniel T. Scavilla: Thanks, Michael. As I mentioned in my opening comments, our focus remains on disciplined execution, and we are making progress against our plan. The management team and board are closely aligned. Priorities are clear, and the organization is engaged and motivated. I also want to recognize the strength of our leadership team, particularly our U.S. commercial leaders. Several competitive hires joined recently who bring deep dental experience and are already making meaningful impact. While it is still early, what we are seeing gives me continued confidence that we are on the right path. My leadership team and I have been spending more time in the field and at local customer events, gaining valuable firsthand perspectives. Customers are noticing a shift in how we show up. Most importantly, we are consistently putting the customer at the center of our decisions and actions with a clear focus on improving both the experience and outcome for the dental practitioners we serve. We are in the early stages of expanding our clinical education and sales force training programs with increasing structure and scalability. Early feedback is encouraging, and the teams are responding well to greater clarity, investments in their development, and increased accountability. This work is strengthening our foundation as we prepare for more consistent execution in the second half of the year. At the same time, we are strengthening our processes to ensure solutions are grounded in real-world customer needs. As part of this effort, we are establishing a CEO advisory board comprised of dentists to provide direct and ongoing customer insights. Returning the U.S. to growth remains our top priority. The actions we are taking to strengthen talent, execution, expand distribution, and improve customer engagement are beginning to show early traction. At the same time, we are reinforcing the key drivers of our long-term growth. A central priority is sharpening our focus on the implant business. While recent performance in this segment has been challenging, we continue to benefit from strong underlying assets and a deep heritage in the space. To build on this foundation, we initiated a disciplined set of actions to improve performance and position the business for sustainable growth. I will provide more detailed updates in future earnings calls. Innovation also remains central, supported by increased R&D investment with a clear focus on our highest value opportunities. Let me share a few of our recent launches as seen on Slide 7 in the earnings presentation. We just announced the launch of SmartView Detect, the first FDA-cleared and CE-marked AI-enabled diagnostic aid that automatically identifies potential inflammation at the root tip in 3D scans. Integrated into the DS Core platform, the solution works with both new and existing systems, enabling seamless adoption. In clinical evaluation, SmartView Detect increased detection sensitivity by approximately 46% relative to unaided review, helping reduce the risk of overlooked findings while improving workflow efficiency. This innovation not only enhances diagnostic confidence, but also supports clearer patient communication, reinforcing our commitment to advancing connected, high-quality dental care. In endodontics, we introduced the Reciproc Minima File System and the X-Smart Go cordless endomotor, both designed to simplify workflows and improve efficiency. Reciproc Minima enables treatment of narrow and complex canals with a one-file approach, while X-Smart Go enhances mobility and performance through cordless operation and integrated intelligence. Together, these solutions reflect our focus on practical, evidence-based innovation. In imaging, we announced FDA clearance of our dental-dedicated MRI, representing an important step forward in expanding our capabilities in soft tissue diagnostics. The system has been validated in clinical settings, and is expected to support broader collaboration with leading academic and research institutions, consistent with our strategy to build clinical evidence and drive adoption. It also complements our existing imaging portfolio. Beyond dental, Wellspect continues to show solid momentum. Adoption of Sureti for females is expanding, supported by ease of use, discretion, patient comfort, and encouraging feedback from both patients and clinicians. Building on this, the recent launch of the male version extends the portfolio to a broader patient population. Finally, we are making progress in expanding and strengthening our U.S. distribution network. As announced yesterday, we signed an expanded agreement with Atlanta Dental Supply, adding our connected technology solutions portfolio effective August 1. This marks our fourth new distributor agreement this year and enhances our regional coverage, improving access and service levels in an important market. The other distribution agreements announced in the first quarter are beginning to build traction and expand our commercial reach. Early traction includes Benco installing its first CEREC system under the new agreement, an important milestone achieved ahead of schedule. To lead DENTSPLY SIRONA Inc. into its next phase, we are strengthening our foundation with better tools, more integrated systems, and increased automation. This builds on the strength of our existing teams, while enhancing capabilities in transformation, operations, and financial performance. Our transformation office continues to drive execution of the return to growth action plan, with a focus on embedding lean operating principles, simplifying processes, and improving how work gets done across the organization through the customer's lens. In parallel, we are advancing our enterprise AI strategy to drive efficiency and support innovation across both commercial and operational areas. In Q1, we began deploying AI-enabled tools in select workflows to improve productivity, with a broader rollout planned throughout the year. Within finance, we are strengthening capabilities while maintaining continuity as we actively progress on our search for a permanent CFO. Michael continues to be a strong partner in his interim role, ensuring stability and focus on execution. We are simplifying and optimizing the operating model to improve efficiency and scalability. The restructuring program remains on track to deliver $120 million in annual savings, with benefits building through 2026 and becoming more meaningful in the second half of the year. Key actions include cost optimization, organizational simplification, and supply chain efficiencies, along with reducing complexity across legal entities and IT systems. Through these actions and by driving lean principles further into the organization, we will improve our speed, competitiveness, and the customer experience. Early proof points are visible, including a reduction of approximately $20 million in operating expenses during the first quarter. These savings are being reinvested into growth areas such as R&D, clinical, and commercial capabilities, while we continue to manage external headwinds. A disciplined approach to capital allocation and balance sheet management remains a priority. During the quarter, we reduced debt by approximately $80 million, reflecting our commitment to deleveraging. Capital allocation priorities remain focused on debt reduction and share repurchases, supported by improving working capital and free cash flow. With the dividend eliminated during the first quarter, we have increased flexibility in how we deploy capital, and as performance improves, we expect to be in a position to evaluate the timing of share repurchases later this year. In closing, progress is encouraging, execution is improving, cost discipline is in place, and we are building the capabilities needed to drive sustainable growth. Early proof points are emerging across the business, and visibility should continue to improve as the year progresses, particularly in the second half. We remain confident in the strategy and focused on delivering long-term value for shareholders. I believe the potential for DENTSPLY SIRONA Inc. has never been greater, and we have at our fingertips everything we need to achieve this. Thank you. Now let us turn to Q&A. Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We kindly ask that all attendees limit their questions to one primary question and one follow-up question. Our first question comes from the line of Allen Charles Lutz of Bank of America. Please go ahead. Allen Charles Lutz: Thanks for all the details, Dan. On the return to growth action plan, there is a lot of good steps there. You talked about new distribution relationships and expanding ones you have already had, investing in clinical education, and then new product investments. So there is a lot of things on the plate. How do you think about the timing of these benefits? I think at the top of the call, you alluded to maybe some benefits happening toward the second half of the year. As we think about all those things that you are spending time on or that you have done so far, is this something where we should start to expect more material benefits in the back half of this year? Or is this effectively more of a two- or three-year roadmap? We would love if you could just give us a sense of how you are thinking strategically about the timing of some of these investments you are making in that return to growth plan. Thanks. Daniel T. Scavilla: Thanks, Allen. I appreciate the question. And I think you kind of answered it, right? When we first rolled out the return to growth plan, we called it a 24-month plan, recognizing that you cannot move fast enough, but at the same time, cannot change this in the speed that all of us would wish. Q1 was the beginning where we established the plan, built the teams, and did all the reorganization. This is really us out of the gate in the first quarter. As we begin some of the restructuring that is occurring in the first and second quarter, you will see some of those cost benefits come through more in the fourth quarter than you would in the first half of the year. As you look at the commercial cadence and what we plan to drive, again, I would think we will begin to see some things in the fourth quarter, but I really do believe that more of the improvements will be seen as we get into 2027 and certainly into 2028. Allen Charles Lutz: Appreciate all the color there. And then we would love to hear an update on some of your early conversations with DSOs. Where within your portfolio is the most interest, and how can X-ray benefit help you at those? Daniel T. Scavilla: Thanks. Again, great question. There is a lot of great activity currently occurring with DSOs. It is something we had begun into the last quarter of last year. If you look at who we are and what we offer, you have this incredible strength of a broad portfolio. Whether you want to actually build out new dental suites—we can provide all of that—or you want to get into longer plans for consumables and pull-throughs, we can do that as well. We are really talking with several concurrently, and we are looking to have a more active plan again toward the second half of this year and into next year. I think the strength is in the broad offering we can give them as a one-stop shop, and therefore bring all of the leverage bundling together for the best impact for them and ease of doing business with us. Operator: Our next question comes from the line of Jonathan David Block at Stifel. Please go ahead. Jonathan David Block: Maybe just the first one. I would say the trends with the consumer are certainly a watch with the geopolitical backdrop, and you guys are so global in nature that I figured I would take the opportunity. When you look across your book of business, anything to call out between Americas and EMEA and APAC when we think about March or April trends, whether that would be weakening or maybe even something to call out in terms of more resilience than maybe you expected considering what is going on in the world? Daniel T. Scavilla: Great question, Jonathan. There are certainly a lot of moving parts here. We did not really call out the Middle East. We will keep our eyes on that. It is a low single-digit impact for us right now. The continued struggle in Central Europe with Russia certainly has its weight, something that we have built into our forecast. As of now, we stay with what we planned in our initial business plan, and should we see some of these risks changing or shifting, we will take more action after we get through the second quarter. Jonathan David Block: Fair enough. And maybe the second question—and maybe a half question here—can you talk to us on where you are with the drop-ship model with the distributors? You talked to more distributors coming on board, but what more needs to be done there? Maybe if you want to talk to the receptivity. I mean, I think for them, it is not tying up their cash. And if you feel like it is giving you a greater voice with the distributors. And then admittedly, a completely unrelated question would just be the cadence throughout the year—do we think about the exit EBITDA margin in 4Q, which might help us bridge from 1Q to 4Q? Thanks. Daniel T. Scavilla: No problem. A couple of things. The transition into the new capital model really applies to some of the existing dealers, not necessarily new ones. We will provide this for everybody, but when we talk about the inventory build or the change in inventory that you were referring to, that is a little more of a Patterson and Shine dynamic than all of the new players who would start at zero anyway. The first quarter did not include any of that burn-through of the inventory. We expect to see that from Q2 through Q4. It is well received. It is built into all of our agreements. It is honestly not a negotiating point with us because the benefits are for both sides and pretty easily accepted that way. I will refrain right now from giving you what we think Q4 guidance is. It is not something we do. We want to get a couple of quarters under our belt with all of the moving parts we have, and it will really help you determine what is the best way to set up your 2027 model. Operator: Thank you. One moment for our next question. Our next question comes from the line of Jeffrey D. Johnson with R.W. Baird. Please go ahead. Jeffrey D. Johnson: Yes, thank you. Good evening, guys. Dan, I wanted to start with Wellspect. That business showed through very consistently and nicely this quarter. OIS and CTS, we know there is a lot of moving parts there. On the EDS side, I think that was probably the biggest surprise to me from a segment performance, just the down 7%. The comp got a little bit tougher, but the switch from plus to minus this quarter—what was driving that shift? The markets seem like they have held in fairly consistently. What was the underlying driver of that fall off? Thanks. Daniel T. Scavilla: I would tell you we looked at a little bit of softness in the fourth quarter, and we saw that carry into the first quarter. I trace that down to specific markets. I will not call them out right now. While we believe some of it is destocking of dealers, especially those that may have gone into a little more PE-based approaches, we are working through the program for a better understanding of where that is. Right now, it really looks like there was a bigger shift in Europe than we would have anticipated. The U.S. is kind of in line where we thought. Even within Europe, there are probably about five different markets that we are taking a look at to understand what is being driven there. Our current estimates and assumptions are there is some continued destocking that we felt in the fourth quarter and in the first quarter. As you noticed, we have not called off of our number. We think that this is a timing issue as we stand today, but we will look to see how we can prove that true. Jeffrey D. Johnson: Understood. And then as my follow-up question, you mentioned again tonight returning the U.S. to growth by maybe later this year. Europe is actually a bigger segment for you guys geographically. Maybe the consumables thing you were just referencing there drove that European number down to down 5.6% this quarter. But as you focus on the U.S., I would assume you also plan or hope or are working towards getting that European number more consistently to growth as well. Help me understand how you are thinking about Europe over the next few quarters and eventually getting that return to growth as well. Daniel T. Scavilla: Of course we want Europe to get back into growth. It is foundational. The U.S. stays on track; we are happy with that. In Europe, you talked about EDS, which I would agree with. Keep in mind that treatment centers were fairly large last year as well. As Michael called out, that is an academic-type thing where they come in blips, not really something you can easily forecast and see. We want to make sure we do not overstate the change because of that one-time headwind. A strong Europe and APAC are needed as well as continued growth in the Americas, and we are focusing on it. The vast majority of what we are doing to return the U.S. to growth is applicable throughout the world. Operator: Thank you. One moment for our next question. Our next question comes from the line of Michael Anthony Sarcone of Jefferies. Please go ahead. Michael Anthony Sarcone: Just wanted to start on gross margin. You talked about 550 basis points of contraction. Maybe you can give us a little more color on what is driving those in 1Q and then how we should think about the cadence of gross margin through the year? Michael Pomeroy: A big piece of the headwind in gross margin is tariffs. When you are looking year on year, tariffs did not exist to the extent they do now, so that is a pretty big piece. We talked about EDS 2025, which comes off the balance sheet. It is inventoriable, therefore capitalized, and that was a negative hit as well. As far as going forward, everybody knows what is happening with tariffs. We will start seeing the adjustments from the SCOTUS decision and then down to the Trump 10% in Q2. So that piece is going to look a lot better. Dan talked about what we are working on as far as Europe—getting the destocking behind us, which we believe it is. And the third piece is tariffs down the road. But just pure apples to apples, I would think we should be gaining 300 basis points at a minimum back in the Q2–Q3 timeframe. Michael Anthony Sarcone: Okay. That is helpful. And on macro and geopolitics from an input cost standpoint, what are you seeing in terms of higher oil and freight prices? Daniel T. Scavilla: You were breaking up a bit, but I think I got it. Yes, we are seeing some headwinds with freight and oil. We will continue to monitor that and understand if it is something we can offset, absorb, change, or have to adjust. I want more than one quarter under the belt before we make that decision. Operator: Thank you. One moment for our next question. Our next question comes from the line of Analyst from Piper Sandler. Please go ahead. Analyst: Hey, guys. This is Joe Donahue on for Jason Bednar. Thanks for taking the questions. Starting on consumables more broadly, we are seeing a continued mix shift toward private label. Strategically, how are you thinking about navigating this shift? And do you read the private label trend as still having runway, or is it starting to plateau in the current environment at all? Daniel T. Scavilla: It is a fair question. Private label is something that has been around and will continue to be around. It is something that we will obviously look at and, where it makes sense, compete against. We have several programs in development to make this a meaningful and worthwhile approach with customers. I am not going to lay those out just yet for competitive reasons. I want to get them launched before we discuss them. But it certainly has our attention and the need for us to penetrate the market with more creative ways to get our products into the hands of dentists. Analyst: Thanks. And then to push a little more on pricing with input costs here—do you feel you have incremental ability to pass through price to offset these pressures? What is your appetite throughout the year and what might be included in the guide for pricing versus how much more you could possibly take? Daniel T. Scavilla: We took some minor pricing last year, more on capital than anything. Our intent is not to change that right now, and I do not see anywhere where we would benefit from price increases of any significance. Right now, it is really about us staying focused on return to growth and executing in a way that is beneficial to the customer. I do not think there is a significant price play that would get us where we need to get to. Operator: Thank you. One moment for our next question. Our next question comes from the line of Elizabeth Hammell Anderson with Evercore ISI. Please go ahead. Elizabeth Hammell Anderson: Hi, guys. Good afternoon. Given the R&D spending in the quarter and your focus on new products, and at some recent dental shows, can you talk about the new product contribution in the quarter and how you are seeing that progress over the course of the rest of the year and maybe 2027? Daniel T. Scavilla: Thanks, Elizabeth. We do not disclose that level of detail. We do monitor it, and it is something that we have our eye on. I will hint that we need to see those metrics improve for our investment in R&D, and I think there is an execution plan that should allow us to do that. It is not something I would put out publicly in terms of contributions for this year or next. Elizabeth Hammell Anderson: But would you agree that it is a ramping contribution as we go into next year, really starting to step up maybe in 2027–2028? Daniel T. Scavilla: I would agree with that. Operator: One moment for our next question. Our next question comes from the line of Michael Aaron Cherny with Leerink Partners. Please go ahead. Michael Aaron Cherny: Afternoon. Thanks for taking the questions. I know we have touched on a lot of the different segments. I just want to dive in a bit on implants. As you think about the next couple of years of go-to-market, where do you think you are in your combination of product reboot, sales reboot, and how to factor that into that component contributing to the return to growth opportunity? Daniel T. Scavilla: It is a fantastic question. While we talk about geographically focusing on the U.S. as a return to health—which it is—implants are one of the top priorities. I have commissioned a team of dental KOLs to work with us and get the voice of the customer. We are working on several approaches with the team to come back with more holistic programs. I want to get them formed and launched before I speak about them. Implants are an area of focus. We are not happy with our performance to date. We recognize we have some of the best offerings in the market, and we simply need to execute in a better way and utilize those assets more strongly. Michael Aaron Cherny: And relative to your comments about the buyback, as you think about the evaluation to the end of the year, what are the moving pieces that are going to impact your decision on a go/no-go evaluation? Daniel T. Scavilla: Not many, to be honest. There was an opportunity by removing the dividend and redeploying it. We had some near-term debt coming due that made sense to retire. I wanted to put the funds there first because it will help us deleverage, especially as EBITDA gets stronger. It did not make sense to carry that forward. In the second half of the year, we will look at the option to remove stock. At this price, I am anxious to do it. I think it is going to be a great one to remove. I am going to get the debt in line first. I want to preserve our credit ratings the way they are, then move into removing shares in a way that makes sense not only in the second half of the year but ongoing thereafter. Operator: One moment for our next question. Our next question comes from the line of Lilia-Celine Lozada at JPMorgan. Please go ahead. Lilia-Celine Lozada: Maybe I will start with guidance. You beat by quite a bit on the top line on a reported basis, but reiterated the guide. I appreciate it is still early, but what is the thinking behind that? Why not flow through the beat? And are there any offsetting dynamics in Q2 through Q4 that we should be keeping in mind? Daniel T. Scavilla: It is a great question. It is my style that I am bringing into DENTSPLY SIRONA Inc. I did the same thing back at Globus. I am not going to make a call after one quarter. I like to see at least two before we do. Regardless of it, I would not have brought it up or down. It is not a concern. It is just more of a style. I would rather be appropriately conservative than anything else right now. That is all it reflects. Lilia-Celine Lozada: Got it. Makes sense. Then I was hoping you could dig into CTS a little bit more. That came in nicely higher than what we were thinking. Can you talk a bit more about what drove that strength and what you are seeing in terms of appetite for capital in this environment? Daniel T. Scavilla: There are a lot of moving parts. Having expanded the dealers and working on programs with them—we called out through Michael’s script—we are seeing some strength in the U.S. Again, one quarter does not make a trend. We will continue to execute and, after a couple of quarters, see how that is shaping up. I would attribute the CTS strength more to activity occurring in the U.S. through our partners. Operator: Thank you. One moment for our next question. Next question comes from the line of Analyst at UBS. Please go ahead. Analyst: Thanks for taking my question. Dan, I appreciate the lift that you have here operationally and all the things that you have initiated internally. When you think about the growth initiatives, which segments or geographies do you think catch up or get to growing faster than the market? What products do you think you can get to quickest? Can DENTSPLY SIRONA Inc. grow faster than the market, in line with the market, or better than market in implants or something to that effect? What are you most excited about, or where do you think you can return to market growth or better, and what segment is fastest? Daniel T. Scavilla: I will refrain from giving segment-by-segment growth expectations. We have been working on that, and there will be an investor day probably toward the end of this year or beginning of next, and we will do that along with the strategic plan. I believe that this organization, with the right structure and focus, can grow at or above market over time. We need to work our way through that in 2026 and into 2027, but that is the target. The U.S. has to return because of its size. Within that, through the actions we have taken with dealers, it has to be about the right placement of capital. It has to be, in my mind, implant-focused, EDS-focused, and with our enhanced R&D, we need deeper penetration into the ortho market. All of those are in play. I want to get them functioning first before I commit anything in particular. Among those, we should be at or above market as we get into a healthy cadence. Analyst: And a quick follow-up. You are talking about capital deployment and share buybacks. Presumably there is not likely a focus on M&A, but if there was, in Wellspect or in dental, is there an area where a tuck-in or something more material might enhance the product portfolio or be more synergistic or needed? Daniel T. Scavilla: I do not think there is anything needed. I am looking at M&A because even if we decide not to do it over the next few quarters, we are going to go back to that and sustain. We have a plan in place already. We have established an independent board with Wellspect and will announce that as we finalize. It is going to focus on hypergrowth within Wellspect so that we drive way above market and penetrate deeper. Should we find adjacencies there that are bolt-on or can be fast in closing out a gap, that would be one area of interest. In the non-dental area, we have several conversations currently with longer-term potential. Within dental, I want to refrain from specifics right now. I am looking for an accelerated way to differentiate ourselves in certain areas. Some of it would be CTS to help penetration. As far as implantable products themselves, there is nothing we are chasing down at this time or have interest in. Operator: Thank you. One moment for our next question. Our next question comes from the line of Steven James Valiquette at Mizuho Securities. Please go ahead. Steven James Valiquette: Great. Thanks. Good afternoon. We heard one of the global dental distributors today talk about some lower industry pricing trends on scanners or other digital equipment, primarily from newer market entrants. I am curious what you are seeing on the competitive landscape front in IOS, and what this might mean for PrimeScan or your other offerings. Daniel T. Scavilla: I think your data is correct. There are new entrants at low cost. We have to look at our current model versus what could be market appropriate in this changing dynamic, and that is where our size and breadth of portfolio come into play. We are doing a few things. One is looking to become more competitive in that area, probably through more structured programs that not only have a scanner but the pull-through effect of it—things some of the lower-cost entrants will not be able to compete with without bundling up. We are going to use our portfolio in a bundle strategy that will allow us to accelerate some of the penetration we are seeing and be more market appropriate today. Operator: Our next question comes from the line of Erin Wilson Wright at Morgan Stanley. Please go ahead. Erin Wilson Wright: Great, thanks. You highlighted in the deck as well as your prepared remarks a lot on innovation in terms of specific products and areas of focus. What could really move the needle? Would you call out a couple that could be significant that we should pay attention to going forward from an innovation perspective? Daniel T. Scavilla: Only among the ones discussed on the call, I like the AI detection as a way to further enhance the DS Core offering to our current and future customers. That one excites me. I have been a fan of Wellspect, and I see the potential of this business. The Sureti launches into an entirely new area for them and into new geographic markets. Both of those are exciting. I think the MRI is a much longer, more clinical long-term play. I do not see that as a large revenue generator over time, but rather something that will lead to future products or approaches that can be very interesting. Reciproc Minima using one file is a great approach that can reduce cost and speed up time, with what appears to be great outcomes for patients. I like them all. I think they all have potential to move us forward. Erin Wilson Wright: And on macro and input costs, you did say you are seeing an impact now. Can you quantify that? Is it material right now? And just remind us—do you have anything embedded in your guidance, or do you think you can mitigate it? Why not make any changes on that front just to be conservative? Daniel T. Scavilla: I will make it simple. We are not going to disclose specifics. I am creating freedom to move if we see escalation or unforeseen things. If something material occurs, we would have to react and share adjustments, whether we can absorb them or not. There is nothing material today; otherwise we would have disclosed it. In a changing world, should that change, we will come back and update your assumptions. Operator: One moment for our next question. Our next question comes from the line of Analyst at Citi. Please go ahead. Analyst: I want to go back to implant volume. You mentioned that across all regions, implant volumes were a little bit lower than expected. Curious if you can bifurcate between premium and value demand, realizing that the significant majority of your portfolio is premium. Is there any significant differentiation by region? And you kind of alluded to this in your prepared remarks, but can you provide a little more detail on the strategy to stem some of that lower demand and the timing of those benefits? Daniel T. Scavilla: We are down in both value and premium for the quarter. For value—MIS in particular—it is simply underutilized. To stem that, we need to position it differently as a brand that can really drive, which I feel has not been fully implemented by the company. We are working on that. Astra is still one of the best products out there. Clinical education and rep education are all parts of that to drive improvements. I feel implants are more of an execution issue than a product issue. We have the right portfolio. We have to improve education to execute better. We will have market-appropriate or competitive programs forming in the second quarter, but I will refrain from details until we get them implemented. Analyst: As a follow-up, last quarter you guided to a $30 million headwind in the first half of this year due to the inventory sell-through underneath the new drop-ship model. Was much of that realized this quarter? And can you quantify on a basis point basis how it impacted gross margins? Michael Pomeroy: None of it was realized this quarter. It still is in our line of sight to happen, consistent with our previous guidance, but it is going to be more of a late Q2 and then second-half impact. Operator: Thank you. One moment for our next question. Our next question comes from the line of Brandon Vazquez at William Blair. Please go ahead. Brandon Vazquez: Great, thanks for the question. Maybe I can ask a portfolio question from the opposite side. As you are in the seat another quarter here, as you are looking at the portfolio, is there anything you think that maybe DENTSPLY SIRONA Inc. is not the right home for? Anything on the rationalization side that might help improve the P&L? Daniel T. Scavilla: Great question, Brandon. My answer is no, not yet. I want to see how the market responds to our return to growth plan. I want to look at these from a different light. I do not like the position we are currently in, and I want to stabilize and get them growing. Then we say what makes sense or not. We announced the creation of the Growth and Value Committee. With that, I have the board working with me to look at potential M&A and whether it makes sense for something to be set up as a divestiture. My ask of them—and right now everybody is aligned—is to get through the execution phase before we evaluate where that makes sense. I am not afraid to do it. I just do not have the right facts or positioning to do that in what I think is the best interest of all of us. Brandon Vazquez: Makes sense. And as a follow-up, within CTS and EDS, APAC was highlighted as an area of strength while there are some other pockets of weakness. Could you spend a minute on APAC and why things are doing relatively well there for this portfolio compared to the other regions? Daniel T. Scavilla: I would point to the leadership and structure. They are strong and well educated, and they spend well on clinical education. Everything I am saying I am bringing into the U.S. was started there, and I think that is one of the drivers. With APAC as well, we are looking at doing a similar thing. It is more of a long-term investment growth. Again, I would point out the strength really based on the execution of a team with a good plan, and one that we can learn from and spread throughout the world. Operator: This concludes the question and answer session. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Thank you for joining us, and welcome to the Freshworks Inc. first quarter 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 Kate Scolnick, VP of Investor Relations. Kate, please go ahead. Kate Scolnick: Thank you. Good afternoon, and welcome to Freshworks Inc.'s first quarter 2026 earnings conference call. Joining me today are Dennis Woodside, Freshworks Inc.'s chief executive officer and president, and Tyler Sloat, Freshworks Inc.'s chief operating officer and chief financial officer. The primary purpose of today's call is to provide you with information regarding our first quarter 2026 performance, and our financial outlook for our second quarter and full year 2026. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our management's beliefs about our business and industry, including our financial expectations and estimates, uncertainties in the macroeconomic environment in which we operate, market volatility, and certain other assumptions made by the company, all of which are subject to change. These statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks include, but are not limited to, our ability to sustain our growth, to innovate, to reach our long-term revenue goals, to meet customer demand, and to control costs and improve operating efficiency. For a discussion of additional material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-Ks, and other periodic filings with the SEC. Freshworks Inc. assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this call, except as required by law. During the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures for historical periods are included in our earnings release, which is available on our Investor Relations website at ir.freshworks.com. I encourage you to visit our Investor Relations site to access our earnings release, supplemental earnings slides, periodic SEC reports, and a replay of today's call to learn more about Freshworks Inc. For presentation purposes today, Dennis' financial comments will be on an as-reported basis. Tyler will be providing financial comments on an as-reported and constant currency basis. I will now turn the call over to Dennis. Please go ahead. Dennis Woodside: Good afternoon, everyone, and thank you for joining us. Freshworks Inc. delivered a strong start to 2026, exceeding expectations across revenue, profitability, and free cash flow. Our Q1 revenue grew 16% year over year, above the high end of our estimates. Non-GAAP operating margin was 18%, nearly three points above our estimate. And adjusted free cash flow margin was 24%. Once again, we achieved rule of 40. In Q1, we signed the two largest deals in Freshworks Inc. history, including our first seven-figure EX ARR deal. Customers with more than $100 thousand in ARR grew 29% year over year, and customers with more than $50 thousand in ARR grew 22% year over year. This demonstrates our continued success in serving mid-market and enterprise customers. Freshworks Inc. is the AI-enabled unified service operations platform that is fast to deploy, intuitive to use, and enables every employee to be more productive. We entered 2026 with clear goals: expanding our EX business, monetizing AI at scale, and profitably growing our CX business, as we grow Freshworks Inc. to a $1 billion ARR company and beyond. Now let's look at the results for each of these areas in Q1. Our EX business represents the primary and largest growth opportunity. EX ARR grew 27% year over year in Q1, with both new and expansion business coming in ahead of our expectations. We are attracting a fast-growing base of mid-market companies and enterprises choosing Freshservice for enterprise-grade capabilities, fast time to value, and lower complexity in implementation. Most notably, in Q1, a global leader in nutrition replaced our largest competitor with Freshservice in what represents the largest new customer deal in our company's history. They were seeking a solution that could handle enterprise-grade scale without sacrificing the intuitive experience necessary to manage complex workflows. Following that historic win, Piedmont Healthcare also selected Freshservice over our largest competitor, citing our significantly lower total cost of ownership, faster implementation, and enterprise capabilities. Finally, Reed, the UK's number one specialist recruitment company, moved to Freshworks Inc. to achieve a faster and more collaborative enterprise IT experience. These wins underscore a clear trend: organizations are increasingly choosing our platform for its ability to deliver sophisticated results without the traditional overhead. Freshworks Inc.'s ability to deliver enterprise-grade outcomes without the implementation drag and administrative burden of legacy systems is exactly why we are displacing vendors whose products have become too expensive and complex for mid-market and enterprise customers to maintain. We are also expanding our right to win by integrating and broadening our EX offerings. In March, we launched a new Freshservice ITAM experience, bringing Device42 capabilities natively into Freshservice and making it easier for customers to use in a single cloud experience. We also completed the acquisition of FireHydrant, which advances our vision for an AI-enabled service ops platform that unifies service, asset, and operational data. We will complete the integration of FireHydrant over the course of 2026. Moving on to our AI progress, Freddy AI continues to be embedded throughout our platform, enhancing customer outcomes today while building toward a long-term monetization opportunity. Freddy AI Copilot is one of our fastest-growing products, with strong customer growth, new business attach rates, and higher expansion among AI customers. In Q1, Freddy AI Copilot customer growth exceeded 80% year over year, and the attach rate for new deals over $30 thousand in ARR was above 65%. Specifically, in our EX business in Q1, our customer penetration for AI surpassed 20%, nearly doubling year over year, and roughly a third of all new EX customers in Q1 had Copilot attached. AmeriSure, a commercial insurance provider and EX customer, has been able to transform service delivery within a single platform using Freshservice's AI-driven workflows and Freddy Insights. With Freshservice for business teams, the use case has expanded beyond IT into legal, HR, underwriting, and marketing, saving thousands of hours in 2025 alone and cutting employee onboarding resolution time by 97%. We look forward to detailing more about our future AI strategy and EX product innovations at our Refresh event next week. Turning to our customer experience business, we continued to deliver durable growth, with CX ARR up 6% year over year in Q1. We are making progress in this business through go-to-market discipline, platform integration, and increased market fit enabled by our AI capabilities. A leading provider of lender-placed insurance solutions consolidated a fragmented stack of JSM, Genesys, and SharePoint into a single Freshworks Inc. platform. By unifying ticketing, automation, and AI in one place, the team reduced manual effort, improved operational visibility, and gained a clear path to scaling support. Over 80% of our CX customer base has now migrated to the new Freshdesk Omni platform. This successful replatforming is more than just an improvement for customers; it is the foundational work to enable the next wave of generative AI capabilities in our CX products and accelerate margin accretion. Since we began offering Freshdesk Omni at the end of last year, ARPA is 2.5 times higher for new Freshdesk Omni customers compared to the prior platform. In lockstep with our focus on durable growth from our EX and CX businesses, we remain committed to driving structural operating efficiencies that support enterprise-grade scale and long-term profitability. Q1 non-GAAP operating margin reached 18%, nearly three points above our estimate, reflecting the disciplined execution we expect to sustain throughout 2026. Today, we announced workforce changes we are making to the company in Q2 to consolidate overlapping go-to-market efforts, streamline our product development process, and apply AI and automation across our business. These actions enable us to focus energy on our momentum in EX and accelerate Freshworks Inc.'s competitiveness. Tyler will provide the financial impact and updates to our outlook in his remarks. Turning to capital allocation, our operating model continues to deliver durable free cash flow. This operational strength allows us to take a balanced approach to capital allocation, reinvesting in high-return growth opportunities while also returning capital to shareholders. In February, our board authorized a new $400 million share repurchase program, reflecting our confidence in the intrinsic value of our business. In Q1, we reduced shares outstanding by approximately 2%. We remain confident in our ability to compound adjusted free cash flow and drive long-term shareholder returns. Overall, Freshworks Inc. achieved significant progress in Q1, accelerating our momentum with profitable growth fueled by our EX opportunities. By structurally shifting our operating model over the last two years, we have established a durable framework that balances top-line performance with capital efficiency. Our long-term focus is on compounding adjusted free cash flow per share. Having more than doubled this metric over the last two years, we are now positioned to compound adjusted free cash flow per share by at least 20% annually over the next three years. We will share more details on the operational drivers and our long-term vision at the Refresh event next week. I will now turn it over to Tyler to walk through our financials. Tyler Sloat: Thanks, Dennis, and thanks, everyone, for joining on the call and via webcast today. We kicked off 2026 with strong results, exceeding our expectations on revenue, non-GAAP operating income, and free cash flow. Our Q1 performance reflects accelerating momentum and strong retention in EX, increasing success in the enterprise market, and disciplined operational execution across the business. For our call today, I will cover the Q1 2026 financial results, provide background on the key metrics, and close with our forward-looking commentary and expectations for Q2 and full year 2026. As a reminder, most of my discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, restructuring charges, and other adjustments. I will also talk about our adjusted free cash flow, which excludes the cash outlay related to the cost associated with the Q2 restructuring announced earlier today. To provide greater transparency into our underlying business performance, I will also include constant currency comparisons throughout today's call. Starting with the income statement, we had a strong first quarter. Total revenue reached $228.6 million, up 16% year over year as reported or 14% on a constant currency basis. Within this total, professional services revenue was approximately $2 million. Professional services revenue grew in line with our internal expectations and is a key component of our overall customer success strategy, ensuring successful deployment and adoption of our platform. EX continues to be our primary growth engine, and EX ARR ended at over $540 million, growing 27% year over year on an as-reported basis and 25% on a constant currency basis. This performance was supported by strong expansion and new logo activity, including the two largest new business contracts in our history. These large wins validate our enterprise readiness and competitive positioning in market. Looking ahead, we anticipate EX ARR to grow in the mid-twenties and EX ARR to be over 60% of total ARR by year end. Turning to our CX business, we ended Q1 with over $395 million in ARR, up 6% year over year on an as-reported basis and 4% on a constant currency basis. The replatforming work we are doing to Freshdesk Omni to improve product consistency, support AI adoption, and increase the competitiveness of our platform is on track and will enable efficiency gains for the CX business over time. We have a disciplined focus on our CX business as we complete our customer migration and tighten alignment with our ideal customer profile. Going forward, we are adopting a prudent outlook and anticipate CX ARR to grow in the low single digits in 2026. Moving to margins, we demonstrated the durability of our business model by maintaining a non-GAAP gross margin of 80.3% in Q1, consistent with prior quarters. Our non-GAAP operating income for the first quarter reached $41 million, translating to a non-GAAP operating margin of approximately 18%. This performance surpassed the high end of our initial expectations for the quarter. The key drivers behind this result were twofold: strong top-line performance and continued efficiency gains realized across various lines of our operating expenses. We are structurally continuing to shift our business towards GAAP profitability, with strategic efficiency gains driving a meaningful improvement in margins throughout the year. As Dennis noted, we announced operational changes to our workforce that consolidate overlapping organizational efforts, streamline our product development process, and increase the leverage of AI and automation across our business. As a result of these actions, we are reducing our global headcount by approximately 11%. We anticipate taking one-time restructuring charges of approximately $8 million, with the vast majority in Q2. In a moment, I will discuss our updated Q2 and full year estimates that incorporate the financial impact of these actions. Moving to operating metrics, net dollar retention was 106% on an as-reported basis and 105% on a constant currency basis, a one-point acceleration from the prior quarter. Within this, we are demonstrating strong momentum in the expansion growth of our EX business. Q1 EX net dollar retention achieved 111% on an as-reported basis and 109% on a constant currency basis. Going forward, we expect to sustain net dollar retention of approximately 105% on a constant currency basis for Q2 2026. As a reminder, this excludes any impact from Device42 legacy customers. Moving on, I would like to provide some additional color on results from our customer cohorts. Customers contributing more than $50 thousand in ARR grew 22% year over year as reported and 20% on a constant currency basis. This cohort represents over 55% of our total ARR. Customers contributing more than $100 thousand in ARR grew 29% year over year as reported and 26% on a constant currency basis. This cohort represents approximately 39% of our total ARR. Double-digit growth in our larger customer cohorts was driven by the strong performance within EX, which we believe validates our strategy to increase our focused investments on mid-market and enterprise EX customers. The accelerating growth we are achieving tells us we are structurally well positioned to capture a disproportionate share of the future EX market and sustain durable growth from our most strategic customers. Now let's turn to calculated billings, balance sheet, and cash items. Calculated billings came in at $235 million in Q1, up approximately 16% year over year as reported and 13.5% on a constant currency basis. For Q2, we estimate billings growth of approximately 14.5% on both an as-reported and constant currency basis. Looking ahead, we expect billings growth to be in line with revenue growth for 2026. Our cash position remains strong. In Q1, we generated $55.8 million in free cash flow, representing a 24% margin and slightly better than our expectations. Adjusted free cash flow per share was $0.20, an 8% increase over the prior year. This metric underscores our operational efficiency and our disciplined approach to converting growth into tangible shareholder value. Turning to our capital structure, we view share repurchases as part of a disciplined capital allocation framework and a reflection of our confidence in the long-term opportunity ahead. In Q1, we repurchased 5.7 million shares for $45.4 million, while utilizing an additional $7 million to offset dilution through the net settlement of vested equity. We ended Q1 with approximately 318 million fully diluted shares outstanding, down 2% year over year. Included within this were approximately 279 million basic shares outstanding, which also declined year over year. We ended the quarter with $780 million in cash and investments, providing ample financial firepower to continue our repurchase program while investing in future growth. Now on to our forward-looking estimates. As a reminder, our non-GAAP net income projections for 2026 assume a tax rate of 24%. For Q2 2026, we expect revenue to be in the range of $232 million to $235 million, growing approximately 13% to 15% year over year; non-GAAP income from operations to be in the range of $41 million to $43 million; and non-GAAP net income per share to be approximately $0.13, assuming weighted average shares outstanding of approximately 280 million shares. For the full year 2026, we expect revenue to be in the range of $958 million to [inaudible]. This results in adjusted free cash flow margin of 24% to 27.5% for Q2 and full year 2026, respectively. Our full year 2026 outlook for adjusted free cash flow per share is $0.94, up 24% compared to fiscal 2025. As a reminder, cash used for stock repurchases is reflected in our financing activities and is excluded from our adjusted free cash flow calculations. Finally, our forward-looking estimates are based on FX rates as of 05/01/2026 and do not take into account any impact from currency moves. Overall, Freshworks Inc. delivered a strong start to 2026, establishing a solid foundation for the year ahead. We remain confident in our ability to consistently exceed our goals as we drive durable growth and expanding profitability. To that end, our internal metric that best aligns with our strategic priorities and long-term shareholder value creation is growth in adjusted free cash flow per share. Over the last two years, we have more than doubled our adjusted free cash flow per share results. More importantly, we have laid the foundation to compound adjusted free cash flow per share by at least 20% annually over the next three years. We look forward to sharing more details on this metric, the operational drivers behind it, and our long-term vision at our upcoming financial analyst session at our Refresh event next week. Thank you. Operator, we are ready for Q&A. Operator: Thank you. We will now open the call for questions. Please limit yourself to one question. 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 Scott Berg at Needham and Company. Your line is open. Please go ahead. Analyst: Hi, everyone. This is Lucas Mekop on for Scott Berg. Thanks for taking the questions. On the employee experience side, what drove the variance to the high end of your implied year-over-year constant currency revenue growth here in the first quarter? Historically, that has tended to skew towards the higher end, so I am trying to understand any changes in the quarter. Dennis Woodside: First, we continue to see real momentum in the EX business, and the move upmarket is working. You see that in a couple of different ways. If you look at our growth of accounts that are spending more than $100 thousand with us, that is up 29% year over year. We had our biggest deal ever—a large nutrition company that was a 10-year customer of one of our competitors—that is moving over to us for all the reasons we have discussed: enterprise-grade scale, much faster time to value, easier to manage the platform, and AI capabilities. We also had our second largest land ever with a large healthcare provider—very similar story. The upmarket motion continues to drive the overall EX business. Over the last couple of years, we have built a platform that extends from service management to operations management (now with FireHydrant) to asset management. We brought the Device42 capabilities into the cloud and launched that last quarter, and then into ESM. That is what customers are looking for, particularly in the mid-market—customers from 5 thousand to 20 thousand employees. We call these mid-market or agile enterprises that are looking for a provider that can keep up with them, and that market is big. Tyler? Tyler Sloat: In general, EX is doing really well. It is organically accelerating growth, and that is something we are really proud of. We have been talking about it for a couple of years now, and we are seeing great product market fit, evidenced in some of the larger customers choosing us over our biggest competitor. Analyst: Thanks. And as a quick follow-up, you were reviewing pricing changes earlier in the year. Do you have any updated view on the impact of pricing changes on your full-year guidance? Tyler Sloat: We had pricing changes, but they are not material to our guidance. We are going through a normal process with our customers as they renew, which is more of a CPI-type increase that any other software company would do. This is something we put in place about a year and a half ago. In general, there is no impact to our guidance because of pricing changes. The impact is really because new business is going really well on the EX side. Operator: Your next question comes from the line of Morgan Stanley. Your line is open. Please go ahead. Oscar Saavedra: Hi, you have got Oscar Saavedra on for Elizabeth Porter. Thank you for taking my question. I want to stick with Freshservice. Nice to see the wins you called out against your largest competitor. As we think about that opportunity, how would you characterize the pipeline building, given that pipeline going into last quarter looked pretty strong as well? Tyler Sloat: It is a continuation from what we saw coming into the year. We have been building out the field motion over the last year. Last year was about putting the leaders in place, and those leaders started filling out the roles underneath them—sales reps, CSMs, and ASMs who can engage larger customers. We are building that muscle, including the pipeline muscle, and we are seeing a really strong pipeline in the field for EX in particular. Oscar Saavedra: Got it. And a follow-up around seat expansion: there is debate about lower headcount among customers, but your NDR picked up quarter over quarter on a constant currency basis. Can you share details on whether that was more of an upsell driver, or did you also see strong seat expansion? Dennis Woodside: We saw strong new business wins and strong seat expansion as well. Remember, our product portfolio is broadening. We have additional seats accessible outside of the core IT department through ESM, which has been a big growth driver for us over the last year. We have asset growth through advanced ITAM that monetizes on an asset base—customers pay for every piece of software or hardware cataloged by the system. We are in a position of taking share from bigger players, which creates the opportunity to gain seats regardless of the overall market. We have not seen seat erosion; seat growth continues to be a meaningful driver of our business. Our business model is evolving. We have consumption-based offerings like Freddy AI Agent, asset-based offerings like advanced ITAM, and resolution- or transaction-based offerings. We expect the model to continue to evolve over the course of the year, and we are excited about new products coming out next week that will enhance monetization, particularly around AI. Operator: Your next question comes from the line of Citizens. Your line is open. Please go ahead. Austin Cole: This is Austin Cole on for Patrick D. Walravens. Dennis, could you double-click on what allowed you to win that largest deal? And as you move upmarket, how much interest are you seeing in the AI solutions and in Copilot? Dennis Woodside: Customers in the mid-market and lower end of enterprise are looking for an enterprise-grade platform that extends from service management through operations management, asset management, and ESM. They want fast time to value and a solution with a proven track record transitioning large customers from legacy platforms onto ours and making them successful quickly. They are looking for AI functionality today as well as a strong roadmap, and they appreciate having choice in how they want to consume AI over time. Some want to provision their agents with Copilot; others want to go directly into agentic AI. At our Refresh for EX event next week, we will announce product enhancements that lean into this enterprise motion and customer choice. We will roll out AI Agent Studio for EX, which allows customers to build their own agentic capabilities directly in our platform, with 20 preconfigured workflows for onboarding, offboarding, software provisioning, password changes, and more. We are also announcing our MCP Gateway, which will allow customers who want to bring their own AI—or build agents in cloud or in ChatGPT—to do so and take advantage of the data and information in our platform through MCP calls, which we will monetize over time. We launched our cloud-based version of advanced IT Asset Management about a month ago—available for all customers—which opens up growth for cloud-first customers. With FireHydrant, we have a new integration with Freshservice so you can see incident response data through Freshservice—another vector of growth we are opening up this quarter. EX grew 27% year over year this past quarter. We see EX continuing to be a bigger part and the majority of the business overall, driving growth. We have oriented investments in go-to-market and engineering around that. Operator: Your next question comes from the line of Canaccord. Your line is open. Please go ahead. David E. Hynes: Hey, it is actually DJ. Dennis, I hear largest deals ever and pipeline is fantastic, with signs of organic acceleration. Why the decision to restructure now, and where will those optimizations be focused? Dennis Woodside: We are building an agile company that can deliver strong free cash flow per share growth while fueling the EX business that is growing 27% year over year. A couple of reasons we acted now. First, we recently consolidated our go-to-market strategy. We had a more equal focus on inbound versus outbound. We are increasingly focusing on EX, which is primarily an outbound motion, and on acquiring CX customers with better unit economics. That has led us to rebalance teams and spend more toward EX, and to run the CX business to drive profitability and cash that we reinvest in EX. Second, over the last year to year and a half, we have invested in changing how we build product to embed AI in the development process, resulting in much shorter cycle times. Over half of our code is originated in AI today, which changes how fast we build and the number of people we need. Third, across the business, we have invested in automation and AI to streamline operations and move faster. All of these factors contributed to the restructuring. It sets us up well for the rest of the year, allowing continued investment in EX growth initiatives and efficient, profitable operation of CX. David E. Hynes: Thanks. And Tyler, a follow-up: what does dollar-based net retention look like if we isolate the EX business? Tyler Sloat: Net dollar retention for EX is still over 110%, coming in around 111% as reported and 109% at constant currency. That includes a bit of headwind from Device42 legacy churn—those are multi-year contracts, and we have discussed that since we bought Device42. We are pleased with the result. As EX continues to grow faster, on a weighted average basis, it helps overall NDR—we saw a slight acceleration this quarter as a result. We are introducing more products that provide upsell capabilities against core Freshservice. Operator: The next question comes from the line of Wolfe Research. Your line is open. Please go ahead. Alex Zukin: Thanks for taking my question. Tyler, it looks like you accelerated revenue and billings growth constant currency in the quarter, and you are guiding for accelerating constant currency billings growth next quarter. Anything one-time in nature to call out this quarter? And why were you in line with your constant currency revenue guide rather than ahead of it at the high end? Tyler Sloat: There were no one-times. In past quarters, we called out significant Device42 deals that had accelerated revenue on the front end. We have also talked about some churn on Device42, which is somewhat of a headwind against revenue growth because as those deals renew, we had upfront sums on the old term-license model. So no one-time positives here—just really good execution, and good go-forward execution as well. We rolled through the beat for the year. We are quite positive on what happened in the quarter, specifically in EX. We are being prudent about our estimates for CX going forward—internally optimistic, but externally prudent. Alex Zukin: And Dennis, lots of noise in the market about some vendors going more upmarket or downmarket. What are you seeing generally in your lanes from competitors both higher and lower? Any AI anxiety impacting sales cycles? Dennis Woodside: We do not see AI anxiety slowing or impacting deals. Most of our larger deals now include an AI component—AI is core to the pitch, discussion, and roadmap. Customers are coming for the full platform as well: they need capabilities across IT and beyond to make a switch. On the EX side, primary competitors on the large side are ServiceNow and Atlassian, plus a fragmented tail—Ivanti, Cherwell, BMC, and others. On the CX side, it is more fragmented—Zendesk and a range of smaller players. We have not seen major changes in competitive dynamics. We are confident in our ability to win against larger EX competitors. We had many deals close this past quarter—including the largest and second largest in our history—both multi-year customers of our largest competitor. For companies in the 5 thousand to 20 thousand employee range, we have the right product, and that is increasingly apparent. In CX, dynamics are similar; AI is more prevalent in conversations. We are focusing CX on SMB, commercial, and mid-market customers where we have strong unit economics and expansion dynamics. We are no longer chasing micro deals at the lower end. With replatforming, there are positive signs: we have over 2.5x ARPA for new Freshdesk Omni customers. If we keep that trend and realize price increases from migrating customers to a single Freshdesk Omni product, that will flow through to CX over time. We are being conservative for the rest of the year—our guide implies low single-digit growth for CX—because we want to see how it plays out over the next quarter. Overall, we are set up for a good year. We raised our non-GAAP operating profit by about $26 million, and we see the ability to drive a profitable business with mid- to high-teens growth over multiple quarters. Operator: Your next question comes from the line of Raymond James. Your line is open. Please go ahead. Brian Christopher Peterson: Thanks, I will keep it to one. Dennis, can we get an update on channel efforts? How big are bookings generation today? As you build out the broader EX suite, does that change conversations with partners and how you could expand that base over time? Dennis Woodside: Most of our channel partners are regional service providers that historically may have specialized in JSM or Ivanti or BMC. They are important and are driving meaningful business for us. We do have a couple of GSIs we have been working with—Unisys is one—but that is nascent. We brought in a new channel leader focused on moving up and engaging GSIs. There is interest because customers on the lower side of the enterprise market are looking for choice, and we have a great product. We will continue to invest in the channel. Right now, dynamics are favorable on the regional side; the GSI side is early. Operator: Your next question comes from the line of Piper Sandler. Your line is open. Please go ahead. William Fitzsimmons: Hey, thanks for taking my question. You mentioned opening up the platform to third-party agents and the potential monetization of third-party AI agents. How should we think about that potential within the platform? And on the large EX displacements, how should we think about the repeatability of these over time? Dennis Woodside: On EX displacements, we have been winning bigger deals for a while and will continue to highlight them. The metrics show it—customers over $100 thousand are up 29% year over year, and ARPA for the business has been growing nicely. It is repeatable, and we are repeating it every quarter. Our pipeline this quarter is bigger than last quarter and meaningfully larger than a year ago. On opening up the platform, at our Refresh EX event next week we will reveal our MCP Gateway, which enables customers who want to build broader analytics platforms—combining data from multiple systems into a data lake and applying AI—to both pull and push information to our system. We will monetize it over time. It is a way for us to participate in AI initiatives customers drive outside of our AI. It allows customers to choose: use our Copilot or AI Agent, or build their own agents that interact with Freshservice data and systems—extracting data and driving actions within Freshservice. We are building an open system that can monetize both over time. We will have more details next week at the launch. Operator: There are no further questions.
Operator: Welcome to the first quarter 2026 financial results conference call and webcast. At this time, all participant lines are in a listen-only mode. For those of you participating in the conference call, there will be an opportunity for your questions at the end of today's call and prepared remarks. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press 1 again. Please note, this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Juliet Cunningham, vice president of investor relations. Juliet Cunningham: Afternoon, everyone, and thanks for joining us today. With me are Brian J. Blaser, President and Chief Executive Officer, and Joseph M. Busky, Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website. To assist in the presentation, we also posted supplemental information on our Investor Relations page that will be referenced in this call. This conference call and supplemental information may contain forward-looking statements which are made as of today, 05/05/2026. We assume no obligation to update any forward-looking statement except as required by law. Statements that are not strictly historical, including the company's expectations, plans, financial guidance, future performance, and prospects, are forward-looking statements that are subject to certain risks, uncertainty, assumptions, and other factors. Actual results may vary materially from those expressed or implied in these forward-looking statements. Please refer to our SEC filings for a description of potential risks. In addition, today's call includes discussion of certain non-GAAP financial measures. Tables reconciling these non-GAAP measures to their most directly comparable GAAP measures are available in our earnings release and supplemental information on the Investor Relations page of our website. Lastly, unless stated otherwise, all year-over-year revenue growth rates given on today's call are on a constant currency basis. And now I would like to turn the call over to our CEO, Brian J. Blaser. Brian J. Blaser: Thanks, Juliet, and good afternoon, everyone. I will start today with a brief perspective on the first quarter and then discuss details of our business performance more broadly. Our first quarter results were impacted by a significantly softer respiratory season compared to Q1 of last year, with influenza-like illness, or ILI, visits down approximately 30% as reported by the CDC in April. While ILI visits are one indicator, the season was also notably weaker across other key measures including severity of illness, hospitalizations, and duration. Overall, the respiratory season was both significantly milder and shorter than in Q1 2025. We also experienced broader macroeconomic and geopolitical headwinds during the first quarter. In China, sales slowed in March ahead of the anticipated national IVD pricing guidelines as distributors exercised caution on inventory purchases in light of potential future pricing declines. While final guidelines have not yet been issued following the comment period, our updated full-year 2026 guidance reflects the estimated impact based on the current draft. And as is expected, this estimate may change once the final guidelines and implementation timeline are announced, and, accordingly, we are preparing mitigation actions to help offset these headwinds. Moving into 2027, the proposed pricing changes would impact only about half our sales in China, and even with the new guidelines, that business is certainly not going away and will continue to be a meaningful component of our revenues. Notably, even after these pricing changes are implemented, we believe our China business will continue to be accretive to the company margin profile. We do not think the changes will be fully implemented until the middle of next year, which gives us time to work on mitigating actions. Shifting back to Q1 results, we also saw delays in some orders and tenders due to the ongoing disruption in the Middle East. Assuming conditions stabilize, we expect these orders and tenders to resume during the remainder of the year. Importantly, our underlying business remains strong and durable. Our core labs and immunohematology franchises are performing well, and we are executing against our priorities. As a result, we believe we are well positioned to deliver on our objectives to expand our adjusted EBITDA margin and improve cash flow in 2026. We are also making solid progress in advancing our strategy. We completed the acquisition of Lex Diagnostics in April, adding a highly differentiated ultrafast molecular platform that strengthens our position in point of care, an area we believe will be a meaningful driver of future growth and reinforces our ability to deliver integrated diagnostic solutions across the continuum of care. We are already seeing strong customer interest and have secured our first orders. Customer insights reinforce this opportunity. Approximately 90% of Sofia customers currently use both antigen and molecular testing systems, and many have indicated a willingness to switch to our more competitive molecular platform. Their priorities are clear: better ease of use, faster time to result, and lower cost. And Lex is designed to deliver all three. To support launch readiness, we are expanding manufacturing capacity at our site in the UK, and we expect to begin placing instruments this quarter with measurable assay pull-through and associated revenue beginning in early 2027. Turning to our labs business, we launched our high-sensitivity troponin assay in the U.S., strengthening our cardiac portfolio and enhancing our clinical value proposition. We are seeing strong demand, and we are now shipping to more than 300 U.S. customers. We also began rolling out the VITROS 450 platform in select international markets, expanding access to our diagnostic solutions. As a successor to the VITROS 350, this platform is designed to meet the needs of emerging markets requiring low-volume, cost-effective solutions. Initial shipments are targeted for JAPAC followed by LATAM and EMEA, where we recently received the CE Mark. Importantly, the combination of VITROS 450 and VITROS ECL enables us to deliver a comprehensive solution across clinical chemistry and immunoassays in attractive international markets. We expect these product launches to support our mid-single-digit revenue growth expectations for the labs business, which represents over half of our revenue. In summary, we are navigating near-term headwinds, but our strategy is sound, our innovation pipeline is strong, and we remain focused on executing with discipline to deliver sustainable, profitable growth. I will now turn the call over to Joseph M. Busky. Joseph M. Busky: Okay. Thanks, Brian. I will walk through the key financials for 2026. Unless otherwise noted, all comparisons are to the prior-year period on a constant currency basis. Total reported revenue was $620 million. Of that, non-respiratory revenue was $552 million, or $544 million excluding the donor screening business. Labs revenue declined 8% primarily due to the factors Brian discussed. In addition, the termination of our joint business agreement with Grifols reduced Q1 labs revenue and created a difficult year-over-year comp. Immunohematology grew 3%, driven by North America, China, and JAPAC. Triage declined by $3 million primarily due to slower distributor sales in China. Looking at our respiratory revenue, as was widely reported, the North America respiratory market showed an atypical decline versus the prior-year period. This was an industry-wide trend, not unique to QuidelOrtho Corporation, and is supported by KOLs and competitor reports. As a result, our respiratory revenue was $68 million, down significantly as noted in our preannouncement due to the approximately 30% lower ILI visits compared to Q1 2025. Keep in mind that our large global installed base of the Sofia platform and QuickVue has demonstrated growth over time, and importantly, during 2026, we saw no change in testing protocols, and our market share remained stable. Lastly, on revenue, foreign currency exchange was favorable by 210 basis points during the quarter. Now moving down the P&L, non-GAAP opex decreased by 2%, primarily due to R&D efficiencies. Adjusted gross profit margin was 44%, a decrease of 630 basis points due to product mix with lower respiratory revenue contribution, and our adjusted EBITDA was $109 million, representing an 18% adjusted EBITDA margin, and diluted adjusted loss per share was $0.40. We expect to continue to drive adjusted EBITDA margin expansion for the full year with targeted staffing reductions, procurement, and facility consolidation cost savings initiatives. Now turning to the balance sheet. At the end of March, we had cash of $140 million and borrowings of $130 million under our revolving credit facility. From a cash flow standpoint, operating cash flow was negative $33 million and free cash flow was negative $67 million. While we expected cash flow to be negative in the first half, which is consistent with our historical seasonality, first quarter 2026 cash flow declined year over year primarily due to lower EBITDA related to the weaker respiratory season and the timing of accounts payable and accrued interest. Inventory also increased due to the weaker respiratory season as well as in preparation for multiple upcoming product launches. On the positive side, we delivered strong accounts receivable cash collections of $54 million and reduced our CapEx by $22 million compared to the prior-year period, as a result of lower systems and manufacturing capacity spend. We remain focused on improving cash flow generation and still expect positive cash flow for the full year, now expected to be in the range of $100 million to $120 million, with positive cash flow driven by higher revenue in the second half of the year. Lastly, net debt to adjusted EBITDA leverage was 4.1x, including pro forma adjustments allowable under our credit agreement. We continue to expect pro forma leverage under the terms of our credit agreement to be at 3.25x to 3.5x by the end of this year. To wrap up, first quarter results reflected the impact of lower respiratory volumes, macro and geopolitical pressure, and continued investment in our strategic initiatives including molecular diagnostics. Now I would like to cover our full-year 2026 outlook at a high level. For a full list of assumptions, please refer to Page 6 of our first quarter 2026 earnings presentation. Importantly, we are providing a new guidance range. As noted in our Q1 preannouncement, we are tethered to the low end of our previously provided range, which was purposely wide to account for respiratory season variability. We now expect total reported revenue of $2 billion to $2.75 billion, which is driven by two changes: our first quarter performance and the expected lower full-year revenue in China, which takes into consideration distributor reactions to the pending China national IVD pricing guidelines as currently drafted; and in North America, first quarter respiratory revenue reflecting a weaker ILI trend. Looking back over the past ten years, and excluding pandemic years, in periods where ILI declined in Q1 versus the prior year, trends rebounded over the remainder of the year, resulting in higher ILI on a full-year basis. Despite this empirical data, to be prudent, we are continuing to plan for an average respiratory season and forecasting a flat second half without a bump-up and an 8% decline in respiratory revenue for the full year 2026. These two revenue impacts flow from the top line to the bottom line. Therefore, we now expect full-year 2026 adjusted EBITDA of $615 million to $630 million, still representing an adjusted EBITDA margin of 23%, which reflects a 100 basis point improvement over full-year 2025. We expect adjusted diluted earnings per share of $0.80 to $2.00. We expect to deliver free cash flow of $100 million to $120 million. Note that the second quarter has historically been our seasonally lowest quarter. Consistent with this pattern, we expect sequential revenue, adjusted EBITDA, and adjusted EPS to be roughly in line with Q1 2026 but still reflecting year-over-year growth across all three metrics. Our updated outlook reflects improving operating performance in the second half of the year as well as continued disciplined execution and the ramping up of the Lex Diagnostics business. We will now open the call for questions. Operator: We will now begin the 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. 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 Tycho Peterson of Jefferies. Your line is open. Please go ahead. Jack Meehan: Yeah, hi. This is Jack on for Tycho. Thanks for the question. Could you just walk us through the guide for second quarter growth by segment? And then also, down the P&L, what are margins going to look like? Joseph M. Busky: Yeah. Jack, as noted in the prepared remarks, we do expect that sequentially Q2 will be relatively flat with Q1 but will provide growth year over year. The growth is going to come from the core business as you think about the labs business and the IH business and the Triage business, that growth versus prior year. Jack Meehan: Okay. That is helpful. Then on China, NHSA, can you tell us exactly how big of a headwind that is in 2026, what you are assuming in the guidance, and just a little bit more detail on how you arrived at that number? Joseph M. Busky: Yeah, sure. As you think about the updated revenue guide, which, again, is tethered to the low end of the previous revenue guide, there are really only two changes that we made to the revenue guide. I want to be really clear with that. One is the respiratory season weakness we saw in Q1, and then the impacts that we are seeing in China from our distributors pausing on their purchases due to the pending new national pricing guidelines, which we expect to come out in the next couple of months. I would say if you look at the new revenue guide, Jack, it is down roughly $75 million at the midpoint. It is probably split almost 50/50 between respiratory and China, maybe a little bit less on China, a little bit more on respiratory. Maybe, you know, 45 million respiratory and 30 million China kind of thing. That is where we are seeing it. We have pretty good visibility, as you would imagine, from our local team and the good relationships we have with our customer base. So we feel pretty good about this new guide for 2026. Operator: Your next question comes from the line of Andrew Brackmann of William Blair. Your line is open. Please go ahead. Andrew Brackmann: Hey, guys. Good afternoon. Thanks for taking the question. I wanted to pick up off of Jack's first question there with respect to Q2. So if you are sequentially sort of flattish to Q1, I think that implies a pretty significant ramp in adjusted EBITDA margin in Q3 and Q4. Can you maybe just talk to us about some of the levers that you see there, not just on the revenue side but also on the cost side as well? Joseph M. Busky: Yeah, hey, Andrew. I do think that what we are looking at in the guide, as you think about first half versus second half, is that we are expecting the revenue growth to pick up quite a bit in the second half versus the first half. That is really a function of our expectation that the China impacts we talked about in the prepared remarks generally are going to happen in the first half of the year and not so much in the second half of the year. In addition, as I said, we are expecting continued growth with labs, IH, and Triage. We are planning for an average respiratory season in the second half of the year, so we are not expecting growth in the second half for respiratory year over year, but we do expect it to be flat, so I do not expect it to be a headwind. All those factors, including what Brian mentioned with the new products coming out—the 450, the high-sensitivity troponin—and you are going to have some Lex revenue in the second half, all those things contribute to the higher revenue in the second half versus the first half of the year, which will drop down and drive higher EBITDA, EPS, and cash flow. Andrew Brackmann: Okay. Thanks for all that. And then, Brian, with respect to Lex, it sounds like some folks in your customer base are pretty interested. Can you maybe just remind us about switching dynamics and what you are seeing? Brian J. Blaser: We are excited about Lex and are working actively, as I mentioned, to build additional capacity at our site in the UK to support the ramp-up. At this point, we are expecting to place a few hundred instruments this year, followed by a more significant ramp-up in 2027 that I think is really going to begin to create meaningful assay pull-through. We are doing everything we can to bring on additional capacity as quickly as possible, because I think more than anything, we will probably be capacity constrained versus demand constrained given what we are seeing with the product. Most of these instruments will be placed in customers' sites, meaning there is no real capital outlay from a switching cost standpoint. The ease-of-use profile—this is truly a plug-and-play instrument that requires sample in, answer out in six to ten minutes. Your question about the switching costs: there are really very low barriers to customer objection to placing new instruments. We do not think that is going to be an issue, and we think the value proposition across speed, turnaround time, and cost is really going to position this platform well. Operator: Your next question comes from the line of Patrick Donnelly of Citi. Your line is open. Please go ahead. Patrick Donnelly: Hey, guys. Thank you for taking the question. Maybe one on the China side. I am sure you guys saw this morning a competitor of sorts that walked away from their China diagnostics business and sold it, which was rewarded, given that it has been an overhang on a lot of the company. What is your commitment there on the China side and visibility given some of these recent changes? It just feels like a slippery slope over there. How are you framing up that risk and the comfort level going forward on that business? Brian J. Blaser: Thanks, Patrick. Clearly, the reimbursement changes are a headwind there, but the way we are looking at it, the reimbursement changes themselves will only impact about half our sales there. We have no plans to walk away from China, and even after these changes are implemented, we believe the business continues to be accretive to our company margin profile. We have time to address this. We think that the changes will not be fully implemented until probably mid next year, and so we are going to be taking actions to offset that. We will continue to monitor the environment in China after these changes are made, but as long as the economics continue to be favorable, we intend to remain in that market. Over the very long term, it continues to be an attractive growth market for healthcare and diagnostic testing in particular. Patrick Donnelly: Okay. That is helpful. And then maybe just on the margin side, the EBITDA build, can you talk about some of the actions you are taking on the cost side, not only this year but just the base heading forward? Obviously, you guys in the past have given some longer-term targets. How are you thinking about the key levers there as we work our way through the year and into next year? Thank you. Brian J. Blaser: We continue to do a lot of heavy lifting on the margin side of the business. I referenced that we have taken out close to a thousand positions in the organization. A lot of that work pushed us into the low-20s adjusted EBITDA margin. We are going to start to see a 50 to 100 basis point improvement starting in 2026 from our donor screening exit. We have a rich portfolio of projects across our indirect and direct procurement efforts. We have the shutdown of our Raritan facility in progress, and we have a lot of opportunity outside the U.S. to optimize our profitability in our OUS regions. Additionally, we continue to benefit from placing more immunoassay volume that is at higher margin. Moving forward, you are going to see the benefit of Lex and molecular margins being typically much higher than immunoassay margins as well. We get into that mid-20s range solidly with our procurement initiatives and the Raritan footprint optimization, and with some targeted staff reductions, I think we push into the higher-20s as Lex becomes a bigger component of the business over the next few years. Operator: Your next question comes from the line of Lu Li of UBS. Your line is open. Please go ahead. Lu Li: Great. Thank you for taking my questions. I want to go back to China a little bit. I think you mentioned that in the guide you are assuming the China impacts are basically happening in the first half and not the second half. Can you provide a little bit more color on that? Are you still seeing distributors pausing sales in April and May as well? Joseph M. Busky: Yeah. We are still seeing some of that pressure, and over the next couple of months here, we are going to see that behavior in the first half order patterns. We expect it to start to mitigate, and we believe that will stabilize over time. Lu Li: Got it. And then my second question, just to double confirm your margin target. Are you still hoping to get to mid- to high-20s by mid 2027, or does that margin target get a little bit delayed given potential changes in China and maybe other macro factors? Joseph M. Busky: Hey, Lu. It is Joe. I think Brian touched on this a minute ago. Just to reiterate, we are confident in our EBITDA margin goals and the timeline for them. There is no change to that. That is because we still have, as Brian said, all these initiatives around procurement and site consolidation in flight that we expect to complete as we move through this year and into early next year. On China, we do have some time. We do not think that these potential reimbursement changes will be enacted until you get more into mid-2027, so we have about a year to implement cost mitigation actions to offset any potential price declines that we may see in 2027. Because of all that, we still feel really good about the margin goals and the timing that we have communicated already in the past. Operator: If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. There are no further questions at this time. I will now turn the call back to Brian J. Blaser, President and Chief Executive Officer, for closing remarks. Brian J. Blaser: Thank you, operator. In closing, stepping back from the first quarter and the headwinds that we saw in the respiratory season and China, this really does not change our direction. We are executing well. Our strategy is working, and we are strengthening the business in the right areas. We do expect a stronger second half and remain focused on delivering consistent, profitable growth. Thank you for your interest in the company, and we look forward to updating you in the quarters ahead. Operator: This concludes today's call. Thank you.
Operator: Good afternoon, and welcome to Supernus Pharmaceuticals, Inc. first quarter 2026 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to Peter Vozzo of ICR Health Care, Investor Relations representative for Supernus Pharmaceuticals, Inc. You may begin. Thank you. Good afternoon, everyone, and thank you for joining us today for Supernus Pharmaceuticals, Inc. first quarter 2026 financial results conference call. Peter Vozzo: Today, after the close of the market, the company issued a press release announcing these results. On the call with me today are Supernus Pharmaceuticals, Inc. Chief Executive Officer, Jack A. Khattar, and Chief Financial Officer, Timothy C. Dec. Today's call is being made available via the Investor Relations section of the company's website at ir.supernus.com. During the course of this call, management may make certain forward-looking statements regarding future events and the company's future performance. These forward-looking statements reflect Supernus Pharmaceuticals, Inc.'s current perspective on trends and information. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factors section of the company's latest SEC filing. Actual results may differ materially from those projected in these forward-looking statements. For the benefit of those of you who may be listening to the replay, this call is being held and recorded on 05/05/2026. Since then, the company may have made additional announcements related to the topics discussed. Please reference the company's most recent press releases and current filings with the SEC. Supernus Pharmaceuticals, Inc. declines any obligation to update these forward-looking statements except as required by applicable securities laws. I will now turn the call over to Jack. Jack A. Khattar: Thank you, Peter, and thanks everyone for taking the time to join us on today's call. Supernus Pharmaceuticals, Inc.'s first quarter results reflect a strong start to the year, including a 56% year-over-year increase in combined revenues of our growth products and an 11% year-over-year increase in adjusted operating earnings. Starting with Onepco, during the first quarter, Onepco generated net sales of $8.4 million, reflecting a partial benefit from the resumption of new patient initiations in February 2026. We are pleased with the rebound in the business since we resumed patient initiations, with some of the metrics in March reaching or even exceeding levels achieved before the supply constraints. For instance, prescriptions in March reached 463, exceeding the level reached in October 2025 before the supply constraints. Also, the number of prescribers in a single month with shipments to patients increased in March to the highest level since the launch of the product. Overall, more than 645 prescribers have submitted approximately 2,200 enrollment forms since the launch of the product through April 2026. We are also pleased with the progress with the second supplier on Onapro. We expect regulatory submission to the FDA in the third quarter of this year with potential approval before midyear 2027. Switching now to Zirzuve, Supernus Pharmaceuticals, Inc. reported $27.6 million in collaboration revenues in the first quarter. Full first quarter 2026 U.S. sales of XERZUVEY as reported by Biogen increased approximately 100% compared to the same period in 2025. In 2026, Zarzaur saw strong growth of 8,273% in rhythm prescriptions and number of prescribers respectively compared to the same period last year. Since launch, 85% of the prescriptions have come from routine prescribers and more than 29,000 patients have been treated with ZERZUVEC. Regarding KELLI, in the first quarter and as reported by IQVIA, prescriptions grew by 19% compared to the same period last year, outpacing the 10% growth in the total AHD market. Net sales of $78 million represented a strong 20% increase over the first quarter last year. Despite typical first quarter headwinds, Teledy's growth continues to be solid and is coming from both patient populations, with adult prescription growth of 27% and pediatric prescription growth of 15%. In addition, the total quarterly number of prescribers for Ikelebri reached a high of approximately 43,000, with adult prescribers for the first time surpassing the number of pediatric prescribers. Switching now to GOCOVRI for 2026, net sales reached $35.2 million, increasing by 15% compared to the same quarter in 2025. Total number of prescriptions grew by 7% in 2026 compared to the same period last year. Moving on to R&D, the follow-on Phase 2b randomized double-blind placebo-controlled trial with SPN-820 in approximately 200 adults with major depressive disorder is ongoing. This study will examine the safety and tolerability of SPN-820 and its efficacy at a dose of 2,400 milligram given intermittently twice per week as an adjunctive treatment to the current baseline antidepressant therapy. Our Phase 2b randomized double-blind placebo-controlled study of SPN-817 is also ongoing with a targeted enrollment of approximately 258 adult patients with treatment-resistant focal seizures. This trial utilizes 3 milligram and 4 milligram twice-daily doses. And for SPN-443, our novel stimulant ADHD product candidate, we expect to initiate a Phase 1 single ascending and multiple ascending dose study in adult healthy volunteers in 2026. Finally, corporate development will continue to be a top priority for us as we look for additional strategic opportunities to further strengthen our future growth and leadership position in CNS through revenue-generating products or late-stage pipeline product candidates. With that, I will now turn the call over to Tim. Timothy C. Dec: Thank you, Jack. Good afternoon, everyone. As I review our first quarter 2026 results, please refer to today's press release and 10-Q that was filed earlier today. We achieved total revenue of $207.7 million for 2026, an increase of 39% compared to the same quarter last year. Total revenues were comprised of revenues from our commercial products including XERJUVEY, collaboration revenues, and royalty, licensing, and other revenues. Revenues from commercial products increased to $178 million, a 26% increase compared to the same quarter last year. This increase in revenues from commercial products was primarily due to the increase in net sales of our growth products, CalRit, GOCOVRI, and Anapco, as well as the addition of collaboration revenues from ZERZUDE. In addition, revenues from royalty and licensing and other revenues were $29.3 million. This includes $20 million of licensing revenues related to the achievement of a commercial milestone under the company's collaboration agreement with Shinobi. For 2026, combined R&D and SG&A expenses were $164.6 million as compared to $116.9 million for the same quarter last year. This increase was primarily due to an increase in SG&A expenses associated with the collaboration agreement with Biogen. Operating loss on a GAAP basis for 2026 was $8.3 million as compared to an operating loss of $10.3 million for the same quarter last year. The change was primarily due to higher revenues partially offset by an increase in SG&A expenses associated with the collaboration agreement with Biogen. GAAP net loss was $2.3 million for 2026, or net loss per share of $0.04, compared to GAAP net loss of $11.8 million, or $0.21 per diluted share, in the same period last year. On a non-GAAP basis, which excludes amortization of intangibles, share-based compensation, contingent consideration, and depreciation, adjusted operating earnings for 2026 were $28.7 million compared to $25.9 million in the same quarter of last year. As of 03/31/2026, the company had approximately $384 million in cash, cash equivalents, and marketable securities, compared to [inaudible] as of 12/31/2025. This increase was primarily due to cash generated from operations, the timing of Medicaid payments, and the Shinobi-related commercial milestones. The company's balance sheet remains strong with no debt, providing significant financial flexibility for potential M&A and other growth opportunities. Now turning to guidance. For full year 2026, the company reiterates its financial guidance for total revenues, combined R&D and SG&A expenses, and non-GAAP operating earnings. As such, we expect total revenues to range from $840 million to $870 million, comprised of commercial product revenues and royalty and licensing revenues. For full year 2026, we expect combined R&D and SG&A expenses to range from $620 million to $650 million. Overall, we expect full-year operating earnings in the range of $0 to $30 million. And finally, we expect non-GAAP operating earnings to range from $140 million to $170 million. Please refer to the earnings press release issued prior to this call that identifies the various ranges of reconciling items between GAAP and non-GAAP. With that, I will now turn the call back over to the operator for Q&A. Operator? Operator: We will now open the call for questions. Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you will need to press star-1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star-1-1 again. Please stand by. Our first question comes from Andrew Tsai from Jefferies. Your line is now open. Analyst: Hi. Thanks for the updates, and thanks for taking my questions. Specifically on NAPCO, it is great to see that you have 2,200 start forms now up from 1,800 in January. Ultimately, what percentage of those patients or start forms do you think will be ultimately converted to a paying patient? And can you remind us how many weeks it can take from a start form to a paying patient, how long that could take? Thank you. Yeah. On average, from the time you get a form until you have a shipment, you could lose somewhere in the 40% to 45% of these patients in the process for all kinds of reasons, whether it is a change in the medical condition of the patient over time, the insurance issue, any of these reasons. Or just lack of response; sometimes a lot of these forms do not have all the completed information, so you are calling the patient trying to get more information from them to be able to process it. Sometimes they just do not call back. And then, as far as the period of time, it could take several weeks as we go through this process over time. Of course, we are always looking at different bottlenecks and try to streamline and improve the process. But it is several weeks for somebody to have the form submitted until finally they get the product shipped. Got it. Thank you. And so following up on that, to get to your On APCO guidance, the high end of $75 million, mathematically, you are going to be needing more than 700 patients on therapy. So if I did 2,200, 50% conversion, that would be over 1,000 patients potentially on an—so it looks like you can get there. So can you remind us how many patients are still on Anapco today? And when could you expect most of those kind of hypothetical patients to get on drug? You know, should it be within the next three to six months then? Thank you. Yeah. I mean, the high end of our guidance is, you know, the $70 million— Jack A. Khattar: You are thinking about it the right way. Yes. I mean, that could translate to somewhere around, on an average, about 700 patients that you need to have around 700 patients throughout the whole year, clearly, to give you the $70 million in sales. The thing is with the 2,200, you have to remember that is a number that is launch-to-date. That is not 2,200 in 2026, obviously. So it would be interesting to see how many we generate for this year and how many out of the 20 or whatever is left actually out of the 2,200. If we look at the backlog right now, we have probably somewhere around 570, give or take, patients in the queue. Versus last time we talked, it was around 700. So we are going through the backlog, and we are actually improving as time goes on. We are improving our number of patients that are being processed per week. Remember, I mean, we just restarted the whole machinery, so to speak, or the whole process started, you know, February, so to speak. So it has taken us—March we have been very happy with the progress the team has made through March, really getting us to very high levels. As I mentioned in my previous remarks, even exceeding performance metrics that were before the supply constraints. So things are really on the uptake. We are pretty happy with the rebound in the business, how we are processing these forms, how many of these forms we are able to translate into real patients and real shipments. But we maintain the guidance, of course, because we would like to see another full quarter. So Q1, as I mentioned in my remarks, was really a partial quarter. It was not really a full quarter. So let us see a full quarter and how quickly we can go through this backlog. In the first quarter, we only really benefited from March, so to speak. February was very partial and very minimal initiation in January. And therefore, it is not a true reflection of a full quarter with the business rebounding. But we are very happy with how things are moving along across several metrics, with the demand continuing to be strong, as you pointed out, with the 2,200 forms, but also with the way the team is processing these forms and minimizing the drop-offs and losses throughout the process. We feel pretty good, obviously, and that is why we did not change the guidance. So pretty good about the $45 to the $70 million guidance on that. Analyst: Very good. Thank you. Operator: Thank you. Our next question comes from the line of David Amsellem from Piper Sandler. Your line is open. David Amsellem: Hi. Yes. This is Alex on for David. Thanks for taking our questions. First one, sort of jumping off of the last question regarding the guidance range for MAP Co and the assumptions to get to the top end of the range and the number of patients. Can you maybe speak to what you are seeing in terms of patient persistence for patients who are getting drug? And then secondly, regarding XERZUVEY, can you maybe speak to how you are thinking about the growth runway of the product? Thank you. Jack A. Khattar: Yeah. Regarding the Xueve, as I mentioned in my remarks, we are really pleased with the performance of the product. If you look at the true fundamental metrics as far as prescriptions, number of prescribers, we are really broadening the prescriber base, and we have been very successful with our partner adviser in doing that. And, of course, the prescriptions grew a very healthy 82% in the quarter versus last year. As far as penetration, we are still in the real early innings on this product, as we mentioned in previous quarters. The potential of the product is fairly big. Every year, we have around 500,000 women who experience these symptoms. And as I mentioned again earlier, only 29,000 patients have been treated with ZERZURA since launching, and we are into year three right now. So we have a long way to go with Zanzuve, and we are very happy with the momentum of the brand. And, of course, we also started significant efforts on the DTC side and other programs. So we have pretty nice expectations of growth from the product. Regarding—if I understood your question on WinAPCO—is it really the patient and the kind of patient we are getting on Onepco? It looks like we are starting to get some feel for who is that patient. We do not have a complete full picture yet because, as you would imagine, with a new product, it evolves over time. But some of the early indicators: patients tend to be more on the younger side as far as age and/or the disease, meaning they have not been diagnosed for a long, long time. They tend to be active. From a physician perspective, they are looking for something different than levodopa/carbidopa. So that is the kind of patient profile that seems to be emerging right now as we speak on the oneposide. David Amsellem: Thank you. And then what are you seeing in terms of patient persistence for Panopco? Jack A. Khattar: Yeah. It is a little bit too early for us because we got the disruption in the supply and so forth. Actually, we were pretty happy with the refills and how many patients stayed with us around the time of the supply constraint. We do have dropouts that are fairly consistent with the clinical study, maybe a little bit more. We are watching it very carefully. Typically, these dropouts occur when you have the titration and how well the titration has happened, because with apomorphine, you have to do titration very slowly and with starting with lower doses. You cannot jump in pretty quickly into high doses on apomorphine. So depending on how that is happening and how the patient is responding to that, once they go through that titration, they typically tend to stay with it and be pretty happy and pleased with it. And that has been the experience that historically has been in Europe. Operator: Our next question comes from the line of Kristen Kluska from Cantor. I apologize. Kristen Brianne Kluska: It is okay. Hi, everyone. Congrats on a great start to calendar year 2026 here. Just on a NOPCO, as we think about the mid-2027 approval, how are you working with your partners out in Europe about thinking about what the demand might look like in 2027 onwards to be able to work with them to meet that criteria? And then when we think about the U.S. right now, in terms of the patients that are getting on therapy, given that these capacity strengths are still there to an extent, are you seeing that physicians are prioritizing certain patients over another just knowing that they might not be able to get their hands on enough supply for all of the patients they would want to treat? Jack A. Khattar: Yeah. Regarding the last question, we have not detected anything specific that because of the previous supply chain they are using the product on a different patient or one patient versus another, so we cannot really at this point answer that question specifically. But overall, regarding your other part of the question on the supplier and 2027 demand and so forth, we do have a plan with our second supplier and also the current supplier, because depending on the timing as to when the second supplier comes in in 2027 to meet the demand of 2027, certainly. That is really how we align all that and lay over the current supply, the second supply, and look at the demand in total and make sure that we are covered from either one of them and/or both at the same time. The second supplier also, I should say, has multiples of the capacity that the current supplier has. So once the second supplier is online, we will feel pretty good about 2027. And I did mention once earlier we are even working on another supplier as a backup as well, in addition to the second supplier. So we are giving up a lot of the backups from a supply perspective to make sure we meet the demand not only in 2027, of course, and several years beyond. Kristen Brianne Kluska: Okay. Thanks. And then on XERZUVY, how are you seeing adoption in line with the prescribing? Meaning, are you seeing some patients are coming back for a second cycle of it? What percent of patients are completing the 14-day treatment course? I guess what I am trying to allude to is how close to the recommendations are you seeing this real time? Thanks again. Jack A. Khattar: Yeah. So I think the claim—the people stick with the 14-day course therapy. It is a short-term therapy to start with, so it is unlikely that people are going to quit on it, especially when they start seeing the benefit early, pretty quickly by day three. That obviously even reinforces it and encourages them to finish the 14-day therapy. And with Xelube, obviously, it is a very different kind of business. You do not have refills, of course, unless mom gets pregnant again in another year or cycle, so to speak, and she happens to have also PPD a second time with the second pregnancy. But normally, there is no relapse or anything like that for them to come back and cycle through it again. Operator: Thank you. And our next question comes from the line of Vishwesh Shah from TD Cowen. Line is now open. Analyst: Hi. Thank you. Congrats to you guys on another great quarter. So on Calibri, what are you seeing in terms of some of the adoption trends right now? You commented on some of the adults trying out Calgary, and so is that the shift in focus now, or what do you think will drive growth in adoption through the rest of the year? Thanks. Jack A. Khattar: Yeah. We are actually very excited on Calgary and what we really saw in the first quarter. It is pretty interesting dynamics in a very positive way, specifically in the adult segment of the market. There are several things that I would pretty much emphasize on Calvi. Clearly, the adult growth has been outpacing pediatric growth for a number of quarters, actually. This is not the first quarter it happens. We are very pleased with the fact that the adult continues to grow because it is the biggest segment of the market naturally, and you want to penetrate that segment as much as possible and be very successful in it for the continued future growth of the product. For example, give you another metric: if you look at new prescriptions in 2026, adult again grew by 27%. This is in new prescriptions, not auto prescriptions. And these continue to be strong also with 16% growth. The interesting thing is we have been emphasizing adult. We have been putting a little bit more emphasis on adult, especially when you are out of the back-to-school season because we all pay, of course, the emphasis. We rotate the resources in the back-to-school season. Clearly, we put more of a push on pediatrics, but we do not neglect adults. And then when we are out of the back-to-school season, we try to take advantage of the growth in the adult market because, from a market point of view, in the total market, adult also continues to be the fastest segment that is growing. So we want to take advantage of that as well. We are pretty pleased with that. And as I mentioned earlier, this is for the first time now the number of prescribers in the adult have surpassed our number of prescribers in PDF. It really jumped pretty quickly, noticeably, in this first quarter, so we were very pleased to see that. Also, from the patient perspective, what is really happening, which we are encouraged about also, is the fact that the patient profile—and you would expect that typically in a brand as it stays on the market for a while, and now we are into year six, pretty much, in May—we are in year six of the brand. The patient profile is broadening, so it is not anymore some of the early low-hanging fruit that you are getting. What I mean by that is you are really getting a much broader types of patients into the franchise, and physicians are starting to think of so many different types of patients and needs out there that Calvi could be the answer for. For example, patients who, of course, are intolerant to stimulants. Something interesting emerging is patients are really looking for all-day coverage. A lot of the adults—we know it as a fact—when they use stimulants, even if they use controlled-release stimulants, so many of them have to supplement at the end of the day with immediate-release stimulant to give them that full-day coverage. But with Calvi, you do not need any of that. You just need to take it once a day, whether at night or in the morning, and it will give you full-day coverage. I think physicians, over time, as they have more experience with the product, are finding more ways to use Kaldi as a true solution for a lot of their patients. And then, of course, those who are partial responders to stimulants—I mean, stimulants work, but they do not work for everybody, and sometimes we forget that—and a lot of physicians are using it for those partial responders to the stimulants. Then the complex ADHD—and, of course, that comes with time as we generate more data around the product and the potential use of the product with comorbidities and so forth—more and more patients are starting to understand that Calendly could really play a role with these patients who have that, what we call, complex ADHD because of the serotonin modulation and the way you need multimodal activity and pharmacodynamic profile of Calgary. So a lot of very exciting things continue to happen there and really a lot of momentum in the brand. Analyst: Thanks so much for all the details. And then on NAPCO, what dynamics are you seeing between patients opting for Onabco versus Violet? So what kind of competitive dynamics are you seeing there? Jack A. Khattar: Yeah. I mentioned very quickly—the first cutoff typically is patients who have been on levodopa/carbidopa, and the physician may not see any incremental additional benefit for the patient to stay on that drug, and therefore they could potentially benefit more from something else, a different drug, different mechanism, different molecule, and therefore they would go and turn to something like an apple. And vice versa, if the physician feels that the patient may still benefit from some levodopa/carbidopa maybe for another year or two and then they might consider Onepo. So they might go towards something like, buy something else instead of Onako. So that is the first type of thing that, obviously, the physician is assessing. And then, interesting from our research, it looks like our patient profile tends to be on the younger, active side, earlier in the disease, versus the Vylev patient tends to be a little bit more on the older side. We are trying to dig deeper into this to really understand what is behind some of that. Some of the folks who may need and have a very difficult time at night may choose Vylev because you put Vylev through the night. With our product, you get pretty much a similar efficacy on reducing OFF time, but you do not have to wear it 24 hours. But with Vylev, you have to wear it 24 hours to give you pretty much similar type of efficacy. So there are different patients that are emerging that could be really different candidates for either Onabco or Mylan. Operator: Thank you. Our next question comes from Annabel Samimy from Stifel. Your line is now open. Annabel Samimy: Hi. This is Jack on for Annabel. Thanks for taking our questions, and congrats on the quarter. So on XERZUVEY, I know that there are the DTC campaign running right now. Included product has been doing very well overall. But do you have any additional insights or color on feedback from that and how patients are responding to the DTC campaign compared to maybe a more direct physician recommendation? Jack A. Khattar: Yeah. Unfortunately, no, because it is really early to be able to have a good read. We just started it, and you need several months of data to get a meaningful read on a response, if you are getting a good response from the DTC. The only thing I can tell you is anecdotal feedback from physicians and from patients who have seen it. They really relate to it. The messages, the communication out of the commercial and so forth, we have received very positive feedback on that. But in the end, it has to turn into prescriptions, of course. That is really the key measure at the end of the day. It is pretty early for us right now to say anything as far as the impact of the campaign. But certainly, the effort there is clearly to provide significant education because this is a market that needs a lot of education on the consumer side as well as on the health care provider side. That is what we are trying to do. We have been building the market, and it takes a while to build the market. That is something that needs to be continued to be invested in. But again, initial signals, which are more anecdotal, seem to be positive. Annabel Samimy: No. Very helpful. And then just quickly, given your success with that collaboration, is your current M&A appetite kind of more focused on maybe something similar, like a revenue-generating partnership, or more on acquisition of wholly owned late-stage assets? Are there any shifting preferences there, or are you still kind of agnostic to any option? Jack A. Khattar: Yeah. No. Our priority is revenue-generating assets that we can wholly own and, obviously, build and grow from whatever it is at the time we buy it. The second priority, if it is not revenue-generating, we are looking at assets that are fairly late stage. These assets could potentially be launched in, like, between a year to three years from the time we acquire them. That is really what we are very much focused on, and fairly agnostic in the CNS space and, of course, women’s health as well. Analyst: Hey, guys. Thanks for taking our question. I want to follow up on bringing the second supplier online for Onabco. Did you get a chance to meet with the FDA to get any sort of feedback or alignment on the path of getting the approval? Did any of the feedback help inform the cut timeline guidance you have provided today? What I am wondering is whether there is any accelerated path, like rolling submission, relative to your 3Q filing guidance. And I guess on the other side of things, on approval timeline, you guided to by mid-2027. I recall on the last earnings call you talked about review timeline could be arranged somewhere in the six- to nine-month range. So I am curious if you have any better clarity on the review timeline now if you have already met with the FDA, and I have a follow-up after that. Jack A. Khattar: Yeah. Sure. Yes, we have been very much in touch with the FDA on an ongoing basis, and yes, the guidance we just gave today has been and is based on the discussions we have had with the FDA. So if we do file, which we said we are expecting to file in the third quarter, we expect the approval, again consistent with what we said before, could be six months to nine months. So that will fall at the upper end of the timeline in the nine months—that means midyear 2027. And if it does take only six months for review, that obviously will be earlier than that. So that is pretty consistent. The FDA was consistent with their feedback with all the discussions we have had with them. So depending when exactly we file—July, August, September, whatever—and then you add six months to it, or it could take nine months, that is really within that frame that we just gave today. Analyst: Great. And my follow-up is, obviously, the second supplier already has experience applying the product in Europe. But given the sometimes idiosyncratic nature of the agency handing out manufacturing issue citations and the second more broadly, can you talk about the confidence level of timely clearance of the second supplier? Jack A. Khattar: I mean, we have no indication that something could happen that could really derail this timeline from that perspective. Clearly, once we submit the package, they have to review the data and so forth, and then they have to also schedule the inspection. As far as we know, they have been doing inspections, although it is outside the U.S. and in Europe. We are not aware of anything that could hinder that. That is why we continue to keep the timeline fluid, saying six to nine months, because of that specifically, but we are not aware of anything that could tell us that this could derail this thing completely and make it not an option for us at all. We are pretty confident that we should be able to meet that timeline and secure that second supply. Analyst: Okay. Great. Thanks so much for answering our question. Operator: Thank you. I am showing no further questions at this time. I would now like to turn it back over to Peter Vozzo. Peter Vozzo: Thank you for joining us on this call today. 2026 is off to a great start. We have positive momentum across our business, and we continue to generate strong cash flows beyond the strength of our growth products and through the efficiency of our operations. We look forward to continued strong growth and execution on our growth products throughout the year. Thanks again for joining us this afternoon. We look forward to providing you with updates throughout the year. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
Operator: Good afternoon. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Astera Labs first quarter 2026 earnings conference call. All lines have been placed on mute to prevent any background noise. After management remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I will now turn the call over to Leslie Green, Investor Relations for Astera Labs, Inc. Common Stock. Please go ahead. Leslie Green: Good afternoon, everyone, and welcome to Astera Labs, Inc. Common Stock first quarter 2026 earnings conference call. Joining us on the call today are Jitendra Mohan, Chief Executive Officer and Co‑Founder; Sanjay Gajendra, President and Chief Operating Officer and Co‑Founder; and Desmond Lynch, Chief Financial Officer. Before we get started, I would like to remind everyone that certain comments made in this call today may include forward‑looking statements regarding, among other things, expected future financial results, strategies and plans, future operations, and the markets in which we operate. These forward‑looking statements reflect management's current beliefs, expectations, and assumptions about future events which are inherently subject to risks and uncertainties that are discussed in detail in today's earnings release and in the periodic reports and filings we file from time to time with the SEC, including the risks set forth in our most recent Annual Report on Form 10‑K. It is not possible for the company's management to predict all risks and uncertainties that could have an impact on these forward‑looking statements or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward‑looking statement. In light of these risks, uncertainties, and assumptions, all results, events, or circumstances reflected in the forward‑looking statements discussed during this call may not occur and actual results could differ materially from those anticipated or implied. All of our statements are made based on information available to management as of today and the company undertakes no obligation to update such statements after the date of this call except as required by law. Also during the call, we will refer to certain non‑GAAP financial measures which we consider to be an important measure of the company's performance. For example, the overview of our Q1 financial results and Q2 financial guidance are on a non‑GAAP basis. These non‑GAAP financial measures are provided in addition to, and not as a substitute for, financial results prepared in accordance with U.S. GAAP. A discussion of why we use non‑GAAP financial measures—whose difference is primarily stock compensation, acquisition‑related costs, and related income tax effect—and reconciliations between our GAAP and non‑GAAP financial measures and financial outlook are available in the earnings release we issued today, which can be accessed through the Investor Relations portion of our website. With that, I would like to turn the call over to Jitendra Mohan, CEO of Astera Labs, Inc. Common Stock. Jitendra Mohan: Thank you, Leslie. Good afternoon, everyone, and thanks for joining our first quarter conference call for fiscal year 2026. Today, I will update you on AI infrastructure market trends, our Q1 results, and recent announcements. I will then turn the call over to Sanjay to discuss Astera Labs, Inc. Common Stock’s growth profile. I would also like to welcome Des, our CFO, joining this call for the first time. Des will cover our Q1 financials and Q2 guidance. Since our last earnings call, AI infrastructure spending has clearly accelerated. Hyperscalers, AI labs, and sovereign entities are signaling the industry buildout is still in its early stages, underpinned by strong monetization and ROI. We expect these strong secular trends to be a tailwind for Astera Labs, Inc. Common Stock’s growth over the long term. Astera Labs, Inc. Common Stock delivered strong results in Q1 with revenue and non‑GAAP EPS above our outlook. Revenue for the quarter was $308 million, up 14% from the prior quarter and up 93% versus Q1 of last year. Revenue growth was broad‑based, spanning across our signal conditioning and fabric switch product portfolios as we continue to diversify our business profile with new design wins across multiple customers and product categories. Our PCIe 6 business across both AI fabric and signal conditioning was strong in Q1, with revenue expanding to more than one‑third of our total revenue. We have now shipped millions of PCIe Gen 6 ports to date, demonstrating the robustness and maturity of our PCIe portfolio. Torus smart cable modules for Ethernet AECs continue to perform well as new program designs shift into volume while others ramp to mature levels across GPU, XPU, and general‑purpose systems. On the scale‑out fabric front, our initial design wins with Scorpio X Series in smaller radix configurations shifted from pre‑production shipments to initial volume ramp during the first quarter. Building on this momentum, today we announced the expansion of our Scorpio product line of AI fabric switches for both scale‑up and scale‑out use cases. Scorpio X Series now supports up to 320 lanes for high‑radix scale‑up networking and Scorpio P Series PCIe 6 portfolio now spans 32 to 320 lanes for diverse system topologies, making it the broadest in the industry. Our new flagship Scorpio X Series 320‑lane has been purpose built to maximize AI economics by leveraging hardware‑accelerated hypercast and in‑network compute engines to boost collective operations by up to 2x. In‑network compute offloads critical accelerator‑to‑accelerator communication and computation directly onto the switch, dramatically reducing the networking overhead during large‑scale training and inference. These hardware capabilities are delivered through enhancements to our Cosmos software which can now integrate deeper into our customer software stacks, providing not only diagnostics and telemetry, but also directly improving AI platform performance. Core features’ advanced hardware and software capabilities are a result of Astera Labs, Inc. Common Stock’s deep system‑level understanding of AI architectures and close customer collaborations, creating a durable competitive moat. We are excited to report that we are now shipping initial volumes of our new 320‑lane Scorpio X, with production volumes ramping in 2026. Scorpio X Series also has a widening interest in design activity with hyperscalers, edge AI inference providers, and enterprise infrastructure builders to address high‑bandwidth AI clustering use cases. Scorpio P Series continues to grow through 2026, and we expect initial shipments to at least two additional major hyperscalers towards the end of 2026, with broader deployment in 2027. On the optical front, we made good progress during the quarter as we continue to work through the qualification process at a large AI platform provider with our ultra‑high‑precision optical fiber coupler product, which we expect to ship in volume starting in 2027. We are actively expanding our volume manufacturing capabilities to support the ramp of both scale‑out and scale‑up TPO applications. Beyond the early commercial traction of our merchant connectors, our high‑density fiber coupler technology will be a critical piece of our long‑term optical roadmap for NPO and CPO applications. Finally, our Leo memory controller is on track for an early ramp of CXL‑attached memory with Microsoft Azure M‑series virtual machines, and during the quarter, we captured a new custom design win for a KV cache–oriented application, with shipments expected in 2027. As we look to 2026, robust demand reflects secular AI infrastructure spending, deep customer partnerships, and expansion towards higher‑value solutions within our portfolio. This trend is quickly increasing our silicon dollar content opportunity beyond $1,000 per XPU and positions Astera Labs, Inc. Common Stock to outperform our end‑market growth rates. As a result, we expect strong revenue growth to continue through 2026 and into 2027, driven by the proliferation of AI fabrics and the industry's transition to PCIe 6, 800‑gig, and 1.6T Ethernet connectivity. Based on the momentum we are seeing in 2026, we are strategically investing to drive strong continued growth. Our acquisition of XScale Photonics has created immediate design opportunities and our design center is fully integrated and working with customers on new programs. We have expanded our product portfolio, increased dollar content per accelerator, and diversified our customer base with additional design‑ins. We are making progress within large market opportunities including optical engines and interconnects, UALink fabrics, and custom solutions for NVLink and AI inferencing. Most of all, I am proud of the stellar team we have built through worldwide hiring and thoughtful acquisitions, the progress we have made, and the results we are delivering together. With that, let me turn the call over to our President and COO, Sanjay Gajendra, to outline our vision for growth over the next several years. Sanjay Gajendra: Thanks, Jitendra, and good afternoon, everyone. Today, I will provide an update on our recent execution followed by an overview of the meaningful market opportunities that will fuel Astera Labs, Inc. Common Stock’s growth over the next several years. Astera Labs, Inc. Common Stock’s mission is to deliver a purpose‑built intelligent connectivity platform with a portfolio of standard, custom, and platform‑level solutions across copper and optical interconnects for rack‑scale AI infrastructure deployments. As AI deployments advance to production at scale and operational efficiency, infrastructure teams face a new set of constraints—multitrillion‑parameter models, agentic workflows, multistep reasoning distributed across heterogeneous compute infrastructure, to name a few. The industry needs connectivity and solutions purpose built to address these workloads: higher radix to simplify topologies, intelligent fabric capabilities to reduce communication overhead, open and platform‑specific optimization, and data‑center‑grade diagnostics to maintain uptime when a single fault can cost millions of dollars in idle compute. Let me now walk through our approach to address these evolving needs and our future strategy. Starting with our standard products, we continue to see strong momentum across both AI fabric and signal conditioning portfolios. We strengthened our mission‑critical position with the introduction of our flagship Scorpio X Series 320‑lane scale‑up fabric switch and the overall expansion of our Scorpio switch portfolio. The Scorpio X Series 320‑lane high‑radix AI fabric switch replaces multiple legacy switches to enable large scale‑up cluster sizes in a single hop and reduces overall latency. Several new features such as in‑network compute reduce time‑to‑first‑token and tokens‑per‑watt performance. The newly expanded Scorpio P Series PCIe switch portfolio now spans from 32 lanes to 320 lanes to enable diverse accelerator optionality and system topologies. Our AI fabric portfolio is poised to expand further into 2027 with the introduction of UALink‑based products for AI scale‑up platforms. In early April, the UALink Consortium published a new specification which defines in‑network compute, chiplets, manageability, and 200G performance. UALink 2.0 delivers these advancements with an open, vendor‑neutral approach and confirms that scale‑up switching is not simply hardware, but an AI‑aware fabric actively helping the system compute and drive performance. This evolution plays into Astera Labs, Inc. Common Stock’s strengths, as demonstrated by the industry‑leading feature set that is being deployed through our Scorpio portfolio expansion today. The maturity of the ecosystem is also accelerating, with OEMs and suppliers working tightly to deploy initial programs in 2027. On the signal conditioning portfolio, our Aries products will expand to support PCIe 7 and our Torus portfolio into 1.6T Ethernet, positioning us at the forefront of the next connectivity upgrade cycle. Turning to our optical business, Astera Labs, Inc. Common Stock’s signal connectivity business is driven by the rapid shift of AI systems towards rack‑scale architectures and higher compute capabilities where scaling performance increasingly depends on high‑bandwidth, high‑radix, low‑latency interconnects. These requirements will expand our AI connectivity opportunities across both copper and optical interconnects. Astera Labs, Inc. Common Stock is well positioned to lead this transition by extending its proven value‑chain approach from copper into optics. Over the past couple of years, we have been systematically investing to broaden our internal capabilities across advanced analog and mixed‑signal design, DSP, electronic ICs, photonic ICs, and optical packaging capability, while also deepening our supply‑chain relationships. Together, these capabilities will enable high‑volume deployment of a complete scale‑up optical engine. We are focused on three areas pertaining to scale‑up optics: 1) high‑density detachable, reflowable fiber‑attach solutions using the core technology from our XScale acquisition—we expect to ship these connectors in volume starting in 2027; 2) chipsets in support of NPO that will enable multi‑rack AI clusters starting in 2027; and 3) eventually fully optically enabled Scorpio X fabric switches with CPO supporting larger domains, higher egress densities, and bandwidth. Next, let me talk about our custom solutions business that also continues to make meaningful progress as we work to develop new products and close on new designs. Once again, tight collaboration with hyperscaler customers coupled with a diverse set of foundational technology and operational capabilities have been essential to our initial success. These opportunities represent a new multibillion‑dollar market opportunity for Astera Labs, Inc. Common Stock. First, we are engaging with multiple customers to enable NVIDIA NVLink Fusion’s scale‑up architecture for hybrid racks. Our strong historical execution delivering intelligent connectivity solutions for NVIDIA‑based systems positions us well to develop and design within these new custom programs. Second, we are seeing new custom solution opportunities within the memory space for KV cache applications. We are happy to report that we have won a new design leveraging a customized version of our Leo CXL controller to maximize performance within these AI use cases. Overall, we are pleased with the initial traction we have seen on the custom solutions front and have conviction that this opportunity set will continue to broaden and become a meaningful business for Astera Labs, Inc. Common Stock over the next few years. Finally, we continue to demonstrate solid momentum with our platform business as we ultimately look to expand beyond add‑in cards and smart cable modules to enable broader rack‑scale solutions for customers. As we have grown from an I/O component supplier to an AI fabric solution provider over the past couple of years, customers are looking for Astera Labs, Inc. Common Stock to bring additional value to the AI rack at the system level. In conclusion, Astera Labs, Inc. Common Stock is at a key inflection point in the company's journey as we begin to ship production volumes of our scale‑up AI fabrics. We are also making great strides towards broadening our business across new product categories including optical and custom solutions as our partners look for us to deliver more value in next‑generation systems. Therefore, we will continue to strategically and thoughtfully invest as we position Astera Labs, Inc. Common Stock to deliver growth rates above our end‑market benchmarks over the long term. With that, I will turn the call over to our CFO, Desmond Lynch, who will discuss our Q1 financial results and our Q2 outlook. Desmond Lynch: Thank you, Sanjay, and good afternoon, everyone. I am pleased to be joining you today for my first earnings call as CFO of Astera Labs, Inc. Common Stock. I look forward to partnering with Jitendra, Sanjay, and the rest of the leadership team as we continue to drive long‑term value for our shareholders. Today, I will begin by reviewing our Q1 financial results and will then discuss our Q2 guidance, both presented on a non‑GAAP basis. Revenue in Q1 2026 was $308.4 million, up 14% versus the previous quarter and up 93% year over year. We saw revenue growth across our signal conditioning and switch fabric portfolios, supporting both scale‑up and scale‑out connectivity for AI fabric and reach‑extension applications. Our Scorpio product family performed well in Q1, driven by strong demand for PCIe Gen 6 switching applications and continued expansion of designs across various platforms. During the quarter, Scorpio X Series products began shipping in initial production volumes. Looking ahead, we expect Scorpio X Series shipments to increase in Q2 along with initial shipments of our new Scorpio X 320‑lane and then ramp to full volume production in 2026. Aries revenue grew on strong early adoption of our PCIe 6 solutions for both scale‑out and scale‑up signal conditioning. In total, PCIe Gen 6 revenue across AI fabric and signal conditioning contributed more than one‑third of total company revenue in the quarter. Torus also delivered solid results driven by broad adoption of AEC to extend reach in both AI and general‑purpose compute platforms. Non‑GAAP gross margin for the first quarter was 76.4%, up 70 basis points sequentially, primarily driven by a lower mix of hardware sales across our signal conditioning portfolio. Non‑GAAP operating expenses for the first quarter were $123.9 million, reflecting continued R&D investment to support our expanding product roadmap, including a full quarter of our XScale acquisition and a partial quarter of our newly formed Israel Design Center. Within Q1 non‑GAAP operating expenses, R&D expenses were $96.2 million, sales and marketing expenses were $12 million, and general and administrative expenses were $15.7 million. Non‑GAAP operating margin for the first quarter was 36.2%. We will continue to invest strategically to drive above‑industry revenue growth over the long term while maintaining strong and durable profitability. For the first quarter, interest income was $11.6 million, our non‑GAAP tax rate was 11%, and non‑GAAP fully diluted shares outstanding were 181.2 million shares. Non‑GAAP diluted earnings per share for the quarter were $0.61. We ended the quarter with cash, cash equivalents, and marketable securities totaling $1.18 billion, flat versus Q4, as cash from operations of $74.6 million was offset by cash paid for acquisitions. Now turning to our outlook for the second quarter, we expect revenue to be between $355 million and $365 million, up 15% to 18% sequentially, driven by continued strength across our AI fabric and signal conditioning portfolios. Aries revenue growth is expected to be driven by continued strong adoption of PCIe 6 across AI platforms, supporting both scale‑up and scale‑out connectivity. Torus growth is expected to be driven by increased volumes for AI scale‑out connectivity. And in AI fabric, we expect robust growth driven by the continued early‑stage ramp of our Scorpio X Series products for large‑scale XPU clustering applications as well as continued growth in our PCIe solutions in customized GPU platforms. We expect second‑quarter non‑GAAP gross margin to be approximately 73%. This outlook includes an estimated 200 basis point non‑cash impact related to a recently executed one‑time agreement with one of our customers. We expect second‑quarter non‑GAAP operating expenses to be between $128 million and $131 million. Interest income is expected to be approximately $11 million and we expect a non‑GAAP tax rate to be approximately 12%. We expect our Q2 share count to be 184 million diluted shares outstanding. Overall, we are expecting non‑GAAP fully diluted earnings per share to be between $0.68 and $0.70. This concludes our prepared remarks, and once again, we appreciate everyone joining the call. I will now turn the call back to our operator to begin Q&A. Operator? Operator: Thank you. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We ask that you please limit yourself to one question to allow everyone an opportunity to ask a question. If time permits, we may queue again for follow‑up questions. We will now open the call for questions. We will take our first question from Harlan Sur at JPMorgan. Harlan Sur: Good afternoon. Thanks for taking my questions, and great job on the execution by the team. Now as your customers build compute workload inflection from training to inference in the second half of last year, essentially very focused now on monetization, we saw that as inferencing workflows evolved—one‑shot to reasoning to knowledge and tech—this created new silicon opportunities. It created new storage tiers. It created more demand for high‑performance CPUs. Obviously, storage and CPUs communicate via PCIe, so right in the sweet spot of your technology and product leadership—that is one example. Your CXL solutions targeted at KV cache applications may be another example, but can you help us understand how the transition to more inferencing‑based workloads, especially agentic‑based workloads, has potentially helped to create new opportunities for the team and potentially expand your SAM opportunity? Jitendra Mohan: Harlan, thank you. You point out very correctly that inferencing has created a lot of focus in the industry and a lot of additional opportunities. The good news is that at Astera Labs, Inc. Common Stock, we have been focused on these AI applications from the start. We helped the training workloads when the training workloads were still the mainstream. We are helping the inferencing workloads equally well. The KV cache offload is a great opportunity where we mentioned earlier that we picked up a new design for a custom application for KV cache offload. That is really a key part of AI inferencing. I also want to draw your attention to the newly introduced Scorpio X 320‑lane family that supports in‑network compute and hypercast. Both of these are extremely important technologies to reduce the networking overhead and deliver additional performance for training as well as inferencing. And not only that, we enable these hardware‑accelerated modes through our Cosmos software which now not only gives our customers the ability to do diagnostics and telemetry, but allows them to uniquely improve the performance of their system for their inferencing workload using these unique capabilities that we have worked in tight collaboration with our customers. Operator: We will move to our next question from Blayne Curtis at Jefferies. Blayne Curtis: Hey, guys. Good afternoon, and I will echo the congrats on the nice results. Maybe you can, in terms of the Scorpio ramp—I know last quarter you talked about it being 20% of revenue. It is a big ramp. I am assuming that is the biggest driver into June. I was wondering if you can kind of frame just how big that is. And then I am curious, particularly this 320‑lane product that is ramping—what are the milestones, and what is left to do? You have sampled it, but to get that to production in an AI server, I am just kind of curious what is left there. Desmond Lynch: Hi, Blayne. It is Des. Thanks for your question. We have been very pleased with the performance of our Scorpio product family. It has certainly been a large driver for growth in the first half of the year. We continue to expect to see Scorpio P continuing to ramp driven by scale‑out opportunities. And then Scorpio X—this is really a greenfield opportunity for us associated with scale‑up connectivity. The small solutions are ramping today, and we do expect to see the layering in of the high‑radix configurations in the second half of the year. Given the size of the opportunity and the associated dollar content, we would expect to see that Scorpio will become our largest product line by the end of the year, which is strong performance for the product line that was only a small percent of total company revenue last year. And as we go throughout the year, I would expect to see X Series revenue exceeding P Series. But overall, we are very pleased with the performance of the Scorpio product family and the outlook of the business. Then into your second point about other milestones— Jitendra Mohan: We are already shipping, as Des mentioned, the newly introduced Scorpio X family, and you will be able to see and touch and feel this at Computex where we will be demonstrating this live in our booth. Operator: We will move next to Joe Moore at Morgan Stanley. Joe Moore: Great. Thank you. You talked quite a bit about your optical strategy. Can you talk about the timeframe where you see optical scale‑up becoming more relevant? And do you have the building blocks that you need to progress from copper to optical in that space, or do you need tuck‑in type technologies, and do you need to invest a lot more? Just a general sense of what it is going to take to transition from copper to optical over the next several years. Sanjay Gajendra: Thanks for the question. We have been working for the last couple of years building all the foundational things that are required for optical enablement—all of the mixed signal that is required, all of the electronic ICs, as well as we did the acquisition with XScale that brought in the pluggable connector as well as the PIC technology. In general, I want to say we have made tremendous progress in preparation for the optical opportunities that are coming up on us. For us, in terms of timeline, what we believe is that the NPO‑based opportunities—or the near‑package optics—would be the first one to ramp, and that will start happening in 2027. We will also be ramping our pluggable connector technologies for AEC, mostly for scale‑out, next year, 2027, with more of the main deployments for CPO happening in the 2028 timeframe. So in general, for us, between the components that we are building that go inside the NPO, the detachable connector technology for folks that have their own CPO solutions, as well as our own Scorpio X devices that will come in to support both NPO variants and CPO variants, we believe it is all coming together nicely for us. One key consideration, of course, that we have been working is the supply chain and getting all of the commitments in place so that we can not only provide the technology that is required for NPO and CPO, but also make sure that we are able to ship to revenue. Overall, there is quite a bit of work and progress that we have done enabling us to start ramping in 2027. Operator: We will take our next question from Ross Seymore at Deutsche Bank. Ross Seymore: Congrats on the strong results and guide. I just want to talk about a small part of your business today, but something that sounds like it could grow a little faster than we thought before, and that is specifically your Leo product line. Given the dominance or resurgence of the CPU demand and memory being such a large cost and bottleneck these days, how has the demand trajectory and growth potential changed in your view—your ability to do the pooling and the sharing and the memory side in CXL in general? Jitendra Mohan: We are definitely seeing increased traction for CXL, not only for the general‑purpose compute applications where we started, but also for inferencing as we touched upon earlier. Staying with general‑purpose compute first, we are seeing additional demand from our customers. We are on track for deploying this with Microsoft Azure for their M‑series instances at the data center. That is in private beta now, expected to go into general availability end of the year. We see additional customers also following suit for this particular high‑memory‑type application. In addition, we are also excited by the new KV cache offload or AI inferencing opportunities. Some of our customers have already designed us in. In fact, we picked up our second design win—a custom application for CXL—earlier this quarter. We are working with our customer, which is an additional new hyperscaler, on at‑scale performance tests and expect that one to ship revenue in 2027. Operator: We will go next to Tore Svanberg at Stifel. Tore Svanberg: Yes, thank you. Congrats on the record quarter, and Des, welcome on board. I wanted to follow up on what you said about Scorpio mix as we approach the end of the year, especially in relation to Aries. Because obviously Aries is now ramping in PCIe Gen 6. Next year, obviously, there is going to be a lot of mixed networking topologies. So I understand Scorpio will be the biggest product by the end of the year. How should we think about 2027 between Aries and Scorpio? Because there are significant drivers for both. Desmond Lynch: Hey, Tore. Thanks for the question. Yes, we have been very pleased with the growth rate of our Scorpio product family, as I mentioned earlier—really excited about the continued growth opportunity ahead of us. That said, we still expect to see strong growth within the Aries product line. We expect to continue to grow our leadership position there. We expect to see strong growth given the PCIe 6 portfolio. It is just the fact that Scorpio will continue to be our largest and fastest‑growing business within the company. Operator: Next, we will move to Ananda Baruah at Loop Capital. Ananda Baruah: Yeah, good afternoon, guys. Thanks for taking the questions, and congrats on the great execution here. I guess the question would be, what is a good way—particularly with all the additional context you have given around Scorpio X and Scorpio P lanes progressing through the back half of ’26—as we move forward post ’26, and clusters get bigger, and presumably high‑radix switches have more ports, should we expect Scorpio X and Scorpio P switches to continue to increase the lane count? And if so, is there any useful anecdotal way to think about how that may occur? Should we just think that that can continue in some perpetuity? Jitendra Mohan: Thanks for the question. We can talk for an hour just on that topic, but let me say this. The AI fabric switches have become a very important part of our overall strategy, and we are investing heavily not only in the current generation that we have announced, but also upcoming devices. We are going to continue to focus on PCI Express because that is a large part of the business today, but we are also working on UALink products that will form the basis of the next generation of these devices. In terms of the lane count, we work very closely with our customers to understand what their deployment profile is going to look like because it is really important to target the right lane counts and rate for these devices. If you do not, then the cluster sizes get limited, and if you over‑index, then you come up with a solution that is not competitive. Fortunately, we have very good partnerships with our customers and they are telling us what the deployment looks like. I also want to add that as the cluster sizes increase, it is not only important to have a switch; it is also important to have the right media types for the deployment. So for our family of switches, we will continue to support copper connectivity as we have so far. As Sanjay mentioned earlier, increasingly we will enable optical connectivity as well, starting with NPO with the next generation of switches and then going to CPO. As a switch company, it gives us a perfect opportunity to deploy optical solutions, and that is something that we will completely leverage to make sure that we have end‑to‑end connectivity with our switches, including copper, NPO, and CPO. Operator: Take our next question from Natalia Winkler at UBS. Natalia Winkler: Thank you for taking my question, and congratulations on the results. I was wondering if you can add a little bit more color on the NVLink Fusion opportunity for you guys. Specifically, how do you see it from the standpoint of portfolio—where it would be most interesting for you—and also from the standpoint of the competitive landscape given some of the partnerships that NVIDIA has for NVLink Fusion as well. Sanjay Gajendra: Thanks for the question. In general, if you look at our business, you can broadly divide that into three categories: standard products, custom solutions, and the module/solution business. Clearly, an area that we see tremendous opportunity for us going forward is the custom solutions under which we are developing the NVLink Fusion–type devices. This is proving to be pretty interesting. We have several very deep engagements for an initial design win in collaboration with NVIDIA and a hyperscaler. That project is going well, and we do expect that to start contributing revenue in 2027, as some of the GPUs that are designed for this kind of use case—which is called a hybrid rack situation—come to market. In a hybrid rack, the GPU or the XPU still talks native protocols, which could be protocols like PCIe or UALink and others, but when they need to leverage and cross over and talk to an NVLink‑type ecosystem, then they would need a product that is based on NVLink Fusion that we are developing. In short, we are very deep in engagement from a silicon development standpoint, so we do expect that this will start providing some meaningful revenue in 2027 and then grow from there. On the competitive situation, this is an ecosystem that NVIDIA is creating with NVLink Fusion. There are others, but for us, the main thing is that we have been engaged with real customers and real applications, and to that end, we will continue to focus on that and do what we need to do, and not get distracted by any competitive press releases. Operator: We will go to our next question from Sebastien Cyrus Naji at William Blair. Sebastien Cyrus Naji: Congrats on strong results. My question is on the Scorpio business and maybe a little bit of a follow‑up to one of the prior questions. With your announcement of the new 320‑lane Scorpio switches for both the X and P Series, how should we be thinking about ASPs for the higher‑radix solutions? Is it right to think that your dollar content is correlated directly to the lane count, or is there another way to think about your dollar content? Any details there? Sanjay Gajendra: In general, the bigger the switch, the higher the ASP—that is the way the industry works. But also please keep in mind that these switches are more like AI fabric‑class devices, which are a lot more than just the number of lanes. We talked about in‑network compute, we talked about hypercast, and we talked about several features that we have that are unique and critical for deploying AI clusters—whether for training or, more and more, for inference applications where things like latency become super important. So when it comes to ASPs, it is a combination of what features are enabled and not just based on lane count. We do see our content continue to increase, and to that end we are expecting—and going forward with the design wins we have—over $1,000 worth of content per accelerator, and that is significant and growing rapidly for us. Considering the path that we have taken so far—from offering retimers to now offering complete AI fabric, and with the future products with optically enabled switches and so on—you can imagine that this content would grow from a dollars‑per‑accelerator standpoint. Operator: We will go next to Quinn Bolton at Needham. Quinn Bolton: Hey, guys. Let me offer my congratulations as well. You mentioned the KV cache offload custom design. I am wondering if you might be able to put any sort of numbers around it in terms of dollar content per CPU or dollar content per gigabyte or terabyte of memory that is attached. Is there a way we can think about how to size that opportunity? Sanjay Gajendra: These are going into new inference applications. There are multiple use cases and platforms that we see for this. In that context, this would be a significant opportunity for us to execute and deliver on. In terms of exact dollar association, it is probably a little bit early because some of the platforms and architectures are being finalized. But in general, for us, inference and KV cache is a significant opportunity. We have the IP not just for memory, but for things like KV cache acceleration as part of our portfolio right now. We will increasingly develop products that provide more function and capability to ensure that memory is available for KV cache use cases. I will also say that the ASPs will continue to be pretty meaningful when you think about the cost of the memory. In other words, these controllers will always fade compared to the amount of money that people are paying for the memory itself. So these are not ASP‑challenged, and we will continue to make sure that we extract the most value out of these products. Operator: We will move to our next question from Karl Ackerman at BNP Paribas. Analyst: Hi, this is Sam Feldman on for Karl Ackerman. Thanks for taking my question. You mentioned near‑package optics as a solution to CPO. From Astera Labs, Inc. Common Stock’s point of view, do you believe customers view XPO as a viable option to extending pluggable optics? And does Astera Labs, Inc. Common Stock plan to participate in the XPO MSA? Jitendra Mohan: That is a great question. We work very closely with our customers to understand what solutions they are looking for. XPO is a pluggable technology that has come about recently, and we will certainly participate in that. But not all of our customers at the moment are looking to intercept XPO. The customers that are looking to intercept with NPO, we will certainly support them because it gives you a way to have very high egress density without the limitations of front‑plate density. The customers that want us to work directly on CPO—we absolutely will work with them. As Sanjay mentioned earlier, we are engaged in that opportunity. That should ship in 2027. And for customers that are looking to do XPO, we will engage with them as well. Right now, our focus has been on NPO and CPO so far. Operator: We will take our next question from Suji Desilva at ROTH Capital. Suji Desilva: Hi, Jitendra, Sanjay, and welcome, Des. Just a bigger‑picture question. You mentioned the word “custom” quite a bit on this call—more than in the past. When you first got going, Hopper was there and Aries was fairly standard. Are we past the point, or evolving to the point, where standard products are not as applicable because each platform is different? Should we think all products having some customization, or where is the line there? Sanjay Gajendra: I am glad you asked the question. If you think about infrastructure and AI use cases, they all are unique between platforms and between customers. Having said that, if you look at the software‑defined architecture we have with our products—even our standard products like Aries, Torus, Scorpio, and so on—they provide a ton of customization that customers leverage through the Cosmos interface. Cosmos allows them to not only monitor, but also customize, and now with the new devices we announced today, they can do a lot more from a performance and key offload feature‑enablement standpoint. So customization has been our story through software‑defined architecture and offered through our standard products. But when we talk about our business, the business model is different. We are developing a product for a given customer under a business model that includes NREs and other ways of paying for the development and, of course, the product revenue that comes when the product starts shipping. As we are getting into bigger devices—whether it is for fabric‑class or other connectivity technology that goes beyond what we have done so far—having the custom solution portfolio is important. We are approaching that with our customers by also offering a variety of foundational technology that we have been building for the last couple of years. We see custom being an important growth driver for us. At the same time, please think about our business in a way where the standard products continue to be a very important part of our overall portfolio. We will do custom, but we will be very systematic about it. We will not take any opportunity that comes our way because sometimes the custom business can be so unique to one customer, with a lot of risk and margin implications. We will be systematic and thoughtful about the opportunities that we pursue on the custom side. Operator: We will go next to Mehdi Hosseini at Susquehanna. Analyst: Hi, this is Bashan filling in for Mehdi. Congrats on the quarter, and welcome, Des. I wanted to follow up on UALink. Can you share an update on the adoption process and the timeline for UALink‑based switches? And what do you expect the dollar content to be? How should we think about the difference between PCIe switching pricing and the UALink pricing? Jitendra Mohan: Within the last three months or so, we have had a couple of announcements from our hyperscaler customers on what the intercept is. Both Amazon as well as AMD have said that their ASIC and GPU will launch sometime in 2027, and we will certainly be prepared to intercept that launch with our UALink switch. In terms of the comparison of a UALink switch to PCI Express, a couple of things to state: as we go into this new generation of devices, both the complexity as well as the speed of these devices is going up—sometimes in lane count, other times in radix. The value that we are able to charge for these devices will be substantially higher than what we are able to do for PCI Express switches. The media attach also tends to change. We may go from a majority copper PCIe to a blend of copper and NPO with the next‑generation switches. That also gives us a meaningfully large opportunity in terms of revenue and the TAM that we are able to address, finally leading up to CPO, which is a really rich opportunity with a very large TAM that we are able to address, all because we have the platform in the form of Scorpio X switches. Operator: We will move next to Tore Svanberg at Stifel for a quick follow‑up on capacity. Tore Svanberg: Yes, just a quick follow‑up on capacity. Your inventory days, I think, came in at 75 days— Desmond Lynch: Hi, Tore. It is Des here. Based upon our current view of demand, we do have supply in place through the end of the year, and we are very comfortable with what our inventory holdings are here. Like others within the industry, we continue to see pockets of supply challenges, but what we have done is really a nice job of diversifying our backend supply chain, and we have been able to make sure that we have sufficient supply in place to meet the revenue commitments. So no concerns just now, and we continue to work with our supply chain partners for supply going into 2027. Operator: And that concludes the question and answer session. I will turn the call back over to Leslie Green for closing remarks. Leslie Green: Thank you, Audra, and thank you, everyone, for your participation and questions. Please do refer to our Investor Relations website for information regarding upcoming financial conferences and events. Thanks so much. Operator: And this concludes today’s conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the first quarter 2026 Arista Networks, Inc. financial results earnings conference call. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. If you need to reach an operator at any time during the conference, please press the star key followed by zero. As a reminder, this conference is being recorded and will be available for replay from the Investor Relations section on the Arista website following this call. Mr. Rudolph Araujo, Arista's head of investor advocacy, you may begin. Thank you, Regina. Rudolph Araujo: Good afternoon, everyone, and thank you for joining us. With me on today's call are Jayshree Ullal, Arista Networks, Inc. Chairperson and Chief Executive Officer, and Chantelle Breithaupt, Arista's Chief Financial Officer. This afternoon, Arista Networks, Inc. issued a press release announcing its fiscal first quarter results for the period ending 03/31/2026. If you want a copy of this release, you can find it on our website. During the course of this conference call, Arista Networks, Inc. management will make forward-looking statements, including those relating to our financial outlook for the second quarter of the 2026 fiscal year, longer-term business model and financial outlooks for 2026 and beyond, our total addressable market and strategy by addressing these market opportunities, including AI, inventory management, lead times, and product innovation, which are subject to the risks and uncertainties that we discussed in detail in our documents filed with the SEC, specifically in our most recent Form 10-Q and Form 10-K, and which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today and you should not rely on them as representing our views in the future. We undertake no obligation to update these statements after this call. This analysis of our Q1 results and our guidance for Q2 2026 is based on non-GAAP and excludes stock-based compensation expense, intangible asset amortization, gains and losses on strategic investments, and income tax effect of these non-GAAP exclusions, including the recognition of direct access tax benefits associated with stock-based awards. A full reconciliation of our selected GAAP to non-GAAP results is provided in our earnings release. With that, I will turn the call over to Jayshree. Jayshree Ullal: Thank you, Rudy. Welcome everyone to our first quarter 2026 earnings call. Arista Networks, Inc. has experienced significant velocity in all our sectors in Q1 and we are now commanding the number one market share in high-speed switching in the greater than 10 gigabit Ethernet category. With that, we have overtaken many incumbent vendors according to major market analysts for 2025. Our cloud and AI networking strategy for diverse AI accelerators continues to gain traction. Unlike typical workloads, AI workflow patterns can be long-lived elephant flows, or short-lived and simply not predictable. This implies careful attention to performance where a flow can cause burstiness for a long duration of milliseconds. The intensity of a flow can determine the line-rate throughput. The shifting traffic patterns to map the flow synchronized to all-to-all, or all-reduce, or bursts of collective communication are all important for AI training and inference applications. I would like to take a moment to review our three AI fabric use cases. In scale up mode, we have familiar technologies such as NVLink and PCIe that have enabled vertical scaling of single compute nodes or racks. The advent of eSun, Ethernet for scale up networking specifications, allows for increasing or decreasing computing power in a flexible manner with Ethernet to automatically adapt to workload demands. Scale up will be a new entry for Arista Networks, Inc. in 2027 and beyond, where we will be working closely with our customers to build AI racks with very fast interconnects for co-packaged copper, CTC, or open co-packaged optics, CTO, as well as supporting collectives and memory acceleration. Scale out, or horizontal scaling, involves adding more machines to a leaf-spine fabric, moving workloads across multiple servers or nodes, or even connecting other elements like storage or CPUs. As you scale out with massive datasets, bottlenecks can be resolved with collective and protocol acceleration at L2, L3, cluster load balancing all at wire rate. The system must deliver consistent performance without degradation as more nodes participate. Arista Networks, Inc. is a shining example here with greater than 100 cumulative customers to date in 800 gigabit Ethernet deployments, and we expect the addition of 1.6 terabit in 2027 at production scale. Scale across drives across the cloud and AI, as the AI accelerators in a location may need to be distributed to achieve the appropriate bandwidth capacity with the optimal power. As workloads become more complex and more distributed, the bisectional bandwidth must scale smoothly to avoid bottlenecks and preserve performance. This demands sophisticated traffic engineering, deep routing, encryption properties, and integrated optics based on Arista EOS stack and using Arista's flagship 7800R3 or R4 series. The 7800 has established itself in this category as the premier scale-across choice. You can see that Arista Networks, Inc.'s accelerated networking strategy and these three types of AI fabrics are critical to deployment of diverse accelerators and frontier models. Traditional static network topologies with hotspot jitter that slows down job completion time or increases time to first token for inference are not the way to go. Arista's EtherLink portfolio addresses both the synchronous flows for massive training and the low latency for concurrent swarms of real-time inference in this era of trillions of tokens, terabits of performance, and terawatts of power. In 2024, you may recall, we discussed four Ethernet-based AI training deployments and, of course, since then, we have expanded and explored to countless others. This fourth customer from the group has officially moved from InfiniBand to Ethernet at production scale over the last two years. The high-speed Ethernet AI design with flexible air or liquid-cooled infrastructure overcomes the physical constraints of power and space for AI workloads. It results in a low-latency distributed AI supercomputer fabric across global regions. What is clear to me and us is our networking prowess with data control and management and multi-planar orchestration is not only central to our AI switching performance, but also important for high-speed optics transmission. At the recent Optical Fiber Conference, Arista Networks, Inc. unveiled its extended pluggable optics, XPO, form factor, designed specifically for optics innovations at high speed. Now endorsed by greater than 100 vendors, salient features include record-breaking throughput delivering 12.8 terabits per pluggable module; unprecedented rack density achieving 204.8 terabits per OCP rack unit; integrated cold plate capable of cooling up to 400 watts power per module; and the universality and flexibility across a range of pluggable optics, copper, as well as linear half-time or retimed interfaces. A special kudos to Andy Bechtolsheim, Arista’s chief architect, for driving from OSFP ten years ago to this next generation XPO, bringing structural improvements in power, footprint, and cost reductions. Our enterprise business experienced strong results in Q1 2026 both in data center and campus. Our Big Switch (BNS)/Bangalore VeloCloud acquisition is also integrating well into our branch and campus strategy, bringing more distributed enterprise use cases and a new channel motion with managed service providers, MSPs. To share some recent wins, let us hear now from Todd Nightingale and Kenneth Duda, our co-presidents, to delineate our Arista 2.0 centers of data strategy. Over to you. Kenneth Duda: Thanks, Jayshree. Arista Networks, Inc. is diversifying this business with new customer acquisitions covering a broad set of use cases, all unified by Arista's EOS stack and its ability to modernize enterprise infrastructure operating models. Our first highlighted win is a Neo Cloud AI network. The customer was constrained by an incumbent white box architecture that simply could not keep pace with the massive scale-out requirements of AI. Arista Networks, Inc. was selected as a commercially proven and reliable scale-out architecture, with unmatched stability of EOS and the ability to connect AMD MI series XPUs. Arista’s AI leaf and spine EtherLink products were deployed at 800G to provide the incredible performance modern AI networks require. The AI fabric was tuned using Arista's cluster load balancing scale-out to thousands of XPUs, minimizing hotspots and congestion. On the software side, the customer leveraged AVD, Arista's Validated Design framework, to automate network provisioning which both reduces the total cost of ownership and provides an easy path to reliable network deployment at scale, where without AVD automation a small mistake can cost precious days of debugging time. This was a strategic Neo Cloud win with large potential for upside growth, in an area where we are seeing enormous opportunity and velocity in both Neo Cloud and Sovereign Cloud customers. Our next win is in the service provider sector, with a leading regional fiber-to-the-home provider serving hundreds of thousands of subscribers. As subscriber bandwidth demands have surged, this customer realized their legacy routing architecture was too rigid, too brittle, and too costly to scale. They needed a solution which would modernize their next-generation backbone and internet peering edge. Arista Networks, Inc. won this upgrade by proving an automation-first approach with a modern operating model driving operational savings and increased subscriber reliability. On the hardware side, we deployed popular 7280 routing platforms using EOS's FLX capabilities, which unlock deep buffering, a rich control-plane software stack, and full internet route scale. On the software side, Arista's AVD framework again automates router provisioning to reduce the time it takes to turn up services while also reducing errors. Here, we saw great results from our technology partnership with Palo Alto Networks, ensuring the routing edge integrated securely and seamlessly with our overarching security architecture. And here, Arista's core value proposition of lower operating cost and greater reliability drove a competitive win. Now I will hand it off to Todd. Todd Nightingale: Thanks, Ken. Our third win is in the insurance services sector. Following a year of strategic collaboration, the customer wanted to modernize their infrastructure with a streamlined, automated foundation capable of delivering granular, real-time insights to secure and monitor critical applications. Here, observability was truly the key. Arista Networks, Inc. secured this comprehensive win after executing a flawless proof of concept, proving our architecture significantly exceeded operational standards. To achieve deep network observability, the customer deployed our R3 series filter-and-delivery roles on our monitoring fabric, DANZ Monitoring Fabric (DMF/DMS). Additionally, they deployed campus switches to radically simplify out-of-band management. Leveraging the rich telemetry capabilities of EOS, the customer unlocked advanced features like VXLAN header stripping and transitioned to a fully automated declarative operational model. Our final win is within the manufacturing sector where we are seeing amazing momentum. Here we have a customer operating more than 100 factory sites globally, servicing continuous 24x7 production. Shifting traffic patterns, manual provisioning, and importantly, a lack of visibility and forensics into microbursts and drops were keeping them from achieving their goals. Arista Networks, Inc. won an extensive bake-off against two established vendors, both of whom proposed campus designs that could not match what Arista delivered: a universal leaf-spine campus based on open standards, running a single EOS binary across campus, data center, and WAN. The Cognitive Campus solution leveraged a 100G campus spine, high-powered PoE leaves, and Arista Wi-Fi 7. CloudVision drove provisioning, configuration, and lifecycle end-to-end with consistent tooling across the network infrastructure. Here, it really was Arista's modern operating model that drove differentiation in the engagement: hitless production upgrades, latency analyzer for microburst visibility, and true packet drop forensics. The teams were able to significantly reduce production-impacting maintenance windows and expose events that had previously caused line interruption. In all four of these examples, Arista's support team stood out to customers for its best-in-class service, well known for troubleshooting issues with customers long after Arista gear is no longer suspected to be at fault. Arista's modern operating model also played a key role, especially the AVD tooling that Ken mentioned for architecture, validation, and deployment. We are excited about the momentum across the entire enterprise business and especially the diversification that it brings to Arista Networks, Inc. Thanks, Jayshree. Jayshree Ullal: Thank you, Todd. Thank you, Ken. It was so fantastic to hear of happy customer outcomes. We had another fitting example of that at our Innovate 2026 event here in the facility held in March. The energy and enthusiasm of our greater than 250 customers who attended was truly infectious and inspiring. I want to especially give a shout out to Ashwin Koli and Divya Wagner's team who have already improved our outstanding Net Promoter Score from 87 to 89 ratings, translating to a 94% customer approval. This really exemplifies the lowest security vulnerabilities in the tech industry. It enhances our ability to better cope with the many risks that AI is creating. As I look ahead at the year, our Arista 2.0 momentum continues to march on and resonate. Our demand is actually the best I have ever seen in my Arista tenure. The supply, however, is a slightly different and opposite tale. We are experiencing industry-wide shortages across the board, be it wafers, silicon chips, CPUs, optics, and, of course, memory that I referred to last quarter, coupled with elevated cost to procure these. Clearly, our demand is outstripping our supply this year. While we hope the supply chain will ease in the next year or two, the Arista operations team has been diligently engaging with our vendors in strengthening supply agreements and engaging in multiyear purchase commitments. We anticipate gross margin pressure due to mix and tradeoffs we are making to pay more to assure supply continuity to our customers. Nevertheless, it gives us confidence to increase our forecast growth slightly to 27.7%, aiming now for $11.5 billion for 2026. We also increased our AI target now to $3.5 billion this year, thereby more than doubling our AI sales annually. And with that good news, over to you, Chantelle, for the financial details. Chantelle Breithaupt: Thank you, Jayshree. I continue to be impressed by the company's ability to deliver such a breadth and depth of networking innovation. It is a core tenet that underpins our strong financial return to shareholders. To detail our most recent financial outcomes: revenues in Q1 were $2.71 billion, up 35.1% year-over-year and above our guidance of $2.6 billion. Growth was seen across the customer sectors, led by our AI and specialty provider customers within the quarter. International revenues for the quarter came in at $418.9 million, or 15.5% of total revenue, down from 21.2% last quarter. This quarter-over-quarter decrease was primarily influenced by Americas-based sales to our large global customers. The overall gross margin in Q1 was 62.4%, within the guidance range of 62% to 63%, and down from 63.4% in the prior quarter. This quarter-over-quarter decrease is due to the lower mix of sales to our enterprise customers in the quarter. Operating expenses for the quarter were $396.8 million, or 14.6% of revenue, down slightly from last quarter at $397.1 million. R&D spending came in strong at $271.5 million, or 10% of revenue, despite a slight sequential decrease due to the timing of new product introduction costs. Arista Networks, Inc. continues to demonstrate its commitment and focus on networking innovation. Sales and marketing expense was $103.5 million, or 3.8% of revenue, down from 4% last quarter, representative of the highly efficient Arista go-to-market methodology. Our G&A cost came in at $21.8 million, or 0.8% of revenue, down from $26.3 million last quarter, reflecting our strong base cost productivity within a pure-play networking business model. Our operating income for the quarter was $1.29 billion, or 47.8% of revenue. Let me pause here to thank the greater Arista team for all of their efforts and resulting excellent execution in a dynamic environment. Other income and expense for the quarter was a favorable $110.8 million and our effective tax rate was 21.1%. Overall, this resulted in net income for the quarter of $1.11 billion, or 40.9% of revenue. Our diluted share count was 1.27 billion shares, resulting in diluted earnings per share for the quarter of $0.87, up 31.8% from the prior year. Now turning to the balance sheet: cash, cash equivalents, and marketable securities ended the quarter at approximately $12.35 billion. In the quarter, we did not repurchase our common stock. Of the $1.5 billion repurchase program approved in May 2025, $817.9 million remain available for repurchase in future quarters. The actual timing and amount of future repurchases will be dependent on market and business conditions, stock price, and other factors. Now turning to operating cash performance for the quarter: we generated approximately $1.69 billion of cash from operations in the period, strongest in the history of Arista Networks, Inc. This was driven by a robust earnings performance coupled with an increase in deferred revenue due to the linearity of shipments within the quarter. DSOs came in at 64 days, down from 70 days in Q4. Our inventory turns improved slightly, landing at 1.7 versus 1.5 in the prior quarter. We ended the quarter with $2.38 billion in inventory, up from $2.25 billion last quarter. This marginal increase is a calculated investment in the mix of raw materials to fulfill our growing demand. Our purchase commitments at the end of the quarter were $8.9 billion, up from $6.8 billion at the end of Q4. As mentioned in prior quarters, this expected activity mostly represents purchases for chips related to new products and AI deployments. We will continue to have some variability in future quarters, as a reflection of the combination of demand for our new products, component variability, and the lead times from our key suppliers. This could also result in quarters of elevated inventory balances ahead of the deployment. Our total deferred revenue balance was $6.2 billion, up from $5.37 billion in the prior quarter. The majority of the deferred revenue balance is product-related. Our product deferred revenue increased approximately $643 million versus last quarter. We remain in a period of ramping our new products, winning new and expanding use cases, including AI. These trends have resulted in increased customer-specific acceptance clauses and an increase in the volatility of our product deferred revenue balances. As mentioned in prior quarters, the deferred balance can move significantly on a quarterly basis independent of underlying business drivers. Accounts payable days were 54 days, down from 60 days in Q4, reflecting the timing of inventory receipts and payments. Capital expenditures for the quarter were $54.5 million. We continue the construction work to build expanded facilities in Santa Clara. In Q1, we incurred approximately $40 million in CapEx related to this program, estimated to reach $180 million in 2026. These Q1 results have provided a strong start to our fiscal year 2026. As Jayshree mentioned, we are now pleased to raise our 2026 fiscal year outlook to 27.7% revenue growth, delivering approximately $11.5 billion. We maintain our 2026 campus revenue goal of $1.25 billion, and raise our AI fabrics goal from $3.25 billion to $3.5 billion. I would like to take this opportunity to remind the audience that the timing and outcome of customer projects with acceptance terms can create quarterly and sequential dynamics that do not follow prior year trends. For gross margin, we reiterate the range for the fiscal year of 62% to 64%, inclusive of mix and anticipated supply chain cost increases for memory and silicon. Given this challenging supply backdrop, I am proud of our sourcing team's execution, which strongly contributes to the gross margin outlook holding in our guidance range. We feel confident that we can source the necessary supply to meet our customers' needs. Our operating margin outlook remains at approximately 46% for the fiscal year with a tax rate expected at 21.5%. On the cash front, we will continue to work to optimize our working capital investments with some expected variability in inventory and cash flow from operations due to the timing of component receipts on purchase commitments. More specifically now, our guidance for the second quarter is as follows, now with the added quarterly metric of diluted earnings per share: revenues of approximately $2.8 billion; gross margin between 62% and 63%; operating margin between 46% and 47%; and diluted earnings per share of approximately $0.88 with approximately 1.27 billion diluted shares. Our effective tax rate is expected to be approximately 21.5%. In closing, we are optimistic about the fiscal year ahead. The industry has many times demonstrated the pattern of landing on Ethernet, the winning technology, and that is where Arista Networks, Inc. shines best. We appreciate our customers' choice of working with us to achieve their business outcomes. Now, Rudy, back to you for Q&A. Rudolph Araujo: Thank you, Chantelle. We will now move to the Q&A portion of the Arista Networks, Inc. earnings call. To allow for greater participation, I would like to request that everyone please limit themselves to one question. Your line will be placed on mute after your question. Thank you for your understanding. Regina, please take it away. Operator: We will now begin the Q&A portion of the Arista Networks, Inc. earnings call. If you would like to ask a question, please press star then one on your telephone keypad. If you would like to withdraw your question, press star and the number one again. Please pick up your handset before asking questions to ensure optimal sound quality. Our first question will come from the line of Simon Leopold with Raymond James. Please go ahead. Simon Leopold: Great. Thank you very much for taking the question. I wanted to explore your commentary around the scale-across opportunity in particular, and I guess what I am trying to get a better sense of is how much revenue, if any, did that contribute last year and how material is that to the $3.5 billion forecast you are giving this year? And how should that trend longer term? Thank you. Jayshree Ullal: Sure, Simon. I think last year on scale across we were just beginning, so I think they were small numbers. The majority of the numbers were really scale out. That is our heritage, and that is where we excel. If I were to anticipate how it would be this year, again, scale up is virtually zero and nonexistent because it really only comes to play after the ESUN spec, so consider that more a 2027–2028 number. I think the number will be shared between scale across and scale out. I do not know if I can say it is 50/50 or 70/30 or 60/40, but scale across will definitely contribute at least a third of our AI number. Operator: Our next question will come from the line of George Notter with Wolfe Research. Please go ahead. George Notter: Hi, guys. Thanks very much. Maybe just continuing the discussion on scale up. You know, we are starting to see rack design wins. One of your competitors in the ODM space, I think, has got a couple of designs that they have announced at least. And I know you are kind of pointing towards ESUN as being a key catalyst in generating business there. But can you talk a little bit about where you are in terms of designs with customers, progress? Anything you can tell us there would be great. And I, in fact, think a few quarters ago, you said you had five to seven scale-up rack designs that you were at least working on. I am just wondering if you can update that. Thanks a lot. Jayshree Ullal: Yeah, that is correct, George. I think there is no doubt in our minds that we will have a number of racks and a number of scale-up use cases in 2027. Maybe some of them will be in early trials, but the majority of them are looking at really starting with 1.6T and 1.6T will really happen in 2027. There may be a few, a handful of them, some experimental stuff at 800G. But we continue to see at least five to seven rack opportunities. Some of them are multiple racks to the same customer. We are actively designing with them. There is a huge amount of liquid cooling, designs with very dense cabling options, acceleration of collectives and memory, features we have to work on for low latency. So I definitely feel we are in an active engineering phase with Ken and Hugh's teams this year. But unlike the ODMs, I think we are held to a higher bar, and we have to just make sure that this is production worthy and specification-adhering to ESUN. So I would say today scale up is mostly limited to NVLink from NVIDIA and maybe some PCI switching. But the majority of the Ethernet scale up will only really happen in 2027 and 2028. Operator: Our next question will come from the line of Antoine Chkaiban with New Street Research. Please go ahead. Antoine Chkaiban: Hi. Thank you very much for taking my question. So with the supply outstripping demand, I am wondering how much your current supply allows you to grow this year and next. Is the updated supply growth guide of 28% growth a good reflection of how much supply you have secured for this year? What could that number look like next year, based on how much supply you think you can get as of today? Jayshree Ullal: Antoine, I think the supply chain problem—and, Todd, maybe you can add to this—is not a one- or two-quarter phenomenon. We now think it is a one- or two-year phenomenon. At first, we thought it was memory. Now it is all the wafer fabrication facilities. Every chip is challenged, and you can see how Chantelle has leaned in with the purchase commitments for multiple years. So while we will continue to improve, it is a reflection of not just demand, but how much we can ship this year. And as we continue to ship this year, we can give you better visibility on next year. But I can just tell you, we see multiyear demand and we are going to do everything, including hurt our gross margins, to supply to that demand this year and next year. Because we believe that we certainly do not want to keep GPUs idle and AI infrastructure underutilized because Arista Networks, Inc. did not supply the network. So can the number get better this year? I think this reflects our best attempt at a good number. We started out at 20%, we were at 25%, now we are at 27.7%. Could we improve toward the tail end of the year? We will see. The amount of decommits we are seeing does not feel good. So we think a lot of this will continue into next year and keep us constrained for the next couple of years. Operator: Our next question will come from the line of Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers: Jayshree, last quarter you had alluded to engagements with other hyperscale cloud titan customers. I think you also pointed to maybe having one or two new 10% customers this year. I am curious where we stand today. Any updated thoughts on adding one or two new customers at 10% plus? And maybe qualitatively, just talk about your engagements you are having beyond your two big cloud titans across the hyperscale vertical. Thank you. Jayshree Ullal: Yeah, absolutely. First of all, the two big ones—we never take them for granted—Microsoft and Meta, they are all-time favorites. They have been 10% and greater customers for over a decade, and the partnership could never be stronger. And it continues to get better both in cloud and in AI. In terms of the new entrants, we still expect at least one, maybe two. And maybe I should caveat this by saying, certainly in demand we see one or two. We shall see, Todd, how we do on shipments to see if we can achieve the greater than 10%. The two of them have very interesting characteristics. They exhibit what I would call the three use cases I just alluded to—scale up, scale out, and scale across—where we really have a fabric notion of creating. So far we have been working with them a lot on the front end; now we get to complement that on the back end, definitely for scale out and scale across and maybe even a little bit of scale up in some of these use cases. The other thing we are seeing with a lot of these use cases is the lack of power in sites and the ability and demand to distribute and get a more multi-tenant scale across is very high in these two use cases. A third common thread we are seeing across them, much as we all talk about ODM and white box, is they deeply appreciate EOS and the features and the reliability and the observability and just the fact that we have a robust, highly scalable Layer 2/Layer 3 stack commands a lot of superior advantages. So I believe the diversity of these cloud titans is largely due to the fact that we have great hardware and software combined. Ken, do you want to say a few words on that? Kenneth Duda: It has just been an incredible journey to live through this and see the level of infrastructure build-out we are getting and how well positioned our hardware and software roadmaps are to address these ever-evolving, world-class use cases. It is just a blast to get to work on this stuff. Jayshree Ullal: That is always fun when your job is a blast. So, Ben, I still see one, maybe two 10% customers. Todd, hopefully, we can ship it. Oh, sorry, Aaron. Operator: Our next question will come from the line of Ben Reitzes with Melius Research. Please go ahead. Ben Reitzes: Oh, there you go, Jayshree. Here I am. I wanted to ask around the product constraints. Are you able to say what the number was in the quarter and what it is taking away in terms of the $2.8 billion guide? Is it safe to say things would have been $100 million or $200 million higher for both? And then if you do not mind, if you can touch on why the gross margin should go back up to 63%. What is it that you guys are doing that gives us confidence that it can actually expand a tad from here? Chantelle Breithaupt: I think that— Hey, Ben. I do not think the commentary about the demand outstripping the supply is a Q1/Q2 issue. I think we are talking about looking ahead Q3, Q4, into next year. So I do not think there is something outside of what we have guided or what we have delivered in the first half. In the sense of the margin, the margin is a mix of things. The team members are executing in full force. The supply chain is doing everything they can on ensuring that we have the best supply at the best price, and so we have incorporated that. The only chance for margin expansion would be due to mix. So I think that is the opportunity as we look to see what we can deliver in the second half, Ben. I think that would be the opportunity. Kenneth Duda: The teams are also doing everything they can to make sure we control our costs, especially in the manufacturing side, and that includes bringing on secondary providers, qualifying new components, etc., to make our supply chain more resilient and more cost-effective in the long run. Jayshree Ullal: And one thing to clarify also on gross margins is we view this as a partnership with our customers. While we did consider and have raised prices a little bit, unlike our competitors, we have not done two price increases. We have not done major price increases. And the price increases really come into play once our backlog starts to reduce. So you will not see the impact of that. Our gross margins are a strong factor of costs going up and us still eating a lot of the costs and giving our customers the benefit and promise of the pricing we said we would give to them. Operator: Our next question will come from the line of Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hey, good afternoon. Thanks for the question. I was just wondering if you could talk about whether or not Arista Networks, Inc. is seeing networking attach opportunities for customers that are using TPU or TPU-like architectures. And then, anything you could comment about as it relates to growing Neo Cloud traction? Is that something that you think may be a little bit underappreciated by the analyst community? Thank you very much. Jayshree Ullal: Yeah, Michael. You are absolutely right. I will take your second question first. It is easy to talk about the titans because the giant numbers are so ginormous. But the Neo Clouds are a very important sector because they do not always have the staff to do everything they want to do. They really lean on Arista Networks, Inc.'s design expertise, EOS expertise, network design configurations we can provide them, and a family of 22 products we have in AI. So yes, I would agree with you. It is underappreciated, and the Neo Cloud is very strong this quarter, if I recall, Chantelle, for us in the specialty and cloud providers. The other question you had was the TPU. In general, we are seeing diverse accelerators. Last time, I spoke about the AMD accelerators. This time, I will definitely give a nod to the TPUs, because in particularly scale-across use cases, we are seeing multi-tenants connecting to different AI accelerators, including GPUs as well. So I think the diversity of accelerators is creating tremendous multi-accelerator opportunity and multi-protocol features that we can provide for them in our network. Operator: Our next question will come from the line of Analyst with TD Cowen. Please go ahead. Analyst: Great. Thanks. Congrats on the results, and thanks for letting me join in on the fun here. Jayshree, I wanted to get your thoughts on—we have been talking a lot about agentic AI and the demands that it is placing on maybe some of the more general-purpose infrastructure that has been in the background over the last couple years. You have talked in the past about a two-to-one pressure on front-end networking created by back-end. First, is that still the correct way to think about it? And second, as agentic workflows become more common, is there any additional demand, from your perspective, having a single-image EOS platform on the front and the back end, or are the front and back end still pretty siloed? Jayshree Ullal: Well, first of all, welcome to your first call. It will be fun. So agentic AI is kind of a buzzword. Let me break it into how the biggest killer application we see in agentic AI right now is still training. And indeed, it is going to move to more distributed inference, and we would also like to see agentic AI move into a lot of enterprise use cases—all of which we are seeing, by the way. But I would say large, medium, small: the largest killer agentic AI application is training; the medium is inference; and the small is enterprise. In terms of back end versus front end, we are now seeing way more back-end activity, particularly with our large AI titans and cloud titans, because there is just so much scale they need to prepare for the billions of parameters and tokens. So much so that I think the front end, they might come back and refresh, but they are almost ignoring right now in favor of the back end. Having said that, by virtue of the back-end deployments, I do not know if we see a two-to-one to the front end anymore, but we at least see a one-to-one. And the one-to-one can be wide area, CPU, and storage. Those are probably the three common use cases. Not all the customers are uplifting everything and doing all three, although we have had cases where some of them did an upgrade at the front end before they went into the back end. But usually, they will have to come back to that because the minute you put that kind of performance pressure and scale on the back end, you almost have to do something in the front end. At the moment, I would say it is more one-to-one. And at the moment, I would also say the scale across in the back end has become a bigger use case than we imagined this time last year. Kenneth Duda: The other thing I have to mention here is just how good it feels to have the same set of products and the same common operating system, management suite, and operating model across the front end and back end. This lowers cost to the customer, simplifies their design process, and we are one of the few vendors who can do that. Jayshree Ullal: I think only—we think only. Yes. Absolutely. Good point, Ken. Operator: Our next question will come from the line of Meta Marshall with Morgan Stanley. Please go ahead. Meta Marshall: Maybe just a question on XPO monetization or just how it helps you continue to gain share with customers or just mindshare with customers by being so front-footed with the technology. Thanks. Chantelle Breithaupt: Yeah. Thank you, Meta. I think, as you know, we are not a classic optics vendor. Jayshree Ullal: But almost always, whenever we are selling our switches, it has to connect to something, and usually it is some form of copper or optics. These innovations with OSFP, I remember this super well where everybody was saying, “Oh no, we can just use QSFP.” It has proven to be not only a contribution for Arista Networks, Inc., but really for the industry wide. And that is still how we see it with XPO as well. While the industry has been talking a lot about co-packaged optics, these are still science experiments, and they are very proprietary with individual vendors doing their own thing. We embrace open CPO a few years from now, but we think XPO has a ten-year run, especially at 1.6T and 3.2T where you need liquid cooling and you need that kind of capacity. So all those scale-up racks we are talking about would not be possible without XPO or CTC or any one of those technologies. We see this as—just as the last decade was greatly influenced by OSFP, the next decade will be greatly influenced by XPO. And remember, 99% of the optical market today that we connect to is all pluggable optics. So this is a very crucial invention and innovation, not just for Arista Networks, Inc., but the industry at large. Kenneth Duda: I think this is a great example of how Arista Networks, Inc. enables an ecosystem and then we profit as that ecosystem grows. What XPO unlocks is a standard, interoperable way to get to four times the faceplate bandwidth with liquid cooling, which is absolutely critical for these AI use cases. Without that, you have this huge bottleneck at the front panel. The amount of extra rack space required to get through OSFP is immense. So we are really enabling the future growth of our industry this way, which we benefit from and others benefit from as well. Jayshree Ullal: It is stunning to me. I remember when I first talked to Andy and Vijay, they said, “Oh, we think we will get about 20 signatures,” and then it was 40. And now it is north of 100. So it tells me the whole consortium is coming together for things like Ethernet, IP, and standardization of optics. Operator: Our next question will come from the line of Tal Liani with Bank of America. Please go ahead. Tal Liani: Hi, guys. Can you hear me? Jayshree Ullal: Yes, Tal. We can hear you. Chantelle Breithaupt: Yep. Meta Marshall: Hello. Tal Liani: I promised myself to be nice today, so I have a good question for you. Deferred revenue. Deferred revenue has doubled in the last year, and it went up—if I combine short term and long term—by $826 million. It went up significantly in the last four quarters. What needs to happen—what are the conditions—for deferred revenues to be recognized over the next few quarters? Is it about data centers going live and traffic going into data centers? What are the sources for the deferred revenue increase? Thanks. Jayshree Ullal: Tal, I really do like you, so I am going to be nice to you not because I have to, but because I like to. If you remember ten years ago, we had a similar phenomenon where, in the cloud, the whole leaf-spine design was brand new. Nobody really knew how to build it or monetize it, and they were building some of the world's largest networks for Azure, etc. We had new products; they had new designs. They had done traditionally the access-aggregation-core and were now moving to the fat-tree topology. We had some fairly lengthy qualification cycles. I would say there is a customer aspect to it and a product aspect to it. The customer aspect is they need to have the space, they need to have the facilities, they need to have their—in this case—GPUs; back then it used to be CPUs. They have to have their rack and stack, and in many cases, by the way, we are running into examples where literally they need to manually install the cables, and that takes several months. Thousands of people have to do that. So there is certainly a customer acceptance piece of it which starts with being ready. There is also a new product aspect. Many of these new products in the Arista EtherLink family, particularly for the AI, are brand new—brand new chips, brand new software. Familiarity with it, particularly in the back end for scale out and scale across, is new to them. So there is a level of testing and making sure it works for the rest of their ecosystem, including the front end, that is super important, and Arista Networks, Inc. bears a huge responsibility for that as well. So all this to tell you, the length of time to qualify this, which used to be two to four quarters, has extended more like six to even eight quarters. It has gotten much longer. Chantelle, do you want to add something? Chantelle Breithaupt: The only other thing I would add, thank you, Jayshree, is that we do recognize some of it every quarter. So it is not like it is one balance. This is aging and growing, Tal. We recognize things every quarter—things come in and things are recognized to the P&L. So I just want to make sure you understand that it is not just piling. Some things go in and some things come out. Jayshree Ullal: Does that make sense, Tal? Tal, you are on mute? Analyst: They mute him after this question. Kenneth Duda: Alright. Operator: Our next question will come from the line of Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: I guess, Jayshree, you folks have kind of positioned XPO as the next OSFP, and I would love to understand that as XPO ramps from the OFC demos to potentially deployments in 2027, how do you see a change in the optics architecture within AI clusters? And then maybe specific to Arista Networks, Inc., does that change the growth profile or your content per AI rack or cluster as we go forward? Thank you. Jayshree Ullal: Thank you, Amit. I think you should look at XPO as a partner to OSFP. At 400G and 800G you will be fine with OSFP. As we go to higher speeds in 2027–2028 or beyond, OSFP will run out of steam, and XPO will be the new connector of choice. So the migration to higher speeds equals the migration to XPO, particularly for scale out and scale across. Within a rack and scale up, there are still a number of choices. I think within short distances of two to three meters, you are still going to see a lot of co-packaged copper, and I think XPO in terms of density will be another alternative. But I do not rule out open CPO as well over there. They are really looking to maximize their density in a minimum amount of space. So I think XPO will be particularly prevalent in scale out and scale across, and will be one of the choices in scale up. Operator: Our next question comes from the line of John Jeffrey Hopson on for Ryan Koontz with Needham. Please go ahead. John Jeffrey Hopson: Hi. I appreciate the question. On the scale across, it seems like that would be a really good fit for all Arista's capabilities. And I know you mentioned it would maybe be around a third of revenue this year. But is this something where scale across could even be larger than scale out over the next couple of years? Thanks. Jayshree Ullal: Hi, Jeff. I think the answer to that would lie in how well we do with both and what form factors are used for both. The majority of the scale across today uses a very premier, valuable, heavy-duty routing platform—the 7800. So if we do lots of that, it could get well beyond the 30%. But some of them may do it with fixed boxes too, or fixed switches, and choose to add a lot of cable, in which case it would not go well above that. So we do not know what we do not know. But I would agree with you that scale across is by far the most significant and differentiated opportunity that really highlights Arista Networks, Inc.'s prowess in both platforms and software. Operator: Our next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee: Hi. Thanks for taking my question. Slightly related to the last question here. You said most of the cloud revenue near term is going to scale out and scale across as we wait for scale up to ramp. How are you thinking about your market share when it comes to scale out versus scale across? In the early days of scale across, what are you seeing in terms of market share? And are you seeing customer decisions being led in across by the incumbent in scale out? Or is it a different decision altogether in terms of how they are designing vendors for scale across? Thank you. Jayshree Ullal: Good question, Samik. You are making me think. I would say if it is a greenfield deployment, then they tend to think of it together. They are not only building the sites, but they are thinking of the interconnect across them, and therefore market share is generally strong in both. In some cases where Arista Networks, Inc. has not been a historical participant within the data center, we now have an opportunity to offer the scale across multi-tenant in a non-greenfield situation—let us say in a brownfield—where now they have got disparate data centers or AI clusters that we now have to bring in. So once again, I think Arista Networks, Inc. is a really fitting example to be in scale across for both of those use cases, but with the additional opportunity in a brand new data center to be in all use cases, if that makes sense. So it is giving us a chance to participate with different types of accelerators and different types of models because people are not getting the power and they are having to distribute the data centers. As a result of distribution, you need more engineering, routing, multitenancy. I would say scale across is the common denominator in all our use cases, and scale up and scale out may be nice options in brand-new greenfields. Operator: Our next question comes from the line of Karl Ackerman with BNP Paribas. Please go ahead. Karl Ackerman: Yes, thank you. Jayshree, you are doing more network design today more than ever. Does that change your ability to monetize your services to capture more of the value that you are adding to these applications? As you address that, given the large mix of services revenue within deferred, could services revenue accelerate faster and represent perhaps 25% or 30% of sales going forward? Thank you. Jayshree Ullal: I do not think so, Karl. I think we are a product company, and the majority of our revenue generation and interest in Arista Networks, Inc. as a company for all the designs we are doing comes from our product heritage. It is not like we charge for services. In fact, we work closely with our partners also. We will recommend network designs. We will support services. And certainly things like we are the gold standard for worldwide support. But I do not expect services as a function of our revenue to go up. I continue to see us as a product-led company. Operator: Our next question comes from the line of Matt Niknam with Truist. Please go ahead. Matt Niknam: I wanted to go back to gross margin. We were sort of in that 62-ish range. They dipped about 170 bps year-on-year. I want to dig into whether it was primarily mix-related or, if you can, quantify how significant the memory and cost-related impacts were—if there is any color you can provide. Thanks. Chantelle Breithaupt: It is a great question. I would say the majority—if you look at prior quarter or prior year—the majority of the difference is mix of the customers. Just to clarify, our larger customers have a lower gross margin accretion, and so that mix is the primary driver. The secondary, although not as significant, would be things depending on the quarter—depending on how deferred is moving—tariffs, the memory costs, or the silicon costs depending on the quarter. So secondary driver, but the primary driver is mix of the customer segments. Operator: Our next question comes from the line of Analyst with UBS. Please go ahead. Analyst: Thanks. Hi, this is Andrew for David. From a high level, with almost $2.4 billion of inventory and almost two years in COGS of purchase commitments, how should we think about the supply constraints and where that inventory and purchase commitments are not satisfactory to meet demand? Where are the holes in your inventory? Kenneth Duda: I would not say we have holes in our inventory, but we have surging demand, especially on the newest platforms, which of course is driving our need for the most modern silicon from our providers, and it is driving a need for an expanded amount of memory—even more than we were expecting before the year began. That is driving us to be a buyer in the market. Luckily, we have got pretty good spending power; we are a very reliable partner in these scenarios, and so we partner closely with these vendors. But there is no doubt that the newest platforms we are delivering, especially in the AI space, are driving needs of ours in the high end of our portfolio. Jayshree Ullal: Yeah, and just to add to that, the real hole is lead times. We are experiencing such significant wafer fab shortages that we are not getting the chips in time. So more than a hole, I would just say our purchase commitments are multiyear because we are having to deal with forecasts that are out multiple years so that we get them in time, because the lead time of these chips is so long. I think that is the biggest issue—lead time. Kenneth Duda: We are experiencing 52-week lead times pretty reliably, with reservation needs beyond that, and our customers certainly do not want to wait that long. Operator: Our next question comes from the line of James Fish with Piper Sandler. Please go ahead. James Fish: Hey, guys. Chantelle, maybe for you. The guide raise was primarily all on AI. Are you guys prioritizing these shipments, or what has given the hesitancy around the non-AI, non-campus at this point and leaving that roughly flat still? And, Jayshree, as we think about the mix here on gross margin, what are you seeing in terms of Blue Box adoption now? And are you seeing any net pull-in of demand just given you have a lot of smart customers here and they are very much aware of supply chain constraints? Thanks, guys. Chantelle Breithaupt: Thank you, James. I do not think we are saying, because we are raising the revenue and attribute that to AI, that we are not excited about all the other customer segments. I think you heard both Jayshree and me talk about being very happy with how the year started and what we are seeing across all three customer segments. We are very happy with what we are seeing in enterprise, which I would not say is quite AI yet, so let us count that as the non-AI bucket that you referred to. Wait and see—we are reporting Q1. We will see how the year goes, but we are very confident across all three that we are seeing strong demand. So I would leave it at: let us see where we get to in our future quarter guides. Jayshree Ullal: I would agree with that. Just to remind everybody, we have raised now from about $10.5 billion last September to $11.5 billion. And yes, a high degree of that is AI, but we have aggressive commitments on the campus to go to a $1.25 billion year and continue to service and grow our data center and cloud just as well. So all three are growing, but certainly AI is taking the news headline. Regarding Blue Box adoption, one of the customer use cases you actually heard about was a move from white box to Blue Box. The goal right now in their desire to move to Blue Boxes is: it works, number one; it scales, number two; it actually does the job for us with AMD accelerators, number three. Down the road, they may use open operating systems, but they were very pleased with the diagnostics capability, the platform SDK—where we literally rewrite every piece of software and know all the Broadcom chip transistors very well—and the EOS features. Down the road, they may use some open NOSes as well. That would be a really good example of a Blue Box that has EOS today and may go down to other NOSes. We continue to see that, particularly in the Neo Clouds. We have always seen a bit of that in the cloud and AI titans because they know how to work with open NOSes. So we have had that hybrid strategy always, but we are certainly seeing more of that in the Neo Clouds now. Rudolph Araujo: Regina, we have time for one last question. Operator: Our final question will come from the line of Ben Bollin with Cleveland Research. Please go ahead. Ben Bollin: Good afternoon, everyone. Thank you for taking the question. Jayshree, you referenced inference a little bit earlier. You said it is kind of a smaller use case right now. I am interested to hear your thoughts on where you think enterprise is in terms of their ability to consume inference and create agents, and then how that develops over time and where you think the front-end networks and edge networks are today in their ability to support those use cases. Basically, do we get the sustained investment period because what you are seeing now bleeds and becomes much more significant in enterprise, and how long-lasting that might be? Jayshree Ullal: I tend to agree with your thesis that while today we are in a training fever, a more distributed AI, generative AI paradigm with instances—which means you do not always need the GPU—you are going to have high-end CPUs and a smaller set of parameters and tokens to manage, and you are going to have specific agentic AI use cases and applications. We are seeing very early trials and stages—nothing super big yet. They are not in the hundreds of thousands of GPUs like you see with the AI titans. But we are frequently seeing our customers in certain high-tech sectors want to deploy clusters that are a thousand, a few thousand—definitely not 10,000—in the low thousands. They tend to be, as you said, not training but more inference-based, more agentic AI edge-inference based as well. I think we will see more of that. This is the calm before the storm, if you will. As AI gets more distributed, I think it does not need GPUs alone. It is going to need more high-performance compute. Many of them seem to feel to us like high-performance compute HPC use cases that are getting revived for AI. So I agree with your thesis, Ben. I think it is going to take a couple of years to fully happen. Rudolph Araujo: This concludes Arista Networks, Inc. first quarter 2026 earnings call. We have a presentation posted that provides additional information on our results, which you can access on the Investors section of our website. Thank you for joining us today and for your interest in Arista Networks, Inc. Operator: Thank you for joining, ladies and gentlemen. This concludes today’s call. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to Accel Entertainment, Inc.'s Q1 2026 Earnings Call. After today's prepared remarks, we will host a question and answer session. Star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Scott D. Levin. Scott D. Levin: Welcome to Accel Entertainment, Inc.'s First Quarter 2026 Earnings Call. Participating on the call today are Andrew Harry Rubenstein, Accel’s chief executive officer; Brett Summerer, Accel’s chief financial officer; and Mark T. Phelan, Accel’s president and chief operating officer. Please refer to our website for the press release and supplemental information that will be discussed on this call. Today’s call is being recorded and will be available on our website under Events and Presentations within the Investor Relations section of our website. Some of the comments in today’s call may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today, and the company undertakes no obligation to update these statements unless required by law. For a more detailed discussion of these and other risk factors, investors should review the forward-looking statements section of the earnings press release available on our website as well as other risk factor disclosures in our filings with the SEC. Any projected financial information presented in this call is for illustrative purposes only and should not be relied upon as being predictive of future results. The inclusion of any financial forecast information in this call should not be regarded as a representation by any person that the results reflected in such forecasts will be achieved. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the non-GAAP measures, as well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website. Following management’s prepared remarks, we will open the call for a question and answer session. With that, I would now like to introduce Andy. Please go ahead. Andrew Harry Rubenstein: Thank you, Scott, and good afternoon, everyone. Accel Entertainment, Inc. delivered a strong start to 2026, the company’s highest-ever Q1 adjusted EBITDA result. First quarter revenue increased 9% year over year to $352 million, marking an all-time quarterly record for the company. Adjusted EBITDA also grew 9% to $54 million, reflecting solid underlying performance across the business. These results reflected the continued strength of our distributed gaming model, ongoing momentum in our developing markets, and our team’s disciplined execution across each of our businesses. We ended the quarter operating 4,540 locations and 28,353 gaming terminals nationwide, representing year-over-year increases of 3% and 4% respectively. Turning to our core markets, Illinois remains the foundation of our business and continued to deliver strong results in the first quarter. Total Illinois revenue, excluding Fairmont Park, increased 6% year over year to $242 million. Our distributed gaming operations in the state continue to benefit from strategic location optimization and new machine placements, with total average location hold per day increasing 9% year over year to $962. This performance underscores the effectiveness of our ongoing strategy to improve route quality and concentrate investment in higher-yielding placements, even as we maintain broadly flat VGT counts in this mature market. Our rollout of ticket-in, ticket-out technology in Illinois, or more commonly referred to as TITO, continues to progress well. With all of our terminals now TITO-enabled, we are beginning to realize the benefit of TITO. We expect that benefit to build through the remainder of 2026 as players become accustomed to the convenience of TITO. Chicago represents one of the most exciting near-term growth opportunities we have seen in some time. The Illinois Gaming Board is actively processing applications from Chicago establishments as we continue signing up locations while waiting for final regulatory approvals. As the market leader in Illinois, with 2,678 locations and 15,413 gaming terminals, and an established platform of infrastructure, people, and relationships, we believe we are uniquely positioned to move quickly and efficiently when the market opens. We currently anticipate the first Chicago locations could go live in late 2026 or in 2027. We will continue to provide updates as the process unfolds. Montana delivered steady performance in the first quarter, with total average location hold per day increasing 5% year over year. In addition, our Grand Vision Gaming subsidiary continues to develop exciting and engaging new content that enhances margins through exclusivity while supporting our broader business. Across our developing markets, we continue to build momentum. Nebraska delivered outstanding results with revenue increasing 57% year over year and total average location hold per day up 57%, supported by new machine placements. We continue to see the benefit of our operating leverage with the business growth and market density. Georgia also delivered strong growth, with revenue up 43% year over year and total average location hold per day up 14%. In Nevada, we grew locations 27% and terminals 28% year over year, reflecting the significant footprint expansion from the Dynasty Games acquisition and our new route partnership with Rebel Convenience Stores. Mark will discuss Nevada in more detail shortly. Louisiana continued to grow with revenue up 12% year over year, and our bolt-on acquisition pipeline remains active and attractive. At Fairmont Park Casino and Racing, we are excited to have launched live dealer table games last month, including blackjack, roulette, and novelty games, marking a significant step in Fairmont’s evolution into a full-scale gaming and entertainment destination. Reflecting our continued confidence in the long-term value of Accel Entertainment, Inc. shares and our commitment to returning capital to shareholders, we repurchased approximately 1.1 million shares of our common stock for $12 million in 2026 to date. Our balance sheet remains strong, with $274 million in cash and net debt of approximately $306 million, representing net leverage of approximately 1.4x. Our $300 million revolving credit facility remains fully undrawn, providing significant financial flexibility as we continue to evaluate organic growth, tuck-in acquisitions, and capital return opportunities. I want to take a moment to address the broader macroeconomic environment and the resilience of our business model. We are operating in a period of heightened uncertainty brought on by tariffs, inflation, and geopolitical instability. I want to be clear about why we believe Accel Entertainment, Inc. is well positioned in this environment. Our business is fundamentally hyperlocal. We operate gaming terminals in neighborhood bars, restaurants, convenience stores, and truck stops—the kinds of places people visit in their daily lives. Our customers are local players engaging in local entertainment, and that behavior has proven remarkably resilient across economic cycles. We also believe the current environment may be driving incremental trade-down activity toward local, convenient, and affordable entertainment options. This is exactly the kind of experience our location partners provide, and which we view as a stabilizing tailwind for our business. Our cost to serve allows us to flex, which means we have the ability to manage our business efficiently even in periods of softer consumer demand. Tax refund season provided its typical seasonal tailwind as we moved through the quarter, and we continue to monitor the broader consumer environment for any signs of impact on player activity. Continuing through the beginning of the second quarter to date, we have not observed any material impact to our business. On the contrary, volumes remain strong. We believe our distributed, local, and community-rooted business model represents one of the most resilient profiles in the gaming space. Lastly, before I turn the call over to Mark, I want to briefly touch on our leadership transition. As we announced in February, I have stepped into the chairman role, and Mark will assume the chief executive officer role effective August 7. I am incredibly proud of what this team has built over the past seven years, and I have full confidence in Mark and the entire Accel Entertainment, Inc. leadership team to continue to grow this business and capitalize on the significant opportunities ahead. With that, I will turn the call over to Mark to review our operations in more detail. Mark T. Phelan: Thank you, Andy. From an operational standpoint, Q1 2026 reflected continued disciplined execution across each of our markets with a focus on route quality, hold-per-day improvement, and targeted growth investment. In Illinois, our team remained focused on improving location mix, redeploying underperforming assets, and deploying capital into higher-yielding machine placements. Illinois location count declined modestly year over year as we continued our deliberate strategy of optimizing the route rather than growing for the sake of location count. The result of that strategy is clear in our hold-per-day performance. Illinois location hold per day increased 9% year over year to $902 per location, which is a strong result and reflective of the quality improvements we have made across the route over the past several years. In Chicago, our team has been actively preparing for the market opening. We have been working closely with city leadership to support the development of best practices and an efficient regulatory framework. We have begun signing up Chicago locations and are well positioned to mobilize when the Illinois Gaming Board begins issuing approvals. In Nevada, our focus in Q1 2026 was integration and building out our newly expanded footprint. As a reminder, we completed the acquisition of Dynasty Games in December 2025, adding 20 locations and approximately 120 gaming terminals across Northern Nevada. We also launched our route partnership with Rebel Convenience Stores in January 2026, adding 55 locations and over 400 gaming machines across Southern Nevada. That rollout was executed efficiently. Our team has been working to elevate the gaming experience at these Rebel locations with new machines and proprietary content, and we are encouraged by the early increases in play we are seeing. We expect those trends to continue building through the back half of the year. We now operate in Nevada across 450 locations and 3,348 gaming terminals, representing a market we continue to be excited about for the long term. The Nebraska team delivered exceptional results. Revenue was up 57% year over year, driven by new machine placements featuring our proprietary content and ongoing investment in the market. As our terminal density increases in Nebraska, we continue to see strong operating leverage. In Georgia, we continue to expand our footprint, with locations up 28%, terminals up 35% year over year, and hold per day up 14%, reflecting Accel Entertainment, Inc.’s continued development of this market. In Louisiana, we continue to execute our bolt-on acquisition strategy. The pipeline of opportunities remains active. We believe we remain the buyer of choice in this market given our size and track record of accretive integration. At Fairmont Park, the property continues to evolve. Casino operations remain the primary driver of performance, with hold per day continuing steady upward growth. We launched live dealer table games in April 2026, including blackjack, roulette, Ultimate Texas Hold ’Em, and baccarat, marking a significant step in Fairmont’s evolution to a full-scale gaming and entertainment destination. Importantly, revenue from these new gaming positions is being reinvested in the racing product. For the 2026 season, we increased total purses by $500,000, which is already attracting larger field sizes and more competitive racing. Our second racing season is now underway, and we are watching customer behavior closely as the season builds. We continue to evaluate the timing and scope of the overall Fairmont investment as we gain more operating experience in the property. For the meantime, we are pleased with its contributions and prospects for further growth of the live table games. Across all of our markets, our operational approach remains consistent: disciplined capital deployment, service excellence at the location level, data-driven decision making, and strong local relationships. That operating discipline underpins our financial performance and supports our ability to generate growing free cash flow over time. Before I turn it over to Brett, I want to share a broader thought on where we see this business heading. When we think about what Accel Entertainment, Inc. is building, we increasingly view it less as a logistics business and more as a gaming and hospitality business. A logistics business competes on efficiency, scale, and cost. A gaming and hospitality business competes on experience, content, relationships, and differentiation—and it commands meaningfully better economics as a result. Everything we are doing, including new exclusive content in Nebraska and Georgia, table games launch and increased purses at Fairmont, the TITO rollout that improves the player experience in Illinois, the quality upgrades at our Rebel locations in Nevada—all of it is oriented around delivering a better, more engaging entertainment experience for our players and a more valuable relationship for our location partners. That is a key driver of our next phase of margin expansion and profitability growth at Accel Entertainment, Inc., and it is what gets me most excited as I prepare to step into the CEO role later this year. With that, I will turn the call over to Brett to review the financial results in greater detail. Brett Summerer: Thank you, Mark, and good afternoon, everyone. I will begin with our first quarter results and then provide additional detail on cash flow, the balance sheet, and capital allocation. As Andy mentioned, for the first quarter, total revenue increased 9% year over year to $352 million, an all-time quarterly record for Accel Entertainment, Inc. Growth was broad-based with strength in Illinois, Nebraska, Georgia, Nevada, and Louisiana. Net gaming revenue increased 10% year over year to $331 million, which was the primary driver of our top-line performance. Operating income for the quarter was $27 million compared to $26 million in the prior-year period. Net income was $15 million, essentially flat year over year, as higher operating income was offset by higher depreciation and amortization associated with our growing asset base, and also the timing of our purse expense, as I will discuss later. On a per-share basis, diluted EPS was $0.17 for both Q1 2026 and 2025. Adjusted EBITDA for the first quarter was $54 million, an increase of 9% compared to the prior-year period. Our underlying operating performance was solid, and growth was essentially in line with our strong revenue performance. It is important to note that adjusted EBITDA and net income were impacted by the timing of our purse expense accrual in Fairmont Park. This was a $2 million shift in the timing of how our Fairmont Park purse expense accrual is recorded. In 2025, our first year of racing operations, purse expense was recognized as races were conducted, which concentrated expense in Q2 and Q3. In 2026, we determined it was more appropriate to accrue this expense in line with revenue recognition, as revenues are generated throughout the year and contribute to the annual purse obligation. As a result, expense is now being recognized earlier in the year and more evenly across periods. This change impacts the timing of expense recognition by quarter, but does not impact full-year results other than the $500,000 strategic increase to the purse that Mark referenced earlier. Excluding this item, adjusted EBITDA and net income would have been approximately $2 million and $1.5 million higher, respectively, to enable easier comparison to prior periods. Turning to capital expenditures, total CapEx in the first quarter was $23 million, down from $27 million in the prior-year period. We continue to expect full-year 2026 CapEx to be in the range of $60 million to $70 million, which compares to approximately $89 million in 2025, which included elevated investment in Fairmont Park. The majority of our 2026 CapEx is maintenance-oriented, with growth capital concentrated in our developing markets. It is worth noting that our maintenance capital spending is not like other companies. There is an incremental return on this investment with a reasonable payback. From a cash flow perspective, operating cash flow for the quarter was $43 million. We used approximately $23 million in investing activities, primarily for CapEx, and $42 million in financing activities, reflecting debt repayment, share repurchases, and other items. I also want to highlight free cash flow as a metric we intend to discuss more regularly going forward, as we believe it best reflects the underlying cash generation strength of our business. We define free cash flow as net cash provided by operating activities less CapEx net of PP&E disposals. With CapEx normalizing in 2026 and our developing markets scaling profitably, we expect free cash flow to continue to grow and view this as a key priority. Given our adjusted EBITDA of $54 million and our free cash flow of $20 million, we have a cash conversion of 38%. Moving to the balance sheet and liquidity, we ended the quarter with $274 million in cash and cash equivalents. Total debt, net of debt issuance cost, was $581 million, resulting in net debt of approximately $306 million and net leverage of approximately 1.4x on a trailing twelve-month adjusted EBITDA basis. Our $300 million revolving credit facility remains fully available. We entered into a new interest rate collar on 01/30/2026, which replaced our prior interest rate cap arrangement. The collar establishes a cap rate of 4% and a floor of 2.92% on our term loan and matures in September 2029. This instrument is designed to provide continued protection against interest rate volatility while optimizing our cost of capital. As of 03/31/2026, we repurchased a total of 18.7 million shares under our share repurchase program that began in November 2021, at a total purchase price of approximately $195.6 million, leaving approximately $151.2 million remaining under the current program authorization. Our board has historically been thoughtful about the share repurchase program authorization, and we will evaluate next steps in the context of our broader capital allocation priorities. Our capital allocation framework remains disciplined and return-focused. We continue to evaluate each dollar of capital across our organic investment, bolt-on strategic acquisitions, debt reduction, and share repurchases, always with an eye toward generating the highest risk-adjusted return for our shareholders. Looking ahead, our recurring revenue model, disciplined capital deployment, and continued operating leverage position us well to convert earnings into free cash flow and fund our growth initiatives while maintaining a strong balance sheet. We remain confident in our ability to continue delivering on our commitments in 2026 and beyond. With that, operator, please open the line for questions. Operator: We will now open the call for questions. 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. Your first question comes from the line of Patrick Keough with Truist Securities. Your line is now open. Please go ahead. Patrick Keough: Great. Hey, guys. Thank you so much for taking the question. Sorry, am I echoing? Okay, great. Apologies. So early days with TITO, obviously, in Illinois, but could you give any color on early player adoption metrics and any impact you are seeing on cash-handling costs thus far? Thank you. Brett Summerer: Yes, sure. So a couple different things to set the table. When we initially thought about TITO and what it could mean for us, we had some internal estimates, and we have talked a little bit about it in the past—potentially up to around that 20% mark. What we are seeing so far in adoption is around 13%, and it has not fully tapered off yet, so there is still potentially upside there. If we think about what it can mean for us, I wish it were a simple answer. As you can probably appreciate, our overall play is increasing, and because our overall play increases, the amount of cash that is out there on the street is higher for us to go pick up. So that actually drives additional cost, but it has nothing to do with TITO. On the flip side of that, TITO is helping us reduce that. It is happening organically. As you can probably appreciate, we do our cash routes and pickups on a weekly basis. We have some automation behind it, but ultimately, it comes down to humans and the practices that we have throughout the organization. As cash gets to certain collection levels, we are picking it up and taking it off the street. So it is not a one-time cash benefit or a one-time cost reduction that we are going to see. It will be something that plays out over time. I would just caution that we only got to 100% fully TITO-enabled a handful of weeks ago as well, so again, more to come on that. It is just a piece of the overall picture, and teasing it out specifically is going to be difficult, but you should overall see a little bit of a benefit in terms of additional cash in our banks as well as in our cost structure. Patrick Keough: Okay. Understood. That is very helpful. Thank you. And for my follow-up, the JCAR recently approved the Illinois Gaming Control Board’s vertical integration rules. From your perspective, could you talk a bit about what this entails and if you see yourself as the best beneficiary as these are enforced? Thanks so much. Andrew Harry Rubenstein: Hi, Patrick. Although that rule was passed by JCAR, it has recently been contested by some of the operators in circuit court, so we are going to wait to see how that plays out before we draw any conclusions. Operator: Your next question comes from the line of Steven Donald Pizzella with Deutsche Bank. Your line is now open. Please go ahead. Steven Donald Pizzella: Hey, good afternoon, thank you for taking our questions. Maybe we can start with some of the recent trends. It looks like from the data we can see out of the IGB, January and February were very strong, then slowed down a little bit. March was still solid. What did you see in terms of April? I know, Andy, you mentioned potential benefits from a trade-down effect, the tax refunds potentially maybe offset by some gas prices. Then I guess just on that latter point, as you look at your history, to what extent has your customer base been sensitive to gas prices? Thank you. Andrew Harry Rubenstein: From our perspective, we really have not seen any noticeable impact from gas prices yet. Historically, it has not been a major factor, and I am speaking mostly from the Illinois market. Our players actually need to travel less to reach our establishments, as opposed to going to a regional casino. So we tend to benefit when the player wants to stay closer to home. Whether it is going to impact their overall budget for entertainment spending, we are unsure, but we do know that they will be spending less on gas to come play at our establishments. So we may get a benefit where they will elect to play with us even though they have less dollars in their total budget. Operator: Your next question comes from the line of Jordan Bender with Citizens. Your line is now open. Please go ahead. Jordan Bender: Hey, everyone. Good afternoon. Thanks for the question. Maybe to start with the pruning in Illinois—another quarter in which you took out a good amount of locations and units. Can you maybe just update us on where we stand there? And then, related to that, are the units or locations that you are going to take out today or going forward going to have less of an impact versus maybe some of the low-hanging fruit that we saw over the last two years? Thank you. Mark T. Phelan: Hey, Jordan. The strategy on pruning is really just opportunistic. When we see opportunities to reduce locations that actually burn our cash, we tend to do it. I do not think there is particularly low-hanging fruit that is still out there. We are always mindful of that, and we are also mindful of our organic revenue that is coming online. So it is a balance between new revenue and revenue that is actually costing us. Jordan Bender: Understood. Thanks. And just a follow-up: the plans for the permanent at Fairmont—you kind of said there is nothing to maybe report today. I think the original expectations were maybe there would be some sort of plan in ’26. Is there some sort of timeframe or plan when we might be able to hear more about something definite there? Mark T. Phelan: We are still in the maturation stage of the temporary. As Andy mentioned, we rolled out table games about a month ago, and we just had over 700 people at the Derby Day on Saturday. We are still contemplating and trying to figure out what the optimal size looks like. When we do figure it out, we will obviously let everyone know. Operator: Your next question comes from the line of Chad C. Beynon with Macquarie Capital. Your line is now open. Please go ahead. Chad C. Beynon: Andy, Mark, Brett, thanks for taking my question. Wanted to ask about legislative momentum or just any traction that we saw in the first quarter. I know there was a bill in Virginia that was vetoed by the governor. Wondering if you could talk about all states so far this year where we have seen some progress where there could be changes in ’27 or beyond? Thank you. Mark T. Phelan: Hey, Chad. Unfortunately, again, this is all us handicapping, but it appears that there is not going to be a lot of legislation that progresses legalization of video gaming terminals or skill games in the United States. You mentioned Virginia—the governor did veto that. There is some life still left in that bill, but its life is slowly eking out as time moves on. So we are not particularly optimistic about any sort of legislative movement in 2026. Chad C. Beynon: Okay. Thank you. Turning to Nevada opportunities, great to see the unit growth sequentially and year over year as a result of the two items that you talked about. When you think about more acquisitions, just from a quantitative standpoint, is Nevada still the biggest growth market, or are some of these emerging markets becoming bigger in terms of the absolute impact to the Accel model? Thank you. Mark T. Phelan: Nevada actually includes some opportunistic model changes where we are doing space leases instead of revenue shares with participation bars. In terms of our individual markets, we are optimistic about all of them in terms of acquisitions. We have talked a bit about Louisiana. It is a mature market, but we have a great partner down in the state, and we think we can grow that market accretively as well as with significant volume over time. Illinois is always an opportunity to acquire routes at accretive prices, and in most of our other markets, we are always on the lookout. So I would say all markets are aligned toward growing potentially through acquisitions. Operator: Your next question comes from the line of David Bain with Texas Capital Securities. Your line is now open. Please go ahead. David Bain: Great. Thank you. First, based on your observations of the licensing process in Chicago—maybe discussions with city council and your overall distributed experience—how is that process going? Is it at the pace you would expect? Is it a little slower? Can you maybe help us with locations blessed before the end of the year and next—just trying to get an idea as to how we are looking? Mark T. Phelan: Hey, David. We feel good about the Illinois Gaming Board processing applications, but the city has yet to promulgate any rules around VGT gaming, and that is a wild card. We would imagine it would be done in the next, call it, quarter, but that is me just handicapping it. David Bain: Okay. And then assuming that begins to ramp, my secondary question would be: you mentioned Louisiana valuation rationalizing, and with Chad, you spoke to Illinois still being a good M&A market. Are there valuations moving around perhaps in Illinois, maybe going higher as we get closer to Chicago licensing locations? Does it make it more of an exciting market heading into that? Or how are you thinking about M&A there? Mark T. Phelan: We are really excited about the market. I would point to our multiple. We are the only public company in this industry, and we are certainly not going to buy anything that is not accretive to us. So you can use that as a benchmark as to what we see in terms of acquisitions and multiples. Operator: A reminder. Our next question comes from the line of Maxwell James Marsh with CBRE. Your line is now open. Please go ahead. Maxwell James Marsh: Hi, thanks for taking my question. Maybe to approach gas prices from a different angle—I think it is fairly intuitive that your hyperlocal customer is resilient to gas prices broadly—but is there or could there be a localized impact on the truck stop part of your business, specifically looking at Louisiana with its higher proportion of truck stops through Toucan? Andrew Harry Rubenstein: The reality of the truck stop business is it is not truckers; it is local people that play at the truck stop because it is a more gaming-focused venue than going into a tavern. People who want to play and have a true gaming experience enjoy playing at the truck stops. In Louisiana, that is even more in focus because the Louisiana truck stops have up to 60 games; it is really like a small casino. Because those establishments are in proximity to where these people live, they tend to thrive in environments where people are watching their entertainment dollars. Instead of driving a greater distance to a regional casino—which they have throughout Louisiana—they tend to stay closer to home, either in the tavern market or, in this case, the truck stop market. So although they may have reduced disposable income, we may get a bigger share of their entertainment wallet. Mark T. Phelan: Max, I would just add that truck stops are a bit of a misnomer in terms of who plays there. That is usually local people, not truck drivers. In Louisiana, they are probably benefiting from the increase in energy prices and natural gas particularly, so we do not necessarily view that as a vulnerable part of our portfolio. And the offshore drilling industry is a major source of employment in Louisiana, so those individuals probably have more dollars in their pocket than they do in a normal situation. Maxwell James Marsh: Okay. Understood. Thanks for that clarity. And if we could just touch on EBITDA margins quickly—approaching 16% this quarter when we adjust for Fairmont’s purse expense—following a really strong 4Q. Could you take us under the hood on EBITDA margins and how to think about that going forward? Brett Summerer: Since it is forward-looking, I cannot really talk too much about it, but I would point you to two things. One, look at the EBITDA margins that we have delivered in the past. What you saw last year is Q4 was a little higher, and Q1, Q2, and Q3 were all in the mid-15% range. So there is some seasonality associated with that, which you can see play out. The other thing to be thoughtful about—in our earnings release, we have a gross margin table that shares the gross margin within each of our business pieces. In the “all other” space, which we do not disclose the individual components for, you can see the overall movement of the non-regulated markets increasing. I think that is the right way to think about where this is going and our performance year on year. Operator: Your next question comes from the line of Gregory Thomas Gibas with Northland Securities. Your line is now open. Please go ahead. Gregory Thomas Gibas: Great. Good afternoon, Andy, Mark. Thanks for taking the questions. In terms of capital expenditures, how much was allocated for Fairmont this year out of your $60 million to $70 million outlook, and how much is more maintenance? Brett Summerer: Thanks for the question. We do not usually talk about the forecast and how we break down the different pieces of it. What I will say is, year over year, the primary piece of lower capital is because Fairmont construction is not in there—in at least not in a big way like it was last year. So the vast majority of about a 20% decline in capital is because we are investing less into Fairmont, because we have most of the hard structure out of the way. On maintenance versus growth, we also have what I would consider to be non-return maintenance capital, which is like most businesses—but in our business, we really do not have much of that. The way that I look at it is: growth capital is generally stuff that pays back within a year—adding a machine to a place that does not have a machine. The maintenance capital has a return on investment—depends on the market and the machine and other factors—but call it a two- to three-year payback, which is still a good project to invest in. That is separate and distinct from, you know, fixing the walls when somebody backs a truck into them. Most of our capital this year is in the maintenance bucket, so you are going to get that kind of payback, which is in that two- to three-year timeframe, but it is still a very high IRR and well in excess of our WACC. Gregory Thomas Gibas: Okay, great. That is helpful. And as it relates to the tuck-in acquisition strategy, is Louisiana still maybe the top priority relative to other markets, and how does your pipeline of potential opportunities look in that market? Mark T. Phelan: Louisiana is definitely a focus of ours in terms of M&A. That has always been our thesis there, and the pipeline is good. We are excited about that state growing. But as I said earlier, there are other states that also have very accretive acquisition candidates that we are always viewing and reviewing. Operator: We have reached the end of the Q&A session. I will now turn the call back to Andrew Harry Rubenstein for closing remarks. Andrew Harry Rubenstein: Thank you, operator, and thank you to everyone who joined us today. We enter the remainder of the year with a clear set of priorities. We have a strong balance sheet and what we believe is one of the most compelling near-term growth opportunities in our company’s history with the pending launch of the Chicago VGT market. As always, I want to thank our employees, whose dedication and execution make these results possible; our location partners, who trust us to help grow their businesses; and our shareholders for their continued support and confidence in our team. We look forward to updating you on our progress when we report our second quarter results in August. Thank you. Operator: This concludes today’s call. Thank you for attending. You may now disconnect.