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Operator: Good afternoon, and welcome to the Upstart Holdings, Inc. First Quarter 2026 Earnings Call. At this time, all participants are in a listen-only mode to prevent any background noise. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sonya Banerjee, Head of Investor Relations. Sonya, please go ahead. Sonya Banerjee: Thank you. Welcome to the Upstart Holdings, Inc. earnings call for 2026. Joining me today are Paul Gu, our Co-Founder and CEO, and Andrea Blankmeyer, our CFO. During today's call, we will make forward-looking statements, which include statements about our outlook and business strategy. These statements are based on our expectations and beliefs as of today, which are subject to a variety of risks, uncertainties, and assumptions and should not be viewed as a guarantee of future performance. Actual results may differ materially as a result of various risk factors that have been described in our SEC filings. We assume no obligation to update any forward-looking statements as a result of new information or future events except as required by law. Our discussion will include non-GAAP financial measures, which are not a substitute for our GAAP results. Reconciliations of our historical GAAP to non-GAAP results can be found in our earnings materials, which are available on our IR website. With that, Paul, over to you. Paul Gu: Thank you, Sonya, and thank you everyone for joining us today. I want to start my first official earnings call as CEO by stating simply that the Upstart leadership team and I are here to build a high-growth and high-return business. I am the founder at 20 to start something, and now after 14 years, I would not be doing this if I did not believe the upside ahead for Upstart Holdings, Inc. was as good as that of any startup. In recent decades, there has been a growing trend for the fastest-growing companies to stay private, and as a result, public companies are typically past their high-growth years. We believe Upstart Holdings, Inc. is not. As reflected in our three-year outlook of 35% annualized revenue growth, we expect to be one of the fastest multiyear compounders at our scale. Consumer credit is arguably the oldest, most economically foundational business there is, and today is the perfect time to reimagine it. Unlike in some areas, the application of AI to credit is an unambiguous good for the consumer, saving them time and money to use on the parts of life that really matter. For lenders, AI will transform credit from a structurally commodity-like business to one where the player who wins the technology and modeling race wins the market. With a decade-long head start, we believe that race is ours to lose. Capitalizing on this enormous market opportunity will require some investment. Fortunately, we have just the right business to fund it: core personal loans—unsecured installment loans to consumers not conventionally considered super prime. Our significant and growing lead in technology built up over that decade plus gives our product there the best rates and best process in the market, making room for unusually high margins while still delivering the best product to the customer. You are going to hear me talk a lot more about this as CEO. Our core personal loan business makes a lot of money and my first priority is to do a lot more of it. Businesses in today's world, especially in lending, can too easily put up big numbers that depend on even bigger equity bases. At Upstart Holdings, Inc., we have always treated equity as a real cost, and I intend to double down on that rigor. Our operating strategy is to reinvest the profits from core personal loans into building the best product and most trusted brand across every category of consumer credit. This approach allows us to simultaneously maximize earnings over the long run, while running an extremely capital-efficient business. Similarly, our funding strategy for loans will continue to be one that relies primarily on third-party capital. As they say, the market is a weighing machine in the long run, and my bet is that the businesses with the most profits and the least dilution will weigh the most. Now I would like to turn to Q1 and where we stand today. Originations grew 61% year over year and revenue grew 44%, while profit declined marginally. These are strong results and put us comfortably on track to our full-year guidance on both the top and bottom lines. These numbers reflect a mix of four factors: secular improvements to technology and marketing; strong momentum in newer products in the super prime segment; the usual Q1 seasonal headwinds in borrower demand and annual employee-related expenses; and some planned investments. I will focus on our platform and product strategy and then turn it over to Andrea for the numbers. As always, our most important growth lever is improving our underwriting model. In Q1, we increased the accuracy lead of our personal loans model over benchmark by 1.4 percentage points. Our model’s advantage now stands at 173.6%, while 87.4% of the total inaccuracy remains to be solved. This quarter, we extended the scope of our models to predict post-default recoveries, replacing the assumptions we had used historically with the full strength of our AI models. This fuller view of loan economics lets us serve more creditworthy borrowers, which drove approximately 3.5% more originations at equivalent risk levels relative to our prior model. Simply put, our lead over traditional credit scoring continues to grow. We are also moving quickly to maximize use of AI across every part of the business. In servicing and collections, we doubled daily AI-assisted borrower conversation volume, brought that capability to our mobile app, and expanded our AI-powered payment features. We also deployed AI-driven quality assurance tools to review customer service calls, giving us a scalable, consistent way to continuously improve the borrower experience. Across our platform, we originated more than 425 thousand loans in Q1. We believe more Americans are choosing to borrow from us than any pure fintech platform. With well over 20 million unique consumers having created accounts to check their rate with Upstart Holdings, Inc., we are rapidly building towards being the most trusted brand in consumer credit. In auto, originations grew more than 300% year over year, and 30% sequentially. Auto retail was a standout, with originations up roughly 13 times year over year and nearly doubling sequentially, driven by a rapidly expanding active dealer network. Our work to reduce friction for dealers is paying off. About a quarter of retail transactions in Q1 used the remote signature capability we launched late last year. We also rolled out a new feature that lets dealers generate firm AI-powered offers across multiple vehicles from a single customer application, and we deepened integrations with dealers' existing compliance and CRM tools. In home, originations grew 250% year over year and 16% sequentially, driven by better marketing reach and efficiency. In Q1, more than one quarter of these loans were fully automated, and we achieved an average time to close of just six days from application to signing, a new record for us and a fraction of the industry average of roughly 40 days. In early April, we also added richer bank account data to our HELOC income verification process, improving accuracy and the salability of these loans to capital markets partners. This progress in auto and home has set us well on our way to serving the full range of consumer credit needs. With growth strong and technology advancing rapidly, the time is now right for both products to begin shifting some of their focus from pure growth to unit economics. Last month, we also launched Cashline, our first unsecured revolving credit product. This is an important step toward our vision of always-on credit for every borrower, and we are thrilled by the early results. Looking forward, the next area we are focusing our product and growth efforts on is none other than core personal loans. I said earlier that the profits from this business are central to our strategy, and we have already begun taking action to grow it. While we would normally expect originations to decline sequentially in Q1, core personal loans were flat to Q4. That stronger-than-seasonal performance signals the early stages of the reacceleration we expect to continue through the rest of the year. I want to turn to the capital side of the business. Funding supply for loans is strong. Thanks to the pioneering work Sanjay and the capital team have done, well over half of our capital is committed. Year to date, we have expanded and deepened our forward flow relationships, securing over $4 billion in new committed capital. That includes about $2 billion in new commitments from Altura, Centerbridge, and Wafra, alongside renewals from Fortress and Blue Owl. Notably, we closed a 24-month commitment, which is our longest deal term yet, designed to provide durable capital through market cycles. I am also proud to share that this continues our track record of a 100% renewal rate with every partner since our first deal in 2022. Additionally, our recent securitizations totaling approximately $1 billion were multiple times oversubscribed, with the most recent transaction upsized. This reflects strong secondary liquidity for our loans, even amid broader market volatility. We also included auto secured personal loans in a securitization for the first time, an important milestone when it comes to new product funding. These results, happening against the backdrop of market volatility in other areas of credit, are a clear vote of confidence in our platform. We take the trust our capital partners have given us seriously and always treat credit performance as an uncompromising first priority. The average return of our last 12 quarterly vintages of loans exceeds treasuries by 651 basis points, with every individual vintage exceeding treasuries by at least 385 basis points. Finally, the bank charter. In March, we announced our application for a national bank charter. As I said earlier, our strategy for funding loans is to rely primarily on third-party capital, and the bank charter does not change that. We expect banks, credit unions, and institutional investors to continue to purchase the vast majority of loans originated on our platform. A bank charter will, however, bring significant regulatory benefits to Upstart Holdings, Inc., including by expanding our addressable market across all 50 states, reducing the operational and financial cost of originating loans, and accelerating our technology velocity by enabling us to interface with regulators directly. These benefits directly support our growth and profit goals and will show up over the next few years. Now I want to close by welcoming Andrea, who joined us as CFO in March. Andrea is an incredibly talented finance leader, with a background in complex, novel business models. She is learning the ropes here faster than I could have hoped for and is already making an impact on how we plan, prioritize, and execute. It is now my great privilege to turn the call over to her for a discussion of our financial results. Andrea Blankmeyer: Thank you, Paul. I appreciate the warm welcome. And good afternoon, everyone. I look forward to spending more time with many of you in the coming weeks and months. It is a privilege to take my first earnings call as CFO. The Upstart Holdings, Inc. team has built a highly differentiated AI-powered credit platform, and the runway in front of us is enormous. I take seriously my responsibility as the financial steward of this platform, including the discipline Paul described around treating equity as a real cost and running a capital-efficient business. I spent my first weeks here digging into the business and the plan, and Paul and I are fully aligned on our financial priorities. I look forward to updating you on our progress each quarter. Turning to Q1. Before I review the numbers, I will provide some color around some of the factors Paul mentioned that were specific to the quarter and an expected part of our trajectory for the year. Starting with newer products, we continue to make progress growing our auto and home businesses, and saw strong growth in super prime personal loan originations as well. This drove a sequential dip in our overall take rate and our contribution margin. Next is seasonality. At the top of the funnel, we typically see consumer demand for personal loans soften in Q1 as tax refunds reduce borrowing needs. This soft demand typically translates into lower conversion and a modest step down in contribution margin in Q1 versus Q4. Additionally, our business has OpEx seasonality in the first quarter of the year, with a step up in corporate costs associated with our compensation and benefit cycle and the timing of our annual company-wide gathering. Finally, we made deliberate investments in talent in Q1. This sets us up to achieve our objectives for 2026 and beyond. Each of these factors—mix, seasonality, and investment—in addition to the platform and product gains Paul mentioned, was contemplated in the team's planning for the year. We are on track to deliver on our full-year guidance. Now I will walk through our Q1 results. Originations were $3.4 billion, up 61% from the prior year and 8% sequentially. Within this, total personal loan originations grew 6% relative to Q4, reflecting 26% sequential growth in super prime and better-than-typical seasonal performance in our core business, which was roughly flat sequentially relative to the historical Q1 step down. Our newer secured products continue to scale, with auto originations up 32% sequentially and home up 16%. Taken together, these results demonstrate the strength of our core business and the growing contribution of our newer products to overall platform growth. Total revenue came in at approximately $308 million, up 44% year on year and 4% sequentially. This included revenue from fees of roughly $277 million, up 49% year on year and 4% sequentially, driven by growth in platform originations. Within fee revenues, servicing revenue continued to show solid growth, up 52% year over year and 22% sequentially, driven primarily by higher origination volumes along with an increase in fees connected with the sale of loans. Net interest income and fair value adjustments totaled approximately $31 million, up modestly year on year and roughly flat with Q4. Our contribution profits, a non-GAAP metric defined as revenue from fees minus variable costs for borrower acquisition, verification, and servicing, was $137 million, up 34% year over year but down 2% sequentially, primarily as a result of increased marketing investment to optimize digital channels and support new product growth. Contribution margin came in at 50%, down three percentage points from the prior quarter, reflecting the mix, seasonality, and marketing investment dynamics. We expect contribution margin in Q1 will be the low point for the year, barring any changes to the macroeconomic environment. In total, GAAP operating expenses were $516 million in Q1, up 45% year on year and 14% sequentially. Variable expenses—borrower acquisition, verification, and servicing—rose 68% year on year and 12% sequentially, with the step up versus Q4 reflecting marketing investments. Fixed expenses were up 31% year over year and 15% sequentially, reflecting the beginning-of-year investment and seasonal step-up in corporate costs I discussed earlier. I will note that our fixed cost investments for the year were front-loaded into Q1, and we expect more modest sequential growth for the remainder of 2026. This sets us up for the adjusted EBITDA margin acceleration we have guided to as the year progresses. In Q1, we had a net loss of approximately $7 million. GAAP earnings per share was negative $0.07 based on a diluted weighted average share count of 97 million. Adjusted EBITDA was roughly $40 million with a margin of 13%. With this quarter's results, we are on track to deliver on our adjusted EBITDA outlook of $294 million for the year and to be solidly profitable on a GAAP basis. We ended Q1 with just over $1 billion in loans held on our balance sheet, up approximately $30 million from Q4. It continues to be our strategy to primarily rely on third-party capital to fund our growing originations. Notably, our secured products and other R&D loan balance declined modestly quarter over quarter, even as auto and home originations accelerated. More broadly speaking, as Paul mentioned, and supported by consistent credit performance, we have continued to enhance our capital platform. So far this year, we have signed more than $4 billion in committed capital partnerships, completed two securitizations for $1 billion in total collateral, and increased the proportion of home and auto loans funded by a third party. Additionally, in February, we bought back 3.2 million shares of Upstart Holdings, Inc. stock for $100 million, and we have about $122 million remaining under our current authorization. Looking ahead, we are reiterating our full-year guidance. This means that for full-year 2026, we continue to expect total revenues of approximately $1.4 billion, revenue from fees of approximately $1.3 billion, and adjusted EBITDA of approximately $294 million, which equates to approximately 21% of total revenues, consistent with our prior guidance. Our guidance assumes a stable macroeconomic backdrop. Additionally, I will share some color on the drivers and the shape of the year. First, for the full year, we continue to expect growth in absolute contribution profit dollars to be within at least five percentage points of fee revenue growth. We plan to deliver this profit growth using two complementary levers: growing our core personal loan business, where margins are already strong, and continuing to improve unit economics on auto and home as they scale. Second, marketing and OpEx growth should moderate in the remainder of the year relative to what we saw sequentially in Q1. Third, we continue to expect adjusted EBITDA to be weighted toward the second half of the year, driven by originations growth, improved contribution margin, and OpEx leverage as we progress through the year. To close, our performance in Q1 was right on track. We entered Q2 with momentum across our core business and our newer products, with consistent credit performance, and with a reinforced capital base. I also want to thank Paul, Sanjay, and the whole team for their support and partnership as I come up to speed. With that, I would like to turn it over to the operator to begin Q&A. Operator: Thank you. We will now open the call for questions. To ask a question, please press star one on your telephone keypad. Once again, that is star one if you would like to ask a question. We will pause for just a moment. And again, that is star one if you would like to ask a question. Our first question will come from Mihir Bhatia with Bank of America. Mihir Bhatia: Hi. Good afternoon. Thank you for taking my question and congratulations to both of you on the new role. So just, I guess, in Q1, you called this out a little bit. Originations were up 60%, revenues up 40%, but profitability declined. You highlighted some of the OpEx headwinds during the quarter. You are reinforcing the full-year guide. So maybe just take a step back since you are both newer to the role, and just elaborate on how you are thinking about balancing near-term profit versus reinvestment and growth? Specifically, is there a framework guiding that trade-off, or are you just comfortable prioritizing reinvestment at the expense of margins given the opportunity that you are pursuing? Paul Gu: I think the first thing I would say is that we are very much on track for our full-year guidance. We are reiterating the guidance on the year, and so a lot of what you are seeing in Q1 is very specific to Q1, which are some seasonal effects and some front-loaded investment. But I would not say necessarily that as a matter of strategy, we have decided to make any changes to how profitable the business is going to be. We are very much on track for the annual guide, which does have $294 million of adjusted EBITDA there and net income positive, so we feel really good about that. I would say taking a step back and thinking about the business on a go-forward basis, we do think there is an enormous amount of growth ahead of us. We think we can keep compounding revenue at a high rate for a long time here, and we certainly intend to do that. I think the math is just really clear that in the long run, this business is going to throw off the most profits and be worth the most if we capture that growth and that market share, and so we definitely want to be reinvesting. But as you heard me say, we want to reinvest in a way that is capital efficient. A big part of the way we intend to do that is by growing in segments where we have high contribution margins and take those margins and reinvest those into growing the business. Some of that is, from an accounting perspective, going to show up as cost, and some of that is going to show up in ways that will decrease the near-term profitability, but they are investment choices that we think we can make in a capital-efficient way to grow the total long-term profits of the business. Mihir Bhatia: Thanks. And then if I could start to follow up on the revolving product some more. Talk about the availability of that. Is it broadly available? And discuss the economics, funding partners, how you are thinking about that product. It seems like a little bit of a credit card replacement. Is that the right way to think about it? Anything more on the revolving product. Thank you. Paul Gu: We do not have too much to share on that product yet other than, yes, it is out broadly. It is called Cashline. We are really excited about it. It had probably the best first day we have ever had for a new product launch. I think there is an enormous opportunity, an enormous need in the market. It is a revolving-like product, and as it grows and reaches scale, we will naturally, just like with our other products, figure out the right third-party partners to work with on the capital side. But for now, it is early days. We are getting the product right, and we are very optimistic about it. Operator: We will now take our next question from Kyle David Peterson with Needham. Kyle David Peterson: Great. Good afternoon. Thank you. I wanted to follow up on the prior questions on expenses. I guess both in sales and marketing and G&A were a little higher than we expected. I know you called out some of the seasonality. So I just wanted to see geographically where did some of the seasonal expenses fall and were there any costs related to the announcement you are pursuing the bank application? And how should we think about that expense load moving forward as you go through the process? Andrea Blankmeyer: Great, thanks for the question, Kyle. The expenses from a seasonality perspective are largely showing up in two places. One is on the payroll expense with respect to our people. That is really related to the annual reset of our compensation and our benefit cycle. Additionally, I would say primarily in G&A is where we see costs associated with our annual company-wide gathering, which happens here in Q1 and represents a seasonal uptick. As we mentioned on the call, as we look out over the remainder of the year, our expectation is both on the marketing and the more fixed OpEx side for the business that we will see more moderated sequential quarter-on-quarter OpEx growth relative to what we saw here in Q1. Kyle David Peterson: Okay. I guess, were there any material expenses from the bank application this quarter or nothing worth calling out? Andrea Blankmeyer: Great point. There is nothing material this quarter. We have contemplated the expenses with implementing and launching the bank and that application throughout the remainder of the year in the guide. Kyle David Peterson: Thank you. And then a follow-up on funding. It has been great to see the volume hold up. I know there have been a lot of concerns about private credit. Could you give at least at a high level an update on where your funding comes from in terms of stickier institutional money with more permanent forms of capital versus some of these either interval funds or BDCs that probably are suffering a little more with redemptions and such? If you could size up the relative nature of those and how you feel about and feedback you are getting from your partners, that would be really helpful. Paul Gu: Great question, and one I am excited to talk about. Funding has been a real area of strength for us. It has been an area of strength because I think fundamentally in the markets, capital is going to flow to the places with the best performance. The performance that we have had on the credit side and that our partners have been able to see over the last couple of years has been exceedingly strong. Earlier in the prepared remarks, I shared about the performance over the last 12 quarters and the spread to treasuries being very consistently high. Our partners have been able to see that. As a result, year to date, we have been able to add over $4 billion of additional capacity, and most of that capacity is coming in the form of committed capital deals. These are deals that have commitments over an extended period of time. I mentioned that we now have our first 24-month deal—that is a new high for us in terms of how long these deals are committed. That is so important to us because, fundamentally, we can have a lot of confidence in how our credit is going to perform, but we do not have a lot of control over what happens in the outside world with market volatility, market perception, what is going on in other categories of credit. From our perspective, it is a huge de-risking to be able to do deals with partners that believe in the credit and want to sign up for a commitment over an extended period of time that can get us through any potential market cycle that arises. We think of that as a real win, and we have been able to get a lot of partnerships going that have that extended commitment in place. We feel very good about where we are on loan funding. Operator: We will take our next question from Simon Alistair Clinch with Rothschild and Company Redburn. Simon Alistair Clinch: Hi. Thanks for taking my question. I was wondering, on the point about funding and the long-term capital commitments, when we think about the signings you have had recently, could you perhaps describe whether the economics of the sharing of risk have changed in any way or how that is evolving as these newer deals are being renewed? Paul Gu: Sure. We do have risk sharing as a component in many of these deals, and investors can see some of the details about that in our earnings presentation. I would say those deal terms have largely stayed consistent to improving over time. Certainly, like anything, as we do more of these and we do them at greater scale and we prove how they work, we expect over the long run that the terms will get better and better for us. They have been consistent and improving. There is a risk-sharing piece of these deals that is capital we think is well spent. It is a very small percentage of all the capital that funds these loans, and increasingly, that is capital that, from our perspective, is expected to earn a quite healthy, strong return. So capital well spent and certainly fits within the framework of running a capital-efficient business that we talked about. Simon Alistair Clinch: Great. And just as a follow-up, going back to the balance sheet loans, they were up marginally sequentially. Usually when we see a lot of new funding commitments coming through, sometimes they come with upfront purchases of loans off the balance sheet. It does not look like we have seen that. Could you talk about the dynamics of that, please, and is $1 billion really the level that we should be expecting on a go-forward basis? Andrea Blankmeyer: Sure, Simon. I am happy to take that one. We expect to see some degree of normal-course fluctuation on the balance sheet size on a quarter-on-quarter basis, driven by the timing of sales, and that is largely what we saw here in Q1. It is our expectation, as we look out over the remainder of the year, to see some step down in that overall balance in the rest of the year relative to Q1. With respect to the dynamic of back-book sales versus forward flow, we saw a mix of both on the balance sheet in the quarter. What was very good to see, when it comes to the strength of the capital platform, is in Q1 we did see a higher proportion of our originations on auto and home sold directly through to third parties versus what we saw in Q4 and in 2025. We are making very good progress on that front on the secured products. Otherwise, there is just this timing dynamic on the balance sheet that we do expect to see from time to time. Operator: We will now take a question from Dan Dolev from Mizuho. Dan Dolev: Oh, hey, guys. Congrats on the quarter. Got two quick questions. I am looking at, I think, slide 22, and that is the expected cash flow versus the upside/downside. It looks like the trend is widening there. Maybe can you explain some of the dynamics? And then I have a quick follow-up. Thank you. Andrea Blankmeyer: Sure. I am happy to speak to that, and then Sanjay can chime in as helpful. We see it widening out really reflective of just the increased capital co-investment amount. You see the max upside and max downside widen; it is really reflective of the total dollars that are at stake and co-invested here. Does that answer your question? Dan Dolev: Yes, it does. I do have a quick follow-up. Can you give some comments about the overall health of the consumer that you are seeing? I think it will be helpful for investors, and congrats again. Paul Gu: Certainly. We see the American consumer as largely stable over the period. In fact, we have seen the consumer largely stable since late last year, and we have been in a pretty tight range of what we call the Upstart macro index. From our perspective, stability is a really good thing. That is all we ever ask. Certainly, an improving consumer could be a tailwind, but a stable consumer is a good one from our perspective, and that is what we have seen. We, like everybody else, watch developments, but where we are unique is that we are very committed to being a model-first, model-led company. We let our models detect what is going on in terms of consumer repayment patterns, both in the aggregate and at the segment level. We have not seen any of the factors in the news come into play in a significant way yet, and so consumer stable. Operator: Our next question will come from Peter Corwin Christiansen with Citi. Peter Corwin Christiansen: Good evening. Thanks for the question. Congrats on the committed levels. That is great to hear. I would love to hear your take on demand on the at-will side from some of your bank partners. Then I have a follow-up. Paul Gu: Feel free to follow up if this is not what you are asking about. We have been announcing and signing deals with partners both at our traditional financial institutions—banks and credit unions—as well as with institutional investors that are private credit or another form of institutional capital. On both sides, the demand for loans has been very healthy and growing. That is against the market backdrop where there have been concerns in other categories of credit, in particular in software and some other areas. But for us, because of the strong performance, the demand from both types of institutions has been very strong, and we have been doing deals in both places. Peter Corwin Christiansen: That is helpful. I want to dig into conversion rate seasonality a little bit. You did have a little bit of a step down last year in Q1 as well, maybe a little bit more profound this year. Generally, as we look at the conversion rate and how it progressed last year, it peaked in Q2 and then leveled off and stayed fairly flat in 2025. Should we think about that progression being the same or at least expectations right now for the remainder of 2026? And on the Q1 sequential step down, which is seasonal, it seems like it was a bit more than in previous years. Any additional comments on that? Paul Gu: It is a good observation. You are right about that. There are two different effects going on with conversion rate. The first is a seasonal effect, and that happens every Q1. Every Q1, there is a noticeable reduction in borrower demand for loans related to tax season and tax refunds. That happened this year just like it happens every year and is an important part of the story. With respect to the conversion rate metric specifically, this particular metric has a lot going on in it. It used to be a much simpler metric when we really just had one product, one segment—what we now call core personal loans. Now, because we have a mix of products that serve consumers up and down the spectrum, there are significant mix effects going on. This metric in recent quarters has become increasingly affected by our small-dollar product, which is still a relatively new, not totally mature product. Small-dollar products, because they are very small loans, do not have a big impact on the origination dollars or the financials of the business, but they have an outsized impact on the unit-count conversion rate—just how many loans in the numerator converted. We did have a decline in the small-dollar product in Q1, and that had an outsized impact on the conversion rate metric that we cite. This is something we will think about how to improve from a metric perspective. From a core personal loan perspective, that business actually had very stable conversion rates, unseasonably strong conversion rates, and unseasonably strong volumes as we talked about earlier. Peter Corwin Christiansen: That is super helpful, Paul. I appreciate it. Sorry, just one follow-up. Considering the Upstart market macro index is doing marginally better at least on a trailing basis, should we expect some of that small-dollar mix shift impact perhaps bleeding a little bit into Q2? Paul Gu: We do not have any specific guidance on the small-dollar product volumes at this time. The seasonal effects, of course, will run off as we get further into Q2 and past tax season, so that will no longer be a factor. You are right that there is an effect where small-dollar can sometimes move inversely with core personal loans, because it fits after core personal loans in most of the approval funnel. That can be a dynamic, but we do not have any specific guidance on the small-dollar numbers. They are not a very large part of the overall financials right now. Operator: Our next question will come from James Eugene Faucette with Morgan Stanley. James Eugene Faucette: Good afternoon. Thank you very much. A follow-up on forward flow agreements and then a more strategic question. On the forward flow details, you have been really active there, but are you seeing any change from those partners with respect to target gross yields or return on equity—any internal metrics that are changing at all, especially given the environment that people have pointed to? Paul Gu: As I said earlier, we have been able to do these deals against a challenging macro backdrop, and we have been able to do them largely consistent to improving deal terms. That includes the kinds of spreads that people are looking for above benchmark rates. Ultimately, it is all downstream of credit performance. If credit performance was not good, that would not be true—we might not even be doing some of these deals. But because credit performance is strong, everything else is downstream of that. The amount of spread you need is a function of how much risk you perceive there to be and underperformance and all of that. We have been really happy with the way we have been able to do these deals, and we expect to continue doing them. James Eugene Faucette: Got it. And then on the HELOC product—really good growth, the highlight of a six-day process versus up to 40 days as being the industry norm. Where are you seeing, at least in these early days, that speed advantage show up? Higher conversion, lower CAC, loss selection, partner appetite, take rates, anything like that? And where is that mix coming from or what is driving that you like? Is it cross-sell from personal loans or direct to consumer? Paul Gu: You are absolutely right that being able to run a six-day process is huge in HELOC. It manifests in all of those places you listed. You get better conversion, which necessarily means lower CAC. Another place that is really impactful for HELOC is the operational cost of originating one of these products. Every time you can move a loan from one that has a heavy dose of manual work to one that can either be fully automated or just require a tiny bit of manual work, there are very significant ops savings. I talked earlier about how we are now turning our attention towards optimizing the margin profile on these new products, and a big part of that is getting the process right and getting the cost down. Technology and getting that six-day process are a huge part of making that happen. From a customer acquisition perspective, we do a wide range of things, but compared to our personal loans product, we have a heavier dosage of cross-sell from the existing customer base, and that will be an increasingly important part of our strategy. Over 20 million people have created accounts at some point to check their rate. That means we have a lot of information and a relationship with them. As we get more offerings across credit needs, that is going to be powerful, and it is already showing up in HELOC and our ability to cross-sell. Operator: We will now take a question from Analyst with Goldman Sachs. Analyst: I appreciate you taking the question. I wanted to follow up on the commentary around the 5% spread between contribution profit and revenue from fees. Can you talk about the framework for thinking about that, particularly in light of the ramp of new products, which I understand put some pressure on that spread but maybe is not something you want to artificially throttle? What would cause you to come in above or below that level? Andrea Blankmeyer: Thanks. You are hitting the nail on the head. We are looking to grow contribution profit within five points of fee revenue growth this year. The lag on contribution profit dollar growth relative to revenue is primarily driven by mix and the strong growth in our newer secured products, as well as in prime personal loans. It still represents very substantial contribution profit dollar growth against the platform throughout the year. The things that are going to drive that contribution dollar growth are twofold. First is continuing to lean into the strength of our core personal loan product and drive growth of originations there, which are quite accretive from a margin perspective. Second is driving the continued growth of these secured products alongside continued improvement in the unit economic performance of those products. As those products grow in scale, that will contribute to improved contribution margin as we continue to drive more automation and reduce friction in the process. That will help improve unit economics. As we continue to increase the sell-through of the product off the balance sheet, that will also help drive unit economic performance, representing a tailwind to contribution profit dollar expansion throughout the course of this year. We are looking to hit that number on a contribution profit dollar basis, and those two levers are going to drive it. Analyst: Got it. Appreciate that. You mentioned early signs of acceleration—unseasonally stronger contribution margins and better than seasonality performance in the core personal products. What are you seeing that is allowing you to outperform seasonality, and why do you expect to accelerate that over the course of the year? Paul Gu: These comments were in reference to the core personal loan business. Core personal loans are our historic personal loan product offered to consumers that are not conventionally defined as super prime. These borrowers have long been the place that our business has had the largest competitive advantage. We have a very large amount of differentiation in our ability to underwrite these borrowers compared to what the market offers, and as a result, we have had very strong pricing power historically in this segment. Over the last year, we have been very focused on growing and establishing our foothold in new products, especially in home and auto, and also balancing out the platform by getting very competitive and having a set of great rates to offer on very prime customers. With the success we have had in home and auto, we have been able to redirect more focus back to the core. Growth is driven by investment in technology, improvements in that funnel, and improvements in marketing directed towards that customer. We have been doing those things. Those are durable improvements that compound. We are starting to see some of those benefits in the Q1 results. That is why it was able to beat its seasonal expectation. We expect that to continue through the year as we keep reinvesting back into this product, widen the technology lead, and improve marketing to reach more people. By doing those things, we will see this product grow more, which in turn will generate more contribution profits for the rest of the business to use and reinvest. Andrea Blankmeyer: And just to put some numbers on what we are seeing here in Q1 versus previous years: in Q1 2025 and Q1 2024, core personal loans saw about a 10% quarter-on-quarter decline. This year, we are seeing flat originations, and that speaks to the better-than-seasonal performance. Operator: Next question will come from John Douglas Hecht with Jefferies. John Douglas Hecht: Afternoon, guys. Thanks very much. You talked about some of the seasonal factors and product shift changes with customer acquisition costs, but is there anything going on at the unit level? Have you seen any changes to origination fee structures in various products, and are you exploring different channels of customer acquisition? Anything going on there to talk about that piece of the business? Paul Gu: No large fundamental changes there. We still use the full range of marketing channels that we used before. We made improvements across many of those, leading to some of the wins and better-than-seasonal numbers. We talked last quarter about our intentional strategy not to max out on take rates from borrowers, and we have stuck to our strategy. We are very intentionally not maximizing short-term profitability. If that was our north star, we could have a lot more of it by squeezing more out of take rates and fees, especially in certain segments. That is not our strategy because we do not think that is the best way to maximize long-term value. There is incredible value in winning over customers and building relationships with them, and leaving a little bit extra on the other side of the table. We have stuck to that strategy with respect to how we think about origination fees. When we go out and do marketing, we keep in mind that it is valuable to win over a customer, and it is not all about maximizing the profit on day one. John Douglas Hecht: With that in mind, any comments on whether it is recurring customer activity or direct-to-customer activity or cross-sell—any signals you are seeing there? Paul Gu: We certainly do both. We think it is really important to have a lot of repeat customer activity. We are increasingly focused on what we think of as returning user activity. These are not necessarily people that got loans with us before, but those 20 million-plus who have checked their rate with Upstart Holdings, Inc. at some point. Maybe they could not get approved the first time, or maybe they did not get the type or size of loan they were looking for, so they did not accept. These are perfect candidates as we have more and better products to go back to. We are doing more and more of that, and that is something we want to maximize. We are also still early in our growth journey. 20 million is just a fraction of the U.S. population. As the player in the market that we think can serve the entire spectrum—from great rates for very prime to great offers for the other end—we can be a full-spectrum offering. We think our addressable market is a lot more than 20 million Americans, so we want to keep adding new people into the database and keep marketing to do that. Put those together, and in the long run, you are going to have a very valuable business. Operator: Our next question will be from Patrick Moley with Piper Sandler. Patrick Moley: Yes, good afternoon. Thanks for taking the question. I wanted to go back to the bank charter. Could you walk us through some of the key regulatory milestones ahead and the expected timeline before you start realizing some of the operational and financial benefits you talked about? Thanks. Paul Gu: We are excited about the bank charter. As you mentioned, the benefits are primarily regulatory. To clarify, we expect nice improvements that are both operational and financial out of doing the bank, but it is not a balance sheet strategy. It is not something we are doing to change how we fund loans or how much capital the business needs to operate. In terms of process, we have submitted our application with the OCC for a national bank charter, and we are working with the OCC on pieces of that application. We do not have specific guidance on exact timing. That is going to come in our work with the regulator, but we are very motivated, and the regulators have been really constructive in how they have worked with us and other companies. Patrick Moley: Great. Then a quick one. You bought back $100 million of stock in the first quarter. I think you have a little over $100 million left on the authorization. How are you thinking about the pace of buybacks throughout the rest of the year, and how do you balance that with some of the balance sheet co-investment and new product funding needs? Paul Gu: I will go back to saying that we think capital efficiency is really important. We want to think of equity capital as a real cost. We want to think about metrics in per-share terms as often as we can. In the long run, we are going to be thinking about how to maximize earnings and minimize dilution. Whenever there are opportunities afforded by a combination of available cash and liquidity, financial outlook, and the price is right, we will be looking at opportunities to use stock buyback dollars. Having said that, the reason we are not always buying back all the time is that we have so much growth ahead of us that the threshold for doing that is really high. We know there are many growth opportunities we can invest in operationally, so our threshold for using cash for any other purpose is going to be really high. But once in a while, we will have that opportunity in the market, and whenever that is, we will certainly consider doing it. Operator: We will now move to Analyst with BTIG. Analyst: Hey, good afternoon. Thanks for taking my questions. I wanted to follow up on the bank question and focus on the economic implications of becoming a bank. On Upstart’s blog post you highlighted about $200 million of annual frictional costs and also the lack of being able to be in certain geographies or serve certain customers. Could you elaborate on that? How difficult is it, and could you really remove $200 million of annual frictional costs? That would be big versus your EBITDA guidance of $294 million. Do we see that in EBITDA, or does it come from higher transaction volumes, or some combination? Paul Gu: A lot of that $200 million number is really in missed opportunity on the revenue line. It might show up in a different place than if you were just thinking about these as true friction costs. The way it manifests is a few things. First, we have a number of states and segments of the market where we cannot operate or are limited in how much we can operate because of state-level regulatory issues, and having a national bank charter to operate through resolves most of those and gives us access to the full market up to the 36% rate limit. That is a big deal—that is TAM we are missing out on today that directly gets solved by having access to the national bank charter. Second are direct operational and financial costs associated with the way we operate today. We originate loans through a large network of many financial institutions, and that comes with both direct financial costs—paid or earned by the financial institutions instead of us—and the cost and friction in managing that complex system of many players originating. Those are the really concrete costs that go into that $200 million number. Then there is a separate, more intangible benefit that does not go in that number but is as important. We are in a decade where there will be substantial advances in AI that will transform consumer credit. Every regulator will naturally be asking questions about that, wanting to understand it, and wanting to work with the leading frontier companies. From our position as the company that has been doing this longest, we should have a direct relationship with the regulators in helping them understand what it means to apply AI in lending, and do that directly as opposed to through a large number of intermediary financial institutions. Analyst: Great. That is super helpful. Thank you. Switching topics, going back to take rate. Transaction volumes grew 61% year over year and overall revenues grew 44% year over year. How should we expect that dynamic going forward? When you talk about improving the unit economics of auto and home, I know you said you did not want to maximize profit, but does part of improving the unit economics involve the revenue side, or is that primarily on the cost side? Andrea Blankmeyer: Great question. The take rates we are seeing in Q1 are largely a reflection of the dynamics we have spoken about previously: growth of our newer secured products as well as mix shift to prime in personal loans. All of those have been growing very well and have manifested in take rate that has come down year on year, as expected. In addition, seasonality typically brings some softness in take rate in Q1 relative to Q4 associated with the softness in demand—all of which is expected. Stepping back for the remainder of the year, take rate is an output metric for us, not an input metric. As take rate moves in the business, it will be reflective of changing product mix. That said, a key driver of the platform’s ability to deliver contribution profit dollar growth this year is improving unit economics on our auto and home products throughout the course of the year. We have already seen meaningful progress over the last year, and we expect that progress to continue. To your question, that should show up up and down the P&L. It will come from improvement and efficiency on the cost side—driven by increasing automation—as well as the benefits of scale. We also expect it to show up in improving take rates on average across the secured product set as we look through the remainder of the year, driven primarily by increased sell-through of loans off the balance sheet to third parties. Operator: Our next question will be from Giuliano Bologna with Compass Point. Giuliano Bologna: Good afternoon and congrats on the results. As a first question, last quarter you mapped out an expectation of around $100 million of revenue from HELOC and auto between a ballpark 4% upfront take rate and 2% servicing. Is that still the rough expectation? And then I noticed within the servicing line item there was a step up in other fees historically driven by this. It is closer to $3.9 million. Is that anything related to servicing some of those HELOC or auto loans? And how should we think about that going forward? Andrea Blankmeyer: Thanks for the questions, Giuliano. On the first point, the roughly $100 million of fee revenue from auto and secured continues to be in the right ballpark in terms of what we expect. The take plus servicing that Sanjay spoke to last quarter represents more of the medium-term take rate for that product set in aggregate. We may or may not fully achieve that inside of 2026, but over a one- to two-year time horizon as those products grow and scale, that is the target. On your second question on the other fees in servicing, I might need to follow up with you on that one, but I can certainly do that. Giuliano Bologna: That is very helpful. From an execution perspective, as you sell more of those loans through, should we expect servicing fee revenue to be an incremental driver, especially on the margin side, because you are probably spending disproportionately on marketing and other expenses on the front end, but then a lot of the revenue from the growth of those new products is really deferred and realized over time? Andrea Blankmeyer: I think I understand your question, and yes, that would be the case. As we sell these loans through, in terms of how it impacts revenue, we will recognize take rate upfront upon the sale of those loans. Especially on our auto products, where we expect to have a higher proportion of the compensation come from servicing, we will also be generating servicing revenue that we will recognize over time and that will offset the servicing costs that we bear. Operator: We will now take a question from Robert Henry Wildhack with Autonomous Research. Robert Henry Wildhack: Hi, everyone. I wanted to follow up on the comment around medium-term take rate and servicing rate for HELOC and auto. In your experience, or do you have any sense for how long a new product takes to reach mature unit economics? Andrea, you mentioned maybe not 12 months, but 12 to 24 months. Will they be mature by then, or is there scope to improve beyond that time frame? Paul Gu: Great question. The beauty of our business is that there is not really any moment where we deem a product mature, because the margins are driven by the level of differentiation created by our technology. It was a lot of years before our core personal loans product reached current levels of take rates and contribution margins—probably seven or eight years—because year after year the models kept getting better and the level of automation kept getting better. That is what allows pricing power when the next best offer is far away and you can increase take rates and still have the best product. We are very much in a position today where these products have found a great fit in the market. We are ready to start optimizing their margin profiles. It is not like they will be done optimizing this year or next year or probably even the year after. They are going to keep getting better as we create more space for differentiation and therefore more space for pricing power. We view that as a fundamentally very good dynamic where we can keep improving the technology, which keeps creating more differentiation, which then allows more pricing power. We do expect these products to get meaningfully better in their margin profiles in the near term. Robert Henry Wildhack: Thanks. And on the Cashline product, can you talk a little bit more about who the target user is? Is it a complement to personal loans or a substitute for someone who does not need or want $15,000 to $20,000? And what about the economics—origination fees—and do you expect those balances and loans will sit on your own balance sheet? Paul Gu: Cashline is designed for someone who has a need for a smaller amount of credit but on a more regular basis. If you think of personal loans as a one-shot $10,000 loan, a cash line is hundreds of dollars but something you might access multiple times a month or quarter. The design of the product needs to be very different, but it is a really valuable customer because it is accessed so frequently over time. In terms of funding, as that product grows, it is going to have its own dedicated funding partners that are the right home for it. Because the product is so short term and the loans are so small, it is not a major factor in the balance sheet today, and it is not something we are particularly worried about. Operator: We will now take our next question from David Scharf with Citizens Capital Markets. David Scharf: Yes, good afternoon. Thanks. Paul, I had a couple of questions related to how we ought to be thinking about the impact of the shifting origination mix—specifically more prime personal loans and HELOC, which by definition is going to be a more prime borrower. First, focusing on capital. It looks like a third of your retained risk on the balance sheet is the beneficial interest—the co-investing. Should that relationship or percentage drop over time as a bigger part of your business becomes prime focused? It seems like the investor part of the marketplace is going to require risk retention to a greater extent the lower-rated the credit. Can you walk us through if the balance sheet is going to change as the mix of your originations changes? Paul Gu: It is a good question. I want to start by correcting a misconception about the required level of risk sharing. When we looked at our business over the last few years, one of our fundamental convictions was that we had confidence in our credit, but we did not have control over what happens in the outside market. There would be market environments where funding was less available and others where it was more available, much of it outside our control even if our credit was performing well. We thought it was strategically critical, in our desire to build the largest provider of consumer credit, to have capital arrangements and partnerships that could endure through market cycles. Our putting in a small portion of risk sharing into some of these deals was fundamentally in exchange for having committed capital over multiyear windows. We do not view that as a requirement. It is not a bad thing—we view it as something pretty innovative that allows us to solve one of the most important challenges in a fast-scaling business like ours. Coming back to your question on newer products and prime mix and how that will affect it, you are right that the primer products will tend to have a lower level of capital required from a risk-sharing perspective. I would not leap to the conclusion that the ultimate mix will be any particular mix of primeness, because we have so much growth in multiple product categories right now. We are putting a lot of focus on growing that core personal loan segment, which is an extremely strong and very profitable segment for us. We have a lot of growth in the auto product, which is a product that every American across the economic spectrum needs. HELOC tends to be a more prime product. Depending on the exact rate at which each of these products grows, you could end up with any particular mix of primeness. David Scharf: Got it. Understood. That is helpful. Applying the same rubric to the medium term—the three-year guidance—the 35% revenue CAGR is significant, and margins going from 21% to 25% is material as well. But the margin increase is possibly not as much of a pickup as we would expect with revenue increasing two and a half times. Is that related to product mix, or should we interpret that as three years from now you still anticipate being in growth mode and in an above-trend period of investment spending? Paul Gu: More the latter. We are expecting the business to grow a significant amount for a long time. We gave three-year guidance of 35% CAGR, and interestingly, 35% was approximately the same amount of growth we guided to in the first year as the later years. You might infer from that that it is not heavily front-loaded like it might be for a business that you expect to grow a lot and then taper off. The market opportunity here is so large across so many categories of credit that we hope to be doing this for a very long time. It is our working expectation that there will be great opportunities to reinvest profit into continuing to grow the business over time. I could not tell you today what will happen in year four, five, or six, but if I had to guess, I would guess there will be great opportunities to reinvest for some time. That is what is in our plan today. Operator: And it appears there are no further telephone questions. I would like to turn the conference back to Paul Gu for closing comments. Paul Gu: Great. Thank you everyone for your questions and for your time today. I want to leave you with a few things I hope you can take away from our conversation. First, Q1 was strong and puts us comfortably on track to deliver our full-year outlook on both revenue and profit. Second, core personal loans is our superpower. It has great margins, and we are going to do a lot more of it. Third, home and auto have found their places in the market, and it is time to make them profitable. Finally, the opportunity ahead for AI to remake consumer credit is enormous, and we intend to go after it while making every dollar of capital count. Thank you to our team, our capital partners, and our shareholders. We look forward to seeing you next quarter. Operator: Once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Mercury Systems, Inc. Third Quarter Fiscal 2026 conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the company's Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo. Tyler Hojo: Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, William L. Ballhaus, and our Executive Vice President and CFO, David E. Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing is posted on the Relations section of the website under Events and Presentations. Turning to slide two in the presentation, I would like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury Systems, Inc.'s financial outlook, future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on slide two in the earnings press release, and the risk factors included in Mercury Systems, Inc.'s SEC filings. I would also like to mention that, in addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, during our call we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release. I will now turn the call over to Mercury Systems, Inc.'s Chairman and CEO, William L. Ballhaus. Please turn to slide three. William L. Ballhaus: Thanks, Tyler. Good afternoon. Thank you for joining our Q3 FY '26 earnings call. We delivered Q3 results that were ahead of our expectations, with significant year-over-year growth in backlog, revenue, and adjusted EBITDA. Strong demand signals and solid execution contributed to better-than-expected organic growth and margin expansion this quarter. Today, I will cover three topics. First, some introductory comments on our business and results. Second, an update on our four priorities: performance excellence, building a thriving growth engine, expanding margins, and driving free cash flow. And third, performance expectations for the balance of FY '26 and longer term. Then I will turn it over to Dave, who will walk through our financial results in more detail. Before jumping in, I would like to thank our customers for their collaborative partnership and the trust they put in Mercury Systems, Inc. to support their most critical programs. I would also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge. Please turn to slide four. Our Q3 results reflected robust organic growth and margin expansion. Record bookings of $348.3 million and a 1.48 book-to-bill resulted in a record backlog approaching $1.6 billion; revenue of $235.8 million, up 11.5% organically year over year; adjusted EBITDA of $36.1 million and adjusted EBITDA margin of 15.3%, up 46% and 360 basis points, respectively, year over year; and free cash outflow of $1.8 million, meaningfully outperforming our expectations. We ended Q3 with $332 million of cash on hand. These results reflect ongoing focus on our four priority areas, with highlights that include solid execution across our broad portfolio of production and development programs; backlog growth of 18% year over year and a sequential increase of twelve-month backlog of 10.3%; a streamlined operating structure enabling increased positive operating leverage and significant margin expansion; and continued progress on free cash flow drivers with net working capital down 4.1% year over year. Please turn to slide five. Starting with our four priorities and priority one, performance excellence, where we are focused on sound execution on development programs, accelerating deliveries for our customers broadly across our portfolio, and ramping the rate on numerous programs transitioning to higher-volume production. We accelerated progress across a number of programs and generated approximately $25 million of revenue, $15 million of adjusted EBITDA, and $25 million of cash all primarily planned for the fourth quarter. This acceleration, enabled by our efforts to align our supply base to yield faster backlog conversion, contributed to top-line growth, adjusted EBITDA margin, and free cash flow that exceeded our expectations for Q3 and will also factor into our outlook for Q4, which I will speak to shortly. Our strong bookings and record backlog combined with our ability to more rapidly convert backlog is translating into organic growth exceeding our expectations coming into FY '26. Notably, our domestic revenue, representing 88% of our Q3 revenue, generated 17% year-over-year growth. Beyond this solid performance, we progressed on a number of actions in the quarter to increase capacity, add automation, and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency. Notably, we added capacity to our highly automated manufacturing footprint in Phoenix, Arizona, and initiated operations within our additional 50,000 square feet of factory space to support ramped production for our common processing architecture programs and to allow for efficient scaling. In the quarter, we also completed the acquisition of critical manufacturing process technology provider integral to a number of our key ramping programs. These are among a number of actions we have taken, along with prior investments across a number of critical technology developments that are driving our ability to accelerate delivery of vital capabilities to our warfighters and our allies. Please turn to slide six. Moving on to priority two, driving organic growth. We believe that our near-term organic growth will be driven by increased volume on existing production programs and the ongoing transition of a number of development programs to production. Additionally, we expect possible upside tied to potential tailwind from customer-driven acceleration and increased quantities across a broad set of production programs in our portfolio. Lastly, we are excited about new development programs and the potential of the production volume associated with those wins. In Q3, we delivered a record quarter with $348.3 million of bookings resulting in a book-to-bill of 1.48 and a record backlog approaching $1.6 billion. Our trailing twelve-month bookings are a record $1.23 billion. Q3 bookings were driven largely by follow-on production orders reflecting strong customer demand across core franchise programs. This bookings mix reflects the transitioning of our business toward higher-rate production and we believe does not meaningfully capture the potential incremental tailwinds we see in the market. The largest bookings in the quarter were across several missiles, C4I, and space programs. In addition, the quarter featured the strongest bookings of the fiscal year for solutions that leverage our common processing architecture. Finally, we secured a follow-on development award on a strategic program that has the potential to proliferate across multiple platforms. Beyond our backlog growth, we continue to see the potential for higher demand on multiple programs across our portfolio, driven by increased defense budgets globally and domestic priorities like Golden Dome. I remain optimistic that these potential market tailwinds may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond. Please turn to slide seven. Now turning to priority three, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low- to mid-20% range, we are focused on the following drivers: backlog margin expansion as we convert lower-margin backlog and add new bookings aligned with our target margin profile; ongoing initiatives to further simplify, automate, and optimize our operations; and driving organic growth to increase positive operating leverage. Q3 adjusted EBITDA margin of 15.3% was ahead of our expectations and up 360 basis points year over year. Gross margin of 29.3% was up 230 basis points year over year, consistent with our expectation that average backlog margin will continue to increase as we convert legacy lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses are down year over year, both on an absolute basis and as a percent of sales, reflecting our focus on continuously driving cost structure efficiencies to enable significant positive operating leverage as we accelerate organic growth. Please forward to slide eight. Finally, turning to priority four, improved free cash flow. We continue to make progress on the drivers of free cash flow, and in particular, reducing net working capital, which, at approximately $4.344 billion, is down $18.7 million year over year. Net debt was $259.7 million at the end of Q3. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning, and supply chain management will continue to yield a strong balance sheet that provides sufficient flexibility for us to pursue and capture potential market tailwinds. Please turn to slide nine. Looking ahead, I am very optimistic about our team's performance, strategic positioning, the market backdrop, and our expectation to deliver results in line with our target profile of above-market top-line growth, adjusted EBITDA margins in the low- to mid-20% range, and free cash flow conversion of 50%. We believe our strong year-to-date results show meaningful progress toward this target profile, with an aggregate 1.3 book-to-bill, 9% top-line growth, 15% adjusted EBITDA margins, 400 basis points of EBITDA margin expansion year over year, and free cash flow of $39.5 million. Coming out of Q3, we are raising our expectations for FY '26. We believe our efforts to stage material earlier have improved revenue linearity and increased forecast visibility, and that progress is now reflected in our updated expectations for FY '26. As a result, our outlook incorporates backlog conversion that historically may have materialized in accelerations and results above forecast. Our Q4 bookings have the potential to be the strongest of the year, based on a pipeline of opportunities that is more robust than our Q3 pipeline, which we believe could be an indicator of increased top-line growth and further margin expansion beyond FY 2026. We now expect annual revenue growth for FY '26 approaching mid single digits, up from low single digits. We expect full-year adjusted EBITDA margin of mid teens, up from approaching mid teens. Finally, with respect to free cash flow, we expect free cash flow to be positive for Q4. In summary, with our positive momentum year to date, and coming out of a very solid Q3, I expect FY '26 performance to deliver a significant step toward our target profile. Additionally, I am gaining optimism regarding the potential tailwinds associated with increased global defense budgets and domestic priorities like Golden Dome to materialize and drive upside bookings to our plan over time. With that, I will turn it over to Dave to walk through the financial results for the quarter, and I look forward to your questions. Dave? David E. Farnsworth: Thank you, Bill. Our third quarter results reflect continued solid progress toward our goal of delivering organic growth and expanding margins. We still have work to do to reach our targeted profile, but we are encouraged by the progress we have made and expect to continue this momentum going forward. With that, please turn to slide 10, which details our third quarter results. Our bookings for the quarter were approximately $348 million, with a book-to-bill of 1.48. A record backlog of nearly $1.6 billion is up $240 million, or 17.9%, year over year. Revenues for the third quarter were nearly $236 million, up approximately $24 million, or 11.5% organically, compared to the prior year. During the third quarter, we were again able to accelerate progress on a number of customers' high-priority programs worth approximately $25 million of revenue primarily planned for FY '26. Gross margin for the third quarter increased approximately 230 basis points to 29.3% as compared to the same quarter last year. The gross margin increase during the third quarter was primarily driven by lower net EAC change impacts of nearly $2 million and lower net manufacturing adjustments of approximately $4 million. These increases were partially offset by higher inventory reserves of approximately $3 million. As Bill previously noted, we expect to see an improvement in our gross margin performance over time as the average margin in our backlog improves and through our continued focus to simplify, automate, and optimize our operations. We expect average backlog margin to continue to increase as we convert lower-margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses decreased approximately $11 million, or 14.3%, year over year. The decrease in operating expenses was driven primarily by lower restructuring and other charges, selling, general and administrative expenses, and research and development costs of approximately $5 million, $4 million, and $1 million, respectively. These decreases reflect the efficiency improvements and headcount actions we have previously discussed to align our team composition with our increased production mix, driving improved operating leverage. GAAP net loss and loss per share in the third quarter were approximately $3 million and $0.04, respectively, as compared to GAAP net loss and loss per share of approximately $19 million and $0.33, respectively, in the same quarter last year. Adjusted EBITDA for the third quarter was approximately $36 million, up $11 million, or 46.2%, as compared to the same quarter last year. The increase was partially driven by enhanced execution and improved operating leverage. Adjusted earnings per share was $0.27 as compared to $0.06 in the prior year. The year-over-year increase was primarily related to our improved execution and increased operating leverage in the current period as compared to the prior year. Free cash flow for the third quarter was an outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. As we noted last quarter, we did expect to see a free cash outflow in the third quarter; however, we were able to successfully mitigate a large portion of that outflow through improved collections on billed receivables. Slide 11 presents Mercury Systems, Inc.'s balance sheet for the last five quarters. We ended the third quarter with cash and cash equivalents of $332 million, which represents an increase of approximately $62 million, or 23%, from the same period in the prior year. This increase was primarily driven by the last twelve months' free cash flow of approximately $73 million, which was partially offset by $15 million of shares repurchased and retired from our share repurchase program earlier this fiscal year. Billed and unbilled receivables decreased sequentially by approximately $10 million and $4 million, respectively. We continue to expect to allocate factory in the fourth quarter to programs with unbilled receivable balances, which will help drive free cash flow with minimal impact to revenue. Inventory increased sequentially by approximately $12 million. The increase was driven primarily by work in process as we bring product to its final state in support of our increased proportion of point-in-time revenue on many of the company's production programs. Prepaid expenses and other current assets decreased sequentially by approximately $10 million primarily due to insurance proceeds and normal operating expenses. Accounts payable decreased sequentially by approximately $2 million, driven primarily by the timing of payments to our suppliers. Accrued expenses decreased approximately $3 million sequentially, primarily due to the payments of a legal settlement and restructuring activities we announced earlier this fiscal year. Accrued compensation increased approximately $2 million sequentially, primarily due to our incentive compensation plans. The amount due to our factoring facility decreased sequentially by approximately $18 million, primarily due to the timing of payments from our customers due back to our counterparty. Deferred revenues decreased sequentially by approximately $11 million, primarily driven by execution across a number of programs during the period. Working capital decreased approximately $19 million year over year, or 4.1%. Our continued working capital improvement year over year, which is evidenced by our strong balance sheet position, has enabled us to make a $150 million payment against our revolver during the fourth quarter. This continues to demonstrate the progress we have made in reversing the multiyear trend of growth in working capital, resulting in a reduction of approximately $225 million, or 34%, from the peak net working capital in Q1 fiscal 2024. Our balance sheet provides sufficient flexibility for us to pursue and capture potential market tailwinds. Turning to cash flow on slide 12. Free cash flow for the third quarter was a slight outflow of approximately $2 million as compared to an inflow of $24 million in the prior year. We continue to expect free cash flow to be positive for the year, with positive cash flow expected in the fourth quarter, as Bill previously noted. We believe our continuous improvement in program execution, hardware deliveries, just-in-time material, and appropriately timed payment terms will lead to continued reduction in working capital. In closing, we are pleased with the performance in the third quarter and the higher level of predictability in the business. With that, I will now turn the call back over to Bill. William L. Ballhaus: Thanks, Dave. With that, operator, please proceed with the Q&A. Operator: We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 to raise your hand. To withdraw your question, please press 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Kenneth George Herbert. Your line is now open. Kenneth George Herbert: Good afternoon, Bill and Dave. Really nice results. Bill, maybe just to start on implied margins in the fourth quarter. Seasonally, you typically have a nice step up into the fourth quarter. The revised outlook for the full year implies more modest margin expansion into the fourth quarter. Maybe you can just talk about some of the puts and takes into the fourth quarter and then, I guess more importantly, not to get too far ahead, but how much of the move towards the longer-term target up into the low 20s could we expect to see in fiscal '27? David E. Farnsworth: Hey, Ken. If it is okay, I will start, and then Bill can jump in. As far as the sequential growth in margin, we have seen that in the past, and it is accompanying a real significant change in the linearity of our business. As you recall, in the fourth quarter, we have typically seen a higher level of revenue, and the mix has been a bit different. One of the things we have been able to do this year is start to flatten out that linearity a little bit. So a stronger Q3 and with stronger margins accompanying Q3 as well. Where in the past we have seen a step up of potentially a couple hundred basis points, it was from a much lower starting point normally. We do not expect to see that rate of a jump up in the fourth quarter—more of a gradual trend—but we feel good about the total year. And as Bill said, mid teens around the margin for the year. We do feel we are headed in absolutely the right direction and in keeping with our expectation of getting towards our target margins. William L. Ballhaus: What I will add is what Dave highlighted just reflects this smooth transition of the business from this high mix and concentration of development programs a couple of years ago, to completion of those programs, transition into low-rate production, and then increased levels of production. What we have been expecting to see as we have evolved was a combination of increasing top-line growth and then further acceleration of the bottom line. If you adjust for some of what we pulled forward from last year into Q4, what that has translated into is a relatively smooth progression to mid single-digit top-line growth last year and now to high single-digit top-line growth, with nice margin expansion on the bottom line, and some recent indicators of that continuing as we move forward. A couple of things that I would point to would be the growth in our domestic business in Q3, which was up 17% year over year, and then in the quarter, a really nice step up in our next-twelve-months backlog, up 10% from Q2 to Q3. So more than anything, Ken, I think Dave's point around linearity is that we are just seeing a nice smooth progression of the business. Kenneth George Herbert: That is great. Appreciate that, Bill. Maybe for either Dave or Bill, as we think about the strong bookings in the quarter—you called out missiles, C4I, and some space programs—are there any particular programs within those broader buckets you are comfortable calling out or you would specifically highlight as significant sources of bookings? William L. Ballhaus: One of the real strengths of our business is the diversification across our portfolio—no real concentration. No one program makes up more than 10%. The strong bookings really just reflect strong demand across our portfolio in areas like space, C4I, and missile defense, and we think that is a real strong attribute of our business. No single program, no real lumpiness in the bookings—just a strong indication of demand across our broad portfolio. It really is, as we have been talking about— David E. Farnsworth: As we look, there is not one area that we would say is an area you would not focus too much energy on because it is either declining or flat. All the areas from a bookings standpoint are seeing solid activity, and it is in keeping with what the market is doing. To a large degree, these are the production efforts we have been talking about, and this is gearing up more production on those same programs that we have been working. William L. Ballhaus: It really reflects, again, that transition from a heavy concentration of development to the follow-on production, with a nice progression in the quarter. Operator: Thank you for your question. Your next question comes from the line of Peter John Skibitski. Your line is now open. Peter John Skibitski: The book-to-bill, which is really strong this quarter, and it seemed like just the tone of your commentary was more positive in terms of the sales outlook. You have raised the guide here to the mid single-digit range. Even looking at that guide, the fourth quarter revenue looks like it would imply to be down year over year. I just wanted to know if there is continued conservatism there in the guide or if there is just a large percentage of unbilled receivable-type work in the fourth quarter relative to the third quarter. Or maybe something else? William L. Ballhaus: One way that you could think about it is, aside from the $30 million that we accelerated from FY '26 into Q4 of last year, the year-over-year growth comparison in top-line growth looks pretty consistent with what Q1, Q2, and Q3 look like. Again, it more reflects a steady progression of our business to mid single digits last year and then high single digits this year, with some real positive indicators again based on the book-to-bill, the continuing growth of our backlog—which we expect to continue to grow—and then, in particular, the portion of our backlog that we expect to convert over the next twelve months. Peter John Skibitski: And then just on the unbilled receivables, they were down only modestly this quarter. What is the right way to think about that? Does that mean some of these cycles are just going to take a lot longer? I am a little confused as to why we did not see a bigger step down in the receivables. David E. Farnsworth: Some of what is reflected in there and in our inventories is a bit of the up cycle we are seeing in terms of production coming in. There is always a bit of a timing phenomenon. There was a much more significant decline, but there were things added in as we were ramping up on new activities. Nothing more than the timing of things; I would not read anything else into it. We are still focused on burning down some of our older unbilled balances. But as we ramp up revenue, there will be new unbilled balances—certainly better than the terms were in the past—but there will be some from a timing standpoint. Nothing different than what we have been saying. We are still focused on working through the older balances and getting them cleared from our books, so we have the capacity to do all the new work that we see. William L. Ballhaus: There are definitely more dynamics under the hood than you would see if you just looked at the quarter-to-quarter number. And then, Pete, the other thing that I would point out is close to 12% growth year over year and the net working capital coming down year over year despite that growth, which reflects the progress that we are continuing to make and the increased efficiency of our net working capital. Operator: Thank you for your question. Your next question comes from the line of Austin Moeller from Canaccord Genuity. Austin, your line is now open. Austin Moeller: Hi. Good afternoon. Are you looking at the IBAS defense industrial base investments within the fiscal year 2027 budget? And do you see any opportunities to get incremental investments from that program to expand your capacity? William L. Ballhaus: Hey, Austin. Thanks very much for the question. We have had interactions with IBAS. We have programs that are funded by IBAS, and that continues to be an area where we look for opportunities to go after things that they are interested in investing in and that we think can increase our capacity, our efficiency, and our innovation. So, yes, definitely something that is in front of us. Austin Moeller: Great. And just my next question, do you see more contract opportunities within Golden Dome or within the Defense Autonomous Working Group within the fiscal year '27 budget request? William L. Ballhaus: We definitely see opportunities across the board. That is not only in our existing portfolio of programs but also tied to administration priorities like Golden Dome, missile defense, and armaments—across the board right now we are seeing opportunities. We feel like our capabilities are really well aligned with the administration's priorities broadly. One of the things that we have said before and think is unique about our positioning is we have exposure to a broad set of tailwinds across the market. That is what we are focused on capturing right now. Austin Moeller: Excellent. I will pass it back there. Thank you. William L. Ballhaus: Thanks, Austin. Operator: Thank you for your question. Your next question comes from the line of Sheila Kahyaoglu from Jefferies. Sheila, your line is now open. Analyst: Hi, guys. This is Egan McDermott on for Sheila. Maybe just building off of the missile questions that have been asked. Curious, one, if you could sort of size how big Mercury's missile exposure is as a percent of sales, even roughly, and two, with a few large LTAMDS contracts out there of late—you know, thinking like the $8 billion FMS to Kuwait—how would you think about what an order of that magnitude means for your business? William L. Ballhaus: Thanks very much for the question. We do not size up the missile portfolio publicly, but we do have a number of programs with exposure to missiles for sure. Relative to LTAMDS, we typically do not comment on any one program or go into much detail. I will say that it is publicly available that there are conversations around increased demand and increased quantities on LTAMDS, and that really has not factored into any of our bookings to date, but certainly would be a positive if there were increased quantities and accelerations of deliveries. It is one of the potential tailwinds that we are keeping our eye on as we are looking forward. Analyst: Thank you. And maybe just a follow-up on that. Is it fair to think that margins on an order like that out of Kuwait or other FMS would differ from U.S. orders at all or be at all higher? David E. Farnsworth: For us, it is typically something that we work with the prime on, and so we would work with them as to what pricing makes sense and how it makes sense. Typically, the higher margin rates are on foreign direct versus FMS contracts at the prime level. I think that is something you would have to have that conversation broadly with the prime. Operator: Thank you. Analyst: Thank you. Operator: Thank you for your question. Your next question comes from the line of Jonathan Frank Ho from William Blair. Jonathan, your line is now open. Analyst: Hi. This is Garrett Berkham on for Jonathan, and thanks for taking the question. It is nice to see the strong results, and it sounds like demand is strong and relatively broad-based across the board. Are there any areas where you see the most opportunity for reordering and restocking over the near term, just given the ongoing geopolitical conflicts? Thanks. William L. Ballhaus: Thanks for the question. To break down our growth vectors, first and foremost, the primary driver of our near-term organic growth is the transition of our business from a really high concentration of development programs—and it is dozens of programs, not one or two—to the low-rate production phase and then the higher-rate production phase. We are seeing that start to manifest in '25 to '26 and expect our organic growth to continue to accelerate based on those programs ramping up. That really does not have anything to do with tailwinds that we see in the market. Beyond the existing portfolio, we are continuing to win new development programs that are really exciting, where we are bringing together technology and innovation across our portfolio, doing things that nobody else can do and winning new development programs that, over time, are going to add to that production content. Beyond those two items, we do see a number of potential tailwinds tied to a number of different factors: the size of the domestic budgets, the size of the global budgets, and other tailwinds like Golden Dome and rearmament of munitions. We are starting to see those tailwinds manifest in the form of multiyear strategic agreements at increased quantities and increased deliveries with the primes. Right now, none of those tailwinds are reflected in any of our bookings, and we view them as all additive to the target profile that we have talked about and are converging on. We have said for a couple of quarters now that we think that some of those tailwinds could start to manifest likely by the end of calendar 2026 but potentially as early as our fourth quarter, which is our current quarter. We are watching those items as they progress in our pipeline with a lot of excitement. Beyond that, there is a broad set of demand and a lot of tailwinds that we have exposure to, and we are looking forward to seeing how that all plays out over the next quarter and beyond. David E. Farnsworth: On the current business—what we are executing on today—when you look at the queue, you will see the areas that have significant growth in the revenue. Space is up significantly for us. Radar is up, as you would expect. Other sensors and effectors—if you think effectors—that is up significantly in our revenue so far this year. Those are things that the customer needs delivered as fast as possible. You will see that across our entire portfolio of roughly 300 programs. William L. Ballhaus: One of the best indicators of that is, again, if you look at our domestic business, how it is up 17% year over year. A couple of years ago, this is where a lot of our development programs existed in the portfolio, and you can really see now the phenomenon of us having completed the development programs, transitioning into low-rate production, and now starting to ramp up. There are a lot of things that we are seeing in the portfolio and the business that we are excited about. Analyst: That is great. Thank you. Operator: Thank you for your question. At this time, we would like to remind you, if you would like to ask a question or an additional follow-up, please press star 1 to raise your hand. To withdraw your question, please press star 1 again. There are no further questions at this time. Oh, pardon me. Next question comes from the line of Peter J. Arment from Baird. Peter, your line is now open. Peter J. Arment: Hey. Thanks. Good afternoon, Bill, Dave, Tyler. Nice results. Tyler Hojo: Hey. Peter J. Arment: Bill, it has been a common theme the last few quarters that you have talked about the ability to stage material earlier and better align your supply base that is leading to better performance on the top line. Could you give a little more insight into that staging or a little more color around it? William L. Ballhaus: I think it has been one of the big improvements in the business, and we are not done—we still have work to do on this front—but you can see the impact of our efforts in this quarter, the linearity, and our outlook for the year. If we go back close to three years ago, we really swung the pendulum hard on our material focus to a just-in-time delivery model. This was largely because of the buildup in our net working capital and our need to address that. We swung the pendulum hard, and the upside is we have been able to reduce our net working capital by about $250 million over the last couple of years. But it introduced some constraints in being able to accelerate our backlog conversion. It was not so much that availability of material or items in our supply chain were hard to get; it was that we staged the delivery to the right because of the net working capital buildup in the business. Over time, we have worked to accelerate the delivery of material, which has led to accelerations that we cited into past quarters. But that led to a bathtub in the future quarters that made it hard for us to forecast what those quarters would look like because we had a lot of unknowns associated with filling the bathtub and trying to accelerate more material. Over the last several quarters, we have focused on pulling our supply chain to the left—bringing the due dates for material ahead of our need date—so that we have more flexibility and more degrees of freedom in how we convert our backlog. That has translated into a higher organic growth rate and our ability to convert backlog faster than we thought we would be able to coming into the year. It is a great shift in the business. We are really excited about it. We have more work to do, but for future quarters it gives us much better visibility into our deliveries, and we can incorporate that into our forecast. That is a pivot and a transition that we have made this quarter. Hopefully, that is helpful in explaining the dynamics. Peter J. Arment: Very helpful. And you mentioned you had the strongest bookings quarter for the CPA—the Common Processing Architecture—so it sounds like momentum is really building there. What other color can you give us around the CPA that you are seeing with customers? William L. Ballhaus: We have a number of different degrees of freedom to drive there. We have always said that as we increase production, the follow-on bookings would come, and we certainly are seeing that—this quarter was evidence of that. We are seeing strong demand for our current products, and this is an area where we have differentiation in the market. There are certain security standards that we are the only ones that can meet, so we have a nice moat around this business. As we have made progress on the development programs, it has given us the opportunity to focus on the next set of innovations we want to bring to the market. That is showing up as higher performance for our current form factors—getting the latest processing and memory capabilities into the hands of our customers with our common processing architecture wrapped around it. Maybe even more exciting, we are driving into smaller form factors and secure chiplets, which we think opens up a big TAM for that capability. There has been a lot of progress over the last couple of years on our development programs and our technology. The production follow-on orders are coming as a result of that, and we see a lot of room to run into different form factors to open up the market. Eventually, over time, as we take our mission-critical processing to the edge and increase performance while driving to smaller form factors, we see ourselves providing the compute infrastructure needed to have AI distributed across the battlespace. That is where we see being able to take this capability in the future. Operator: There are no further questions at this time. I will now turn the call back to William L. Ballhaus, CEO, for closing remarks. William L. Ballhaus: With that, we will conclude our call. We really appreciate everybody's participation and interest and look forward to getting together next quarter. Thank you.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Talen Energy Corporation First Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. 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 turn the conference over to Sergio Castro, Vice President and Treasurer. Please go ahead. Sergio Castro: Thank you, Kathy. And welcome to Talen Energy Corporation’s first quarter 2026 conference call. Speaking today are Chief Executive Officer, Mac McFarland, President, Terry L. Nutt, and Chief Financial Officer, Cole Muller. They are joined by other senior executives to address questions during the second part of today’s call as necessary. We issued our earnings release this afternoon, all of which can be found in the Investor Relations section of Talen Energy Corporation’s website, talenenergy.com. Today, we are making some forward-looking statements based on current expectations and assumptions. Actual results could differ due to risk factors and other considerations described in our financial disclosures and other SEC filings. Today’s discussion also includes references to certain non-GAAP financial measures. We have provided information reconciling our non-GAAP measures to the most directly comparable GAAP measures in our earnings release and the appendix of our presentation. With that, I will now turn the call over to Mac. Mac McFarland: Great. Thank you, Sergio, and good afternoon, everyone. We appreciate your interest in Talen Energy Corporation, and we look forward to the discussion during our Q&A. I will start with our first quarter results. In the first quarter, we delivered strong operational and financial results, including strong plant performance during the winter cold events, and we are off to a good start to the outage season. In fact, we are in start-up at Susquehanna, slightly exceeding our planned outage duration. Terry and Cole will discuss all of this in more detail later. Also in the first quarter, we signed a Cornerstone transaction advancing our Talen Energy Corporation flywheel strategy and adding meaningful free cash flow per share growth through acquisitions. Today, we are reaffirming our 2026 guidance and providing a preliminary view of our 2027 and 2028 outlooks. Our 2026 guidance does not include the Cornerstone assets; however, we expect to close as soon as this summer and we will update 2026 guidance once we close. We recently closed on the financing for the Cornerstone acquisition, which positions us to close as quickly as possible once we obtain all regulatory approvals. Cole will explain why we acted now in more detail. In short, the carry cost of funding now should be more than offset by closing as soon as possible. We have also reduced market volatility risk and replaced some higher-cost debt. Our preliminary 2027 and 2028 outlooks do include the Cornerstone assets as well as other updates, including higher current forward mark-to-market values from March 31 of this year, improved financing costs, and several other changes. These outlooks show significant year-over-year growth in free cash flow per share and meaningful upside versus the outlook we shared this past January. This demonstrates the strength of our business and our continued ability to return cash to shareholders through meaningful share repurchases. These outlooks also imply we are trading at double-digit free cash flow yields, which we do not believe reflect our increasingly contracted portfolio, and that does not include the other levers that we have for further upside, and Cole will walk you through those later. Looking ahead, nothing has changed in our Talen Energy Corporation flywheel strategy. Our direction of travel remains the same. We continue to believe in data center demand for megawatts. We are building a pipeline of both powered land and new-build options. Terry will walk you through these development activities and how we see the market evolving towards what we call a hybrid model, which uses existing generation for speed to market and is supplemented by new build in later years. Some of you may remember me saying that 2025 was a year of options and 2026 will be a year of market rationalization. While not going into specific project details, we will provide a high-level view of our development portfolio today. We still do expect rationalization across projects in 2026. All that said, we are building a pipeline of real opportunities that can win. With that, I will turn the call over to Terry. Terry L. Nutt: Thank you, Mac, and good afternoon, everyone. For the first three months of 2026, we are reporting $473 million of adjusted EBITDA and $350 million of adjusted free cash flow. A comparison of these amounts to the same quarter last year provides clear evidence of the accretion Talen Energy Corporation has achieved through acquisitions and fundamental growth in the business. Our fleet achieved strong levels of safety and reliability during the quarter. This is even more noteworthy given the frigid temperatures and icy conditions that were present in late January and early February. We are currently in the middle of our spring outage season across the fleet. Our refueling outage at Susquehanna Unit 1 has progressed well, including executing work similar to what we had on Unit 2 last spring. The current outage has been more efficient due to the learnings that we had from last year, and it has resulted in the unit being synced back to the grid yesterday. I would like to thank the men and women of Talen Energy Corporation who continue to demonstrate strong operational and safety performance. Without their efforts, none of this is possible. I would also like to welcome the employees from Freedom and Guernsey who were onboarded to Talen Energy Corporation in April and congratulate them on their strong safety records since start-up. Safety remains our top priority across the fleet. Our team worked safely during a busy quarter. Our recordable incident rate was 0.37, which continues to be below industry average. Our fleet ran well and we generated approximately 16 terawatt-hours of electricity, achieving a 55% fleet-wide capacity factor as our intermediate and peaking assets continue the trend of higher run times to support the grid. We continue to see tightening markets driven by increased demand. In Q1, we saw approximately 3% of incremental deliveries on a weather-adjusted basis in PJM compared to the same period in 2025. This is a clear sign of demand growth that supports our view that energy demand will increase the dispatch of our flexible fleet. Our first quarter generation from 2023 through 2026 increases every year. During this time, our intermediate and peaking assets, in particular Montour and Martins Creek, had significantly higher run times than the same quarter in the prior year, continuing the trend that we have seen the past several years. In relation to spark spreads, we have seen a continued appreciation in the forward curves for the remainder of 2026 through 2028, with the growth in spark spreads across PJM inclusive of the zones where our generation is located. PPL zone spark spreads have seen appreciation since July, but not as pronounced as the moves in PJM West Hub. We believe that some of this price action that is resulting in widening term basis between West Hub and PPL zone is based on recency bias due to transmission work impacting the zone and not fundamental factors. Our expectation is that this basis will tighten as the transmission network and load evolve. Summer spark spreads continue to move higher driven by fundamentally tight market conditions in PJM. This is even more evident as we have seen increased instances of demand-driven volatility widening cash market spark spreads, which in turn is helping to drive the term sparks higher. This is beginning to validate our earlier views that the market response would come as fundamental drivers are seen in the cash market. As I mentioned earlier, demand continues to increase with no meaningful increase in supply. This demonstrates the value of steel in the ground. We are working diligently to close the Cornerstone acquisition that we announced earlier this year. It will further diversify Talen Energy Corporation’s generation portfolio and enhance our large load contracting opportunities. As an update on the regulatory approvals, we filed our 203 application with FERC in January and anticipate approval by this summer. The HSR waiting period expired in March, meaning that we have completed the DOJ approval process. And lastly, there was a hearing with the Indiana Utility Regulatory Commission in April and the unopposed final order was submitted. We anticipate approval in Indiana by this summer. I would like to give you some color on the land development and contracting growth options Mac mentioned earlier. In the near term, we have several 1+ gigawatt opportunities for long-term PPAs at our existing sites as well as other sites in Pennsylvania, and we are advancing potential opportunities across the remainder of our footprint. In relation to specific site development opportunities for land we are currently working on, we are progressing on several different fronts. Those opportunities include land of up to 3 thousand acres in total that can support 3 to 4 gigawatts of data center capacity using current compute density. The zoning of the property ranges from fully zoned acreage to zoning activity that is still in process, such as our Montour site. Additionally, we have the ability at several of these sites to install new generation of 500 megawatts to 1 gigawatt. As part of our strategy, we are advancing a mix of gas and storage generation projects totaling over 2 gigawatts at our sites to support data center contracting and reliability needs. Last week, we submitted several new projects into PJM’s Cycle 1 interconnection study cluster. These projects are a mix of generation solutions including CTs, batteries, and CCGTs. These new generation sources, in combination with our existing assets, provide us the ability to offer a solution to customers that is a hybrid approach of receiving power from existing generation now and new generation down the road. As we have stated before and will reiterate today, development of new generation will need to be done either through long-term offtake agreements or through the PJM RVP, with a focus on financial discipline related to investment return. This initial generation development is capital-light with no material capital required during the initial stage. As development advances, spending will be tied to customer contracts and underwriting, and we will likely utilize project financing structures related to these projects. With that, let me turn it over to Cole to cover our financial results. Cole Muller: Thanks, Terry, and good afternoon, everyone. Looking at our financial results for the first quarter, we reported $473 million of adjusted EBITDA and $350 million of adjusted free cash flow. Adjusted EBITDA more than doubled and adjusted free cash flow quadrupled year-over-year, showing the impact of the Freedom and Guernsey acquisitions that we closed in Q4 last year. These results were also driven by higher prices and spark spreads, higher capacity and ROR revenues that started in June 2025, and the ongoing AWS PPA ramp. Our adjusted free cash flow also benefited from reduced cash tax payments largely related to the impacts from our Freedom and Guernsey acquisitions. We are reaffirming the previously announced 2026 guidance ranges. We had a strong first quarter, though it is not our practice to make adjustments this early in the year. Our adjusted EBITDA range is $1.75 billion to $2.05 billion and our adjusted free cash flow range is $980 million to $1.18 billion. These ranges do not include any contribution from the pending Cornerstone acquisition. We expect to provide an update to 2026 guidance after closing the transaction. We remain committed to maintaining sufficient liquidity and keeping our long-term net leverage ratio below our stated target of 3.5x. As of March 31, our forecasted 2026 net leverage ratio was 3.1x. I will note this excludes any impacts from the Cornerstone acquisition and the associated debt that we raised back in April. Upon closing the Cornerstone transaction, we expect to maintain the ability to achieve below 3.5x net leverage by year-end 2026. We recently secured attractive acquisition financing for the Cornerstone assets, which also provided us an opportunity to optimize the balance sheet. We raised $4 billion of senior unsecured notes in a private placement across five- and seven-year tranches at a blended rate just above 6.25%, de-risking the Cornerstone acquisition financing at attractive pricing and allowing us to be ready to close upon regulatory approvals. We also took out our $1.2 billion senior secured notes that had an 8.625% coupon, delivering more than $40 million per year in interest expense reduction, which adds nearly $1 to our free cash flow per share. I will spend a moment to give more color on why we made the decision to raise the financing ahead of regulatory approvals. First, doing this now, we avoided potential risks to market availability, such as impacts from geopolitical events and upcoming midterm elections, as well as locked in attractive long-term rates in the process. We also removed any complications if we needed to raise funds while potentially in possession of MNPI in future months. Second, having the financing already in place ahead of regulatory approvals speeds up time to close, meaning we can own the asset sooner and benefit more from the peak summer period. We estimate the value of one additional month at approximately $30 million in additional cash flow, which far outweighs the net negative carry of only a few million dollars a month. Note that a portion of the proceeds allowed us to take out the more expensive senior secured notes last week and immediately realize interest savings. Considering where things stand with the regulatory approval processes, we feel that this was the right time to lock down the financing. In eliminating the senior secured notes, we have materially reduced our secured debt composition from approximately 60% of total debt down to 30%, leading to improved credit ratings across multiple agencies. Concurrent with this financing, we are enhancing our liquidity through commitments to upsize our existing revolving credit facility to $1.35 billion and our standalone letter of credit facility to $1.5 billion. We are also extending the LCF maturity through December 2029. These credit facility changes go into effect upon closing the Cornerstone transaction. We show a preliminary update to our 2027 and 2028 outlook that includes the Cornerstone assets along with impacts across the business since last September’s Investor Day, including spark spread expansion through March 31 and impacts from the recent financing that I walked through a moment ago. We also separately include the expected impacts of executing on our share repurchase program, assuming we utilize 70% of available free cash flow. In our base case, we hold share count flat, projecting free cash flow at approximately $34 per share in 2027 and approximately $36 per share in 2028, a 15% improvement from our January estimates, which included the Cornerstone acquisition. When factoring in our share repurchase program, we project approximately $41 per share in 2028, a 30% increase to what we showed back in January. At these projected levels, our free cash flow yield is about 11%. Note that this assumes we use 70% of free cash flow, leaving approximately $1 billion of additional cash available across 2027 and 2028 as more upside for shareholders. In addition, we continue to see upside through the flywheel with accretive M&A—which we demonstrated with the Freedom and Guernsey and now Cornerstone acquisitions—and also through acceleration of the Amazon ramp established in our existing PPA, new data center contracting opportunities, and further spark spread expansion as markets continue to tighten. In fact, we have already seen significant improvements in spark spreads since the March 31 pricing date of approximately $5 per megawatt-hour beyond what is shown in these numbers, which translates to several more dollars per share if marked today. We also expect the recent widening of the West Hub to PPL zonal basis to revert to more recent average levels. Note that in our outlook here, we include the most visible mark that reflects this elevated zonal basis, though as Terry mentioned earlier, we do not see this recent shift being fundamentally driven. A $5 per megawatt-hour impact across 30+ terawatt-hours in PPL zone presents a compelling upside opportunity, particularly as load growth occurs within the zone. Each of these opportunities could provide 10%+ in additional free cash flow per share growth beyond what is shown here, offering a compelling set of further growth opportunities. I should note that there may also be additional upside in 2026 that is not reflected here based on closing the Cornerstone acquisition this summer and/or executing on our share repurchase program throughout the remainder of the year. I want to emphasize that we will continue to maintain capital discipline with a clear focus on accretive levers that meaningfully increase free cash flow per share available to investors through the Talen Energy Corporation flywheel. We show the overall contracted profile of our business when our existing nearly 2 gigawatt PPA reaches full ramp inclusive of the megawatts and cash flows from the Cornerstone assets. With 35% of our gross margin contracted in the long term, contracted cash flows with the AA credit counterparty will be our largest revenue stream, de-risking long-term exposure to PJM capacity and energy markets. In addition, for every incremental 1 gigawatt PPA that we secure, our long-term contracted gross margin increases by 15%, meaning that our next 1 gigawatt PPA may increase our long-term contracted gross margin to 50%. We believe this is a differentiated position with growing cash flows that are becoming more durable. I will now turn it back to Mac. Mac McFarland: All right. Thanks for joining us. That is our prepared remarks. I will now turn it back to the operator and open the line for questions. 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. Please limit yourself to one question and one follow-up. Please stand by while we compile our Q&A roster. Your first question comes from the line of Shahriar Pourreza with Wells Fargo. Your line is now open. Shahriar Pourreza: Hi, good afternoon team. It is actually Constantine here for Shar. Congrats on a great quarter and the development updates. Maybe just starting off on the PJM backdrop with the site development for data centers. Is there tentative framework on things like new capacity versus existing capacity matching, like a one-to-one ratio? Or how flexible would you anticipate that to be going forward, especially as the reserve auction is trying to kind of back-solve this capacity issue? Cole Muller: Yes. Thanks, Constantine. As we have talked about previously, we continue to believe there is opportunity to contract off of our existing generation. Obviously, generation is an important component in how to incentivize a lot of new resources. It is a topic for a lot of discussion right now. As Terry mentioned in the remarks, we do see bringing new generation on the back of PPAs with existing generation. The hybrid model that we have been talking about and working on will help incentivize both contracting near term as load grows over the next three to five years but also bring new generation in the 2030 and beyond timeframe. Certainly not in a one-for-one manner, but we do think a percentage—as you have seen in some other deals over the last number of months—of new build will be part of the solution. Mac McFarland: And to follow up on what Cole said, we have a reserve adequacy issue that has been identified. As we have said for a number of years now, that is really a fifty-hour problem. We are looking at opportunities to solve that. It does not necessarily need to be one-to-one for baseload generation because there are plenty of hours where there is ample energy available. What solves those fifty hours? That is why we have a mix of both batteries—which are the next quickest to market—CTs as the most cost-effective thereafter, and CCGTs for the long run. We are looking at it all in the construct, but we do not think a 1 thousand megawatt PPA requires 1 thousand megawatts of additionality. You can solve that with a number of things to increase the reserve margin for that load. Shahriar Pourreza: Okay. So just to ask a little bit differently, it does not have to be a CCGT-based solution for some of the site development that you are looking for, right? Mac McFarland: No. We actually think that if you look at what is likely to happen in the RVP, you are going to see upgrades. You are going to see CTs converted to CCGTs, which is effectively an upgrade of an existing machine. You are going to see batteries and peakers be the least-cost solution. In our broad-based coalition that we put forth for the RVP, we support a pay-as-bid construct to drive home the affordability issue that is out there. We think that is the least-cost way to do that. CCGTs happen to be at the steeper end of that cost curve, and we think there are more effective ways to solve the reserve margin need. Terry L. Nutt: And to add to Mac’s comments, when you take a look at our existing fleet-wide capacity factor, outside of those fifty hours a year where you have real capacity needs, you can see that there is excess generation on the grid that can support more megawatts outside of those peak periods. If you go back to the slide that we presented, you see this slow, steady creep up in demand, yet there is still excess capacity. That is the reason why you do not need a one-for-one construct in the grand scheme of things. We are solving for the peak hours of the day in very tight periods of time, which, as Mac said, is a capacity issue, not an overall energy issue. Shahriar Pourreza: Maybe quickly following up on the regulatory issue here: with the PJM colocation rules progressing at FERC, how comfortable are your customers in terms of progressing with some of the data center development and the site development while rules are still being finalized? Is there any threshold to look out for? Cole Muller: I would not say there are thresholds. There is a lot of dialogue about where things are going. You mentioned the colocation docket, there is obviously the RVP, and there are other related matters that PJM and others are talking through. We still see significant interest in connecting to the grid and taking power as soon as possible, and that is going to be done off of existing generation. We think that hyperscalers and others will understand that they need to incentivize and bring new generation in five-plus years, but there is no specific threshold they are working towards. Terry L. Nutt: To add a bit more color, the existing development and construction that we see at data center sites across Pennsylvania, using the site near our Susquehanna facility as a great example, is continuing at a steady pace. They are moving forward, getting data halls filled, getting things electrified. We do not see a slowdown in that at all. The hyperscalers’ earnings calls last week showed the continued trend in their businesses. The revenue streams are there, they are moving forward fast, and the capital is hitting the ground in tangible infrastructure. Operator: Your next question comes from the line of Rinny Raveena Singh with Bank of America. Your line is now open. Rinny Raveena Singh: Hi, guys. I just had a question first on the power prices. I know you said that PPL is trading a little bit different than PJM West just because of recency bias. When do you think we might see a correction in that? And is there a specific catalyst to watch for? Terry L. Nutt: Let me start on this one, and then I will hand it over to Chris, who is with us here today. There has been a lot of transmission work in and around PPL zone and other parts of PJM that has been worked on over the last several months. There is a lot of temporal, short-term congestion that we are seeing across the board. Our view, as mentioned in the prepared remarks, is that as load evolves and pops up in PPL zone and other load pockets, we think that basis would trend back and come in line. Chris, do you want to add anything? Christopher E. Morice: Yes. The auction process itself has some illiquidity and timing issues, and reflected in those marks is how those auctions clear. Those disconnect from some of the projections that we are making. Near-term acuteness in basis as a result of this ongoing transmission work is bleeding into that term price. Picking a time in which that reverts or comes back to something more normal will happen through time as that load appears, not as a binary instantaneous moment in time. Cole Muller: We use the most visible marks out there, and we use the PPL zone mark. In the appendix, we show the West Hub–PPL basis over time. For multiple years it traded very narrowly in a range. That has broken out over the last couple of months for the reasons Terry and Chris noted. From a market perspective, we stay true to what is visible, which is why we are calling it an upside opportunity. Mac McFarland: And just one further follow-on: while the basis has widened, the entire market is up. The term market is starting to rationalize supply-demand. While the basis widened, marks were up versus March 31, and even further if you went to yesterday. We think the basis issue is temporal. Rinny Raveena Singh: On the load growth and new build, how are you thinking about new prices for CT or CCGT? And how do you manage the risk of the RVP to fill in capacity price, and the energy risk—focus on long-term data center contracts at higher prices? Terry L. Nutt: You have seen a significant amount of appreciation in the turnkey cost for a CCGT and similarly for combustion turbines. In our proposal for the RVP—and consistent with what PJM has discussed—we think it should be a capacity product. If you build a CT on the back of a reliability backstop award, the capacity revenue stream should underwrite or incentivize that. Energy and ancillaries are second tier. The ability to get that award for multiple years—PJM has talked about up to 15 years—is key. The biggest challenge is not getting additional resources, it is financing those resources and the underpinnings to underwrite and finance them. We think PJM’s proposal largely hits the mark, with some modifications we would like to see. Operator: Your next question comes from the line of Analyst with BNP Paribas. Your line is now open. Analyst: Thanks for taking my question. On the change in free cash flow per share to 2028—last quarter you showed $31–$40 including Cornerstone, now it moves to $41+. You are not leaning on upside drivers like M&A and PPAs in there. How much of that roughly $10 increase is driven by spark spread expansion versus balance sheet and other factors? And any assumption embedded of higher capacity factors on the fleet? Cole Muller: We are not going to get too specific on all the different drivers line by line, but it is all in there. We showed the impact of the share repurchase program separately. The other levers—Cornerstone numbers and spark spreads, among others—get you to a directional answer, but we are not breaking it down further. Analyst: On the backstop option broadly, is there a view of if they will even clear 15 gigawatts—batteries, CTs, some CCGTs—by 2031 with queue reform? Do you think some goes into the second stage of the clearing process, or would the bilateral process do most of the heavy lifting? Terry L. Nutt: When you take a look at cost and affordability, there are some obvious choices on technology. PJM’s cost of new entry benchmark is a CT, which is the most affordable. Certain CTs and batteries can be built more quickly, which matters for reliability backstop timing. CCGTs have longer turbine lead times. The interconnection queue needs clearing and prioritization—that is one area where we are actively engaged in the stakeholder process. Ultimately, the queue matters quite a bit to get new resources online. It is good progress—we will see it push forward. Operator: Your next question comes from the line of Michael P. Sullivan with Wolfe. Your line is now open. Michael P. Sullivan: Why not lean into the development sites that are already fully zoned versus ones getting more public pushback? On the fully zoned ones, what is the hang-up? Terry L. Nutt: On that slide we wanted to give a flavor of the team’s work across the board for well over a year. The ones you hear about publicly—like Montour—we continue to progress, but we have others not in the press that we are pushing forward as well. We wanted investors to understand the broader context. As we think about the hybrid approach—finding some new generation to add—we think that solution checks a lot of boxes for hyperscalers. It is not just zoning; it is also whether you have some new gen to go with it and what existing gen you have on the back of it. Mac McFarland: I do not think there is a hang-up. We are developing a set of options and they all have different statuses as they move through the process. Sometimes one site that has not reached zoning might advance faster because it is preferred by a counterparty at that stage. Others are more zoned and come in. We are bringing along all of these options; Montour is not the only thing in our development pipeline. Michael P. Sullivan: On pricing action, things have moved a lot in the last couple weeks in a shoulder season. What is driving that? And on basis, it seems like it is still going the wrong direction. Terry L. Nutt: One of the things you are seeing is when cash market activity in real-time gets constrained and tight, the term market responds. In late January and early February, there was a significant pricing event for eight or nine days. The market reacted. More recently, during spring outages—when you have a traditional large set of outages—even modest weather can drive price volatility and cash pickup, and the term market feeds off that. Christopher E. Morice: The price appreciation is something we have been tracking and identifying for several quarters. We would highlight our current hedge percentages in the outer years—below our historical ranges—reflecting our conviction in those periods. Fundamental drivers in the cash market are manifesting through the curve over time. Operator: Your next question comes from the line of Agnieszka Storozynski with Seaport. Your line is now open. Agnieszka Storozynski: I wanted to talk about Ohio. You have owned Guernsey for quite some time, and there has been chatter around data centers in Ohio. We heard comments from AEP about dissatisfaction with load interconnection pace in PJM. We also saw behind-the-meter deals. You showed opportunities in Pennsylvania. Could you comment about Ohio, especially vis-à-vis Guernsey? Terry L. Nutt: We noted specific activity in Pennsylvania, but we have also been active in Ohio. We have talked to customers in and around the Guernsey site and across the broader state. We restructured the leadership team at the end of last year and put more focus on different parts of the market—Ohio is definitely one of them. It is a very established market in and around Columbus with several hubs, and we are pushing there as we are in Pennsylvania. Mac McFarland: We like Ohio. We have amassed over 4 gigawatts of gas fleet across there, including a plant in Indiana that serves Ohio. We did that for a reason. The fundamentals and price appreciation are attractive, and it does not have a negative West Hub basis. We are developing options in Ohio, as we are in Pennsylvania, but we are not going to get into specifics. Agnieszka Storozynski: On slide 12 and the Talen Energy Corporation flywheel, it was my understanding that after M&A the next step is monetization of assets. You show M&A as the first upside driver. Is it fair to assume we would first see monetization before another M&A transaction? Mac McFarland: There is nothing to the order of the items on the right-hand side; we kept consistency with prior presentations. In a perfect world, you would add assets, contract them, recycle capital, then add assets again. In reality, we make strategic actions consistent with the flywheel that can be lumpy. We are diligently working to increase our contracted energy margin—toward 50%—and looking at different opportunities. These things take time, and we feel like we have a good pipeline to get things done. Operator: Your next question comes from the line of William Appicelli with UBS. Your line is now open. William Appicelli: On the levelized cost of energy for new build, how wide is that spread—even for a CT—relative to current market conditions? Cole Muller: The gap is wide on a merchant basis for any new build. That is why we—and many others—will do new build supported by some kind of commitment, whether a bilateral contract with a hyperscaler or through the RVP and PJM. That gap has to be bridged for us to make a large commitment in an accretive manner. Current capacity clears are not sufficient to stimulate new build. Different technologies have different LCOE; combined cycles are most expensive but have more energy margin—tradeoffs. The gap is not a couple of bucks; it is pretty large. William Appicelli: Any concerns about a bifurcated market where new incremental megawatts are getting sufficient payment but existing generation is not? Mac McFarland: It is a concern raised broadly, but we do not share the same level of concern because we supported the RVP as a one-time action. The capacity cap was extended for 2029/2030 and 2030/2031—we supported that. It gives time to create and exercise the RVP. It is a valid topic, but we are comfortable with the path. William Appicelli: Lastly, on new gen options, would that include any repowerings or uprates of your existing assets? Terry L. Nutt: It does not. Operator: Your next question comes from the line of Julien Dumoulin-Smith with Jefferies. Your line is now open. Julien Dumoulin-Smith: Coming back to the ratepayer protection pledge from March—does that change anything about your approach to the RVP or strategy? Mac McFarland: The hyperscalers’ pledge to pay their fair share is noted, but there is still an open debate about what “fair share” is and how it is determined within PJM’s market constructs and jurisdictions across PJM, the states, and FERC. Implementation is working its way through. We still see the ability—because of speed to market—to contract through existing assets and to utilize the hybrid model to bring incremental generation for additionality and ratepayer protection. It will take time to evolve. Hyperscalers have not signed up to pay for everything—that is not how restructured markets work. Julien Dumoulin-Smith: As you talk about 500 megawatts to 1 gigawatt of new gen per site, are you thinking about tethering that new gen back to the one-plus gigawatt site opportunities? Mac McFarland: Yes, that is the concept in the hybrid model. We have multiple sites with 500 megawatts to 1 gigawatt potential each, and we recently submitted just over 2 gigawatts into PJM’s cluster. Tethered means pairing existing PPA-supported generation with new resources—batteries or CTs to solve the fifty-hour adequacy problem now, and CCGTs later when you need more energy coverage. You can put those on the back of existing PPAs and solve resource adequacy at a lower cost than immediately building CCGTs, which today can be $3 thousand to $4 thousand per kilowatt to build—far more than $500 per megawatt-day capacity revenues would cover. Julien Dumoulin-Smith: To bring it to conclusion, would an RVP award be the moment that could unlock contracting? Or a bilateral could come first? Terry L. Nutt: There are two paths: a direct offtake agreement with a hyperscaler or an RVP award. It will depend on which path comes first; both can support bringing new megawatts online. Operator: Your next question comes from the line of Nicholas Amicucci with Evercore. Your line is now open. Nicholas Amicucci: Happy Cinco de Mayo. A quick follow-up on Julian’s question: is it fair to say the new generation could be supported either by a long-term DC offtake agreement or the RVP? How do you frame capital deployment—Is RVP more of a fallback, or are economics competitive with a hyperscaler PPA? Mac McFarland: It is not a discrete choice between the two. We will participate in the RVP and in bilateral markets via the hybrid model. The RVP is a centralized, one-time backstop to address resource adequacy, while there is a parallel bilateral market to bring additionality. Bidders will have to decide their capacity and energy bids. CCGTs require a bigger capacity component and energy margin expectation, but we think there are least-cost solutions—batteries and CTs—that can come in under those costs. Nicholas Amicucci: On buybacks, you referenced a double-digit free cash flow yield. You did $100 million in Q1, with $1.9 billion remaining through 2028. Should we expect any acceleration to the Q1 pace, particularly as Cornerstone closes and leverage trends below target? Mac McFarland: When we have the opportunity and can exercise, we like to get in and buy the shares back. $100 million is part of the $2 billion allocation, and we plan to continue at scale over time. Cole Muller: Slide 12 breaks out the share repurchase impacts. To get there, we will be doing things at scale over time. We are committed. Operator: Our final question comes from the line of David Keith Arcaro with Morgan Stanley. Your line is now open. David Keith Arcaro: Could you give any color on what you are hearing from potential counterparties? Are they waiting for more clarity on the backstop procurement? Are there milestones—final PJM rules or running the procurement—that would accelerate contracting? Terry L. Nutt: It is a balance. There is pretty good consensus now on the reliability backstop; we are talking about details. Stakeholders, including customers, have gotten comfortable with that. Some discussions have moved more to the hybrid approach—bringing new generation and adding that to the solution mix. We do not think anything is hindering folks from transacting. Would they prefer 100% clarity? Yes. But they also have demand they need to meet for their customer base, so it is a little of both. Mac McFarland: We have been providing comments on the RVP, including not making it such an extended program. In stakeholder sessions over the last couple of days, PJM started to reformulate timing to be this fall, which we think is good. Anything that brings clarity helps. But capital plans at the hyperscalers are not slowing down. Clarity helps, but it is not necessary. Unfortunately, we are going to have to end it there. I do see that there are a couple more questions in the queue. Apologies to everybody we did not get to—we have run out of time. We appreciate you joining us today and your continued support of Talen Energy Corporation. In summary, we have a strong 2027–2028 outlook with multiple levers we can pull and further upside from spark spread expansion. We are also hopefully pulling back the curtain a bit to show that we are set up to execute on growth through our development pipeline and the opportunities we have been working on for some time. We are excited about that. We look forward to powering the future. Have a great day. Operator: Thank you for your participation in today’s conference. This does conclude the program. You may disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Lucid Group First Quarter 2026 Earnings Conference Call. Please be advised that today's conference call is being recorded. [Operator Instructions] I would now like to turn the conference over to your speaker for today, Nick Twork, Vice President of Communications. Please go ahead. Nick Twork: Thank you, and welcome to Lucid Group's First Quarter 2026 Earnings Call. Joining me today are Silvio Napoli, incoming CEO; Marc Winterhoff, our Interim CEO; and Taoufiq Boussaid, our CFO. Before handing the call over to Silvio, let me remind you that some of the statements on this call include forward-looking statements under the federal securities laws. These include, without limitation, statements regarding the future financial performance of the company, production and delivery volumes, vehicles and products, studios and service networks, financial and operating outlook and guidance, macroeconomic, geopolitical, policy and industry trends, tariffs and trade policy, company initiatives, leadership changes and other future events. These statements are based on various assumptions, whether or not identified in this communication and on the predictions and expectations of our management as of today. Actual events or results are difficult or impossible to predict and may differ due to a number of risks and uncertainties. We refer you to the cautionary language and the risk factors in our annual report on Form 10-K for the year ended December 31, 2025, subsequent quarterly reports on Form 10-Q, current reports on our Form 8-K and other SEC filings and the forward-looking statements on Page 2 of our quarterly earnings presentation available on the Investor Relations section of our website at ir.lucidmotors.com. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, except as required by law. In addition, management will make reference to non-GAAP financial measures during this call. A discussion of why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is available in our earnings press release issued earlier this afternoon as well as in the earnings presentation. With that, I'd like to turn the call over to Lucid's incoming CEO, Silvio Napoli. Silvio, please go ahead. Silvio Napoli: Thank you, Nick. Good morning, everyone, and thank you for joining. This is my first earnings call with Lucid and as already had the opportunity to share with many of you, I'm extremely pleased to be here and part of the Lucid team. With not even a month with the company, I'm still at a very early stage, so I'll keep my remarks brief. Let me start by reiterating why I'm here. Lucid brings together state-of-the-art technology, a premium product platform and a unique opportunity to build a strong, enduring position in a transforming industry. And that combination is compelling. That is the reason that brought me here. Today, 3 weeks into the journey, I'm even more convinced that this is the case. In my first days, I've had the opportunity to meet with our teams in Newark, our headquarters and in some of our key markets. In fact, on the very first day, I traveled to visit a factory in Arizona, the heart of Lucid. Last week, I traveled to Saudi Arabia to witness a strong brand recognition in this fast-growing market and to see firsthand the progress of our new factory under construction. As you know, this manufacturing center is an essential part of our commitment to drive scale, profitability and to position Lucid on the world stage. While there, I've also been meeting with employees, shareholders and with local stakeholders. And everywhere I go, I'm focused on listening and beginning to understand where we are strongest and where we need to improve. And what stands out immediately is the incredible domain competence and outstanding motivation of the Lucid team and the strength of our product. At the same time, it's clear that realizing Lucid's full potential will require sharper focus and consistent execution, particularly around simplification, prioritization and speed. My near-term priorities are straightforward: recenter all our activities around our customers, ensure the organization operates with clarity and accountability, focus resources on the highest impact areas and embed a stronger culture of cost and capital discipline across the business. A central objective over time is to build a more self-sufficient company, one that progresses towards funding its own growth. And that means being rigorous in delivering on our commitments and how we allocate capital to few vital priorities. In simple words, this means making clear choices on where to invest and just as important, where not to. At the risk of stating the obvious, I'm not in the position to comment on results reached prior to my joining. Accordingly, I trust you will understand that today I will not comment on any specifics, including the outlook. My goal over the coming weeks is to deepen my understanding of the business so I can engage more fully with you in the future discussions. With that, I'll turn the call over to the team to walk you through the Q1 results. Thank you. Marc Winterhoff: Thank you, Silvio, and good afternoon, everyone. Let me start with the key takeaways. We expanded our Uber partnership to at least 35,000 vehicles, raised over $1 billion in new capital and ended the quarter with a clear cost reduction program underway. The foundation is solid, and we are building on it. We have made meaningful progress on each of these fronts. Among the highlights. First, we expanded our partnership with Uber to provide a minimum of 35,000 robotaxis, up from 20,000 previously announced and increased their investment to $500 million, up from $300 million, improving our visibility into long-term demand and revenue in a new and growing market. Further reflecting the strengthening relationship between our companies, Sachin Kansal, Chief Product Officer at Uber, has been nominated for election to Lucid's Board of Directors. Second, we significantly strengthened our financial position, raising approximately $1.05 billion, including $550 million investment from the Public Investment Fund through a private placement, reaffirming their continued support and long-term commitment to Lucid. We maintained approximately $2 billion of undrawn commitment under the DDTL after drawing $500 million of cash in April, further enhancing our financial flexibility. Pro forma for the capital raise and the DDTL increase, liquidity at quarter end would have been $4.7 billion, providing ample flexibility to continue to support development of our Midsize platform and the continued build-out of M2. Third, we continue to execute to deliver scale and profitability, delivering $282 million in revenue. Despite the unforeseen geopolitical tensions and logistical obstacles in the region during Q1, our M2 construction never stopped, and we continue to install capital equipment and work towards start of production. The plan remains to ramp up Midsize vehicle production in 2027, and we launched an aggressive cost reduction program targeting cost savings across all areas of the organization in all geographies. Let me walk you through the key updates of the execution of our strategy in detail. Following the framework we laid out at our recent Investor Day, the Lucid Air and Gravity continue to anchor our near-term growth. And our focus here remains execution, quality, delivery and customer experience. Operationally, we produced 5,500 vehicles in Q1, up 149% year-over-year. Despite a temporary disruption, which elevated costs, we exited the quarter trending back toward our cost targets. We delivered 3,093 vehicles, which was flat compared to Q1 2025. When Gravity deliveries were temporarily impacted by a supplier issue, we acted quickly, resolved it and resumed deliveries with additional quality controls. As deliveries resumed, we saw improving momentum through the quarter, including the highest March deliveries in Lucid history, up 14% year-over-year. We also experienced a strong rebound in order intake, up 144% in North America in March from February, with Gravity driving the majority of demand. In March, we regained our position among the best-selling EVs in our segments. We also continue to make progress on our partnerships for our international distribution, including the official launch of our first retail partnership in Europe, which allows us to scale more quickly in a capital-efficient way. We expect the delivery trajectory to improve through the year. Near-term demand signals are mixed, but we see tailwinds building into the second half. Apart from seasonality, which historically drives greater deliveries in second half, there are numerous other factors which may deliver a lift, including high gas prices, which tilt demand towards vehicles with more attractive operating costs, competitive dynamics, including exits from the Air and Gravity segments, lease cycles, Lucid software updates, potential tariffs on European imports and potential improvements in macroeconomic and geopolitical conditions. As a result, we continue to expect a back-end weighted delivery profile for 2026, but are confident in the long-term trajectory of demand. Our priority now is consistent and predictable conversion of production into deliveries. Central to our framework to scale and drive profitable growth is the Midsize platform. The Midsize platform brings Lucid's signature range, efficiency and driving experience to a much larger TAM and broader set of customers and is key to unlocking scale, affordability and improved unit economics. At our recent Investor Day, we provided a clearer view of the future product portfolio with the expected pricing starting below $50,000, reinforcing Lucid's entry into a more accessible segment of the market. I'm pleased to be able to share that our BOM cost position remains favorable, still tracking below our initial cost estimates. During the quarter, construction on M2 and installation of capital equipment continued, and we remain on track for production ramp-up of the Midsize in 2027. Turning to our third priority, autonomy. In mid-April, we announced the expansion of our partnerships with Uber, increasing their total investment to $500 million and expanding the planned deployment to at least 35,000 robotaxi vehicles. This represents a meaningful increase in both scale and long-term visibility for the program, which generates a new revenue stream through a partnership approach that enables rapid speed to market in a new and rapidly growing market with minimal CapEx. I'm excited to share that we have met all milestones so far in our joint project with Nuro to provide autonomous Lucid Gravities to Uber for commercial launch by the end of the year, and remaining milestones are on track. We delivered 75 engineering vehicles and testing and mileage accumulation is ongoing in several cities throughout the U.S. Starting in mid-April, Uber and Nuro employees are now able to test the end-to-end customer experience, including ordering a robotaxi within the Uber app and choosing from select destinations for drop-off. Our partners at Nuro have also received approval from the California DMV for driverless testing of the Lucid Gravity in the state, making it one of the only a handful of vehicles that have received such approval. This is a key step in paving the way for launching commercial autonomous operations later this year. Looking forward, we are targeting the following milestones as we track toward commercial robotaxi operations in late 2026. This quarter, Lucid will start our production validation builds, which are intended to reflect our production intent design and some of the key robotaxi features like exterior beaconing for customers, interior cameras and consumer interfaces. This build is expected to be completed in Q3 and allows us to begin more comprehensive end-to-end testing with our partners as well as homologation testing and validation. And following the completion of testing in Q3, we anticipate starting regular production of robotaxi vehicles for commercial sale in early Q4 at M1. As you can see, we are well on our way to achieving our goals with our robotaxi program and commercial launch is on track for late 2026. In parallel, we continue to expand advanced driver assistance features across our consumer vehicles. Over time, we expect these features to become an increasingly important source of recurring revenue with subscription-based offerings being launched starting in 2027. In closing, Q1 highlighted areas where we still need to improve execution, and we are taking clear actions to address them. I'd like to close with a few personal words. It has been a privilege to serve as Interim CEO. We delivered 2 years of consecutive record quarters when it comes to deliveries until the end of 2025. We ramped the Gravity throughout 2025, resulting in a production increase of about 100% last year. We've navigated real headwinds and the team's ability to keep moving through them is something I'm proud of. We sharpened and expanded our strategy with a clear and capital-efficient approach to provide leading autonomy solutions, both for robotaxis and personally owned vehicles. We made meaningful progress across our partnerships, including expanded commitments from both PIF and Uber. I'm confident in this team and Silvio's leadership and in where Lucid is headed. And I'm looking forward to continue to contribute as Chief Operating Officer. With that, let me hand over to Taoufiq. Taoufiq Boussaid: Thank you, Marc. I will walk you through the financial results for the quarter, the structural drivers behind them and how recent actions position us to execute against the framework we laid out at the Investor Day. Q1 was disrupted by a temporary stop sale, but the underlying business held and in March, orders and deliveries rebounded. With roughly similar units delivered and lower regulatory credit sales, revenue grew by approximately 20% year-over-year to $282 million in Q1, driven primarily by mix and pricing effects from Gravity. Let me give you the context that makes this number more useful for thinking about Q2 and the rest of the year. We produced 5,500 vehicles in the quarter but delivered 3,093. This gap reflects a combination of the impact of the temporary Gravity stop sale during which finished vehicles sat in inventory pending validation rather than converting to revenue and segment contraction. A key highlight of the quarter was Uber's expanded vehicle commitment and increased investment in Lucid. It matters for 3 reasons. It improves long-term revenue visibility. It derisks the volume ramp into the Midsize era, and it validates our vehicle platform as the reference point for commercial autonomy deployment. This is a durable addition to the capital structure and to the revenue outlook, not a onetime transaction. Gross margin for the quarter was negative 110.4% versus negative 80.7% in Q4 and negative 97.2% in Q1 a year ago. I want to be precise about the walk because the composition matters more than the headline. Three factors drove the sequential decline, lower delivery volume against a largely fixed manufacturing cost base, underabsorption of fixed cost and large regulatory credit revenue in Q4 that didn't repeat in Q1. Partially offsetting these were IEEPA tariff refunds and the lower inventory write-down versus the prior quarter. These costs were tied directly to the stop sale. With that resolved, they don't carry forward. What remains and what we are focused on is the structural trajectory, which includes, as shared at Investor Day, an average of 50% to 60% reduction in unit cost over the coming years. While we saw unit cost spike during the quarter driven by temporary disruption, it trended back towards the targeted trajectory in March. As volume scale into the second half and with the launch of the Midsize vehicle platform, we expect continued structural improvement in unit economics. I want to be clear, the underlying midterm trajectory of unit cost improvement that we described at Investor Day remains intact, and Q1 does not alter it. Turning to operating expenses. This totaled approximately $678 million for the quarter. R&D was $336 million, down sequentially from $361 million, reflecting program level sequencing even as we continue to fund the Midsize platform and our autonomy stack. SG&A increased $22 million sequentially to $304 million, primarily driven by discrete items, including a prior quarter provision reversal. Excluding these items, underlying SG&A was broadly stable. Year-over-year, SG&A increased $92 million with the comparison impacted by a $35 million noncash benefit in the prior year related to the reversal of stock-based compensation. These numbers also don't yet capture the $500 million in savings expected from our recently announced headcount actions over the next 3 years with the near-term impact most significant. Taken together, our posture on operating expenses is straightforward: protect the investments that build long-term competitive advantage, Midsize, autonomy, software and drive discipline everywhere else. Net loss for the quarter was approximately $1 billion compared to $366 million in the first quarter of 2025. The increase reflects the gross margin dynamics we discussed, continued investment in the business, particularly the Midsize platform and higher SG&A with the year-over-year comparison impacted by a discrete benefit in the prior year. Importantly, a significant portion of the year-over-year change is driven by noncash and nonoperating items, including a $274 million unfavorable change in the fair value of derivative liabilities related to movements in our stock price as well as lower interest income and higher interest expense. And as mentioned, it does not reflect the benefits of our recent headcount actions no more recently launched cost takeout initiatives. Net loss in any quarter reflects noncash and nonoperating items that move significantly with our stock price. The operating loss and cash consumption metrics give a cleaner read on trajectory. Our focus remains on improving operating leverage as we scale volumes and continue to drive cost discipline across the business. Turning to liquidity and capital structure. We ended the quarter with approximately $700 million in cash and cash equivalents and total liquidity of approximately $3.2 billion. Subsequent to quarter end, we executed a series of transactions that strengthened our balance sheet, $200 million of equity investment of common stock from Uber, $300 million from a registered common stock offering and $550 million in convertible preferred stock from PIF. In addition, PIF and Lucid announced an amendment to our delayed draw term loan, providing greater flexibility and approximately $2 billion of available liquidity following a $500 million draw on April 1. Giving effect to the capital raise and DDTL increase, total liquidity would have been approximately $4.7 billion at quarter end. This extends our operating runway into the second half of 2027 and gives us the flexibility to fund Gravity ramp, M2 construction and launch preparation and continued investment in the Midsize program and autonomy stack. On the question of dilution, which I know is on investor minds, the recent financing was structured deliberately to balance liquidity needs against dilution considerations. The convertible preferred structure with PIF reflects that balance as does the sizing of the common equity component. We will continue to evaluate all financing options, including the public markets when the appropriate conditions materialize. And our bias is toward disciplined capital deployment and with opportunistic raises. The strategic stockholder base around this company, anchored by PIF and now meaningfully reinforced by Uber gives us a structural advantage in how we think about capital over the medium term. Now on working capital and inventory. We also expect to see benefits to cash flow driven by improvements to working capital. Inventory stood at approximately $1.47 billion at quarter end, up from approximately $1.1 billion at the prior quarter and elevated by the stop sale buildup. As deliveries normalize through the year and we draw down that inventory, you should expect a higher conversion into cash. Beyond the stop sell normalization, we are tightening production to delivery alignment as an ongoing operating discipline. The new production reporting methodology, which I will cover in a moment, supports that by improving transparency on the conversion step. We took over $200 million in inventory impairments in Q1. Going forward, we expect those to decline. And as inventory reduces through the year, we expect to benefit from impairment releases. Now I mentioned our new production reporting methodology. I want to take a moment on this change to how we report production. Starting this quarter, we are moving our production metric to a process complete definition, meaning we count a vehicle once it has completed the factory gating process, regardless of whether it ships as a complete unit or in a semi-knockdown form. This change better reflects true quarterly production and reduces the volatility that the prior methodology introduced due to shipment logistics. It has no impact on inventory or days on hand reporting, both of which remain based on finished deliverable vehicles. The effect for investors is greater comparability with peers and a cleaner signal on underlying operational cadence. Under the new methodology, the normal auto industry seasonality, Q2 strongest based on working days, Q1 and Q4 softer due to holidays and planned shutdowns will appear more visibly in our reported numbers. Now let me address our outlook and guidance. With Silvio now on board and conducting his review of the business, we are suspending our prior guidance and we provide a full updated outlook at our Q2 earnings call. I want to be clear, this is a governance decision. Near-term demand conditions remain uneven, and we are managing our production cadence accordingly. Our 2026 objective is unchanged. We continue to work to closely align production with demand to avoid excess inventory. We are not constrained on capacity. We are constrained by our own discipline not to build inventory ahead of demand. As market conditions develop, we will scale production accordingly. We have launched a company-wide program to sharpen operational efficiency, reduce costs and concentrate capital on the highest-return opportunities. Q1 cash performance was affected by the stop sell action and the associated inventory reset, which we expect to normalize as we move forward. We are focused on restoring consistent cash generation and building a more durable operating foundation. Production of our first Midsize vehicle is expected to ramp throughout 2027. And our Lucid Gravity robotaxi program in partnership with Uber and Nuro remains on schedule for launch in late 2026. In closing, to put the quarter in perspective, we strengthened our balance sheet, expanded the strategic partnership that improves long-term visibility and are implementing reporting changes that improve transparency. A temporary stop sale in February was resolved, and we have taken action to address the root cause. The Investor Day framework holds. The path to profitability runs through scale from Midsize cost reduction through M2 and improved mix and operating leverage. Q1 does not change that trajectory. It reinforces the importance of disciplined execution, and that is where our focus is. The fundamentals of this business, the technology, the product and the strategic position we have built are intact. We are managing this period with discipline, and we intend to emerge from it in a stronger competitive position. With that, let me turn it over to the operator for your questions. Operator: We will now begin the question-and-answer session by taking questions submitted through the Say Technologies platform. Nick Twork: Our first question comes from [indiscernible]. How does management plan to restore shareholder confidence and address concerns about bankruptcy or potential take-private scenario? Marc Winterhoff: First, I want you to know that we hear your frustration and restoring your confidence is of our utmost importance to us. We are focused on rebuilding your confidence through disciplined execution, transparency and measurable progress against key operational and financial milestones. The business is moving from a period of heavy investment toward a phase where we can begin to leverage those assets at greater scale. We ended 2025 having scaled production, improved unit economics and maintained liquidity. And yes, we've been hit with an unforeseen operational disruption in Q1, which we solved and deliveries and orders have rebounded towards the end of the quarter. We are focused on translating operational progress into more predictable financial profile. To your specific concerns, we do not speculate on market rumors or hypothetical strategic alternatives. Our focus is on executing the plan we laid out, strengthening the company and creating long-term value for our shareholders. Nick Twork: All right. Our next question comes from Robbie S. When is Lucid going to turn a profit? What is the plan? Taoufiq Boussaid: At our Investor Day, we laid out a clear path to profitability. The target is gross margin breakeven in the midterm, building towards the mid-teens by late decade. And on cash flow, we expect to reach positive free cash flow on a similar horizon. The levers to get there are straightforward. It starts with improving fixed cost absorption as volume grow, continuing to bring down bill of material and manufacturing costs, scaling Gravity, launching the Midsize platform and developing higher-margin recurring revenue from software, ADAS and autonomy. On the Midsize platform specifically, this is a meaningful expansion of our addressable market. And importantly, it has been designed from day 1 with cost, scale and manufacturability at its core. Nick Twork: All right. The next question comes from Crystal M. Based on your current cash burn rate, how many quarters of runway does Lucid have without raising additional capital? And what specific milestones must be met before then to avoid dilution? Taoufiq Boussaid: Based on our current cash burn and the recent financing activities we have taken, including the capital raise and the extension of the DDTL, we have funding runway into the second half of 2027. That gives us adequate flexibility to support the Gravity ramp, progress M2 construction and continued targeted investments in both the Midsize platform and our autonomy software. During this period, our focus is on executing the operational milestones that moves us towards breakeven and reduce our reliance on dilutive capital. That means disciplined execution of the Gravity launch, continued manufacturing efficiency gains, measured advancement of M2 aligned with demand and sustained momentum on the Midsize program. At the same time, we are actively pursuing top line diversification through higher-margin software and services particularly around ADAS. On dilution, we are deliberate in how we approach capital raising. We have consistently favored structures that limit near-term dilution and preserve optionality. The use of preferred convertibles being a good example of managing both timing and impact. But ultimately, the strongest answer to dilution is accelerating our path to breakeven because this is what opens up a much broader range of financing alternatives. Nick Twork: That concludes the questions from the Say Technologies platform. Now I'll turn it over to the operator for live questions. Operator: [Operator Instructions] Our first question comes from the line of Michael Ward with Citigroup. Michael Ward: Can you share any volume targets for M2 for 2027? It sounds like it's going to be a gradual type launch throughout the year. And I'm just wondering if the launch is better than expected, does that liquidity take you into 2028? Marc Winterhoff: The targets on the volume, we actually revealed at the Investor Day, and they have not changed. They have not changed. No, no. We are really laser-focused on that ramp. Michael Ward: Okay. And then the second thing I would ask is, as it relates to the robotaxis, are the volume deliveries to Uber depending on them getting certified? Or is there some sort of a schedule for those volume numbers to start to accelerate? Marc Winterhoff: Well, it's basically actually Nuro getting the certification. As we just mentioned, we make very good... Michael Ward: Nuro? Marc Winterhoff: Yes, very good progress on that. So we are on track with this. I mean still we have to have final certification to be able to do this, for instance, when we start in the Bay Area here in California. But so far, even all the development and the certifications are moving as we expected. Operator: Our next question comes from the line of Andrew Percoco with Morgan Stanley. Andrew Percoco: Maybe if I can start out on the free cash flow expectations and just your general commentary around having sufficient liquidity through or at least until the second half of 2027. Can you just maybe help provide a little bit more context around what some of the underlying assumptions are within that? I understand that you guys are pulling the delivery guidance for the year for some governance reasons, but there's anything you can kind of provide in terms of what your underlying assumptions are around demand, that would be super helpful. Taoufiq Boussaid: Andrew, I think that the first answer to your question is that you need to recall that there is a typical seasonality in the company and that we see a significantly improved cash flows during or on the back end of the year. So we shouldn't do any read-through of the cash performance as of Q1 because of 2 specific events. The first one is the stop sales, so which has led to higher cash burn, and we are saying that we will be recovering that. And the second element that you need to take into account is the typical seasonality with a step-up in the sales towards Q3 and Q4, which is helping us to manage the cash burn. So we haven't guided specifically for the cash burn. We have guided for the runway. The statement still remains unchanged. So we will be providing more visibility on that when we reaffirm the guidance in Q2. Andrew Percoco: Okay. Understood. And maybe just my follow-up is just around the commodity cost environment. A lot of your OEM peers are continuing to highlight some pressures there this year and into next year. Can you just maybe provide an update in terms of what you're seeing? I think you guys in the past have said that you've at least hedged or contracted out some of that commodity exposure. But to what extent are you seeing any kind of incremental pressure there? And might that impact that path to profitability? Marc Winterhoff: Actually, right now, that is very limited. I mean yes, there have been increases over the last couple of months on certain raw materials like aluminum. But very recently, for instance, we haven't actually seen an increase. And the other topic is the DRAM, which hits the whole industry. But even that, I mean, is compared to the rest of the BOM cost of the vehicle, a small amount. So we don't see a major impact compared to where we ended end of last year right now. Operator: Our next question comes from the line of Ben Kallo with Baird. Ben Kallo: Just maybe the first one, could you maybe talk more about the sales partnerships, which I guess will be very important, especially as you introduce the Midsize vehicle. You mentioned one in Europe. Marc Winterhoff: Yes. I mean what we're doing there is we're basically extending our approach there from a pure direct-to-consumer model into also partnering either with dealerships in an agency model, for instance, within Germany, so in areas where we already have a D2C network or with importers in new markets that we are entering right now. And we are in the midst of all this process and recently launched the first agent in addition to our D2C outlets in Germany, which gives one day to the other 2 additional cities to cover. And we have numerous LOIs. I think the recent number is like 12 LOIs that are -- we're pushing forward and hopefully get to a contract situation and launch very soon. But it allows us to much faster grow within the areas and the countries we are already in, for instance, in Germany or in the Netherlands or expand into new countries through an importership where you then use existing infrastructure and existing business relationships of those importers to scale much faster. Ben Kallo: Great. And then just on the review, Silvio's review, could you maybe talk, if possible, just about the timing or when we should expect another update? Or is there not a lot of certainty in that for now? Silvio Napoli: Thank you, Ben. I think at the moment, I'm getting to the position. I would say, as of Q2, we should start somehow getting a sense of where we are. Now in terms of by when I'll be ready to give a plan, et cetera, this, I think, is something I'll discuss with the Board at the earliest opportunity. Operator: Our next question comes from the line of Andres Sheppard with Cantor Fitzgerald. Andres Sheppard-Slinger: Congratulations on the quarter and just wanted to maybe take a brief moment to thank Marc and congratulate him on all his great efforts over the past 2 years. First question, I just wanted to clarify on the guidance. So just to be clear, you'll give us an update in Q2 regarding the production guidance as well as the CapEx guidance. But just to be clear as well, the Midsize timing, robotaxi timing and also the medium-term goals, those are all on track and unchanged. Just wanted to clarify. Marc Winterhoff: On the Midsize, this is also what we guided before. So that is also subject to the suspension right now. But I think what is important to understand is that what really counts is the ramp-up in 2027, and that's what remains unchanged. As I said in the beginning, the volumes that we're looking at is unchanged. On the start of production, that's something that we will guide after review with Silvio and the team then by the end of Q2. I also want to point out that when we talk about the start of production, that is less impactful actually than the ramp. I mean we've seen this, you probably remember with the Gravity where we had an SOP, but then we weren't able to ramp as we intended to. And that is something that we definitely absolutely want to avoid, and that's why we want to review everything and make the right decision for the business. Andres Sheppard-Slinger: Wonderful. Okay. That's super helpful. And maybe just as a quick follow-up. I wanted to touch again on the second production facility, the one in Saudi. Just given the geopolitical conflict still going on, do you foresee any bottlenecks or any issues to the time line for the construction there? Or is that on track? Just any update there would be helpful. Marc Winterhoff: Well, so far, I mean, it is going and we have never stopped doing it. I mean we had a few delays when it comes to arrival of equipment to be installed, but our team was able to mitigate that. And so yes, on that as well, we will update at the end of Q2. But so far, we haven't seen any impact. Operator: [Operator Instructions] Our next question comes from the line of James Picariello with BNP Paribas. Thomas Scholl: This is Jake on for James. First, could you give us some idea of the split between the Gravity and Air deliveries in the first quarter? And approximately how many units were pushed from the first quarter into the second by the stop sale? Marc Winterhoff: I mean as we said in the past, so the majority of our deliveries are now the Gravity. We don't give a direct projection on that. I mean on the average selling price, you maybe can reverse engineer the math somehow. When it comes to how many sales are being pushed into the second quarter, that's actually a number that I don't have handy right now. I mean the numbers of deliveries and orders rebounded in March significantly. But that exact number, I don't have handy. Thomas Scholl: All right. And then thinking a little bit longer term, you guys are targeting breakeven free cash by the end of the decade. Right now, your $4.7 billion in liquidity gets you into the second half of 2027. Is there any way to think about your total liquidity need to get from the second half of 2027 until 2029 or 2030? Taoufiq Boussaid: James, you asked us the same question during the Investor Day. I understand that it's a very important point for you. So again, the key data points that we have. So we have a trajectory of how we will be rebuilding the gross margin and how we'll be progressing over the years. So it's a very important data point for you to assess. We have also communicated the details around the different levers for us to reach the breakeven and the rough timing to get there. I think that our historical and future delivery of the key milestones will allow you to do a calibration of what it would mean, and it will help you estimate the additional capital requirement, which is required. Having said that, I would like to reemphasize 2 very important points. So what we have said is that the important component of the cash burn is related to the CapEx in M2. So we have also shared our trajectory in terms of CapEx reduction. We will have a steep decline after 2027. And as a consequence of that, we will see a significant reduction of the cash requirements that will be needed for the plan. So over time, the cash burn profile in itself will have to change and evolve. So again, I'm sharing some of the important data points. We have not historically been in a position to provide the exact quantification. We obviously have a plan. What is really important is the milestones and how we're executing against some of these important targets, milestones, be it in gross margin, be it in terms of reducing the CapEx and accelerating the trajectory to the breakeven. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. That concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the AMD First Quarter 2026 Conference Call. [Operator Instructions] And please note that this conference is being recorded. I will now turn the conference over to Matt Ramsay, Vice President of Financial Strategy and IR. Thank you, Matt. You may begin. Matthew Ramsay: Thank you, and welcome to AMD's First Quarter 2026 Financial Results Conference Call. By now, you should have had the opportunity to review a copy of our earnings press release and the accompanying slides. If you have not had a chance to review these materials, they can be found on the Investor Relations page of amd.com. We will refer primarily to non-GAAP financial measures during today's call. The full non-GAAP to GAAP reconciliations are available in today's press release and slides posted on our website. Participants on today's conference call are Dr. Lisa Su, our Chair and CEO; and Jean Hu, Executive Vice President, CFO and Treasurer. This is a live call and will be replayed via webcast on our website. Before we begin the call, I would like to note that Jean Hu will present at the Bank of America Global TMT Conference on Tuesday, June 2 in San Francisco. Today's discussion contains forward-looking statements based on current beliefs, assumptions and expectations, speak only as of today and as such, involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to our cautionary statement in our press release for more information on factors that could cause actual results to differ materially. With that, I will hand the call over to Lisa. Lisa Su: Thank you, Matt, and good afternoon to all those listening in today. We delivered an outstanding start to the year driven by accelerating demand for AI infrastructure across our portfolio. Growth was broad-based with every segment increasing year-over-year, led by 57% data center revenue growth. First quarter revenue increased 38% year-over-year to $10.3 billion, earnings grew more than 40%, and free cash flow more than tripled to a record $2.6 billion, driven by significantly higher sales of EPYC CPUs, Instinct GPUs and Ryzen processors. These results mark a clear inflection in our growth trajectory and a structural shift in our business. Data center is now the primary driver of our revenue and earnings growth. And as AI adoption scales, demand is increasing, not only for accelerators, but also for the high-performance CPUs that power and orchestrate those workloads. Turning to our segments. Data Center revenue increased 57% year-over-year to a record $5.8 billion, led by strong demand for our EPYC CPUs and Instinct GPUs. In Server, we delivered our fourth consecutive quarter of record server CPU revenue. Revenue increased more than 50% year-over-year with sales to both Cloud and Enterprise customers each growing more than 50%. Share gains accelerated year-over-year, reflecting the ramp of fifth-gen EPYC Turin CPUs and continued strength of fourth-gen EPYC processors across a wide range of workloads. In Cloud, AI was the primary driver of growth in the quarter as every major cloud provider expanded their EPYC footprint to support a broad range of AI workloads from general purpose compute and data processing to head nodes for accelerators and emerging Agentic applications. EPYC-powered cloud instances increased nearly 50% year-over-year to more than 1,600 with instances optimized for virtually every enterprise workload and expanded availability across the largest global cloud providers. In Enterprise, demand accelerated with record revenue and record sell-through in the quarter. We expanded our customer base with new wins across financial services, health care, industrial and digital infrastructure companies, while also building momentum with mid-market and SMB customers. We are well positioned to continue gaining share as more enterprises standardize on EPYC across on-prem and hybrid environments based on our leadership performance and TCO. Looking ahead, our sixth-gen EPYC Venice processor built on our Zen 6 architecture and 2-nanometer process technology is designed to extend our leadership across cloud, enterprise and AI workloads. The Venice family spans a broad set of CPUs optimized for throughput, performance per watt and performance per dollar, including Verano, our first EPYC CPU purpose built for AI infrastructure. Across the portfolio, Venice widens our competitive advantage, delivering substantially higher performance per socket and per watt versus competitive x86 offerings and more than 2x throughput per socket versus leading ARM-based AI solutions. Customer demand is very strong with more customers validating and ramping platforms at this stage than with any prior EPYC generation, and we remain on track to launch Venice later this year. Looking more broadly, we are seeing a meaningful acceleration in customer demand driven by the rapid scaling of AI workloads across both Cloud and Enterprise. Inferencing and Agentic AI are increasing the need for server CPU compute as these workloads require additional CPU processing for orchestration, data movement and parallel execution in addition to serving as the head nodes for GPUs and accelerators. As a result, we are seeing both stronger near-term demand and deeper engagement with customers on long-term capacity planning. At our Financial Analyst Day in November, we outlined the server CPU market growing at approximately 18% annually over the next 3 to 5 years. Based on the demand signals we are seeing today and the structural increase in CPU compute requirements driven by Agentic AI, we now expect the server CPU TAM to grow at greater than 35% annually, reaching over $120 billion by 2030. In response to this demand, we are working closely with our supply chain partners to meaningfully increase our wafer and back-end capacities to support this growth. As a result, we now expect server CPU revenue to grow by more than 70% year-over-year in the second quarter, with robust growth continuing through the second half of 2026 and into 2027 as we ramp our next-generation EPYC processors. Now turning to our Data Center AI business. Revenue grew by a significant double-digit percentage year-over-year as adoption of Instinct accelerates across cloud, enterprise, sovereign and supercomputing customers. We're seeing strong momentum as customers move from pilots to large-scale production deployments, particularly in inference where our leadership memory capacity and bandwidth are key advantages. This momentum is driving deeper, long-term customer engagements, including large-scale multi-generation deployments. A key example is our expanded strategic partnership with Meta to deploy up to 6 gigawatts of AMD Instinct GPUs spanning several product generations. Our agreement includes a custom GPU accelerator based on our MI450 architecture, co-designed to support Meta's next-generation AI workloads. Shipments are on track to begin in the second half of the year, leveraging our Helios rack-scale architecture, which integrates Instinct GPUs with EPYC Venice CPUs to deliver fully optimized high-performance AI infrastructure. Together with our previously announced OpenAI partnership, these engagements position AMD as a core partner to the world's largest AI infrastructure builders with deep co-engineering relationships and multiyear visibility into large-scale deployments. More broadly, Instinct adoption continues to expand across AI native and enterprise customers for both training and inference workloads. Existing partners are expanding Instinct across a broader set of workloads, while a growing number of new partners are deploying production AI workloads on Instinct, highlighting the maturity of our hardware and software stack. On the software front, we continue to make strong progress with ROCm, improving performance, scalability and enabling customers to reach production faster. In our latest MLPerf results, MI355X delivered strong competitive performance across the full suite with leadership results in multiple categories. We also expanded day 0 support for the leading open models, including the latest Google Gemma 4 family, Qwen, Kimi and others, enabling customers to deploy new models quickly with optimized performance. To build on this momentum, we have significantly accelerated our ROCm development cadence through increased software investments and agent-based coding workflows, enabling faster performance improvements and more rapid deployment of new capabilities. Looking ahead, customer pull for Helios is very strong, driven by our leadership performance, memory bandwidth and scale out capacity. Helios development is progressing well with strong execution across silicon software and systems as we advance through key milestones. We have begun sampling MI450 series GPUs to lead customers and remain on track to ramp Helios production shipments in the second half of the year. As we approach production, demand for MI450 series GPUs continues to strengthen, with lead customer forecasts now exceeding our initial plans and a growing number of new customers engaging on large-scale deployments, including additional multi-gigawatt opportunities. With this expanded visibility, we have strong and increasing confidence in our ability to deliver tens of billions of dollars in annual Data Center AI revenue in 2027 and to exceed our long-term growth target of greater than 80% in the coming years. I look forward to sharing more on our next-generation Instinct GPUs, EPYC processors, Helios rack-scale platform and our growing customer engagements at our Advancing AI event in July. Turning to Client and Gaming. Segment revenue increased 23% year-over-year to $3.6 billion. In client, revenue grew 26% year-over-year to $2.9 billion, led by strong sales of our latest Ryzen processors and continued share gains across consumer and commercial markets. In desktop, we strengthened our Ryzen lineup, including our latest X3D processors that deliver leadership performance across gaming, content creation and professional workloads. We also introduced the Ryzen AI 400 series and Ryzen AI Pro 400 series desktop CPUs, expanding our AI PC offerings across both consumer and commercial systems. In Mobile, we delivered strong growth driven by a richer product mix as Ryzen 400 mobile PC shipments ramped and commercial adoption increased. Commercial was a key highlight in the quarter with sell-through of Ryzen Pro PCs increasing more than 50% year-over-year as Dell, HP and Lenovo broadened their AMD offerings. We also closed new enterprise wins across large technology, financial services, health care and aerospace customers. Looking ahead, we expect demand for our Ryzen CPUs to remain solid in the second quarter. However, we are planning for second half PC shipments to be lower due to higher memory and component costs. Against this backdrop, we still expect our client revenue to grow year-over-year and outperform the market, driven by the strength of our Ryzen portfolio and expanding commercial adoption. In Gaming, revenue increased 11% year-over-year to $720 million. Semi-custom revenue declined year-over-year as expected at this stage of the console cycle, while engagements with customers on next-generation platforms remain strong. In graphics, revenue increased year-over-year led by demand for our latest generation Radeon 9000 series GPUs. We also strengthened our Radeon portfolio with updates to our FSR software that improved performance and digital quality across a broad set of gaming workloads. Similar to the PC market, we believe that second half demand in gaming will be impacted by higher memory and component costs, and we are planning the business accordingly. Turning to our Embedded segment. Revenue increased 6% year-over-year to $873 million, driven by strength in test, measurement and emulation, aerospace and defense and communications as well as increased adoption of our embedded x86 products. Design win momentum grew by a double-digit percentage year-over-year with billions of dollars in new wins across markets, reflecting the continued expansion of our Embedded business from a primarily FPGA-focused portfolio to a broader set of adaptive embedded x86 and semi-custom solutions significantly expanding our TAM. Our semi-custom engagements also expanded in the quarter as data center, communications and other embedded customers leverage our broad IP portfolio and high-performance expertise to build differentiated solutions. In summary, our first quarter results mark a clear step-up in our growth trajectory with accelerating momentum across the business. Our client business continues to outperform the market, driven by Ryzen adoption and share gains, while in Embedded design win momentum and demand are strengthening across our expanded adaptive and x86 portfolio. At the same time, our Data Center business is inflecting with strong demand for both EPYC and Instinct products significant growth. While we are still in the early stages of the AI infrastructure cycle, the pace and scale of deployments we are seeing today reinforce both the magnitude and durability of the opportunity ahead. As inferencing and Agentic AI deployment scale, they are fundamentally increasing compute requirements, driving both larger scale accelerator deployments and significantly more CPU compute. AMD is uniquely positioned to lead in this next phase of AI with leadership products across high-performance service CPUs and AI accelerators and the ability to optimize them together as fully-integrated rack-scale solution. We have a world-class supply chain and are making significant investments to expand capacity and execute at scale. With the momentum we are seeing across the business and the expanding market opportunity, we see a clear path to exceed our long-term financial targets, including delivering more than $20 in EPS over the strategic time frame. Now I will turn the call over to Jean to provide additional color on our first quarter results. Jean? Jean Hu: Thank you, Lisa, and good afternoon, everyone. I'll start with a review of our first quarter financial results and then provide our current outlook for the second quarter of fiscal 2026. We are pleased with our outstanding first quarter results delivering accelerated revenue growth and earnings expansion driven by strong execution and operating leverage. First quarter revenue was $10.3 billion, exceeding the high end of our guidance, growing 38% year-over-year, driven by strong growth in the Data Center and Client and Gaming segments and the return to growth in the Embedded segment. Revenue was flat sequentially with continued growth in the Data Center segment, offset by seasonality in the Client and the Gaming segment and the Embedded segment. Gross margin was 55%, up 170 basis points versus a year ago, driven by a favorable product mix, including a higher data center revenue contribution. Operating expenses were $3.1 billion, an increase of 42% year-over-year as we continue to invest in R&D to support our AI roadmap and the long-term growth opportunities and go-to-market activities. As the business scales, operating income grew faster than topline revenue. Operating income was $2.5 billion, representing a 25% operating margin. Taxes, interest and other result in a net expense of approximately $275 million. For the quarter, diluted earnings per share was $1.37, up 43% year-over-year, underscoring the significant operating leverage in our model as we scale. Now turning to our reportable segment starting with the data center segment. Revenue was a record $5.8 billion, up 57% year-over-year and 7% sequentially, driven by strong demand for EPYC processors and the continued ramp of Instinct GPUs. Data Center segment operating income was $1.6 billion or 28% of revenue compared to $932 million or 25% a year ago. Client and Gaming segment revenue was $3.6 billion, up 23% year-over-year. On a sequential basis, revenue was down 9%, consistent with seasonality. The client business revenue was $2.9 billion, up 26% year-over-year, driven by strong demand for our latest Ryzen processors, favorable product mix and continued share gains across consumer and commercial markets. Sequentially, client revenue was down 7% due to seasonality. The Gaming business revenue was $720 million, up 11% year-over-year, primarily driven by higher demand for Radeon GPUs, partially offset by lower semi customer (sic) [ custom ] revenue. Sequentially, gaming revenue was down 15%, consistent with our expectations. In addition, as Lisa mentioned earlier, we expect second half demand in gaming to be impacted by higher memory and component costs. We now expect second half gaming revenue to decline more than 20% compared to the first half. Client and Gaming segment operating income was $575 million or 16% of revenue compared to $496 million or 17% a year ago. Embedded segment revenue was $873 million, up 6% year-over-year as demand strengthened across several end markets. Sequentially, Embedded revenue was seasonally down 8%. Embedded segment operating income was $338 million or 39% of revenue compared to $328 million or 40% a year ago. Turning to the balance sheet and the cash flow. During the quarter, we generated $3 billion in cash from continuing operations and a record $2.6 billion in free cash flow or 25% of revenue, demonstrating the cash-generating power of our business model. Inventory was roughly flat at $8 billion. At the end of the quarter, cash, cash equivalents and short-term investment was $12.3 billion. In the quarter, we repurchased 1.1 million shares and returned $221 million to shareholders. We ended the quarter with $9.2 billion authorization remaining under our share repurchase program. Now turning to our second quarter 2026 outlook. We expect revenue to be approximately $11.2 billion, plus or minus $300 million. At the middle of our guidance, revenue is expected to be up 46% year-over-year driven by a very strong growth in our Data Center segment, growth in our Client and Gaming segment and a double-digit growth in our Embedded segment. Sequentially, we expect revenue to be up approximately 9% driven by double-digit growth in both our Data Center and the Embedded segments and modest growth in our Client and Gaming segment. In addition, we expect second quarter non-GAAP gross margin to be approximately 56%, non-GAAP operating expenses to be approximately $3.3 billion, non-GAAP other income and expense to be a gain of approximately $60 million. Non-GAAP effective tax rate to be 13%, and the diluted share count is expected to be approximately 1.66 billion shares. In closing, the first quarter of 2026 was an outstanding quarter for AMD, reflecting strong momentum across the business with accelerated revenue and earnings expansion. We are very well positioned to build on the momentum as we scale our Data Center business, expand margins, drive continued earnings growth and the long-term shareholder value creation. With that, I'll turn it back to Matt for the Q&A session. Matthew Ramsay: Thank you, Jean. Operator, we're ready to start the Q&A session now. [Operator Instructions] Operator: [Operator Instructions] The first question comes from the line of Joshua Buchalter with TD Cowen. Joshua Buchalter: Congrats on the results. Actually, I'm going to start with CPUs, which hasn't happened in a bit. It hasn't been that long since you announced the $60 billion server CPU TAM for 2030 at the Analyst Day, and it's very quickly doubled. Agentic AI has obviously gotten a lot of attention in recent months, but it would be helpful to hear your thoughts on how this TAM is inflecting and changing so meaningfully in such a short amount of time. And maybe you could also speak to your confidence in hitting that greater than 50% share target from the Analyst Day as your x86 competitor seems to be improving its supply and also there seems to be more momentum on the merchant and custom ARM CPU side. Lisa Su: Yes. Sure, Josh. Thanks for the question. So first of all, back to the -- when we think about CPU TAM, I mean we've always said that CPUs are very critical part of data center infrastructure, and that's been where we've invested. And we saw the first signs of, let's call it, AI demand really pulling CPU demand last year, and that was the reason we updated the TAM to, let's call it, the 18% CAGR or approximately $60 billion. And what we've seen is all of the things that we believed in terms of Agentic AI and inferencing and all the CPU compute that is required, is just happening, and it's happening at a much faster pace. So over the last, let's call it, the last few months, as we've talked to our customers and we've seen how AI adoption is really unfolding, we're seeing significant more CPU demand from really every major cloud provider as well as enterprise customers. And the way that comes across is as AI adoption scales, you need more inferencing. As inferencing scales and you do more -- you have more agents and Agentic AI, they all require CPUs for all of the orchestration and the data processing and these other tasks. So with that, we've looked at it both bottoms up in terms of talking to customers and having them give us longer-term forecasts as well as just doing some clear workload analysis. And yes, I mean, it's a very exciting TAM. I think it's exciting to see CPUs growing greater than 35% to over $120 billion. And then when you think about AMD in the context of that, I mean, CPUs are critical for so many tasks that you are seeing a lot more discussion about CPUs in the market. But we actually view it in 3 categories, right? There's general purpose compute. There's the head nodes that really support the AI accelerators. And then there are CPUs just for all of the Agentic AI work. And to do all of this, our belief is you need a broad portfolio of CPUs, and that's really what we have been focused on is building not just one type, but really broader in terms of throughput optimized, power optimized, cost optimized, AI infrastructure optimized as we've done in the Venice family. So when you put all that together, we're very excited about the larger TAM, and we're also very happy with the traction that we're getting. We're clearly feeling like we're seeing significant share gain as we're going into our Turin portfolio that has ramped very nicely. Venice is extremely well positioned, and we're working with customers right now on -- beyond Venice and what we're doing in those architectures. So we feel really good about the market as well as our opportunity to grow to greater than 50% share of that market. Joshua Buchalter: I wanted to ask about the Instinct side. So in the press release, you mentioned that MI450 and Helios engagements are strengthening with customer forecast exceeding the expectations and the pipeline growing. You certainly have the big public OpenAI and Meta deals. Was this comment referring to those engagements upsizing versus the announced initial deployments? Or was it other customers and maybe the increase on the MI450 timeline? Or is it MI500 and beyond? Lisa Su: Sure, Josh. So we are very excited about MI450 and Helios. We're seeing significant customer interest in those products as well. So we have certainly talked about our large partnerships with OpenAI and Meta, and those are going really well. We appreciate the deep co-engineering that is going on there. When we look at the totality of, let's call it, based on our current visibility, how those forecasts are coming in with all of our customers, we're actually seeing it above our initial plans that we had planned for 2027. And I think the encouraging thing is we're seeing a breadth of customers who are now very interested in deploying at significant scale MI450 series. And those are for both training and inference workloads, although the largest deployments are for inference. And based on all of that and the scale of new customer interest, we see a path to really get to exceed our original targets of greater than 80% CAGR. And these are really 2027 time frame. Obviously, when we talk to customers, we're talking to them about MI355. There's a lot of good traction we're seeing there. MI450 and Helios, I think for significant large-scale deployments, and then many customers are also very engaged with us on the MI500 series and all of the opportunities there. So we feel like very, very good progress. And the key is that we're continuing to broaden and widen the scope of both customers as well as workloads. Operator: And the next question comes from the line of Thomas O'Malley with Barclays. Thomas O'Malley: Lisa, if I get your numbers correct here in the March quarter, it sounds like the server processor side of the CPU side grew over 50%. If you take it just at the word, it looks like maybe the data center GPU side actually grew in Q1. So I was curious around the cadence of this year kind of previously, you had talked about really a back half weighted and then kind of more so Q4 weighted year. Could you talk about if that's changed at all? And then the second part of the question is, as you go into 2027, clearly, you're pointing out a lot of upside from the larger customers and then kind of the ecosystem around them with new customers as well. But when you look at supply, that's a major issue in the ecosystem today, could you talk about where you're concerned on supply, if you are? And then any gating factors as you look into next year, whether that be power, data center build-outs, et cetera? Or do you feel really good about the ability to grow? Lisa Su: Yes. Okay. A lot of pieces of that question, Tom. So let me try to get through it. So first of all, on the Data Center segment in Q1, the Server business was greater than 50% year-over-year as we said in the prepared remarks. The Data Center AI was actually down modestly because of the China transition. We had more China revenue -- I'm sorry, sequentially more China revenue in Q4, and it was less in Q1. But as we go forward, I think we see strong growth in both segments. So we guided data center Q2, up sequentially double digits, and that's double digits in both Server as well as Data Center AI. And progression as we go forward. So first, on the server CPU side, we talked about growing to over 70% year-over-year in Q2, and that continuing into the second half of the year. And on the Data Center AI side, we will be ramping Helios in the second half of the year, so let's call it, starting with initial volume in Q3 with a significant ramp in Q4 and then continuing to ramp in Q1. So that's kind of a little bit of progression. And then to your questions about customers and supply, I think I answered, Josh, the customer question. I think we have very good visibility now into the deployments that are on track for 2027. And when I say good visibility, it's visibility down to which data centers are the GPU is going to be installed in. And so that's necessary just given all of the constraints out there. We feel that there is tightness in the supply chain, there's certainly tightness in sort of data center build-outs, but we are confident in our ability to supply to the levels of growth that we're talking about and to exceed the levels of growth that we're talking about. And we're also working very closely with our customers and our partners to ensure that we have good visibility to Data Center power. And there is much more power that's coming online in 2027. And so with all those things in mind, I think, again, lots of things to manage. It's a complex ramp, but we're very pleased with the progress on the ramp. Matthew Ramsay: All right, Tom, I think you shotgun approached the multiple questions there. So operator, maybe we can go on to the next caller, please. Thank you. Operator: The next question comes from the line of Ross Seymore with Deutsche Bank. Ross Seymore: The first one is just on the EPYC competition. Lisa, you went through some of the statistics of you versus x86 and you versus ARM, but I wanted to dive a little bit deeper into that. How do you see AMD truly differentiating, especially when you're signing -- well, you see some of your competition signing up the same customers from the ARM side and the x86 competition having more supply. So I just wanted to see if you could dig a little bit deeper into how you think the market share is going to trend over time? Lisa Su: Ross, look, we're very engaged with every major hyperscaler and in terms of understanding their needs on the CPU side. I think we have very much wanted to, let's call it, optimize our CPU roadmap for the various workloads. I think we were early to call this AI component of CPUs. And so we've been actually optimizing very closely with those customers. The way to think about this, Ross, is that you're going to need a broad portfolio of CPUs, like not all CPUs are the same. Frankly, you're going to need different CPUs for whether you're talking about general purpose operations or you're talking about head nodes or you're talking about Agentic AI tasks, they're going to be optimized differently. And we thought through that, and we are absolutely optimizing across the various workloads. So from a competitive standpoint, we feel very good about where things are. And from a deep relationship with the customer set, I think we feel very good about that. So from our current standpoint, I think the depth of our roadmap just expands as we go forward. And you shouldn't think about it as people are going to do one or the other. I think you're going to see people actually use x86 and ARM for many of the large hyperscalers. And even for those who are developing their own, they're still buying lots of CPUs in the merchant market for the reason that I just stated, which is unique different CPUs for the different types of workloads, and there's very high demand at the moment. Ross Seymore: I guess for my follow-up, maybe more for Jean on the gross margin side of things. It's nice to see the gross margin popping up in the second quarter guide. But I just wanted to get some trends longer term, maybe not specific numbers, but how should we think about when Helios and the Instinct side really ramps in the fourth quarter and more so next year. I could see some offsets with that carrying a below corporate average gross margin, but then everything that Lisa talked about with the EPYC side of things being significantly stronger might be more of an offset than it was in the past. So just walk us through the puts and takes of that and maybe directionally where you think gross margin goes over the next year or 2? Jean Hu: Yes, Ross, thanks for the question. We are very pleased with how our gross margin is trending. It came in really strong in Q1. And also, as you mentioned, we guided Q2 higher at 56%. I think as we think about the second half quarter-over-quarter, as you know, there are some puts and takes, right? I would just say, from a tailwind perspective, we actually have multiple tailwinds really are going to help our gross margin. First is the server CPU. Lisa talked about the server CPU expected to grow more than 70% in Q2 and continue to be really strong in second half. That really helps our gross margin. Secondly, in the second half for Gaming actually is going to come down, and our Client business actually continued to go up the stack. So from a Client and Gaming segment, the gross margin actually is going to be also very helpful. Embedded actually is very accretive to our gross margin. Its momentum actually is continuing in the second half. So we are really pleased with all the tailwinds we have. On the other side, MI450 will start to ramp in Q3 and then ramp significantly in Q4. That is below corporate average. So that will have different puts and takes in Q4 in the gross margin side. But when we sit here, when we look at all the positive trends we have to really offset some of the gross margin dilution from MI450 side, we actually feel really good about the setup of the gross margin for 2026. And into next year, I think some of the tailwinds I talked about that will actually continue. That's why we feel confident about continue to drive the gross margin. We actually, during our financial Analyst Day, we outlined the long-term gross margin in the range of 55% to 58%. We think for the first year, we are making good progress there. Operator: And the next question comes from the line of Timothy Arcuri with UBS. Timothy Arcuri: I wanted to ask about units versus ASP for server CPU. If I look at the June guidance, it sort of implies up 25% to 30% for server CPU. And Lisa, you had mentioned second half of the year. It sort of implies that server CPU could grow like 70%, maybe a little more this year. And so I guess my question is, how much of that growth either in June or for the year, is like units versus pricing? Is the -- are these price increases sort of mostly captured in June? Or is that also helping in the back half of the year? Lisa Su: Yes. Tim, the way I would say it is, maybe let me bring you back to Q1 for a moment. So if you look at our significant growth in the server business, it was actually -- although we were up on a year-over-year basis for both ASPs and units, it was actually much more unit driven. So we are shipping more CPUs across not just the high-end Turin family, but we're actually shipping a lot of Genoa sort of the Zen 4 family as well. As we go forward for Q2 and into the second half, we are guiding for a significant amount of growth. I think there's a little bit of ASP in there, but the way we're thinking about pricing, to be fair, is we are in a range where the supply chain is tight. And so there are some inflationary pressures. Costs have gone up a bit, and we are sharing some of that with our customers. But we are also being very thoughtful in -- look, this is -- we're playing out for the long term, and that means that we are -- our goal is to ship more units and a lot more units. And so from that standpoint, you should imagine that the majority of the growth is unit driven, and the ASPs are just really to help cover some of the inflationary pressures. Jean Hu: And just to add to what Lisa said, our ASP is increasing because of the mix where actually each new generation, the core counts, those are increasing, that actually drives the ASP up. Timothy Arcuri: And then I guess, Lisa also, so there's a lot of new architectures that are being used from multi-tenancy all the way to low latency. And your competitor has talked about the low latency part of the market being 20% plus and they, of course, added to their portfolio there. Can you talk about how you see that part of the market? I mean, obviously, you have enough business now you don't need to worry about that probably for now. But can you talk about that? Lisa Su: Yes, sure. So look, I think what we're seeing is what we expected in the sense that as you go -- as the AI adoption continues and the volumes continue to go up and the overall market goes up, you are going to see, let's call it, different compute architecture is being used because you want to get more cost optimization from that. So we expect that even in that situation, obviously, the vast majority of the TAM is still going to be, let's call it, data center GPUs as the primary accelerator. But you may choose to do optimization around inference, around low latency, around certain parts of the stack, whether it's decode versus prefill, I think that's very natural. The way we look at it is we're developing a full compute portfolio. So that's CPUs, that's GPUs, that's the ability to connect to all accelerators as well as the ability to do customization for certain customers, and we've also talked about our semi-custom capabilities. And with all of those sort of compute capabilities in our tool chest, I think we will be able to address, very effectively, a large portion of this market, including the low latency portion of the market. So from our standpoint, this is kind of a natural evolution. Now how fast it goes depends a bit on the technology in terms of what share of the TAM these things become, but we should expect that there will be different variants, and we're well prepared to address those different variants. Operator: And the next question comes from the line of Vivek Arya with Bank of America. Vivek Arya: Lisa, do you think Agentic CPU growth is incremental? Or is it coming at the expense of GPUs conceptually? So if you're raising server CPU TAM, are you also implicitly kind of raising AI TAM? So just I'm interested in your perspective on what did you think server CPU was as a percentage of AI TAM before? And what is it now with this $120 billion number? Lisa Su: Sure, Vivek. So the way we're thinking about is it's largely additive to the TAM. So you should think about we need all of the accelerators to run these foundational models, and then as these agents do work, they spawn more CPU tasks. So I would say largely incremental. The key is to make sure -- what we're seeing is in these deployments, the key is to make sure the ratio of CPUs to GPUs are the right ratio. So if you're installing a gigawatt of compute, the ratio -- there's a percentage of CPU as part of that gigawatt will increase. Some of the conversation in the industry has been about CPU to GPU ratios. And it's very hard to call exactly, but we certainly see the movement towards where in the past, the CPU to GPU ratio was primarily just as a host node in like a 1:4 or 1:8 configuration node, now changing and getting closer to a 1:1 configuration or even -- you can even imagine if you get lots and lots of agents that you could have more CPUs and GPUs. So -- but all in all, to answer your question, I think it's largely additive to the TAM. And the key is that everyone is now planning and thinking about CPUs at the same time that they're thinking about their accelerator deployments, which is a good thing. Vivek Arya: All right. And from my follow-up, Lisa, we continue to see memory prices go up. I imagine that is both kind of a cost inflation for you but perhaps an opportunity to take price as well. I'm curious, how is that dynamic playing out for AMD? And especially for your customers because a greater part of their CapEx increase is really kind of this memory inflation tax, right, that they have to pay. So how is this dynamic playing out for you and for your customers? And the part that I'm really interested in is that have you secured enough supply versus your other larger competitor who has disclosed a lot of prepayments and other things? So just how is this memory inflation dynamic playing out? And are you kind of adequately supplied from that perspective? Lisa Su: Sure. So Vivek, let me answer the second one first. I think from a supply standpoint, we are very happy with our partnerships with the memory vendors, and we have secured enough supply to certainly meet and exceed our targets. So it is a tight memory environment. Let me be clear. But I think we are very deep partnerships with the memory providers. And then back to your comments on the inflationary pressures. I mean, look, this is something that everyone in the industry is working with in the time of tight supply, we are seeing some cost increases on the memory side. I think we are all working through that. The way we're seeing it unfold in the market is actually on the Data Center side, because of the, let's call it, the demand for AI compute, I mean people are largely focused on supply and ensuring that the supply assurance is there. The corollary of that, the larger impact that we're watching is the impact on the consumer markets. And as we said in the prepared remarks, we are expecting that there could be some demand -- sort of the demand impact as a result of the memory price increases on things like the PC business in the second half of the year as well as the Gaming business. So we're taking that into account in our overall model. And we continue to work closely with the memory providers as well as our customers to ensure that every time we ship a CPU or GPU, then it's paired with the memory on the other side so that we don't have compute that is not being deployed. Operator: And the next question comes from the line of Aaron Rakers with Wells Fargo. Aaron Rakers: Congrats on the results. I want to stick on the topic of CPU to GPU. And as we think about the chart that you had outlined at the Analyst Day, there was obviously broken out between traditional CPUs and then the AI bucket on top of that. Obviously, I think the new forecast has a lot to do with the AI CPU expansion. I'm just curious, when you're doing a CPU in an AI workload, is there structurally a different level of ASP tied to that kind of CPU optimized for AI relative to a general purpose server CPU? Any kind of color or help on that would be useful. Lisa Su: Sure, Aaron. So let me start with the broader question. The broader question regarding -- the way we think about the CPU TAM is, again, think about it as 3 categories. So there is a traditional CPUs, let's call it, general purpose CPU TAM that is increasing, but let's call it, increasing at low rate, maybe, let's call it, low double digits, then you have your AI head node, which is connecting to accelerators, which is also growing, but it's smaller. And then the largest piece of the growth is this Agentic AI piece, which we think is really stemming from all of the Agentic processes. I don't have a number that I can tell you in terms of relative ASPs because it really depends on the workload that is being run. And what we see going forward is as core counts increase, obviously, we will see ASP increase. And that's the direction that we're going in as we go forward. But the main point is -- the largest portion of this is the Agentic AI, the CPUs that are serving these Agentic AI workloads in terms of the TAM increase. Aaron Rakers: And as a quick follow up, I'm curious, how do you characterize the competitive landscape as we see some of the ARM introductions in the market. Just curious of your views on the competitive landscape and server CPU. Lisa Su: Yes. Aaron, the best way to think about the server CPU landscape is, again, number one, everyone is talking about CPUs. So that tells you how critical they are for the AI infrastructure. And I think that's a good thing. We feel like we're very well positioned. No question, ARM is good architecture. It has a place in the Data Center market. We view it as more point products relative to a portfolio, where, from an AMD standpoint, we've built this broad portfolio of CPUs, going forward, what you're going to need for all of these different workloads. And we have, in the Venice time frame, added an AI-optimized CPU with the Verano in addition to our throughput optimized and sort of cost optimized point. So from that standpoint, I think we're very competitive. We're continuing to innovate on architecture. We're continuing to innovate on both advanced packaging as well as all of the architectural pieces. So we feel very well positioned going forward. And the key is the TAM is much, much larger than anybody thought. And so there's a lot of opportunity for different products to be successful in this area. Operator: And the next question comes from the line of C.J. Muse with Cantor Fitzgerald. Christopher Muse: I guess first question, I was hoping to speak a bit more about client for all of calendar '26. You talked about growth -- expected growth, but would love to hear your thoughts around seasonality in the second half. And I'm assuming that you are repurposing certain logic tiles from clients over to the Data Center and would love to kind of better understand what the implications are for ASPs on the client side looking into the second half. Lisa Su: Sure. So C.J. I think the client business has performed really well for us. I think if we look at Q1, it actually was a little bit stronger than what we expected. We are seeing some mix shift in the client business. The mix that we're seeing is the M&C or the Notebook business is actually growing, especially the premium portion. We're making very good progress in the commercial PC arena with our AI PCs. We did see desktops a little bit softer just given desktop is a more consumer-focused market. And so in that market, it's more impacted by some of the memory pricing and the component price increases. When we look at the full year, our commentary is we are planning for some demand impact in the second half due to the memory pricing. But even in that environment, what we're focused on is ensuring that we continue to make good progress on the Commercial business and continuing to focus on the premium segments of the market. So we believe that we will continue to grow on a year-over-year basis for the Client business compared to last year. And as it relates to ASPs, again, it's a little bit of puts and takes between Notebook and Desktop. But overall, I think we're feeling good about our opportunity to outperform the market and clients going forward. Does that answer? Christopher Muse: That was perfect. And then I guess a question on Instinct gross margins. With compute essentially sold out and obviously, you're building a business, so one has to be, I guess, conservative on that front. But I would think outside of kind of passing through HBM that given the very tight wafer environment that this would be a place where you could look to drive your Instinct margins closer to your corporate average? How are you thinking about that either today or in the coming 1, 2, 3 years? Jean Hu: C.J. at this stage, we really focus on driving the topline revenue growth on our Instinct family of product. I think on the gross margin side, you're absolutely right, it's really -- the demand for compute is tremendous. We actually are very strategic in how we think about the -- how we work with the customers. And of course, the different customers also have a different gross margin. I think, over time, once we start to ramp our revenue, we'll have a lot of opportunities to improve gross margin, both on the ASP side, but also, more importantly, on the cost side when we scale our business. Operator: And the next question comes from the line of Stacy Rasgon with Bernstein Research. Stacy Rasgon: For the first one, I just wanted to make sure I have the near-term AI GPU trajectory correct. So I know you said it was down sequentially in Q1 because of China. You had like $390 million of China revenue in Q4. So the AI business in Q1 actually grow sequentially ex China because it doesn't feel like it, given the server outlook? And then I look at what's maybe suggested for Q2, are you thinking GPUs and servers kind of grow similar rate sequentially because it would probably put GPUs in Q2 below the overall revenue in Q4, which seems low to me. I'm just trying to tie all that out. Could you help me with that, please? Jean Hu: Yes. So I think, Stacy, I appreciate the question. I think if you look at Q1, we did mention Data Center AI was down modest pace sequentially, primarily due to lower China revenue in the quarter. I think on your second question regarding Q2, you're right, both Data Center AI and the server will grow double digit in Q2. Stacy Rasgon: Yes. But you didn't answer my question. In Q1, did it grow sequentially ex the China step down, I guess, is what I'm asking. Jean Hu: The China, for our business, in Q1, it's not material. So I think I will repeat what I just said. Yes, the revenue -- the China revenue in Q1 is not material. Stacy Rasgon: Okay. Okay. So you don't want to -- okay. Second question, OpEx [indiscernible] for spending -- but it sort of continues to blow past the targets. You kind of give an OpEx guide and then it blows through it and then you guide higher. So again, I'm not bothered by this. I'm just wondering why is the OpEx been so hard to forecast? And how should we be thinking about OpEx through the rest of the year given the revenue growth? Jean Hu: Yes. Thanks, Stacy, for that question. I think the most important thing is given the tremendous market opportunities we have, we actually are investing aggressively. If you look at the past several quarters, we're really leaning in, in investing, but all the AI investments are driving the revenue momentum. So if you look at the Q1, revenue was 38% up, then Q2, we guided 46% up. The investments are driving the revenue momentum. Some of the OpEx increase, of course, is tied to the revenue. When you look at our beat on the revenue side versus our guidance, we did beat on the revenue side, right? So that impacted a little bit. But also, at the same time, we have a lot of customer engagement with our Data Center AI business, we do continue to make sure we have the resource to support our different customers. Matthew Ramsay: Thank you very much. Operator, I think we have time for one more caller on the call. Thank you. Operator: Our final question comes from the line of Blayne Curtis with Jefferies. Blayne Curtis: Lisa, I just want to go back to the supply side. There was a lot of story about your competitor restarting 7-nanometer. I'm just kind of curious as you look at that landscape which is quite robust through the end of the decade, do you think that the older products will stay around longer? And is there a way to think about the implications for gross margin in such a strong market. Is that actually a negative? Lisa Su: Actually, Blayne, I don't think we see the older products hanging around longer. In our case, I think it might be company-specific stuff. In our case, we actually see -- first of all, Turin is very strong. We actually crossed over 50% of our revenue being Turin this quarter. Genoa is very strong. We're still shipping some Milan, but I would say that's come down over time. So in general, people want to use the newer products because they're just more efficient in every aspect from performance, from cost structure, from a power standpoint. So that's what we're seeing. By the way, I should also mention, in addition to what we're seeing in the cloud segment of server, we're seeing really nice strong pickup in enterprise. And there as well, we're seeing our newer products do very well. So from our standpoint, it is all about ensuring that we ship what the customer needs. And in this case, it typically is our newer products, and we expect that to continue. As we transition into Venice later this year, we will expect Turin and Genoa to continue shipping, but there's a lot of goodness in going to the new products. And on the supply chain side, I know there's been a lot of discussion about how tight the supply chain is. The supply chain is tight. I would definitely say that. But I also think this is an area where we excel. We have very deep relationships across the supply chain on the wafer side, on the back end capacity side. And we are seeing meaningful improvements in that. And as our customers come to us with more demand, we are getting more supply. And the good thing about this is we're now talking about '27 CPU demand, we're talking about '28 CPU demand. And so that allows us to just plan much better as we go forward. Blayne Curtis: And then just a quick one for Jean. I'm just curious to follow up on Stacy's question on OpEx. I guess I was a little surprised that SG&A is kind of outpacing R&D. I was just kind of curious, is that start-up costs, because in a strong market, you wouldn't think you would have to discount or have a big sales effort. So I'm just kind of curious for the year, how you think about R&D growth versus SG&A? Jean Hu: I think for the year, you should expect us to grow R&D much faster than SG&A. I think in the past few quarters, we have been really building our go-to-market machine, and we have been investing more in sales and marketing side. But going forward, you should expect the year-over-year growth R&D will grow faster than SG&A growth. Lisa Su: Yes. And if I just add to that, Blayne, the places that we invest -- Jean is absolutely right. We're investing in R&D ahead of sales and marketing. But the places that we're investing in sales and marketing are paying off. So the investments are going into enterprise servers. They're going into commercial PCs. They're going into mid-market, small and medium business. These are places where AMD traditionally didn't invest, but now that we have a much broader portfolio, both on the server CPU and on the commercial PC side, it makes sense for us to invest because that's sort of the very best part of those markets. Matthew Ramsay: All right. Thank you very much, everybody, for joining and your interest in AMD. John, you can go ahead and close the call now. Thanks. Operator: Thank you. And ladies and gentlemen, that does conclude the question-and-answer session, and that also concludes today's teleconference. We thank you for your participation. Please disconnect your lines, and have a wonderful day.
Operator: Good day, everyone. Welcome to the NHI First Quarter 2026 Earnings Webcast and Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Dana Hambly. The floor is yours. Dana Hambly: Thank you, and welcome to the National Health Investors conference call to review results for the first quarter of 2026. On the call today are Eric Mendelsohn, President and CEO; Kevin Pascoe, Chief Investment Officer; John Spaid, Chief Financial Officer; and David Travis, Chief Accounting Officer. The results as well as notice of the accessibility of this conference call were released after the market closed yesterday in a press release that's been covered by the financial media. Any statements in this conference call which are not historical facts are forward-looking statements. NHI cautions investors that any forward-looking statement may involve risks or uncertainties and are not guarantees of future performance. All forward-looking statements represent NHI's judgment as of the date of this conference call. Investors are urged to carefully review various disclosures made by NHI and its periodic reports filed with the Securities and Exchange Commission, including the risk factors and other information disclosed in NHI's Form 10-K for the year ended December 31, 2025, and Form 10-Q for the quarter ended March 31, 2026. Copies of these filings are available on the SEC's website at sec.gov or on NHI's website at nhireit.com. In addition, certain terms used in this call are non-GAAP financial measures, reconciliations of which are provided in NHI's earnings release and related tables and schedules, which have been furnished on Form 8-K to the SEC. Listeners are encouraged to review those reconciliations provided in the earnings release together with all other information provided in that release. I'll now turn the call over to our CEO, Eric Mendelsohn. D. Mendelsohn: Good morning, and thank you for joining us today. NHI delivered a solid start to 2026 with first quarter results exceeding our internal expectations across NAREIT FFO, normalized FFO and FAD. These results reflect continued momentum across the portfolio and the benefits of the investments we've made over the past year, particularly within our SHOP portfolio, which continues to scale rapidly and contribute meaningful growth. At the same time, we're updating our full year guidance, which I want to address upfront. The primary driver of this change is the recently announced agreement to sell the NHC portfolio for $560 million. This transaction advances our capital recycling strategy, increases our concentration in private pay senior housing and enhances our balance sheet, providing significant liquidity to reinvest into higher growth opportunities. While we believe this is the right strategic decision for the long-term, the timing of the transaction and redeployment of capital creates near-term earnings pressure, as reflected in our updated guidance. From an operating standpoint, we continue to make progress expanding our SHOP platform. Invested capital through the first quarter increased more than 100% over the past year. Recent acquisitions and transition properties are performing well and in aggregate, are tracking ahead of our initial expectations. We also announced $107 million acquisition for 7 properties in Colorado last night. On a pro forma basis and including the pending NHC and other asset sales, our SHOP investment increases to approximately 24% of our total portfolio and over 15% of annualized NOI. We have now closed on investments of over $212 million in 2026. We expect to defer a significant portion of capital gains associated with the pending NHC asset sale, which has a basis of less than $15 million. Based on our active pipeline and other tax planning strategies, we expect to further mitigate these gains. While we have good overall SHOP momentum, the legacy Holiday same-store performance continues to be below our expectations. As a result, we've adjusted our full year same-store SHOP NOI growth to a range of 1% to 3%. This impacts our FFO per share guidance by less than 1%. The 11 non-same-store properties that we transitioned and acquired since the first quarter of last year contributed $4.3 million to NOI, representing 5.2% sequential growth from the fourth quarter of 2025. We believe these assets are more indicative of the underlying organic SHOP growth potential. The broader strategic outlook for NHI remains very compelling. We are confident that the steps we are taking today are the right ones to strengthen the company and enhance our long-term growth profile. We are actively reshaping the portfolio to increase our exposure to private pay senior housing, where we see the most attractive risk-adjusted returns. The pending NHC leased portfolio disposition accelerates that shift to approximately 80% of annualized NOI. Overall, the senior housing industry fundamentals present significant organic and external tailwinds. Demand is accelerating and new supply is stagnating. We are working on several initiatives to improve internal growth, and we continue to add depth to our asset management platform through experienced new hires and investments in technology to increase scale advantages. The pipeline is robust, and we remain disciplined in our underwriting and capital allocation. The capital recycling positions the pro forma balance sheet with leverage at less than 3x net debt to adjusted EBITDA, giving us substantial flexibility to pursue accretive acquisitions. Taken together, we believe these factors position NHI to deliver solid long-term FFO per share growth and create sustained value for stockholders. Before I turn the call over to Kevin, I want to say a few words about John Spaid, who recently announced that he will be starting his well-earned retirement on July 1. John joined NHI as employee #13 in 2016, answering my call to bring greater financial acumen in managing NHI's balance sheet and capital market relationships. His leadership has NHI well positioned with an excellent balance sheet and ample access to capital that should fuel our long-term growth strategy. On behalf of the entire NHI community and all of our stakeholders, I congratulate John on a great career and wish he and his wife many years of great golf, travel, fine dining and good living. Thank you, John. I'll now turn the call over to Kevin to discuss our business development and asset management activities. Kevin? Kevin Pascoe: Thank you, Eric. Beginning with business development. NHI is off to a strong start with announced year-to-date SHOP investments of $212.4 million. This includes a 7-property portfolio of assisted and independent living assets in Colorado, which we closed on May 1. The portfolio has 532 units, occupancy in the high 80% range and RevPOR of approximately $5,300. We expect an initial NOI yield for the first year of approximately 8.3% and 7.8% after routine CapEx. Properties are transitioning management to Generations, which is an existing lessee of ours in Colorado, and we have been looking for opportunities to grow with since our initial investment in 2025. We currently have $20.3 million under signed letters of intent and are evaluating an active pipeline valued at $560 million. We are also in discussions on multiple larger portfolio opportunities and have over $200 million in outstanding LOIs. This pipeline continues to give us confidence that we can meet or exceed last year's investment total. Our external growth strategy remains focused on private pay senior housing assets across both SHOP and triple net structures while maintaining flexibility for future SHOP transitions. Though pricing has tightened over the past year, deal volume has accelerated, and we believe we are well positioned given our excellent reputation in the industry, strong access to capital and ability to execute. As a part of our ongoing portfolio management efforts, we completed the disposition of 4 properties with 4 operators for net proceeds of approximately $53.4 million. In addition to the pending NHC transaction, we have 3 other properties under contract for disposition, representing approximately $58 million of expected net proceeds. Turning to our operating performance. Total SHOP NOI increased by 188.1% compared to the first quarter of 2025, driven by the transition and acquisition of 20 properties. Same-store NOI on the 15 legacy Holiday properties declined 2.4% year-over-year to $3 million and represents less than 4% of the company's annualized NOI. The first quarter NOI was in line with our expectations, but occupancy declined throughout the quarter, prompting the change to the full year growth outlook. While the financial impact is limited, we are not satisfied with the performance and are evaluating a range of strategic alternatives for these assets, and we'll provide further detail as decisions are finalized. The non-same-store portfolio, including the Colorado acquisition, now includes 27 properties. The estimated annualized NOI of approximately $33 million represents 73% of total SHOP NOI. As Eric noted, the non-same-store properties generated solid growth from the fourth quarter and our updated guidance reflects an increased contribution relative to our initial forecast. For these newer assets and future acquisitions, we continue to expect near-term NOI growth in the high single-digit to low double-digit range, supporting projected rates of return in the low to mid-teens. Across the triple net portfolio, we continue to see stable performance with no rent concessions and generally steady occupancy and EBITDARM coverage. Cash lease revenue increased approximately 7.7% year-over-year, driven primarily by acquisitions, NHC percentage rent and the annual percentage rent true-up as well as annual escalators. This was partially offset by the transition of 7 properties to SHOP on August 1. EBITDARM coverage improved across our major asset classes. For the 12 months ended December 31, 2025, senior housing and medical coverages, excluding NHC, were 1.61 and 2.53, respectively. Regarding Bickford, we reset the leases to fair market value on April 1. The new structure includes base rent of $38.4 million, which is approximately $3.2 million above the prior base rent and annual escalators of 2% to 3%. In addition, we will receive conditional rent based on a revenue-driven formula similar to the structure previously used for deferral collections. The pro forma EBITDARM coverage on the new base rent at December 31 was 1.55x. Given this elevated coverage, we expect total cash collections from Bickford, including base and conditional rent, to increase modestly under the new lease. The conditional rent component extends through the life of the lease and allows NHI to participate in the potential upside as performance continues to improve. That concludes my remarks, and I'll now turn the call over to John to discuss our financial results and guidance. John? John Spaid: Thank you, Kevin, and hello, everyone. This morning, I'll provide details on our first quarter results and update you on our financial outlook for 2026. I'll be using average diluted common shares for all per share results. For the quarter ended March 31, 2026, our net income per share was $0.82, an increase of 10.8% from the prior year's first quarter. Contributing to our strong Q1 performance was the accretive growth attributable to the $413 million in new investments the company placed in service since the beginning of the second quarter last year. Also contributing to the quarter was an above expectation prior year NHC percentage revenue rent true-up and a larger-than-expected improvement in first quarter NHC percentage revenue rent, which resulted in a $1.3 million higher cash rent for the quarter compared to our February guidance expectations. Also recall that in the prior year first quarter, we recognized $1.2 million in transaction expenses and $0.3 million for proxy contest expenses. Our NAREIT FFO and normalized FFO results per share for the first quarter compared to the prior year period increased 7.9% and 7%, respectively, to $1.23 per share. FAD for the first quarter compared to the prior year period increased 11.6% to $62.5 million. Interest expense for the first quarter was up 4.9% year-over-year due to higher average interest rates on the company's debt. Cash G&A for the first quarter was up 31% to $5.6 million compared to $4.3 million in the first quarter last year as the company continues to ramp its SHOP growth strategy. Weighted average common diluted shares were up 5.8% to 48.5 million shares as a result of the company's greater use of equity in lieu of debt to fund new investments over the last year. During the quarter, we closed on new investments totaling $105.5 million. And subsequent to the quarter's end, we announced an additional investment for $106.9 million in 7 senior housing SHOP properties with an existing operator. At March 31, 2026, we had remaining escrowed forward equity proceeds of approximately $44.2 million available to us in exchange for the future delivery of 643,000 common shares at an average price of $68.81 per share. We ended the quarter with $24.9 million in cash on our balance sheet and $391 million in revolver capacity. During the first quarter, we renewed our shelf registration statement on file with the SEC and concurrently entered into new equity ATM distribution agreements, bringing our ATM capacity back up to $500 million. Our balance sheet ended the first quarter in great shape. Our net debt to adjusted EBITDA was 4x for the quarter and at the midpoint of our 3.5x to 4.5x leverage policy. Our available liquidity, excluding the proceeds from future dispositions, was approximately $960 million attributable to the cash on the balance sheet, excess revolver, forward equity and additional ATM capacity. We have 2 debt maturities in 2026 and 2027 totaling $225 million and no other maturities until our revolver facility matures in 2028. Let me now turn to our dividend and guidance. As we announced last night, our Board of Directors declared a $0.92 per share dividend for stockholders of record June 30, 2026, and payable August 7, 2026. The company expects to offset the expected gains due to our announced dispositions, utilizing IRC Section 1031 like-kind exchanges, including reverse 1031 exchanges to the greatest extent possible. At this time, the company's final year-end 2026 taxable income and capital gains are not yet determinable and may not be fully determinable until the fourth quarter. Last night, we updated our 2026 full year guidance. We expect GAAP net income at the midpoint to be $14.37 per share, reflecting the significant gain associated with the pending NHC lease portfolio disposition. We expect NAREIT FFO and NFFO per share at the midpoint to be $4.77 per share or up 2.6% and down 2.9% compared to 2025, respectively. We expect total FAD at the midpoint to grow 4.1% to $242.2 million. Our full year 2026 guidance includes $180 million in additional future investments and an average NOI yield of 7.8%, comprised approximately 60% in SHOP investments, which we believe is a conservative assumption for the remainder of the year. The guidance includes $392 million in new announced and unidentified 2026 investments at an average NOI yield of 8%. The guidance includes the impacts associated with our recently completed and expected dispositions for 6 properties as well as the 35-property NHC portfolio. Our 2026 guidance reflects the settlement of our remaining forward equity and the retirement of our upcoming debt maturities using proceeds from our revolver. However, we expect our capital market activity to adjust as required to meet the company's liquidity needs due to the changes in the timing and the amount of our investments and dispositions. I'd like to conclude by thanking everyone I've worked with during my 10 years at NHI. I especially want to thank Eric and our Board of Directors for the opportunity to serve as CFO and for their trust. I'm very proud to be leaving the company with a balance sheet in solid shape and well positioned to support the company's future. Once again, thank you for joining the call today. That concludes our prepared remarks. So with that, operator, please open the lines for questions. Operator: [Operator Instructions] Your first question is coming from Farrell Granath with Bank of America. Farrell Granath: This is Farrell Granath. I first wanted to ask about the $560 million incremental pipeline that you're expecting going forward. I know when this initially was announced, we had received color that it was to be paying down debt. And then based on some of your comments, it seems that you're receiving or are able to be underwriting or looking over more deals. Can you give us a little bit more color on the percentage or breakdown of SHOP versus leased or leased with the revenue participation within that $560 million? And if that has actually started to increase after the announcement of -- or likelihood of being able to close deals after the announcement of the NHC lease? Kevin Pascoe: Sure. This is Kevin. I would say our pipeline has been pretty consistent. It is fairly robust right now, predominantly senior housing, which isn't a big change. That's what we've been looking at this whole time. And I think we just have to be open with the structure that we use and mindful of the property or the underlying asset, their ability to have growth and then making sure that we make an assessment, is that appropriate for a lease or a SHOP transaction. I think we want to do more SHOP, and that's going to be an emphasis for us. So there might be a way for us to do -- if it is a lease, maybe there's a way to do a transition into the future, but we're remaining flexible on structure at the moment and just making sure that we understand the underlying fundamentals of the property and what kind of growth profile we can get. Farrell Granath: And I also wanted to ask about the legacy Holiday assets. I know you had commented that they haven't been performing within expectation. What is driving that underperformance? Is it simply from fl,u seasonality? Or is it from other comments that we have heard in prior quarters, due to transition in staff or other items? Kevin Pascoe: There is some modest seasonality. That said, they did hit our projections for the first quarter. The issue that we run into really is relegated to just a handful of properties and some census loss at those, which made us kind of reset expectations for growth. We have a couple of others that we're doing some extensive CapEx projects that ran into some delays, that are going to delay kind of the lease-up there. So we wanted to make sure we were resetting expectations for something that we felt very confident in versus trying to adjust later in the year. I still think our forecast is very manageable, but frankly, disappointing. But like I said, the problem is fairly isolated. And again, as we've talked about in prior calls, we're just talking about a very small portfolio, which is what's moving the percentage here probably more than it should. It affected our -- it's less than 4% for us. Operator: Your next question is coming from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Maybe a question for John, and congratulations on your upcoming retirement. But just wanted to, on the guidance, delve a little deeper into the driver. So how much of the decrease in FAD per share was as a result of the NHC sale? And just to confirm, you're only assuming you reinvest an incremental $180 million and nothing over and above that. Is that correct? John Spaid: Well, it depends on your definition of reinvestment, Juan -- this is John. So there's a lot of moving parts. First, the proceeds. The proceeds are going to -- initially, there's going to be well over $200 million that will reduce debt. Those $200 million are tied to reverse 1031 exchanges that we've already set up. There'll be a portion of those proceeds that we will have to set aside, we can't touch for a period of time with intermediaries and 1031s. Those proceeds will be reinvested at the rate that the intermediaries can provide us. So there's some drag there. We've already been making investments ahead of our original guidance. This investment we announced today was ahead of the original guidance. The $180 million in additional guidance increases our guidance that we gave to you for the total amount that we thought we'd be able to invest this year. We still think that's a very conservative number. So it's a little bit of -- yes, NHC transaction in a variety of different ways did pull down our guidance. However, we've had some outperformance on investments that have offset some of that. But the net effect has -- of the NHC transaction was to pull down our guidance. I hope that helps. Juan Sanabria: It does. And then can I just -- on the NHC transaction, have you had any third-parties reach out looking at potentially topping the bid by NHC to repurchase the assets? D. Mendelsohn: Juan, this is Eric. I'll take that question. If a third-party reaches out in writing, then we will issue a press release about that. Until then, we're not ready to disclose anything. Operator: Your next question is coming from Austin Wurschmidt with KeyBanc Capital Markets. Austin Wurschmidt: Eric or Kevin, in the prepared remarks, I think you indicated you have over $200 million in outstanding LOIs for multiple larger portfolios. I guess given the reluctance to give too much detail on larger portfolio opportunities, just given the difficulty predicting whether you'll transact, I guess, how far along are you in negotiating these deals? How competitive is the process? And should we view your willingness to openly discuss these deals as maybe having a higher probability of closing? Kevin Pascoe: Sure. This is Kevin. I would tell you that we're willing to talk about them because we feel like there is ample opportunity out there, whether we end up landing these deals or some other ones that are in the pipeline. I also don't feel like our pipeline number we gave is indicative. I also don't want to give a bit of a head fake by quoting ridiculously large number. We're reviewing a large amount of opportunities, which generally, when we describe it, did not include $100-plus million portfolio deals that we're looking at. So we wanted to try and give a little bit of flavor for what the pipeline does look like. That said, I feel like we have a solid chance at landing these, which is why we're willing to talk about them, but nothing is for certain until it's closed. Austin Wurschmidt: And just to be clear, these portfolio deals are outside of the $560 million that you put in the release last night, correct? Kevin Pascoe: That's right. Austin Wurschmidt: And then just one more. Recognizing that the same-store shop pool is small, and this was sort of structured with a group of underperforming assets several years ago coming out of the COVID period. But how does this group of assets compare to the assets you've recently acquired and are underwriting today, just to give confidence in maybe the future performance versus what you've seen happen within the same-store pool in the last couple of years? Kevin Pascoe: Sure. This is Kevin again. What we're looking at now is generally newer assets, generally has some element of health care associated with it versus the independent. That said, I don't want to make it such that independent is a negative. I think having some sort of continuum or a combination is helpful, though, and that's generally what we're looking at more now is where you have an ILAL or ILAL memory or some combination thereof. We feel like there's better pricing power on that side and be able to add the element of care and create a bit of a continuum. So generally, it's going to be newer and have the continuum, I'd say that. And then really, what we're looking at is more of a -- when we look at the growth profile, we're not looking at deep value adds. I would characterize the Holiday transition as more of a turnaround. That's not really where we've been playing in the sandbox right now. So it's just a little bit different profile. Austin Wurschmidt: And then just last follow-up there is just have you changed your underwriting at all to drive some additional success in landing these recent deals within SHOP? And that's all for me. Kevin Pascoe: Sure. I would suggest to you that the market is very competitive. So we're trying to meet the market and make sure that we're making good decisions based on data and that we understand the markets that we're going into and what our operators' competencies are as they manage these assets and finding the right fit between the 2. So I think our underwriting has evolved over time, and I feel confident in our ability to execute here. Operator: Your next question is coming from Rich Anderson with Cantor Fitzgerald. Richard Anderson: So I think I heard a number, 24% SHOP. Is that pro forma for the NHC sale? And I'm curious what that number would be after deployment of the proceeds, where we're looking at when all the dust settles from the transaction? Kevin Pascoe: Sure. Rich, this is Kevin. That is a pro forma after NHC. And then what the mix looks like is still to be determined. It just depends on what level of SHOP versus triple net we redeploy the capital into. But I think it's safe to say that looking into the future, that SHOP percentage is going to continue to increase. Richard Anderson: Curious as to why it's only 15% of NOI, like you would think that those numbers would be flipped given the growth profile. This is just the Holiday impact that's causing that lower percentage of NOI? Kevin Pascoe: Yes. I mean I think that those properties in aggregate have been a drag. We're working to make sure we manage that as good stewards of the company, but really focusing on the new SHOP, which we talked about has good -- a much better growth profile to it. Richard Anderson: Okay. When you think about the duration of this is like a, call it a one step back, 2 steps forward type of strategy around the sale rather than the release of the NHC portfolio. So I can appreciate that, but I think it all comes down to how long before you sort of get back to square one. So given all of these comments around pipeline and so on, I mean, what would be a success in your mind to sort of getting back and then surpassing the previous range of guidance and truly presenting this as the right strategy to take? Is this 1 year worth of time, 2 years, 5 years? I think what would be measurable as success in your mind? D. Mendelsohn: Rich, this is Eric. I agree it's -- it is kind of a 2 steps forward, one step back event. But we're excited about the opportunity of focusing on senior housing, having less legacy issues with NHC. What I would consider a success is if we can meet or exceed our original guidance. Keep in mind that we've already 1031ed over $200 million worth of transactions this year. So in my mind, we're almost halfway through that $560 million gain. And if we can redeploy the rest of that, call it, 200 -- $360 million in the next 6 months, then I would consider that a win, especially if it's senior housing and even more especially if it's SHOP. Richard Anderson: John, congrats to you. Good luck. Operator: [Operator Instructions] Your next question is coming from Omatayu Okusana with Deutsche Bank. Omotayo Okusanya: John, a big congratulations. It has been a pleasure working with you, and thanks for always shooting straight and telling it like it is. I always kind of appreciated that about you [Technical Difficulty]. First question from my end, the proceeds from NHC, I mean, is there any chance at all whether with the 1031 rules or anything of that nature where you may have to ultimately deploy that as a special dividend? Or can that scenario kind of [indiscernible] or like is that kind of a [Technical Difficulty]? John Spaid: Yes, this is John. We're looking at that. We are obviously planning in case we do need to declare a special dividend towards the end of the year. As you know, REITs have 2 options here. We can actually pay the tax on the capital gain if we so chose. Typically, REITs don't do that. They would prefer to return the capital back to shareholders unless they can find a better use for the capital and can defer it. And so there are short time frames under these 1031 arrangements. Our average cost of capital, let's say, is 4.6%, 4.7% in that range. So initially, the lost NOI doesn't completely result in a one-for-one reduction in FAD. So we're looking at reducing debt, saving interest expense and then making smart redeployment of that capital. And insofar as we do have to declare a special dividend, the components of that dividend may include a portion of stock. So stay tuned. As I said in my prepared remarks, it's not determinable at this point, and it's going to depend on a lot of factors that we really -- won't really know until we get to the fourth quarter. Omotayo Okusanya: Got you. That's helpful. And then if I could just ask a quick question about Bickford. With the new lease structure now, I would kind of expect you don't collect any "rent deferrals" anymore with the way the new structure is set up. I also wanted to understand a little bit about the slight occupancy dip in the reported metrics, what was kind of going on there? Kevin Pascoe: Tayo, this is Kevin. As for the occupancy dip, it's -- when we look at seasonality and their trends over the last few years, this is within the normal range. So nothing that we're concerned about here. And sorry, could you restate your first question for me, please? Omotayo Okusanya: And then the first question was around the rent deferrals, again, that you've kind of been collecting. But the way the new lease has been structured April 1, does that kind of disappear and it's all kind of being built into the new lease rate? Kevin Pascoe: Yes, I would characterize it as being built into the new rent. We just have a new rent structure where we will get the contingent rent through the rest of the lease versus when the way it currently was structured is there would have been a balloon payment. So now we would extend the period in which we have the contingent rent eligible for probably another 5-plus years. And then we can participate in the revenue growth at the operator level. Operator: You do have a follow-up question coming from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just a quick question on the SHOP pipeline. What kind of yields can we expect on incremental investments? You talked about increased competition. So just curious on the pricing you're seeing in today's market? Kevin Pascoe: Juan, this is Kevin. I would say that we've done very well on the last few deals that we've closed in terms of our initial yields. The market has definitely tightened, and I would not tell you to forecast, that's where the market is today. And what we see is the same as what you see is year 1 yields tend to be in kind of that 7% type range, plus or minus. Some of that's going to be based on vintage of asset market. If you -- if it's a bigger portfolio, it might be a bit lower where you think you might get some better rents or some better growth. But I think that's kind of what we're seeing right now. Our expectation is to try and do something better than that, but we're -- we have to be able to meet the market. Juan Sanabria: And then just kind of going back to one of the earlier questions. I guess the question in the forefront of people's minds is, is the Holiday situation in the kind of the back and forth on expectations there unique to those assets? And what lessons have you learned that you don't think that would be replicated in what you're purchasing or have purchased more recently? Just what are you looking for today that's different? I recognize Holiday was IL only and now it's more of an acuity mix, AL, IL, memory care mix. But if you could just expand on those points, I think that would be helpful. D. Mendelsohn: Juan, this is Eric. You've heard me say this before, the Holiday buildings were a science experiment. When Holiday was sold to Atria, we decided to kick off our SHOP portfolio with that as our first basis. And I would tell you that the new product that we're looking at is not 40 years old, not in need of constant CapEx and not in very tertiary markets. We're looking at mostly senior housing that has assisted living or memory care or some health care component. We're looking at newer buildings. We're looking at operators that have good local infrastructure and good practices in marketing and SEO and SEM marketing that keep the buildings full and keep the margins high. So more to come on what we're doing with the Holiday portfolio, but I'm going to be pointing to the not same-store portfolio going forward because we're getting the kind of performance that we're looking for out of those newer buildings. Juan Sanabria: And just one final one for me. It looks like some of the Florida assets tied to NHC are closing later or are being kind of carved off in some fashion. Could you just talk a little bit about that change, I believe, and why that's taking place? D. Mendelsohn: Sure. That is a sublease. NHC is not running those buildings. They're run by [ Solaris ]. And we are -- for legal reasons, we're just assigning that lease back to NHC. So we keep the sublease intact. It's a technicality of Florida licensing that requires us to do that. But the timing and the closing won't be affected. Operator: There are no further questions in queue at this time. I would now like to turn the floor back over to Eric Mendelsohn for any closing remarks. D. Mendelsohn: Thank you, everyone, for your time and attention today, and we look forward to catching up with you in person at one of the conferences soon. Operator: Thank you, everyone. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Hello, everyone. Thank you for joining us, and welcome to Telesat First Quarter 2026 Financial Results. [Operator Instructions] I will now hand the conference over to James Ratcliffe, Vice President of Investor Relations. Please go ahead. James Ratcliffe: Thank you, Jericho. Good morning, everyone, and thank you for joining us today. Earlier this morning, we filed our quarterly report for the period ending March 31, 2026, on Form 6-K with the SEC and on SEDAR+. Our remarks today may contain forward-looking statements. There are risks that Telesat's actual results may differ materially from the results contemplated by the forward-looking statements as a result of known and unknown risks and uncertainties. For a discussion of known risks, please see Telesat's annual report and updates filed with the SEC. Telesat assumes no responsibility to update or revise these forward-looking statements. I would now like to turn the call over to Dan Goldberg, Telesat's President and Chief Executive Officer. Daniel Goldberg: Okay. Thanks, James, and thank you all for joining us this morning. I'll start with a few words about the business, and then I'll hand the call over to Donald, who will speak to the numbers in more detail. We'll then open the call up to questions. My opening remarks this morning are relatively short since it's been only 7 weeks since we reported our full year 2025 numbers. I am pleased with our performance in the quarter, during which we made significant strides in developing and commercializing the Telesat Lightspeed constellation. The development of the satellites themselves continues to move ahead, and we're also making good progress on a number of related fronts, including user terminal and software development and the development -- I'm sorry, and the deployment of our ground station network. We continue to expect to start full global commercial service around the end of the first quarter of 2028. I'm also pleased with the progress we're making on the commercial front for Telesat Lightspeed. Last month, we signed a contract with Northwestel for Lightspeed service to provide broadband connectivity to communities across the territory of Nunavut in the north of Canada, and we see attractive commercial opportunities across our target verticals. I'd note we're seeing a very positive response to our incorporation of the military Ka-band capacity to Telesat Lightspeed from allied government customers who are keen to leverage the benefits of an advanced secure and resilient LEO satellite constellation operating on frequencies these users have long used for mission-critical operations. A number of allied governments are currently evaluating plans to secure Mil?Ka satellite services in LEO, and so adding this capability to Telesat Lightspeed is both important and timely. As you know, late last year, the government of Canada announced that it selected Telesat and MDA to deliver a multi-frequency satellite network called The Enhanced Satellite Communications Project – Polar or ESCP-P to meet the communications requirements of the Canadian Armed Forces in the Arctic. Since that announcement, we've been engaged with the government to finalize the contractual arrangements for a significant portion of the ESCP-P program. which we anticipate will be concluded in the coming months, recognizing, of course, that there can be no assurance an agreement will ultimately be reached. Assuming we do finalize these arrangements and recognizing that ESCP-P is a material opportunity for the company, our intention is to update our financial projections at that time so that investors can take into account the expected impact on our business. In our GEO segment, first quarter results came in largely as we had expected, with most of the year-over-year decline coming from nonrenewals and lower revenue renewals in our broadcast activities and to a lesser extent, reduction in services for fixed broadband customers. That was partially offset by new contracts for broadband services to commercial airlines. Even though GEO is a largely fixed cost business, we remain focused on reducing costs where possible, and that effort was visible in the quarter with adjusted operating expenses, excluding costs related to our debt refinancing, down 11% year-over-year. As noted in our release, we're reiterating our full year 2026 guidance for GEO revenue and adjusted EBITDA and for total LEO investment. One other note regarding our GEO segment. Last month, we changed the name of our GEO operating subsidiary from Telesat Canada to Telesat GEO Inc. In an effort to reduce confusion between our public entity, Telesat Corporation and the GEO operating subsidiary. Now things should be clearer the Telesat Lightspeed business is in our Telesat LEO subsidiary and our legacy GEO business is in the Telesat GEO subsidiary with both subsidiaries ultimately being wholly owned by Telesat Corporation, our publicly listed entity. Finally, I'd note that we continue to work closely with our advisers last quarter on refinancing the Telesat GEO debt that begins to mature in December of this year, something that remains a high priority for the company. So with that, I'll hand over to Donald, who will speak to the numbers in more detail, and then we'll open the call up to questions. Donald Tremblay: Thank you, Dan, and good morning, everyone. My prepared remarks today will focus on highlights from this morning's press release and filings. In the first quarter of 2026, Telesat reported consolidated revenue of $87 million and adjusted EBITDA of $35 million. Consolidated net loss for the quarter was $151 million compared to $51 million loss for the first quarter in 2025. The negative variation of $100 million was principally due to noncash impairment of goodwill and lower adjusted EBITDA of our GEO business. I'll cover the performance of our GEO segment in more detail in a few minutes. Interest expense for the quarter totaled $50 million, down from $57 million in the first quarter of 2025 as we benefited from lower interest rate on our floating rate debt. Interest expense on our USD-denominated debt was also positively impacted by a stronger Canadian dollar during Q1 of 2026 versus the same period in 2025. Interest relating to Telesat Lightspeed totaling $14 million during the first quarter of 2026 was capitalized to the project compared to $3.5 million for the same period last year as the amount outstanding on the Telesat Lightspeed financing is increasing. The result of our GEO segment was in line with our expectation in Q1. We generated $86 million in revenue during the period, down 26% or $29 million compared to the same period last year. Most of the revenue decline was in our Broadcast segment, driven by expiration of contract for service on Nimiq 4 and Anik F3 satellites in 2025 and lower capacity and rate as part of renewal of contract on Nimiq 5. In our Enterprise segment, the decline was primarily driven by lower revenue from our Xplore contract renewed in October 2025, which did not impact materially our operating cash flow as the contract was mostly prepaid at inception. These declines were partially offset by contract added in 2025 in our Aviation segment. The utilization of our satellite was 55% at the end of Q1, and the backlog of our GEO segment was just below $800 million at the end of March. Our adjusted EBITDA of GEO segment was $55 million for the first quarter, down 37% year-over-year. The decline was primarily driven by lower revenue. Our first quarter 2026 expense excludes approximately -- include approximately $7 million in costs related to our debt refinancing process, up approximately $3 million compared to the same period last year. Adjusting for these expense, our GEO adjusted EBITDA would have been $62 million during the period. Turning to the cash and liquidity position of our GEO business segment. Cash on hand at the end of Q1 was just over $200 million, largely unchanged from the end of 2025. We believe the combination of this cash on hand and the cash flow generated by our GEO assets in 2026 to be sufficient to meet all the company's obligation prior to the Telesat GEO debt maturity in December. As a result of this performance, we are reiterating our GEO business segment guidance for the year of revenue of $300 million to $320 million and adjusted EBITDA of $210 million to $230 million, excluding debt refinancing expenditure. We invested $170 million in the Telesat Lightspeed program during the first quarter of 2026, including $152 million in capital expenditure and $19 million in labor and other operating costs. We continue to expect full year investment in the program to be between $1 billion to $1.2 billion as we announced earlier this year. In the LEO segment, we ended the quarter with almost $300 million in cash on hand. This cash, combined with $1.72 billion in availability under our Telesat Lightspeed financing and USD 325 million from our vendor financing is expected to be sufficient to fully fund the Telesat Lightspeed project until it achieved global commercial service around the end of Q1 2028. Our backlog for Lightspeed totaled approximately $1.1 billion as of the end of Q1. Note that this does not include the recently signed agreement with Northwestel. Before I conclude my prepared remarks, I would like to confirm that we are in compliance with all the covenants in our credit agreement and indenture. I'll now turn the call back to the operator for the Q&A. Operator: [Operator Instructions] Your first question from the line of David McFadgen with ATB Cormark. David McFadgen: Let me just start off by asking you a little bit more about the ESCP-P program. Given the government's committed to lend you over $2 billion in capital and the government wants military Ka-band capacity, isn't it logical? Or isn't the deal going to be that the government -- the Canadian Armed Forces is going to license a lot of the military Ka capacity from you off Lightspeed? Daniel Goldberg: David, it's Dan. So I guess the first thing I'd say is I don't, in my own mind, connect the $2 billion loan to future business with the government of Canada. The government of Canada whether that's Department of Defense or other government satellite users, they're always going to choose the solution that represents the best value prop for them and the taxpayer. So I mean that's just what I've seen in my years doing business with them. It is the case that one of the ESCP-P requirements is for military Ka-band capacity in the Arctic. The other requirements are for UHF and [ X-band ] capacity in the Arctic. And it is the case that, as we said on our last call, we've incorporated Mil?Ka in Telesat Lightspeed, and it serves the globe, including the Arctic. So it could be a good fit for the government, but -- we can't get out ahead of this process. As I mentioned in my remarks, we're engaged with the government now on getting the contractual arrangements in place for the overall program. And so stay tuned. What I also did say, though, is, look, it is a material contract for Telesat. And if and when we conclude the arrangements with the government for ESCP-P, and again, our expectation is that will happen later this year, we will organize an investor call and update our financial projections so that everyone can, yes, appreciate the impact it's going to have on the business. So anyway, that's something that we're committed to do. David McFadgen: Okay. And just a follow-up on that. I mean I was kind of surprised to hear that because if you're licensing or you're allocating 25% of the network to Mil-ka, then you're losing that commercial opportunity, right, on the 25% you give the Mil-ka. So I would have thought that the TAM or the forecast will kind of be the same, but you're kind of implying that the forecast will actually be higher. Is that what you're implying? Daniel Goldberg: Well, I'd say stay tuned. We do believe that the market that the Mil?Ka addresses is a very large market. There as I again noted in my remarks, there are a number of governments around the world right now that are evaluating how to get a military Ka-band capability in LEO, and we're out there engaging with a lot of those folks now. Look, we think that ESCP-P, again, assuming we close the contract, will be meaningfully accretive to the company and our business plan and our outlook. And so once that -- once those arrangements are done, yes, we want to get that out there and share it with the market. Operator: Our next question comes from Edison Yu with Deutsche Bank. Xin Yu: I wanted to just clarify when you say an update on financial projections, is that basically you're going to give an update to those numbers you gave back in 2023, where you had like this Lightspeed annual revenue EBITDA. Is that what you mean that you're going to provide an update when you say that? Daniel Goldberg: So I'd say two things, Edison. One, we'll update our guidance for the year to the extent that ESCP-P is impactful on the numbers for this year. So that's number one. Number two, to the extent that Lightspeed is used in connection with ESCP-P, then yes, the financial projections that we have already made available to the market for Lightspeed, we would update those to the extent that the ESCP-P project incorporates Lightspeed capability. Xin Yu: Understood. And then a follow-up, just higher level, if I think back to actually that same presentation on the TAM, so more high level, you obviously -- you had this huge, huge piece. I think it was $320 billion of enterprise. And I think the government part was actually a very, very small piece of that. And I guess if we look at the situation now, would you say that, that government piece, just from a TAM perspective, regardless if you add or subtract anything on your own, we think that TAM is actually substantially bigger than you thought 2.5 years ago? Daniel Goldberg: Yes. I'd say a couple of things about that. I can't remember just because I don't have that material in front of me, I can't remember what we had estimated the government sort of defense TAM to be. But for sure, I bet almost anything because that was done probably 24 months ago or something like that. For sure, I got to believe that TAM will be meaningfully higher. And when we update our numbers, we'll also be able to talk to investors about our expectation in terms of how the future revenue is going to be distributed across the various applications, government, aero, maritime, fixed broadband. And my recollection is that the current plan has our kind of government defense revenues around 15% in the out years of that forecast. And my expectation is when we update it, given what we're seeing in the market, given the change to military Ka-band for Lightspeed that those government defense revenues will be a much more meaningful portion of our projected Lightspeed revenues in light of the changes that we're seeing and the addition of Mil-Ka to the network. Operator: [Operator Instructions] Our next question comes from Chris Quilty with Quilty Space. Christopher Quilty: Dan, what are your thoughts on the Globalstar Amazon tie-up? Are you impacted in any way directly or indirectly? Daniel Goldberg: I don't think it -- I mean, we certainly watched it with interest, and there were certainly a lot of rumors in the market before the deal was announced. It's more tangential, obviously, to what we do. We certainly weren't surprised by it. And it certainly puts Amazon kind of more on that same trajectory in terms of focus as the moves that Starlink has made with their recent spectrum purchases. So -- but I don't think it's something that really has a direct impact on our business, Chris. Christopher Quilty: Fair enough, and I'd agree. The other thing I wanted to dial into was your terminal strategy. We've seen some activity in the market. AllSpace was just acquired by York and Stellar Blu by Dot before that. When you look at your strategy in terms of using either Telesat supplied modules and then having ODMs to manufacture them, do you feel like you're in the right place now given the timing of the constellation? We've seen challenges certainly with OneWeb and their launch of having terminals available timeliness? Daniel Goldberg: Yes. No, it's a great question. And the short answer is -- I mean, frankly, there's a very long answer, but I'll try to give you the short answer. The short answer is I think we're in an excellent spot right now. And frankly, I think having gone after OneWeb, for instance, we've probably captured some of the hard work that they had to do having come out a little bit earlier. So maybe just a couple of things. The terminal strategy is overwhelmingly flat panel antennas for the user, number one. The different verticals that we're serving will, for the most part, have different flavors of those flat panel antennas, maritime, aero and then there'll be different antennas for commercial aero and for commercial jets. The government users will have a range of antennas and some of those might be hardened to look after their requirements. And then, of course, there'll be terminals for kind of terrestrial fixed broadband connectivity. So what we've announced to date, we've announced cooperation with Intellian and Intellian has done -- back to OneWeb, they've done good work already establishing a very capable factory line for producing flat panel antennas for the OneWeb constellation. And we've obviously been working with them to adapt the products for Ka-band. We've announced something with [indiscernible], and they're a very innovative provider as well. And then Farcast, we've made an investment in Farcast and so have others like Gogo and Lockheed Martin. They've got a very innovative technology where they interleave the transmit and receive capabilities, which allows for a smaller form factor. And so -- and they're making great progress. So all to say -- and then you mentioned AllSpace. What's interesting about them is the government users are quite familiar with them, and they've got capabilities. everything that I talked about just up until now has all been about Ka-band, including Mil?Ka in many instances. The AllSpace antennas can do a range of frequencies, which some of the government users will prioritize for certain of their applications. So anyway, all to say, yes, we feel good about it. And again, our strategy is we'll work with a couple of the antenna manufacturers, and our focus is to try to get the volumes up as high as possible because the higher the volumes are, the lower the unit cost for the flat panel antennas. But it's also the case that the network is open. And so government users, for instance, if they have their own desired user terminals, we can certify those to operate on the network as well. So they're not in kind of a closed ecosystem where we limit their choices in terms of who they can work with. Christopher Quilty: Got you. And final question. I know you said the gateway build-out is sort of on track. But I think in the past, you had talked about potentially looking at ways to bring in third-party financing for the ground segment. Can you give an update on that? Daniel Goldberg: I'll just say that our -- the base case plan that we're executing on is that we fund our gateway rollout and the financing that we have in place is sufficient to fund the landing stations around the world to support the network. So that's the base case. And that's what we've been doing up until now, and we've announced some of the gateways in Canada, in Europe, and Australia, and we've got more in the pipeline. But it is the case that we would consider working with a third-party company to change the model a little bit where they would fund some of that, and we would just simply become a customer. I mean it's already the case that all of us whether that's OneWeb or SpaceX or Amazon, all of us are using, to some extent, third-party sites, right? So whether we own the -- whether these companies own the antennas at that site, that's one thing. But it's almost always the case that all of us building out these global gateways are working with third parties at some level to host antennas, to host racks of equipment and whatnot. So then the next question is, would we go a step further and actually work with a third party who would fund some of those components, the antennas and whatnot. So I'd say that's something that's still under consideration. We would only do it. Obviously, if we had confidence that a third party could deliver the capabilities at the level in terms of reliability, security resiliency that we require for the network, number one. Two, if it's obviously somebody that has to have a strong financial wherewithal and then somebody that can meet other considerations around sovereignty, security, that sort of perspective. So that's where we are right now. But to date, it's been just as originally conceived, we're doing it on our own right now. Operator: Our next question comes from James Bratler with New Street Research. James Ratzer: Dan, I question is interested about the kind of growth buildup for Lightspeed kind of outside of Canada and outside of the military opportunity. I'd just be really interested to hear you talk about kind of when you go out and start speaking to customers, how are you seeing the kind of competitive dynamic with other offerings out in the market from people like Starlink, kind of Amazon Leo, TerraWave. What feedback are you picking up in the market about the competitive dynamics? Daniel Goldberg: So maybe a couple of things. For sure, Starlink is, at this point, far ahead of everyone else in terms of having a highly capable LEO network that's serving these various verticals in many the same ones that we're focused on, plus they do obviously B2C as well. So when we're out there in the market, I'd say they've become, in many instances, a benchmark for the users in these different verticals, which is -- and I think it's a great network and that they have a great service. So the market is competitive. Amazon Leo is coming. They're out there in the market promoting their services and their capabilities. They're not as far along as Starlink in terms of service readiness. But there -- we're seeing and hearing them out in the market. And they won an important Arrow deal within the last quarter. They won an opportunity with Delta. So -- and I'd say TerraWave, that's not really a network that we're hearing a lot about at this moment in time out there in the market. So I'd say the good news about Starlink being out there is they've demonstrated how impactful an advanced LEO network is. And as a result, there is significant receptivity to having other players in the market, more competition and whatnot. And then I'd say beyond that, what we're hearing is, look, and we know this, in order to be successful, we're going to need to compete on some mix of quality of service, price and customer support going forward. And then there are some other features in our network. So we're out there offering a Layer 2 service that is absolutely compatible with the mobile network operators and the telcos standards in terms of metro MEF standards and the like. And we've developed our APIs in a way that makes it very seamless for the telcos and the mobile network operators to integrate our capability kind of with their network backbone and whatnot. So what we're hearing is a significant amount of receptivity to Telesat Lightspeed, provided that it's cost competitive and we can meet all these service capabilities that they're looking for. I will say maybe one other thing is because we're not a B2C provider as well. We're not seen as a competitor in these markets. I think when some of the operators show up, they're oftentimes competing with the incumbent operators in these different countries. They're taking rural broadband subs. Their direct-to-device networks might end up competing for mobile network subscribers as well. That's not our posture when we come into these markets. We're really looking to be a supplier to the incumbent operators and just trying to help them be more competitive in what's a very dynamic, fast-moving market. Donald Tremblay: Yes. And I'd say that deal that we announced with Northwestel last month is an indication of how Lightspeed can offer a service that's transformative for rural broadband users, but working with a long-standing telco that's been operating in that case, in the market of Nunavut for decades. So we think it's a model that works. Operator: There are no further questions at this time. I will now turn the call back to Dan Golberg for closing remarks. Daniel Goldberg: Okay. Well, thank you, operator, and thank you all for joining us this morning, and we look forward to speaking with you again when we issue our second quarter numbers. So thanks again. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, and welcome to the Peabody Energy Corporation Q1 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Kala Finklang. Please go ahead. Kala Finklang: Thanks, operator, and good morning, everyone. We appreciate you joining us for Peabody's First Quarter 2026 Earnings Call. Joining me today are Peabody's President and CEO, Jim Grech; Chief Financial Officer, Mark Spurbeck; and Chief Commercial Officer, Malcolm Roberts. After our prepared remarks, we will open up the call for questions. Before we begin, I want to remind you that our remarks today will include forward-looking statements. Please review the full statement contained in our earnings release and consider the risk factors referenced there, along with our filings with the SEC. I'll now turn the call over to Jim. Jim Grech: Thanks, Kala, and good morning, everyone. Peabody's first quarter was marked by a number of accomplishments amid a positive time for both thermal and metallurgical coal markets. We delivered better-than-expected volumes, pricing and costs in our Seaborne Thermal segment, supported by sharply higher global LNG prices in March. Our U.S. thermal coal volumes continued at a strong pace, driven by continued strong electricity demand. And across our seaborne met portfolio, operations performed in line with expectations, with the notable exception of Centurion. Focusing on our top priority, Centurion, I'll provide a thorough update of where we are today. As you know, as part of our commissioning of equipment in February, we encountered temporary mechanical and electrical issues. While those challenges were resolved, the disruptions led to a slower cutting speed, which in turn contributed to roof control conditions. Maintaining roof integrity is critical to sustaining optimal cutting speeds. As a result, early in the ramp-up, progress was slower than we were anticipating even after resolution of the mechanical and electrical issues. Importantly, once the mechanical and electrical issues were resolved, the team implemented a comprehensive response plan centered on proactive strata management and disciplined execution with safety as a top priority. We have brought together a highly experienced group of engineering and operational personnel from across the platform to address these challenges. Since that time, we have been systematically working through what was at its core an iterative cycle of slower equipment performance affecting roof conditions. Over the past several weeks, we have taken deliberate steps to stabilize the operation by reinforcing the roof and face, realigning shields and improving overall cutting conditions. Naturally, every mine is unique with different geology, equipment and operating conditions, and it has taken some time to apply the right solutions at Centurion. While this has required a longer-than-anticipated commissioning period, it ensures that safety remains paramount as we work toward durable solutions. Our safety performance has remained strong, and I want to be clear that we have had no carbon monoxide events, no methane issues, no ignition events and no regulatory challenges. While we are not yet at full cutting speed, the key remediation steps are largely in place, and we are encouraged by what we're seeing. We believe the remaining temporary headwinds are largely confined to the second quarter, with performance in the back half of 2026 expected to reflect a return to full longwall production rates. We expect to sell roughly 300,000 tons in the second quarter, reflecting strong June production, but a traditional lag in converting production at the mine into sales at the port. Additionally, the 7-week longwall move that had been planned for the fourth quarter is now expected to shift into early 2027, which will support stronger production in the second half of this year. As a result, our full year sales outlook for Centurion is now 2.5 million tons compared to our original expectation of 3.5 million tons. With that said, we've updated full year met segment volumes to reflect the 1 million ton decrease and increased cost to a range of $123 to $133 per ton. Stepping back, Centurion remains one of the most attractive assets in our portfolio with a strong position on realized pricing, cost, structure and mine life. In addition to our coal mining and marketing business, we continue to make progress in our Peabody development initiatives in recent months, focused on unlocking additional value from our vast array of land, reserves, operations and commercial relationships. When we spoke last quarter, we had been recommended for a $6.25 million grant from the Wyoming Energy Authority, and that grant was awarded later in the first quarter. Peabody is now advancing initial plans for the pilot plant to process rare earth elements using PRB coal as feedstock. We also continue to advance additional opportunities related to rare earths and critical minerals. We have a particular focus on germanium, where we see good concentrations, strong end market engagement and favorable supply-demand dynamics. For proprietary reasons, we'll need to keep details at this level for now. I'm also pleased to note that initial test shipment is occurring this quarter for West Coast thermal coal exports. We have sent PRB coal from our North Antelope Rochelle Mine, transported by Union Pacific Rail to Mexico's Port of Guaymas, which is being loaded for export to an Asian customer. This test run reflects close coordination with U.S. and Mexican governments, port authorities and logistics partners. It demonstrates the potential of a West Coast export route for PRB coal. While this is a proof-of-concept shipment, Guaymas has infrastructure that could support additional volumes over time. More broadly, this effort underscores Peabody's ability to connect the largest coal basin in the Western Hemisphere with the largest global demand center for thermal coal imports. We would also note that recent U.S. policy actions continue to affirm the value of reliable coal supply chains and baseload generation capacity to national security and grid resilience priorities. That follows an executive order during the quarter that directed U.S. defense facilities to purchase power from coal fuel generation. We view these moves as highly constructive, both symbolically and practically for longer term coal use in the U.S. For more on the U.S. and global supply-demand fundamentals, I'll turn things over to our Chief Commercial Officer, Malcolm Roberts. Malcolm Roberts: Thanks, Jim, and good morning, all. Last quarter, I noted that we had seen strong upward moves in the past year, first in U.S. coal demand and later in the year in met coal pricing, but that seaborne thermal coal had been stuck in a middling trading range. Recent events in the Middle East, though, have changed the seaborne thermal coal fundamentals. Leading into Q1, seaborne thermal coal had been somewhat range bound with a mild winter in much of Asia suppressing burn and strong domestic production running in China and India had kept seaborne demand modest. However, 2 major forces emerged that both increased demand and constrained supply. First, the Iran conflict in late February caused a sharp re-rating of thermal coal demand and prices moved upward with March Newcastle averaging more than $20 a ton higher than pricing pre-conflict levels. At the same time, high LNG prices and limited availability pushed multiple countries to rely more heavily on coal fuel generation. We've seen both policy support and practical actions for seaborne thermal coal across Japan, Korea, Taiwan, Vietnam, Thailand and the Philippines, among others. As history has reminded us, whether it be Fukushima, Ukraine or the Middle East, coal remains by far the largest source of electricity in the world and continues to play a critical role in global energy security. Coal is abundant, transportable, storable and reliable and today still fuels more than one out of every 3 electrons worldwide, far more than any other form of generation. The second major factor impacting thermal coal fundamentals was Indonesia's directive to keep more coal domestically, which has begun to take a real bite out of supply. Indonesia exports over half of the world's seaborne thermal coal and its government has announced cuts in production that would represent about 1/4 of its exports if fully implemented. We've grown accustomed to such acclamations coming in short of original estimates over the years, but even a portion of that dramatic cut would mean a tightening of thermal coal fundamentals. I will note that not all developments in the seaborne coal markets are favorable. Freight rates have roughly increased 50% from pre-conflict levels, affecting the delivered cost of our products. While the market excitement has centered on thermal coal, seaborne met markets remain very constructive. First quarter benchmark pricing for premium hard coking coal averaged more than 25% above year ago levels and could be characterized as more mid-cycle after the temporary dip we saw in 2025. I'll note the stratification of prices across lesser grades of met coal has become more pronounced. Low-vol PCI is up a more modest 14% over a year ago, while high-vol A pricing was actually 12% lower in the first quarter than in quarter 1 of 2025.. Turning to the U.S. markets. Power demand has remained strong early in the quarter due to a very cold January. Henry Hub gas prices lagged as the quarter wore on and ultimately ran below the fourth quarter and year ago levels. Coal is still dispatched at a decent rate and U.S. coal demand was solid. We're working through the shoulder season and soft gas prices at the moment, but expect overall U.S. load growth to help balance that out as we begin to enter the strong summer burn. With that brief overview of the markets, I'll turn the call over to Mark. Mark Spurbeck: Thanks, Malcolm, and good morning, all. In the first quarter, we recorded a net loss attributable to common stockholders of $32.4 million or $0.27 per diluted share, while delivering adjusted EBITDA of $82.5 million. Results were underpinned by outstanding performance from our seaborne thermal platform, which benefited from higher realized prices and strong demand from Asian markets. The seaborne thermal platform delivered 3 million tons, exceeding expectations and increasing export shipments by 200,000 tons. Realized export prices averaged $86.25 per ton, up more than 5% from the prior quarter, driven by higher Asian demand amid elevated LNG prices in the latter part of the quarter. Higher production from both Australian thermal mines helped reduce cost to $50.26 per ton, below the low end of guidance, resulting in a 25% adjusted EBITDA margin and $48.5 million of adjusted EBITDA. Seaborne metallurgical shipments totaled 2 million tons, 400,000 tons below plan due to the longwall ramp-up challenges at Centurion and unfavorably wet weather at the CMJV, partially offset by higher-than-anticipated production at Metropolitan, where we completed a longwall move ahead of schedule. Costs were higher than our guidance at $142 per ton, largely due to lower volumes at Centurion, partially offset by realized prices that increased 13% quarter-over-quarter. The segment recorded an adjusted EBITDA loss of $7 million as an otherwise strong quarter was reduced by $80 million from the Centurion ramp-up, including $10 million of additional commissioning costs. Our U.S. thermal business delivered $61.5 million of adjusted EBITDA in the first quarter. The PRB shipped 21.2 million tons, exceeding expectations. Costs were above guidance due to sales mix, which included additional shipments of higher heat coal from NARM and timing of certain repairs and maintenance costs. Net-net, costs outpaced higher average realized prices, resulting in lower margins in the quarter and $23.7 million of adjusted EBITDA. Other U.S. thermal shipped 3.3 million tons at better-than-expected costs, demonstrating continued disciplined cost control. I'm also pleased to report that Twentymile continued to perform well in its new longwall panel. Together, the other U.S. thermal mines contributed $37.8 million of adjusted EBITDA. Moving forward, like the rest of the industry, we are keeping a close eye on oil prices. I'll share a few points here for context. Peabody uses approximately 100 million gallons of diesel fuel a year, with the majority used in the U.S. at our large surface mines. Each $10 per barrel change in oil price impacts EBITDA by $6 million per quarter, ignoring potential benefits from higher coal prices. With the continuation of the Middle East conflict, we increased expected full year PRB costs $0.50 per ton to reflect the current forward curve. We also increased seaborne thermal cost guidance by $2 per ton to reflect the current price strip. We have not experienced any disruption to imported fuel deliveries in Australia, and we are working closely with our primary supplier to monitor continued availability. While higher fuel costs are anticipated across the business, the seaborne met and other U.S. thermal segments are expected to remain at beginning of year costs. A firm resolution of the Middle East conflict may result in an improved forecast with lower costs. Looking ahead to the second quarter, we expect seaborne thermal volume of 3 million tons, including 1.9 million tons of export coal, 300,000 of which are priced on average at $64.60 per ton. 1 million tons of Newcastle product and 600,000 tons of higher ash coal remain unpriced. Costs are expected to be between $57 and $62 per ton with approximately $3.50 related to higher fuel costs as well as a stronger Australian dollar and planned repairs and maintenance at Wilpinjong. We expect seaborne metallurgical volume of 2.3 million tons with realizations of 75% of the premium hard coking coal index. Costs are expected to continue at higher than full year run rates due to lower production at Centurion before achieving full longwall volume in the second half of the year. In the PRB, we anticipate shipments of 19 million tons at cost of $13.25, reflecting the traditional second quarter shoulder season and the $0.50 adjustment to higher fuel costs. Other U.S. thermal coal shipments are expected to increase to 3.4 million tons with costs at $45 to $49 per ton, in line with full year guidance. In closing, our first quarter results highlight the value of our diversified global assets. Strong performance from our thermal segments, both abroad and here in the United States, continues to generate substantial free cash flow. Peabody ended the quarter with just under $500 million in cash and total liquidity above $850 million. This financial position reflects the resilience of our balance sheet and provides financial flexibility to navigate near-term challenges, support our shareholder return program and continue to invest in long-term value creation. With that, I'll turn the call back over to Jim. Jim Grech: Thanks, Mark. As we look toward the rest of the second quarter, priority 1 is continuing the positive momentum at Centurion and progressing toward our targeted production rates in a safe and productive manner. Beyond Centurion, we remain focused on delivering strong performance across the broader mining portfolio while maintaining a rigorous cost discipline. Finally, we'll continue unlocking additional value from our extensive asset base over time. With that, operator, we are pleased to open up the call to questions. Operator: [Operator Instructions] The first question comes from Chris LaFemina with Jefferies. Christopher LaFemina: I just wanted to ask first on the PRB cost guidance. So second quarter cost is going to be a bit higher than the first quarter. But then the full year guidance is materially lower than what your first half average would be. And I wanted to understand how you're going to get there. I understand that part of it is, I would assume, a function of higher volumes in the second half of the year, and part of it is that on the strip, diesel prices, I guess, are a bit lower, but it is a substantial drop-off in costs and I just wanted to better understand that. That's my first question. Jim Grech: Chris, you're exactly right. You kind of answered your own question there for the PRB. Costs were higher in the first quarter a little bit, going higher in the second quarter, mainly due to diesel fuel. That's probably about a 75% impact in the second quarter, $0.50 impact over the full year. So you're right, that forward strip declines. That's the biggest change there on the PRB cost. We have lower volume. I think you mentioned lower volume as well, right? I mean second quarter shoulder season, we're looking at about 2 million tons less. So a big denominator difference there as well. Christopher LaFemina: Okay. That makes sense. And then secondly, just on the balance sheet, I noticed that the restricted cash balance fell by like $33 million in the quarter. And I'm not sure I saw the offsetting decline in any associated liabilities. So I might just be missing something there, but what was going on with the cash balance? Mark Spurbeck: Yes. The restricted cash, there was just a movement in how we collateralize some of those obligations. No change in the liabilities. Operator: And the next question comes from Katja Jancic with BMO Capital Markets. Katja Jancic: Maybe staying on PRB. I know that the prices are currently locked in or mostly locked in. Do your contracts in any way allow you to potentially share some of the cost burdens from diesel right now? Or is there an opportunity for that? Malcolm Roberts: Katja, Malcolm here. Look, the majority of our contracts are fixed price contracts that don't have a fuel rise or fall. Katja Jancic: And then if this environment continues, are you potentially looking at hedging any of the diesel costs? Or do you have any hedges in place? Mark Spurbeck: Yes, Katja, we do not hedge diesel. We've looked at this over the years multiple times, whether fixed pricing with our suppliers or hedging it with derivatives is just not cost effective to hedge. Katja Jancic: And maybe one more, if I may. You mentioned the potential for West Coast exports of PRB. Can you talk a bit more about right now currently, what the opportunity could potentially be in more near term? Malcolm Roberts: Yes. Thanks for the question, Katja. Malcolm here again. Look, the potential there in terms of the coal quality is pretty much unlimited. This PRB coal quality is fantastic in terms of its sulfur level, in terms of its ash level. And what we've seen in Asia is a lot of power generating plants have been set up to burn on this type of coal. And that was originally based on Indonesian coal. Now Indonesian coal is being kept more domestically and also we're seeing grades decrease. So there's a real opportunity, particularly in terms of the environment and this high-grade PRB coal to be consumed in Asia. So it was really quite positive and exciting that we're able to work with the port operator down there and also the Union Pacific to do a trial shipment. And the potential there will be limited by the logistics in terms of the Guaymas port. But then also, you'd note that there are West Coast port opportunities currently being discussed and that is something that really encourages us as we move forward. Operator: And the next question comes from Nathan Martin with the Benchmark Company. Nathan Martin: Malcolm, maybe just sticking with you for a second. You mentioned about some of the additional seaborne thermal opportunities you're seeing in the market driven by conflict in the Middle East as well as Indonesia. So is there still demand and price out there? Or have you seen that retreat maybe some of the recent peaks? Malcolm Roberts: Look, I think we're going to potentially go to the next level over the coming months. We've -- I mean the tide that lifts all boats is the Chinese import price. And we've seen that rally reasonably strongly, and I'm hearing appeals for API 5 around $100 a ton at the moment, which is over 1 year ago levels, that's probably $25 in excess of that. Now once that tide comes up, that will also support Newcastle pricing. And LNG pricing is still at quite a multiple as a fuel cost than seaborne thermal coal. And we're just starting to move into the summer in the Northern Hemisphere. So I think there's more to come. Nathan Martin: Okay. Great. That's helpful. And then maybe going to Centurion. I know you guys obviously mentioned aiming to complete the commissioning and production ramp here in the second quarter. Can you talk a little bit more about the timing there? I think maybe Jim has mentioned, but is this kind of an end of quarter completion? How confident are you that the longwall should be up and running or fulfilled in the second half and when that might occur? Jim Grech: Nate, Jim Grech here. And we have a lot of confidence that's going to occur here in the second quarter. I'll give you a little detail around where we're at right now, how we see us getting through the month of May and then the month of June, why we have so much confidence. So right now, our plan gets us to optimize longwall automation by the end of May. And what do we mean by optimized longwall automation? That means we're all done with the commissioning of the equipment, and we are in regular production mode for our forecast. And so to get us to that position by the end of May [technical difficulty] in the coal seam. We have shared optimal position, both the floor and the horizon and the coal seam longwall face straighten level. So our goal is to get us to those conditions by the end of the month and we have made significant progress to getting to those conditions. But it is an iterative process, Nate, that we're in. We advance the shields, we align the shields. If there's any fortifying of the coal roof or face, we do that if needed. And we do another pass with the shield, we cut some coal and then we advance the shields again. So we're going through that process right now, advance the shield, align, fortify, cut, and we're having some very good success with that. And so we're going to keep repeating that process for the next few weeks until we get to this optimized longwall automation position. And then from there, we'll be running per forecast. So a lot of good progress made in the last 2 weeks. We're -- every day, we move further along with our plan. And we, again, feel very good about getting this completed by the end of May, getting out of this commissioning phase and getting into regular production mode starting in June. Nathan Martin: Okay. That's very helpful, Jim. I appreciate that. And then maybe just one more, if I can. You guys had a small update on your rare earth and critical minerals project there. Maybe can we just get some thoughts around the potential time line for that development? You mentioned previously as well as today, the possibility of building a pilot plant. Again, just any updates on time line would be great. Jim Grech: Yes. So you're referring to the grant we got from the Wyoming Energy Authority to build a pilot plant, and we're looking at building at the moment at our Rawhide mine is the site at the moment, but there are some other sites being looked at it. So we expect the development operations and so on to take about 18 months. and then you're going to have some time after that of a year or 2 to get it up to full development of the plant. So we're going to work on the siting first and then initial construction and then get it operating, hopefully, at some extent, 18 months out and then over that 18- to 48-month time frame, just keep ramping it up and with the project. So that's what we're doing on that one project. I just want to remind you, though, that we've got several opportunities that we're pursuing. We've got this option-based approach because we've got multiple feedstocks, whether it's coal or overburden and looking at other of our mines. So we have other projects underway. We're not ready to talk about them yet, but this is the one here that we're talking about at the moment. Operator: And the next question comes from George Eadie with UBS. George Eadie: Jim, your audio was muffling, I think, before, so sorry if this is a bit of a repeat. But what specifically at Centurion were the electrical and mechanical issues experienced? And were there any issues with the shields not bearing the roof weight properly due to roof conditions or undulations at all in the roof? Jim Grech: Yes, George, I'm not sure why. I'm right next to the microphone, and I think I'm talking loud enough. I'll start screaming into this. Are you hearing me okay right now? George Eadie: Yes, yes. I got you good. Jim Grech: Okay. If you hear me catching my breath because I'm talking at the top of my voice. So what we've had is a longer-than-anticipated commissioning period at the mine. So to get to the situations you talked about, during the initial commissioning, we encountered some unanticipated electrical and mechanical issues that we hadn't picked up during -- we did testing, we did a mini build on the surface to test the equipment. But once we got the equipment underground, put it together and put it under full load conditions, we started having some issues with it. So fundamentally, what happened with that is we had 8-year-old unused mining equipment. We put an updated technology in it and then we put it underground. And when I got under full load, we started having issues that we weren't anticipating electrically. And we had to troubleshoot that, order parts and repair. And once we got past the electrical issues, we had some mechanical issues with conveyors and shoots and so on. What I would call standard commissioning issues that you have with this type of situation in a new mine and equipment that's been sitting on the shelves for a while, all taking much longer than we had anticipated. So with that situation going in the longwall sitting, and what happened was the longwall was advancing very slowly during this commissioning period. So the slow progress of the longwall gave rise to some localized ground conditions where the longwall was sitting, we had moisture accumulating in some roof cavities above that, combined with the softening of the floor beneath the shield. So the roof conditions have been addressed with void fill and under control where we have the longwall right now in its current position. The floor conditions we've adjusted to, but what's happened is the -- with the floor conditions, we've got misalignment in a limited number of shields. And that really is where we are in the final stages of remediation that I had outlined to Nate is getting those shields in alignment. And the only way to do that is to advance the longwall, adjust the shields, advance the longwall, adjust the shields. And that's going to take us another week or 2 to do that. So we anticipate getting through that by the end of the month. And as we -- each time we advance, we progressively improve with our remediation. And once we get a little further along here, we get on to some fresh ground underneath those shields, we'll be going at forecasted rates. So George, did I answer the question you had asked there? George Eadie: Yes. Jim Grech: I'm assuming you... George Eadie: Exactly. Yes. No, that was great. Appreciate all that. And so are you guys like testing the shields to make sure they're carrying the roof load? Is that something you can do and are doing, I guess? Jim Grech: Yes. The shield themselves are performing well. It's just they're out of alignment, and we just have to get them straightened out between the floor and the roof. That's really what's going on here at the moment, George. George Eadie: Okay. That's super clear. And then maybe one quickly for Malcolm. Just margins in the PRB just over $1 a ton, a few questions on it before, and we've guided down there. Are there risks to margins getting back sort of $2 and higher going forward with U.S. gas prices at $2.80 and cost pressures impacting on the other end, too? Malcolm Roberts: Yes. Look, with where oil prices are at the moment, margins are being challenged and also this quarter with lower volumes being in shoulder season. But one thing that -- what's pretty evident is that electricity demand is continuing to increase. And as that -- and I think we've just seen the statistics for April. So with this increased demand, we get out of shoulder season, get into the summer. I still expect the spot market to be quite robust and for pricing as we move forward to reflect this higher cost base because I don't think anybody is on their own in terms of the dirt that needs to be moved and the cost of that diesel. So it's a function of the higher cost base being reflected in new deals and the like as we work through that. Mark Spurbeck: Yes, George, I might just add to that. If you look at the implied guidance, the costs and the additional volumes coming in the second half of the year, we're going to be back to margins rate within spinning this into a few dollars a ton. Operator: And the next question comes from Nick Giles with B. Riley Securities. Nick Giles: A lot of my questions have been answered. But just maybe on the seaborne met cost revisions, I think most of which were driven by Centurion timing being pushed out. But can you just touch on the other operations and where costs stand today at those mines? I think diesel isn't as impactful as the PRB, but I was wondering if anything has changed as far as input costs at your kind of non-Centurion operations? Mark Spurbeck: Yes, Nick, I think I'll start with the 2 changes we made to the guidance for the full year in the Thermal segment. So PRB is up $0.50 on a full year basis. That's entirely due to higher diesel pricing. Seaborne thermal as well, up $2 a ton for the full year, entirely due to higher diesel pricing. The seaborne met, that is up $15 a ton, and that's entirely due to the lower volume at Centurion. Now there is some higher diesel costs, obviously, in met and other U.S. thermal, but that's a much smaller use, about 2/3 of our oil in both regions. 2/3 of the U.S. oil or diesel is used at the PRB and about 2/3 of Australian fuel is used in the Seaborne Thermal segment. So the seaborne met and the other U.S. thermal, much smaller impact from diesel, and we were able to maintain those original cost guidance ranges. Nick Giles: Got it. Very helpful. I appreciate that, Mark. And then maybe just one on the Centurion product itself. Can you just talk about how the commercial process has gone to date with customers? How much is contracted? How much could -- is left to still be contracted? And then do you feel that with the higher freight rates globally that Centurion has become more competitive? Or how are you thinking about kind of percentage realization in terms of PRB? Malcolm Roberts: Yes. Thanks for the question, Nick. Look, generally, discussions have gone very well because this product is the highest quality premium hard coking coal at around an 8% to 8.5% ash. And in terms of where it's being sold, traditionally, North Asia has been a big customer when this mine was producing last decade. There's strong demand there. But really, the main focus is on India, and we've concluded a number, probably 8 or 9 contracts there. In terms of how contracted I am for the year, I'd like to treat that as commercially sensitive. So -- but there's plenty of demand there for that product. Hopefully, that answers your question. Operator: And the next question is a follow-up from Christoph LaFemina with Jefferies. Christopher LaFemina: Just one quick follow-up. If you look at the -- like the outlook for the business, if you hit your operational targets, you're going to be generating lots of free cash flow in second half of this year and into 2027. Your balance sheet is very strong. Your share price has been under some pressure, but it really seems like it's a timing issue on the cash flow rather than anything more structurally problematic. And yet you have an opportunity in the market to buy back your stock at a relatively inexpensive level. So I was wondering how you think about the share price weakness and how you can defend the stock? Maybe that's the way to think about it, but can you take advantage of an opportunity here where the market is not pricing in the cash flow that you guys are going to generate and maybe the opportunities for you to buy back your stock at this relatively inexpensive level? Mark Spurbeck: Yes, Chris, we share your outlook for the business, certainly when [indiscernible] comes back online or gets online at full production rates in the second half of the year. There will be a substantial amount of free cash flow in that second half of the year. I think there are a couple of opportunities, buying back shares is one, but also looking at our 2028 convert that's outstanding and addressing maybe some of the dilution there as well. Operator: And next question is a follow-up with George Eadie with UBS. George Eadie: Jim or Malcolm, when will we get some details on this PRB West Coast opportunity, I guess, chasing potential tons you could ship washing, cleaning costs, CapEx and sort of time lines and all the various factors for us to potentially model it up? Malcolm Roberts: Look, I'll start and maybe Jim could give some further details. Look, this cargo is going to go out in May, and we'll get customer feedback. We have another customer visiting our PRB mines next -- I think it's next week or the week after. We're in a detailed qualification process there. And we'll discharge trains and the first one is discharged down in Mexico this week, and we'll see how that goes. We'll load it on the ship and see how that goes and then get the ultimate feedback from the customer. One thing is for sure is that there are opportunities and people are really focusing on this and the railway, particularly Union Pacific, is working with us really constructively. That's encouraging. And then you're also hearing about other West Coast port opportunities. But exactly where we go with the Port of Guaymas, that's going to be a little bit of a suck and see. Let's see how the port performs and the like. But this is more of a proof of concept and the like. In terms of CapEx and the like, we'll be leaving other promoters to develop ports and do those things. We'll be a user of those ports and the like. So I hope I haven't set out a light here. I'll just check with Jim if there's anything he'd like to add. Jim Grech: No, Malcolm. I think the thing to take from this, George, is Malcolm said proof of concept, and most importantly, is there a market for this coal? And as Malcolm pointed out, there's a significant almost unlimited market in terms of what the PRB can produce and move as far as demand because of the comparably -- very favorable comparison to Indonesian quality coal, which is big on the export market. So the opportunity is significant. And the proof of concept is us working with the Union Pacific Railroad. We have been very good to work with the U.S. government, the Mexican government. Can we then do the logistics to move the coal to this very large market? And we've done that. So the next steps are how do we scale this up? How do we get significant tonnages? And whether that's through Guaymas or other ports that are being looked at on the West Coast that are being looked at actively. And I think there's some great opportunity there for those ports to move those Western coal. So there's a lot more opportunity to come. Is it on the horizon like in the next 3 to 6 months? No, there's nothing significant because you need to get to port capacity there. But the demand is there. The demand is not going away. The ability to work with the rail carriers and the U.S. government to develop these opportunities is there. So there's a lot of good potential for us out into the longer term, but not just in the near term. George Eadie: Yes. Okay. Great. And just on that, what is the port capacity you guys could tap here? Is it sort of 5 million to 10 million tons? Is that the right range for me to think? Jim Grech: Well, I think it's what's the port capacity potential. Guaymas could get to those ranges or slightly higher and other ports that are being looked at on the West Coast would be at the upper end of that range. Operator: And this concludes the question-and-answer session. I would like to turn the conference back over to Jim Grech for any closing comments. Jim Grech: Thanks to everyone for your time today as well as your long-standing support. We're going to get back to work and look forward to keeping you apprised of our progress. Operator: Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Operator: Good day, and welcome to the Douglas Dynamics First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nathan Elwell, Vice President, Investor Relations. Please go ahead. Nathan Elwell: Thank you, Chad. Welcome, everyone, and thank you for joining us on today's call. Before we begin, I would like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in yesterday's press release and in our filings with the SEC. Please note the quarterly factsheet can be found on our IR website. Joining me on the call today is Mark Genderen, President and CEO; and Sarah Lauber, Executive Vice President and CFO. Mark will provide an overview of our performance, followed by Sarah reviewing our financial results and guidance. After that, we'll open the call for questions. With that, I'll hand the call over to Mark. Please go ahead. Mark Van Genderen: Thanks, Nathan, and welcome, everyone, to our call. So this was another excellent quarter for our company across the board with both segments executing successfully and delivering just really solid results. We're running efficiently. In the Attachments segment, our team has responded admirably to the above-average snowfall-driven demand of this past winter and the employees in our Solutions segment have delivered another great performance, continuing a strong trend. If you look back at our typical first quarter results, you'll see that it is often the case when we don't generate a profit due to the seasonality of our Attachments business. But this year, we produced record sales, adjusted earnings and EPS, just a tremendous achievement on behalf of the teams. This significant year-over-year growth was really driven -- primarily driven by 3 factors: First, significantly above-average snowfall boosting demand at Attachments. Second, the ongoing strength of demand in our municipal operations; and third, strong execution across the board from our teams to both address this demand and make meaningful progress against our strategic priorities. Okay. Let's talk Work Truck Attachments. Before I discuss the quarter specifically, I want to make a general point on snowfall and our business. Yes, snow is absolutely the main driver of demand in the Attachments business. We need snow to drive excellent results. But it's more than that. Snowfall creates the demand, but it's the relationship we have with our dealers and contractors. It's the projects we undertake every day. It's our fantastic product, our culture, our strategic pillars, the sheer hard work and determination of our team that fulfills that demand. So in short, it's execution that gets product shipped, sold and serviced, and that doesn't happen without our people and their commitment to operational excellence every day. So my continued and heartfelt thanks to the 1,700 people who are at Douglas Dynamics. Okay. Looking back at the winter, snowfall was significantly above average in many of our core markets. In total, the season came in roughly 20% above the 10-year average and 40% higher than last winter. This winter, snowfall came early with major November and December storms in the Midwest and significant persistent lake effect snow in the Great Lakes region. In the first quarter, several large snow and ice storms made their way across much of the country, including Fern and Hernando, record breakers, which brought significant and widespread snowfall totals across the Heartland and up the East Coast, all the way from New Mexico to Maine. Elsewhere in the country, both out West and the South experienced lower snowfall than normal. As a skier myself, I don't like to see dry conditions in the mountains, but it was sure great to see the snowfall where it did. Of course, all this weather meant that many of our dealers and contractors in our core markets in the Midwest and on the East Coast were working tirelessly to keep people safe and get communities back on their feet after the storms. It shouldn't be overlooked how important plowers are to the safety and well-being of the general public and in turn, our dealers who keep the contractors on the road. It is at the very core of our mission statement to keep people safe and communities thriving. As equipment was used during the winter, dealers were drawing down on their inventories, which we believe are now solidly below their 10-year averages. We will see how our dealers replenish their inventories with their preseason orders. All of these elements came together to contribute to a record first quarter top line for Attachments with sales up just over 65%. This included our first full quarter of sales from Venco Venturo, the crane and hoist manufacturer we acquired in November of last year. These excellent results were driven first and foremost by demand for our parts and accessories as the persistent snowfall took its toll on equipment. In fact, we achieved record shipments of P&A during the quarter. Sales of plows and hoppers also increased, but the first quarter at Attachments is always about parts and accessories, and this quarter was no different. So we pretty much exited winter and rolled straight into preseason, which kicked off at the beginning of April. Now as a refresher, we typically receive around 2/3 of our annual orders from dealers in the second and third quarters of the year. We ship these orders in time for our dealers to be stocked and ready to install equipment before the first snowflake of the season fly. While it was still early in preseason, while it's still early, as expected, we are off to a good start following the robust winter I detailed earlier. More specifically, sales of parts and accessories continue to come in strong. Plow sales, while not as directly correlated to last season snowfall as P&A are also tracking ahead of last year. And the great news is that we are in a strong position operationally. Plans are lining up as expected, inventories are in good shape, and our teams are hard at work. We continue to invest in the business and are even pulling ahead select equipment and technology projects given current demand. As it stands right now, we are optimistic about how the year is unfolding. That excitement will build at SIMA, the Snow and Ice Management Association Annual Symposium, which will be held in June this year in Cincinnati. As a market leader, this is a great opportunity here for us to showcase our expanding line of products and spend quality time with our dealers and contractors. All right. Turning to Work Truck Solutions, where the teams consistently continue to perform, now measuring their ability to drive improvements in years, not quarters or months. The team produced near-record sales and once again, record adjusted earnings and record margins, and that's on top of a record first quarter last year. So just really outstanding work. The strongest part of the business remains our municipal-focused operations. Both demand and backlog from municipal customers remains robust, and our sales teams continue to pursue and win important profitable multiyear contracts. From what we've heard across the industry, our excellent lead times are proving tough to match. And combined with our attentive and knowledgeable customer support, we are well positioned to continue our track record of steady, profitable growth. The strength in our municipal operation helped offset slightly softer demand in certain commercial business segments. The outlook is mixed overall, but there are pockets of that business that aren't performing as well as last year. While end users are approaching the current economic environment cautiously and demand for dealer orders remains dynamic in real time, the business is holding its own overall. We are focused on the factors we can influence to continually optimize the business and rapidly adapt to any changes and shifts in customer behavior. And finally, backlog in Solutions remains positive and above traditional levels. We are booking production dates well beyond the current year. Now as we've noted before, our backlog includes vehicles that customers have ordered now for future delivery. Our goal is to make sure that vehicles are delivered exactly when and where they were promised. And our Solutions team does that exceptionally well. All right. So before handing it over to Sarah, I'd like to just take a step back from our operational results and provide a brief strategic update regarding the optimize, expand and activate pillars of our strategic framework that we first shared late last year and how we are now migrating from introduction to action. The first priority is to continue to optimize our current operations across the board. As we said in the past, optimize is not a new concept for Douglas Dynamics. In fact, it's been a core tenet of our company for decades. Striving to get better every day is in the company's DNA. And at any one point in time, there are dozens of project examples, some of which are beginning this year, some are already in progress and many will span multiple years. So let me mention just a few. As much as we and you, I imagine, would like to predict the weather for next winter, we can't. But we continue to improve our demand and production planning processes to more quickly, accurately and precisely respond to whatever mother nature throws our way. We are using a more data-driven approach that incorporates algorithm statistics, historical trends and more recently, AI, leading to a more sophisticated way of smoothing out volatility that is benefiting us this year and will continue to pay dividends in the years ahead. At Attachments, we continue to expand our suite of communication tools with our dealer network, through a greater exchange of data, information and ordering capabilities, resulting in greater efficiency and an improved ease of doing business, which is certainly appreciated by our dealers. On the Solutions side of the business, we are working hard on enhancing our CPQ process, which stands for configure price quote at our municipal operations. This increasingly automated process is helping to produce greater efficiency and accuracy in order taking, which is then helping to streamline many additional processes from sourcing to production planning and at the same time, providing the appropriate level of customization required and desired by our customers. And finally, we recently broke ground on an exciting project at our municipal operations main facility in Manchester, Iowa. We are building a dedicated logistics building adjacent to our existing manufacturing facility. This new facility will serve as a centralized hub for all municipal logistics operations, including receiving raw materials, staging components and shipping finished products. Additionally, this will also help improve efficiency by freeing up critical floor space and reducing congestion at and around our manufacturing facility. So I picked just a few to mention today, but there are many more exciting projects, both being planned and underway. The second pillar is expand, which is our focus on internally driven growth, more specifically, continuing to develop new products across our divisions to meet the emerging needs of customers and geographic expansion where it makes sense. On previous calls, I mentioned our plans to build a new upfit center in Missouri to replace an outdated operation with a brand-new purpose-built facility in an ideal location for both new builds and to make it convenient for customers in the region to have existing trucks serviced. I am pleased to report that the process is virtually complete. The ribbon-cutting ceremony is a few weeks away with production beginning around midyear. The new facility will add much needed capacity to Henderson and is an important factor to help us maintain our best-in-class delivery times. This expansion will allow us to better serve existing customers in surrounding markets to continue to deliver trucks on time and to increase our attractiveness to new customers, all of which will strengthen our competitive advantage. My sincere thanks to everyone involved in making this important project a success. And finally, Activate, which refers to last year's restart of our M&A efforts, which led to the acquisition of Venco Venturo last November. Our integration team is making good progress and the Venco team, as we believe would be the case, are proving to be a great cultural fit. Moving forward, we continue to look for the right businesses and product lines to acquire that align with our attachment-centric strategy. So in summary, 2026 is off to a great start. It is an exciting time at Douglas Dynamics with market conditions and company performance aligning well across most of the business. We are in a strong position and as a more resilient company today, we are prepared for a wide variety of potential scenarios with strategies in place to capitalize on these opportunities. With our strategic framework now really taking hold in the business, we are hitting our stride, always striving to maximize our business and operational agility. While we are proud of our recent results, we know we have a lot more work to do to reach our potential. Our leadership team is working in lockstep, intently focused on executing our strategic plans to produce profitable, sustainable long-term growth. And with that, I'd like to pass the call to Sarah. Sarah Lauber: Thanks, Mark. I'll start with a summary of our financials and then talk to our updated guidance. But before I begin, please note that unless stated otherwise, all the comparisons I'll make today are between the first quarter of 2026 versus the first quarter of 2025. I would sum up our performance in 2 sentences. Our results improved across the board with record shipments of parts and accessories at Work Truck Attachments following significantly above-average snowfall. At Work Truck Solutions, higher volumes for our municipal operations helped offset lower commercial volumes to deliver strong results. Consolidated net sales increased 20% to a record $137.8 million. Gross margins improved by 290 basis points to 27.4% based on strong execution in both segments and significantly higher volumes at Work Truck Attachments. SG&A expenses increased by 13% to $26.3 million as our improved performance led to higher incentive and stock-based compensation plus the increased headcount, which included the addition of Venco Venturo employees. Adjusted EBITDA increased 78% to a record $16.8 million. Adjusted EBITDA margin increased by 400 basis points to 12.2%. This created a record adjusted earnings per share of $0.36. I'm sure you'll agree a fantastic set of results all around. So let's walk through the results for the segments. Working -- starting with Work Truck Attachments. Our excellent results this quarter were driven by strong demand, particularly for parts and accessories and a tremendous effort from our teams to address that demand. Net sales increased 67% to a record $60.9 million and adjusted EBITDA increased significantly to $7.7 million. The fact that equipment was being used in many core markets during the quarter will help the market incrementally move back towards a more normal replacement cycle in the years ahead. The outlook at Attachments remains positive today as we move through the preseason. Turning to Work Truck Solutions. Our teams produced record bottom line results and profitability and near record net sales, and that's despite the tough comparisons to record results in the first quarter of last year. The performance was driven by ongoing strength of municipal operations with commercial operations still exhibiting softer demand. Net sales decreased slightly to $76.9 million, but we're still very close to the record set at this point last year. Adjusted EBITDA increased slightly to a record $9.1 million and margin increased to a record 11.9%. Okay. Let's quickly touch on the balance sheet and capital allocation. Net cash used in operating activities of $1 million was in line with the prior year, primarily due to improved earnings, which offset higher working capital driven by the increased demand. Capital expenditures increased from $2.2 million in the first quarter of 2025 to $3.7 million this quarter as we expected. Free cash flow was negative $4.2 million, a decrease of $700,000 over last year, driven by higher capital expenditures. Let me reiterate our capital allocation priorities for 2026. Our first priority is returning excess cash to shareholders through both our strong dividend and to a lesser extent, share repurchases. This quarter, we returned approximately $10.1 million via the dividend and the repurchase of approximately 70,000 shares of company stock. In addition, we are investing in a variety of projects as part of the optimize and expand strategic pillars. As far as investing in the business, we expect CapEx to increase year-over-year as we saw in the first quarter as we pursue growth opportunities, but we still expect to stay within our typical range of 2% to 3% of net sales. And as Mark mentioned earlier, we expect to continue to pursue strategic M&A opportunities as they arise as part of our Activate strategic pillar. Finally, let's review our outlook. We started the year with strong guidance in place. We decided to raise those ranges today based primarily on our excellent first quarter results, particularly in Attachments. Plus our preseason sales period is off to a good start. However, it's early in the process. There's still a good deal of uncertainty as to how the orders and shipments will settle out. Raising the guidance at this stage of the year is not typical for us, and it's not something we'll do regularly, but this has been an unusually positive start to the year. One important point to consider is the timing of shipments this year. We expect preseason to be close to a 50-50 split between the second and third quarters. That's a large shift from last year. As you may remember, the 2025 preseason was skewed towards the second quarter. The 60-40 split between the second and third quarters last year was a result of higher available inventory going into preseason, which led to more shipments in the second quarter. So far, 2026 is shaping up to produce a return towards more typical shipment timing closer to the 50-50. This is something we are expecting. It's simply timing. It will not be a reflection of our overall preseason results. At Solutions, the situation remains generally in line with our initial expectations for the year, another year of top line growth while maintaining low double-digit margins. Our backlog remains solid, and we have good visibility and continued positive momentum in our municipal operations. In our commercial operations, the outlook is more complex with limited visibility, and there are areas showing softer demand based on macroeconomic uncertainty. Over the long term, we aim to reach margins in the low teens, but our plans don't call for us to get there this year. Regardless, both businesses will continue to focus on the optimized and expand pillars of our strategy to grow even further over the longer term. So continued strong performance and aiming to deliver another very solid year. It's worth mentioning that we plan for and continue to see raw material and energy-related inflation. As in the past, our teams have taken appropriate action thus far, and we are continuing to monitor the situation in case further mitigation is required. Now let me walk through the updated 2026 numbers for you. We now expect 2026 net sales to be between $750 million and $795 million. Adjusted EBITDA is now predicted to range from $110 million to $125 million. Adjusted earnings per share are now expected to be in the range of $2.55 to $3.05. The effective tax rate is still expected to be approximately 24% to 25%. As always, this assumes relatively stable economic and supply chain conditions and average snowfall in the fourth quarter. Based on these assumptions and with our current level of visibility, we believe the business is well positioned to drive significant year-over-year improvement. In fact, at the low end of our new guidance ranges, it would be record annual results for our company. In summary, it was an excellent first quarter. We're in a strong position to deliver another positive performance this year. That concludes our commentary. We'd like to open the call for questions. Operator? Operator: [Operator Instructions] And our first question comes from Mike Shlisky from D.A. Davidson. Linda Umwali: This is Linda Umwali on for Mike. My first question -- first of all, congratulations on the quarter. My first question, we're seeing a return of the final mile vehicle market in early 2026. I know that's not Dejana's main business, but are you seeing any tailwinds there? [Technical Difficulty] Operator: Ladies and gentlemen, it appears that our location for our speakers has inadvertently disconnected from the call. I please urge you to stay on the line while we get them reconnected. Thank you very much for your patience. Linda Umwali: Can you guys hear me? Sarah Lauber: Linda, sorry about that. Mark Van Genderen: Not sure what happened. Linda Umwali: No worries good to have you guys on. Yes. So one for Mike. And my first question was we're seeing a return in the final mile vehicle market this early 2026. I know that it's not Dejana's main business, but are you seeing any tailwinds there? Sarah Lauber: Yes, Linda. absolutely. So the final mile business would be part of our Dejana business. It is a small portion for them, less than 5%. I would say, yes, we're still seeing softness there. So when we're talking about commercial softness, economic uncertainty, all of that, that is clearly what we're seeing in that market. So we've not seen a bounce back as of this point. Linda Umwali: Got it. And then my other question, how much of the 1Q revenue upside in Attachments would you consider to be onetime in nature and directly attributable to specific snowstorms -- trying to figure out what to model for early 2027? Mark Van Genderen: Yes, I can -- when we think about the correlation between snowfall and our product lines, the highest correlation or immediate correlation is between parts and accessories. So when we talk about snowfall being up 40% year-over-year compared to last year, that's where we saw a strong Q4 last year and strong Q1 this year. Plows and hoppers, that's a multiyear replacement cycle. So we look back at the last several years of snowfall. And as you know, we had a few lower-than-average snowfall years and then this one, which we would consider a strong one. So it's hard to predict or to say exactly what that's going to look like. But we can say that I'd say a good portion of our increased expectations for the -- what we achieved for the quarter. And then to Sarah's point, raising guidance for the year is really attributable to the strength of P&A in the first quarter in Attachments and a lot of that's driven by what we saw as above-average snowfall. Sarah Lauber: Yes. Linda, I would add on. I mean our volume increased over 60% in the first quarter, driven by the strong storms and record P&A is when the snow is flying. So 1/3 of the increase was related to parts and accessories. So when you're thinking about next year, I would go back to thinking about average snowfall in the first quarter, not the significantly above average snowfall that we experienced. So our prediction on average snowfall would not be at the same higher level of volume. Linda Umwali: Average snowfall. And my last question, does the new Section 232 tariff structure affect Douglas Dynamics at all? Could you actually reduce your tariff impact? And do you know if any of your competitors are in tougher shape due to the new tariff numbers? Sarah Lauber: Yes. So on the tariffs, the impact that we've experienced thus far and the new impacts for us are not overly material. We are very North America-centric. When thinking about the competitors, I can't say that I could point to any that would change their competitive aspects based on the tariffs that we're seeing today. Operator: [Operator Instructions] The next question comes from Tim Wojs from Baird. Timothy Wojs: Maybe just first question. I guess the 35 -- I think it's $35 million or so of the guidance range raise for sales in the new guide. Could you just break down what's kind of the upside from Q1 versus some of the higher preseason visibility that you talked about? Sarah Lauber: Yes. So I'll frame the increase in the guidance. I don't know that I have an exact breakout of that. But when you think about the increase, it's predominantly the Q1 strength that we saw and then the very early indications of preseason. Off the cuff, I would say maybe it's 50-50 between the 2. And then when you look to the midpoint of the new guidance, you can kind of separate that into the 2 segments being also close to 50-50 because we have had a strong start in Solutions also. Timothy Wojs: Okay. Okay. And then I guess what is -- I guess if you looked at the 2 -- what are you expecting for the segments to grow this year kind of in aggregate? Because I'm kind of, I guess, penciling out that Solutions maybe grows kind of mid-single digits. And if that's the case, Attachments might grow over 30%. I guess are those kind of directionally accurate? Sarah Lauber: Yes. In total, also with Venco, I would say our volume growth is between 15% to 20% in total for Douglas and low -- I'm sorry, mid- to high single digits for solutions and then the remainder at Attachments. Timothy Wojs: Okay. And then I guess just the last question on the equipment shipments and kind of the split, is it -- it sounds like things are coming in better than you would have expected, but the preseason shipments are kind of weighted more to Q3 than we've seen in the last couple of years. Is that just purely a timing dynamic that you're seeing? Or is there anything in the customer base that's pushing those orders from one quarter to another? Mark Van Genderen: No, great question. There's nothing we're seeing from a customer standpoint. It really -- if you look at last year, when we came out of the first quarter with higher company-owned inventory, we had inventory available to ship as soon as preseason orders started coming or I should say a higher percentage of inventory available to ship. So we got the preseason orders, so we would send that out to dealers. This year, there's a bit of a reverse in that because it was a strong winter, we shipped a lot of products. Our inventories -- company-owned inventories were lower than they were last year going into the second quarter. So basically, the orders that they're coming in, we're making product and shipping it compared to last year, where we just had more inventory available. So the goal, the ordering pattern isn't coming in any differently this year from our dealers or when they're expecting it. The commitment to them is we'll try to get it to them. Our focus is by the time, as I mentioned, the first snow flies. So whether they receive that in second quarter or third quarter as long as they're getting it in time to install it on trucks and have it stocked, they're fine with that. It's really on our end to be producing the equipment that we're going to then ship out to fulfill the preseason orders, which this year makes it a little more traditional. Timothy Wojs: Okay. Okay. And does that -- I know that's on the preseason shipment cadence. Is it -- does that also kind of fall down to the EBITDA cadence? Or because I think Q2 has always been the strongest EBITDA quarter. Is that, I guess, still going to be the case in Attachments? Sarah Lauber: Yes. I would say the cadence between the 50-50, that falls through to EBITDA. In the same manner. Operator: And ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn the conference back to Mark Van Genderen, President and CEO, for any closing remarks. Mark Van Genderen: I'd just like to say thank you for your time and continued interest in Douglas Dynamics, and we look forward to talking with you soon. Operator: Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone, and thank you for joining us today for the LCI Industries First Quarter 2026 Earnings Call. My name is Sami, and I'll be coordinating your call today. Before we begin, I would like to remind you that certain statements made on today's conference call regarding LCI Industries and its operations may be considered forward-looking statements under the securities laws and involve a number of risks and uncertainties. As a result, the company cautions you that there are a number of factors, which may -- which -- many of which are beyond the company's control, which could cause actual results and events to differ materially from those described in the forward-looking statements. These factors are discussed in the company's earnings release, Form 10-K and in other filings with the SEC. The company disclaims any obligation or undertaking to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements are made, except by -- required by law. In addition, during today's conference call, management will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these non-GAAP financial measures to their most directly comparable GAAP financial measures are available in the company's earnings release and Investor Relations presentation, which have been posted on the Investor Relations section of the company's website and are also available on Form 8-K filed this morning with the SEC. On the call from management today are Jason Lippert, President and Chief Executive Officer; Lillian Etzkorn, Chief Financial Officer; and Kip Emenhiser, VP of Finance and Treasurer. [Operator Instructions] With that, it's my pleasure to turn the call over to Jason Lippert. Please go ahead. Jason, please go ahead. Jason Lippert: Hello, and thank you to everyone for joining us on our Q1 2026 earnings call. We are energized by the momentum we have built in recent quarters as well as by the current strength of our performance in 2026 as we begin the new year with solid results despite continued sluggishness across both retail and wholesale leisure markets. Before diving into the details, I want to recognize the exceptional work our teams have done over the past decade to diversify our business. Against a very challenging industry backdrop, the diversification has clearly proven its value. Our well-balanced portfolio continues to deliver strong results even in cyclical markets like RV experience volume pressure. Achieving this balance has taken time, discipline and continuous refinement of both our teams and our strategy. Our European operations delivered the strongest quarterly results we have seen since building that platform. And our transportation business continues to perform very well as we integrate Freedman Seating and Trans/Air climate control systems. Altogether, our diversified performance meaningfully contributed to LCI achieving an 11.5% EBITDA margin in our Q1 in what we call a pretty turbulent quarter. For the first quarter of 2026, revenue grew 4% year-over-year to $1.1 billion. We expanded profit margins by nearly 100 basis points and grew adjusted diluted EPS by a robust 18%. This outperformance reflects our ongoing investments and the strong execution of our teams as we continue to focus on operational excellence, manufacturing optimization and self-help initiatives. These efforts include significant plant optimizations, disciplined G&A cost reductions and continued volume gains across the increasingly diverse end markets we serve, all while maintaining a strong focus on innovation and customer service, which remain core pillars of our success. Looking at performance by segment, OEM net sales increased 4% to $853 million. RV OEM revenue declined 4% due to lower North American travel trailer and fifth-wheel shipments, which is a strong outcome considering RV wholesale shipments are down more than 12% through the first quarter. At the same time, we grew our Adjacent Industry OEM sales by 17%, driven primarily by higher demand from North American marine OEMs as well as from bus and utility trailer OEM share growth. In addition, Freedman Seating and Trans/Air continue to outperform plan on both integration and synergy realization. As I previously mentioned, our European business also contributed meaningfully following extensive restructuring efforts over the last 18 months that have positioned the region for improved bottom line performance. In housing, sales were flat year-over-year, outperforming a down market due to continued strength in our residential windows, which helped offset lower manufactured housing demand. As we move through 2026, we expect to further accelerate content gains and expand across our 4 OEM markets while continuing to outperform the broader RV industry. We now expect RV wholesale shipments to be in the range of 315,000 to 330,000 units, which reflects a reduction of 20,000 units at both the high and the low end of prior expectations. For the marine industry, we continue to anticipate flat to low single-digit OEM growth this year. Innovation remains a cornerstone of LCI's long-term success and has driven a significant increase in towable content of 73% since 2020. Recent product introductions, including anti-lock braking systems, Touring Coil Suspensions, SunDecks, Chill Cubes, and our 4000 series windows continue to gain traction as customers look to enhance the end user experience. Towable RV content increased 13% over the past year to $5,826 per unit, representing the largest year-over-year increase in our history as we close on the $6,000 content per unit mark. Our 5 most recently launched products are now generating an annualized revenue run rate exceeding $270 million. Looking ahead, we expect approximately $140 million in incremental annualized run rate gains from new product placements during this 2027 model change as well as from market share expansion in the RV space. Our newest product launch is the next-generation leveling and stabilization system for travel trailers that will be more affordable than past generations. It will also be featured as standard equipment across all Brinkley travel trailers at this year's model change. Brinkley's Model I trailers rank among the industry's top 5 trailer brands, which will provide strong visibility for this product. We believe this launch represents a $100 million total addressable market opportunity for LCI and a natural for customers as we are the standout leader in leveling systems for towables and motorhomes. This ongoing innovation, combined with our scale advantages, advanced manufacturing technologies and deep expertise in complex mission-critical components has created customer loyalty that continues to differentiate LCI. Our customers consistently look to us to help them stand out in their respective brands. Turning to Aftermarket. The same customer loyalty continues to drive consistent outperformance. Auring the quarter, Aftermarket net sales grew 7% in a down retail environment for both automotive and RV. Over the past decade, we have embedded more than $15 billion of replaceable content into RVs that will ultimately enter the service and repair cycles. Over the next 3 years, approximately 1.5 million of these RVs are expected to do so, each requiring LCI parts and service solutions across key categories, including chassis, leveling systems, slide-out systems, awnings, suspensions, windows, furniture, doors and appliances, all of which are critical components. Our RV and Marine Aftermarket Care Center and technical teams, now more than 400 team members strong, has been built from the ground up over the past decade. Today, our team support thousands of dealer service and repair locations nationwide and manage more than 2 million customer interactions annually. As a result, LCI remains one of the most visible and trusted brands in the RV aftermarket. A recent milestone in our growth is the launch of our first in-store Lippert product setup within Blue Compass RV, the second largest RV dealer in the country. As we expand these in-store concepts, we create incremental sales opportunities for both LCI and our great dealer partners. The Lippert upgrade experience delivered through our brand-new Lippert factory service centers continues to gain traction by providing consumers and dealers direct access to advanced upgrades such as Touring Coil Suspension, anti-lock braking systems and other advanced Lippert products. As for mobile service and in-factory upgrades, we are now performing more than 200 service appointments each week, and we expect this initiative to become increasingly impactful as it continues to scale. Our automotive aftermarket business is benefiting from a market disruption as First Brands, previously our largest competitor in the hitch and towing space, moved through bankruptcy. We are actively working to capture displaced OEM and Aftermarket demand, representing an estimated $70 million incremental annual revenue opportunity. Our automotive aftermarket business is currently trending up high teens year-over-year in the second quarter of 2026, reflecting early success in capturing this share as well as great incremental growth in this category given where retail demand is. We are also expanding our Aftermarket infrastructure with the addition of 2 major facilities that we've mentioned on previous calls. Our new 600,000 square foot distribution center in South Bend came online last quarter, significantly increasing our national distribution capacity. And the second facility, approximately 400,000 square feet is expected to be completed by year-end and will consolidate several less efficient manufacturing operations that support Ranch Hand-branded products in Texas while also positioning us in a more favorable labor market in Seguin, Texas. Profitability remains a key highlight. Operating margin improved to 8.7% from 7.8% a year ago, driven by efficiency, improved product mix, plant optimization and continued G&A discipline. We continue to evaluate divestiture opportunities for select lower-margin businesses. As a result, we continue to target 70 basis points to 120 basis points of operating margin improvement in 2026 as we progress toward our long-term goal of achieving double-digit margins. Our balance sheet remains very strong, supported by more than $250 million of operating cash flow over the last 12 months and total liquidity exceeding $700 million at quarter end. We remain disciplined in our capital allocation, prioritizing investment in operational excellence, innovation-driven diversification and complementary M&A. Over the past 25 years, we have completed 77 acquisitions and our pipeline of smaller tuck-in opportunities remains active. Most importantly, returning capital to shareholders remains an important priority, which has been supported by a dividend yield above 3.5% and opportunistic share repurchases. With regards to the discussions with Patrick, our Board has determined that the best path forward is to continue executing our strategy as a stand-alone company, a strategy we feel has and will continue to position us and our stakeholders well into the future. In summary, we are confident in our ability to perform through a wide range of macro environments. Our innovation-driven content growth, higher-margin Aftermarket platform, expanding presence across adjacent OEM markets and disciplined execution continue to strengthen our competitive position. Most importantly, none of this will be possible without the dedication and talent of the incredible people of LCI who continue to drive our long-term success. With that, I will turn it over to Lillian to walk through our financial results in more detail. Lillian Etzkorn: Thank you, Jason, and thank you all for joining us. We're off to a strong start in 2026. In the first quarter, LCI delivered revenue growth, margin expansion and significantly higher earnings per share. This performance comes despite weaker industry fundamentals and a full year RV unit outlook that has deteriorated in recent months. Our results reflect the strength of our operating model and the tremendous efforts of the LCI team as we continue to execute on our strategic initiatives to drive growth and profitability. Taking a closer look at quarterly results, consolidated net sales grew 4% year-over-year to $1.1 billion. OEM net sales also grew 4%, driven by a 17% increase in Adjacent Industries OEM. This growth was fueled by strategic investments and stronger sales to North American Adjacent Industries OEMs. These gains more than offset a 4% decline in RV OEM net sales. The RV OEM performance reflects lower North American travel trailer and fifth-wheel shipments, partially offset by price increases to cover increased material costs, a change in our RV sales mix towards higher content fifth-wheel units, growth in our North American motorhome RV unit shipments and progress in our ongoing efforts to take market share. Content per towable RV unit remains a tailwind for us, increasing to $5,826, which was up 13% year-over-year and 3% sequentially. This year-over-year increase was driven by approximately 3% organic growth from innovation and recent product launches, an improved mix of higher content fifth-wheel units and increases in selling prices to cover increased material costs. Content per motorized unit increased 6% to $3,970. In our Aftermarket business, net sales increased 7% year-over-year to $238 million. Growth was driven by price increases to cover higher material costs as well as contributions from strategic investments. Consolidated operating profit totaled $95 million, up a robust 17% over the prior year period with operating margin expanding 90 basis points to 8.7%. OEM operating profit margin expanded 150 basis points to 9%. This improvement was driven by higher prices on targeted products to cover increased material costs as well as our ongoing efforts to enhance operating efficiencies through footprint optimization, material sourcing strategies and other operating initiatives. Aftermarket operating profit margin was 7.8% compared to 8.7% in the prior year period, primarily reflecting higher material costs related to tariffs and steel as well as investments in capacity and distribution to support continued growth in the Aftermarket segment. We were able to partially offset these factors by raising prices for targeted products in response to a higher material cost, along with sourcing initiatives and favorable sales mix. Adjusted EBITDA for the quarter was $125 million, up 13% year-over-year with the margin expanding 90 basis points to 11.5%. GAAP net income increased 27% to $63 million, resulting in GAAP EPS of $2.53. Adjusted diluted EPS was $2.59, reflecting a $0.06 accounting adjustment for dilution related to our 2030 convertible notes. We remain very well positioned from a balance sheet perspective. Cash and cash equivalents of $142 million at quarter end. Revolver availability was nearly $600 million and total liquidity exceeded $700 million. Net debt to adjusted EBITDA was 1.9x, within our targeted range of 1.5 to 2x and reflecting a quarter end outstanding net debt of just over $800 million. Our approach to capital allocation remains balanced and disciplined. First quarter capital expenditures totaled just under $10 million, in line with the prior year. We also look to opportunistically buy back shares under our $300 million repurchase program, and we maintained our quarterly dividend of $1.15 per share with $28 million paid during the quarter. Finally, we continue to seek thoughtful and complementary investments as part of our balanced capital allocation strategy. Turning to our updated full year outlook. RV wholesale shipments are now expected to be 315,000 to 330,000, as Jason mentioned. Marine industry deliveries are still expected to be flat to up low single digits. Despite the subdued industry backdrop, driven by our self-help initiatives and growth platforms, we continue to expect full year revenue of $4.2 billion to $4.3 billion and an operating profit margin in the range of 7.5% to 8%. Reflecting our strong first quarter performance, we are tightening our full year guidance and now expect 2026 adjusted EPS of $8.75 to $9.25. Looking ahead, some of the key growth drivers include continued innovation and increasing content per unit, Aftermarket growth that's benefiting from the growing number of RVs entering the repair and replacement cycle, housing growth benefiting from our growing number of residential window products and increased automotive aftermarket demand. Our adjusted EPS range, representing up to 24% annual growth at the high end is supported by continued margin expansion. We expect to continue our footprint optimization and address another 8 to 10 facilities this year, alongside ongoing efficiency and cost containment initiatives. Rounding out our updated full year outlook, we expect capital expenditures to be $55 million to $75 million for the year, focused primarily on business investment and innovation. In closing, we are off to a strong start in 2026 with our team focused on executing strategies that drive growth, profitability and enhance shareholder value. With that, operator, we'd be happy to take questions if you could please open up the line. Operator: [Operator Instructions] Our first question comes from Nathan Jones from Stifel. Nathan Jones: I guess I'll start with my first question on the Adjacent Industries OEM growth at 17%. Maybe you can give us a little bit more color on where you saw the strength and weaknesses in that segment given that the growth there was so strong? Jason Lippert: I think a big piece of that came from the -- we haven't lapsed the Freedman and Trans/Air acquisitions completely yet. That's part of it. All the adjacent markets are growing a little bit, but that lapse created some additional increase. Lillian Etzkorn: Yes. Nathan, specifically, the revenue from the acquisitions was $47 million in the quarter. So that contains a good chunk of it. Nathan Jones: Fair enough. I guess second question then on the margin performance. It was obviously also very strong. Can you talk about some of the contributors to that? I know you had -- you obviously had some inflation going through the business this quarter and pricing going through it was price cost positive to that or neutral to that? Just any color you can give us on the contributors to the margin expansion. Jason Lippert: Well, I think the biggest piece of the 100 bps or near 100 bps there is the -- all the self-help we're doing with the G&A improvements, all the facility consolidations and things we're doing there. And that's obviously going to continue on through this year. When we talked about the 8 to 10 facility consolidations we have this year, there's some big ones wrapped up in there. We'll be able to give more color at second quarter because really, we're waiting for July shutdown. There's usually a decent time shutdown during the 4th of July, where we can take the time and shut some of these facilities down and consolidate them with others that are still standing. Nathan Jones: And on the price cost equation, are you able to fully offset the inflationary costs, tariff costs with price? Or is there a lag to that? And then I guess just the last one, the changes in tariffs, any incremental impact from those? And I'll leave it there. Jason Lippert: Yes, there's a lot of puts and takes happening at the moment, obviously. I mean, with the new tariff stack after the Supreme Court struck down the old tariffs, there's a little bit of a stack on top of where we were before. We'll be dealing with that over the next months. But our assumption is we're not going to have any different approach or results to dealing with the tariffs that we did in the last few years that we've been dealing with it. So same strategy, going to continue to work on our strategic sourcing, make sure that we're buying from places and buying from countries strategically so that we're not overpaying on tariffs. And if we've got to pass some things along, we're going to do that and do that carefully with our customers. And there will be -- there always is just a little bit of lag as we sort these things out, but it's not meaningful. Operator: Our next question comes from Daniel Moore from CJS Securities. Dan Moore: Looking at the revenue guide unchanged despite obviously a softer RV outlook. Just in terms of where you see the opportunity to make it up. It sounds like you raised the Aftermarket opportunity for First Brands. Are there other things that are trending stronger, be it pricing, content, adjacent markets? Where is the kind of the makeup there? Jason Lippert: Yes. So First Brands and the Aftermarket piece is a piece of it, obviously. We mentioned in the prepared remarks that revenues for our automotive aftermarket division are mid-teens for the second quarter. We've obviously got good visibility in April and May. So we feel comfortable about that. I think the other big piece is the product placement that we've done on the RV side and the marine side for model year change that's coming up here in June. For just the RV piece alone, it was $140 million of new product placement. So that's new products that we've launched and put in the model year change cycles and also some market share improvements in different areas in the business. And we're winning in some of the other diversified adjacent businesses, but the $140 million piece from June forward annualized is probably the other big piece to offset any kind of softness in RV. So... Dan Moore: Yes, really helpful. You mentioned the obvious momentum in Aftermarket. April revenue as a whole down 4%. Just talk about the cadence of revenue entering May and expectations for Q2 more generally that's kind of embedded in your '26 revenue guide. Lillian Etzkorn: Sure. So, as you know, Q2 historically is probably the strongest quarter for us in any given year, and that is what we're expecting for this year as well. So despite April being a little bit softer, we are expecting sequentially to be up and also to be up year-over-year for the second quarter. And then I would say really just normal seasonality as we move through the balance of the year. Third quarter, we tend to have more of the shutdowns, Europe has shutdowns and then fourth quarter, we taper off. But yes, second quarter, we're expecting it to be nice and strong. Dan Moore: Really helpful, Lillian. Last one for me, a little long-winded, I apologize, but you're clearly incurring incremental costs from tariffs, from steel, aluminum, still maintaining 7.5% to 8% margin for the year. Given that a lot of these will likely be passed on with a little bit of a lag and the ongoing facility consolidations throughout the year and lower fixed cost absorption, let's say, we entered the year -- ended the year at kind of that midpoint, 7.75%, what would that imply on a run rate basis entering fiscal '27, assuming inflationary pressures start to level off? Lillian Etzkorn: Yes. So with that, again, kind of from the seasonality perspective, the fourth quarter in terms of a jump point in absolute terms is always going to be the lightest quarter. So I wouldn't necessarily use the fourth quarter as the run rate into next year just because that is the low point. What I would say, and I think it's reasonable to assume is, as you're seeing the year-over-year improvement in margin by quarter to continue to see that improvement kind of as that delta year-to-year as your start point for the following year, I think, is reasonable. And I think the other thing to point out, just in terms of the self-help, yes, it's a lot of the cost activities that Jason is highlighting. But I would also say just from efficiencies and how we're operating within our facilities, the team has done a really nice job of executing on that in some really difficult environments right now from an industry perspective. Jason Lippert: We feel there's a lot of pent-up demand out there. We're obviously not seeing it in the beginning part of the year here on the retail side, although used seems to be up pretty heavy, much bigger than what new is. New seems -- obviously, it's flat to down in most places, but used is up anywhere from high singles to mid-teens on most counts where we're taking those points and talking to dealers. So, yes, I think it really depends a lot on where retail falls and if we can get new going again, we're certainly going to be working with our customers to make sure that we're giving them every opportunity to get at affordability because that's the biggest headache out there when it comes to some of the sluggishness on the new purchases. Dan Moore: Yes. I guess my thought was given the lag in some of the pricing and some of the initiatives, you'd probably be entering '27 at an even higher level on an annualized basis, but I'll take the rest offline. Operator: Our next question comes from Joe Altobello from Raymond James. Joseph Altobello: I want to just follow-up on that line of question along operating margin and the improvement you're seeing this year. Obviously, it sounds like most of that is not volume dependent and it's largely in your control. You're talking about 8 to 10 facilities closures this year. How much runway do you see into '27 on that self-help side? Jason Lippert: Yes. So, obviously, we've got flow-through from all the changes we made last year that are kind of happening throughout this year, and we've got some carryover from that. And then like I said, these 8 to 10, we're literally just getting ready to start making these moves and changes and consolidations in July. So you can anticipate the benefits from all those moves to impact our P&Ls from July of this year through July of next year. And then we've got more self-help initiatives and some other facility consolidations on tap for next year already lined up. So the way I'd categorize what we've done here is, we started thinking really hot and heavy about this in the middle of '24 and started making changes just in the event that things didn't get better and the environment didn't improve. I'm glad we did that. I think a lot of people were thinking that they come into '26 and that volume would have to get better because it's been such a long depressed period of low retail and wholesale activity. But as we've dug into these self-help initiatives and around G&A specifically and around our plant consolidations and optimization specifically, we just continue to find more and more things. I mean the low-hanging fruit, we're kind of taking care of this year, but there's still some things we can do next year, and that will continue to benefit us through '27 and maybe even into '28. Joseph Altobello: Well, that's sort of what I was getting at, which is, if the industry looks next year like it does this year, you still see some pretty good margin expansion. Jason Lippert: Yes. Lillian Etzkorn: Yes, I think that's reasonable. I mean, Joe, as we've talked before, we've put out there the target of double-digit EBIT margins and really a lot of the self-help that we're doing puts us on a nice glide path towards that. Obviously, as we've spoken before, we do need to see some industry recoveries for the markets that we participate in. But we feel real good with the actions that we can take independent of the industry movements to put us on continued progression from the margin aspect. Jason Lippert: And I think the self-help and the consolidations and optimizations are helping a lot more than what we thought. We've had to rip the Band-Aid off in some spots and get uncomfortable. But at the end of the day, we're starting to scratch double digits without the improvement in the market right now. So I think that that's a good sign. Joseph Altobello: Got it. And maybe last one for me. Jason, I'm not sure how much you want to comment on the discussions with Patrick, but maybe talk about what initially attracted you to the deal. And I don't know if you want to talk about why it ultimately fell apart. Jason Lippert: I mean, as you know, I mean, we've done, as we said in the prepared remarks, 77 acquisitions over the course of at least my last 20 years or so in the seat. And we're looking at stuff all the time. And our Board is always challenging us to look at everything from small tuck-ins to large transformational deals. And this just happened to be one that you heard about that got into discussions. But at the end of the day, I mean, of the 77 we've done, we probably talked to 400 people, and there's been 300 that haven't gotten done. So we're always looking at these things, and we're always looking to -- whether it's transformational or small tuck-ins, these things pop up, you just don't necessarily hear about all of them. So that's about all we're willing to comment on, Joe. Operator: Our next question comes from Patrick Buckley from Jefferies. Patrick Buckley: I think you called out strong European results in your prepared remarks. What's driving that improvement over there? Is the broader consumer environment showing signs of improvement from what you're seeing? Jason Lippert: So I would tell you that we've been over there since 2016, starting to accumulate a platform over there. We bought several businesses and put them together to create a little consolidated supply business over there. Since we've been over there, the market doesn't ever grow big or drop fast. It's pretty consistent. So I wouldn't say it's market conditions. About 18 months ago, we decided to completely restructure the business over there, really decentralize it and took away a bunch of a corporate structure we had put together. And then, again, done some of the same self-help initiatives and plant consolidations and optimizations over there that we've done here in the last 18 months and are starting to show through on results really nice. Patrick Buckley: Got it. And then on the Lippert factory service, could you talk a bit more about the size of that today and what you view as the ultimate size and growth potential of that opportunity and maybe the time line there? Jason Lippert: Yes. So it was more of a thought we had last year. We kind of implemented this concept last year to say, "Hey, look, there's just -- as long as we've been in the business, service continues to be a pain point for the consumer." So we decided to put a few of our own up. We have had one here in Goshen for a long time, but we moved out to Howe right off the toll road, bought a bigger facility with some camping spots and things like that. So it's just more of a destination for people to come to. And we've added 2 more facilities at the beginning of this year, tail end of last year. So it's small today. It's not bigger than $10 million, but we've got, like I said, 200 appointments per week right now, and that's continuing to grow as we get the word out and advertised about this, and we're really taking really good care of consumers that come. So our hope is that over the next several years, we can grow this into a bigger platform that's more meaningful, and we'll continue to give you updates as we move along quarter-to-quarter. Operator: Our next question comes from Scott Stember from ROTH Capital. Scott Stember: A lot of facility consolidation going on over the last 6 to 9 months. I know that there was a bunch that took place in 4Q and another 8 to 10 for this year. Can you maybe size up the actual benefit that we'll see down to the bottom line this year just from that because that's a huge part of the story for your results this year? Lillian Etzkorn: Yes. No, that is a key part of the story for the results. And you're seeing it in the first quarter, and we had 80 basis points improvement from cost enhancements. So a good portion of that is going to be from the consolidations that we've done. And like Jason was saying, we expect that to continue as we progress through this year in the second half, similar to last year. Second half is really where you'll see more of the consolidation activity and the benefits starting to realize, call it, towards the end of this year and more so materially as we get into 2027 is where you'll see the greater impact from our actions in 2026. Scott Stember: Got it. And then, Jason, you made some comments about -- I jumped on the call late, so I'm not sure if I heard everything, but some comments about how the Aftermarket is trending currently for you, I think, in April and May. Can you maybe just talk about that again? And then also with used RVs outperforming new, could you maybe just remind us of how much of a benefit that could be for LCI in the Aftermarket with refurbishing, reconditioning units? Jason Lippert: Yes. So first, what I mentioned earlier was that the auto Aftermarket is trending revenue, Q2 up mid-teens from last year. And as you know, we've got 2 key components to our Aftermarket business. We've got the automotive Aftermarket, which is roughly half of our Aftermarket business, and then we have the RV and marine piece, which RV is a big piece of that. I would say the RV side is still -- it kind of follows new units. So if there's less used units, there's a little bit of sluggishness on the Aftermarket side for RV. But with respect to the used units, and Wagner says it best, I mean, every time they sell a lot of used units, they're always refurbishing and creating more value in those used RVs by whether it's repairing and fixing things or just upgrading some things. So there is a little bit of that. It's just hard to quantify because it's just really hard to track. But used units, new units going up, it's good for our Aftermarket business, and we'll continue to see benefit from that as this goes along. But I think the big piece as we keep talking about is, these COVID units that are going to continue to need repair and replacement over the next several years. I mean there is a slug of those, obviously, to the tune of 1.5 million units. And as those start coming in for repair and replacement parts, a lot of that business is going to come our way. Scott Stember: And on the auto side of the Aftermarket, what is driving that demand? And do you think that's sustainable for the balance of the year? Jason Lippert: Yes. Yes, for sure. I mean the big piece, as we keep mentioning is the First Brands kind of that whole bankruptcy that's creating issues. I mean they have not solved the problem. They've not moved any of those businesses to other businesses that have bought those. So the people that were buying First Brands hitches and towing products basically had to go find new suppliers over the last few months. So this is kind of broke loose. And as the second -- is really the largest player in that space, we're the beneficiary of a lot of that new business. So we're trying to take on as much as we can, given our -- given what capacity we have, and we expect that to continue through the long term because there's -- it doesn't appear that there's anything going to happen with First Brands. Operator: Our next question comes from Tristan Thomas from BMO Capital. Tristan Thomas-Martin: Jason, could you update your retail assumption for the year? Jason Lippert: Yes. I'd say we're kind of -- yes, down mid-single digits probably is probably where we're at, somewhere in there. It's hard to say. I think we'll have a really good feel in a few months after we get through the summer selling season here, obviously, but that's our best guess right now. Tristan Thomas-Martin: Okay. And then just looking at Slide 21, your mix of single axle versus multi-axle fifth-wheels, flat year-over-year in the quarter. Do you expect -- is that surprising? I'm curious if you expected that to maybe be a little bit richer. Jason Lippert: Yes. Yes, it is a little surprising. I mean we obviously talk to a lot of dealers. We talked to a lot of the OEMs. Their commentary to us on the single-axle units is they fully expect that to start trending downward at some point in the near future. They said that there's just too much inventory out there. The good news is it slowed down. I mean, for the last several years, it's been going up. So we've seen it flatten out and peak at this point in time, and we expect it to go down on the flip side. We've seen fifth-wheels -- as you know, we build a lot of chassis, and we get to see a lot of these ratios, 1 for 1 and fifth-wheels are up a little bit right now, which is a good sign. We obviously put a lot more content into fifth-wheel units than we do tandem or single-axle travel trailers. So that's kind of what we're seeing right now. Tristan Thomas-Martin: Okay. And then I'm going to sneak in one more. Just how do we -- from kind of a modeling standpoint, I think you called out $140 million from new model year '27 kind of share gains. Does that include the $100 million opportunity from the travel trailer leveling and stabilization system, the one you called out for Brinkley? And then also kind of the $140 million, how much of that falls in calendar '26 versus calendar year '27? Jason Lippert: Yes. It's not a big piece of that. Tristan, the $100 million is a TAM, is the total addressable market for leveling systems of that type. So we're just launching that, and we expect that once Brinkley gets it out there and people start seeing it that they'll want to get a piece of that, at least we're trying to find leveling systems that fit into the lower price point trailers, some of the lower price point trailers. We've already got leveling systems for trailers, for travel trailers that are a little bit more expensive. So our plan is over like any product launch and innovation, we -- 3 to 5 years, we want to penetrate at least 50% of the market. That's kind of our gold standard for product launches. So we've got -- we're off to the races with a really good customer and brand, and we'll get some good visibility, and then we'll see what happens as it makes its way into the market. But a lot of that $140 million is all sorts of products. Obviously, we've been talking a lot about our Chill Cube and our AC movement. I mean, 3 years ago, we were 15% of the AC market. Today, we're close to 60%. We're making a lot of headway with appliances and our TCS, our Touring Coil Suspensions and our ABS suspension products. So suspension appliances, air conditioners are getting a big piece of that $140 million. But we're also making progress with windows and furniture and chassis and some of our other core products. Operator: Our next question comes from Brandon Rolle from Loop Capital. Brandon Roll?: Just first, just digging in on the second quarter, are you expecting operating margin -- sequential operating margin expansion versus that 8.7% you had in the first quarter? Lillian Etzkorn: Yes. Again, the way I probably think about is think of the year-over-year improvement. Second quarter, again, tends to be a pretty strong quarter for us, just given the seasonality. So typically, you would expect to see that sequential improvement and that year-over-year improvement continuing as well. Brandon Roll?: Okay. Great. And then just on the overall industry recovery for the RVs. Clearly, retail is underwhelmed year-to-date. Is there a scenario where you potentially have to start absorbing some of the raw material price increases because the prices are too much to the end consumer or OEMs just begin to push back a little bit there? Or do you feel comfortable you'll be able to push through price regardless of industry fundamentals? Jason Lippert: Yes, absolutely. I mean there's a couple of strategies. One is, obviously, good, better, best. So we're working with our customers all the time on good, better, best products. So trying to find the most affordable options for people to still offer the consumers the best possible RV they can offer them, even if they've got to go from a good product or a better product to a good product or from a best product to a better product. So that's obviously part of the strategy, and we're always having those conversations and making -- running changes with our customers on those types of things. And then the second thing is, we are working with our customers right now on special floor plans and doing some special deals so that we can get some more affordable product into the marketplace on really popular floor plans. So there's not a single large OEM that we're not having those conversations with right now. And we'll continue to work with them as we get through this retail season and see how things are going. But we've got some -- as you know, we've got a little bit of tariff refunds hopefully coming. We don't have visibility on that yet. But if that does flow through and the refunds come through as the government has promised, then we'll be giving back to the large OEMs what they -- what we had to increase them back when those things first came out. So that will give some additional relief, hopefully. But affordability is the key issue right now, and we need to do everything we can as a supplier in the OEM community to give the dealers products that are priced right for the consumers. Operator: Our next question comes from Alice Wycklendt from Baird. Alice Wycklendt: Just want to circle back on the content per unit. Obviously, really strong organic growth of that up 3%, but the other bucket is a big contributor. I think the bulk of that is the index price adjustments. Can you provide a little bit more detail there? And I'm curious on what was the timing of some of those increases and the expected duration of that tailwind for content per unit? Lillian Etzkorn: So yes, so again, just in terms of the breakout for the content improvement, 3% was organic growth, really driven by the innovative products continuing to get traction in the marketplace. And then as we look at that other, it's a combination of the mix. So as we've had greater fifth-wheel units coming into play, that's benefited us. And then probably proportionately as well are those sales price increases to cover the material costs. And really, those started coming into play, I'd say, last year, call it, into Q2, Q3-ish really around the summertime is when we started to see that. So those impacts will continue to benefit on that content unit as we're moving forward. But the unit mix was also an important part of that increase as well just because we have more content on those larger, better equipped units. Alice Wycklendt: And then just maybe want to take a step back. It sounds like integration of Freedman and Trans/Air is going well. But what does the M&A pipeline look like today? And maybe what are you focused on? Jason Lippert: Yes. As always, we've got a lot of names on the list, Alice. And we're -- at any given point in time, we're talking to 4 or 5 different tuck-in opportunities, and those range anywhere from early discussions to LOIs, and we're -- we'll just keep you posted as we get close to getting these done, but the pipeline and multiples really haven't changed much in the last couple of years since we started looking at M&A again. Operator: We currently have no further questions. I'd like to hand back to Jason for some closing remarks. Jason Lippert: Yes. Well, I think the headlines are -- a lot of the self-help that we've been doing is starting to come into play and have a great impact on the results. And after 10 years of really focusing on diversifying the business in all these different areas, all the acquisitions and organic growth we've done there is really starting to play into our results as well, and we're excited to update you on our Q2 results in a few months. Thanks, everybody, for tuning in. Operator: This concludes today's call. We thank you for joining. You may now disconnect your lines.
Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2026 Sequans Earnings Conference Call. My name is Howard, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to Mr. David Hanover, Investor Relations. David, you may begin. David Hanover: Thank you, operator, and thank you to everyone participating in today's call. Joining me on the call from Sequans Communications are Georges Karam, CEO and Chairman; and Deborah Choate, CFO. Before turning the call over to Georges, I would like to remind our participants of the following important information on behalf of Sequans. First, Sequans issued an earnings press release this morning, and you'll find a copy of the release on the company's website at www.sequans.com under the Newsroom section. Second, this conference call contains projections and other forward-looking statements regarding future events or future financial performance and potential financing sources. All statements other than present and historical facts and conditions contained in this release, including any statements regarding our business strategy, cost optimization plans, strategic options, the ability to enter into new strategic agreements, expectations for sales, our ability to convert our pipeline to revenue and our objectives for future operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 as amended, and Section 21E of the Securities Exchange Act of 1934 as amended. These statements are only predictions and reflect current beliefs and expectations with respect to future events and are based on assumptions and subject to risks and uncertainties and subject to change at any time. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. Given these risks and uncertainties, you should not rely on or place undue reliance on these forward-looking statements. Actual events or results may differ materially from those contained in the projections or forward-looking statements. More information on factors that could affect our business and financial results are included in our public filings made with the Securities and Exchange Commission. And now I'd like to hand the call over to Georges Karam. Please go ahead, Georges. Georges Karam: Thank you, David, and good morning, everyone. I'd like to begin with a brief update on our capital allocation strategy, including how we are approaching the management of our digital asset holdings alongside the continued execution of our IoT semiconductor business. Our priority remains clear. We are focused first and foremost on executing our IoT strategy, scaling our product business and advancing our 5G road map in a disciplined way to create long-term shareholder value. In parallel, we have continued to manage our Bitcoin holdings with a pragmatic and opportunistic approach. In light of current market conditions, we made the decision earlier this year to eliminate all debt-related risk by negotiating an early redemption agreement with our debt holders. This allows us to fully redeem the $94.5 million of convertible debt by June 1, 2026, funded through the sale of Bitcoin that had been held as collateral. As of today, we have already redeemed approximately 62% of this debt, and the remaining balance will be redeemed in the coming weeks. By June 1, we expect to have a near debt-free balance sheet with at least 600 Bitcoin held as unencumbered asset. Looking ahead, we do not intend to further pursue our treasury strategy. Instead, our objective will be to monetize these holdings over time in a disciplined manner, balancing market conditions with our broader capital needs. Importantly, we remain focused on maintaining a strong cash position to support operations, invest in our 5G IoT road map and provide stability as we scale the business. Turning now to the operational side of the business. Our IoT semiconductor business continues to demonstrate solid underlying momentum. For the first quarter, we generated $6.1 million revenue. This performance is broadly in line with our expectations and reflects continued strength in product revenue despite supply challenges, partially offset by variability in the timing of services revenue. Looking ahead, we continue to benefit from a strong backlog, which provides good near-term visibility. Our order backlog continues to build with approximately $22 million in revenue, primarily product-related, already secured for the year, along with early indications of orders extending into the first quarter of next year. This provides us with increasing confidence in the trajectory of the business as we move through 2026 and confirms the healthy nature of our design-win pipeline and related KPI we track. Our full year outlook continues to be supported by an increasing number of design-win projects transitioning to production. We entered the year with more than $300 million in potential 3-year product revenue from design-win projects. Of these, 44% had already reached the production phase and are generating revenue. During the first quarter, 3 additional design-win projects transitioned into production, and we expect additional projects to follow in the second quarter. As a result, we continue to anticipate that more than half of our current design-win pipeline will be in production by the end of June, representing approximately $150 million in potential 3-year revenue. We are also seeing strong momentum with the new customer engagements. In the first quarter, we engaged more than a dozen new customer projects with 6 already confirmed as design wins. These programs are expected to contribute to growth, beginning in 2027 and beyond. Our product pipeline remains primarily driven by our 4G, CAT-M and CAT-1bis technologies. It also includes our RF transceiver product, which supports a wide range of software-defined radio applications, including defense and drone use cases. In addition, we have initiated early engagements around 5G eRedCap, which will be the future successor to 4G and cellular IoT deployments. Smart metering, telematics and asset tracking continue to represent our strongest verticals, followed by security, e-health and medical and other industrial applications. Turning now to product ramps and key drivers. Cat-M continues to be a meaningful growth driver in 2026, led primarily by asset tracking and smart metering deployments. This business is scaling in line with expectation, supported by strong visibility and steady ordering patterns as many Cat-M design-win projects are now in production with key customers deployment underway. CAT-1bis is positioned for a breakout year, supported by multiple customer ramps across telematics, security and some metering use cases. We are already seeing revenue contribution from several design wins with additional projects expected to enter production in the second half of the year. We're also seeing incremental opportunities driven by current market dynamics, which are creating opening for Sequans to gain share. In our RF transceiver business, we continue to see stable demand from existing customers, supported by committed backlog, and we expect additional contribution in the second half of the year. At the same time, we are engaging with a number of new prospective customers, particularly in defense and drone applications, and we expect to begin securing some of these opportunities in the near term. We are also advancing discussions around licensing and collaboration opportunities, which could further expand the reach of our RF portfolio. More broadly, our product pipeline continues to mature with several design-win programs progressing towards production. We are also seeing new generation product opportunities with existing customers, which provide incremental upside with our installed base. At the same time, we are actively preparing for the next major transition in IoT connectivity, which is the migration from 4G to 5G. Market demand for our 5G eRedCap solution continues to strengthen, particularly as mobile network operators look to refarm 4G spectrum and accelerate broader 5G deployment. Importantly, IoT applications represent the final phase of this 4G to 5G transition. And these applications require long device life cycle, often 10 years or more, making a seamless and future-proof migration path essential. Unlike the 4G era, where the market became fragmented across multiple cellular technology categories, we expect the 5G IoT landscape to be more streamlined, centered around eRedCap as the primary standard. This creates a more efficient and scalable ecosystem for both customers and suppliers. Sequans is well positioned in this transition. We already have an established customer base across our 4G portfolio, and we expect to leverage these relationships as we introduce our 5G solutions. In many cases, customers will be able to transition using solutions designed to be compatible with existing deployments, enabling a smoother upgrade path. We continue to make strong progress on our 5G eRedCap program. During the quarter, we received our first engineering test chips, which are now in-house and under evaluation. This represents an important milestone as we advance toward customer sampling, which we continue to target for the second half of 2027. Looking ahead, we believe 5G IoT will represent a significant long-term growth opportunity, both in terms of market size and value per device, supporting improved pricing dynamics relative to 4G. Now turning to services and licensing. Our services and licensing business continues to represent an important source of high-margin revenue, although timing of revenue recognition can vary from quarter-to-quarter. On this front, we have several ongoing discussions that could contribute to revenue over the course of 2026. These include engagements with large global partners, licensing and collaboration opportunities, leveraging our RF and 5G IP portfolio as well as a range of smaller service agreements. These opportunities provide potential upside to our product-driven revenue base while also expanding our reach into new markets and applications. We remain focused on converting these discussions into revenue while managing expectation around time. On the supply chain side, we continue to operate in a dynamic cost and supply environment. We are seeing significant increases in memory pricing, which are impacting the cost of both our chips and modules. We are actively working to address these cost pressures while ensuring we can meet customer demand. At the same time, we have taken proactive steps to secure supply, including multi-sourcing across key components such as memory and packaging. Based on our current plan, we believe supply for our 2027 baseline demand is secure, although we continue to monitor potential upside scenarios. Overall, while cost pressures and supply challenges are real, they are manageable and consistent with the broader industry trends. As we move through 2026, we remain focused on disciplined cost management and reducing cash burn. Our objective continues to be reaching a breakeven run rate by the end of the year as revenue scales. We implemented the cost reduction plan at the end of last year. And while the full benefits will not be realized until midyear, we are confident in achieving our expense targets in the second half. Working capital dynamics will continue to evolve alongside growth, particularly as we support production ramps and manage supply chain requirements. These dynamics may create short-term variability, but they are aligned with long-term revenue growth. Overall, our performance underscores the progress we are making in strengthening our core IoT business, improving financial discipline and maintaining flexibility in our capital strategy. Regarding our outlook for the second quarter, we currently expect revenue to be in the range of $6.8 million to $7.4 million, driven predominantly by product revenue, with potential upside if new licensing deals are closed. Based on our backlog and continued momentum across our design-win pipeline, we expect revenue to build sequentially throughout the remainder of the year. We also remain focused on reducing cash burn and continue to believe we can approach cash flow breakeven by the end of the year as the business scales. Looking ahead, we continue to evaluate strategic alternatives that could accelerate profitability and unlock additional value for shareholders. What's clear to us is that we are operating from a position of strength. We have a solid balance sheet, a growing and increasingly productive IoT business and a differentiated 5G and RF IP portfolio that we believe will be a key driver of long-term value. As we discussed earlier, the transition from 4G to 5G in IoT represents a fundamental shift in the market. With eRedCap expected to become the primary standard, we believe this will create a larger, more unified and more scalable market than what we saw in the 4G cycle. Sequans is uniquely positioned to benefit from this evolution. We expect to leverage our existing 4G customer base as a natural entry point into 5G, enabling a more efficient transition for our customers while accelerating our own time to market. Combined with the expected premium pricing and expanded market opportunity, we believe this positions us to drive meaningful long-term growth and improved profitability. In parallel, we will complete the redemption of our debt by June 1 and continue to manage our capital allocation with discipline, maintaining a strong cash position while preserving flexibility to act opportunistically as conditions evolve. Overall, we remain focused on scaling our IoT business, advancing our 5G road map, developing our new RF transceiver business and executing against the key drivers that we believe will unlock the full value of Sequans over time. With that, I will now turn the call over to Deborah to review our financial results in greater detail. Deborah? Deborah Choate: Thank you, Georges. Hello, everyone. I'll begin by reviewing our first quarter financial results and then provide an update on our balance sheet and digital asset holdings. During the first quarter, our financial results continued to reflect the underlying momentum in the IoT business, along with the impact of actions taken earlier this year to strengthen our balance sheet and simplify our capital structure. For Q1 2026, total revenue was $6.1 million compared to $6.9 million in the fourth quarter. As Georges mentioned, revenue in the quarter was primarily driven by product sales with ongoing variability and licensing and service revenue timing. Gross margin for the quarter was 37.7% compared to 41.4% in the fourth quarter and reflects the ongoing impact of supply chain dynamics and especially revenue and product mix. Operating expenses in the quarter, including R&D and SG&A expenses, were $11.8 million compared to $12.3 million in the fourth quarter. We continue to make progress on our cost reduction plan and remain on track to achieve lower operating expense levels in the second half of the year. During the quarter, we recorded $29.3 million of noncash charges related to the mark-to-market valuation of our Bitcoin holdings compared to a loss of $56.3 million in the fourth quarter. As a reminder, these charges are driven by market price movements and do not reflect underlying operating performance. We also recorded $11.7 million of realized losses on the sale of Bitcoin during the quarter compared to $6.1 million of losses in the fourth quarter, primarily associated with the ongoing redemption of our convertible debt. As discussed previously, the convertible debt and associated embedded derivatives continue to be remeasured each reporting period, resulting in noncash impacts to the P&L. In addition, IFRS accounting requires us to recognize noncash interest expense associated with the 0% coupon instrument. Reflecting these factors, we reported an IFRS net loss of $54.3 million for the quarter compared to an IFRS net loss of $76.4 million in the fourth quarter. On a non-IFRS basis, excluding significant noncash items, we reported a net loss of $20.7 million or $1.42 per ADS compared with a non-IFRS net loss of $16.2 million or $1.04 per ADS in Q4. The comparative numbers for Q4 and Q1 2025 have been adjusted from the unaudited figures published in February 2026 and May 2025. In finalizing the 2025 audit, we made adjustments related to the timing and amount of revenue recognized, the accounting for the compound financial instruments issued in July 2025 and related embedded derivatives, finalization of the ACP purchase accounting and other adjustments attributable to normal year-end closing procedures, audit adjustments and the completion of management review. We are currently still finalizing with our auditors the documentation and disclosure of the impairment test for ACP, goodwill and other acquired intangibles on the balance sheet. The ongoing discussions regarding determination of the cash-generating units to be evaluated and the most appropriate valuation models resulted in delays in issuance of the audit report, and therefore, we filed a statement indicating we would need to extend our filing deadline. We expect to file our Form 20-F this week. Turning to cash flow. Normalized cash burn for the quarter was just under $10 million compared to approximately $7.7 million in the fourth quarter, including working capital movements. As Georges mentioned, working capital can fluctuate as we support production ramp and secure supply. During the quarter, we continued to execute on our balance sheet strategy. As of March 31, 2026, we had redeemed $28.3 million of the $94.5 million face value debt that was outstanding on December 31, 2025. As of April 30, we had redeemed approximately 62% of this convertible debt, funded through the sale of 800 Bitcoin, leaving a balance of approximately $35.9 million due, which we expect to redeem in full by June 1, 2026. At the end of Q1, we held cash and cash equivalents of approximately $10.6 million compared to $13.4 million at the end of 2025. As of the end of Q1, we held 1,514 Bitcoin compared to 2,139 Bitcoin at year-end 2025. And as of April 30, we held 1,114 Bitcoin and expect that we will hold at least 600 Bitcoin after full redemption of the debt, all of which will be fully available for sale. Following completion of the debt redemption, we expect to have a near debt-free balance sheet with a simplified capital structure and increased financial flexibility. Overall, our financial results for the quarter reflect continued progress in scaling the IoT business, improving cost discipline and strengthening the balance sheet. Before turning the call back to Georges to conclude, I'd like to cover a few housekeeping matters. We expect to conclude the final audit procedures with our auditors this week and be in a position to file our annual report on Form 20-F. Since we filed an extension notification last week, as long as we file by May 15, we will still be considered a timely filer. We are currently preparing for our Annual Shareholders Meeting on June 30, 2026. You should expect to see voting materials by early June. Most of the resolutions will be our normal recurring resolutions that you see each year. One of these resolutions is to ask for authorization for a capital increase. This year, we will ask for authorization to issue up to 7.5 million ADS, including up to $15 million in the form of convertible debt. We would like to clarify that we are asking for this authorization only to provide flexibility in the event that we have a strategic opportunity that would require issuance of convertible debt or equity. We currently have no plans to do any equity raise to finance operations. In fact, the shelf registration statement and ATM program that we filed in August 2025 were filed when we had the market cap to be an accelerated filer and were automatically effective. Upon the filing of the 2025 annual report on Form 20-F, we will no longer satisfy the requirements for using an automatic shelf, and therefore, we can no longer issue equity under that August shelf registration or the ATM program. With that, I'll turn the call back to Georges. Georges Karam: As we close, I want to reiterate that our primary focus remains on executing and scaling our IoT business and expanding to software-defined markets such as drones and defense. We are seeing solid momentum across the portfolio, supported by a growing backlog, a maturing design-win pipeline, an increasing number of projects transitioning into production and several advanced licensing and services deals. With continued strength across Cat-M, Cat-1bis and RF transceivers, and with early engagement around 5G eRedCap, we believe the business is well positioned to drive sequential growth while maintaining a clear path towards cash flow breakeven. At the same time, we have taken decisive steps to simplify and strengthen our balance sheet. By eliminating our convertible debt and transitioning away from the treasury strategy, we are increasing financial flexibility and sharpening our focus on the core business. Going forward, our priority is to monetize our remaining Bitcoin holding in a disciplined way while ensuring we maintain the liquidity needed to support operations and invest in our 5G road map. Overall, we believe we are entering an important phase for the company with a stronger financial foundation, improving operational visibility and a clear path to long-term value creation. Thank you for listening. We can move now, operator, to the questions, if you don't mind. Operator: [Operator Instructions] Our first question or comment comes from the line of Luke Horton from Northland. Lucas John Horton: This is Luke on for Mike Grondahl. Just wanted to touch kind of on the 5G road map and pipeline you have there. And I guess, specifically with RedCap, I guess, how large do you expect this opportunity to be relative to the existing kind of Cat-M, Cat-1 business? Georges Karam: Yes. Luke, I mean, just not to be confused, you said RedCap, I'm talking about eRedCap. eRedCap is really the standard that's going to replace literally CAT-M and CAT-1bis. When you look to the 4G -- the 4G IoT, we had like 4 technology used in 4G: NB-IoT, mainly in China, but you have some in Europe and even in Australia and other place; Cat-M, mainly U.S., Japan and half of Europe, I would say; CAT-1bis is -- and CAT-1, which is the fourth one. And as you see, this is really because IoT -- cellular was for the first time entering IoT and for the good and the bad, they ended by having almost competing technology, not 100% competing, covering some application, but there is also a piece of it competing. And this fragmented the market. Obviously, now the carriers, starting in the U.S., and obviously, this will be followed by other region of the world, the carriers, they would like to finish their deployment of 5G. And in other words, they need to refarm the 4G spectrum to use it on 5G and one day switch off the 4G. To do this, you can do it today for all applications on the phone, but you cannot do it for IoT because all the IoT runs on 4G. That's why there is a push to come with the IoT -- 5G IoT, and this is the eRedCap. So eRedCap, by definition, will come and replace [indiscernible] all those Cat-M, NB, CAT-1 and CAT-1bis. You will have like kind of supporting low speed and medium speed. The same technology is able to do this. And because it supports 5G, it will have a little bit higher ASP. And because it supports the low speed and the high speed, so it will be really benefiting from the continuation of the IoT business in cellular and it will be expanding over time as well increasing in the price and increasing the size. So definitely, the opportunity will be, let's say, at least the sum of the 4 opportunity of Cat-1, Cat-1bis, Cat-M and NB-IoT today, plus some premium, let's say, 10%, 15% related to ASP increase because of the 5G. Lucas John Horton: Okay. Got it. I appreciate the color there. And then I guess on the kind of $300 million pipeline that you called out with about 50% of that expected in the next 3 years. And then also just kind of given the sequential growth acceleration, kind of quarterly cadence throughout this year, I guess, where does that confidence come from? And could you provide any other color around those? Georges Karam: Yes. Sure. Luke, I mean, the $300 million, this is what we had, let's say, on January this year as design win in hand, and we said like first 4% of them were in production, which means generating revenue. And we expect to be, by June, 50% of them in production, which will be $150 million. In other words, if you take $150 million in average over 3 years, this is $50 million yearly revenue in average. Obviously, there will be a ramp depending on the project, year 1, year 2, year 3. And the confidence there continues to build. And literally, when you look to our backlog, if you compare this to beginning of the year, this year in Q1, as I'm speaking, we have backlog securing close to $22 million for the year, this year, in product revenue. And we have even portioned, like $2 million, $3 million already in hand for Q1 next year. This backlog is coming from existing design win in production. And this means all our analysis on the fact of our design-win pipeline is really true and accurate, if you want, reflected in the ramp of our customers. So that's why we have really strong confidence on this. Now obviously, we need to continue the conversions from design win to full mass production. That will happen in the second half of the year, I would say, in June and beyond June, let's say, for the second half of the year. And to some extent, if you look to Cat-M business, Cat-M business today is really -- versus our target, we feel almost secured. I don't want to say 100%, but maybe 90% of our plan is already in hand. Why? Because on the Cat-M is really -- a big portion of the Cat-M is design win in production. The Cat-1bis, we have design win, not all of them in production, and this is the piece where we're still working on to ensure the ramp is going to continue in the second half of the year in terms of product revenue. Lucas John Horton: Okay. Great. And then just lastly for me on the digital asset strategy after the June 1 redemption, how do you think about Bitcoin holdings on the balance sheet and kind of capital allocation strategy, I guess, kind of specifically in different crypto market situations, like if there were to be another bull run in crypto versus kind of digital asset pricing pulling back again? Georges Karam: Yes. I mean, Luke, I mean, we went through digital asset thinking seriously that we can develop this business and we can trade above NAV. And then after this, maybe separate the 2 business, which is the core business, IoT from the digital assets because they cannot live together forever. I mean it was really -- my plan was if the 2 -- if digital asset is working in addition to the IoT, knowing that IoT will be working, we'll have, at some time, to separate them and do something there. Unfortunately, for many, many reasons, the digital assets didn't work in a sense like we were not able really to create -- to benefit from the leverage of the debt and be able to get our NAV higher than [ 1 ] , allowing us to keep scaling. So any digital asset strategy needs to have the ability to scale in number of Bitcoin and so on. And unfortunately, because we realized on top of this, the pressure on the Bitcoin, put us almost at risk. And I believe many people were nervous at the beginning of the year if this can hurt the IoT business as well. For all those reasons, we decided really to take out the risk by redeeming the debt. And obviously, from there, have a balance sheet which is clean, no debt. We'll have there, obviously, Bitcoin after -- in June 1. From there, the question becomes, are we going to go and buy Bitcoin? I don't believe so today. This is what I'm clear on it. Now we will have a holding, more than 600 Bitcoin. Are we going to sell them on June 2? I don't believe we'll be doing this on June 2, but we will be taking our time to monetize those Bitcoin in the coming, I would say, couple of quarters, knowing that the purchase price of this Bitcoin, I mean, is higher. And obviously, the trend we are seeing today that the Bitcoin is going into the right direction. So we would like to benefit from this if we can. But in any case, we'll not sacrifice IoT. And in other words, we secure enough cash on the balance sheet to be sure that the company can operate independent of the variability that you could see on the Bitcoin. Operator: Our next question or comment comes from the line of Scott Searle from ROTH Capital Partners. Scott Searle: Maybe just to dive in, Georges, on the RF business, it sounds like there's a lot of momentum building. Could you calibrate us in terms of where that is from a current revenue standpoint, what the backlog and opportunity looks like as you think about '26 and '27? And then as it relates to the RedCap -- eRedCap licensing opportunity, it sounds like there are a number of opportunities in the pipeline. I wonder if you could provide a little bit more color in terms of the magnitude and time line that you could see some of these deals materializing maybe a little bit in terms of how you're thinking about different vertical markets on that licensing front? Georges Karam: Yes. Scott, thanks for the questions. Indeed, as you know, one of the nice surprise we saw this year, which is we acquired the ACP and by acquiring ACP, the original goal was there to get the IP of the RF and accelerate our 5G eRedCap road map. And this is really executed on. As I said, we have already a chip in-house, and this has all the RF and all the analog and everything is working well as we are speaking. So this is -- we did it. But at the same time, we have, let's say, as a bonus on top of this, a product -- RF product that can be sold on stand-alone to existing customer. And when we dig in, we realized that this product is really a great product to go to drone market and defense market where you have very high ASP, very high margin and the market is booming. From this, we obviously secure the existing customer we have. And I could say today, around those customers, we could be doing close to, maybe this year, $5 million or $4 million, $5 million. They are not -- they are -- I'm putting inside this as well the royalty we collect with our Chinese RedCap. But let's call it, outside of this regular IoT business, we have around $5 million almost secured for the year and maybe we can do a couple more, depending, in the second half, if the backlog will confirm versus forecast. But the good news as well there is like we expanded to go to this defense market and drone market. And here, since we announced the Iris family, this product, we had like a dozen of leads across the world, really from many, many countries. And we realized that we have really great product, very competitive in terms of feature set, and people are really happy to use it and test it and engage projects. And as I'm speaking, I have at least several -- a few of them very advanced to consider it a design win. I don't qualify it yet a design win, but a few of them are there. So the potential of this RF business, honestly, could be -- when we're talking about the market, it's very hard to size this market around defense and drones, if you take only the transceiver business, but we are talking about maybe $100 million plus per year potential market. And as you know, this is really very high margin. We're talking about 99% gross margin. So we believe like it makes sense for us to capture a nice market share from there, whether 20%, 30%, we'll see how good we are. but this is really a very nice potential for the company, coming almost with very minimum investment. The only investment we are doing is really in support, marketing because the R&D is already done. So this is on the RF. And then if I look to the licensing and in general, those opportunities, licensing remains very important for us, specifically if we want really to achieve our cash flow breakeven in Q4. Even if the product revenue is really growing nicely, and if you look to our number in Q1, 90% plus is product and my guidance for the Q2, same. So we are really moving to almost product revenue, but we still have several deals under discussion, maybe more than 5 of advanced discussion covering RF covering the eRedCap or let's say, the modem portion as well as the protocol for satellite communication. So on those, we are advanced with many of them. We hope we'll close something in Q2. We're not -- timing sometimes, it's not obvious how much revenue you can take it if you close at end of June. But we are looking to close at least 1 deal this quarter and maybe another 1 or 2 in the second half. And those deals, they vary. I mean there is -- obviously, we have some smaller ones. I'm not mentioning this. It could be a few hundred thousand dollars, but those are really associated with the product revenue in general. But pure service revenue, we're talking about deals here, they could be from a couple of million dollars up to $15 million, 1-5, that we are contemplating there. So potential is big. But obviously, they are binary. I mean, if you get them, you get the $15 million, if you don't get them, you get 0. But we have, as I said, several of them quite advanced. So that's why we are optimistic that we can secure something this year that can help us support -- that add to the product growth in the second half of the year. Scott Searle: And then, George, looking to the second half of this year, you're talking about getting cash flow breakeven. That obviously implies that the product revenue ramps considerably in the second half of this year. Could you expand a little bit on your confidence level on that front? Certainly, that $300 million pipeline is helping, but it sounds like new wins are starting to ramp as well. And could you give us an idea about where you expect product to ramp to by the end of this year? The backlog supports some of that current visibility. But just kind of maybe help us out a little bit with some end markets and the competitive landscape as well. Cat-1bis is very, very hot right now. Kind of where you guys stand from a win rate on that front? Georges Karam: It's really -- the confidence is coming with the maturity of the design win, means those design wins are already in production. Everything which is in production today, and we start to have a sizable number of projects, and as I mentioned, mainly in metering and tracking. These are the 2 markets where we are very good at in a matured way. All those are coming, scaling. Last year, we did some number. This year, we plan to do something that's already secured. So the confidence level is really coming very strong from everything in production. So if I look to my ramp for everything in production, I'm more than 90% sure about it. Everything really shipping. It's really good. We have backlog and we have forecast from customers, and we should have no big surprise in the second half on this. The other piece, which is really where really the risk is or, let's say, where we have a little bit of challenge of timing, not to lose the customer. But if we are planning, obviously, and mainly in the Cat-1bis space because the Cat-M is much more mature today, more than 90% of the Cat-M -- of our Cat-M plan this year is already done, as I said, while maybe in terms of Cat-1bis, we are at 30%, let's say, if I give it a number. Why? Because the Cat-1bis is a product that we introduced after the Cat-M, which means the design wins we have there came later and those guys are not yet all in full production. Some are in full production, and we continue to win in security and telematics and they start moving and we start getting order. But obviously, we're expecting to have more in the second half. So this is the risk really or, let's say, the point to observe if those Cat-1bis projects come on time in terms of moving to production in the second half of the year. But we are optimistic because they are happening and the customer is serious, the projects are moving. And if there is a shift, it will be really minor delay with the customers taking a month or 2 delay, but this will happen at the end of the day. And then if I look to the RF, I told you already, I mean, we are in good shape there because all what we have in hand, we secured maybe 60% power plant in RF already. Still the remaining needs to happen in the second half based on forecast, not yet an order, but based on forecast. So all this give us strong confidence, to be honest. And when you compare to the last year, it has nothing to do -- I mean the company really now -- we talk about many, many customers, many projects, repeating order, established customers to whom we ship -- we ship to them maybe in the last 2 years already, maybe a little bit and growing. And some we started shipping last year and now growing strongly this year. So that's why we are really very, very positive on the ramp of our product revenue in the coming quarters. Scott Searle: Very helpful. Georges, maybe just quickly, the competitive landscape right now for Cat-1bis and kind of what your win rate is. And Deborah, if you could remind us, I know that there -- you've got cost reduction efforts, but there are a lot of moving parts in the world today with currency fluctuations, et cetera. What should we be thinking about in terms of where that OpEx is in the second half of this year and therefore, the breakeven? Georges Karam: Yes. I mean on the competitive landscape, there is not a big change, to be honest, Scott. It's the same thing. Even if -- I saw in the Cat-1bis, Nordic announcing a product, I believe they got it through IP licensing from somewhere, without saying more on this. But you need to understand that Cat-1bis in the U.S. is closed. There is no more certification of new module in Cat-1bis. So any new Cat-1bis will be coming more to address Europe and not in the U.S., not North America. And there, if you go to North America, it's left between Qualcomm and us, to be straight on this. And the challenge of all this, again, you need to imagine that starting in 2029 and maybe not that far, maybe 2030, if this shifts a little bit, you're going to see all the market will be pushing to get eRedCap support, 5G support and you will not be able to deploy new product with 4G without having the 5G. So -- and here, obviously, the competitive landscape is who has 5G technology. And as you know, we benefit from all the investments we have done in the 5G, and we believe we'll be leading in the eRedCap in the market and take a strong position there. Deborah Choate: Yes. And on operating expenses, we expect those to keep coming down. We're targeting to have cash operating expenses below $10 million, targeting $9 million by the end of the year. Operator: Our next question or comment comes from the line of Jacob Stephan from Lake Street Capital Markets. Jacob Stephan: Maybe first, I want to touch on the balance sheet, kind of post June 1. Obviously, $10.6 million in cash. Just kind of help walk us through that a little bit. I know you're going to have roughly 600 Bitcoin, but the collateralized number of 817 that you guys cited in the press release, I guess when you kind of subtract the current holdings from that number, you get like 300. So can you kind of walk us through that a little bit? Georges Karam: Yes. I mean, Jacob, you're right. I mean it's a little bit tricky because we have some Bitcoin already free. We have around 300 Bitcoin in hand that they are free. They are not part of the 800 that Deborah was mentioning. When we talk about the 800, we're talking about the piece which is in the collateral. And obviously, the deal we have with our debt holders is we're keeping all the amount of Bitcoin in collateral until we redeem all the debt. So obviously, once we redeem all the debt, we get all what's left in there. So the more than 600 -- we'll be at least 600, I believe, we should have more. Mainly if the Bitcoin stays where it is today, maybe we'll have a nicer number. It's just only the fact that you pay what's left -- you sell the Bitcoin, you pay what's left. And then when you combine what's left from the collateral plus what we have already in hand, free Bitcoin, we'll end above 600 Bitcoin. So in a very simple way, don't matter the detail there. On June 1, we'll pay all the debt. We'll have more than 600 Bitcoin. And we'll have almost debt-free company, maybe we have $1 million or $2 million. Deborah Choate: The only remaining debt after that will be related to government, like R&D funding that's 0 or low interest. Georges Karam: More short-term debt. Jacob Stephan: Got it. So the actual collateral, the $62 million or so is really just security for the $36 million of debt. But once you pay the $36 million of principal off, that's the remaining. Deborah Choate: Yes. Jacob Stephan: Okay. I got you. Second, I just want to touch on the supply chain. I know you guys talked a lot about it with the memory costs increasing, but what's kind of your confidence level you can procure any additional supply, should any of the kind of upside opportunities that you mentioned to the full year present themselves? Georges Karam: Yes. I mean the -- you're absolutely -- you're mentioning a good point, Jacob. On one side, what I said, like for our, what I call it, baseline, we are good today. We were not -- last quarter, we were a little bit worry about Q4. Now we are fine. I mean maybe we'll not -- however, we are short in terms of covering upside, depending how big is the upside, right? I mean if we have a big deal and we need to serve it in Q4, we'll be short if I look to the number today. However, we have capacity to increase, we will be paying more in reality. So there is always some supply capacity that will cost you more, like you lose on margin and so on. So we are contemplating this. We are working on those angles. We believe there is a potential of upside that we can cover it, but maybe this will come with a reduced margin if we have to get it because we'll be paying more. And on the memory supply, as you know, this is an industry problem today and mainly driven by AI demand. But just to make it very simple, for me, even if there is -- even if AI is taking all the capacity of memory, if this is true at the end of the day, AI will not work neither, right? Because you cannot have all the electronic only running with the AI processor, right? I mean you need a lot of things around it, some communication and so on, and you need memory. So there is availability of memory, just only people benefiting off the cycle. And I can tell you, you have crazy price increases. We're not talking in percentage. You talk about multiple -- you can talk about 2x, 3x, some memory, sometimes more than this. So that's what we are seeing. And obviously, this is the industry trend. We cannot fight for it. But however, we have good relationship with the supplier, and we are securing our capacity. So we are not missing capacity. We also introduced some second sources on some of them. We have one memory, which was really key. We have already a second source already available and shipping to some customers, not to everybody. And obviously, over time, this gives us a chance as well to secure supply, but also keep pressure on the pricing not to pay -- at least to pay based on what the market is setting as a price for memory. Operator: Our next question or comment comes from the line of Fedor Shabalin from B. Riley. Fedor Shabalin: Georges, Once the convertible debt is fully redeemed, how should we think about the preferred use of the proceeds from the sale of remaining Bitcoin? How would you rate funding operational expenses versus maybe share buybacks? Georges Karam: Yes. Fedor, I mean, it's a good point to mention on this. Obviously, we still have the share buyback plan in hand, and we can execute on it. And in Q1, we did some share buyback already. Honestly, we don't need all this money on our balance sheet. And as I'm speaking, we'll be turning -- we don't need it in a sense for operation, for cash burn. Our cash burn should be reduced and be limited, and this will put the company in a very strong position in terms of balance sheet. The option of buying opportunistically, we could be looking to this. We're not giving up on this, making some buyback. Obviously, it depends on the business evolution in the second half, on the licensing deal we secured, let's assume we secure a big licensing deal and we add -- because maybe on revenue, we will not take all the deals now, but this can add a lot of cash because in the licensing deal, you have always some upfront payment that could be significant. There, maybe we feel like we have enough cash to -- and if the share is not performing, to come and support the share and make some buyback. So this is really on the agenda of the Board, and we can execute on it opportunistically, based on the market condition. Fedor Shabalin: That's helpful. And my follow-up is about -- you did a great job outlining revenue pipeline and timing and cadence for 2026, and the same for operating expenses. I would like to dig a little bit deeper into details on operating expenses side. You mentioned that you would expect decrease in OpEx for the year. And I remember you mentioned $9 million, something like that, the number by the end of 2026. Where most of the savings come from on the OpEx side? That's the question. Georges Karam: Yes. I mean, Fedor, last year -- to be honest, now the company is in, I would say, efficient mode. But as you remember, last year, with all the movement of the company with the deal we did with Qualcomm and we had the acquisition of ACP, and we have a lot of even exceptional items related to Bitcoin, digital strategy in general as well. So all this, let's say, got cleaned, we cleaned it in Q4. Some of it was not effective in Q1. So -- and some will be effective in Q2. And for sure, by end of Q2, we'll get the full benefit of what we have. And we continue watching this. But in general, the focus was really -- we have our -- if I take in terms of R&D, our 4G product is maturing. There is only need for support on the 4G product. So in other words, we moved all the spending in 5G -- sorry, in R&D to 5G and with very minimum 4G, just all what we need for the support. This was an angle of saving. The investment into the 5G was aligned with time to market. We could go much faster if we want. We can go slower. And this was the decision based -- we need to be just in time. We don't want to be, with our eRedCap, 1 year ahead of time because this will not benefit for the company. And we don't want to be late. So -- and this also give us a variation, if you want, that a level -- a variable that we can play with. And obviously, in general, I would say all the G&A spending... Deborah Choate: Yes. I don't think -- there's not one particular item, but across the board, we've had some planned headcount reductions, basically people leaving that we're not replacing. We have -- we work with a certain number of contractors that gives us leverage there when we are -- to reduce that number as different R&D projects finish. We've also looked at just the overall structure in terms of rent, basically, overall, all of the G&A expenses are being reduced across the board. Operator: I'm showing no additional questions or comments in the queue at this time. I'd like to turn the conference back over to Mr. Georges Karam for any closing remarks. Georges Karam: So thank you all for joining the call and for all your questions. Looking forward to see you in the near future. Bye-bye. Operator: Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.
Operator: Hello, and welcome, everyone, joining today's Onity Group's First Quarter Earnings and Business Update Conference Call. [Operator Instructions] Please note, this call is being recorded, and we are standing by if you should need any assistance. It is now my pleasure to turn the meeting over to Valerie Haertel, Vice President, Investor Relations. Please go ahead. Valerie Haertel: Good morning, and welcome to Onity Group's first quarter 2026 earnings call. Please note that our earnings release and presentation are available on our website at onitygroup.com. Speaking on the call will be Chair, President, and Chief Executive Officer, Glen Messina; and Chief Financial Officer, Sean O'Neil. As a reminder, our comments today may contain forward-looking statements made pursuant to the safe harbor provisions of the federal securities laws. These statements may be identified by reference to a future period or by use of forward-looking terminology and address matters that are uncertain. Forward-looking statements speak only as of the date they are made and involve assumptions, risks, and uncertainties, including those described in our SEC filings. In the past, actual results have differed materially from those suggested by forward-looking statements, and this may happen again. In addition, the presentation and our comments contain references to non-GAAP financial measures, such as adjusted pretax income. We believe these non-GAAP measures provide a useful supplement to discussions and analysis of our financial condition because they are measures that management uses to assess the performance of our operations and allocate resources. Non-GAAP measures should be viewed in addition to and not as an alternative for the company's reported GAAP results. A reconciliation of these non-GAAP measures to their most directly comparable GAAP measures and management's reasons for including them may be found in the press release and the appendix to the investor presentation. Now I will turn the call over to Glen Messina. Glen Messina: Thanks, Valerie. Good morning, everyone, and thank you for joining our call. We're looking forward to sharing our results for the first quarter, as well as reviewing our strategy and financial objectives to deliver long-term value for our shareholders. Let's get started on Slide 3. In the first quarter, we delivered double-digit year-over-year growth in adjusted revenue, origination volume, subservicing additions, and total servicing UPB. Our balanced business performed well in the face of record prepayments with origination profitability partially offsetting higher MSR runoff in servicing. First quarter results were impacted by heightened interest rate and financial market volatility, higher-than-expected refinancing activity, and increased FHA late-stage delinquencies driven by recent changes to the FHA loan modification rules. We are taking decisive actions to address these items while continuing to execute on our growth initiatives and the fundamentals of our balanced business model, which has proven resilient over the long term. As a result of discussions with Ginnie Mae, we've revised our recent proposed strategic partnership with Finance of America Reverse and resubmitted the transaction for approval. Finally, considering ongoing market volatility due to geopolitical events, we are revising our full year 2026 adjusted ROE guidance to 10% to 15%. Let's turn to Slide 4 to review a few key financial highlights. We increased revenue double-digit year-over-year, reflecting strong growth in origination volume, subservicing additions, and total servicing UPB. Elevated refinancing activity, driven by lower interest rates and higher-than-expected consumer refinancing response, helped Consumer Direct increase origination volume by nearly 4x over the first quarter of last year. Net income attributable to common shareholders for the first quarter was $7 million, or $0.74 per share diluted, down from $21 million last year. Similarly, our adjusted pretax loss of $6 million was below prior year and last quarter adjusted pretax income levels as origination income only partially offset higher MSR runoff. While origination adjusted pretax income of $34 million was up 3.5x over prior year, it included the impact of both market volatility effects on origination pipeline hedging and loan sales performance and capacity limits due to the elevated consumer refinancing response. Servicing income was down $54 million versus prior year due to higher-than-expected MSR runoff and higher FHA late-stage delinquencies due to the recent FHA modification rule changes. Let's turn to Slide 5 for a discussion about the first quarter market environment. During the first quarter, we experienced increased volatility in key drivers of mortgage activity resulting from the GSE's announcement of their intent to purchase mortgage-backed securities compounded by the impacts of the war in Iran. This is reflected in the intra-quarter high and low points of the ICE BofA MOVE Index, an indicator of U.S. Treasury bond volatility, as well as 30-year mortgage rates and the MBA Refi Index. This increased volatility contributed to reduced origination pipeline hedge effectiveness and lower loan sales performance. On the right is a comparison of the refinancing response for mortgages originated in 2023 and later in the second half of 2024 compared to the 6 months ending March of this year. In a little more than a year since the last refinancing surge, a less severe rate drop from high to low and marginally lower mortgage interest rates produced almost a 38% higher refinancing response in this most recent refinancing period, exceeding the level we predicted. Let's turn to Slide 6 to review the actions we're taking to address these items. In total, we believe addressing the factors that affected our results in the first quarter can deliver up to $27 million in incremental adjusted pretax income. We believe the origination pipeline hedging and loan sales performance has a quarterly adjusted pretax income improvement opportunity of between $5 million to $7 million. We are naturally exposed to variation in hedge and loan sales performance due to market and spread volatility. Historically, this impact has been both positive and negative, and we expect this can naturally reverse with reduced volatility. Next, the higher-than-expected borrower reaction to the first quarter decline in mortgage rates exceeded our origination staffing capacity based on modeling from past experience. We believe this prevented us from realizing $8 million to $14 million of adjusted pretax income in the first quarter. We've updated our capacity planning models to reflect recent borrower behaviors, have increased our Consumer Direct staffing level since the end of Q4 by 34%, and we are continuing to invest in AI tools and enabling technology to increase origination scalability. Next, we believe there's a $4 million to $6 million quarterly adjusted pretax income improvement opportunity with the normalization of FHA delinquencies. We've improved borrower communication, frequency of early intervention, and introduced digital tools to assist borrowers. We continue to expect FHA delinquencies will normalize by the end of the second quarter. Lastly, we are using machine learning to evaluate loan-level runoff and recapture propensity to inform our investing decisions and recapture strategies. Over time, we expect this can have a favorable impact on MSR runoff in future refinance-driven markets, and the improvement opportunity will vary depending upon interest rates. Let's turn to Slide 7 to review our balanced business model. While there may be variability in any given quarter due to evolving market dynamics, our balanced business continues to demonstrate long-term resiliency to changes in interest rates. As interest rates have declined, and despite the significant impact from market volatility, origination income has increased over 2.5x versus the prior 12-month period. Our strong originations income has helped to offset a reduction in servicing income in the most recent 12 months versus the prior 12-month period, despite a doubling of MSR runoff. We remain committed to executing our growth initiatives and the fundamentals of our balanced business model, which works as intended over the long term. Let's turn to Slide 8 for more about our growth focus and actions. In the first quarter, our originations team doubled volume year-over-year versus 44% growth for the overall industry. In Business-to-Business, our enterprise sales approach, product breadth, and client service delivery model have been highly effective growth enablers. In Consumer Direct, our continued investment in talent and technology enabled volume growth of 4x versus prior year as declining rates increased consumer refinancing demand. Refinance payoff units in the first quarter were up 3.6x prior year level and up 35% versus the prior quarter. Despite these headwinds, our Consumer Direct team improved the refinance recapture rate 3 percentage points versus the prior quarter. And our last 12 months refinance recapture rate continues to outperform the ICE industry average. We're continuing to invest in technology and process optimization to enhance customer experience, reduce costs, and improve scalability and competitiveness in both Business-to-Business and Consumer Direct. Let's turn to Slide 9 to see what we've accomplished in subservicing. The disruption created by the trend of industry consolidation among subservicers continues to create opportunity for us. The level of interest from prospective clients exploring subservicing options and alternatives remains high. First quarter subservicing additions were up 94% versus prior year, driven by new relationships and existing clients. Also in the first quarter, we signed 2 new clients and have 5 more agreements under negotiations. We believe we're on track to achieve our first half subservicing additions target of $28 billion and achieve over $50 billion for the full year. We continue to invest in technology with the next generation of our LASI client-focused AI assistant technology to drive an exceptional client experience. Our continued AI investment and strong servicing performance have helped us achieve a client Net Promoter Score level rivaling Amazon, Apple, and Google. In specialty subservicing, we continue to expand our business purpose residential and commercial subservicing portfolio, increasing UPB 28% versus last year. While the requirements are more complex than performing residential servicing, the returns are better. We have the expertise, and we're investing to enable continued growth in 2026. Overall, we believe we're well positioned to take advantage of the disruption in subservicing market, and we continue to invest in our sales and operating capabilities to pursue a robust opportunity pipeline. Let's turn to Slide 10 to talk about how we've grown our servicing portfolio. Total servicing UPB ended the quarter up 11% year-over-year versus total industry servicing growth of 3%, with growth in both owned MSR and subservicing. Year-over-year servicing additions net of runoff of $53 billion more than offset planned transfers to Rithm and other client deboardings. With MSR demand keeping prices elevated, several of our clients have taken the opportunity to monetize their MSRs and are replenishing their portfolio as industry origination volume increases. Our ability to grow our servicing portfolio while our clients execute opportunistic MSR sales highlights the power of our origination capability and success of our growth strategy. Now please turn to Slide 11 where our technology is continuing to enhance our business performance. We're integrating AI into every stage of the borrower journey across our business with a keen focus on maximizing our recapture rate. Our investment focus for 2026 is on 3 key areas: lead generation, lead conversion, and platform scalability. In lead generation, we're increasing signal detection for refinance-ready borrowers, leveraging unstructured data to inform our marketing and messaging. In lead conversion, we're maximizing conversion with targeted value propositions and workflow assignments. In platform scalability, we're focused on expanding engagement capacity and taking work out of the process to maximize human capability. These actions are having a tremendous impact. Leads on payoffs that resulted in new loans are up 40% year-over-year, and lead to lock conversion has improved 60% year-over-year. This includes a 34% increase in engagement and an 8% increase in conversion for conventional loans, the toughest to recapture. We've seen a 25% improvement in contact rate on leads coming through our digital channels with our AI-powered voice agent, and over 350 document types are categorized and data extracted with 95% accuracy, driving increased scalability. While lots of companies are talking about AI these days, we are one of the few companies that are delivering tangible results across both servicing and originations. We remain focused on integrating AI and machine learning to improve how we invest, enhance borrower understanding and engagement, maximize opportunity conversion, and improve outcomes across our business. Now please turn to Slide 12 for an update on our transaction with Finance of America Reverse. As disclosed in our public release this morning, our proposed transaction with Finance of America Reverse was not approved as submitted. However, based on discussions with Ginnie Mae, we've revised our transaction and resubmitted it for approval. In the revised transaction, we'll be selling approximately 57% of our owned reverse servicing portfolio to Finance of America, representing approximately 77% of our reverse MSR investment. We expect between $70 million to $80 million in proceeds before holdbacks and pricing adjustments as of March 31. The origination, product marketing, and subservicing elements of the transaction remain consistent with the original transaction terms. We expect about 70% of the remaining reverse servicing portfolio will run off in 4 years. As before, we will continue to engage in reverse mortgage asset management transactions and activities. Overall, benefits of the transaction remain largely the same. We will establish a significant subservicing relationship with the reverse mortgage market leader, reduce our balance sheet exposure to HECM assets and liabilities, improve our liquidity and capital ratio metrics, and we'll enhance our focus on other high-growth business areas. The transaction is still subject to Ginnie Mae approval and is currently under review. Now I'll turn it over to Sean to discuss our results in more detail. Sean O'Neil: Thanks, Glen. Let's turn to Slide 13 for a recap of key financial measures by quarter. Revenue was up 26%, continuing the strong year-over-year growth trend, which increased from last quarter's impressive 20% year-over-year growth. Sequential quarter revenue growth was flat due to seasonal Q1 decline in float income, which was $8 million lower quarter-over-quarter and is a component of servicing revenue. Originations delivered continued strong revenue growth over 2x year-over-year and 7% sequentially. Operating efficiency continued to improve on both year-over-year and sequential quarters, which reflects our long-term focus on cost-effective growth. Book value per share is up $17 year-over-year and up $1 on a sequential quarter basis. Now let's turn to Slide 14 for a detailed view of adjusted pretax income by segment. On the left side, Originations adjusted pretax income was significantly higher year-over-year by $24 million. This reflects an improvement in our recapture efforts as well as lower mortgage rates in February. A later slide will show the continued trends of record levels of funded origination in both our Consumer Direct and B2B channels. Year-over-year servicing adjusted PTI declined by $54 million, predominantly driven by high MSR runoff in the last 2 quarters and partially offset by growth in float volumes and other positive operational improvements from growth of our servicing portfolio. The illustration to the right is an approximation of where the first quarter 2026 adjusted PTI could potentially have landed had we been able to address 3 key drivers: first, the ongoing elevated FHA delinquencies impacting servicing income due to the loan mod change in the fourth quarter. We saw delinquency cures from FHA mods starting to trend back to a normal level at the tail end of the first quarter. We are taking action to address this area through improved borrower communication, early intervention, and digital tools to assist borrowers. Second, the impact of rate volatility on our origination pipeline marks and associated hedge costs. Third, the need to have a more fully scaled Consumer Direct operations to capture the heightened response by borrowers on interest rate sensitivity. We've updated our capacity planning models to reflect recent borrower behaviors, increased our Consumer Direct staffing levels, and we are continuing to invest in machine learning to maximize portfolio recapture. Had we been able to address all of these drivers, combined with the process improvements we now have in place, we believe we could have significantly mitigated our $6 million adjusted pretax loss up to an approximate $21 million adjusted pretax income. Please turn to Slide 15 for observations on how we allocate additional capital. Our previously stated considerations for capital remain unchanged. On the left, we show an increase in capital is typically immediately deployed to delever and replace mark-to-market MSR debt with longer tenure non-mark-to-market high-yield debt. Then, other deployment avenues are considered. These include M&A opportunities, increasing growth-oriented assets such as MSRs, buying back shares, or other deleveraging options. The right graph provides an illustrative view of incremental MSR purchases and the projected 2-year adjusted pretax income improvement. Please turn to Slide 16 for a deep dive on Originations pretax income trends. Originations pretax income grew by 3.5x on a year-over-year basis, which was driven by more than doubling of volume across the combined channel view of the business. The strongest contributor for either year-over-year or sequential quarter income was the Consumer Direct retail channel, which benefited from the ongoing recapture enhancements as well as higher staffing levels, resulting in a sevenfold increase in adjusted PTI. Both B2B and Consumer Direct channels benefited from a growth focus on new products, including non-QM and closed-end seconds. As a reminder, we don't include closed-end volumes in our recapture calculations. Please turn to Slide 17 for a channel view for originations. The B2B channel, which includes both correspondent and co-issue activities, saw about a 2x increase in volume year-over-year and slightly better margins than the first quarter of 2025. On a sequential basis, it had roughly the same volume but saw margin pressure late in the quarter due to interest rate volatility. Consumer Direct had even better performance, posting strong volume gains year-over-year of 4x and a 50% increase on the sequential quarter. However, we did see lower margins in the first quarter, again, driven by interest rate volatility. We also showed some improved metrics for Consumer Direct with higher revenue per loan and improved cost per loan versus prior year. Please turn to Slide 18 for our Servicing segment performance. Servicing revenues were up 12% year-over-year, but down slightly from last quarter. The quarter's decline was driven primarily by lower float revenue from a typical seasonal dip. This is due to escrow tax disbursements that lowered deposit volumes late into the fourth quarter and early in the first quarter. Servicing-owned UPB is a driver of both revenue and income, and it grew about 18% year-over-year, and total UPB grew about 10% year-over-year. Our Servicing segment experienced the first quarter of adjusted pretax loss in 16 quarters, primarily driven by MSR runoff and seasonal float income declines. As you can see in the lower right, the impact from runoff tripled year-over-year from $33 million to $99 million. This is mainly driven by higher prepayments linked to borrower interest rate sensitivity and the lingering delinquencies from the FHA mod changes in the fourth quarter, which we expect to normalize in the second quarter. Please turn to Slide 19 for details on improved advances in the Servicing segment. Over the last 2 years, we have decreased advances by almost 30% while we have grown our owned UPB simultaneously by a similar rate. As you can see by the dark blue graph, the bulk of our advances are linked to delinquencies in our PLS or nonagency-owned MSR book. We have been deploying various strategies and process improvements to reduce these advances, which then assist the P&L with lower interest expense. These strategies range from increased digital contact with borrowers to AI-enabled agents that assist our contact center in quickly providing the most effective range of solutions for both the borrower and the MSR owner. Regarding digital, we continue to experience approximately 90% of our inbound contacts being handled with digital channels such as chats, the mobile app, or website responses. Please turn to Slide 20 for an assessment of our continued strong hedging performance. Once again, our MSR hedge strategy continued to perform well and as intended in the first quarter. Our strategy is designed to mitigate interest rate risk, and the hedge has been effective in minimizing the impact of interest rate on our MSR valuation net of hedge for the last 9 quarters. We frequently review and assess our hedge strategy to manage risk and optimize liquidity and total returns. Of note, we insourced our MSR valuation process in the first quarter. This was accomplished by adopting an MSR model used by many industry participants, including third-party valuation agents. This gives us more agility to run numerous scenarios to both ensure our valuations are consistent with current data and adjust our hedge accordingly. We continue to use multiple third-party valuation agents to provide guardrails to our valuation. On Slide 21, we provide our updated view on 2026 guidance. As Glen mentioned earlier, we are widening our adjusted ROE range from 13% to 15% to 10% to 15%. This is to accommodate ongoing and potential future interest rate volatility. Our updated guidance on adjusted ROE is not dependent on the Finance of America transaction closing. The other areas we provided guidance on are unchanged. We continue to grow our total servicing book, $338 billion, or up 11% on the year, improve our operating efficiency, and continued strong hedging performance. Back to you, Glen. Glen Messina: Thanks, Sean. Let's turn to Slide 22 for a few comments before we open the call for questions. We delivered solid performance in several key areas of our business, including double-digit year-over-year growth in adjusted revenue, origination volume, subservicing additions, and total servicing UPB. We've built a technology-enabled, award-winning servicing platform that is efficient, delivers differentiated performance, and excellent service. We've been recognized for the fifth year in a row by Fannie Mae and Freddie Mac for delivering top-tier servicing for our owned portfolio or for our subservicing clients. We are taking decisive actions to address the items that impacted our first quarter performance while continuing to execute on our growth initiatives and the fundamentals of our balanced business model, which has proven resilient over the long term. We remain focused on accelerating profitable growth in 2026 and creating value for all stakeholders, supported by expanded use of AI-powered technologies to drive service excellence, reduce costs, and grow revenue. Finally, subject to Ginnie Mae approval, we look forward to completing our transaction with Finance of America Reverse, which will establish a subservicing relationship with the market leader, permit capital reallocation, and enable greater focus on other high-value growth opportunities. Overall, we remain optimistic about the potential for our business. And with that, operator, let's open the call for questions. Operator: [Operator Instructions] And we'll take our first question from Bose George with KBW. Bose George: Actually, first, on the MSR runoff. I think last quarter you noted that the higher FHA delinquency issue was $14 million impact. What was that number this quarter? And just trying to figure out how big a piece of that $17 million increase in MSR realizations came from the FHA. Glen Messina: Bose, we sized that at approximately $4 million to $6 million in the first quarter. And as we noted last quarter, we did expect that there would be some carryover effect into the first quarter, again, $4 million to $6 million. But again, we're expecting delinquencies to normalize by the end of the second quarter based on some of the things that Sean talked about in terms of seeing modifications begin and resolutions begin to flow again. Bose George: Okay. And so the rest of the increase in the realized cash flows was from actual increase in prepayments that you saw quarter-over-quarter? Glen Messina: That's correct, Bose. Bose George: And then in terms of -- is there a P&L impact as well from the higher FHA delinquencies? So next quarter, if delinquencies stabilize at these levels, I assume that the marks decline or go away, but is there a P&L impact we should think about if delinquencies remain somewhat elevated because of this issue? Glen Messina: Yes. If delinquencies, let's say, don't change, so if they just stay flat, Sean, correct me, but I think that would produce 0 impact from a runoff perspective. If delinquencies actually improve, that would be a favorable impact to runoff or a reduction of runoff. So as delinquencies move around, again, if they go up vis-a-vis end of the first quarter, it could be increased runoff. If they get better, it could be less runoff. Bose George: And then just one on the pipeline hedging. You noted the volatility there. Does that just flow through the gain on sale so that, that shows up as a slightly lower margin? Glen Messina: That's correct, Bose. That would show up through gain on sale. And again, I think as you know, when you have a lot of market volatility, unfortunately, it does increase hedge costs and reduce hedge effectiveness as a result of pull-through in your pipeline, your actual pull-through deviating from your estimates. And that all boils down into a gain on sale impact. Operator: [Operator Instructions] We'll move next to Doug Harter with BTIG. Douglas Harter: As you think about the updated guidance, how much of that is just reflecting the fact that the first quarter came in below that range versus what -- as we think about what the expected range for quarters 2 through 4 would be? Sean O'Neil: Doug, it's Sean. The range of expected guidance incorporates both the reduced adjusted ROE we're seeing this quarter as well as anticipating high rate volatility and essentially elevated rates for a longer period of time. And so it's a combination of both. Douglas Harter: And then as you look at Slide 6 with the opportunities that you lay out, what would be the time frame that you would expect really for the first 3, obviously, the fourth one is more challenging. But how do you think about the opportunity or the time line to achieving those first 3 items on Slide 6? Glen Messina: Doug, on the first one for the origination pipeline and loan sales effectiveness, again, that could vary from quarter-to-quarter. So that is relative volatility. We have seen that move in both directions over time. Case in point would be the second quarter of last year when Liberation Day and the tariffs were announced, there was an adverse impact on the quarter, and it reversed out the next quarter. So timing is going to be market volatility dependent. On the Originations scalability, that takes -- obviously, that is going to be dependent upon the level of refinancing activity and a refinancing surge. So that is somewhat market dependent. But the incremental staffing and the incremental investments, we'll start to see improvements of that in Q2, Q3, Q4, right? So that will take into effect through the balance of the year. And the magnitude is going to be a function of what is the surge in refinancing volume since that's basically what we're quantifying here was the lost refinancing opportunity. On the FHA modification changes, we expect delinquencies to normalize by the end of the second quarter. So assuming that they do normalize, we'll see most of this bleed through in the second and third quarter. Operator: [Operator Instructions] And it does appear that there are no further questions at this time. I would now like to hand back to Glen Messina for any additional or closing remarks. Glen Messina: Great. Thank you, Chloe. Look, we'd like to thank our shareholders and key business partners for their ongoing support of Onity. And I also want to thank and recognize our Board of Directors and global business team for their hard work and commitment to our success. And we look forward to updating everyone on our progress on our next earnings call. Thank you very much. Operator: Thank you. This brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect.
Mike Bishop: Hello, everyone, and welcome to Atomera's First Quarter 2026 Update Call. I'd like to remind everyone that this call and webinar are being recorded, and a replay will be available on Atomera's IR website for 1 year. I'm Mike Bishop with the company's Investor Relations. As in prior quarters, we are using Zoom, and we will follow a similar format. [Operator Instructions] We will open with prepared remarks from Scott Bibaud, Atomera's President and CEO; and Frank Laurencio, Atomera's CFO. Then we will open the call to questions. If you are joining by telephone, you may follow a slide presentation to accompany our remarks on the Events and Presentations section of our Investor Relations page on our website. Before we begin, I would like to remind everyone that during today's call, we will make forward-looking statements. These forward-looking statements, whether in prepared remarks or during the Q&A session, are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of our filings with the Securities and Exchange Commission, specifically in the company's annual report on Form 10-K filed with the SEC on February 24, 2026. Except as otherwise required by federal securities laws, Atomera disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regards to those events, conditions and circumstances. Also, please note that during this call, we will be discussing non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release, which is posted on our website. Now with that, I'd like to turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott. Scott Bibaud: Thanks, Mike, and good afternoon, everyone. This quarter, we made solid progress with multiple customers across our highest value markets while also expanding the breadth of applications where MST can solve real current pain points for the semiconductor industry. We're seeing strong customer pull in advanced logic, memory and wide band gap materials like GaN and power and in RF, areas that are being shaped by the rapid growth of AI infrastructure, which is driving the need for better power efficiency, signal integrity and system performance. Today, I'll start with an update on gate-all-around, where we've been working closely with customers and our strategic partners to validate MST in these advanced geometries. Then I'll touch on our customer pipeline and close with updates on GaN, giving insights on some exciting new technical results that are shaping near-term opportunities. As we said before, the move to gate-all-around at 2 nanometers and beyond is one of the most important architectural transitions in the industry, and it's also one of the most difficult manufacturing environments since fabs must build incredibly complicated structures at line widths of 5,000x smaller than a human hair, where a small amount of atomic migration can cause big problems. Gate-all-around transistors are the building blocks for AI infrastructure and dopant diffusion control is critical to their effectiveness in terms of performance and reliability. Therefore, the industry is demanding clear proof that any new material can be deposited precisely and that it delivers measurable benefits in advanced silicon devices. Today, there are 4 companies in the world developing gate-all-around transistors, TSMC, Samsung, Intel and Rapidus. We know that each of them can use the capabilities of MST, so it's our goal to achieve adoption at all 4. Further, as these companies transition to the generation beyond gate-all-around called CFET, our technology becomes even more essential. So working with us now is in their best interest long term. In our last earnings call, we have just received measured silicon results that prove MST is the best solution for a critical source strain liner application in these small geometry transistors. At this point, we're actively working on evaluations of our technology with 2 of our target gate-all-around customers and discussions are underway with the others. It is typical that a customer asked to conduct multiple demonstrations before agreeing to accept a new technology for implementation in their fab wafer flow. These demonstrations help to validate our claims while simultaneously addressing the detailed implementation and functionality questions these customers are focused on solving. We also expanded the scope of our work with our strategic development partner this quarter, which is important because it strengthens both our technical velocity and our credibility with the ecosystem. Their test and development infrastructure helps us generate the kind of data that advanced node customers insist on seeing before engaging and their endorsement will certainly help us engage a broader set of teams within each target account. Each of the large memory manufacturers are facing similar challenges to the gate-all-around customers as they develop their next-generation transistors in DRAMs and high-bandwidth memories. Our team is in discussions with them right now, and we are currently working on multiple solutions using MST to assist in this area. Right now, memory manufacturers would do almost anything to get greater fab capacity, and they have the resources to evaluate different methods of doing so. We hope to take advantage of that opportunity with solutions enabled by MST. The momentum we're seeing in the advanced node transistor space is a result of many years of work targeting current market trends. The macro challenges that AI success has put front and center, capacity and performance of CPUs, GPUs, logic and memory, the power demands of cloud providers and the increased costs associated with these are all areas that Atomera can help solve. For that reason, we believe that MST is a fundamental tool for the future of AI. Our customer pipeline remains very active across multiple domains. For example, our work with our large IDM customer continues to go well, and we expect additional results from wafer runs soon. Our efforts with ST Microelectronics are bearing fruit, and we are confident we will reengage with them again in the near future, consistent with our view that MST can create value across multiple product lines, especially in a large diversified IDM or foundry. In RF SOI, we are seeing strong results confirming our extensive TCAD simulations. The technical results we've been focused on, including for both power switch and LNA have been confirmed through customer silicon runs. The near-term question is less about performance and more about the most efficient path to commercialization, particularly in cases involving fabless licensees where aligning the business structure with the manufacturing flow can be complex. In power devices, we're seeing excellent potential in new development work being done to target MST at both TrenchFET and HVT transistors, useful in high-frequency, high-speed and high-voltage applications. At the same time, wafers continue moving forward with our second JDA partner, and we'll keep pushing those efforts toward production pathway. Turning to GaN. We made meaningful advancements this quarter, including a breakthrough that could give us a technical leadership in RF GaN on silicon to augment the advantages previously outlined for power GaN on silicon. To explain the innovation, I need to give a little background. GaN on silicon is a much more economical growth method than alternatives built on exotic substrates like silicon carbide or sapphire. But when GaN on silicon is manufactured due to the GaN stack growth process, gallium and aluminum ions gather at the silicon substrate interface, forming an unwanted sheet charge layer called a parasitic channel, which is well known to limit RF performance and GaN on silicon applications. In fact, its elimination has been the subject of materials and growth studies for more than 20 years. In the past few weeks, we received preliminary performance data suggesting MST can dramatically reduce the parasitic channel. It does this by using MST's fundamental interface engineering to block the gallium and aluminum ions from getting into the silicon substrate. An industry veteran told us that in his 20 years, this is the best measured sheet charge data he has ever seen. We're continuing to validate this very promising discovery with our test and measurement partners. RF GaN on silicon is a value in the wireless infrastructure, military, defense and satellite markets. It's also being actively evaluated for high integrated RF front ends such as those for 6G cellular. So the market potential is large and growing fast. We are actively engaging on both 200-millimeter and 300-millimeter wafer sizes in GaN depending on our customers' requests. That matters because the wafer size for GaN on silicon is one of its key advantages leading directly to a customer's path to high-volume production, low-cost structure and a set of fabs that can support ramp, including opening doors for new applications with conventional silicon fabrication methods and devices. We're seeing expanded interest in partnerships across the ecosystem, including engagements involving Incize, Synopsys, Texas State University, Sandia and others. Those kinds of parallel tasks, commercial customers plus research and ecosystem partners can compress development cycles and accelerate the time from promising materials data to something customers can qualify and deploy. Work here is aimed at generating data that is both technically rigorous and directly translatable to customer device requirements. Finally, a quick note on our announcement last week about expanding our collaboration with Synopsys. We've worked with Synopsys for years to enable accurate modeling of MST inside the Sentaurus TCAD environment through our MST CAD tool set. This expanded collaboration extends that relationship into GaN workflows for both high-value RF and power devices. Practically, this means we're working closely with Synopsys to provide feedback on their GaN models, and we'll be jointly developing marketing materials so customers and partners can evaluate the physical and electrical effects of MST and GaN more quickly and with higher confidence. To summarize, we're making progress where it matters, expanding and deepening gate-all-around engagements, broadening GaN from power into RF with concrete technical innovations and continuing to advance multiple customer programs across our pipeline. We remain focused on converting technical validation into commercial structures that can drive repeatable revenue and are confident in our ability to do so. This is indeed an exciting time for Atomera. With that, I'll turn the call over to Frank, our CFO, to review our financials. Francis Laurencio: Thank you, Scott. At the close of the market today, we issued a press release announcing our results for the first quarter of 2026, and this slide shows our summary financials. Our GAAP net loss for the first quarter of 2026 was $6.1 million or $0.17 per share compared to a net loss of $5.2 million, which was also $0.17 a share in Q1 of 2025. On a non-GAAP basis, net loss last quarter was $4.9 million or $0.14 a share. And our Q1 2025 net loss was $4.4 million or $0.15 a share. GAAP operating expenses were $6.2 million in Q1 of 2026, which was an increase of $742,000 from $5.5 million of GAAP operating expense in Q1 2025. Stock compensation expense, which is excluded from non-GAAP results, increased by $397,000, primarily due to new hires and our adoption in Q1 of 2025 of performance stock units, or PSUs, for executives. PSUs vest over 3 years, whereas the time-based options and RSUs that we had previously granted to executives vested over 4 years. Although the vesting period is shorter, PSUs vest only if our stock performs well relative to the Russell 2000. The first tranche of PSUs issued in Q1 2025 lapsed without vesting because we did not hit the required stock price performance threshold. With the exception of stock compensation expense, the drivers of GAAP and non-GAAP expenses are substantially the same. So I will drill down into other factors that impacted our expenses by focusing on non-GAAP numbers. Please refer to the slide presentation for a reconciliation between GAAP and non-GAAP results. Non-GAAP operating expenses in the first quarter were $4.8 million, a year-over-year increase of $348,000 from $4.4 million in Q1 2025. Sales and marketing expense increased by $203,000, reflecting our 2 executive hires since October. R&D expenses increased by $127,000 from $2.8 million in Q1 of last year to $2.9 million in the first quarter of this year, primarily due to higher spending on outsourced engineering to support the wafer runs for our gate-all-around engagements, our IDM customer and our JDA customer, which drives spending on metrology. G&A expenses were basically flat from the first quarter of last year. Turning to sequential quarterly results. First quarter 2026 non-GAAP net loss was $4.9 million or $0.14 a share compared to net loss of $3.3 million or $0.10 a share in Q4 of 2025. Operating expenses were $4.8 million in Q1, which is a $1.6 million increase from $3.2 million in Q4. Let me offer some color on the magnitude of the sequential increase. As I explained on our last quarterly call, our Compensation Committee elected not to pay the full 2025 executive bonus, withholding approximately $669,000, which normally would have been paid out in January. The committee provided the executive team the opportunity to earn back the withheld amount in 2026 upon achievement of commercial objectives. This led to us reversing accrued bonus expense in the fourth quarter, which skews the comparison of expenses between Q1 and Q4. Our balance of cash, cash equivalents and short-term investments on March 31, 2026, was $41.1 million compared to $19.2 million on December 31, 2025. We used $4.6 million of cash in operating activities during Q1 compared to $3.2 million in Q4 and $4.8 million in Q1 of last year. As is typical for us, cash used in the first quarter of every year is higher than other quarters due to payments for items that are expensed over the year. In February of this year, we closed on a $25 million registered direct stock offering, selling 5 million shares of common stock at $5 per share, netting us proceeds of $23.6 million after fees and expenses. Prior to this offering, we had also raised $3.2 million in Q1 by selling approximately 1.3 million shares under our ATM at an average price of $2.47. Currently, we have 38.7 million shares outstanding. With the proceeds of our equity offering, we feel that our current cash balance puts us in a strong position to execute on the opportunities ahead of us, but we will continue to be disciplined about controlling our costs. On our last call, I said that we expected our 2026 annual non-GAAP operating expense to be approximately $18.5 million, and we are holding to that number. To reiterate, the reason why the expense increase appears as large as it does over $15.9 million of OpEx in 2025 is the bonus deferral, which essentially shifted expenses out of Q4 and moved them into 2026. Organic increases in spending mainly relate to the hiring of our VP of Sales in Q4 last year and our VP of Marketing in Q1. Revenue in Q1 was $11,000 and consisted of fees for wafer deliveries to the large IDM that Scott talked about. And we have $96,000 of deferred revenue on our balance sheet. Approximately $46,000 of revenue that we expected to recognize in Q1 pushed out to Q2 because wafer shipments that we anticipating making last quarter pushed out to early this quarter. Accordingly, we expect Q2 revenue to be in the range of $50,000 to $100,000. With that, I will turn the call back over to Scott for a few summary remarks before we open the call up to questions. Scott? Scott Bibaud: Thanks, Frank. And before we take questions, I want to thank our employees, our customers and our shareholders for their continued support. We're excited about the progress we're making, and we remain focused on translating our growing body of simulation and customer silicon evidence into commercial agreements that can drive long-term repeatable revenue and a strong sustainable business. Mike, we will now take questions. Mike Bishop: [Operator Instructions] And right now, it looks like Richard is ready to ask a first question. Richard, please go ahead. Richard Shannon: Scott, the gate-all-around stuff here, you made some very interesting comments. I want to touch on a few of these things here. So you mentioned that you've got -- now have measured silicon results here and your customers have said that they're better than the other solutions that they have here. Just want to make sure that that's what you said, and then I have a couple of follow-ups on that topic. Scott Bibaud: Yes, you maybe -- are you talking about GaN or gate-all-around? Richard Shannon: Gate-all-around. Scott Bibaud: On gate-all-around, we do have measured silicon results. And we evaluated our results against another method that people in the industry are using to accomplish the same type of thing we're doing, and our results are a significant improvement. So yes, we have definitely had that, and we're showing that to customers. Richard Shannon: So to follow up on this, so I assume that the measured results are wafers run at 1 of these 4 targeted customers. Is that correct? Or it's independent? Scott Bibaud: In fact the measured results are something that we did in conjunction with our strategic partner, where they had gate-all-around structures, and we use those devices to grow MST on those gate-all-around structures in the wafer, and then we're able to conduct this testing. So now that's -- if you think about how we approach customers, we go out and we show customers our simulation data, which we can do without a strategic partner. But then having silicon tested data is a massive improvement over that. So that's been able to really open the doors for us to get into the customers. The next step from there is the customer will typically say, okay, we can see you did that on your strategic partners' structure. Now we want you to do it on our structure because our structure is different. Everybody is different. And when I mentioned that we're -- we have work underway with 2 of the target customers there doing demonstrations, that's the step we're at where we're trying to do -- implement our technology on their structures and show them that. We believe that the step after that, Richard, will be that they'll have to install MST in their fabs to do any further testing because these structures are so small and hard to manufacture that it's difficult to do a lot more work by having us run demonstrations in our fab. Richard Shannon: Okay. So to that point, do you have a commitment to attempt to do this on your customer structures? Or is just the discussions to get that agreed to? Scott Bibaud: We're working on it with 2 of them actually -- I don't know what you mean by commitment, but I guess they're sending us wafers and we're putting on. So yes, that's pretty committed. Richard Shannon: Okay. That sounds pretty good. So what's the time frame for this work to get done? And then I assume, given what I've heard for the many years that I followed you guys that the analysis of these can often take a while, and these are more complex than most. So I would assume that analysis takes a while. So what's the kind of the turnaround time between getting that done, analyzing and getting to that next step? What do you foresee that taking? Scott Bibaud: It's going to take several months. Just us doing the work, we have to really do a lot of development work to just figure out how to grow things effectively in these tiny devices that they're sending us. And so normally, when someone sends us wafers within 3 weeks to a month, we can turn those around and send them back. In this case, my guess is it might take us longer than that, 2 to 3 months. And then when we sit in the back, they have to put them in their fab and run them for several months. So it could be in the order of 6 months before we start to see results coming out of this. Now in -- I mentioned a few times on the call and both structural analysis, which is where they are looking at what we did for deposition in those structures and making sure that what we did was appropriate, they can do that pretty quickly because you're taking TEM images like electron microscope images and looking at what we did, that -- those results will come quickly, but the electrical results will be the result of running the wafers through the whole line. Richard Shannon: Got it. Okay. And so you're expecting or expecting to run wafers with -- wafers from 2 different GAA customers then over the next few months? Scott Bibaud: Yes. Richard Shannon: Okay. Going back to my first question here and understanding the results you measured with the runs you did with your equipment partner. I want to get a sense of whether the customers agree that the comparisons you've done with, I think, an industry standard approach to dopant diffusion, they actually agree with that as well that, that is much better than what they've been -- what they can get internally? Or is this just what your equipment partners concluded for you? Scott Bibaud: I think there's no doubt that the customers that we've been able to engage with and get down to lots of details on it, they have been impressed enough that they want to move forward with these further demonstrations. So yes, they definitely saw the benefit of using MST to conduct -- to block the dopant diffusion in the areas that we're talking about and how it works better than what they're currently implementing. Richard Shannon: Okay. Okay. Fair enough. Some really interesting stuff going on there. Maybe a couple of other quick questions. So on the DRAM side, it sounds like we made some progress here. But if I'm to compare that with the progress on the logic side to the memory side, it sounds like the logic is reasonably farther ahead than memory. Is that a fair comparison? Scott Bibaud: Yes, that's true. We are talking with the memory manufacturers, and they -- one thing, memory is quite a different architecture than logic that we're using gate-all-around. But in memory, they're having the same type of dopant diffusion problems with their newer architectures as the gate-all-around folks are and our technology is directly applicable to that. So we have a lot of interest in -- from the DRAM guys about that. We're also talking to them about some other solutions that may be able to help them in different ways. So it's lots of different vectors of how we're engaged with DRAM guys. I should say with the memory guys because it's also in high bandwidth memory, not just DRAM. But we're further ahead with the gate-all-around customers than we are with them. Richard Shannon: Okay. All right. Fair enough. Maybe a question on the GaN side here. So I think before -- my recollection is you're talking more about applications of GaN into the power space, but more recently, it's been in RF here. How would you characterize kind of the -- which one is kind of the leader in terms of getting to the next step here and getting installation licenses, I know that's not the right term, but it's kind of what I think of it, installation licenses or using the wafers with that already built in there, which one is kind of in the lead here if either one is notably better? Scott Bibaud: Okay. So it's kind of interesting where you're right saying that we initially targeted the power market for our GaN on silicon work. The power market is actually much larger than the GaN on RF market today. And that's one of the reasons why we targeted it first. And for the power market, we -- our big value that we've been talking about is to improve crystal quality and therefore, to allow people to manufacture on larger wafers because there'd be less ball and warp as they're growing the GaN and fewer defects and therefore, would have a lot of inherent value. Now the only challenge with that is to validate all that work, you actually have to build wafers and build electrical devices and do a lot of testing. So that takes some time. And everybody's GaN growth properties are different. So there's some tuning that has to happen -- and so that takes time. The new things I just mentioned, GaN on RF, we got some test data and we just spoke about it at a big compound semiconductor conference last week, and there is a huge amount of interest in the industry. And just looking at this early data that we got, it has to be validated and so forth. But just looking at that data could be enough for someone to adopt us because it's such a big breakthrough in such an area where the industry needs solutions. In RF, they don't actually have to do the full electrical testing before they can decide to move forward on something. So it could be that we're moving -- although we're earlier into the GaN on silicon for RF market, that one could move faster. Richard Shannon: Okay. All right. Fair enough. One last question for me. And maybe going back to STMicro here, and I'm not sure if this is the -- who you're now referring to the IDM customer or not here. So maybe correct me if I'm misassuming that here. But maybe just kind of indicate where we're sitting here with those guys. Obviously, we have put a pause on the power stuff that you're hoping to move forward with that you talked about late last year. How about the other applications with them? Are they still moving as full force as you had expected and had been seeing since the cessation of the power work with them? Scott Bibaud: Yes. Just to clarify, when I talk about the IDM, it's not STMicro. STMicro is another IDM, and we think we have a lot of different areas that we can engage with STMicro, but that's a separate engagement. So yes, we've been talking with multiple business units over there and been doing some work, some evaluation work, and we have recently got some results that lead us to believe that we're going to start reengaging with them on developing a product. We aren't at the point where we can talk about that yet, and ST hasn't specifically given us any okay to talk about it. But yes, we've been saying since we had to give that unfortunate news about the BCD program at ST that we are working with other groups and that our relationship with the company was great. And the thing is they really know and understand MST technology and have seen it and they believe in it. So this is kind of an indication of those comments that we've been making and I haven't been able to announce a new deal with them yet, but we hope to be able to do that in the future. Mike Bishop: Okay. There are a few questions that have been asked in the Q&A line, and I'll just bring them up one by one. So the first kind of question is about gate-all-around and it's that given the evaluation periods that we've seen in other areas of Atomera, are there specific milestones that need to be hit to convert these gate-all-around customers into JDA? And what's a realistic time frame for such a conversion? Scott Bibaud: Yes. At a high level, I'll -- maybe I'll put a little bit more structure on what I showed -- I talked about Richard before. It's typical customers who want to see kind of 4 different levels. They want to see TCAD results that show that you have the potential to deliver performance, and they have to understand all the TCAD background and believe in it. Then they'll move ahead and say, we want to see that captured on silicon. So we've done those 2 steps and gate-all-around. The next step, they say, okay, we want to see that captured in silicon, but on our silicon on our structure, we're going to send you guys wafers. We want you to deposit it on our structure and send it back to us, and we'll evaluate it. Now they know they're not going to get the most perfect performance out of that because the work we have to do together and tuning them up and getting everything to work fully integrated. But they're just trying to do a proof of concept on their platform, right? That's the stage we're at right now with 2 of the customers. Beyond that, the stage after that would be where they install and do the actual implementation on their device, tuning it all appropriately. So yes, it's a fair question to say when should we expect to see a JDA sometime during -- in this period of us doing the evaluation on their devices and when we get to the point we'll install there because that would involve a license, then we should be having a JDA in place. These companies do not move fast when you're talking about kind of legal agreements. So -- but we're working hard to make those happen, and we hope to be able to announce them at some point in the near future. Mike Bishop: Okay. And Frank, the question regarding the equity raise. An investor asked, he is curious about the background and reason for the third-party private placement. And given the stock price rise, was that -- could we have had better timing? Francis Laurencio: Right. Yes, thanks for that. One of the comments I've made in talking about the capital that we raised in Q1 was some funding that we got via the ATM. And if you look at that, the average price on that was $2.47, which is roughly about where we were trading about 1.5 weeks or 2 before we did the equity raise. And so the $5 price that we executed on there, given what we had seen so far, not only in Q1, but really looking back over the last couple of years, it made us look at this as a very good opportunity because, sure, the stock had run up to $7. And now in the last couple of weeks, it's run up again. But given the past trading levels that we had and again, a lot of geopolitical uncertainty in the middle of February, which we've kind of seen play out since then. Of course, you can't know how the equity market is going to perform. But on balance, it seems like a very good opportunity for us to execute on that. And then frankly, be able to work toward commercial outcomes and not worry about the day-to-day movements in the stock price to have to use the ATM to keep our balance sheet strong. So we've now strengthened the balance sheet. It's always kind of easier with the benefit of hindsight to second guess the price, but I think it was a very good decision to execute then. Mike Bishop: Question on the tool partner. How has your relationship evolved with your tool partner, the strategic partner? And are they giving you more engineering personnel? And how has that relationship changed over time? Scott Bibaud: Yes, that's a good question. We have been -- we try to be good partners with each of the big tool vendors. There's 3 main tool vendors that the industry uses for epi tools. And we typically want to be kind of an arms dealer work with whatever tool our customers want to work with. So we have good relationships with all of them. The tool vendor that we have the strategic partnership with we've been working with for more than a decade, and had a good relationship with. But now that we've entered into the strategic partnership, the level of co-development work that we're doing is at a whole new level. So we have weekly meetings with their engineering team where we are working on developing the test data that we need for marketing to customers. And as customers ask us questions and want to get more demos, and we dig in and do work on that together. So yes, on an engineering cooperation level, it's at a whole new level. The second area is on the marketing and sales to customers, and that's something that we've never really done with them in the past, and that's where we would be developing the right materials for us to both go into target customers and talk about MST technology and what a good solution that is. Now one thing I've calculated a number of times is that if we are successful licensing our technology to customers, in many cases, the tool vendor is going to make more money from us winning designs there than we will. So there's obvious advantages for them making us successful. And so they're not doing this out of the goodness of their heart. But the good news is, I think they've recognized that in the last year since we started this, and we're really seeing the benefit as we're engaging with customers. Mike Bishop: Okay. And this is a follow-up kind of to the when moving of the gate-all-around customer -- engagement. But investor asked last -- commented that the last call sounded like 2026, we would see several deals being made. Is it safe to say that now that sounds unlikely? Or is there still hope for inking an agreement this year? Scott Bibaud: We're only in the fifth month of the year, and I'm hopeful every month that we're going to be inking deals. So definitely, we'd say there's definitely a very strong chance. Mike Bishop: And if you look at all the areas in which you are working, which of the segments do you think is closest to producing a royalty-bearing license? Scott Bibaud: So I spoke a call or 2 ago about wafer-based products. And I think that the development effort in a wafer-based product is relatively easier. So some of the areas where we're offering wafer-based solutions are in gallium nitride and in RF SOI. And there's -- we have wafer-based solutions that we're offering in the memory space. So I think one of those could be the fastest. But we also have been working on power and on RF SOI with customers for a very long time. So those could also be quick time to market. It's very hard to call with so many moving pieces. Mike Bishop: All right. And with that, Scott, I'll turn the call to you for closing comments here. Scott Bibaud: Okay. Well, I want to just thank you all for joining us to hear the progress being made within Atomera. I hope you're feeling the excitement that we are. Please continue to look for our news, articles and blog posts, which are available along with investor alerts on our website, atomera.com. Should you have additional questions, please contact Mike Bishop. We'll be happy to follow up. Thanks again for your support, and we look forward to our next update call. Mike Bishop: Thank you. This concludes the call.
Operator: Greetings, and welcome to Energy Vault's First Quarter 2026 Earnings Conference Call. . [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Michael Beer, CFO. Thank you, Mr. Beer. You may begin. Michael Beer: Hello, and welcome to Energy Vault's First Quarter 2026 Financial Results Conference Call. As a reminder, Energy Vault's earnings press release and presentation are available now on our investor website, and we will be referring to the presentation during this call. A replay of this call will be available later today on the Investor Relations portion of our website. This call is now being recorded. If you object in any way, please disconnect now. Please note that Energy Vault's earnings release and this call contain forward-looking statements that are subject to risks and uncertainties. These forward-looking statements are only estimates and may differ materially from the actual future events or results due to a variety of factors. Please refer to our most recent 10-K or 10-Q filing for a list of factors that cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements, except as required by law. In addition, please note that we will be presenting and discussing certain non-GAAP financial information. Please refer to the safe harbor disclaimer and non-GAAP financial measures presented in our earnings release for more details, including a reconciliation to comparable GAAP measures. Joining me on this call today is Robert Piconi, our Chairman and Chief Executive Officer. At this time, I'd like to hand the call over to Robert. Robert Piconi: Michael, thank you, and I'd like to welcome everybody. Good afternoon, evening and morning. I want to call out upfront as well the investor presentation that hopefully all of you by standard course, download. It is on the website and it would be great if you are listening in here to download that. I will be referring to some of the charts in that deck, in particular, Pages 4 through 9. Very interestingly, hopefully, as you've noticed, we are providing even more transparency with some of the data, in particular, as we have made this transition now to an integrated storage IPP, and we'll be providing some more details in and around backlog, for example, and even looking at our comparable companies in what we're considering as a new peer set as we've made this transition. If you've seen the results by now, hopefully, you'll agree that this is a very strong validation of our shift into an energy infrastructure platform provider, more than doubling our megawatt capacity under management from last quarter to over 1 gigawatt. The new project acquisitions that make that up as designed will ensure long-term high-margin and recurring revenue streams as reflected in the strong contract backlog growth that as you see, is over $1.3 billion, made up primarily of our own and operate projects now, projects that are prefunded to our existing Asset Vault platform. We also see strong near-term demand growth for our AI compute infrastructure solutions, integrating storage, generation and under our unified software control. That strong historical execution capability, and I know I've talked about that a few times here, in particular in the last year, as we delivered revenue and in particular, in Q4, delivering over $150 million, we have earned this right with our customers, and that's enabling interim revenue upside potential while our larger scale own and operate projects are being constructed and coming online in the coming 12 months, 24 months and 36 months. With the move squarely now into the IPP and digital infrastructure company peer groups as reflected by our current contracted backlog, and you can refer to Page 9 as we look at this, we do believe a re-rating here is going to help the valuation and the related upside to our current trading. Over the past 12 months, we have transitioned from a project-based provider into a fully integrated power and AI infrastructure platform. And as we can see by the results in the execution and scaling of our own and operate model, the quarter demonstrates that acceleration. This is no longer a forward-looking transition. It is now visible across our backlog, our asset base and our financial performance. In particular, it will, as it did last year as we get into the latter half of the year as revenue again scales. We're providing an integrated energy and power infrastructure platform that's bringing together, as a reminder, not only energy storage, but also now generation components and as always, our intelligent software platform that from design, from the inception was designed to handle any generation tech, whether that be gas or renewable as well as any and all storage technologies to solve one of the most pressing challenges in the global economy today, and that's delivering reliable power quickly and at scale. We integrate these capabilities and capital structures to build, own and operate and in particular, as a vertically integrated IPP. What that means is we can be faster, we can be more cost effective as our gross margins are showing and demonstrating at about 2x the market. And that comes from less friction and less friction in terms of cost and time. And at the end, delivers higher quality. We're achieving over 99% uptime across every one of our storage projects that are operating today. And we do this now and are solving what is the primary constraint across global markets, and that is access to power. The most important takeaway perhaps this quarter is we're accelerating that execution now of our own and operate model. You can see that in three areas as well as any other details that we're going to be providing on the call, but our portfolio now exceeds 1 gigawatt of assets under control that's contracted, under construction or already operating. Our backlog has grown to over $1.35 billion and over 80% of that, as you'll see, is tied to owned assets now, which is a shift if we go back just a short 4 quarters to 5 quarters. And we now have visibility to over $180 million in recurring EBITDA run rate, which is ahead of our plan, also reflecting the inclusion now of Powered Land and Powered Shell opportunities where we are owning assets and providing power. This has obviously reflected a shift from a more episodic project revenue to predictable long-term infrastructure cash flows. And importantly, we are executing ahead of that plan, as I've just mentioned, and a lot of that's due to some of the dynamics we're seeing now in the AI infrastructure compute space. If you look at Page 4, which we provided, which looks back from our Q4 2024 actual, looks at our revenue and our backlog and shows what that looked like at the end of 2025. So growing that backlog from about $400 million to $1.3 billion today. As well, it looks at our gross margin, which has improved from 13.5% just 6 quarters ago to almost 24% at the end of '25 and projecting close to 25% for this year. I would say that if you look at the backward-looking view, we have executed now the strategy and are now, if you look at our backlog at 80% owned and operate, we're there. At the same time, as highlighted, therefore, in the press release, we've got some -- and if you turn to Slide 5, we delivered broad-based triple-digit growth across most all key metrics. Revenue up over 150% year-over-year. Backlog more than doubled 108% adjusted gross profit up 25%, cash up 148%, reaching $117 million. And our megawatts, very importantly, under our control, up almost 5x year-over-year and already more than doubled to 140% sequentially. Every core metric, all of these capacity backlog revenue and our liquidity is fulfilling what we've outlined and what we demonstrated with our strategic shift from 2 years ago. If you look at Slide 6, we've added this look at our backlog to take a look at where we've transitioned in just the last six quarters. What you see is a shift from what has historically been our energy storage EPC revenue, looking at our current backlog at $1.35 billion to where it's primarily the long-term own and operate revenue streams. And importantly, the gross margins associated with that backlog will be fundamentally shifting as we build these projects and bring them online over the next 12 months, 24 months and 36 months, those margins shifting from the 20% to 25% range up to the 60% to 80% range for IPP level margins. A lot of the growth that we're seeing both in terms of the initial megawatts we've been adding, but as well as what will be added more in the future is related to the AI data center space as well that's powering a lot of the infrastructure investments, in particular, in the U.S. Power availability is now the gating factor for expansion. We've added 100 megawatts of Powered Land and Powered Shell just this quarter. That alone is going to be expected to generate $65 million in recurring EBITDA in the next 12 months to 18 months that, that comes online. Beyond the primary power capacity, we're addressing resilience needs through energy storage systems that we deliver and operate. And if you go to Page 7, just a reminder of that unit economics growth that I just described from that backlog, you can see how that works relative to our core stand-alone storage there at the bottom of the metric and then moving up to our Powered Land and Powered Shell as well as the geographic expansion. And the addition of the Powered Land and Powered Shell for AI is what's helping drive our acceleration. Very importantly, I think as you move to Page 8 as well, you can see that we're expanding where we're going to be going, not only as we look at this quarter, you see expanded from 440 megawatts to over 1 gigawatt, as I mentioned previously. But looking out over the years, we're also increasing where we're going and what we're going to have under management by 2030, reaching almost 4 gigawatts as we look at today and what we see in our funnels and our development pipeline and what we're executing that's underneath our control already. You can see the EBITDA numbers there in those outer years get very large, and a lot of that work to achieve that is underway now as we're building and constructing these systems, they're going to come online over the next 2 years to 3 years. I want to finish here if you look at Slide 9 and highlights how the market is beginning to reframe Energy Vault, not as a traditional storage company, but as a broader power infrastructure platform. This evolution is critical as we expand into owning and operating integrated energy assets, particularly in support of the AI data center and digital infrastructure. I've mentioned this before, but not all megawatts are valued the same, and hence, our move into the AI digital infrastructure space is accelerating what we're going to be delivering in our initial targets. We're moving into a category that commands structurally higher valuation multiples. The infrastructure platforms with predictable long-duration cash flows and low revenue volatility are valued differently from project-based businesses, and this shift is increasingly reflected in how investors benchmark this sector. Importantly, this repositioning supports a meaningful re-rating opportunity as we execute and continue to execute against our megawatt pipeline and bring assets under ownership control, we unlock the full value of the long-term contracted EBITDA streams. Successful execution of megawatts under control is the bridge to this value realization. I mentioned again that strong historical execution capabilities have earned us this right with our existing customers who want to work with us on new projects, but also enabling this interim revenue upside while our larger scale projects are being constructed and coming online. With this transition, we're firmly into the IPP and digital infrastructure peer groups reflected in our contracted backlog now at about 80%. And we believe this evolution is going to support the re-rating and some meaningful upside to our current trading levels. If you look at that chart, you'll see how we've historically looked at our comp companies in there and looked at the performance, both the year-to-date this year as well as the trailing 12 months. And you can see we've had a very, very strong appreciation of the stock price, if you go back 1 year ago, but also this year now into our current trading. But I think most importantly, if you look at some of the new trading comps in the mid part of the page there and look at the valuation multiples there on the right, you'll see the opportunity that, of course, we've seen and why we made the strategic shift back 2 years ago. To close, before I turn it over to Michael, who's going to get into some of the details of our results for the quarter. We're accelerating the execution of our own and operate strategy. I think this big increase in the uptick in the megawatts under our management is a strong reflection of that. We're also scaling a globally diversified infrastructure platform now over 1 gigawatt. And I think that's important because things regionally can change. We saw that with the tariff environment just 1 year ago. There was a lot of uncertainty, having the exposure to markets like Australia, for example, and our recent acquisition of a large portfolio, 850 megawatts in Japan with 350 megawatts of near-term projects there reflect the fact that we are expanding in the most attractive markets and will give us that global diversity despite the fact that we see tremendous and large opportunity and probably the largest opportunity right here at home in the U.S. Energy Vault today isn't just participating in this transition. We are building the infrastructure backbone that enables it across the energy and power side, AI and the industrial markets. I also want to mention and thank the Energy Vault team for their dedication, their passion, their commitment to executing our strategy here every day. I think the results here are a reflection of this, our reiteration of where we're going to be this year and the guidance we just set 6 weeks ago. We feel very, very good about executing and a lot of upside, we believe, that exists within that guidance range. With that, I'll turn it over to Mike Beer. Michael Beer: Thanks, Rob. As you can see in the financial summary on Slide 18, we delivered Q1 revenue of $21.9 million, representing 156% increase year-over-year, driven by higher energy storage project deliveries and initial contributions from assets within our Asset Vault portfolio. Adjusted gross profit for the quarter was $6.1 million, up 25% year-over-year, with an adjusted gross margin of 27.9%. Adjusted gross profit reflects the removal of Asset Vault operating project-related depreciation and amortization as those projects commenced operations in mid-2025. The prior year gross margin of 57.1% was highly skewed by IP-related revenue. Adjusted EBITDA was negative $13.6 million in the period compared to negative $11.3 million in the prior year period, reflecting continued investments in our own and operate strategy, including development expense and organizational scaling to support long-term growth. Excluding onetime impacts from the extinguishment of debt and stock-based comp, Q1 2026 adjusted net income of negative $20 million compared to negative $11.8 million in the prior year period due to higher D&A and personnel from the new O&O Asset Vault projects and associated project-related financing expense and interest. From a cash position and financing perspective, we ended the quarter with $117.1 million in total cash and cash equivalents, reflecting continued investment in our Asset Vault portfolio alongside strengthening financing activities. As Rob mentioned, during the quarter, we significantly enhanced our balance sheet through the successful completion of $150 million convertible senior notes offering, which was upsized from $125 million. A portion of the proceeds was used to repay $45 million in higher cost debt while also implementing a capped call structure with an implied conversion price of $8.12 per share. In addition, we began monetizing investment tax credits, completing approximately $12 million of net ITC transfers with approximately $40 million in total ITC proceeds expected across all projects placed in service thus far. These actions collectively strengthen our liquidity position and provide the financing flexibility to accelerate execution of our global asset ownership strategy. At the project level, management is in the market for the SOSA and Stoney Creek project financings, which we expect to complete this quarter and in the second half of 2026, respectively. We're also evaluating a number of other financing opportunities, including those in support of our ramp in Japan and surrounding the Powered Land space. Turning to our latest backlog and development pipeline on Slide 17. We exited the quarter with a record backlog of $1.35 billion, representing 108% year-over-year growth with over 80% associated with our own and operate portfolio across the United States and Australia. This backlog provides strong multiyear revenue visibility and reflects continued traction in converting our developed pipeline into contracted projects. From a commercial activity standpoint, we made meaningful progress expanding our global footprint and asset base. One, we advanced our U.S. portfolio with the acquisition of the 175-megawatt 350-megawatt hour McMurtre BESS project in Texas. Two, we announced entry into the Japan market, including the 850-megawatt development portfolio with 350 megawatts in advanced stage projects expected to close this quarter. Three, we have added a number of smaller projects in Switzerland and made headway with the opportunity in the Balkans. And four, we continue scaling our AI power infrastructure platform, including progress on the 75-megawatt Powered Land opportunity where a number of agreements have now been secured. Across our platform, total megawatts under control, in construction or in operation now exceed 1 gigawatt, supporting a growing base of long-term recurring revenue opportunities. From a developed pipeline perspective, which we now view on a megawatt basis versus megawatt hour, we are now actively progressing opportunities valued at $3.5 billion associated with over 3.5 gigawatts. Taken together, our advanced developed pipeline and contracted backlog provides strong visibility into the next phase of growth for the company. As we continue executing our strategy, we are seeing clear validation of our transition towards a vertically integrated build, own and operate model. Our global asset portfolio now exceeds 1 gigawatt and is expected to generate over $180 million in annual recurring EBITDA run rate ahead of prior expectations. And this positions us to deliver increasing levels of predictable, high-quality earnings as assets move into operation. Turning to our business outlook for 2026. We are reaffirming our full year 2026 guidance, including revenue in the range of $225 million to $300 million, with approximately $75 million to $100 million in internal Asset Vault project builds. Gross margin of 15% to 25% and year-end cash in the range of $150 million to $200 million. This outlook reflects continued execution across our backlog, scaling contributions from owned and operated assets and disciplined capital deployment. With that, I'll hand it back over to you, Rob. Robert Piconi: Great, Michael. Thank you. I think with that, we'll turn it over to the operator for any questions. Operator: . [Operator Instructions] The first question comes from the line of Justin Clare with ROTH Capital Partners. Justin Clare: Congrats on the growth in the backlog here. I wanted to just start out on the AI infrastructure here and the 100 megawatts of Powered Shell and Powered Land that you plan to complete over the next 12 months to 18 months. Wondering if you could just share more on the status of those projects. For example, how much of the 100 megawatts is contracted and has offtake versus how much is in negotiation? What's the interconnection status? And then where are you in terms of permitting those projects as well? Robert Piconi: Okay. We have announced 100 megawatts there in Powered Land and Powered Shell. As you know, I think at our last earnings, we mentioned publicly the Southwest utility for the 75 megawatt of Powered Land that also is under a load study for application for 925 additional megawatts for a total of 1 gigawatt. So that's in the phase right now of the first 75 megawatt is already in construction and committed, and it's going to be coming online in January, okay? So as far as the Powered Land goes, from the Powered Shell perspective, we have our already announced agreement with Crusoe that's under now that development, and we have all the sites and all the load ready for that, and that's going to be constructed. And as we said before, that will start to come online in Q4 this year. So that's where we are in as far as the Powered Land and the Powered Shell. And I think most of those and as we look at the opportunities that we're developing is where you're going to expect to see some significant growth. If you look at the -- on -- I think it's Page 8 of the deck, you'll see, in fact, that mix shift. So you'll see the mix of Powered Land and Powered Shell versus our stand-alone storage, you see it increasing significantly there between where we are today in March 2026 up through 2030. So you can see that, that's going to move from roughly about 10% of that megawatt funnel to a little over half of it over the next few years. So I would expect that you'll be seeing and you will -- can expect to be seeing more announcements in that space. Justin Clare: Great. Okay. I appreciate the detail there. And then on the $180 million of recurring EBITDA that is anticipated when you build out the backlog here, wondering what the timing of that is and how that ramps over the next 2 years to 3 years or so? And then wondering on the $180 million, if you could also break down how much of that may be related to BESS projects versus how much is Powered Land and Powered Shell? Michael Beer: Sure. Happy to comment. We previously gave guidance in November of last year around the overall size of the Asset Vault portfolio. And we had initially talked about that being sort of a target of $150 million of recurring EBITDA. We've since announced our entry into Japan. We believe Japan is a 350-megawatt sort of attractive late-stage portfolio. So that would be in addition to that initial guidance. And now we've given more fidelity around what we believe the contribution would be from Powered land and Powered Shell on the order of about $65 million in recurring EBITDA. So if you were to take the $150 million, remove the $65 million from Powered Land and Powered Shell, obviously, the increase beyond that is associated with the Japan portfolio. This is sort of envisioned to be in that sort of, let's call it, circa 2028, early 2029 type time frame. Robert Piconi: Just to add to that, to the -- and there are some good charts we've included in the deck that referenced that, the one on the unit economics. So the reason we're seeing this acceleration as we met almost a year ago, we looked at a lot of the storage, the stand-alone storage IPP. As we've evolved the last 12 months and looked at the AI compute infrastructure space, those deals and those megawatts that we're contracting and owning are delivering anywhere from 5x to 10x the EBITDA contribution per megawatt per year. That's why we're providing some of the breakdown around what that mix shift of these megawatts is going to look like. And as we add more of those, you obviously can expect continual acceleration in terms of hitting and just growing that annualized recurring EBITDA number. And if you look at the chart on Page 8, you'll see where we expect that to go as we've increased that just from the last quarter. Operator: Next question comes from the line of Derek Soderberg with Cantor Fitzgerald. Derek Soderberg: First one on gross margins here. Guidance looks like 15% to 25% for the year. So just kind of thinking about that range, what are some of the variables? Maybe it's battery cell pricing, maybe some project mix. What sort of variables are going to determine where you guys sort of land in that range? And maybe as of today, where do you think you're sort of tracking towards that range, maybe the lower end, the higher end? Maybe talk about that. Michael Beer: Yes. You can see quarter-to-quarter, there can be some different mix components. Even a year ago, we had some significant IP-related contribution. So we had a 57% gross margin. This quarter, on an adjusted basis, it's about 28%. On a GAAP basis, it's about 22% Obviously, we're tracking to be better than the midpoint of guidance. You will have a very back-end loaded sort of revenue year associated with project deliveries, right? So we still are in the EPC business. And so the fourth quarter will be heavily influenced with some of those deliveries. Those deliveries can generally obviously balance out the overall shape of the year and the total gross margin profile. So still we are very confident on the overall range. Obviously, we endeavor to do better than the midpoint, just as we had done last year. Robert Piconi: Derek, the other thing I would just add to that is our new gross margins now and revenue that's going to include the storage IPP is also just from a GAAP perspective, it's going to include the noncash portions of depreciation. That's why we're referring and this will make the comparisons good from last year to this year. our adjusted gross margin, which is really getting at that cash gross margin only without the IPP revenue, so you can really compare apples-to-apples as you look at the EPC revenue. If you do it that way, for example, we're closer to, I think it's 27.8%, 27.9% this quarter. So we intend to focus on execution on managing our supply chain as we've done in the last quarter, we obviously continue to be setting ranges that we know and feel comfortable we can hit and we'll push execution to remain on that upside. Derek Soderberg: Got it. That's helpful. And then as my follow-up, sort of related to the first set of questions. So the first 75 megawatts on the Powered Land piece coming online in January of '27 and then the 25 megs coming online in Q4 of this year. I was wondering if you could sort of maybe provide some detail on how that revenue is going to scale, how the EBITDA is going to scale? Anything around that? And then also just on that opportunity to potentially go up to 1 gig on that sort of higher EBITDA per megawatt opportunity. Can you talk about what sort of milestones you need to hit before that larger opportunity starts to materialize? Robert Piconi: Sure. Let me -- I'll hit both of those, and Michael, you can chime in as well. To the first question on both the 75 megawatt and the 25 -- the 75 megawatt is committed to be online in January, as I mentioned. So that full 75 megawatt will be online. Essentially, the switch is getting put in place. There's some transmission that's being built out. That is already underway. We already have made payments towards that to happen and committed. What you would see on that is an offtake agreement of that 75 megawatt. But once that turns on in January, you can expect that to be fully monetized, meaning we will be in a contract and monetizing that. So we should get almost a full year of EBITDA there of that 75 megawatt, and it's estimated at somewhere in and around $35 million. So that's the $75 million. On the 25, just to be clear, we're going to be starting those deliveries, meaning we're going to start to receive and have those systems come on within Q4. So not all 25 megawatts will be in Q4, but then will -- as we've said, will come in the next 12 months to 18 months. So meaning we'll be beginning to receive and activate the Powered Shells and then be installing those and then the forward quarters from there. So that's helpful. The good news about that is we're going to -- we expect in the next 12 months to 18 months to have that roughly $65 million up and going on an annualized run rate basis. The second part of your question on the 75 going to 1 gigawatt. So there is a study that's already underway that we're engaged with the Southwest utility. that study is looking at the addition of 920 megawatts to that 75. So that would be up to a full gigawatt. Those are large numbers. You can do the math on just what that 75 is, as I said, and scale that. But we do expect somewhere in and around $0.5 million or so per megawatt on that. But that's a study that's going to happen that's happening now. There will be some decisions, I think, made then this year, we expect in the next 3 months to 6 months on also some sizing of what the capacity upgrade will be. And that's essentially going to be all the transmission and high-voltage equipment that will be required to bring that 925 megawatt here to market. And that will be coming in place over the next 24 months, 36 months, 48 months. We are expecting, just to be clear on that, we are expecting to look at doing an interim step with some other generation equipment that we would couple with our storage, for example, to try to bring online something on an interim basis of another 225 megawatts to potentially add to that 75. So this is within this core Powered Land segment. So that would be an interim step to get a solution in place. Obviously, as we've said before, with a hyperscaler that it's in a very attractive location that we'll be sharing more of as we do some formal announcements, namely utility, et cetera, and other things this year. But from a time line perspective, just to summarize, the 75 megawatt in January. Following that within the next 18 months to 24 months, we're looking at another 225 megawatts to bring online on an interim basis until that other 925 megawatt of grid power would come online in the next 36 months plus. Operator: Next question comes from the line of Brian Lee with Goldman Sachs. This is Tyler on for Brian. Tyler Bisset: Just first, I wanted to touch on the margins in terms of the backlog. So what is the time line to reach the 60% to 80% IPP margins as you execute on the backlog? And just to confirm, this would be on an adjusted basis? Michael Beer: Yes. So this is over time, there's obviously two distinct margin profiles for each of the different businesses. The 20% to 25% is akin to the legacy, let's call it, EPC-related business. The transition to the IPP business model, those 60% to 80% IPP margins, you can see that all laid out on, I believe it's Slide 6. Obviously, there's going to be a mix effect that will take place over time, right, as these projects come online. We're not exiting the EPC business. We'll continue to do that, not only for third-party customers, but we self-perform these projects for ourselves, and there's actually a positive working capital function that, that serves. So we'll continue to be in that business. But it will be a blending over time. It won't just be a flip of a switch. Tyler Bisset: Helpful. And then can you provide an update on just your revenue trajectory for the balance of the year? I noticed accounts receivable stepped down in the quarter. So could you see 2Q revenues decreasing quarter-over-quarter? And I guess, how are you thinking about the balance of the year from a revenue standpoint? Michael Beer: We generally don't give sort of quarterly guidance in that respect. But as mentioned, it will be a back-end loaded year. I would use a profile akin to what you had seen last year. Robert Piconi: And as you saw there, just to add to that, we had very strong year-over-year compares just given we are projecting over 30% growth at the midpoint here. So if you look at the trajectory, as Michael said, and look at that framework, we are expecting something similar there. And -- but generally, I think if you look at the year-over-year compares, we're still going to be pretty favorable, I think, as we ramp and scale. Tyler Bisset: Understood. And just one more for me. Can you just provide some more details on the progress on the developed pipeline and backlog? It looks like developed pipeline increased to 3.2 gigawatts from 1.8 gigawatts last quarter, but the value went up to $3.5 billion from three. And then on the backlog, it looks like it remained flat at 3 gigawatt hours, but the value went up slightly. So can you just discuss some of the moving pieces here? Michael Beer: Yes. There's always a bunch of ins and outs, FX, there's a host of things that can sort of move these things at the margin. I think within developed pipeline, interestingly, we're starting to see some real benefits of this integrated model and the fact that sort of one hand washes the other. While we are in both the EPC business and the IPP business, we're now starting to see some opportunities emerge that sort of split the difference or are emerging from both camps. And so the fact that we do have a keen focus on both sides of the business is being very additive in that respect. So we're seeing new projects being added all the time. We also call our developed pipeline to make sure that if things are stale or projects have moved on or for whatever reason. So we try to keep this very current and not make sure it's stale. So I think this does represent the current slate of investments that we have here in the U.S. across multiple sort of industry subsegments. And geographically, we're seeing some other things emerge internationally. Robert Piconi: Then the other perspective I'd share with you here, and this is an important one and it was something that we looked at as we made the decision 2 years ago to focus on owning and operating. So that means we're acquiring megawatts. We're going to be building them, but then the revenue doesn't come during that build, right? So it doesn't come until we actually go COD or we go online with the project. So you would have normally expected if we're really making that shift, you might have expected our revenue, our rev rec actually going down over a period, right, 12 months to 24 months as you make the transition. What we challenged the team with here and what we targeted to do was despite the shift we've made from owning and operating assets where we are not recognizing revenue, even though the activity is much more than even our projected revenue is showing because we have activity that we don't recognize. We are building projects. Energy Vault is building projects for Asset Vault. It is not showing up and recognized revenue. So we have more activity than we've ever had. The challenge was how do we keep revenue growth, meaning recognized revenue going until these new projects come online. And what I feel very good about with the team and the execution is that we were able to still have a year this year in 2026 with strong double-digit revenue growth despite the fact that as you see in the megawatts that are growing to now over 1 gigawatt that we have under our control and management and building out that we are not recognizing revenue on that. Despite that, we're still seeing that revenue growth. And that's -- a lot of that's driven, I think, in the U.S. market, in particular, with what's happening with the AI infrastructure and in particular, these power packages that are getting put together where we're looking at and we are doing and integrating our energy storage with generation, with gas generation, for example, but also with UPS backups that are a part of those and coupled with that gas generation. And then we're integrating that solution across a single pane of glass, meaning a single software platform to bring that all together for a customer. So those are solutions that we actually do sell and turn over. So that is -- allows us to do the revenue recognition in parallel. So this -- the whole AI compute infrastructure and the billions and arguably, you'd say trillions over time that's going to be spent for that, that is enabling us to maintain this revenue growth with that focus on these solutions. And a lot of that has come from customers that know us, they trust us, where we've executed for, they have their systems up and running at 99% plus availability -- so we feel not only good about that in the revenue projections we've done this year for growth, but we do see a lot of upside to the current revenue projections for that growth as well. Operator: Next question comes from the line of Sid Rajeev with Fundamental Research Corp. Siddharth Rajeev: Congratulations on the strong results. How are Calistoga and Cross Trails operations performing given it's been almost 12 months since both started operating? Are revenue and margins there in line with your expectations? Michael Beer: Yes. The Cross Trails project continues to perform well. There hasn't been a change, and we're expecting on the order of circa $10 million in EBITDA on a full year basis. across CRC and Cross Trails. Robert Piconi: Yes. I'd add to that, too, as we all know, I think, in the market, anyone that's in the IPP market, ERCOT obviously is undergoing and has been really the last 12 months, 18 months, really almost the last 2 years, weakness, at least on a cyclical basis versus the prior year. So I think we're seeing that. And the good news about our system there in ERCOT is it's been running at a 99% availability despite that. And obviously, we'll take advantage of opportunities when they come. But it is -- that sort of softness in the ERCOT market has made it a buyer's market when we're looking at acquiring megawatts. So therein lies some opportunity. We've been very, very careful with selecting the best points of interconnect and doing a lot, a lot of diligence there to have the points of interconnect as is the case with McMurtre that we announced that's just north of Dallas there in Texas. So at points where we do believe we can leverage good economics. Siddharth Rajeev: Great. And with the ownership structure of the Japanese initiative, will that be similar to your other assets given you're partnering with the local developer there? Robert Piconi: Yes, we were expecting, and I think we mentioned this in the -- when we made the announcement, the Japanese market is fascinating because if you go back and look at where ERCOT was 4 years to 5 years ago, we see the Japanese market just evolving now in that same type of economic environment and opportunity, therefore, to initially deploy and take advantage of a lot of the frequency and some of the other ancillary services and even the arbitrage opportunity there in Japan. So in terms of structurally, that initial team that we're acquiring that was from an existing large company there. That team is going to be the one that's going to be continuing developing those near-term projects. So of the 850 that are within that portfolio, there's 350 megawatts of near-term projects that, as we said in our announcement, we expect this quarter to close on that 350 megawatt and then get those constructed and get those up and operating. So I think from an overall structure in terms of how we look at debt and equity and financing these, I would say it would be unlike as we're looking at projects in the U.S. and Australia. I think one of the differences there, Michael can comment on this, too, is you have a very favorable interest rate environment, I think, in Japan that is going to be helpful relative to the financing and they're very known project financing models as well. Michael Beer: Yes. It's an existing team that we're effectively acqui-hiring with a very robust portfolio. As we mentioned in some of the prepared remarks, we are going to be going to market from a financing perspective in support of a host of those projects. So -- the fact of the matter is we entered the Australian market just a few short years ago and look at the amount of traction that we've been able to sort of generate there. So we're looking to replicate that in the Japanese market. Siddharth Rajeev: Any comments on the offtake pricing you can get there? Is the ROI, would you say it's comparable to the U.S. or higher? Michael Beer: I don't believe we've given real specifics there. It is an attractive market, but obviously, we feel as if we're early to that market. And obviously, we're putting our money where our mouth is, but we haven't given any of those specifics. Robert Piconi: Or expecting… Michael Beer: I think… Robert Piconi: Yes. Michael Beer: I was just going to add, we're -- I wouldn't think that it's going to be far off from what our expectations are on achieving IRRs sort of low double-digit type of IRRs as we get started there and opportunity for optimization on that. But we're – Robert Piconi: Hence our investment there. It is -- we believe that is today and will continue to be in the coming years, an attractive market. Operator: Next question comes from the line of Noel Parks with Tuohy Brothers. Noel Parks: I had a couple. One thing you were mentioning gas generation a moment ago and sort of in the landscape of potential business out there for your pipeline. I guess I'm wondering maybe what's the main pain point for potential customers? And I guess I'm thinking about whether there's any difference between those where they're looking, say, for new AI-related generation where gas generation is probably going to be at the core of it versus situations more where it's a case of playing catch-up with wind and solar for grid integration. So I guess is one of those a much bigger driver than the other, would you say? Robert Piconi: Yes. No, it's a good question. The reason you're hearing more and more about gas is just two things. Obviously, the power demand is largely outstrips the supply or the ability to deliver it. So that's one. So any of the -- any and all solutions, solar, wind, combined with other types of generation and leveraging, we have obviously abundant natural gas in the U.S. So I think gas is going to play an important component, in particular, over the next 3 years, 5 years plus. But in addition, remember, what's driving this are data centers and the requirements are at five-nines reliability, which is -- if you're thinking about that and thinking what that requires, and it's going to be different regionally. But look at -- if you go back to an event, for example, in Texas, we all remember in the and the cold and the frost and the freeze and that shut down things for a matter of days. With the requirements in SLAs at five-nines reliability and AI compute infrastructure, these are things that, therefore, require not only redundancy, but in some case, there's multiple redundancies. So you can think about having a grid connection, okay, everybody likes that. You can add energy storage to that, which will be good for -- if there's an outage, you can name it for some hours, let's say, and even up to the day. But if you get into a multi-day outage, that's where we're looking at having some type of reciprocating engines or gas, diesel gen, et cetera. So you can actually have a solution that when you put together, for example, grid power plus energy storage plus some gas power backup, you've got something where you can deliver on five-nines. So it's -- hence, that's the numbers. you're seeing in those -- that tremendous amount of CapEx in the data center build-outs. A lot of that CapEx is also essentially guaranteeing that power availability and delivery. Does that make sense? Noel Parks: Yes, absolutely. And you did touch a bit on it already, sort of the comparison of Japan to where ERCOT was a few years ago. But when you announced the Japan acquisition, you sort of stressed the importance of grid stability and load balancing in Japan that they're at that stage now. I just wonder if you could maybe just dig into that a little bit deeper and whether there are similar analogous regions that might be needing to deal with this sooner rather than later? Robert Piconi: Yes. I'd say that the perspectives we've shared from the announcement and what you've just articulated is what we see. And as I mentioned, we're going to see some of the fast frequency response, that load balancing and I think opportunities to capture different types of pricing at different times of day. So I think generally, that dynamic is going to be positive, we believe, for the market. And I think others that have entered there recently are seeing the same thing. As far as other markets that have those same dynamics, there's an important aspect to look at this, and I think Asia-Pac is a great example where there are other markets that may have those same types of environmental factors. But the other thing we look at is scale and priority in terms of the markets we choose and not spreading ourselves too thin. So there would be -- there are, I think, other markets that have those same characteristics and even in some newer European growth markets, for example, that we're seeing. But we're very focused right now, I think, on some of the largest opportunities and focusing our capital investment, our human resource investment in the areas where we see the biggest upside. And a lot of that, by the way, is right here at home in the U.S. Noel Parks: Right. Great. And if I could just run one more by you. I was thinking about the process of project financing over the last couple of years, you've seen this real transition from being able to get it much earlier in the project life cycle. So I'm just wondering, as you're going through your process of negotiating and raising it for your upcoming projects. I'm just wondering, is there considerably less of an education burden that you have to address in terms of your counterparties and their due diligence? Or is it essentially still just everyone needs to go through a pretty similar pattern taking process? Michael Beer: Yes. The market is evolving so quickly, whereas nobody would have even looked at sort of merchant years ago, now that's being sort of incorporated in the models and we were getting very creative in how they structure bridges or construction financing sort of in and around some of the ITCs. The market is evolving very, very quickly. Certainly, here in the U.S., we're also seeing that bleed over into some of the other markets where we're constructing assets such as Australia and what I suspect is likely Japan, but we need to go through that process. The fact of the matter is we've now done this a few times, and we now know what we're looking for as we're evaluating project attractiveness and what can possibly go wrong. So just mitigating risk where possible, bringing partners into the fold earlier in the conversation and trying to build a good, let's call it, feedback loop of existing partners so that we can sort of instant repeat across the entire portfolio and just remove friction where possible. Operator: Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to Robert Piconi for closing comments. Robert Piconi: Great, operator. Thank you. Look, just in closing here, and hopefully, as you've gone through the numbers and go through the charts, again, encourage everyone to download those. We are sharing more and more detail and some transparency on things that tie to the future profitability and growth of this business. I think a lot of the key metrics we share, the growth in the megawatts under management that have more than doubled since just going back since we last spoke, which wasn't that long ago, 6 weeks, 7 weeks ago, getting over that gigawatt -- that first gigawatt that's within our control now to go execute. Those are not small markers. And I think on top of that, then you look at the backlog, which is a different cut, looking at what we've actually contracted -- so just to highlight, 80% now of that backlog that stands today at the $1.3 billion is contracted at much, much higher IPP type of gross margins. Again, that's something that should give investors a lot of comfort relative to the future profitability as we bring those online. But also just operationally, and this, I think, as investors look at teams and companies to invest in and the execution that we've had, if you look at just the last 6 months, 8 months, last year, one of the most challenging years starting off with the tariffs and uncertainty really through the first half of the year into the mid part of the year, yet the team at Energy Vault executed and delivered the only energy storage company to deliver on their original guidance that we set for the year and in a strong way in the quarter, delivering positive adjusted EBITDA even in that last quarter as we delivered. We're expecting to do the same this year and with strong execution, expect to have some continual positive and upside surprises in what we're doing just with the nature of our market penetration, in particular, what's happening here in the U.S. market. So we have a lot underway. As I mentioned in answer to one of the questions here on other regions, other markets, we are staying very, very focused on these three core segments and just the very attractive core markets. And that's the Asia-Pac as far as Australia and Japan go. That's in Europe, we're developing. I think some of the interesting own and operate opportunities there, as we've mentioned before, but in particular, right here at home in the U.S. And it's required us to have a very nimble and diverse and dynamic supply chain given the changes in the rules and FIAC and a lot of the focus on domestic solutions. So that is something our supply chain has been able to be very nimble and deliver as we demonstrated in Q4. But really, as far as where we are at this point with what we have both under contract now and under development that's within our control as well as those opportunities as referenced by one of the questions, we -- our developed pipeline has more than doubled just from the last time we spoke, which was 6 weeks ago. These are really important markers to look at. We've had a very good hit rate in terms of a conversion rate, I'll call it, in terms of taking that developed pipeline and converting that, in particular, those megawatts into things that are within our control, meaning acquiring attractive points of interconnect. These are really the markers that I think investors should be looking at relative to the future with a very proven team that's been able to execute and deliver here for customers at extremely high availability, which is, at the end of the day now, how we're really being judged by our customers is being able to achieve that 99% plus availability that they not only require contractually, but really demand. It is a market requirement now as we look at power solutions. And finally, just again, as I always do, none of this happens by itself or under standard processes and procedures. We have a very nimble and agile and hardworking and do whatever it takes team at Energy Vault. A lot of hours worked to deliver what we deliver day in and day out. I want to thank all the employees that make these results happen that are passionate about delivering for customers, are passionate about maintaining our focus on sustainability as we announced also this past quarter, 2 years in a row now being ranked the #1 energy storage company, #1 energy company in our industry from a sustainability score judged by S&P Global. So true to our mission and the vision we want to achieve as a company, I could not be prouder of the team here at Energy Vault and where we are today. And personally, I have never felt better about where this company is going to go, what we're going to be able to achieve. We do not limit our thinking in terms of where we go, how big the hill is to climb and what it takes to get there. As all of you know, listening in on this call, there's no shortage of capital to put behind strong management teams in a very attractive space with a proven track record of delivery. And I think we hit on all those fronts. With that, operator, I completed the call here. I'll turn it back to you. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Good evening. My name is Michelle, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DaVita First Quarter 2026 Earnings Call. [Operator Instructions] Mr. Eliason, you may begin your conference. Nic Eliason: Thank you, and welcome to our first quarter conference call. We appreciate your continued interest in our company. I'm Nic Eliason, Group Vice President of Investor Relations. And joining me today are Javier Rodriguez, our CEO; and Joel Ackerman, our CFO. Please note that during this call, we may make forward-looking statements within the meaning of the federal securities laws. All of these statements are subject to known and unknown risks and uncertainties that could cause the actual results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please refer to our first quarter earnings press release and our SEC filings, including our most recent annual report on Form 10-K, all subsequent quarterly reports on Form 10-Q and other subsequent filings that we make with the SEC. Our forward-looking statements are based on information currently available to us, and we do not intend and undertake no duty to update these statements, except as may be required by law. Additionally, we'd like to remind you that during this call, we will discuss some non-GAAP financial measures. A reconciliation of these non-GAAP measures to the most comparable GAAP financial measures is included in our earnings press release furnished to the SEC and available on our website. I will now turn the call over to Javier Rodriguez. Javier Rodriguez: Thank you, Nic. Good afternoon, everyone, and thank you for joining the call today. DaVita's foundation is clinical excellence, driven by operating rigor that produces durable results. We have consistently delivered exceptional clinical outcomes and strong financial performance, and this quarter is no exception. To ensure we sustain and build upon this foundation, we're actively investing in our future capabilities. In a rapidly evolving landscape, we're taking a pragmatic approach to expanding our IT systems and digital infrastructure. These targeted technology investments are designed to empower our clinical teams and serve as a backbone for our next chapter of clinical and operational excellence. Today, I'll walk through our first quarter performance, share how technology is enhancing our operations, provide an update on ACA Plans and finish with our outlook for the remainder of the year. But first, I'll start as we always do with a clinical highlight. This quarter, we're highlighting the continued momentum of Integrated Kidney Care, or IKC, our value-based care business. In the latest results from CMS' Comprehensive Kidney Care Contracting program, or CKCC, we delivered year-over-year improvements across all 3 key measurements, which are gross savings rates, total quality score and high-performing status. Clinically, this means our IKC care model, together with our physician partners is improving the health and well-being of our patients. Economically, we generated the highest total aggregate savings of any participant driven by our 4.5% improvement in gross saving rate since the beginning of the program. This is a clear example of how IKC clinical rigor paired with data-driven insights is delivering better outcomes for our patients and a more sustainable model for the future of Kidney Care. Turning to the first quarter. We delivered strong financial results ahead of our expectations with outperformance from each element of our U.S. dialysis trilogy; treatment volume, revenue per treatment and cost per treatment. This balanced outperformance reflects the strength of our team and our focus on consistent execution. I'll touch on a couple of key metrics that contributed to the quarter and will help shape the remainder of the year. Starting with volume. In the first quarter, our treatment volume was slightly ahead of forecast. Quarter-end census was ahead of plan as a result of better-than-forecasted mortality, partially offset by lower-than-forecasted admits. Census also benefited from patient transfers in related to ongoing clinic closures by Fresenius. Although negligible in the first quarter volume, we anticipate that these transfers will contribute to positive treatment growth over the remainder of the year. As a result, we're raising our volume growth expectations for the full year from flat to a range of 25 to 50 basis point increase. Approximately half of the increase is from better underlying performance and half is related to transfer in from Fresenius. Switching to labor. Q1 was ahead of plan, primarily from better productivity, which we expect to sustain over the balance of the year. Let me turn to our technology strategy and the investments we're making to strengthen our operations and ultimately, our clinical outcomes. We're taking a disciplined approach to AI that we've been building towards for years, and we're seeing that groundwork translate into real impact. Our strategy has 2 parts. First, we've modernized our data infrastructure. This means standardizing and integrating high-quality data across the enterprise through systems like our proprietary EMR platform. That work gives us a differentiated foundation to power AI applications at scale. Second, we're actively deploying AI solutions across clinical, operational and business use cases with a focus on supporting our caregivers, improving how we operate and drive measurable impact. One example is [ ScheduleHub ], a new tool that dynamically processes changes in each center's patient census, capacity and teammate availability to recommend optimal patient and staffing schedules in real time. Given the complexity of the center scheduling, we expect this will reduce administrative burden for our facility administrators and enhance teammate experience while supporting patient care. This is one of many examples where our sustained IT investments translate into tangible scale benefits across the enterprise. We're still early in our AI journey, but given the strength of our data foundation, and the pace of our deployment, we are well positioned to outperform both clinically and operationally as technology evolves. Next, on ACA Plan enrollment. Based on what we know today, ACA open enrollment is trending towards a slightly favorable outcome relative to our prior expectations of an approximately $40 million headwind in 2026. This favorability will be partially offset by more patients selecting lower-level bronze plans, which translates to higher out-of-pocket costs and a modest RPT headwind. We will gain greater clarity on the enrollment outcome and mix impact as we get deeper into the year. I will conclude my remarks with our financial outlook for the remainder of the year. With our first quarter results, we're off to a strong start for the year. As a result, we're raising and narrowing our guidance for adjusted operating income to a range of $2.15 billion to $2.25 billion. Similarly, we're raising our adjusted EPS guidance to a range of $14.10 to $15.20 per share. The increased guidance is primarily the result of our higher volume forecast for the year and lower patient care costs. I will now turn the call over to Joel to discuss our financial performance in more detail. Joel Ackerman: Thank you, Javier. Today, I'll provide details on our first quarter results, then give you some more context on the update to 2026 guidance that Javier shared. First quarter adjusted operating income was $482 million, adjusted earnings per share from continuing operations was $2.87 and free cash flow was $140 million. Adjusted operating income came in about $50 million ahead of our forecast. Approximately half was the result of performance ahead of plan and the other half, the result of timing. Starting with detail on the U.S. dialysis segment. Treatments declined about 20 basis points versus the first quarter of 2025 and treatments per normalized day increased 40 basis points versus Q1 of 2025, approximately 20 basis points ahead of our expectations. As Javier mentioned, we are increasing our full year volume forecast to 25 to 50 basis points. As a reminder, this represents our forecast for treatment growth. This translates to 50 to 75 basis points of growth in treatments per normalized day because of the year-over-year treatment per normalized day headwind in 2026 compared to 2025. Revenue per treatment declined approximately $5 sequentially, primarily as a result of the typical first quarter headwind from patient-pay responsibility. Year-over-year RPT growth was approximately 4% in the quarter. We still expect full year RPT growth in the range of 1% to 2%. Patient care cost per treatment were about flat to the fourth quarter. This was primarily the result of a seasonal decline from high health benefit costs in the fourth quarter, offset by typical increases in wages and other cost growth. Patient care costs were lower than expected, largely as a result of better-than-expected productivity improvements. U.S. dialysis G&A costs declined $16 million from the seasonally high fourth quarter, although growth versus the first quarter of 2025 was about $37 million or 13%. This growth is the result of continued investment in technology. Turning to our other segments. In the first quarter, international adjusted operating income was $30 million, and IKC had an adjusted operating loss of $19 million, both in line with our expectations. Regarding capital allocation, we repurchased 3 million shares during the first quarter, and we repurchased an additional 2 million shares since the end of the quarter, which includes the shares bought from Berkshire Hathaway pursuant to our repurchase agreement. At the end of the first quarter, our leverage ratio was 3.34x consolidated EBITDA, well within our target leverage range of 3 to 3.5x. Below the operating income line, other income was $4 million, a sequential increase, primarily as the result of no longer recognizing losses from our investment in Mozarc. Debt expense in the first quarter was $145 million. As an update to our guidance, we now expect quarterly debt expense for the remainder of the year to be similar to Q1 due to higher share repurchases and higher interest rate expectations resulting in full year debt expense about flat to last year. For 2026 guidance, as Javier described, we are raising our adjusted operating income guidance range by $40 million at the midpoint. The largest driver of the increase is our expectations for higher treatment volume. The second factor is an expectation for continued labor efficiencies within patient care costs. Regarding the phasing of our guidance through the balance of the year, we currently expect adjusted operating income to be about evenly split across each of the 3 remaining quarters, which assumes Q4 weighted IKC operating income. Our expectations are that the seasonal pattern we saw in 2025 are not typical, and we expect to see phasing more in line with 2024. Moving to EPS. We are also increasing our adjusted EPS guidance consistent with our updated guidance range for adjusted operating income. That concludes my prepared remarks for today. Operator, please open the call for Q&A. Operator: [Operator Instructions] Our first caller is Kevin Fischbeck with Bank of America. Kevin Fischbeck: I wanted to dig in a little bit to the volume commentary. I guess, is there any way that you can kind of break out whether weather had an impact, how much that was? And then the improved mortality? Is there a way to kind of break that into what was maybe just a light flu season year-over-year versus underlying trends you're trying to think about how durable the better mortality for the rest of this year? Joel Ackerman: Yes. Thanks for the question, Kevin. On weather, weather came in exactly as we expected. As you would imagine, we build weather into our forecast. It can range from year-to-year. It was, as I said, in line with forecast. I'd call it, about 10 bps better than last year. In terms of flu overall, again, came in line with our forecast. What we had said at the beginning of the year was we were building in a flu season that looked like 2 years ago. And while the pattern was a little different quarter-over-quarter, the impact for us was about what we expected. As we think about flu, we focus on cumulative hospitalizations, which you can find on the CDC website as the main driver of volume impact for us, and this year is in line with what we saw 2 years ago. In terms of splitting out the mortality coming in a little better than expected, it was probably not about the flu because flu came in as expected. It was more around the underlying mortality. Kevin Fischbeck: Okay. Great. And then can you just give a little more color on the rate update? Why was the rate so strong in Q1 relative to your guidance for the year? Joel Ackerman: Yes. So rate -- RPT was up a little more than 4%, so call it $17.50. I would say 2/3 of that was normal stuff in terms of rate increases and mix shifts, about, call it, $6, I would attribute to timing. Part of that was negative timing in Q1 of '25 and part of it was positive timing this year. We see timing -- we call it out frequently around RPT. And for the year, we're sticking with our 1% to 2% guide. Kevin Fischbeck: Okay. So nothing unusual there around like drugs or binders or anything like that kind of skewed the number? Joel Ackerman: No, nothing unusual. Kevin Fischbeck: Okay. And then maybe just the last question. Can you talk a little bit more about the ACA impact and how you're thinking about it? It sounds like you're saying it was coming in better, but it sounds like the guidance hasn't changed yet for the year to get that right. And then how are you thinking about the timing? Is it that Q1 came in better? Now you're assuming it's going to ramp? Or did you always assume Q1 was going to be a little bit lighter relative to the year, thoughts there? Javier Rodriguez: Yes, Kevin, it's a great question. And the reality is that it is very early. So just to repeat, Q1 was pretty flattish to Q4. So it has performed better than we expected. That said, the reality is that we haven't seen the effectuation rate and the affordability play out, and so it's too early. We have to see payments and we have to see enrollment over time. And that's why we're thinking it's a little premature to change our numbers. But the reality is that we will need -- the real data point that we want to see is the mix of our future incidents. And that is, of course, too early to tell. So we're holding to that $40 million number. Although right now, we would be trending -- $40 million number, we're trending a little better than that. Operator: Our next caller is Andrew Mok with Barclays. Andrew Mok: Hoping you could provide more color on what you're doing to position yourself to capture market share and the visibility you have into those share gains at this point to raise guidance, specifically to the clinic closures? Javier Rodriguez: Look, at the end of the day, we, of course, are in a very competitive market. The centers that are being closed, you can assume are small centers, and you can also assume that Fresenius and anyone that closes a center would work hard to try to keep those patients in their own network and with their same physicians, et cetera. And so we are, of course, making sure that the market is aware of our share availability and our physician access and all the things that one would do. And then, of course, the patients and the physicians will make their choice. Andrew Mok: Great. And then I just wanted to follow up on the mortality comment. I appreciate that flu wasn't necessarily the driver. But any color on the underlying mortality performance would be helpful considering that's an important metric for building consensus on volumes for the balance of the year? Joel Ackerman: Yes. It is an important metric. You're absolutely right about that, Andrew. I would say the changes are rather small, and we're not ready to call out any significant underlying trend. That said, we did up the volume guidance, and it's captured in there. Andrew Mok: I guess how are you able to isolate that it was mortality versus some of the other dynamics in the market with flu and clinic closures? Joel Ackerman: Clinic closures are a separate issue because they are about admissions, and we've got a lot of visibility on patients coming in and patients leaving. In terms of mortality, as we've said before, it can be a hard variable to know in real time, but we feel pretty good about what we saw from Q1 now that we're sitting here in May. Javier Rodriguez: Andrew, I think let me try and be helpful with this because you're asking the right question. And there are several inputs that go into treatment. As you can imagine, you've got seasonality, you've got mortality, you've got admissions, you've got missed treatments, you've got transfers, but they're all pretty small. And so what we're trying to do is instead of going into a world of small numbers, give you a range that handicaps all of those variables. Operator: Our next caller is Pito Chickering with Deutsche Bank. Pito Chickering: Just a follow-up on the treatment commentary. Can you just talk about the new starts to dialysis in first quarter? And as you think about Fresenius scaling in from their closures, is this an immediate ramp in sort of 1Q, 2Q and then normalize in the back half of the year? Just want to make sure that as you're increasing your treatment growth guidance here that we're also modeling where you guys go from 2Q and then where you guys finished the year in fourth quarter? Joel Ackerman: Yes. So on the admit side, I don't think we've got a lot of color to go in. We're talking about basis points of change and then to go to the next level and bifurcate that among all the inputs that Javier mentioned, I think, gets us to a point of false precision. In terms of timing on the new starts, we saw what I would guess is about half the new starts from Fresenius that we would see by the end of the first quarter, we would guess the other half will come in Q2. So if you're thinking about how to model them, I would say we'll get probably 2/3 of a year worth of those new starts. Pito Chickering: So does -- when we pull together with the new starts, in the mortality and the Fresenius, kind of where should we be ending the fourth quarter from a treatment -- organic treatment growth perspective? Joel Ackerman: Yes. I think the way we're thinking about it is treatments per normalized day, which we think takes out the quarter-to-quarter and year-to-year noise associated with the different number of days in a quarter and the different mix of Monday, Wednesday, Friday, Tuesday, Thursday, Saturday. So what we would expect is the normalized treatment per day count to grow over the course of the year. It's sitting today at about 40 bps positive, and we would expect that to grow over the course of the year. Just to make sure everyone's following how we're thinking about this, our new guide for treatment volume is plus 25 to 50 bps. Because there's a 25-day headwind in the year on normalized treatment days, our guide for the year would be plus 50 bps to 75 bps of normalized treatments per day. So that's 40 bps now getting to that average of 50 bps to 75 bps for the year ending somewhere higher than that. Pito Chickering: Okay. Great. And then a follow-up here on the revenue per treatment. If you pull out the $6 you're talking about from a timing perspective, gets us to $4.11 to $4.12, typically, 2Q ramps, $4 or $5 as you burn through the deductibles and then we see continued ramp in the third quarter and then obviously, fourth quarter, we get the update with the new Medicare rates. I guess, I'm trying to figure out how we're still getting to 1% to 2% revenue per treatment guidance growth, even pulling out at $6 in the fourth quarter -- from the first quarter because of normal seasonality you guys see in the interim treatment? Joel Ackerman: Yes. So I think there are 2 dynamics. One is normal variability. So the quarter was a little higher, and you take that out. The second dynamic is around mix and the enhanced premium tax credits. What we would expect is commercial mix to decline over the course of the year, and that will put pressure on RPT, which would help you bridge from a higher number in Q1 to the 1% to 2% for the year. Pito Chickering: Okay. But at this point, through April, you haven't seen that negative hits that you're guiding to, you're just sort of just assuming it comes until later on in the year? Joel Ackerman: That's correct. Pito Chickering: Great. And then last question. Your G&A per treatment, you talked about was up 13% due to tech investments. Where does it end the year? And kind of -- should we think about this declining linear throughout the year as those investments were made or just any color around how we should be modeling G&A treatments for -- G&A cost per treatment throughout the year as the tech investments begin to decline? Javier Rodriguez: Yes. I appreciate the question on G&A. And I want to reassure you that we are looking at this incredibly diligently. And if one looks at G&A independently, that line is growing at a faster rate than revenue. And so I think it's worthwhile to let you know our philosophy on it, which is we look at G&A as a piece of the total cost. In other words, we're not trying to optimize G&A, but rather not worry about the geography of the expense as long as the sum of the parts add up to a good number. So if you look at the last 5 years CAGR on our total cost, which includes patient care costs, depreciation and amortization and G&A, that CAGR is 2.6%. And so we spend a lot of time trying to make sure that we optimize the cost, and we worry less about the geography on the P&L. So I think that our guide will stand on our cost, which is that 1.25% to 2.25% we gave at the beginning of the year. Pito Chickering: Great quarter, guys. Appreciate it. Operator: [Operator Instructions] Our next caller is Justin Lake with Wolfe Research. Dillon Nissan: This is Dillon on for Justin. Just a couple of quick questions. What did commercial mix do in the quarter? And then also curious on the Medicare Advantage side, can you speak a little bit about what the growth in share was as well? Joel Ackerman: Yes. Thanks, Dillon, for the question. The answer is pretty much the same on both. They were pretty flat relative to last quarter. Operator: Next question is from A.J. Rice from UBS. Albert Rice: Maybe just to ask on a couple of items that are mentioned in the press release, whether there's anything significant to call out. You talk about a decrease year-to-year in health benefit expense, pharmaceutical cost, and then on the G&A line, professional fees, was the -- was that sort of as expected? Or was there anything unusually positive that happened there? Just asking. Joel Ackerman: Yes, A.J., it was as expected. We'll often see the decline sequentially from Q4 to Q1, especially in health benefits. So nothing unusual there. Albert Rice: Okay. And then I appreciate the comments about the technology investments and some of the use cases you're looking at. Is there any way realizing even if you get savings, you may choose to reinvest it in other ways. But is there any way to sort of size some of the opportunities you see? And are those being reflected now in operating results? Or what is your thought about how long it may take for the sum of this to impact operating performance? Javier Rodriguez: Yes. I appreciate the question. I think the way we look at it is the long-term view that we, again, are trying to ensure that we are putting our clinicians in the best position and that we're making the trade-off on efficiency for the long term to make sure that we sustain 3% to 7% OI growth over time. And so as you know, right now, technology is moving at a very quick pace. And some of these will be a lot of user experience, i.e., we're just enhancing the experience. And some of these will be helpful toward the bottom line. And it's a little early, and I don't think we want to get into the timing of it, but rather the sustainability and the outperformance of it. Operator: Our next caller is Ryan Langston with TD Cowen. Ryan Langston: Nice to see the operating income guide up, EPS guide up as well. I noticed the free cash flow guide did not change. I think this was a similar dynamic last year. Just wanted to confirm that's normal course and nothing specific to read into? Joel Ackerman: Yes. Ryan, you're thinking about it the right way. There's just more variability in a wider range with free cash flow, so we didn't move the number despite the increase in OI. Ryan Langston: Okay. And then this administration is really focused on fraud, waste and abuse. It seems to me dialysis might be a little better insulated versus other types of providers. Just any general thoughts on this administration's focus on that FWA and what this could mean potentially for DaVita or maybe not mean for DaVita or even just more broadly for dialysis in general? Javier Rodriguez: Yes. Thanks for the question. It's tough for us to comment on the broader environment. But what I can say is we take compliance incredibly seriously. And number two, what we do have a little help in is that dialysis is not a controversial diagnosis. So there's not like, "Oh, should I go get this treatment or not" controversy, so that makes it easier. And then the fact that it is a bundle in a single DRG, in essence, simplifies some of the compliance issues. But again, we are internally focused on making sure we do right by the government. Operator: At this time, I'm showing no further questions. Speakers, I'll turn the call back over to you for closing comments. Javier Rodriguez: Okay. Thank you, Michelle, and thank you all for joining the call today. I would wrap up with 3 takeaways. First, our most recent clinical initiatives are beginning to gain traction, and we're seeing early signs of the benefits for our patients. Second, our business is performing well as we continue to achieve our clinical goals. This drives our strong financial results. And finally, we maintain a long-term view on our business, and we'll continue to invest in our future. Thank you all for joining this quarter. Be well, and we look forward to seeing you next time. Happy Cinco de Mayo, everyone. Operator: Thank you. This concludes today's conference call. You may go ahead and disconnect at this time.
Operator: Good day, and thank you for standing by. Welcome to the InnovAge 2026 Fiscal Third Quarter Earnings Call. [Operator Instructions] Please be advised today's conference is being recorded. I would like to hand the conference over to your speaker today, Ryan Kubota. Please go ahead. Ryan Kubota: Thank you, operator. Good afternoon, and thank you all for joining the InnovAge 2026 Fiscal Third Quarter Earnings Call. With me today is Patrick Blair, CEO; and Ben Adams, CFO. Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal third quarter results. You may access the release on the Investor Relations section of our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, May 5, 2026, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We will also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, our clinical and operational value initiatives, the effects of recent legislation and federal budget cuts, including Medicare and Medicaid rate pressures, seasonality of cost trends, the status of current and future legal proceedings and regulatory actions and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick? Patrick Blair: Thank you, Ryan, and good afternoon, everyone. I'd like to begin by thanking our InnovAge colleagues, our participants and their families, our government partners and our investor community for your continued trust and support. The work our teams do every day to care for a very complex and vulnerable population is what drives our performance, and I'm proud of the progress we're making and the consistency we're beginning to demonstrate as an organization. We delivered a solid third quarter and continue to see steady momentum across the business. These results reflect stronger operating execution and the benefits of the investments we've made over the past few years to strengthen the platform. For the quarter, we reported approximately $252 million in total revenue, center-level contribution margin of $61 million and adjusted EBITDA of $30 million. We ended the quarter serving approximately 8,050 participants in 6 states across 20 centers. Based on our year-to-date operating trends and financial performance, we are once again raising our fiscal year 2026 guidance for revenue and adjusted EBITDA. We now expect revenue in the range of $950 million to $975 million and adjusted EBITDA in the range of $85 million to $90 million. Overall, our performance continues to show steady year-over-year improvement across key operational and clinical metrics. Our performance this year has been supported by several in-year factors that came in more favorably than we expected, including better-than-expected Medicaid rates and favorable Medicare risk scores and continued discipline across medical management. So as we think about our momentum, we believe it is real and increasingly durable, but we are also being thoughtful about our assumptions as we look ahead to fiscal 2027. Just as importantly, we view our improving financial performance as an enabler, not an endpoint. The progress we're making is allowing us to reinvest in the business in ways that we believe directly benefit participants and strengthen the model over the long term. That includes continued investment in our clinical teams and interdisciplinary model, advancing our technology platform, including early and closely monitored applications of AI to improve care coordination and participant experience and strengthening how we measure and manage quality. We are also investing in growth, including our new centers in Florida, which are still maturing from an operations and financial perspective. Given the complexity of the PACE population we serve, these long-term investments are essential. Our goal is to deliver strong, sustainable performance while continuing to invest in the model and be a responsible partner to states and the federal government. In the PACE model, financial performance and quality are not separate. They are directly linked. When we improve quality, we see better participant outcomes, more consistent engagement, lower unnecessary utilization and ultimately better fiscal management for our state and federal partners. We track a wide range of required quality and utilization metrics, and these remain an important part of how we manage the business day-to-day. But we also recognize that many of these measures, while necessary, don't fully capture what matters most to our participants or to the full value of the model. At its core, our focus is helping participants maintain their independence, remain in the community for as long as possible and receive care that is individualized and aligned with their goals. This includes supporting caregivers, coordinating care across the continuum and intervening early before issues escalate. Over the past several years, we have made meaningful investments in our clinical teams, our care model and our operational infrastructure to strengthen our ability to deliver on those outcomes. More recently, we have begun to invest more intentionally in how we measure them. We are in the early stages of developing a more comprehensive set of outcome-oriented measures focused on areas like functional trajectory, the ability of participants to remain in the community and further aligning care with participant goals. These are areas where we believe the PACE model delivers meaningful value. Our initial focus is on building the data, processes and operational consistency required to measure these outcomes reliably. As the capabilities mature, we expect to incorporate them more formally into how we manage the business. We believe this is an important step, not only in demonstrating the full value of the PACE model, but also in ensuring that our continued financial progress is clearly aligned with better outcomes for the participants we serve and the partners we support. AI is another area in which we are investing more heavily. When we think about the objectives we share with our regulators, improving participant experience, enhancing outcomes for a complex population and doing so in a cost-effective way, we believe AI with the appropriate oversight has the potential to be a meaningful enabler. While still early, the work we've done over the past several months increases our confidence that these capabilities can have a real impact on both the quality and efficiency of our model. Much of our clinical AI work is being led by Dr. Paul Taheri. Although Paul has only been with us a short time, he has quickly stepped in to help shape our approach, bring a strong focus on practical application, clinical rigor and ensuring these tools are designed to support, not replace clinical judgment. We're piloting a range of use cases designed to support our clinicians and to streamline operations. In our clinical workflows, we're piloting AI tools to help synthesize information across the participant record to support care planning and to identify potential risks such as medication interactions or avoidable acute events. The goal is to increase the quality of the care we provide for our participants and enable our teams to operate more effectively at the top of their license. We are also applying these capabilities to operational areas such as scheduling, transportation and care coordination, where we see meaningful opportunity to reduce friction, improve the participant experience and better utilize our existing capacity. One area we are particularly focused on is how we schedule and deliver services across our centers. Today, there are structural inefficiencies that can lead to cancellations, unused capacity and administrative burden. We believe AI-enabled scheduling and coordination can help address these challenges, allowing us to improve the experience, to serve more participants within our existing footprint and to increase capacity over time. Importantly, we're approaching this work with discipline. We're testing, learning and measuring impact before scaling. And we're focused on use cases where we see clear alignment between improved outcomes, better participant experience and more efficient operations. Over time, we believe these investments will further strengthen our platform and expand our ability to deliver high-quality coordinated care at scale. Stepping back, one of the things these results and the progress we've made over the past several years now allow us to do is to take a more forward-looking view on growth. Over the last 4 years, our focus has been on stabilizing and strengthening the platform. And as a result of that work, we're now beginning to generate more consistent earnings and cash flow, which gives us greater strategic flexibility as we look ahead. That flexibility allows us to take a more proactive and thoughtful approach to growth. First, we continue to see meaningful opportunity within our existing footprint by filling our current centers, strengthening our sales capabilities and expanding our reach through new channels and partnerships. At the same time, we're beginning to evaluate a broader set of potential growth alternatives that could allow us to expand our model to more seniors over time. These may include acquisitions, joint ventures, partnerships or participation in new programs and demonstration models that align with our capabilities. Overall, we're entering the next phase as an organization, one that positions us well to expand access to our model and to serve more seniors who can benefit from it. Before I conclude, I'd like to spend a few minutes on the rate environment. As we know, this is an important area of focus for everyone. Ben will provide more detailed visibility into our fiscal 2027 outlook, including rates on our fourth quarter and fiscal year earnings call in early September. But given where we sit today, we thought it would be helpful to share some early perspective on how we're thinking about the environment, recognizing that our visibility is still evolving. Starting with Medicare. The final 2027 rate notice came in more favorable than initially proposed, particularly for Medicare Advantage plans. That improvement was driven in part by deferred changes to the V28 risk model transition, which had a more meaningful impact on MA than on PACE. For PACE, our rate setting framework and transition time line are different. And given the complexity of the population we serve, the benefit from the deferred changes to V28 is more limited. The net result is that we expect Medicare rates to increase approximately 1.5% to 2% in fiscal year 2027, which is more modest and increase than what will likely be experienced by MA plans. On the Medicaid side, we're beginning to see early indications from our state partners that budget pressures are increasing. That said, it's important to step back and view Medicaid rates in PACE over a longer horizon. This has always been a program with some degree of year-to-year variability. There are periods where rates run ahead of cost trend and margins expand and periods like the one we're planning for where cost trends may outpace rate growth and margins can tighten without other offsetting improvements. Over time, these dynamics tend to balance out. Rates have kept pace with the underlying cost of caring for this population and have supported appropriate and sustainable margins for operators who execute well at scale. We believe we're seeing normal cycle variability, not a change in the underlying economics of the model. Importantly, this is where the strength of our model matters because we are fully accountable for both the clinical and cost side of the equation, we can manage through periods like this and protect performance over time. So while we have benefited from a more favorable rate environment in fiscal 2026 and are planning for a more tempered environment in fiscal 2027, we remain confident in the durability of the model and our ability to execute through the cycle. As we approach the end of the fiscal year, we believe InnovAge is operating from a position of strength. The work we've done over the past several years is translating into more consistent performance and a more disciplined integrated operating model. We're focused on continuing to deliver strong, sustainable performance while investing in the model, supporting our participants and being a responsible partner to the states and the federal government. With that, I'll turn it over to Ben to walk through our financial performance in more detail. Benjamin Adams: Thank you, Patrick. Today, I will provide some highlights from our third quarter fiscal year 2026 financial performance and insight into some of the trends we saw during the fiscal third quarter. Starting with census. We served approximately 8,050 participants across 20 centers as of March 31, 2026, which represents growth of 6.9% compared to the third quarter of fiscal year 2025 and sequential quarter growth of 0.5%. We reported 24,060 member months in the third quarter, an increase of approximately 6.7% compared to the third quarter of fiscal year 2025 and an increase of approximately 0.4% over the second quarter of fiscal year 2026. Our third quarter census increase reflects normal seasonal growth resulting from the Medicare Advantage open enrollment period. Total revenues of $251.9 million increased 15.5% compared to $218.1 million in the third quarter of fiscal year 2025, driven by higher capitation rates and growth in member months. The capitation rate increase reflects annual Medicaid and Medicare rate increases and a lower revenue reserve, while member month growth was driven by enrollment expansion across our California, Colorado and Florida centers. Compared to the second quarter of fiscal year 2026, total revenues increased 5.1%, primarily due to higher capitation rates driven by annual rate increases in California and Medicare, both effective January 1, 2026. We incurred $113.2 million of external provider costs in the third quarter of fiscal year 2026, representing an increase of 5% compared to the third quarter of fiscal year 2025. The year-over-year increase was driven by growth in member months, partially offset by a reduction in cost per participant. Lower cost per participant was primarily attributable to reduced permanent nursing facility utilization and lower pharmacy expense following the transition to in-house pharmacy services. These improvements were partially offset by annual rate increases for assisted living and permanent nursing facility services as well as higher assisted living utilization. Compared to the second quarter of fiscal year 2026, external provider costs increased 1.1%, driven by modest growth in member months and a slight increase in cost per participant related to seasonal growth in the volume and cost of inpatient admissions. Cost of care, excluding depreciation and amortization, was $77.7 million in the third quarter, an increase of 11.8% compared to the third quarter of fiscal year 2025. The year-over-year increase reflects growth in member months and higher cost per participant. The increase was primarily driven by a net increase in salaries, wages and benefits due to higher wage rates, partially offset by reduced headcount, higher third-party fees and shipping costs associated with in-house pharmacy services and higher contract services and fleet costs, inclusive of contract transportation. Cost of care, excluding depreciation and amortization, increased 3.7% compared to the second quarter of fiscal year 2026, driven by higher salaries, wages and benefits associated with the annual reset of employee benefits and payroll taxes as well as an increase in consulting expense, partially offset by lower contract transportation. Center-level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, which includes all medical and pharmacy costs was $61 million for the quarter compared to $40.7 million for the third quarter of fiscal year 2025. As a percentage of revenue, center level contribution margin of 24.2% increased by approximately 550 basis points in the quarter compared to 18.7% in the third quarter of fiscal year 2025. Compared to the second quarter of fiscal year 2026, center level contribution margin increased 15.5% from $52.8 million and as a percentage of revenue increased 220 basis points compared to 22% over the same period. Sales and marketing expenses of approximately $8.7 million increased 26.3% compared to the third quarter of fiscal year 2025, primarily driven by higher wage rates and increased marketing spend to support growth. Sales and marketing expenses increased by approximately 8.2% compared to the second quarter of fiscal year 2026, driven by sales compensation and marketing spend timing. Corporate general and administrative expenses of $76.5 million increased 98.3% compared to the third quarter of fiscal year 2025, primarily driven by an increase in litigation liability. Corporate general and administrative expenses increased 187.6% compared to the second quarter of fiscal year 2026, primarily due to the litigation liability. Net loss was $29.9 million for the quarter compared to net loss of $11.1 million in the third quarter of fiscal year 2025. We reported a net loss of $0.22 per share, and our weighted average share count was approximately 135.7 million shares for the quarter on a fully diluted basis. Adjusted EBITDA was $30.5 million for the quarter compared to $10.8 million in the third quarter of fiscal year 2025 and $22.2 million in the second quarter of 2026. Our adjusted EBITDA margin was 12.1% for the quarter compared to 4.9% in the third quarter of fiscal year 2025 and 9.2% in the second quarter of fiscal year 2026. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and start-up ramp through the first 24 months of de novo operations. Accordingly, this quarter's de novo losses do not include our Tampa and Crenshaw centers as both have progressed beyond the initial 24-month de novo period. For the third quarter, de novo losses were $1.8 million, primarily related to our Orlando, Florida center. This compares to $3.5 million of de novo losses in the third quarter of fiscal year 2025 and $4.7 million of de novo losses in the second quarter of fiscal year 2026. Turning to our balance sheet. We ended the quarter with $95.5 million in cash and cash equivalents, plus $43.1 million in short-term investments. We had $69.4 million in total debt on the balance sheet, representing debt under our senior secured term loan, revolving credit facility and finance leases. For the third quarter, we recorded positive cash flow from operations of $18.1 million and had $3.6 million of capital expenditures. Building on the strong performance we delivered through the first 9 months of fiscal 2026 and based on information available today, we are updating our full year revenue and adjusted EBITDA outlook. All other guidance metrics remained unchanged. We expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants and member months to be in the range of 92,900 to 95,700. We are now projecting total revenue for fiscal 2026 in the range of $950 million to $975 million. Adjusted EBITDA is now projected to be in the range of $85 million to $90 million, and we anticipate that de novo losses for fiscal year 2026 will be in the $11.5 million to $13.5 million range. As we enter the final quarter of fiscal 2026 and begin planning for fiscal 2027, I'd like to share a few observations on where we stand today and how we're thinking about the year ahead. First, the business is performing well overall. Our sustained focus on quality, compliance and operational discipline has created a stronger and more resilient foundation. Over the past several years, we have meaningfully improved the consistency and predictability of the business, and we now have better data and insight to inform care delivery and operational decision-making. Second, as Patrick mentioned, we are beginning to see rate pressures emerge as we engage with our state Medicaid partners. While it remains early in the rate setting process, initial indications suggest rate increases in fiscal 2027 may be lower than what we have experienced historically. If this persists and when combined with a more modest Medicare rate environment, it could create top line pressure in fiscal 2027. That said, we view this as a near-term dynamic rather than as a structural shift. Currently, we do not believe these conditions represent a new long-term run rate, and we expect the rate environment to normalize over time. Importantly, our improved cost discipline, operating visibility and focus on execution position us to manage through this period. In closing, we are pleased with the strong performance we delivered this quarter and year-to-date. The business is operating from a position of strength, and our updated guidance reflects both our execution to date and our current assessment of the operating environment. As we continue to refine our operations, we are placing greater emphasis on the full participant experience and evaluating opportunities to enhance care, delivery, efficiency and outcomes over time. We remain committed to disciplined execution as we close out fiscal 2026, and we believe we are positioned to manage near-term headwinds and to build long-term value. Operator, that concludes our prepared remarks. Please open the line for questions. Operator: [Operator Instructions] Our first question comes from Matthew Gillmor with KeyBanc. Matthew Gillmor: I guess I wanted to first follow up on the comments around 2027. Could you maybe first help frame up sort of the change in the Medicaid rate increases that you've seen on a go-forward basis versus maybe the rearview just so we get a sense for the change in that dynamic? And then as a follow-up to that, one of the things we've been particularly encouraged by has been your ability to keep cost growth sort of almost flat for the last 2 years. So as you're thinking about the go forward, I was just curious about your confidence in able to maintain your cost growth at those levels, which presumably would help the dynamic for 2027 and maybe what you're doing to prepare the organization for what you think may be a more challenging rate environment next year? Patrick Blair: Matt, it's Patrick. Thanks for the question. Overall, I'd say we don't have rates for fiscal year '27 yet. We're just, I think, navigating along with the states what is a pretty complex fiscal backdrop. I mean, states are seeing a combination of factors with sort of post-pandemic funding and broader budget pressures and they're having to rebalance across various health care priorities. So I think what we're doing is just trying to be transparent that it's going to be a different environment for rates than we have seen in the past. I mean this is pretty typical of operating in a state partnered model. It's not new or unexpected. I think our approach has been and is currently as we sort of head into the '27 rate setting is just to stay very closely aligned with our state partners and continue to focus on delivering high-quality care and outcomes and operate as efficiently as we can. One of the things we do hear consistently with every state is just the belief in the PACE value proposition and how well aligned it is to what the states are trying to achieve and caring for this really high needs population is something they take very seriously. So we're -- I think just overall, we still know very little about '27. So I wanted to just make sure I shared that. But I think that's sort of how we view it. So in summary, we're kind of mindful of the broader environment, but we think we have the ability to navigate it just like we have in the past. Now that kind of probably takes me to your second point about our ability to manage sort of cost trends in an inflationary environment. We're still feeling very confident about that. And as I shared in my remarks, we have a lot of work underway right now that's AI supported. So I mentioned in some of the opening remarks, some of the clinical work we're doing. But we believe there is a lot of opportunity across our care model to really empower our providers to better information to help them avoid unnecessary specialist referrals, avoid ER visits, unnecessary services, in some ways, providing as much care as possible in our centers. I mentioned, I think, scheduling. It's another area where we're using AI to really understand the throughput of our centers and understand something as straightforward as the impact the cancellations have on our transportation, on our staffing. And we're learning a lot about our business and the drivers and AI is really supporting that. And we think there's a lot of prep capacity. We think there's manual workflows that we can work around. We think there's augmentations to our staffing models that we can pursue that will make us more efficient and deliver a better participant experience. So that's a long way of sort of saying that the rate environment is one where we're used to navigating it. We'll do that successfully, and we're working hard to define next year's OVIs, operational value initiatives like the scheduling example and clinical value initiatives that we're doing to take clinical variation out of the system, we think there's real opportunity to operate more efficiency, improve the patient experience, deliver better clinical outcomes and do all of that in a very complex sort of fiscal backdrop for states. Ben, anything to add? Benjamin Adams: I actually don't have anything to add. I think that was exactly where we think of it. Matthew Gillmor: Okay. Great. That was really helpful. I appreciate it. And then as a follow-up, I did want to ask about revenue performance on the quarter. It's obviously a very strong quarter overall. But on the top line, you had mentioned better Medicaid rates and also some favorability with RAF. I was hoping you could discuss the details of that a little bit better. And one point I wanted to get at or one thing I wanted to ask about was just the sustainability of the revenue upside you saw in the quarter. I guess I normally would think of RAF and Medicaid rates as sustainable in future quarters, but I just wanted to get your perspective on that dynamic. Benjamin Adams: Yes. I guess, well, you're right, we did start seeing in the back half of the year, a step-up in rates on the Medicaid side and a step-up in risk scores, right? So both of those things were positive starting in January, and they rolled through the second half of the year. If you think about sort of which states sort of kick in with their rates on January 1, California is an important one for us. And we had a pretty good rate environment in California this year following on some difficult years in California. So that benefited us in the second half of the year. If you think about the risk scores, you're right, I think of those, assuming we don't have a mix -- a change in the mix of enrollment or some other mix in our population, that improvement in risk scores ought to be durable going forward in the future. But obviously, you kind of got to watch it every -- as you go into the future because they might -- they do change a little bit, but we're hoping for some durability there. And I think Patrick commented on the rate outlook a moment ago as it relates to Medicaid. So you can sort of factor some of those comments into how we're thinking about California for next year, which would be the next time it would renew in January. Operator: Our next question comes from Jared Haase with William Blair. Jared Haase: I appreciate all the color thus far. Patrick, I think you talked a little bit about sort of emphasizing the flexibility that you have now just based on the stable profile that you've reached here with the model in terms of the go-forward growth strategy, and I think you outlined a couple of different levers, whether that's M&A, joint ventures, partnerships. And then I think you even alluded to potentially some new programs or demonstrations. And so I was wondering if we could just dig into your thinking there a little bit further, maybe force rank some of those different options that are -- that you have available to you as to what might be more realistic over the next handful of quarters. And I'd also love to press on the new programs or demonstration models, how you guys are thinking about that and what programs seem interesting to you? Patrick Blair: Well, thanks for the question. I would start by just reminding folks that in many ways, we think of ourselves as having kind of come out of the turnaround at the beginning of the calendar year. And now we're in a place where we're feeling and seeing a lot stronger operational, financial and sort of compliance positioning and performance. And so we're beginning to devote more time to evaluating a range of options that we could pursue. M&A is clearly one of them. There are a lot of PACE programs across the country. Many of them are very successful. Some are not. And we've learned from an acquisition we did in California about 18 months ago that we have the ability to bolt on and smaller PACE programs that were maybe struggling to grow, putting them on our platform, on our staffing model in sort of our sales model. It really, in some ways, allows us to pursue a derisked de novo without the longer return on capital that a pure de novo can take. So understanding where those opportunities exist is something that we're spending a little time on. It's hard to handicap this early in the process where that exists. Obviously, some states are -- have more attractive environments than others. And so that's also a layer that we put on that. Partnerships, you've seen some of the partnerships we've done in Florida and in California. We think there's -- those are hospital partnerships. We are seeing kind of the proof of concept play out in a positive way. There's still calibration that has to be done so that both entities are sort of -- and participants are all sort of benefiting in the appropriate ways, but we do see more opportunities to do hospital joint ventures that really help us extend our place in the community. When it comes to PACE in general, I wouldn't want to overlook the opportunity from just basic policy modernization. There are opportunities that are not radical changes to sort of the regulatory contours of the program, more like practical evolutions of the program that would allow us to expand faster, something like simplifying enrollment, making it easier for seniors and families to choose PACE. We're working closely with our industry peers and our industry association to articulate those policy modernization opportunities that we see that could help the PACE program serve more seniors over time. And we're really pleased, I think, with the level of interest and curiosity that we see from CMS and CMMI and their openness to listen to what are the things that could change to really help PACE serve more seniors. So that's sort of the policy horizon. Then I think maybe the last element to your question was the notion of sort of these PACE-inspired adjacencies. We are a big believer that the PACE model can be adapted to serve seniors who are not eligible for PACE today, but could be eligible in the future. These are -- there are opportunities that we see there some via demonstration, some just kind of de novo adjacent new product development that we could pursue. Our focus still is very much on growing our core PACE business. But as we are able to experience better operating performance and a more consistent model, we really believe strongly that PACE can serve a broader segment of the population. And we're kind of doing everything sort of in our power and working with our industry peers to make that case. And so over time, we're hopeful that opportunities that are inspired by our core business and very close to our core business could present themselves, and we'd love to pursue it. Jared Haase: Okay. That's really helpful. And then as a follow-up, I really appreciate all the details you guys provided just regarding rate development and your current view for 2027. If I take a step back from a strategic perspective, if we do find ourselves in an environment where rates are lagging medical cost trend, do you have a bias as it relates to striking the balance between maintaining your current growth levels versus maintaining profitability? I realize from your comments, there are a number of initiatives in place that can sort of drive efficiencies. So maybe there isn't really a trade-off in that way. But I guess I'd just be curious if you do a year like this with a more muted rate environment, how you think about that in one direction or the other? Patrick Blair: I'll ask Ben to maybe share some initial thoughts and then I'll follow. Benjamin Adams: Yes, I'm sorry, I missed some of the question coming through. I couldn't figure it. What exactly is the question? Are you talking about -- are we talking about mitigants in a challenging rate environment? Jared Haase: Exactly. Yes. My thought was just as we think about potentially moving into this more challenging rate environment for 2027, obviously, you outlined a number of initiatives in place. But just kind of philosophically, do you approach your strategy with the mindset of pursuing growth as a priority or maintaining profitability? Benjamin Adams: Yes. Yes. Well, it's really interesting. Patrick talked a lot about quality in his prepared remarks. And I think where we are right now is we've gotten to a point where we're -- we've got some nice margins. We're generating cash flow. And we think one of the best things that we can do in a market that begins to slow down is not aside from looking at strategic things that Patrick talked about, is invest very heavily in quality in our business, in our centers. And I think we all feel really strongly that the better experience we give to our participants, the more likely it is going to drive growth and good financial outcomes for us. So I think what you'll see going into this year is we'll spend a lot of time on improving the patient experience on efficiencies in our center in ways that we can be more intentional in our strategies going forward. So aside from the growth metrics that Patrick talked about before, this sort of reinvest into the business and the quality business, I think, is going to be very important for the coming year. I don't know if that really answered your question. There are other specific areas we'll look at in terms of operational value initiatives and clinical value initiatives like Patrick talked about, but it's sort of a mindset. It's very much driven towards quality as one of the drivers of growth. Patrick Blair: Ben, I might just add that I do feel that we still have opportunity to enhance our sort of sales and marketing model. We made great strides in the last couple of years. But under Matt Huray, our leader of the sales and marketing function, we're really continuing to test and learn and try new things. We are adding new members to the team. We're exploring new channel partnerships. And so setting aside sort of rate, we really are focused on as much new census gross enrollment as we can attract. And there's a lot of great work that's going on in that area. Ben mentioned the participant experience. we are now at a place where we're spending a lot of time to really understand when people leave us, why do they leave us? Did they have a particular encounter that was frustrating. Was there some friction or abrasion in their time with us? Were we slow to recover on a service issue? We're really digging into why people choose to leave. And that's another opportunity to drive growth is to reduce the number of people that decide to leave us. Some of the people, it's voluntary and they're making a conscious decision, but there's also involuntary disenrollment. So we are very focused on sort of the sales and enrollment side of the growth equation as well as the participant experience, keeping people with us longer, basically increasing tenure. I think that's a real bias of ours. And on the margin side, in some ways, we've pulled forward into 2 years what we thought was going to take 3 years from a margin perspective. And now that we're at a place where we're achieving what we set out to and communicated in our Investor Day a few years ago, I think investing in growth while maintaining a consistent margin is probably more of a priority than expanding margins at this point, if that's helpful. Operator: Our next question comes from Benjamin Rossi with JPMorgan. Benjamin Rossi: So following up on your 2027 commentary, I appreciate that you're planning to provide more details next quarter. But as you think about initial enrollment growth, what are your initial thoughts on your aggregate patient risk scores and new member acuity mix? It sounds as though based on your Medicare rate assumptions, you're assuming acuity decline somewhat year-over-year. Is that a fair read? Patrick Blair: No, I don't -- I wouldn't read too much into it. I think we're going through the budgeting process right now. And our fiscal year ends June 30, so we're really getting into the meat of the budgeting process. I don't think we expect a material change in mix shift, either in terms of our population, independent assisted living or folks in nursing facilities or a significant change in risk score mix. But we're sort of getting into that process right now. We'll have more to talk about it when we get through the budget process and we issue guidance in September. Benjamin Rossi: Okay. Understood on that. And just as a follow-up on your updated outlook implies 4Q top line growth will decelerate a bit sequentially, while EBIT growth will remain elevated. What do you assume gets better quarter-over-quarter as we go into the next quarter, either across PMPM trend or cost design? And is there anything discrete across revenue or cost that you'd call out within your progression during fiscal 4Q? Patrick Blair: No, I don't think so. I think that we've generally benefited, as we said before, from better rates in the back half of the year and also better risk scores. And I would expect those trends would kind of continue going into Q4. If you think about how sort of the pattern of gross enrollment works and you can go back and look over the last couple of years, we usually have a pretty good, pretty steady Q4 in terms of gross enrollment growth. And I would think that we probably experienced something not too different from what we've seen in prior years. Operator: And I'm not showing any further questions at this time. And as such, this does conclude today's presentation. We thank you for your participation. You may now disconnect, and have a wonderful day.
Operator: Greetings, and welcome to Lumen Technologies' First Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, May 5, 2026. Your speakers for today are Kate Johnson, CEO; and Chris Stansbury, President and CFO. I would now like to turn the conference over to Jim Breen, Senior Vice President of Investor Relations. Jim, please go ahead. James Breen: Good afternoon, everyone, and thank you for joining Lumen Technologies' Q1 2026 Earnings Call. Before we begin, I'd like to remind everyone that today's presentation will include forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations, assumptions and projections about future events and financial performance. Actual results may differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties. A detailed discussion of these factors can be found in our most recent filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, our quarterly report on Form 10-Q for this quarter and any subsequent filings. We undertake no obligation to update or revise any forward-looking statements made today, whether as a result of new information, future events or otherwise. Today's presentation may also include non-GAAP financial measures. Reconciliations are provided in our posted materials. I'll pass it on to Kate. Kathleen Johnson: Thanks, Jim, and thanks, everybody, for joining the call and also for your feedback following the Lumen Investor Day. In addition to hearing your perspective about our strategy and new business model, we're tweaking the format of our earnings call by shortening our prepared remarks and leaving more time for your strategy-oriented questions. So let's get to it. Lumen delivered a solid performance during the first quarter, with revenue and EBITDA in line with expectations. I'll let Chris handle the detail in a few minutes after I provide an update on our strategy and execution. Enterprises are facing a huge challenge. They're trying to build an AI-driven future on infrastructure that simply wasn't designed to support it. It's no longer about point-to-point connectivity, it's about whether you can move massive amounts of data securely, predictably and in real time across highly distributed environments. And just as importantly, it's about whether you can control and orchestrate that movement dynamically. Lumen is solving that problem. We're bringing together 3 core assets: world-class physical infrastructure, a programmable network and a connected ecosystem of clouds, applications and partners. And individually, each of these assets matter. But together, they solve the complexity problem by forming a comprehensive platform designed for AI and rooted in simplicity. The whole industry now recognizes the need for better networking, better performance and better economics. It's not just Lumen talking about disruption anymore. But we believe it is Lumen who stands alone in our readiness to deliver game-changing capabilities to meet the needs of enterprise customers in an AI-driven world. And it starts with the physical layer. Lumen already has one of the largest fiber networks in the world. We're making significant investments in long-haul capacity, metro expansion, data center-interconnect and cloud adjacency. And we're on track to deliver all of the commitments we shared in detail at Investor Day. This physical foundation is table stakes that supports the proliferation of data workloads, but alone, it's insufficient to capture the full value of opportunity that we see. That's where the programmable network comes in: a single pane of glass where enterprises can control and orchestrate connectivity across their entire technology footprint of clouds, data centers, applications and partner networks. Lumen has made strong progress in capturing the North-South part of this market with Lumen Connect and NaaS, giving customers API-driven on-demand access to our network. And today, we announced our intent to acquire the software company Alkira. Alkira is expected to extend and enhance our programmable network into the fastest-growing segment of the enterprise networking market, the East-West part, establishing the control plane for cloud connectivity. After close, our combined capabilities will enable us to provide comprehensive coverage of North-South and East-West connectivity, whether on-net or off-net, with game-changing innovation, including direct cloud on-ramps and Multi-Cloud Gateway, and all of this in a single programmable system. We'll also be able to provide digital marketplace access to a myriad of ecosystem partners, simplifying network purchase and deployment experiences. Together, Lumen Connect and Alkira will significantly accelerate time to value for customers operating in a complex multi-cloud and AI-driven architecture world. Strategically, this acquisition will substantially complete our digital architecture. And post close, it's all about integration and continuing our first- and third-party service innovation to deliver new value for customers and growth for Lumen. As you know, we've also had some exciting recent announcements. AWS and Lumen partnered to launch AWS Interconnect - last mile, a service allowing enterprises to establish fast, secure, private direct connections from on-prem to the AWS cloud. And Google just announced the availability of private connectivity discovery through Google Cloud Marketplace, with an upcoming preview of API provision prem to cloud connectivity offering, all powered by Lumen. These two new offerings are another example of how we're innovating to help enterprise customers deliver on their AI ambitions while simultaneously giving Lumen an opportunity to capture some of the over $2 billion in annual revenue currently served by carrier-neutral facility cross-connects. And it's Lumen Multi-Cloud Gateway that makes these direct on-ramp offerings possible, enabling customers to connect any cloud and any data center in any combination over our private network rather than the public Internet. It's how we bridge North-South and East-West connectivity domain securely and consistently. Now after closing the acquisition, Multi-Cloud Gateway and Alkira together will turn direct cloud on-ramps into more than just access points into clouds and data centers. They will become programmable entry points into a broader digital fabric. And speaking of that digital fabric, let's spend a minute on our Q1 adoption metrics. We're continuing to see strong adoption of our NaaS services with strength in off-net and large enterprise adoption this quarter. In the first quarter specifically, customer adoption grew 25% quarter-over-quarter, active ports grew 35% quarter-over-quarter and active services grew 32% quarter-over-quarter. What's more, in Q1, we had two landmark wins. A leading global financial services firm committed to a more than 600-site branch upgrade with Lumen NaaS. Their goal is to drive deposit growth with faster new branch activation and deliver AI advisory and fraud detection services across all of those sites. And a large global logistics firm is deploying Lumen NaaS at 300 sites to ensure faster activation of acquired service centers, directly accelerating freight capacity and revenue. Both customer wins tell the same story: Programmable networks are essential in delivering AI-powered business transformation. Back in February at Investor Day, we shared a multiyear road map for how we plan to drive digital service innovation, adoption and revenue growth. And since then, we've made meaningful progress in execution, and we have some encouraging buying pattern data that we'd like to share. Starting with basic NaaS. We now have nearly 2,500 NaaS customers, with more than 30% of them being repeat purchasers. What's more, over 20% of first-time NaaS adopters in Q1 were customers who are brand new to Lumen. They weren't doing any business with us before they bought our NaaS ports and services. Now the remaining NaaS first-time adopters this quarter were existing Lumen customers. But what's interesting is that more than 60% of them were expanding their footprint with Lumen NaaS, not migrating from the old services. These trends are encouraging, as they suggest market share gain, and we'll continue to track them as we grow the business. In the second scenario, upselling services, approximately 25% of all NaaS customers are attaching more than one service per port, primarily DDoS and Lumen Defender, another positive indicator of growth. And in the third buying scenario, Multi-Cloud Gateway, it's already in-market, enabling innovation with tech titans like AWS and Google, as I shared. And after we close the Alkira transaction, it will be the bridge between East-West and North-South traffic, giving our customers the feeling of one network, any cloud, total control globally. And the fourth and fifth buying scenarios, direct connections into SaaS providers and dynamic East-West cloud interconnects, that will be our focus post-Alkira transaction close, as we believe there's material growth potential there. Now let me finish up by sharing what we think this acquisition means to Lumen, our customers and our shareholders. Alkira is a bull's eye in terms of strategic alignment and value creation. For Lumen, we expect it to dramatically accelerate our road map execution from years to months. It will reduce execution risk. It will give us an injection of talent, and it will give us a partner platform that's expected to be marketplace-ready on day 1. Our customers will get the value they deserve: ample bandwidth, control, simplicity and accelerated time to value. And our investors will get what they deserve: better economics across the board from Lumen. Lumen has firmly entered a growth phase, and our future is very bright. Chris, over to you. Christopher Stansbury: Thanks, Kate. I'm pleased that Lumen has delivered another quarter of positive momentum towards our financial and operational goals. First, we transformed the balance sheet by closing the fiber-to-the-home sale to AT&T, reducing leverage below 4x and reducing annual interest expense by nearly $300 million. Second, we recently simplified our capital structure by refinancing our revolver with a new $825 million facility. We also simplified our reporting structure this quarter, moving from 3 quarterly filings to 2, and we expect to move to a single parent company filing beginning next quarter after completion of the Qwest exchange offer. Now this is a big deal. Why? For the first time in over 15 years, our equity investors, our bond investors and management will be aligned on one financial view of Lumen. Finally aligning those 3 together, we'll all be looking at the same information at the same time. Third, we further aligned our operating systems by implementing Phase 2 of our ERP platform and are now on a unified ledger. This positions us to retire legacy systems and drive additional efficiencies over time. Fourth, we delivered solid financial results in line with our expectations and above consensus, with strategic business revenue for the first quarter at 51% of our total. And last, today, we announced our acquisition of Alkira. This is an important moment for Lumen. As our balance sheet has become a strategic asset, we've been asked about potential M&A. We've said that we'd be interested in technology assets only if they enhance our product portfolio, only at a reasonable valuation and only if accretive to the broader financials, and Alkira checked all those boxes. We believe that the Alkira acquisition will enhance Lumen Connect and expand our digital offerings across the East-West TAM, with the potential to accelerate digital revenue as adoption scales. We plan to finance the $475 million transaction with cash on hand. Once closed, we estimate the transaction will be immaterial to financials and neutral to margins in the near term, but accretive to both as the platform scales. We estimate the deal will close sometime in the third quarter, and we look forward to welcoming our new teammates. Now moving on to our financial performance in the first quarter. Before I start, we provided additional detail on the fiber-to-the-home sale impact in the financial trending schedule. Total revenue was in line with our expectations and ahead of consensus as our revenue mix continues to improve. Total business revenue declined 3.2% year-over-year to $2.44 billion as our revenue mix continued to improve in North America. Total business was down 2.8% year-over-year. North American enterprise revenue, which includes wholesale, was down only 0.8% year-over-year. In short, as Kate mentioned earlier, we believe Lumen is taking market share. Strategic revenue was 51% of total business revenue in Q1, up from 49% in the fourth quarter, even with legacy results slightly ahead of internal expectations. Digital revenue in the first quarter was $37 million, in line with our expectations. And as a reminder, included in that digital revenue number is NaaS security products and cloud voice services. We're still early in the adoption curve, and the shift to consumption-based revenue will take time. Quarterly results can be variable, and the key signals are customer adoption and expanding consumption. Our projections assume linear growth, but we believe there will be an inflection as the consumption flywheel gains traction, and we believe Alkira will be a tailwind to that timing. We're encouraged by the increased interest we're seeing from both existing and prospective customers. First quarter PCF revenue was $78 million associated with the nearly $13 billion in PCF deals that we've announced to date. Roughly $32 million of that was a delivery milestone payment that was anticipated in our Investor Day projections for 2026 PCF revenue, but won't reoccur in Q2. Our long-term PCF revenue projections shared at Investor Day do not include any incremental PCF deals beyond those already announced. We remain opportunistic on additional accretive opportunities. And while PCF is a key pillar, we believe that our differentiation comes from monetizing the network through a programmable digital layer and partner ecosystem to drive durable, higher-quality digital revenue. Adjusted EBITDA, excluding special items, was $849 million in Q1 compared to approximately $929 million in the prior year quarter. The year-over-year decline reflects expected revenue trends, higher [ healthcare ] costs and the sale of our fiber-to-the-home assets. Special items impacting adjusted EBITDA totaled negative $430 million this quarter, and this includes a gain on the fiber-to-the-home transaction, severance, transaction and separation costs and our modernization and simplification initiatives. This onetime gain from the sale of the fiber-to-the-home business was $596 million in the quarter. And with that sale now closed, we expect the transaction-related special items to decline throughout the year. Capital expenditures, excluding special items, were approximately $859 million, in line with our expectations and full year guidance. That included approximately $161 million of CapEx associated with PCF deals. Now we're raising 2026 free cash flow guidance from $1.2 billion to $1.4 billion to $1.9 billion to $2.1 billion as a result of $729 million of the proceeds from the fiber-to-the-home deal being classified as cash flow from operations. As such, free cash flow in the first quarter was $756 million, excluding special items. The cash proceeds from the divestiture have been primarily used to pay down debt in the first quarter of 2026. We received roughly $870 million in cash associated with the PCF deals, and we expect free cash flow will continue to be lumpy quarter-to-quarter, but trends remain in line with our full year guidance. Now to wrap up. We remain on track to meet our full year guidance, and we'll continue investing in our transformation to serve customers in a multi-cloud AI world. We've meaningfully strengthened our balance sheet, which allows us to make strategic investments like our anticipated acquisition of Alkira, all while keeping leverage below 4x. We're focused on building credibility through execution and transparent disclosure, highlighted by one -- sorry, on-time and on-budget PCF builds, improving digital revenue visibility and continued ERP and modernization progress. We're pleased with our progress towards our key financial goals. We're operating with agility across the company, and we will continue to put in the hard work, fortifying our position as the premier digital enterprise services provider. Back over to you, Kate. Kathleen Johnson: Thanks, Chris. Look, the big takeaway for today, the vision for Lumen and Alkira is all about simplifying the customer experience, providing them quick, secure and effortless connections between people, data and applications. We're going to deliver one network, any cloud, total control globally. It's an exciting time. So with that, we'll take questions, operator. Operator: [Operator Instructions] Your first question comes from the line of Michael Rollins with Citigroup. Michael Rollins: So I have a strategic question and an operating question. So on the strategic side, with the acquisition, can you frame the opportunity to accelerate and the speed at which you can go to market with the capabilities that you're acquiring? And then on the operating side, if you could unpack a bit more of the Business segment revenue performance in the quarter? And particularly in the North American enterprise, where -- if you could frame maybe what went better for certain of the verticals and products and maybe what -- if there's anything that didn't contribute as much as you were hoping? Kathleen Johnson: Yes, I'll start with the strategy, and Chris, will turn the revenue question over to you. Mike, thanks for the question. Alkira is pretty exciting because it gives us access into data center-interconnect and cloud-to-cloud connectivity, which is the fastest-growing part of the market, growing, we think, 20% CAGR, which is pretty darn exciting. If you take our installed base of customers all up, legacy and strategic revenue, and you offer that to the commercial engine that we're going to create for Alkira, it becomes a pretty exciting accelerant. It gives us new access to much more significant TAM growing at a much faster rate. I think what's more is that we now enable in a CapEx-efficient way, international expansion. Because it's carrier- and cloud-agnostic. And so that's what we plan to do. We don't plan to absorb Alkira. We plan to enable and accelerate them by bringing our network as an underlay and making sure that they have the very best of our pipeline pointed right at their value proposition. So we're pretty excited about the growth trajectory. And obviously, we want this to accelerate our path to growth. Christopher Stansbury: Yes. And just on the operational question, if you look at kind of key drivers to total, I would say one standout was strategic waves. And again, those are waves that are 100-gig or greater. We saw some nice growth there, and we expect that to continue. And as Kate mentioned, more broadly, we're just seeing strength in the broader digital portfolio. The part that was a pleasant surprise, and it was really highlighted in some of the data Kate shared, is that as customers are lighting up NaaS services, we're not seeing as much cannibalization. And I think that's one reason why legacy did a little better than we anticipated. And look, we'll take that all day long as we drive the conversion to our digital future. Michael Rollins: And just one last thing on that point. Is that a temporary benefit of -- that, that cannibalization may be just further down the road? Or do you think that it just represents that the customers just need to invest more, and so the aggregate outcome is better? Christopher Stansbury: I think the end game here is, yes, eventually, the new does replace the old and we fully cannibalize. I think as customers -- it's early. So we're still trying to read all these signals. But as customers are driving to the new, at least in the near term, they're maintaining the old. And again, I think that's a bit of a tailwind that we hadn't anticipated. We'll see if it continues. But again, the cash that, that business provides is welcome, and we'll use it to continue to invest in the transformation. Operator: Your next question comes from the line of Frank Louthan with Raymond James & Associates. Frank Louthan: One question on some of the costs that you called out, some of the modernization costs and so forth. I assume some of those are related to the transaction with AT&T. Is there a total amount of that? How long will those types of costs go on? And then on the wavelength business you just called out, you mentioned that outperformed. Are you seeing any customers having issues making installations or having any issues with availability of memory or chips to -- for those products? Christopher Stansbury: Yes. So the transaction-related costs were about $50 million in the quarter. And as I said in my prepared remarks, we would expect that to go down significantly in future quarters. So you'll continue to see that special items number get a little smaller. As it relates to waves, I mean, again, I'm going to touch a nerve here. It's not about just selling on price anymore. And we've been saying that for a long, long time now. It's about solving a customer's problem. And the speed to dial up waves is important, but it's really around the broader problem that customers are trying to solve, which is the ability to move data all over the place. Our RapidRoutes investment and the ability to light up high-capacity, low-latency waves very quickly, we think is certainly a driver of that strategy. Kathleen Johnson: And saw a material uptick in the adoption rate on RapidRoutes specifically in the quarter, which is great because it hasn't even been in production for very long. Operator: Your next question comes from the line of Gregory Williams with TD Cowen. Gregory Williams: Great. I also have one strategic and one operational question. On the strategic side, with Alkira, it sounds like it enables the [ cross-side ] platform to off-net customers. And Kate, you mentioned international. I just remember last September, you unveiled Project Berkeley, and that was supposed to deliver off-net service as well. So does this replace that? Or it sits on top of that? Or are they not related? I'm just trying to understand the two. Kathleen Johnson: So -- yes, go ahead. Second part? Gregory Williams: On the operational side, I was just thinking about EBITDA by the Street by about $50 million. You did not raise guidance. Curious, if you expect some sort of step down through the balance of the year? And how much of that EBITDA was from the cost-saving initiatives? Kathleen Johnson: Chris, do you want to hit EBITDA first? I'll just... Christopher Stansbury: Yes. We're not disclosing the cost-saving initiatives by quarter. But again, we remain on track and are super positive about where we're headed for the year. Remember that the first quarter also had effectively, a month of fiber-to-the-home EBITDA in that. So you do need to adjust for that. All that said, it was a strong quarter, but we remain firm on the guidance for the year and our ability to inflect at this point. Kathleen Johnson: Yes. And strategically, your question about fabric ports is actually a really good one. So remember, fabric ports is about enabling building on-prem to be able to connect to the cloud and to be able to grow those services in a cloud economic way. And the Alkira platform really focuses on the East-West interconnect. So that's data center-to-data center, cloud-to-cloud, et cetera. So they operate with more of a virtual port kind of a model, and it's better together. So our fabric ports are really -- Project Berkeley is really the Lumen Connect platform all up. It's not just a piece of hardware. And when you put Alkira and Lumen together, you get coverage of all the different interconnection possibilities. Operator: Your next question comes from the line of Michael Funk with Bank of America. Michael Funk: You mentioned a bit earlier that you don't intend to absorb Alkira. But I am wondering, what will be an evolved integration process with Alkira even in terms of some of the back-office systems like billing, customer onboarding? And then second question, more numbers-based. You mentioned the milestone payment in 1Q. Any help thinking about other milestone payments projected in 2026? And the tracking to -- I think you talked about $1,650 to $1,850 in PCF cash flow for the year? Kathleen Johnson: Regarding the integration, when I said we won't absorb it, of course, we'll look to take whatever capabilities on a single digital platform [ post cash procure ] to pay. Which, by the way, we're pretty proud of the fact that we've implemented and upgraded a brand-new ERP system, Phase 1 and Phase 2 at Lumen as of this week. So we're making huge progress, and we'll leverage all of that technology platform. What I was referring to when I talked about not absorbing it, I'm very cognizant of a big company swallowing or suffocating the smaller company. I have a bunch of experience in the tech world of doing a bunch of acquisitions. And we need to make sure that Alkira stays Alkira in this transaction because we love what they do. They're customer obsessed. They have an amazing engineering team, an incredible platform, and their speed is incredible. So I think what you'll see is more of Lumen integrating into Alkira rather than the other way around. Christopher Stansbury: Yes. And on your question of kind of the onetime benefits, there was about $32 million in PCF in the quarter that won't recur. I think in the third quarter, we're expecting a smaller one. And so we'll give some more color at that time. While I don't think it will impact 2026, I mean, one thing with the Alkira transaction is we do expect our CapEx in the coming years to be reduced by somewhere in the $100 million to $200 million range. And so after we get a little more time to inspect that, we'll give everybody an update. Michael Funk: Okay. And that's an aggregate, the $100 million or $200 million, or that's per annum? Christopher Stansbury: Yes. That's aggregate. Operator: [Operator Instructions] Your next question comes from the line of Nick Del Deo with MoffettNathanson. Nicholas Del Deo: First, just another little clarification from Chris on the performance payment in PCF. Is that what drove the sequential step-up in public service revenue? Or was something else going on there? Christopher Stansbury: No. It wasn't driven by that. And the -- and again, it wasn't performance-based. It's just the way that, that contract was delivered that we were... Nicholas Del Deo: I'm sorry, the delivery pay. I used the wrong term, sorry. Christopher Stansbury: Some of it [ was in ] public. Yes. Nicholas Del Deo: Okay. Anything else we should be aware of in public sector as we think about the coming quarters? Christopher Stansbury: I think in the current quarter, legacy performed a little better. And in the coming quarters, again, it's -- there's tremendous opportunity in that space. It's just a very long decision cycle. So it's hard to predict when decisions will get made, but we feel very good about our position and ability to deliver to those customers. Nicholas Del Deo: Okay. Okay. And then maybe one on Alkira. Are you able to share anything regarding its current revenue or EBITDA? Or if not, can you share anything to help give us a sense of its market presence or its customer base or its traction in the market today? Christopher Stansbury: Yes. So we aren't sharing anything. They do have a number of customers today. Their revenue is relatively small, I will say that. Look, I think that the powerful combination here is that we bring a customer installed base and scale that Alkira didn't have on what is, in an unparalleled way, the strongest enterprise network on the planet. And what Alkira brings to Lumen is really the brain of that control plane and the ability to connect those things together and move workloads from anywhere to anywhere, right? As Kate said, one network, every cloud, total control globally. That's a big deal, and nobody else is doing that. So that's where we see the power of these things coming together, and frankly, delivering much faster, what our vision has been for the last 3 years. And so it was a great opportunity, and we're excited to share more after we close. Operator: Your next question comes from the line of Batya Levi with UBS. Batya Levi: Just a follow-up on the public sector. Was part of the $32 million booked in there? And what else drove the sequential strength in that line? And can you just talk in general about your expectations for Business revenues for the full year? Christopher Stansbury: So again, we don't guide revenue in total. What I would say is that on our path to inflecting EBITDA this year and ultimately, revenue over the next couple of years -- and again, we'll get back to you with how we see Alkira can help us accelerate that -- is you will continue to see kind of a rate of decline that is better than our competition and one that improves year-over-year in total. So there will be fluctuations quarter-to-quarter, but we feel very good about the fact that we are clearly differentiating ourselves in the marketplace, and the performance is going to show that. As it relates to public sector, as I just mentioned previously, yes, part of that $32 million was in public sector. And public sector also benefited from lower legacy churn than what we've been previously experiencing. Batya Levi: Do you expect that to continue? Christopher Stansbury: Look -- and I think we can't look at strategic and legacy as two separate and distinct things. I would love nothing more than to tell you that legacy declines in public sector accelerated because a number of new strategic initiatives were signed, right? So what's the objective here? For everything to be strategic over time. And so yes, we do expect that to happen at some point in the future. I hope we actually see some faster decision-making that would allow us to drive more strategic. And in part, that would be driven by turning off some legacy product. That would be a great thing. Operator: There are no further questions at this time. I will now turn the call back to Kate Johnson for closing remarks. Kathleen Johnson: Thanks, operator. Just a short note to say thank you to all Lumenaries for your amazing work and helping get us here. The transformation is going so well because of all you do every single day. Our future is very bright. And with that, thanks for joining the call. Have a great night. Operator: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.
Operator: Good day and welcome to Flywire's First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this call is being recorded. I would now like to turn the call over to Masha Kahn, Investor Relations. Please go ahead. Maria Kahn: Thank you, and good afternoon. With us today are Mike Massaro, Chief Executive Officer; Rob Orgel, President and Chief Operating Officer; and Cosmin Pitigoi, Chief Financial Officer. Our first quarter 2026 earnings press release, supplemental presentation and when filed, Form 10-Q are available at ir.flywire.com. Today's call is being recorded and will be available for replay on our website. During the call, we'll be discussing certain forward-looking information. Actual results could differ materially from those contemplated by these statements. In addition, unless otherwise indicated, all financial measures discussed on this conference call are non-GAAP financial measures. Please refer to our press release and SEC filings for more information on the risks related to forward-looking statements and the required reconciliations of non-GAAP financial measures. With that, I'll turn the call over to Mike. Michael Massaro: Thank you, Masha, and thanks to everyone for joining us here today. It was a great quarter with significant growth and a beat on both the top and bottom line, with broad-based outperformance across education, travel, healthcare and B2B. We are building for scale while driving efficiencies into our operations. Our product and tech organization continues to generate high-quality, high-value, differentiated products and services. And our go-to-market teams continue to sign meaningful enterprise deals, while also landing and expanding across our global client base. We are executing against our multiyear strategy to deliver $1 billion in revenue with impressive financial metrics, and I want to spend a moment on why those metrics keep improving. We go where others are unable or unwilling to go. Most companies are built for simplicity, ours is built for complexity. Multicurrency, multi-method, multi-rail, deeply integrated, sector-specific payments and software at scale. This is what Flywire is built for. Every new payment method, every new regulatory layer, every new integration only strengthens our differentiated position. The harder the workflow, the fewer companies can follow, and that is exactly where we specialize. This is what defines our moat. We have proven the thesis and the execution continues to improve. We are signing larger clients, growing volumes and product attach rates within existing relationships. Our momentum is yet another proof point. When clients stay, expand and refer others to Flywire, the market is telling you clearly our model works. And the total addressable market continues to expand. 3 years ago, Flywire is primarily a cross-border payments provider. Today, we serve the full suite of domestic and international payment flows across major geographies. And in education alone, that expansion has grown our addressable market, roughly tenfold. Many of our existing clients are still cross-border only, moving them towards processing 100% of their payment volume through Flywire is a growth engine that lives within our installed base, independent of macro conditions. Let me walk you through 4 priorities, each designed to build long-term value. First, optimizing and strengthening the core platform. The most important thing to understand about our platform is that it gets more efficient as it scales. As payment volume grows, our routing intelligence improves, banking relationships deepen, cost per transaction declines. This is not static infrastructure. It is a network that becomes more valuable with every new corridor, every new client, and every new additional dollar of volume we process. To put that in concrete terms, our payment platform today moves well over $30 billion per year, adds value to clients in more than 50 countries and accepts payments from 240 countries and territories. That scale funds better banking relationships, better routing economics and better localized experiences than a smaller platform can replicate. More volume improves the network, a better network attracts more clients, more clients deepen the integrations and deeper integrations make us harder to displace. And every capability we build, whether in education, travel, B2B or healthcare, becomes part of our shared platform designed to compound across every vertical. Our second priority is accelerating our revenue flywheel. We are seeing clear acceleration across our go-to-market motion. We are seeing bigger deals, more enterprise wins and time to signature is decreasing. Across every vertical, clients get more. More conversion, more AR visibility, more staff time on high-value work and less of everything that slows them down. Fewer payment failures, less reconciliation burden, less bad debt, less inbound questions. That ROI is what drives retention and retention drives expansion. Our land and expand strategy drives gross profit growth and paired with very low revenue churn across education and travel, it reflects a platform that once adopted, becomes foundational infrastructure for our clients. Our third priority is innovating to deepen our ownership of critical workflows. What keeps clients with us is not just the payment, it is everything Flywire does around it, the software, the workflow, the visibility, the operational efficiency. We are continuously expanding our software platform to reduce operational burden and strengthen revenue management for our clients. This quarter in education alone, we enhanced our solution capabilities to better automate student communications, improve due date visibility and scaled our U.S. loan disbursements for U.K. institutions. Similar innovation is happening across every vertical, in healthcare, travel, B2B, we are removing the complex workflows that our clients have managed manually for years. Clients trust Flywire with their most critical workflows and look to us to deliver new products, features, and payment methods. One of our key moats is the network of integrations, compliance infrastructure and operational connections around the transactions, embedded into ERP systems, bank networks and systems of record in ways that are genuinely hard to displace. As payment complexity increases, our relevance grows because clients do not want to solve orchestration, reconciliation and compliance themselves, they want a trusted platform that absorbs that and streamlines operations for them. That is exactly what Flywire does. And our fourth and last priority, AI is an enabler for Flywire, not a threat. AI increases the value of whoever owns the workflow and the data. At Flywire, we own both. Generic AI solutions do not have our transactional data across education, healthcare, travel and B2B. They cannot replicate our deep ERP integrations and our regulatory licensing or the years of client-specific behavior data that underpin what we do. So as AI becomes more powerful as a category, we believe our position becomes more valuable to our clients, not less. We are also already seeing internal AI benefits emerge in our cost structure, and the opportunity ahead is significant. We've seen approximately 40% of customer inquiries auto-resolved without human intervention, with 30% reduction in support handling time and cost per contact. We are also seeing faster onboarding, thanks to AI-assisted implementations and increased throughput without a linear increase to head count. Across the business, the impact is broad. Engineering teams shipping code faster, product teams innovating more quickly and incorporating client feedback more rapidly. And a finance team automating routine analysis so they can focus on higher judgment work. These improvements are already happening even while we continue our enterprise-wide digital transformation. Rearchitecting not just our underlying operating systems and data, but also our organization, processes, and ways of working end to end with an agentic AI future in mind. The winners in an AI-driven world will be platforms that own the workflow, the data and the client relationships, delivering results and doing so more efficiently than ever. That is the future of Flywire. So let me leave you with what defines Flywire. We run toward complexity. We operate a network of global and local payment methods, coupled with regulatory expertise all around the world. We manage the deep software integrations that most payment companies cannot build and most software companies cannot operate. We have built the capability, the team and the infrastructure to go exactly where others cannot or will not follow. We focus on underserved large industries, education, travel, healthcare and B2B, which have massive addressable markets with long-term structural growth tailwinds. These are not cyclical bets. They are durable expanding opportunities and Flywire is built to capture them at scale. And we deliver innovative technology paired with exceptional client service, removing complexity for our clients so they can focus on their mission while fundamentally improving how they get paid. Flywire is uniquely positioned to do this, our industry-leading software, our global payments platform and our FlyMates, genuine experts in the industries we serve, who execute every day to deliver real outcomes for our clients. That combination is rare. It is hard to replicate. It is what gives us confidence in where Flywire is headed. Rob will now take you through the further evidence of what I've described, the wins, the go-lives and the client outcomes that are compounding into durable growth. Rob? Rob Orgel: Thanks, Mike. The pattern across our business is consistent. We go where payment workflows are fragmented and operationally intensive. We embed deeply and we expand as clients consolidate more of their financial operations onto our platform. Let me walk you through 3 themes that define Q1: strategic vendor consolidation of these workflows, geographic diversification beyond traditional markets and accelerated software-led monetization across travel, B2B and beyond. Let me start with vendor consolidation. Clients are choosing to consolidate fragmented financial workflows onto a single trusted platform. We are leveraging this dynamic across our verticals and the reason we win is that we are the only platform that can handle all the complex workflows they need. As an example, Cornell University has committed to a long-term agreement for our full student financial software suite. Cornell is a large institution, tens of thousands of students, significant international enrollment, multiple funding sources, including sponsor billing and loan disbursements and a collections operation that touches separate debt types simultaneously. They are consolidating their billing, payments, payment plans, refunds and collection processes onto a unified global platform that only Flywire can provide. This reduces the complexity and cost of managing multiple fragmented vendors while giving Cornell a simpler, more automated and uniform view of their student financial activity. In the U.K., our SFS is delivering measurable results at institutions facing similar operational challenges. Kingston University reduced manual financial suspensions by over 30% this quarter through automated workflow management. We signed 3 additional U.K. SFS clients this quarter, all attracted by our ability to manage their unique operational needs. Separately, The University of Edinburgh, one of our largest U.K. cross-border clients, achieved approximately GBP 1 million in savings in under a year by consolidating their international tuition flows and doing reconciliation via our platform. In healthcare, we expanded with Endeavor Health, where we are now managing their pre-service, point of service, and post-service patient payments, deeply integrated with Epic across this multisystem organization. Endeavor operates across multiple hospitals and care sites, each with its own billing environment and requiring us to support a high degree of specialized workflows. Our certified integrations with Epic, Cerner and Oracle, combined with our regulatorily compliant vertical software workflows are barriers that keep most payment providers out of this market. The second thing we are seeing clearly reaffirmed in 2026 is the demand for our solutions is truly global. Using education as an example, our solutions are proving themselves outside of our traditional big 4 markets, being the U.S., the U.K., Canada and Australia. Education revenue outside those markets grew over 40% year-over-year in Q1 and more than 60% of new education clients signed were from outside the Big 4. In Europe, we are seeing momentum in Germany, Spain, Italy and other markets as international students continue to diversify destination markets. These are not simple markets to operate in. Each requires navigating local requirements, including integrations, translations, reconciliation requirements and payments infrastructure. Institutions need a platform that can absorb that layered complexity and that is what we provide. In Asia, we are seeing the same strong demand. This quarter, we went live with a top global university in Singapore and now have the majority of the country's universities using Flywire. Singaporean institutions are managing multiple currencies, regional payment rails and local compliance requirements on top of international tuition flows. Having the majority of this market using our platform also creates compounding network effects, that shared corridor economics, deeper regional banking relationships and routing intelligence that improves with every additional dollar of volume we process there. We see lots of needs in Singapore and many other markets that are addressed by our software capabilities. Wrapping up my comments on why we win in global education. In Canada, where the broader market remains under pressure, our revenue has turned positive as we continue to expand our installed base and win competitive RFPs. This quarter, for example, we started processing payments for University of Calgary, a major Canadian University with over 30,000 students, and we see continued opportunity to take share in that market. Finally, our software-led approach has been a key catalyst for capturing and monetizing payment volume. In travel, our hospitality solutions, formerly branded, Sertifi, are continuing to grow well. Payment attachment is increasing and more volume is routing through Flywire as we replace legacy gateway processors with our solution. The complexity these clients face is specific to high-value hospitality, contracts involving multiple signatories, card-not-present fraud prevention, multicurrency deposits, refund and charge-back management across jurisdictions and reconciliation against property management systems. All workflows a generic payment gateway was never designed to handle. Unlike a gateway, we sit inside the contract workflow itself. Our sign and pay capability collapses the contract and payment into one moment. The client signs, the payment is captured, the booking is confirmed. For operators running high-value cross-border transactions, that reduces charge-back exposure at the point of transaction. A level of workflow ownership no generalist processor can replicate. We estimate there is still an additional $2.5 billion of payment volume within our existing U.S. hospitality clients alone that we can capture. And we are investing also in an international rollout this year as we see the same fragmented workflows exist in other major travel and hospitality markets. In luxury and experiential travel, Q1 was our second largest quarter for ARR signings with 15 deals over $100,000. Carr Golf and Travelling The Fairways, both left large horizontal processors for Flywire, drawn by operational efficiencies and the ability to replace a separate invoicing tool with a single workflow. The reason we win in luxury travel has not changed, competitive rates, automated reconciliation and a level of service generalist processors cannot match. Software-led monetization is also working well in our B2B business. Studycast, a cloud-based imaging workflow platform for healthcare came to us with unique invoicing scenarios across multiple markets. They were seeking to improve low cash flow visibility and improve an entirely manual AR process. We are giving them invoicing, payments and global settlement in one workflow, that means automated reconciliation, faster collections and better working capital visibility. CMC and Lula Life, 2 other clients that went live this quarter, are variations of the same story. Complex billing and operations that are perfectly suited for Flywire. Across every vertical, the logic is the same. We go where others are unwilling or unable to go. We embed deeply and our platform becomes critical infrastructure once deployed. Cosmin will show you what it looks like in the numbers. And with that, I'll turn it over to Cosmin. Cosmin Pitigoi: Thanks, Rob. I'll detail our financial performance for Q1 2026, discuss our margin dynamics and provide our updated full year outlook. Q1 performance strength was broad-based and results exceeded expectations. Total revenue reached $184 million, up 43% on a spot basis and 37% FX-neutral growth, including 7 points in organic contribution from Sertifi. Almost half of the 9-point outperformance versus the midpoint on an FX-neutral basis was driven by a strong January education peak in some of our core markets, with the remaining beat coming from strength in our travel segment, specifically hospitality, in particular, Sertifi payments. In addition, we continued seeing stronger-than-expected payment processing volumes from Cleveland Clinic and invoice migration, which had approximately a mid-single-digit tailwind in Q1 and expect to be of similar magnitude in Q2. Transaction revenue was $155 million, up 43% year-over-year. This was driven by a 45% growth in transaction payment volume with continued contribution from education, both cross-border and domestic as well as travel. As a reminder, quarter-to-quarter blended yields can vary with mix, especially as domestic payments ramp up. Higher domestic volumes and greater credit card penetration carry different economics than cross-border flows. On a like-for-like basis, pricing remains stable and competitive behavior continues to be disciplined. Our spreads reflect the value we deliver, compliance, reconciliation, ERP integrations and enterprise-grade infrastructure, not commodity payment processing. Platform and other revenues were $29 million, up 40% year-over-year, primarily driven by growth in hospitality. Adjusted gross profit reached $110.5 million increasing 34% year-over-year at spot, including 3 tailwinds. Approximately 8 points inorganic contribution from Sertifi, a mid-single-digit points from FX translation and a high single-digit benefit from stronger education performance in January. Importantly, this 34% gross profit dollar growth is successfully converting into adjusted EBITDA margin expansion, demonstrating real operating leverage. Adjusted EBITDA was $39 million, resulting in a 21.4% margin expanding at 452 bps year-over-year, which was above the upper end of our guide. The strength in adjusted EBITDA reflects gross profit growth and continued operating leverage across every expense category as our non-GAAP operating expenses grew at a meaningfully slower rate than gross profit. Our adjusted gross margin of 60.1% was down by approximately 400 basis points. Margin dynamics are driven by 3 factors: mix, FX and temporary large payment processing ramps, not competitive pressure. This quarter, the margin change was primarily driven by approximately 250 basis points from the mixed contribution of higher Cleveland Clinic and B2B invoice client payment revenues that began ramping in the second half of 2025. The balance of the margin change was due to continued vertical mix shifts. FX on settlement impact in Q1 was minimal on an absolute basis. But we did benefit from a favorable year-over-year comparison given the headwind we experienced in Q1 2025. Excluding the ramp activity, gross margin dynamics would be within our expected range. We emphasize that these ramp dynamics are temporary and will be largely complete by the end of 2026. In Q1, we delivered GAAP net income of more than $12 million. It is a direct result of the operating leverage we have been building into this business, and we remain on track to grow GAAP net income by approximately 3 to 4x on a full year basis. Turning to capital allocation. Our balance sheet remains strong with approximately $215 million in corporate cash, giving us significant financial flexibility while continuing to invest in the business. Today, we're announcing an accelerated share repurchase program of up to $50 million under our existing share repurchase authorization, the single largest capital return action in Flywire's history as a public company. The ASR program reflects our conviction in the intrinsic value of the business and our view that the current share price represents a compelling opportunity. This is not a change in our growth investment philosophy. We're acting on market dislocation. The company intends to fund the ASR with available cash on hand. The ultimate amount and timing of repurchases will be informed by prevailing market conditions and price levels ensuring alignment with our return thresholds and broader capital allocation priorities, including continued investment in organic growth and selective M&A. Since launching the repurchase program, we have now deployed $128 million in total share buybacks, which represents the majority of free cash flow over that time period. A track record of consistent execution, not episodic activity. Moving to guidance. We are raising both revenue and EBITDA guidance for the full year 2026. We now expect 18% to 24% FX-neutral revenue growth with approximately 3 to 4 points from payment processing ramps in B2B and healthcare, mostly benefiting the first half of the year. And roughly 1.5 points of inorganic contribution as we lap Sertifi. Adjusted gross profit is expected to grow just above the mid-teens year-over-year at spot. We expect approximately 175 to 375 basis points of full year EBITDA margin expansion, reaching approximately 22.8% at the midpoint. Stock-based compensation remains targeted at approximately 10% of revenue, while we continue managing growth and net dilution in a disciplined manner. And anticipates free cash flow conversion of 70% to 75% of adjusted EBITDA. Our Q1 outperformance flows through to upgraded full year 2026 guidance. Before I walk through the details, I want to flag one shaping dynamic. Second half revenue growth is expected to decelerate relative to the first half, not because of any change in the underlying business, but because we are anniversarying the Cleveland Clinic and invoice payment volume ramps from the second half of 2025. Gross profit growth is less affected given the margin profile of that revenue. On macro, we are not changing our underlying assumptions. While Q1 benefited from a strong January education peak and favorable timing that we view as nonrecurring, we continue to expect performance to normalize over the remainder of the year as we remain prudent and data dependent. For Q2 2026, we expect FX-neutral revenue growth of 18% to 24%. As we indicated last quarter, growth will moderate from Q1 as Sertifi laps out. But underlying organic momentum remains solid. At current spot rates, we anticipate 1 point of FX tailwinds. Gross profit dollar growth is expected in the mid-teens range at spot rate including low single-digit estimated benefit from FX on settlement year-over-year dynamics. Adjusted EBITDA margin is expected to expand by approximately 75 basis points year-over-year at the midpoint of our guidance. Following a very strong Q1 margin expansion, the Q2 expansion is modestly below our typical annual expansion rate, reflecting 2 dynamics. First, we're lapping the restructuring actions we took the first quarter of 2025, which created a more favorable cost base than the prior year period in Q2. And second, we're making deliberate investments in domestic expansion growth, data and AI infrastructure alongside scaling Sertifi beyond the historically U.S.-focused business into a global platform as part of our broader hospitality strategy, all high conviction long-term priorities. Note that Q2 is our seasonally lowest revenue and EBITDA quarter with margin expansion weighted to the back half of the year as revenue scales seasonally. In closing, Q1 demonstrates the durability of our diversified platform, the scalability of our operating model and our continued commitment to disciplined capital allocation. As Mike described, we are actively embedding AI and automation across our operations. We structured AI governance at the executive level to accelerate adoption and rigor. Having spent 2 decades believing in the power of data architecture and machine learning to empower people, today, that conviction is being supercharged by AI agents that are profoundly enhancing our human capabilities across the business. One of the core principles of the enterprise-wide digital transformation program is the concept of democratizing certified data, making accurate structured data available to everyone across the organization, both our people and AI agents working side by side. We are actively investing in the capabilities our teams need to thrive in an AI-augmented environment, and we are being equally deliberate about aligning our organizational structure. The goal is an organization that is faster, more scalable and structurally better suited to the next phase of Flywire's growth. We're redesigning how work gets done from the ground up, not layering new tools on to old workflows. This is the hardest part of any transformation and where the greatest long-term efficiency and scalability gains will be realized. In sales and marketing, this will enable us to match the right product to the right client with greater precision and less resource strain and our sales reps to become even more productive with more revenue per rep and shorter sales cycles. In R&D and product, it enables us to iterate and innovate faster for our clients. And in G&A, we see the longest runway ahead. We're rearchitecting these functions from the ground up to be agent-ready and we expect the productivity gains to be meaningful as that infrastructure matures. As gross profit continues to grow faster than OpEx over time, the operating leverage is driving our EBITDA margin expansion, and we expect to continue as growth and profitability reinforce each other. By normalizing our foundation, embedding AI natively and rearchitecting our systems and how we operate, we are structurally lowering the cost of scale while expanding our capacity to grow. Q1 is evidence. The model is already working, and our digital transformation is how we make it more durable at scale. I'll now turn it back to the operator for questions. Operator? Operator: [Operator Instructions] Our first question comes from Ken Suchoski with Autonomous Research. Kenneth Suchoski: Really good results here. I just wanted to dig into the success in the non-Big 4 education markets. I think I heard 40% revenue growth, 60% of new clients coming from these markets. So are these just less penetrated? Are you taking more share? Or maybe it's a smaller base, but any additional detail there would be great. Rob Orgel: Ken, it's Rob here, and I'm happy to take this one. You're right, we called out the success in the non-Big 4 markets. And really, it's the product of our strategy and our capabilities combined with a lot of market opportunity out there. So if you think about what we can bring to those markets, right, it's the distinctive software capabilities, all of the global payment network, the solution tailored for the industry. And in those markets, they don't tend to have somebody who looks like us can do the kinds of things we do. And so take that, combine it with a team that's local, a customer service capability that's local and suits them, and we really have a distinctively strong capability. I'd remind you that for even more of those places, we've expanded this capability. It's not just cross-border, it's domestic plus cross-border in a lot of the major markets. And so it's a set of markets that we're really excited about, especially as students overall diversify their destinations. Kenneth Suchoski: Okay. Great. That's really helpful. And then maybe just on Sertifi, I think you talked about scaling that business sort of outside the U.S. and taking that global. Maybe just give us an update there. What are the actions you're taking? I mean, which markets you're looking to prioritize and what the road map is there. Michael Massaro: Ken, this is Mike. So on the hospitality business, I mean, I think the synergies still are very clear as they were at the time of deal, right, which is monetize more payment volume that sits next to the hospitality software that Sertifi had and prepare the platform and take it global to hospitality clients all over the world. And so that second one is on track. A lot of great work done by the tech teams to kind of integrate travel capabilities from the core Flywire travel business as well as the hospitality side. And that team is being built out and super excited to continue that international expansion. Specifically, probably think of us as going to Europe, it's a big area for us, obviously, with our existing travel business in Southeast Asia, in particular, being our kind of 2 geographies that we'd expect most of that growth to be coming from in the short term, but it is a multiyear strategy. Operator: Our next question comes from Tien-Tsin Huang with JPMorgan. Tien-Tsin Huang: Great results. Thinking about the second quarter margin variance, I know you talked about there a little bit, but I'm just curious, is that mostly discretionary on your part from an investing standpoint? What would drive you to go ahead and invest more? I'm sure that would translate into a pretty fast return if you did that. So I'm just trying to better understand the puts and takes around where you might land and what would drive that? Cosmin Pitigoi: Yes. Thanks, Tien-Tsin. This is Cosmin. So following a very strong Q1, even in Q2, we were investing obviously modestly around some of the high conviction areas that we've seen. But as you've seen us for the rest of the year, we're expecting to see margins expand even more so and raise the full year outlook. And so feel good about the investments and the return of those. And so -- and plus, I would remind you just from last year, we're lapping some of those one-offs. But in general, Q2 is pretty small. So on a very small base, overall, as you saw in my prepared remarks, in terms of the EBITDA number there. Tien-Tsin Huang: Got it. No, that makes sense. And then Mike and Rob, you both talked about enterprise wins and competing for larger deals. I know you're comping out Cleveland Clinic. Just in general, do you feel like there's some, I don't want to call them gorillas, but just larger deals like that in the pipeline that you're seeing, maybe that's a little bit different than maybe this time last year. Rob Orgel: So we're overall really pleased with the quality of pipeline growth. We're pleased with the size of deals. We called out the deal size growth here in Q1. Want to be careful making reference to clients like Cleveland Clinic and so on, like that's obviously -- I know exactly what animal you just referenced, but it's a very, very big animal. And so we don't sort of call that out as being the norm. But overall, we're very happy with the quality of pipeline, and we're pursuing a lot of great accounts. Operator: Our next question comes from Dan Perlin with RBC Capital Markets. Daniel Perlin: Again, great results. Mike, I just want to go back to the original topics you're going to run through and the one that kind of stood out again is kind of vendor consolidation becoming more of a, I think, a consistent theme. I think you always thought that was going to be kind of the case, but it does feel like it's picked up some, I guess, velocity here over the past several quarters. And I'm wondering, is that a function of your go-to-market motion? Is it like the density in market and people are increasingly recognizing your capabilities, I guess, holistically. I'm just trying to get a sense of where that might help in itself going forward. Michael Massaro: Sure, Dan. Yes. I think it's a combination of things, I think, obviously, we sit in an area where we're dealing with lots of complexity. We're offloading that for our customers. And when you do that, they trust you to do more. And so I would say the more problems we solve, the more they come to us looking for other opportunities to leverage Flywire technology. I think that's probably the first one. The other thing I would just say is in this age of AI, right, a lot of people talk about kind of disruption from AI, but like if you innovate, if you deliver value, leveraging this technology, customers see that value. They want to work with you more. And I think for us, our teams are moving faster. They're delivering better results. They're delivering great client experiences. When their payers have challenges, we're there to help. And I think all those things are just driving people to realize all the potential they have to work more with Flywire, and I think that's what you're likely to see, right? We're sitting there with the regulated infrastructure to process complex payments and we have industry-leading software, and we have an amazing team. And I think that combination is really powerful and hard to beat. Daniel Perlin: Yes. Totally makes sense. Just a quick one on travel. Understanding that you guys obviously tilt more towards affluent travelers. But have you seen any evidence that higher oil prices or jet fuel or any of those things are putting any kind of organic crimp. I mean, obviously, there's kind of some noncyclical overlays just given the pace of wins that you guys have in that business that would mask it. But like if you thought about it on a same-store basis, are you seeing anything creep in yet? Michael Massaro: Yes. So this is Mike again. I haven't seen anything creep in. Obviously, Q1 was good, as Cosmin mentioned in travel. I would say, I'd just point obviously something that causes us to continue to be prudent in how we talk about the year. It's early in the year. You started to hear a little bit of disruption around oil availability for airplane travel. It's something we're watching closely. Haven't seen any impacts yet. Again, you're exactly right. We're dealing typically with a luxury traveler. And if they've kind of committed to this once in a lifetime or big trip a year, if something changes in their logistics, they're probably going to figure out how to go a little earlier or adjust around some of those changes. And so that's our expectation. Our clients haven't seen any hit yet. But obviously the world is quite dynamic and we continue to be prudent in how we talk about the year. Operator: Our next question comes from Chris Kennedy with William Blair. Cristopher Kennedy: Cosmin, thanks for the comments on the data platform initiative. Is there a way to think about kind of where we are in that journey and when most of the benefits that you talked about will be fully realized? Cosmin Pitigoi: Chris, thanks for the question. And certainly, as you can probably tell, a very exciting and passionate kind of area for me. So we're sort of, I would say, we're past the early innings. We're certainly deepened already in sort of the architecture and systems integration side. And we have a very ambitious -- one of the reasons you see G&A, that area kind of investments. This is where we're putting a lot of investments there. So already kind of lost to the races and expect as you get into next year, a lot of that platform around the data and the systems architecture and the capabilities will be built out, but we're actually seeing some early results even now we're doing some work around how we manage vendors internally, how we manage a lot of our processes. So you're seeing some of that already play out. But I would say exiting this year into next year, you'll see a lot more. And I think with the launch of some of the new tools certainly Claude, as many of us here are using that on a daily, hourly basis. The sort of acceleration and amplification of the impact of what we're putting in place, we're even more excited about it. So certainly look forward to that. Cristopher Kennedy: Great. And then it was great to see the Penn State win. Can you just talk about kind of the traction or the momentum that you guys have for SFS in the U.S.? Rob Orgel: Yes, I can take that. This is Rob. As you called out, we announced the go-live for Penn State. Just recently, we announced Cornell today, along with Flagler. We've announced a number of other wins over recent quarters here in the U.S. And I think there's a bunch of things going on that are helping us build this momentum, right? So there is this theme of vendor consolidation that is strong, and I referenced there's a strong push for modernization that's happening inside our client base, particularly inside U.S. EDU. And I think the third thing that's happening that I'd call out is sort of our reference base of clients is growing. So sort of our reputation and our standing in the segment continues to improve as the premier provider of SFS and domestic type capabilities. That along with the skill of our team is all what's driving our momentum. Operator: Our next question comes from Michael Infante with Morgan Stanley. Michael Infante: Can you just break down what you're seeing with respect to payer retention at schools that are only using cross-border payments versus schools that have adopted domestic payments and SFS? Are you beginning to see evidence that SFS is improving payer retention just given the traction that you guys are seeing on the net new side? Michael Massaro: Yes. So this is Mike, and I'll let Cosmin make some comments, too, about the different cohorts of users as well, but I'll let him jump in on later. But I would just say, in general, remember, when you get SFS, you get all the volume, right? You're getting all the tuition dollars, whether they're coming in, be a cross-border, whether they're coming in domestically. And so for us the core strategy is to own that student account portal. And if you own that student account portal, you get full utilization. And so obviously, as you're dealing with just a cross-border solution, you're getting a percentage of that, Cosmin's spoken in the past about what that is. I'll let him comment. Cosmin Pitigoi: Yes. So if you look -- because one of the questions we always get is around the U.S. in particular. So in the U.S., you can think of the U.S. revenues, for example, last year, about 1/3 each, 1/3 is first year, 1/3 is first years of international, about 1/3 that are sort of every other cohort, if you will, international and another 1/3 is domestic. So that 1/3 of first year and existing cohort of international students, we see, as Mike said, the continued retention from that comes from a few different sources. One, we talk about the domestic expansion. So the more SFS, domestic full suite we have, the better that retention gets. Second, we obviously can improve user experience and as we work on that. So that is also the second thing. And then third is all of our banking partnerships in those source markets help us to improve that retention. Now we don't have a lot of that necessarily baked into guidance. We're taking a prudent approach with that. But we're seeing good trends around retention and overall, feel good about the mix of the different cohorts over time, even with, again, I'm sure the pressure on that first year part of it. Michael Infante: That's helpful. And then maybe just on the macro side of the equation, obviously, you saw the reiterated assumptions on some of the visa trends. Can you just sort of level set with us in terms of what you're seeing by market? It looks like the U.S. and Australia broadly tracking with those expectations, maybe the U.K. and Canada, a little bit soft. Just what are you sort of seeing with respect to things like deposit trends and your conversations with schools and agents? Cosmin Pitigoi: Yes, I can start. So yes, our macro assumptions haven't changed. So for the U.S., while even last year, we didn't see much above sort of 20% as you're getting to the mid part of the year into September. For U.S., we've assumed visa is down 30%, which is quite prudent as we look into it. Look, we've looked at some of our data. And if you look at some of the application data, it's down sort of in the high single digits as we've mentioned before. So not yet, and again, you saw the performance in Q1 quite strong, but we're not counting on that for the rest of the year. We're taking a prudent approach as we think about the Q3 peak. So that's in the U.S. And certainly, lots of headlines, lots of headlines everywhere technically, but we've taken a pretty prudent approach across the board. Canada, again, coming off several years of being down almost 60%, we've assumed down 10%. Again, lots of headlines there, too, but so far, we feel pretty good about our path to basically continuing to -- now that market actually growing again for us, which is great to see, and again, driven by a lot of our new client wins. And then U.K., Australia, roughly flat visas, again, some headlines there, but overall, both of those markets are growing faster than the visa trends, which is kind of what we normally watch for. So hopefully, that's helpful. Operator: Our next question comes from Jeff Cantwell with Seaport Research. Jeffrey Cantwell: I apologize if I missed this earlier. I want to see if you could elaborate maybe a little bit more on RLAS growth which grew faster than your TPV growth this quarter, that was by over 600 basis points. What are you seeing in terms of the underlying strength in RLAS analyst growth across your 4 businesses that are the biggest drivers of that? And could you maybe help us understand on your outlook for the remainder of the year? How durable is that spread between RLAS growth and volume growth? Or what are the main things to be thinking about? Cosmin Pitigoi: Jeff, thanks for the question. Yes. So in general, when we look at the spreads, still pretty stable overall, as you saw in my prepared remarks, Q1 was a slight jump, but as you've seen in the past, there's volatility from one quarter to another in that number. But overall, we feel pretty good about the -- it is not necessarily an impact of pricing, for competitive pricing specifically, but really it's a mix effect. So overall, spreads are pretty stable and feel good where we -- as we look ahead for the rest of the year. Jeffrey Cantwell: Great. Okay. And then if I could just squeeze in a quick follow-up. On AI, I'm curious if you guys are thinking about that as an OpEx opportunity as well. We're seeing some of the payments companies, payment/software companies start to rationalize some of their OpEx lines in the spirit of we are finding efficiencies on the AI side of things. I'm just curious what your thoughts are there? And maybe if you're seeing some opportunities as you think out over the next, call it, a year or 2 years and so forth. Michael Massaro: Jeff, it's Mike. So I think there's huge opportunity for us internally and externally. So if you look at internally, imagine, we've all various teams inside Flywire leveraging it, whether it's product designs faster, whether it's development faster, whether it's -- we have some great stats on the call around customer support in ways we're leveraging it. So I think every company has to be looking at a world in which they're going to become more efficient. They're going to be able to do more with less as they grow their business over the next couple of years and that's how we're thinking about it here at Flywire. So I'd say we're definitely thinking about it. I share Cosmin's excitement about the data and the transformation efforts we have at the system layer and being able to do that at a time when so much is emerging around AI, it's really -- it's a lot of fun running a company when you have all those different tools at your disposal. Operator: Our next question comes from Nate Svensson with Deutsche Bank. Christopher Svensson: I want to follow up on a couple of questions that have been asked earlier. First on SFS, obviously, nice to see all the new wins. I was hoping you could remind us on how long it takes for the SFS deals to ramp once you sign them. I think the typical SFS contract is something like a low single-digit million revenue contributor on an annual basis. Maybe that old commentary was U.K. specific. So you can correct me if I'm wrong there. But really just wondering how long it takes for these wins from 1Q to ramp and then fully flow through to the P&L for the year. Rob Orgel: Nate, it's Rob here. So from the time of a client go live, we would expect that ramp to essentially initiate right away, but to get to the full maturity, what we would call the target ARR in the way we look at these things, you'd expect that to take you well into the second year, right? You've kind of got the adoption and learning cycle that comes with the payment plans. You've got the full rollout of all the other capabilities that may follow the initial launch. So that's the -- that's kind of the range of time frame that we'd be focused on for achieving the significant majority of that would be the target ARR. Christopher Svensson: Got it. Helpful. And then I did want to ask for a little more color on the January education outperformance. I think you had called out that it was some of your key markets. So I assume that's Big 4, but I was hoping for a little more specifics there. I know Canada returned to growth in 1Q, but I don't know if that was a driver of the outperformance relative to expectation or if there was better performance in some of the other markets, U.S., U.K., Australia that caused you to call out January specifically? Cosmin Pitigoi: Yes. It's your latter. So it's actually -- it's U.S. and U.K. with a bit of Australia. We saw sort of strong from a destination market. And then -- and we saw that coming from across our main corridors that we usually see. We also saw some strong domestic performance within the U.K. where we continue seeing strong growth. So those are the markets, U.S., U.K., Australia with, again, kind of our main corridors and as far as the outperformance and a bit of the domestic performance in the U.K. And again, that's why we're also just being prudent. We're not flowing that through into the rest of the year, but feel good that we had that strong start to the year. Operator: Our next question comes from Charles Nabhan with Stephens. Charles Nabhan: Congrats on the result. Good to see another strong quarter of bookings activity. I was hoping you could comment on the composition of those bookings as well as whether you're seeing any changes in the size of the new clients that you're bringing in? Michael Massaro: This is Mike. So we're actually seeing a whole bunch of positive trends. So we even time to signature being faster, but deal size being up and the number also being up from prior quarters. So again, back to that kind of 200 range that we had talked about in previous quarters. So we feel good about all those metrics. Again, I think, Rob mentioned a little bit earlier, just some of the reasons. Again, I think it's great execution by our go-to-market teams. I think you're seeing us continue to kind of cross-sell exceptionally well with that land and expand strategy, and I think that's what's driving it. Charles Nabhan: And as a follow-up, you've announced a number of new integrations over the -- in partnerships over the past few quarters. And it sounds like you have the key ones in place like Ellucian and Oracle, Workday. But Curious as we think about the medium- to long-term outlook of the business, how much opportunity is there to expand business through new integrations. If you could give us a sense for how we should think about that portion of the TAM, that would be helpful. Rob Orgel: Yes. This is Rob. I can jump on that one. So there's really 2 dimensions that get us excited about the partnership piece. So first is having coverage across the key partners that really matter in our verticals. And so the most recent one that we announced was the partnership with Workday, which we are indeed very excited about. But that builds on successful capabilities we have across the other major systems in education namely Ellucian and PeopleSoft for Oracle or the Oracle Suite but know that we have partnerships in a whole bunch of other parts of the world that are relevant for the work that we do there. And so we take a lot of pride in the work that's done by that integrations team and it's what helps make it possible for us to do things all around the world. Operator: Our next question comes from Madison Suhr with Raymond James. Madison Suhr: I wanted to start on the payment processing ramps. So you raised the expected contribution from 2% to 3% to 4% for the year. Just how much of that increase was driven by existing signings that you already have in place that are maybe going live more quickly or seeing greater volume than you initially thought versus how much of that incremental 150 basis points was driven by new customer signings throughout the quarter? Cosmin Pitigoi: Madison, thank you. Yes, it is all the existing signings and it's really the Cleveland Clinic. And some of the B2B invoice migration that we talked about -- so as those existing ramps. Just obviously, you saw a much stronger Q1 performance from those coming through and we expect that to continue into Q2 and then you sort of lap it as you get into the second half, but it's existing clients. Madison Suhr: Okay. Got it. And then just a follow-up here on incremental margins. So it looks like the updated guide implies like a low to mid-30% incremental for the year. I understand that there's some investments in 2Q, but it does seem like the second half will need to step up even from 1Q levels. So Cosmin, maybe can you just help bridge what gives you the confidence that incremental margin should accelerate in the second half? Cosmin Pitigoi: Yes. Thank you. Yes, partially, it's a dynamic of lapping last year. So we had a number of investments even in the second half of last year. And so we're lapping that. So that's why we feel good that we're going to see that acceleration into the second half and also just on the investments start to pay off. So I feel good about the sort of mid-30s for the year with higher kind of leaning into second half. And then 24% to 25% EBITDA margins into next year certainly look like well within our sights then as we exit this year with that kind of strength. Operator: Our next question comes from Patrick Ennis with UBS. Patrick Ennis: So on Cleveland Clinic, I know you talked about maybe some higher margin revenue coming online in Q2. Just wanted to confirm that's still the case and should be supportive of gross margins, all else equal. Rob Orgel: This is Rob. I can jump in there. You said that exactly right. So as we called out earlier in the explanation for the rollout plan for Cleveland Clinic, we went with the payment processing first and the software piece is what comes next. Still on track for Q2 launch. And just as you say, that improves the margin of the overall Cleveland Clinic opportunity. Patrick Ennis: Okay. Awesome. And then just on the hospitality business, I mean, impressive TPV growth there. Could you talk about maybe the success you're having in cross-selling payments into Sertifi clients? And then maybe just talk more generically about what the net take rate looks like there compared to kind of maybe some of the more non-cross-border-related volume you have, so domestic education, B2B, healthcare payment processing? Michael Massaro: Yes. So this is Mike. I guess what I'll say is that was a core thesis when we acquired the Sertifi hospitality business, and I think the team is doing a great job executing, right? We knew that there was a lot of volume that was kind of going through that workflow in that software. And we knew with our kind of focus on our network, we could monetize more of that volume. And so the team is doing a great job doing it. Plenty of room to go on that. It's a multiyear synergy that we've always talked about. And I would say you can think about that monetization as mostly being domestic. Remember, 20,000 hotel locations in the United States were the primary customer set of that. And as we go international, you can expect some of that to be a little more cross-border there. The U.S. volume does have some ACH and some card, but I think you can think about it kind of as domestic volume monetization initially with international expansion and expected more foreign exchange impacts potentially as we go international with that product. Operator: Thank you. That's all the time we have for questions. This does conclude the question-and-answer session. You may now disconnect. Everyone, enjoy the rest of your day.
Operator: Good day, and thank you for standing by. Welcome to the Q1 2026 BlackLine Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Matt Humphries, SVP of Investor Relations. Please go ahead. Matt Humphries: Good afternoon, and thank you for joining us today. With me on the call are Owen Ryan, Chief Executive Officer of BlackLine; as well with Patrick Villanova, Chief Financial Officer. With the Q&A portion of today's call, we'll also have Jeremy Ung, BlackLine's Chief Technology Officer, join us. Before we get started, I'd like to note that certain statements made during this conference call that are not historical facts, including those regarding our future plans, objectives and expected performance, in particular, our guidance for Q2 and full year 2026 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent our outlook only as of the date of this call. While we believe any forward-looking statements made during this call are reasonable, actual results could differ materially, and these statements are based on our current expectations as of today and are subject to risks and uncertainties, including those stated in our periodic report filed with the Securities and Exchange Commission, in particular, our Form 10-K and Form 10-Q. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. All comparisons we make today on the call will relate to our corresponding period of last year, unless otherwise noted. Unless otherwise stated, our financial measures disclosed on this call will be non-GAAP. A discussion of these non-GAAP financial measures and information regarding reconciliations of our historical GAAP versus non-GAAP results is available in our earnings release and presentation, which may be found on our Investor Relations website at investors.blackline.com or in our Form 8-K filed with the SEC today. Now I'll turn the call over to BlackLine's Chief Executive Officer, Owen Ryan. Owen? Owen Ryan: Thank you, Matt. Good afternoon, everyone. At our AI investor session in March, we shared our technology vision in detail and made our case for why BlackLine is positioned to be the trusted governance and control layer for CFOs deploying AI across their financial operations. Today is about sharing with you the momentum we are building as we translate that vision into reality. Our Q1 results demonstrated that our strategy is working, delivering solid top line growth and profitability. Revenue grew to 9.7% year-over-year and non-GAAP operating margin improved to 21.6%. These results are underpinned by progress on our key strategic initiatives. The adoption of our platform, Studio360 continues to build with the metric reaching 13% of eligible ARR up from 11% in Q4. More importantly, we are seeing this strategy translate into deeper customer commitments. This is best reflected in our remaining performance obligations, or RPO, which grew 18% and driven by the longer contract terms that are inherent to our new platform strategy. Let me go deeper into our platform strategy and commercial model. Platform adoption maintained a healthy pace following Q4 seasonality with 94% of the eligible new bookings landing on platform pricing, a strong signal that our commercial model is becoming the standard for how customers buy BlackLine. We also saw continued migration activity from existing customers in Q1. Our teams are actively engaged with customers preparing for platform conversion ahead of their upcoming renewals. This new model is also positively changing our deal economics. Average new deal size this quarter was up 85% to $162,000 driven by platform and strategic product sales. Our standard offering now includes a broader set of capabilities on Studio360, which naturally increases the initial land. Our platform model allows us to sell units of financial productivity rather than seats, which, over time, we believe opens access to labor and operational budgets beyond traditional software spend. It also creates the natural expansion path for our agentic AI offerings. The model works like this, as customers adopt our platform, they commit to a platform fee that provides access to the full breadth of our capabilities within a framework of governance, reliability and control that they and their auditors already trust. As they then deploy Verity agents and automate work that was previously manual, consumption-based pricing layers on top of that base, similar to how we price capabilities like matching today. That alignment between how our customers drive efficiency and how we capture value, all within a trusted control environment is fundamental to what we are building. When we look at the full picture, we believe that a platform that provides broad access, embedded AI driving deeper daily engagement and agentic offerings layering consumption on top meaningfully increases the lifetime value of a BlackLine customer. This brings me to what I believe is the most important topic on today's call, AI and our Verity portfolio. Last month at our BeyondTheBlack Conference in London, we introduced agentic financial operations, a new operating model that defines how the office of the CFO harnesses AI safely, strategically and at scale. The response from customers, partners and the broader market has reinforced our conviction that we are addressing the right problem at the right time and with the right approach. The opportunity is straightforward. As an enterprise deploys AI agents across their business in procurement, sales operations, accounts payable, they are creating new uncontrolled financial touch points that need to be governed. Every one of those AI-generated transactions eventually hits the general ledger. Everyone must be reconciled, validated and audited. For a CFO, who personally attest to the accuracy of financial statements, that is a responsibility that requires a trusted platform. Agentic financial operations is designed to close this governance and trust gap. Every action an AI agent takes within BlackLine leaves a digital footprint identical to a human user, full chain of thought, immutable audit trails embedded controls. This is what CFOs demand what audit committees rely upon and what auditors require. The market reaction from customers and partners since our London launch has been encouraging. Customers are telling us they want to leverage what we are building and provide input on our road map rather than try to build these capabilities themselves. Their ROI framework is clear, make their finance operations more durable and competitive and let a trusted partner handle their AI infrastructure so they can focus on running their business. Before I walk you through what Verity is delivering commercially, I want to spend a moment on how we build because the pace of our innovation is becoming a strength. We are using AI to fundamentally accelerate our own product development. Our engineering teams have adopted AI augmented coding practices across our development workflows and the results are measurable. The time from idea to production has decreased 22% versus last year. We are shipping capabilities faster with fewer resources and at a higher quality. This is a structural improvement in R&D productivity that we expect to compound over time. That increased velocity is translating directly into how we deliver value. Our customers have benefited from our foundational AI capability since last year. We are expanding further into Agentic AI. A year ago, Verity agents were a strategic vision. Today, we have multiple purpose-built agents in market in preview are launching in the near term. Combined with our new AI innovation hub and a fully integrated AI native acquisition, we are executing against our AI road map with clear deliberate focus. Now let me share what this engine is producing for our customers. Over the past year, we have been building and refining our embedded Verity AI capabilities like Verity Assist, Verity Narrate and Verity Flag and close collaboration with our customers, their auditors and our partners. That feedback loop has been critical, allowing us to validate not just performance, but the trust and governance framework around them. Even before we broaden access, adoption among early users was doubling every quarter. In Q1, with that validation in hand, we made these capabilities standard across most of our customer base. Over 2/3 of our customers are now actively using these tools, a 285% increase in adoption quarter-over-quarter. In Q1 alone, unique users grew 68% and total usage grew 183%. What this tells us is that AI is moving beyond experimentation for our customers and into their day-to-day workflows. As they embed these capabilities into how they operate, it deepens their relationship with BlackLine. Over time, we expect that to support both stronger retention and additional consumption under our platform pricing model. Verity Prepare, our AI-powered reconciliation agent is now available to customers and is deployed with several mega enterprise customers. The validated outcomes customers are seeing are significant, over 90% reduction in reconciliation processing time. One customer that had been spending 3 hours manually executing certain reconciliations has seen that fall to 10 minutes and 95% time savings. Based on their experience, they are now ready to enable Verity Prepare broadly across their business. That progression from pilot to enterprise-wide rollout is exactly the adoption pattern we are building toward. Early usage data shows the cost to serve is efficient at current scale with clear paths to optimize further as adoption grows. Our multi-model architecture allows us to deliver meaningful customer value at margins consistent with our financial targets. Verity Match is now in its early adopter phase. Our existing matching solution is a powerful capability as it handles high-volume, complex data sets across multiple ERPs and source systems and deliver strong automation rates for our customers. Verity Match builds on that foundation by applying AI to the long tail of complex exceptions like combined vendor payments, transposed invoice numbers, missing remittance details. Rules-based systems have historically left these for accountants to resolve manually. In early customer testing, we see a 64% reduction in transactions requiring manual investigation. And by running our models on NVIDIA GPUs, we can process matches up to 25x more cost efficiently and faster than on prior architectures, improving both the customer experience and unit economics as this scales. Verity Collect will launch this quarter and the demand signal has been stronger than expected. We had to close our early adopter program because customer demand exceeded our planned capacity. The value proposition is direct. Predicting payment delinquency before an invoice becomes past due and autonomously managing the collections outreach across voice, e-mail and digital channels. For CFOs, this translates directly to working capital improvement, which in the current macro environment is a top priority. While it is still early, we believe the initial proof points are compelling in one early adopter scenario our AI agent completed collections outreach activities in under 30 minutes that would have taken a human team of approximately 45 hours. That kind of efficiency gain, freeing collection teams to focus on high-value accounts and complex disputes is exactly what is driving the demand we are seeing. We expect Verity Collect to be a meaningful accelerant to our broader invoice to cash momentum as it scales. Verity Accruals has seen a significant acceleration in customer interest and pipeline growth as its value proposition resonates in the market anchored by initial successes including closed deals and proof of concepts with key targets in both the enterprise and mid-market. These are largely existing customers looking to expand their footprint, which validates the cross-sell motion we have been building. Customers land on Studio360 and then adopt additional Verity agents as they see results. One advantage worth highlighting is that our customers do not need to build a new governance framework to deploy Verity. BlackLine already is that framework. Verity agents operate within the same SOX compliant controls, audit trails and approval workflows our customers have relied on for years. Customers can begin deploying AI within a controlled environment today and their auditors already trust, which we believe lowers the barrier to adoption and supports a faster path from pilot to broader rollout. Turning to how this strategy aligns with our Q1 execution, our platform and AI approach is showing consistent progress in the enterprise. This sustained focus is reflected in our metrics. First, we saw an increase in customers with over $1 million in ARR. We closed the first quarter with 86 customers at this level, an increase of 9% year-over-year along 14% growth in our $250,000-plus customer cohort. Second, this strategy is driving deeper adoption and additional cross-sell across our portfolio. Our strategic products represented 37% of sales in Q1, up from 33% last quarter and 27% in the prior year. This proves that when we lead with value and outcomes, customers invest more deeply in BlackLine, adopting more solutions with less friction. And third, you can see the strategy in action and key wins from the quarter. Within our existing customer base, we saw a significant validation for our AI offerings, particularly Verity Accruals. We secured a major renewal and expansion with a leading billing company, demonstrating their deep loyalty to BlackLine and strong interest in our AI capabilities. We saw similar momentum with a leading global mobility and car sharing company, which also expanded its footprint with a strategic win for Verity Accruals. Our upmarket motion and governance thesis also continues to resonate strongly in highly regulated and complex environments. This quarter, we welcomed one of the nation's largest health care providers as a new logo replacing an ERP competitor, which is a powerful validation of our trusted control framework and innovation. We also saw significant expansion within our enterprise base, including a premier global construction services company that added our invoice to cash solution. Additionally, we executed a major rip and replace at a leading fintech provider, successfully displacing multiple competitors to consolidate their financial operations on to BlackLine, adopting Studio360, Journals, reconciliations and Transaction Matching. Last, we delivered highly strategic wins, particularly among companies at the forefront of the AI revolution. We secured a net new agreement with a global leader in memory and data storage for AI, successfully migrating their processes off an ERP competitor and on to BlackLine. Through that same channel, we also expanded our footprint with one of the world's premier data and AI platform companies. The fact that organizations building the future of AI rely on BlackLine for their own financial governance speaks to the strength and trust of our platform. We believe our customer base is healthier than our headline retention metrics suggest and it is getting stronger. The lower mid-market churn we have discussed in prior quarters is running through a finite and shrinking pool of at-risk accounts. At the same time, the changes we have made, platform pricing that creates stickier customer relationships, a broader solution footprint per customer, increasing multiyear renewal commitments and a redesigned customer success model are fundamentally improving the quality of our installed base. We expect the cumulative effect of these changes to become more visible in our retention metrics as we move throughout the year and into next. Finally, our partner ecosystem and our SAP relationship continue to be meaningful contributors to growth. Our integration with SAP's advanced financial close is now generating pipeline as we were able to sell into SAP's installed base of AFC customers. Our Joule, Verity proof of concept is also progressing toward a commercial framework, and we are actively working to launch platform pricing within SolEx. We are also seeing acceleration in our public sector business through SAP with several active deals in the pipeline. We see our partner ecosystem as a force multiplier across demand generation, delivery and customer success and is critical to scaling our growth. In closing, our path forward is clear. AI is creating more financial activity across the enterprise, not less. All of it must be governed, reconciled and audited. We are the system of record and control that makes this possible. Our customers are telling us they want to move fast with AI, but they also tell us that trust, reliability and security are nonnegotiables. This is exactly what 25 years of BlackLine expertise delivers. With that, let me turn it over to Patrick for a detailed review of our financial results and our guidance. Patrick Villanova: Thank you, Owen. As discussed, our strategy is building clear momentum, and our Q1 financial results reflect that progress. We delivered solid top line growth, demonstrate the quality and durability of that growth through our key strategic metrics and showed significant leverage in our operating model. Let me walk you through the details. Total revenue was $183 million, up 10% and with subscription revenue growing 10% and service revenue growing 11%. The acceleration in services reflects the faster implementation time lines and go-live activity we are driving through our delivery engine. ARR reached $712 million, up 9%, reflecting the bookings momentum we saw in Q4, carrying forward and continued strength in platform and strategic product adoption. Importantly, we believe the quality and predictability of our future revenue growth is strengthening. This is best illustrated by our RPO, which grew 18% to $1.1 billion fueled by larger deal sizes and longer contract terms inherent to our platform model. Similarly, the health of our near-term pipeline is also reflected in our current RPO growth of 12%, which underscores the solid market demand for our solutions. This momentum is directly linked to the steady adoption of platform pricing, which reached 13% of ARR at quarter end, up from 11% in Q4. Calculated billings growth was 9% in the quarter, our trailing 12-month billings growth, which helps normalize for quarterly variations, improved to 9%. Turning to the health of our customer base. Our key metrics remained solid across our 4,300 customers. Net revenue retention was 105%, which includes an approximate 1 point headwind from FX. Underlying expansion within our installed base remains solid, driven by 2 dynamics: customers migrating to platform pricing, which naturally expands the scope of their relationship with us and strong attach rates for our strategic products, which represented 37% of sales this quarter. Customers are investing more broadly in BlackLine and our platform model is making that expansion easier and faster. On retention, our revenue renewal rate was 93%. Enterprise renewal rates remained strong at 96%, consistent with the durability we have seen in this segment, the lower mid-market headwind we have discussed in prior quarters continue to weigh on the overall rate, though the remaining at-risk pool is finite and shrinking. We expect this drag to diminish as we move through the year. Our SolEx channel delivered one of its strongest new bookings quarters as our joint go-to-market with SAP continues to mature. SAP customers now account for over 26% of our total revenue, and we see further opportunity ahead as our broader platform strategy opens new avenues into SAP's installed base of commercial and public sector customers. Now let me turn to profitability and cash flow. Our non-GAAP subscription gross margin improved to 83%. Our non-GAAP gross margin improved to 80.2%, in line with our expectations. Non-GAAP operating margin was 21.6%, reflecting the continued productivity improvements we are driving across the business. We are seeing meaningful efficiency gains from our own adoption of AI and automation in areas like customer onboarding, implementation delivery and internal operations. This enables us to grow revenue faster than expenses while maintaining our investment in innovation. Non-GAAP net income attributable to BlackLine was $40 million, representing a 22% non-GAAP net income margin with adjusted earnings per share growing 14% to $0.56. We delivered operating cash flow of $46 million and free cash flow of $36 million or a 20% free cash flow margin. After paying off our 2026 convertible notes in March, we have approximately $525 million in cash, cash equivalents and marketable securities versus $667 million in debt. Finally, we continue to execute our capital allocation strategy. In the quarter, we returned approximately $47 million to shareholders through the purchase of 1.2 million shares. Before I get into guidance, I want to step back and frame where we are against our multiyear financial targets. We entered the year with a clear objective continue accelerating revenue growth toward double digits, expand operating margin and do both while increasing our pace of innovation. Q1 demonstrated progress on all 3 fronts. Revenue growth accelerated, margins expanded and the pace of our product delivery has never been faster. These results give us confidence to raise our full year outlook. On the specifics, I want to call out a few dynamics that are important for modeling purposes. The first quarter's top line performance included about a $1 million benefit from certain items related to specific customer deployments and timing. These are nonrecurring in nature. Looking ahead, we anticipate a modest revenue headwind of roughly $1 million to $2 million over the balance of the year due to FX. After accounting for both of these dynamics, our Q2 and full year guidance reflect continued acceleration in our underlying revenue growth rate as we move through the year. On the macro, we are not immune to the external environment, and we have built our guidance with that in mind. That said, the financial close is a regulatory obligation, not a discretionary spend item. Our customers cannot defer compliance and the complexity of their financial operations is increasing, not decreasing. Combined with our growing RPO strong multiyear renewal trends and an expanding enterprise pipeline, we have good visibility into the rest of the year. Our raised guidance reflects both that visibility at an appropriate level of prudence given the uncertainty in the broader environment. With that context, for the second quarter, we expect total GAAP revenue to be in the range of $186 million to $188 million, representing 8.1% to 9.3% growth. We expect non-GAAP operating margin to be in the range of 21.5% to 22.5%, and we expect non-GAAP net income attributable to BlackLine to be in a range of $40 million to $42 million, or $0.57 to $0.59 on a per share basis. Our share count is expected to be about 73.3 million diluted weighted average shares. And for the full year 2026, we expect total GAAP revenue to be in the range of $765 million to $769 million, representing 9.2% to 9.8% growth. We expect non-GAAP operating margin to be in the range of 24% to 24.5%. And finally, we expect our non-GAAP net income attributable to BlackLine to be $174 million to $182 million, or $2.42 to $2.53 on a per share basis. Our share count is expected to be 74.4 million diluted weighted average shares. Operator, we're ready for questions. Operator: [Operator Instructions] And our first question comes from Alex Sklar of Raymond James. Alexander Sklar: Owen, maybe first for you on Verity and some of the adoption you've seen there. You spoke to it being a big factor in the majority of the large deals in the last 2 quarters, what are you seeing in terms of adoption and usage from spend new customer cohorts, specifically as they've gone live on BlackLine? And Patrick, maybe can you remind us if there's any consumption revenue embedded in the 2026 outlook? Owen Ryan: Yes, Alex, first of all, good to hear from you. Thanks for the question. I think whether it's a new customer or even an existing customer, things that we're hearing from our -- from that cohort is basically, one, is they want to move at a good pace with AI, move a little bit faster. But what they're also telling us is that they do not want to compromise anything on trust and governance. And so what they're trying to figure out with us when we go in and talk with them is they first tell us that the AI that we're rolling out needs to work within an existing controls environment, which is what we have and what they really appreciate. They want to make sure that the AI that they're deploying has actually been built by people in the business that understand their business. So they're not necessarily enamored with sort of generic AI. And so -- and we sit there and we can talk about the hundreds of billions of transactions that we processed over for all of our customers over all these years and can show the accuracy and effectiveness and efficiency with which that works and then the ability for their auditors to know and rely on it and trust it. That all becomes really important in all of the conversation. And the last thing that we hear from them, Alex, it's not like what we bought today on February 25 is the end all be all. So what they're really looking for is also trying to understand what is our road map? How does it align to their interest? And then how can they potentially weigh in with others in their industry to sort of move forward. And one of the examples of a big win we had this quarter was with a very, very large health care company. Well, if you look at the largest health care companies in the United States, we probably have 9 out of the 10 at this point in time. And so bringing that cohort together to show that experience because they all have those common issues and they're all trying to figure out how to use AI the right way in that environment. So those are the things that we sort of really hear. It's like yes, we wanted to be cutting edge, but more importantly or just as importantly, they want to be able to trust it. They want to make sure it's accurate. It's auditable, reliable and secure. And then emerging probably after the quarter, but there's a lot more conversation now about the total cost of ownership and cost certainty, because what's happening with AI and other parts of the market where people are consuming tokens at a very, very high level without really understanding what they're getting from an ROI perspective. That's what I'm seeing in those conversations. But Patrick, over to you. Patrick Villanova: Yes, Alex, to answer the second part of your question, just to hit the nail on the head, there is a nominal amount of consumption revenue included in the 2026 guide for the remainder of the year. Now with that said, you should start to see that in our leading indicators. The reason for that -- for all the reasons that Owen just said, our customers right now are uptaking these agentic offerings as well as other AI offerings, testing them out, getting comfortable with them, increasing consumption. As they move up through the consumption tiers, we expect to see that show up in our leading indicators, which materializes in revenue in 2027. And the way we're seeing it now, the pace that we're at, we can reassert that at least 50% of our ARR exiting 2026 will be non-seat-based as a result of everything that we just discussed. Alexander Sklar: Okay. That's great color from both there. I appreciate that. Maybe just a follow-up on the strategic product bookings mix. I think that's a new record, can you just talk about the commonality you saw in terms of solution adoption? And then I heard faster adoption of strategic products for those customers under platform pricing. Can you elaborate what you're seeing there with the 13% of the base now on platform? How much of an unlocked that is? Owen Ryan: So I think, Alex, just -- and I want to make sure I understood your question, which was what's driving the strategic product sales into the platform. And I mean, basically, it's the work that Jeremy and his team are doing with Stuart and his team to sort of make sure that the whole system works together seamlessly, that can be implemented by our partners. Our teams are sometimes jointly with our customers who are able to demonstrate faster time to value for what they're being -- what they're asking for. And then I think importantly, as we continue to innovate in those products, we're widening the gap, quite frankly, with anybody that would have been a competitor. So those are the things that I think we're seeing in the market so far. And hopefully, that was responsive to your question, Alex. Alexander Sklar: Great. Thanks, Owen. Owen Ryan: Patrick, do you want to talk about the acceleration of 11% to 13%? Patrick Villanova: Yes, Alex, the second part of your question there, I think what I heard was, does our continual increase in the strategic product mix, is that derivative of our platform approach. And the short answer is, yes, they are related. We would expect to see a continued increase in mix of our strategic products versus nonstrategic because most, if not all of our strategic products are consumption based. Now the second part of that, as customers migrate to our platform, that enables a smoother sales motion of our strategic products. It is a connective tissue, connected fiber between all of our solutions, which allows data to flow seamlessly between them, and that allows us to sell into that customer base with less obstacles. So as we see more and more customers move to the platform, we would expect to see that mix of strategic products continue to increase as well. Operator: Our next question comes from Chris Quintero of Morgan Stanley. Christopher Quintero: I want to ask about RPO, a really nice growth rate to see there. And at a time when there's so much innovation going on in the space, I'm curious from your perspective at a high level, why are customers existing and you like making these such deep longer-term commitments and really tying themselves to the BlackLine story and product road map here? Owen Ryan: Yes. Look, I think, Chris, it's sort of what I just said at the beginning, right? So we've been -- we're in our 25th anniversary, actually officially June 2 for those who are paying attention to that. But I think it's when you've been a trusted partner for the world's leading companies for as long as we have been, there's a lot of safety and security and you think about the profile of our customer that buy. So there is a confidence in that. And then when you sit there and you think about the way BlackLine innovates amongst and between our customer base, our partners, staying close to what the auditors are requiring, what BPOs are trying to do. You bring all that together and you have that much more of a collaborative effort. That's why we announced the innovation hub that we said we were putting out, I guess, about a month ago, we announced that. But all of that is sort of giving them a high degree of confidence about what it is that we're doing. And again, I think we're hearing more and more frequently. We don't want to have to build this ourselves. We'd rather partner with a company like BlackLine. And so you're seeing that longer commitment because these things are not 1 year one-and-done kind of activities. The rollout, the building of AI isn't going to stop 12, 18, 24 months in the future. And so you're seeing a lot of that from a commitment perspective, as to our customers wanting to just partner and go on that journey with us. But Patrick, anything you'd add to that? Patrick Villanova: Yes, Chris, for all the reasons Owen just said, our RPO story is a very good story right now. Delivering 18% overall RPO growth, 12% CRPO growth year-over-year. It's indicative that our customers or new customers that we're landing, they're larger in nature. They're signing up for longer terms right out of the gates. And then coupling that with our existing customers that have been with us for years, they're coming up for renewal and they want to be with us for several more years. They want to continue the journey. They're intrigued by the innovation. They want to be part of this, so they want to partner with us. And not per se, go at it alone. So it's a very positive story underpinning our RPO growth rate and it's indicative that our existing and new customers want to be with us for several more years. Christopher Quintero: Excellent. Super helpful. And then I want to follow up on Verity. Within that early customer cohort that you have adopting the product. What are you seeing from a transaction volume perspective for those customers that are adopting it? And how does that compare versus customers that haven't quite gone there yet? Owen Ryan: Jeremy, you want to take that question? Jeremy Ung: Yes. I think we are definitely seeing repeat engagement from customers using Verity. So that's extremely promising. And with the customers that are doing this, Owen mentioned the 90% time savings in things like preparations activities, that's really what's driving the repeat usage of these capabilities, the value being delivered. And so in the cohort, we definitely see people who are using Verity come back to use Verity again for risk analysis, for narration capabilities, for other analyses. And so that's what's really driving the usage and the transactions from these customers. Operator: And our next question comes from Patrick Walravens of Citizens. Patrick Walravens: Congratulations to you guys on the progress here. Owen, I would love to talk a little bit more about SAP, in particular, when you talk about the public sector opportunity with SAP, there's a couple of things there. I mean, I guess I don't usually think about the public sector and BlackLine because the public sector has kind of different accounting. And then secondly, I did notice that one of your SolEx salespeople moved to SAP focusing on the public sector recently, so I figured there's some connection there. But I'd just love to hear your thoughts. Owen Ryan: Yes. So first of all, the relationship with SAP, in my view, just continues to get stronger and better. I think the collaboration around product road map, customer success work that we're doing around AI together are all things that, from my vantage point, I just -- I couldn't be more pleased with that. Obviously, we all wanted to go faster, but that's just par for the course. But I will say to you, one of the privileges of working with SAP is they're very professional and they're very thorough in what they do. And so sometimes, you might give up a little bit of speed for that professionalism and the thoroughness with which it's done, but it works particularly well. As it relates to public sector. I think we've been signaling now for a couple of years, our move to becoming an IL-2 compliant than IL-4. We've had some wins now in the public sector space. We are going to continue to invest in. We've had a very nice growing pipeline of opportunities with various federal agencies. Those in many ways is a bit of a tailwind for us in the sense that the government is trying to modernize. And Pat, if you're as a taxpayer, I'm going to say this, the government really has a hard time producing any kind of "audited financial statements". And so no matter the basis of accounting, you still have to get it right. And so that's where we've been able to find a real opportunity to grow into that organization. And so yes, so we're excited about that opportunity. Patrick Walravens: Okay. Are there any really big deals in the pipeline on this? Owen Ryan: There's always big deals, Pat. I got to just get them across the finish line. The government spends big when they spend. But they have their selling season, as you know. So that's not until the end of the third quarter. Operator: And our next question comes from George Kurosawa of Citi. George Michael Kurosawa: I'm on for Steve Enders. Maybe you could talk about this move that you discussed on the Verity side from POCs into more scaled enterprise production. How hands-on is that transition process? Is there a component of forward deployed engineers or some similar construct that's required here? How turnkey is it? Maybe you could talk about what the learnings have been in customers making that migration? Jeremy Ung: Yes. So I can take that question. So in terms of adoption, obviously, with the earlier capabilities and in the agentic capability, we've been fairly hands-on with our customers. But we've always had a forward deployed engineered style motion in terms of how we've used customer engineering resources to customize solutions, to customize journal entry capabilities to fit the needs of businesses. And so we're taking the same hands-on approach with the earliest cohort of customers adopting these agentic capabilities, but we are set up well to expand this to a forward deployed engineer motion in the future based on what we already do today with our customers. George Michael Kurosawa: Okay. Great. And then I did want to touch on the platform pricing cadence here. I apologize if I missed this earlier in the call, but I think it was a 7% increase in percent of ARR in Q4 and 2% in Q1. I'm sure this is going to be a bit of a lumpy metric. I'm just wondering if you could just comment maybe there's some seasonality, just the number of at-bats you had and just the dynamics under the hood there and your confidence in doubling the ARR on that pricing model. Patrick Villanova: Yes. Thank you. We're very confident that we're going to reach 25-plus percent by the end of the year in terms of the amount of eligible ARR we have on the platform model. With that said, you hit the nail on the head. Our largest renewal cohorts are in Q2 and Q4, and Q1 is by far the lightest. So we did not expect it to be a linear path from 11% to 25-plus percent by the end of the year, and we're right where we thought we'd be coming out of what is traditionally a lighter quarter in this industry. Operator: And our next question comes from Matt VanVliet of Cantor. Matthew VanVliet: Maybe a follow-up on the SolEx partnership and then kind of a broader question on the overall go-to-market side I think coming into the year or BeyondTheBlack last year, you talked about maybe greater alignment with senior executives at SAP. Curious how much of that is sort of already coming through the pipeline versus being maybe a little bit back half weighted just given the seasonality of that business. And then wrapped around that, just sort of the execution that Stuart had talked about coming in to have more accountability on sort of a daily basis. How is that playing out on both sides of the SolEx and the rest of the go-to-market team? Owen Ryan: Yes. A couple of things. So I'll say again, I think we're very pleased with the progress we're making in trying to team with SAP. As I think you know, I think they report something like their second and fourth quarter, they're very large, and I think 40% of their bookings come in the fourth quarter. So there is a bit of a tail to this, but you're not buying a big ERP systems for the moment. The sales cycles are even longer than ours, as I understand it. But there's great alignment. The teams are working really well. I think you would see it in presales, the incentives are aligned the right way. And there's just more and more success stories that are being created amongst and between SAP system integrators, BlackLine and customers. And so those stories become very compelling when you hear them together because when you're spending the kind of money you have to do an ERP upgrade and then implement BlackLine, you want to make sure the ROI is there. So I feel very, very good about that. I think the -- you look at the work that Stuart is driving on behalf of our team, I think it's going well. I think the one thing that we're learning from our own experience as our deal sizes get larger, there's a few more people around the table and making sure that we understand the different constituencies. So CIOs would be a place that a year ago, we're not necessarily as much of a focus, for us we're having to spend more time with CIOs. Some companies now have the equivalent of an AIs czar. And so we're having -- sort of learning how to work with some of that. And then obviously, the deal sizes are bigger. So it just takes a little bit longer to work your way through that. But I think Stuart is the right guy doing the right things with this team to drive the success that we want. So I feel quite good about that. Matthew VanVliet: All right, helpful. And then as you look at customers that are either already on the platform pricing or maybe on the next list to potentially migrate over to that, is there any different margin structure that you're assuming in sort of year 1, year 2 of those deals that ultimately sort of maybe builds back up? Or how do those -- how does that pricing around both the usage of the platform, but also kind of encompassing the size of the organization and the complexity there, have a margin profile that maybe differs from the seat-based model? Owen Ryan: Yes. So as we just talked about, we're about 13% of our way through. We look at our customer cohorts very carefully that are coming up for renewal in terms of who's eligible for the platform in terms of which customers are most likely to adopt and then which customers are going to consume the platform and at what rate. We've been looking at data for the last year, and early on, but right now, we are not seeing any margin compression as a result of adopting the platform. The cost of delivery on day 1 is not that significant. And so we see the immediate uplift and then we're now monitoring the secondary element of the revenue generation of the platform, which is consumption. So far, based upon what we're seeing, we are not seeing margin compression. In fact, I believe if you see in Q1, we had our highest gross margin in years, and that was as planned. That's part of our migration completion to GCP. We still had some redundancy in data centers in Q1. And for the time being, we expect gross margin to expand throughout the year, and we're not seeing any data points that are contrary to that. But we will continue to closely monitor the impact of AI. Operator: Our next question comes from Daniel Jester of BMO Capital Markets. Kyle Aberasturi: This is Kyle Aberasturi on for Dan Jester. It sounded like a solid quarter for both Verity and for platform deals. I guess just how do you see customers allocating resources between pure AI products and more broader digital transformation trends? Owen Ryan: So I would say our customers are not just looking to buy AI for the sake of AI. I mean I think for our customer base, it's about being part of digital financial transformation journey that happens to have more power being provided because of AI, but people are just not buying whip cream without wanting the cake, if you will. So there's got to be a real foundation underneath all of this is as we move forward. And so I think that continuing to underline everything we do will be the complete platform across record to report or invoice to cash and further powered by what the AI capabilities that Jeremy and the team are building. That's my experience with the market right now, but I'm going to -- I'm looking at both my other presenters here and seeing if they're hearing anything different from our teams in the field. Jeremy Ung: Yes. I think overall, AI, there's excitement about our road map and vision, but it needs to tie to their overall objectives as an organization. And so it's really in support of the transformation objectives BlackLine has always supported and accelerated. And AI is an accelerant to that. It enables that to happen more quickly and with less resources on their side. But ultimately, it ties to the transformation objectives we are already part of. Owen Ryan: Thanks, Jeremy. It ties to being able to fit into the control environment as well, right? Our customers need to understand that there's not going to be anything introduced into the control structure that's going to create an issue for them. Kyle Aberasturi: Great. And just a quick follow-up. The Middle East was an area of investment last year. I guess, just has there been any impact today hitting the business? Owen Ryan: As they like to say timing and life is everything, right? So we -- as for those of you who don't know, really sort of opened up operations at the tail end of last year in Saudi Arabia. We had our first nice win in February, if I remember correctly. And then obviously, the war broke out in Iran at the end of February. So it has had an impact on the environment in the Middle East. But we didn't have lots of big numbers built into our financial plan for this year. I think the thing that Patrick and the team and I are watching very closely is the impact on Europe. That's the one area where we saw some slowdown at the end of the quarter that we're watching to see if there's going to be much more of an impact in that part of the world as the troubles in the Middle East continue to unfold. Operator: And our next question comes from Rob Oliver of Baird. Robert Oliver: Great. You guys hosted a really cool AI event this quarter and some longtime customers that we've talked to over the years like Quest and others like Bristol-Myers were there. And as you talk about the usage ramp and Verity, maybe provide for us a sense or an update for -- as you think about the outlook for this year and the next couple of years, how that Verity usage ramps as you move towards your '27 targets. Within that call, it was fascinating because one of the customers was like, yes, we're all in on it. The other was like we're still dabbling. So just would love to get some more color around the customers that know you and love you, what they're doing with the AI components of the platform? Owen Ryan: Yes. Rob, first of all, good to hear your voice, and thanks for your question. And listen, we have customers that run every end of the spectrum, right? So -- and whether they love it or not, there's still some governance that these companies have in place on how quickly they want to evolve with AI, partly just to their own ability to digest it, part of it, just making sure that every T is crossed, every I is dotted as they move through the alphabet, if you will. And so I think the thing that we saw out of the first quarter again, which was important from my vantage point, was we may have taken longer to get everything into the market. But when it went, we had very, very high confidence that it was going to work. It was reliable, it was trusted because our customers have already kicked the tires as many times as they possibly could. The auditors that sort of, I won't use the word blessed, but had a high degree of confidence in it. And so I think that's the approach that we're going to continue to see. There's going to be some customers that Jeremy and his team want to experiment with us. And I guess maybe the way I would sort of describe it is, we've got customers that want to ride in the Peloton, some of them want to be at the front of the Peloton. Some of them want to be at the back of the Peloton. They don't want to be in group too, right? So they don't want to have fallen away from the pack, but they're sort of, some of them want to drift for a little bit of time just to see how things are unfolding. And I think one of the things that we are trying to do is take advantage of our industry capabilities and get some of these customers to talk to one another, that are in the same industry sector so that they get a higher degree of confidence of what's being used, how it's being used and why they can rely on. But Jeremy, please add. Jeremy Ung: That's also part of why we launched that AI hub. The -- Owen alluded to the fact that we have some customers who really want to be designed partners with us and want to think about be forward leaning about how they expand usage of AI into their organizations, but also how they define it for finance and accounting discipline as a whole. And so that's really what's the intent behind that hub and builds upon our narrative from our AI day, but it's really about pushing the envelope with these customers in a safe, governed and trustworthy manner and being able to design together with them is part of what the leaders in these spaces are looking to. Operator: And our next question comes from Patrick O'Neill of Wolfe Research. John O'Neill: Just a quick one for me. I wanted to ask about the mid-market churn? And maybe can you quantify the growth headwind attributed to that churn, both in the results and then maybe what's factored in the guidance? And then when that does subside, it sounds like towards the end of this year, how should we think about the potential for net retention to expand as we look into next year and beyond? Patrick Villanova: Yes, Patrick. So a couple of data points there. No surprises in terms of where we're going or the results from a customer account perspective in Q1. We've been signaling for well over a year now that there's going to be churn in the lower mid-market and we expect that to slow down in the second half of this year. We're tracking that cohort very carefully and feel very confident that, that number will trend down from a customer churn count perspective as this year evolves. It's a good data point to note that it is a headwind for lack of a better term that we've baked into the guide. There's no surprises there. We've baked it into the plan. We saw this coming. For every customer that we land, the average customer size for new logo is over 3x the size of a customer we lose. So that gives you -- that's a very key data point, not just in terms of our success of the nature and size of customers that we're landing and landing on the platform, but it also is a good indicator in terms of the general size and nature of the customers that are leaving us. So as the year evolves, we would expect some expansion on DBNRR as well as GRR as we work through that cohort and enter 2027. Operator: And our next question comes from Billy Fitzsimmons of Piper Sandler. William Fitzsimmons: I want to double click, I was going to ask about kind of the demand environment outside of North America and the opportunity there, it came up in one of the prior questions. And in the answer, there was a commentary kind of around Europe and some of the macro impacts there that -- can we please double-click on that? What was kind of the impact there, if any, in 1Q? And what are you kind of seeing positive or negative in 2Q since then? Because it's come up in investor conversations about the potential for maybe elevated push up relative to other geos? Owen Ryan: So first of all, broadly, pipeline in the business continues to grow at a very healthy pace all around the globe. So we're not really seeing a significant difference between one geography versus the other. And so that bodes well for what we are trying to do in the marketplace. That said, as we said, the end of March was a little bit less than we would have expected. And so some pretty large deals did get pushed out. I would say to you that business throughout North America looks very solid. Asia-Pac, there's parts of it that look really good. So for Japan, it seems to be doing well for us. And then Europe is okay. I think the thing that I worry more about than the war because it will work its way through when businesses still need to implement BlackLine as we move forward is the tension, the geopolitical tensions between the U.S. and Europe and what that might mean for us for infrastructure we have to build in Europe compared to what we have in North America now. So I know Patrick and Jeremy have been sort of modeling that out. If data sovereignty becomes a bigger, more pressing issue, then we're ready to deal with it. We know how to deal with it. We just obviously built something in Saudi Arabia. But that is the one thing that I am watching. I think we can work our way through the macroeconomics pretty well. But I want to make sure we also don't lose sight of is the geopolitical issues that could have an impact on investments we would need to make in the business maybe later this year or to '27 or '28. William Fitzsimmons: Super helpful. Glad to hear about some of the momentum in specific geos like Japan. Operator: Our next question comes from Adam Hotchkiss of Goldman Sachs. Adam Hotchkiss: Patrick, I just wanted to start with you. I think you mentioned the $1 million nonrecurring benefit to Q1. Could you just maybe help us understand that a little bit better what that was and why that's not recurring? Patrick Villanova: Yes, Adam, it has a little bit to do with the timing of implementations, the timing of delivery, it's onetime in nature. But I think, Adam, the key takeaway is even though we had $1 million of onetime benefits in Q1 from a top line perspective, we're passing along all of that into the guide less FX headwinds. So overall, we did not view it as a headwind to the update and increase of the guide for the full year. And of the $2.1 million beat, we're passing about half of that into the full year guide. The other half being an FX headwind from where rates were at the time we established the guide for the year. Adam Hotchkiss: Okay. Yes, that's helpful color, Patrick. And then, Owen, just any updated thoughts on win rates or the broader competitive environment? I know way down market, there are some AI native full-stack ERPs that are getting a lot of funding that are probably serving companies nowhere near the size of where you are. But curious, just broadly for the enterprise players and sort of where you stand, how that's going? Owen Ryan: Yes, I'm going to say this, and I'm probably going to regret it in some ways, but it feels to us like our ability to compete at the enterprise, we've distinguished ourselves even more from our traditional competitor set. I think the robustness of which Jeremy has built, the completeness of the road map, the work that we've been able to do to improve time to value, provide more certainty around cost of ownership, continuing to be viewed as a very collaborative player as to what we do has been good to see in the enterprise space. And you can see that in our pipeline as it's growing. The number of opportunities isn't necessarily growing very large, but the dollar size is increasing nicely, and that's in the enterprise space, and we're pretty encouraged by the number of 7-figure deals that we have in front of us for this year and next year. Operator: I'm showing no further questions at this time. I'd like to turn it back to BlackLine's CEO, Owen Ryan, for closing remarks. Owen Ryan: Thank you, and thank you all for taking the time to listen to our call today and to ask questions about our company. We appreciate your interest in us, and we look forward to catching up and talking more soon. Thanks, everybody. Have a great night. Operator: This concludes today's conference call. Thank you for participating, and you may now disconnect.
Operator: Good day, and welcome to the Key Tronic's Fiscal Year 2026 Third Quarter Investor Call. Today's conference is being recorded. After the presentation, we will begin the question-and-answer period. At this time, I would like to turn the call over to Tony Voorhees. Please go ahead. Anthony Voorhees: Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Key Tronic. I would like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane, Washington headquarters is Brett Larsen, our President and Chief Executive Officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events of the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC, specifically our latest 10-K and quarterly 10-Qs. Please note that on this call, we will discuss historical, financial, and other statistical information regarding our business and operations. Some of this information is included in today's press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast, and the link can be found on our Investor Relations website. In addition, the slides, together with the recorded version of this call, will be available on the Investor Relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and the reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website. For the third quarter of fiscal year 2026, we reported total revenue of $89.6 million, compared to $112.0 million in the same period of fiscal year 2025. Year-over-year revenue for the third quarter of fiscal year 2026 continued to be adversely impacted by reduced demand from a legacy customer and an end-of-life program. Additionally, we also faced temporary challenges during the quarter related to winter storm Fern in the Southern U.S., customer design delays on a new program with a legacy customer, and delays in receiving allocated components on a separate new program. For the first 9 months of fiscal year 2026, our total revenue was $284.6 million, compared to $357.4 million in the same period of fiscal year 2025. Despite these short-term impacts, we are already seeing activity improve, with demand returning from several legacy customers and multiple new programs continue to launch and ramp, driving expected revenue growth for the fourth quarter. Importantly, even with lower revenue in the third quarter of fiscal year 2026, we delivered an improvement in gross margin compared to the prior year period. This demonstrates the operating efficiencies gained from our cost-cutting initiatives during the past 2 years. Gross margin was 8.0% and operating margin was negative 0.3% in the third quarter of fiscal year 2026, up from 7.7% and negative 0.4%, respectively, in the same period of fiscal year 2025. Excluding the charges related to the China closure, which we will discuss in a moment, the adjusted gross margin was 8.5% for the third quarter of fiscal year 2026, up from 8.4% in the same period of fiscal year 2025. These results demonstrate that our business today is structurally more efficient and better positioned to generate margin as volume returns. In line with our long-term strategic plan, we continue to prepare for anticipated long-term growth by executing our nearshoring and tariff mitigation strategies to reduce costs while maintaining the diversity and flexibility of our key locations and capabilities. During the quarter, we continued to wind down manufacturing operations in China, shifting more production to our expanding facilities in the U.S. and Vietnam. The China winddown is expected to be completed by the end of the current fiscal year and anticipated to save approximately $1.2 million per quarter following completion. As top line growth returns, we anticipate margins to be strengthened by the improvements in our operating efficiencies and the positive impact of our strategic cost-savings initiatives. We also believe the recent cost-savings initiatives have made us more competitive when quoting new program opportunities. As production volumes increase and our operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance. The reduction in revenue had a significant impact on our bottom line. The net loss was $2.6 million, or $0.24 per share, for the third quarter of fiscal year 2026, compared to a net loss of $0.6 million, or $0.06 per share, for the same period of fiscal year 2025. For the first 9 months of fiscal year 2026, the net loss was $13.5 million, or $1.24 per share, compared to net loss of $4.4 million, or $0.41 per share, for the same period of fiscal year 2025. Our adjusted net loss was $2.8 million, or $0.26 per share, for the third quarter of fiscal year 2026, compared to adjusted net income of $0.1 million, or $0.01 per share, for the same period of fiscal year 2025. For the first 9 months of fiscal year 2026, our adjusted net loss was $3.9 million, or $0.36 per share, compared to adjusted net loss of $1.2 million, or $0.11 per share, for the same period of fiscal year 2025. Our focus on operating discipline continues to support a strong balance sheet. Our inventory for the third quarter of fiscal 2026 is down $13.5 million, or 14.0% from a year ago. Our current ratio was 2.1:1 compared to 2.7:1 from a year ago. At the same time, accounts receivable DSOs were at 85 days, compared to 92 days a year ago, reflecting stronger collection on receivables. Year-to-date cash flow provided by operations for the first 9 months of fiscal year 2026 was approximately $10.0 million, as compared to $10.1 million for the same period of fiscal year 2025. Our continuing ability to generate cash from operations has allowed us to reduce debt year-over-year by approximately $14.3 million and helps position us well as demand accelerates and new programs ramp. Capital expenditures in the third quarter were minimal, while year-to-date total capital expenditures through the third quarter were approximately $3.7 million. We expect CapEx for the full year to be around $5 million to $8 million, largely spent on new innovative production equipment and automation. While we're keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities, utilize leasing facilities, and make efficiency improvements to prepare for growth and add capacity. As we move further into fiscal 2026, we continue to face a lot of global economic uncertainties and volatile trade policies. Nevertheless, we are increasingly encouraged by the demand trends we're seeing as we enter the fourth quarter. Activity with several longstanding customers is improving, new programs are ramping, and our expanded U.S. and Vietnam capacity is generating increased customer interest. Our improved operating efficiency makes us more competitive, resulting in a stronger pipeline of potential new business, and we remain focused on further improving our profitability. Our production backlog has grown, and we believe that we are increasingly well positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new product ramps in light of continued macroeconomic uncertainty, we are not providing forward-looking guidance in the fourth quarter of fiscal year 2026. That's it for me. Brett? Brett Larsen: Thanks, Tony. Despite reduced demand from certain longstanding customers and the delays in production caused by winter storm Fern in the third quarter, we're encouraged by the improvements in our operating efficiencies and by the gradual rebound in demand from several longstanding customers and the continued growth of new programs that we're seeing in the fourth quarter. We continue to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth as we cease manufacturing operations in China, continue to right-size our Mexico facility, and build out new production capacity in the U.S. and Vietnam. Our improved operating efficiency has made us more competitive, and we expect our revenue to gradually begin to rebound and see a return to profitability in the fourth quarter of fiscal 2026. As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties, and increasing costs associated with China-based production, we are winding down our facilities there and transferring programs to Vietnam. We anticipate savings generated from the shutdown to approximate $1.2 million per quarter once fully executed. As part of our global sourcing strategy, we will, however, continue to operate in China with a small team focused on sourcing critical components locally. Over the past 24 months, we have also reduced our total head count by approximately 42% in Mexico and have begun transferring some programs from Mexico to the U.S. and Vietnam. Our Mexico facility continues to offer a unique solution for tariff mitigation under the existing USMCA tariff agreement. Given the sustained trend of continued wage increases in Mexico, we have streamlined our operations, increased efficiencies, and invested in automation to be more cost-competitive in the market. Due to the successful cost reduction and streamlining production processes, we have recently seen an increase in the quoting volume and probability of landing new programs manufactured in our Mexican facilities. We've also seen an influx of new customer visits and audits of our Juarez campus as of late that demonstrates we are competitive for a growing variety of quoting opportunities. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. We are very excited about the recent investments made in the U.S. and Vietnam to build out capacity and new capabilities to meet evolving customer demand. You will recall that we opened our new technology and resource and development location in Arkansas during the first quarter of fiscal 2026. Our U.S.-based production provides customers with outstanding flexibility, engineering support, and ease of communications. We expect double-digit growth in our facility in Arkansas during the upcoming fiscal year. You will also recall that we have recently doubled our manufacturing capacity in Vietnam that now has the capability to support anticipated future medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that was associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate that these new facilities in the U.S. and Vietnam will enable us to benefit from customer demand for rebalancing their contract manufacturing and mitigate the severe impact and uncertainty surrounding the tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our U.S. and Vietnam facilities. These initiatives reflect the longstanding customer trends, both to nearshore as well as derisk the potential adverse impact of tariff increases and geopolitical tensions. During the third quarter of fiscal 2026, we won new programs in automotive technology, industrial tooling, pest control, and industrial power management. Our improved operating efficiency has also made us more competitive, increasing our sales pipeline, particularly in such steady growth sectors as utilities and data center equipment. Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and dual sourcing of contract manufacturing. In light of the significant transitions and streamlining initiatives we've made in the past 2 years, it's worth reviewing our key competitive advantages going forward. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. First, we've enhanced our cost and tariff efficiency and the flexibility of our global manufacturing footprint. We expect that global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsource strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart, long-term strategy. Second, many of our manufacturing program wins are predicated upon Key Tronic's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program-specific design challenges make that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters. Third, we continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection blow, gas assist, multishot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America as well as to our expanding Vietnam facilities. We're expecting revenue growth in the coming quarters from new programs launching in the U.S., Mexico, and Vietnam. Significant improvements in our operating efficiencies are creating a stronger pipeline of potential new business. Over the long term, we remain very encouraged by our cost reductions made over the past 2 years to become more market-competitive, our increasing cash flow generated from operations, enhanced global manufacturing footprint, and the innovations of our design engineering. All these initiatives have increased our potential for profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions. Operator: [Operator Instructions] And we will take our first question from Matt Dhane with Tieton Capital Management. Matthew Dhane: I did want to ask, you referenced you had 4 wins in your press release. Just wanted to get a sense of the size of each of those wins, as well as where they're going to be -- where the manufacturing is going to be taking place, and then also expected timing of the ramps of those. Brett Larsen: You bet. Happy to do that, Matt. So I think the first one, that automotive technology, that's about a $3 million to $5 million program that's slated to start in Juarez in fiscal '27. My expectation is we'll probably start ramping that in the second quarter. Next is the industrial tooling. This one is a bit unique. It was a design program that we started here in Spokane. Now they're wanting us to actually start building some low-volume production. So we're actually going to do that in our downstairs facility here in Spokane temporarily while we ramp that. Currently, it has about an order of about $3 million, but we're expecting that to grow. Ramp on that is immediate. Third is pest control. That's a $2.5 million opportunity incremental to some other business of an existing customer down in Juarez, Mexico. And then the last -- fourth is the industrial power management. That's an $8 million to $10 million opportunity that will start towards the end of the calendar quarter, so again, second quarter of fiscal '27 in our Springdale, Arkansas facility. Matthew Dhane: One other question I did have. So obviously, tariffs has been a key conversation point here for a while. You talked about your pipeline building. What role is tariffs playing today in conversations with prospective customers? And yes, just help me understand all that, if you could. Brett Larsen: Yes. There's quite a bit of moving parts -- continue to be moving parts with -- related to tariffs. I think we're well situated now that we have an increased capacity to build product in Vietnam. The fact that USMCA is still in -- still a mitigation opportunity as well in Mexico and those that want to nearshore in the U.S. So I think we're seeing a hesitancy to make a decision or to award us a program. Some of that hesitancy is coming to close, and we're actually seeing the actual awarded opportunities begin to pile up. So I think this hesitancy and uncertainty for so long of awarding a program and elongating that sales cycle now begins to -- I think, people are becoming okay with the fact that there's going to be continued uncertainty, and we're actually seeing stocking levels decrease in certain key new opportunities and legacy customers. So I think it's a change in the market of, 'I'll wait and see what tariffs do,' to now, 'it's a complete, open -- continued changing in and out because of the required response -- or the required stockouts and reducing inventories, they're going to need to make a decision. And so, I'm making that in light of the uncertainty. That's a long-winded answer to, I think we anticipate some wins that we've been waiting for, for quite some time. Operator: [Operator Instructions] And we will take our next question from George Melas with MKH Management. George Melas: Nice to hear a consistent story about increased capability -- in the number and capability of design engineers. Can you elaborate a little bit on that? And is that still very much -- is design complexity very much one of the focus of your sales opportunities? Brett Larsen: Yes. As we spoke before, George, part of our strategy is to continue to grow that design capability. So we're continuing to recruit and hire new design engineers. We have found it incredibly important for us to continue down that path. If you get into a customer relationship where you're providing design capabilities to them, not only is that business very sticky, you're also helping them design the product to be a good fit to your own production equipment and capabilities within your own factory. So we're going to continue down that road. What's kind of fun to see is this is the first design project that we're actually building within our Spokane facility with the engineers themselves. This is a little new to us. We've done this many years back. But my expectation is that this may become a bit more of the norm, as we take over the design responsibility to bring a new product to market. And maybe they use our engineers to put the first series or set of products together. George Melas: That sounds good. Can you also give us a bit of an update on the data processing customer in Mississippi? I think that's a potentially very, very significant project, but I think it was always expected to ramp rather slowly or progressively. Can you update us on that? Brett Larsen: You bet, George. So that customer down in Mississippi continues to be flat quarter-over-quarter, so quarter 2 to quarter 3 is flat. Our hope is that, that will continue to ramp over time. But to date, it's been relatively flat over the last 2 quarters. There's not any real growth that we see in Q4, but maybe in fiscal '27. That's the consign program, I think, that we spoke about at length a couple of quarters ago. But it still continues to be a very good program for us. It's just -- it's been fairly flat last 2 quarters. George Melas: And at what level it is now in terms of what you think it could be? Is it at 1/4 of its potential? Or how would you characterize it compared to what the potential expectation is? Brett Larsen: That's a difficult one to quantify. I think we're probably 50% of what our initial expectation was. But I think this is very market sensitive and based off of where we're at today, again, that's a tough one. I wish I had a crystal ball, George, but we're definitely not where we thought its capacity was, but it's a complete unknown at this point. Anthony Voorhees: And I'd just add to that, George, that this customer has a number of SKUs that we could build. And we've actually built a few different SKUs for them already. So we're ready to take on more when it becomes available to us. Brett Larsen: Yes. The relationship is just very market sensitive. George Melas: And maybe just one clarification. You guys mentioned in your prepared remarks that you can see a return to profitability in the fourth quarter. So basically, it means next quarter. Brett Larsen: Yes. George Melas: What kind of revenue level do you need in order to hit that target? Brett Larsen: Yes, I don't know that we're yet giving guidance. Tony mentioned that there still is quite a bit of uncertainty in some ramps and the things that are going on. So I don't know that we want to quantify our revenue. Our expectation is definitely that there's going to be revenue growth Q4 sequentially from Q3. And we still feel strongly that we'll be in the black bottom line. In future quarters, we'll readdress that. But at this point, I'd rather not give guidance. George Melas: Okay. And then just a quick question. In the last quarter, you mentioned potential savings from China from stopping the -- closing the manufacturing operations there. And you also mentioned $1.5 million of savings related to the reduction in force in Mexico. Is that something that you've started to benefit from that has started to hit the bottom line? Or do we really see that in the fourth quarter or in fiscal '27? Anthony Voorhees: Yes. Thanks, George, for that question. So in China, specifically, we have completed our manufacturing operations there. So now we have a bit additional work to do just to get other materials and equipment out of China that we want to send to one of our other locations or sell it. So we do have a bit of work to do there. We completed that production in April, so just not that long ago. So we should start to see those employees severanced now, and we'll start to see improvements related to the $1.2 million that we mentioned in the script, probably in later this quarter. Brett Larsen: Yes. So I think the full $1.2 million won't be until Q1. But there is some incremental savings in this quarter, Q4, that we will see. Anthony Voorhees: And with regard to the Juarez, Mexico question, we have completed that severance. We are seeing some revenue growth down there in our Mexico operations. So we didn't complete 100% of that severance, as we will need some of those employees as we're seeing some revenue growth there in that facility. Operator: [Operator Instructions] And at this time, we have no further questions. I would now like to turn the call back to Brett Larsen. Brett Larsen: Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thank you. Operator: This does conclude today's call. Thank you for your participation. You may now disconnect.