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Operator: Ladies and gentlemen, welcome to the Q4 2025 Analyst Conference call and live webcast. I'm Moore, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ioana Patriniche, Head of Investor Relations. Please go ahead. Ioana Patriniche: Thank you for joining us for our fourth quarter and full year 2025 preliminary results call. As usual, our Chief Executive Officer, Christian Sewing, will speak first; followed by Chief Financial Officer, James von Moltke. The presentation, as always, is available to download in the Investor Relations section of our website, db.com. Before we get started, let me just remind you that the presentation contains forward-looking statements, which may not develop as we currently expect. We therefore ask you to take notice of the precautionary warning at the end of our materials. With that, let me hand over to Christian. Christian Sewing: Thank you, Ioana, and good morning from me. Let me start with the key message. We delivered on all our 2025 targets. Thanks to strong momentum across all our businesses, we reported revenues of EUR 32 billion. This represents compound annual revenue growth of 6% since 2021, the midpoint of our target range of 5.5% to 6.5%. We self-funded this growth by achieving EUR 2.5 billion of operational efficiencies and delivered a cost income ratio of 64%, in line with our target of below 65%. Asset quality remains solid. Credit loss provisions at EUR 1.7 billion are down year-on-year and in line with our most recent expectations. We delivered record profits in 2025 with pretax profit of EUR 9.7 billion and net profit of EUR 7.1 billion. Post-tax return on tangible equity was 10.3%, meeting our full year target of above 10%. We see this as a great start towards our commitment of greater than 13% by 2028. We are also delivering on our capital objectives. We finished the year with a strong CET1 ratio of 14.2% even after a number of capital headwinds absorbed in the fourth quarter. James will detail these shortly. And thanks to our robust organic capital generation and delivery of our capital efficiency program, we again raised distributions to shareholders. With the proposed EUR 1 dividend per share and an authorized share buyback of EUR 1 billion, distributions in respect of 2025 will represent EUR 2.9 billion in line with our 50% payout commitment. As a result, cumulative distributions for 2021 to 2025 would reach EUR 8.5 billion, exceeding our original EUR 8 billion target. And we will be looking to do a further share buyback this year. And importantly, over these last few years, we have significantly strengthened our foundation. We have positioned Deutsche Bank to further increase value creation in the years ahead by scaling our global Hausbank. Let's look at how we delivered the improved profitability. As we explained at our Investor Deep Dive in November, we have transformed Deutsche Bank into a simpler, more focused business with a significantly improved financial profile. We delivered on our revenue ambition of around EUR 32 billion this year, an increase of 7% compared to the prior year or 26% since 2021 due to our diversified business mix and revenue composition. Cost discipline remains strong in 2025. Noninterest expenses came in at EUR 20.7 billion, down 10% year-on-year. We kept adjusted costs broadly flat and achieved a material reduction in nonoperating costs, reflecting lower litigation expenses. Our 2025 cost base is nearly EUR 1 billion lower than in 2021, a reduction of around 4% over this period. Operational efficiencies enabled us to self-fund foundational investments in our technology architecture, control environment and client franchise. This cost reduction, combined with our strong revenue growth, created significant operating leverage. In 2025 alone, we delivered operating leverage of 17% and our pre-provision profit was EUR 11.4 billion, up threefold since 2021. This resulted in record profits in 2025 with pretax profit of EUR 9.7 billion, up by 84% year-on-year. The improvement in our profitability was delivered through the successful execution of our global Hausbank strategy across all our divisions as you can see on Slide 4. All 4 businesses have delivered a reduction in their cost income ratios and substantial improvement in profitability since 2021 leading to double-digit returns in 2025. Corporate Bank delivered revenue growth of more than 40% since 2021. The revenue mix benefited from a normalized interest rate environment, and importantly, from our actions to increase fee income. This helped us to deliver stable revenues in 2025 despite lower rates and FX pressures. Going forward, the action we took in recent years mean the Corporate Bank is well positioned to scale the global Hausbank model by further leveraging our global network, product capabilities and client relationships. Our investment bank has transformed over the past few years. In fact, our efforts were focused on deepening and broadening the franchise with targeted investments into existing and adjacent businesses, reinforcing our world-class franchise. As a result, we gained market share and client activity increased by a further 11% in 2025 compared to the previous year. We are also repositioning Investment Banking and Capital Markets, or IBCM, building on our German leadership and focused offering, investing in sector and product expertise to expand our advisory and ECM capabilities while maintaining the strength of our debt franchise. Private Bank has made tremendous progress with its transformation creating a more focused, efficient and connected franchise with cost-to-income ratio below 70% and returns above 10% in 2025. The Private Bank's 2 complementary business attracted EUR 110 billion of net inflows since 2021, setting a strong foundation for the next stage of our plan. Our Asset Management arm DWS attracted EUR 85 billion of net new assets in the last 4 years, with assets under management surpassing EUR 1 trillion in 2025. And DWS, as a leading German and European asset manager with strong capabilities across asset types, is uniquely positioned to offer clients a gateway to Europe. We also delivered on our sustainability agenda across divisions. Sustainable finance volumes were EUR 98 billion in 2025, the highest annual volume since 2021, with EUR 31 billion raised in the fourth quarter alone. And we have achieved a cumulative total of over EUR 470 billion since 2020. Together with significantly improved ESG ratings, our sustainable finance business activity sets a strong base to further strengthen and scale our sustainability agenda in years ahead. Delivering on our strategy has created significant shareholder value, as you can see on Slide 5. First, improved profitability contributed to a 25% increase in our tangible book value per share since 2021 to almost EUR 31. And second, we have consistently increased shareholder distributions. For the financial year 2025, we plan to propose a dividend of EUR 1 per share or around EUR 1.9 billion in total at the AGM in May. We were pleased to have received supervisory authorization for EUR 1 billion share buyback. The resulting distribution of EUR 2.9 billion are consistent with our goal of a payout ratio of 50% for 2025. Including these proposed distributions, we would reach cumulative distributions of EUR 8.5 billion in respect of the financial years 2021 to 2025. And as I mentioned earlier, we will evaluate the possibility of an additional share buyback in the second half of 2026. Before I hand over to James, I want to briefly address the next phase of our strategy on Slide 6. We have built a firm foundation for the next phase of our strategic agenda, which is all about scaling our Global Hausbank. At the Investor Deep Dive in November, we set out a road map to increase post-tax return on tangible equity from 10% in 2025 to greater than 13% over the next 3 years. We also set out our plans to further improve our cost/income ratio to below 60% from 64% in 2025. We plan to achieve this via 3 levers: focused growth, strict capital discipline and a scalable operating model. Disciplined execution will accelerate value create for our shareholders include further increased capital distributions. As we guided, we are increasing our payout ratio to 60% this year. As we made clear in November, we have all the levers to achieve our goals in our hands today. We have planned prudently, and we see upside to our targets if the environment develops positively. 2026 is about taking the next steps to successfully deliver our strategy, and we are encouraged by the strong start to the year we have made so far. Delivering on our 2028 agenda will enable us to reach our long-term goal to become the European champion and banking as measured by a clearly defined set of criteria, a truly global bank domiciled in Germany, the largest economy in Europe and the #3 economy in the world. A champion for our clients as their trusted partner in a world which remains uncertain. A champion for shareholders, reflecting the value we create for them and a great home for our talented people. A final thought before I hand over to James. Today's results mark the end of an era in more ways than one. This will be the last quarter in which I sit down together with my colleague, James von Moltke, to discuss our results with you. James joined us in 2017, and as you know, I was appointed CEO the following year. Since then, James has been a fantastic partner and a trusted counselor of Deutsche Bank's journey of transformation. It would be impossible for me to put into words everything James has contributed to what we have achieved on that journey. But there is one thing I can tell you, the successes we are discussing with you today are a great deal to James professionalism and his outstanding dedication to our bank. And in the past few months, I have witnessed a seamless transition to our incoming CFO, Raja Akram, who had a great start. Raja, it is a joy working with you. Thank you, James, for all you have done for Deutsche Bank. James von Moltke: Christian, thank you for the kind words. Indeed, this is the last time I will present the bank's results before handing over the CFO role to my successor, Raja Akram. Doing this from a position of strength is something I'm particularly proud of. The management team and the entire bank have put tremendous effort into turning the bank around and achieving this milestone. And as I said in November, we have significantly strengthened our foundations, rebuild stakeholder confidence and position the bank for sustainable value creation above our cost of capital in the years ahead. Let me now turn to Page 8, a slide we have consistently shown since we made commitments to accelerate our Global Hausbank strategy and which shows the development of our key performance indicators. With a strong finish to the end of the year and continued execution, we successfully delivered against all broader objectives and targets we set for ourselves for 2025. We maintained a strong capital foundation and our liquidity metrics are robust. The liquidity coverage ratio finished the year at 144% and the net stable funding ratio was 119%. And let me add the proposed EUR 2.9 billion capital for dividends and share buybacks, which complete our distributions in respect of 2025 are already deducted from our CET1 capital, such that the 14.2% CE Type 1 ratio represents an excellent starting point going into 2026. With that, let me now turn to the fourth quarter and full year highlights on Slide 9. Our diversified and complementary business mix enabled us to generate revenue growth of 7% year-on-year both in Q4 and for the full year. With normalized nonoperating costs this year and adjusted costs broadly flat, fourth quarter and full year noninterest expenses were 15% and 10% lower, respectively, year-on-year. Our full year tax rate was 27% benefiting from the German tax reform and the geographical mix of income. We expect the 2026 full year tax rate to be around 28%. In the fourth quarter, diluted earnings per share was $0.76 bringing the full year to EUR 3.09, while tangible book value per share increased 4% year-on-year to EUR 30.98. Before I move on, let me share my usual remarks on Corporate & Other with further information in the appendix on Slide 37. C&O generated a pretax loss of EUR 109 million in the quarter, primarily driven by shareholder expenses, legacy portfolios and other centrally held items, partially offset by positive revenues in valuation and timing differences. Let me now turn to some of the drivers of these results, starting with net interest income on Slide 10. NII across key banking book segments and other funding was EUR 3.4 billion for the quarter and $13.3 billion for the full year, in line with our plans when adjusted for FX effects. The Private Bank continued to deliver steady NII growth and improved its net interest margin by around 30 basis points year-on-year, reflecting higher deposit revenues and the ongoing rollover of our structural hedge portfolio. Momentum continued in FIC financing with sequential growth in NII supported by loan growth. Corporate Bank NII was slightly up quarter-on-quarter, reflecting a significant deposit increase, which positions us strongly going into 2026. Overall, for 2026, we expect NII across key banking book segments and other funding to increase to around EUR 14 billion. We expect this increase to be supported by targeted portfolio growth in both deposits and loans, but the largest contributor will be structural hedge rollover of which around 90% is locked in through swaps. You can find details on the benefit from the long-term hedge portfolio rollover on Slide 25 of the appendix. Turning to Slide 11. We maintained strict cost discipline throughout the year and delivered adjusted costs in line with our guidance at EUR 5.1 billion for the fourth quarter and EUR 20.3 billion for the year. As in prior quarters, the compensation costs were up on a year-on-year basis, primarily reflecting higher performance-related accruals. For the full year, higher deferred equity compensation and the impact of increasing Deutsche Bank and DWS share prices also played a role. Noncompensation costs were down across categories, both in the fourth quarter and the full year. And similar to last year, fourth quarter bank levies were mainly driven by the U.K. levy. With that, let me turn to provision for credit losses on Slide 12. Overall, provision for credit losses was stable in the fourth quarter as an increase in Stage 3 was offset by releases in Stages 1 and 2. Full year provisions stood at EUR 1.7 billion, 7% lower than in 2024 despite elevated macroeconomic and geopolitical uncertainty and ongoing headwinds in commercial real estate. Net releases in Stages 1 and 2 provisions were mainly driven by improved macroeconomic forecasts with additional benefits from portfolio effects, partially offset by a net increase in over lease. Key Stage 3 drivers were higher provisions in the Corporate Bank and CRE-related provisions in the investment bank, including one larger single name event. Private Bank provisions returned to a more normalized level. Wider asset quality remains resilient, and we continue to expect provisions for credit losses to trend moderately downwards in 2026 relative to 2025. Turning to capital on Slide 13. Our fourth quarter common equity Tier 1 ratio came in at 14.2%, a decrease of 30 basis points compared to the previous quarter with a 44 basis point reduction related to one-off effects as discussed last quarter. These effects included the discontinuation of the transitional rule for unrealized gains and losses on sovereign debt, and the annual update of operational risk-weighted assets impacting the ratio by 27 basis points and 17 basis points, respectively. Higher market risk-weighted assets reduced the ratio by 9 basis points as trading activity picked up to more normalized levels in the quarter, while credit growth was offset by a securitization benefit. The impact of these items on the ratio was partially offset by 21 basis points of capital generation, reflecting our strong fourth quarter earnings, net of AT1 coupon and dividend deductions. Our fourth quarter leverage ratio remained flat at 4.6%. The discontinuation of the aforementioned transitional OCI filter had an impact of 6 basis points. The 10 basis point reduction relating to an increase in cash and reverse repo was more than offset by a 13 basis point increase due to our EUR 1 billion AT1 issuance in November and the other CET1 capital increase drivers. Now let us turn to performance in our businesses, starting with the Corporate Bank on Slide 15. Corporate Bank closed 2025 with a solid financial performance, delivering a full year post-tax return on tangible equity of 15.3% and a cost income ratio of 62% providing a strong foundation for growth in 2026. In the fourth quarter, Corporate Bank revenues remained stable sequentially as strong deposit volume growth offset the impact of lower deposit margins. Compared to the prior year quarter, revenues were essentially flat. Margin normalization and FX headwinds were largely offset by interest rate hedging, higher average deposits and a 4% increase in net commission and fee income. Deposit volumes increased significantly by EUR 25 billion in the quarter, driven by strong growth in site deposits towards year-end. This underscores the strength of our client relationships and product capabilities. Adjusted for FX movements, loans grew by EUR 2 billion sequentially and by EUR 7 billion year-on-year, driven by both flow and structured transactions in our trade finance business. Noninterest expenses were essentially flat sequentially, reflecting disciplined cost management and down year-on-year due to the nonrecurrence of a litigation matter. After low levels in prior quarters, higher provision for credit losses reflect a few Stage 3 events in the middle market. However, we do not see the most recent quarter as evidence of a pattern. For the full year 2026, we expect a modest increase in Corporate Bank revenues with accelerating sequential growth as the year progresses. Remaining interest rate and foreign exchange headwinds will impact the year-on-year comparisons in the first half of the year, temporarily masking the underlying business momentum. As these effects diminish in the second half, we expect the year-on-year growth to be more pronounced. I'll now turn to the Investment Bank on Slide 16. Revenues for the fourth quarter increased 5% year-on-year, driven by ongoing strength in FIC. FIC revenues increased 6%, representing the strongest fourth quarter on record despite lower levels of volatility driven by continued outperformance in FIC markets, specifically foreign exchange and emerging markets. FIC financing revenues were slightly higher, reflecting ongoing momentum and targeted balance sheet deployment seen throughout 2025. Client engagement continued to be strong with full year activity increasing across both institutional and corporate clients. Moving to IBCM. Revenues were slightly lower, driven by a reduction in advisory compared to a very strong prior year quarter. Capital Markets performance was broadly flat as higher equity origination revenues were offset by slightly lower debt origination with reduced LDCM revenues broadly mitigated by strength in investment-grade debt. For the full year, the IBCM revenue decline of 6% was driven by mark-to-market losses on LDCM exposures early in the year and the business would have been essentially flat excluding these losses. Looking ahead to the first quarter, the IBCM pipeline is the strongest it has been at this point for a number of years. Noninterest expenses were essentially flat year-on-year despite higher variable compensation and irrespective of favorable FX, reflecting continued cost discipline seen throughout the year. Provision for credit losses was EUR 97 million, essentially flat to the prior year. Increased Stage 3 provisions, including one larger single name event were offset by lower Stage 1 and 2 provisions. Let me now turn to Private Bank on Slide 17. In the Private Bank, disciplined strategy execution delivered 14% operating leverage, driving significantly higher quarterly profitability, supporting the delivery of a post-tax return on tangible equity of 10.5% for the full year. Revenues of EUR 2.4 billion include NII growth of 10% year-on-year driven by higher deposit revenues, including benefits from hedge rollover while the prior year quarter was affected by the impact of certain hedging costs. Net commission and fee income was essentially flat year-on-year with growth in discretionary portfolio mandates offset by lower income from cards and payments. Personal Banking revenues were essentially flat. Continued growth in deposit revenues was offset by the nonrecurrence of smaller episodic items and by lower lending revenues, reflecting our strategic focus on value-accretive products totaling approximately EUR 80 million. Excluding these impacts, revenues would have grown by 5%. Wealth Management revenues also grew by 5% year-on-year, adjusted for the aforementioned hedging costs and 10% on a reported basis, driven by higher deposit revenues and continued momentum in discretionary portfolio mandates. Noninterest expenses declined by 11%. The cumulative impact of transformation-driven efficiencies and lower restructuring and severance costs was partially offset by higher performance-related compensation. The Private Bank advanced its strategy with additional branch closures in the quarter, bringing the total closures to 126 for the year and contributing to workforce reductions of nearly 1,600 with further net reductions expected this year. Net inflows into assets under management for the full year were EUR 27 billion. This was supported by EUR 12 billion of inflows and investment products as well as deposit campaigns in Germany. Provision for credit losses improved year-on-year with the prior quarter impacted by a small number of legacy cases in Wealth Management and residual transitory effects from operational backlogs. Provisions in the third quarter benefited from model updates. Turning to Slide 18. DWS is showing a significantly improved financial profile, over achieving its financial targets for 2025 as communicated 3 years ago, notably by reporting an EPS of EUR 4.64 for the full year. In Deutsche Bank's Asset Management segment, profit for tax in the fourth quarter improved significantly by 73% from the prior year period, driven by higher revenues and resulting in an increase in return on tangible equity of 20 percentage points to 41% for this quarter. Revenues increased by 25% versus the prior year quarter. Higher management fees reflected an increase in average assets under management with higher fee levels from almost all asset classes. Performance fees saw a significant increase from the prior year period, primarily due to the recognition of fees from an infrastructure fund. Other revenues also improved significantly compared to the prior year period, reflecting a small gain from guaranteed product valuations compared to a loss reported in the prior year quarter. Noninterest expenses and adjusted costs were essentially flat as higher variable compensation costs were effectively offset by lower general and administrative expenses, resulting in a decline in the cost income ratio to 55% for the quarter. Quarterly net inflows totaled EUR 10 billion with positive inflow flows across passive, including X-trackers, active and alternatives and reflected sustained long-term inflows across all regions and client types. The total inflows also include EUR 5 billion of net inflows in cash products, which were partially offset by EUR 2 billion of net outflows from advisory services. Total assets under management increased to EUR 1.08 trillion in the quarter, driven by positive market impact and the aforementioned net inflows. As you may have seen in DWS' disclosure materials this morning, DWS upgraded its ambitions for 2028 raising its EPS growth target to 10% to 15% per year and setting a performance and transaction fee contribution of 4% to 8% per year of net revenues. DWS now also targets a cost income ratio of below 55% for 2027 and has aligned its net flow ambitions with the targets we communicated at our IDD in November. For further details, please have a look at DWS' disclosure on their Investor Relations website. Turning to the outlook on Slide 19. Looking ahead, the delivery of all of our 2025 targets and objectives provides a firm basis for the next phase of our strategy until 2028, scaling the Global Hausbank. Business moment going into 2026 has been good and sets us up well as we start scaling our franchise and benefit from the investments we are making. As we said at our Investor Day in November, we plan to show improvements in operating performance every year, including in 2026. We expect full year revenues to increase to around EUR 33 billion, aided by banking book NII growing to EUR 14 billion as well as growth in net commission and fee income. As I said earlier, we expect a modest increase in full year Corporate Bank revenues with accelerating sequential growth as the year presses. In the Investment Bank, we expect revenues to be slightly higher compared to 2025 with growth in IBCM revenues in line with the overall growth strategy of the business and essentially flat FIC revenues. We also expect continued growth in the Private Bank with full year revenues slightly higher. Likewise, asset management should also see a modest increase in revenues. Looking at the first quarter, in light of a normalization in C&O revenues and against a very strong FIC performance in the prior year quarter, our baseline expectation is for revenues to be flat year-on-year. Nonetheless, we are encouraged by the very good start we have seen in January. Noninterest expenses in 2026 are expected to increase to slightly above EUR 21 billion, in line with the trajectory provided in November. This includes around EUR 900 million of incremental investments in 2026 to unlock growth and efficiencies as early as this year. Our asset quality remains solid. And as I said earlier, we continue to expect provision for credit losses to trend moderately downwards in 2026 as commercial real estate provisions ameliorate and other portfolios normalized, bringing us closer to lower expected average run rate of around 30 basis points through 2028. The EUR 2.9 billion of capital distributions proposed in respect of 2025 bring us above our EUR 8 billion target for cumulative distributions in respect of 2021 to 2025. We also want to deliver attractive capital returns going forward, which is why we're increasing our payout ratio to 60% starting this year with modest but continuous growth in the dividend per share, complemented by share buybacks. In short, our strong capital position and full year profit growth provide a firm foundation as we head into 2026 and we aim to deliver additional shareholder distributions in the second half of this year, subject to customary authorizations. As Raja rightly said in November, we are ready to scale Deutsche Bank with focused growth and strict capital discipline and a scalable operating model at its core. For me, personally, being able to hand over the CFO role at a moment when the bank stands on strong foundations, enjoys business momentum and strong client engagement and is able to execute with discipline and purpose is deeply meaningful. With that, I'd like to conclude my last set of quarterly remarks for Deutsche Bank with a heartfelt thank you to all employees globally for their hard work over the years to support the transformation of the bank and the delivery of our 2025 goals. I also want to thank our analysts and investor community for the high level of engagement over the years as you have followed the story and supported this management team in a myriad of ways. Lastly, I want to take a moment to thank Raja for his partnership and efforts to ensure a smooth transition and to wish him every success as he assumes the CFO role. Christian, Raja and I look forward to the Q&A session. With deep dedication, thank you. And I'll now hand back to Ioana. Ioana Patriniche: Thank you, James. Operator, we're now ready to take questions. Operator: [Operator Instructions] And the first question comes from Nicolas Payen from Kepler Cheuvreux. Nicolas Payen: I just wanted to start by thanking you, James for all your help and support for over the years. It was much appreciated. I'm wishing you the best for your next chapters and I'm happy to welcome, Raja. Then I have 2 questions, please. The first one is regarding your revenue guidance. Maybe could you clarify a bit how you intend to reach the EUR 33 billion of revenues with, for instance, as you mentioned, high CO, which was pretty strong and also the FIC trading, which we mentioned has a very strong by in January. And maybe also how the -- what are the FX rate that you assumed in your guidance? And if the recent moves had any impact on it? So yes, what are the different moving parts for the revenue picture in 2026 and also in Q1? Then still for 2026, the operating leverage is likely to be rather limited as we invest quite significantly in the business. I think you mentioned EUR 900 million at the last IDD. So if you could elaborate on what are you spending the money on and how this will support your business going forward? Christian Sewing: Nicolas, it's Christian. Thank you very much for your questions. I start with the revenue guidance. Also a little bit of the composition we see, and then I hand over to Raja with regard to operating leverage for 2026, also taking investments into account. Look, first of all, I'm really happy not to stay too long about that, what we achieved in 2025 because it's nothing else than a very, very solid starting position for the next era of growth for Deutsche Bank. You have seen that actually the momentum is in each and every business, also in business like the Corporate Bank, even if it looks like a nominal number that we have a reduction '25 versus '24, if you really take out the interest rate pressure and you think about the operating growth which we have achieved, and it's a very, very positive story. And that is actually something which we see continuing in 2026. We actually anticipate continued growth in every operating business in 2026 with a little bit of different levels and different dynamics at divisional level as we said in our prepared remarks. Corporate Bank, modest increase full year over '25, in particular, with accelerating sequential growth as the year progresses. So all I can see also with the discussions we have with our clients on lending with the investments we have done into our fee business, I can see that this is ramping up. Then from our NII guidance, we have, there is a clear sequential growth in the second half, and that will lead actually that Corporate Bank will see a modest increase year-over-year. To be honest, in this regard, the overall situation which we are facing in this world, the geopolitical uncertainties, the way the Corporate Bank works with the investment bank. And I said before, but it's coming more and more through that we are seen as the European alternative also outside Europe for the clients is gaining momentum, and therefore, I'm very positive that we see an increase in the Corporate Bank. Investment Bank, we also see the revenues to be slightly higher compared to 2025. Now driven by IBCM, we said that also in our prepared remarks, we do believe that the investments we have done, but also that actually the movement, which we have seen in IBCM U.S. is going more and more into Europe is gaining traction. And if only the last 8 weeks is a guide in terms of pitches we have done, mandates we have won in particular here in Europe, then I'm very optimistic that Ellison's strategy to reposition IBCM, in particular on the advisory side, is actually being very, very successful. On top of that, if I just look at our, sort of, say, existing and traditional business in the IBCM business like debt origination super-strong start in January. And I do believe that this is further pushing the growth. Now you see we are conservative, and that is because we have actually planned FIC to be, so to say, essentially flat for the year. Again, if the last 3.5 weeks are only a guide for what is happening, I think then this is very conservative. And -- but it gives us the buffer for further increases and also potentially compensating other items. So a really good start. And again, the momentum we see in the investment bank, be it on the trading side, but also on the advisory side, very, very good. Private Bank is simply expected to show continued growth, with full year revenues higher than last year. Where does it come from, from both sides, Personal Banking, I talked in November very extensively with Claudio about the chances we have on the investment side. You have seen over the last 2 months, actually, what has happened in Germany when it comes to the restructuring of the pension system in Germany, more and more efforts and emphasis is put on private pension. And here, we have a huge chance and we see it simply by looking at our assets under management in the Personal Banking how it's growing. And on the wealth management side, to be honest, I'm very happy with the progress Claudio is doing, not only what he has shown in '25, but actually, that he is continuing and is actually executing on the growth in terms of hiring people, and we have seen, I think, in the first 3 weeks of January, we have already from his anticipated growth, 24 people relationship managers on the platform, another 40 have been hired. And there, you can see that everything we told you in November is playing out, and it will go into growth. And if I just look at the assets under management, it plays favorably. So Private Bank larger or higher than last year. And asset management, likewise, I mean you saw last night's ad hoc and also the reaction this morning. Very good job by Stefan Hoops, I think he has positioned DWS in the asset management as the European alternative. We see the growth in that business. And therefore, I'm confident that also asset management over a record year in '25 sees another increase. Now if I put this all together, we will be at EUR 33 billion. And again, I just gave you a little bit of feel how January started, that it's not only confidence, I have a bit of hope. And that brings me to a hope in terms of doing it more. Now that brings me to Q1. Q1, we plan essentially flat over last year. Never forget that last year, we had a fantastic Q1, in particular, in the Investment Bank and in FIC. Now again, I think it's a right plan to do this. However, if I see the first 3.5 weeks in FIC, then there is hope that we can even overshoot that. And therefore, I do believe what we see right now is that the positioning in each of the 4 business is having a real momentum is helping us. And if I then see the EUR 33 billion of revenues, which we will have in year 2026 compared to the quality of revenues in 2025, where we'll also benefit from C&O and the benefit from C&O will be lesser in '26 and '25, it's even a better bank. And that makes me so confident that we have strong qualitative growth in each of the business. Raja, would you take the other question? Raja Akram: Nicolas, this is Raja. Thanks for taking my first question as an incoming CFO, I think you had 2 questions. One was on FX and what we had planned around that. I think the December FX, which is based on our planning is around $1.18. Today, we're around $1.19 has implications on both top line and the expense. But at this point, where we sit, given the magnitude of our revenue and expense base, I think it's completely manageable. Obviously, we will evaluate it if there are any course of change. On the other question that you had about operating leverage, you're absolutely right. We committed in the Investor Day to a $1.5 billion investment program over the last -- next 3 years, of which almost less than half was slated for 2026, but let me also remind you, we also signed up for $2 billion of operating efficiencies over the same period, which also began in 2026. Now the mix of investments and the operating efficiencies, obviously, is different given its first year. So that will obviously have an impact on our reported operating leverage. I'm not a big fan of doing things excluding things, but I would just say that the underlying operating leverage of the business is extremely strong. And what we are really excited about is that with these investments, the incremental operating leverage that will generate in 2027 and 2028 will be exponential. So yes -- but that said, we are absolutely committing to absolutely having positive operating leverage starting in 2026. And as Christian said, let's see how the revenue trajectory plays out and also how our calendarization of the investments plays out because, obviously, that's something that we completely control. But at this point, we are absolutely committed to our expense guidance in the IDD, which was, if you remember, around 3% over 2025. Operator: The next question comes from Flora Bocahut from Barclays. Flora Benhakoun Bocahut: First of all, James, thank you from me too. And obviously, wishing you all the best. Moving to the questions. The first question is on the excess capital usage. You just closed the year now at 14.2% CET1, that's after the distributions that you announced today. You say very clearly, you want to do potentially another buyback later this year. So can you maybe tell us how, at this stage you are thinking about using the capital that you already have in excess and that you will continue to build this year between reinvesting into your organic growth, potential M&A, so external growth or additional distribution to shareholders? And can I also maybe just clarify on FRTB, if there's any new news regarding the magnitude and the timing on the capital walk? The second question would actually be on the deposits because there was a good deposit growth this quarter. And actually, we have more and more banks that are talking about tougher competitive pricing across various geographies. Obviously, Germany is a market where we continue to see appetite from some of your competitors to try and gain share. So can you maybe elaborate on what it is you expect in terms of the deposit volume growth as well as pricing, especially for Germany, but actually for the various markets, that would be helpful. Raja Akram: So let me start with capital. Let me take you back a couple of months where we clearly kind of laid out our capital cadence, the top priority being safety and soundness and resiliency, clearly, with the 14.2% capital ratio, we have kind of put that to bed. And as you -- as I mentioned, we said that we would like to operate between a range of 13.5% to 14% on an ongoing basis. James talked about the authorized capital distribution that is already coming for 2026. And I think we also have now a plan to start an in-year buyback rhythm, which we did not have previously. So we expect that we will be doing buybacks during 2026. And obviously, the cadence of that will be dependent on how the revenue and trajectory is going and the timing. So we absolutely commit to that. I will also remind you that from an M&A perspective, it was kind of on the bottom of my list of capital hierarchy. We remain open to opportunities as every management team should be. But from our perspective, and Christian and I share the same view that it has to fit various criteria of strategy, culture, financial before we will consider that. So at this point, if it was up to us, we would like to do return to the shareholders because they deserve it. And in fact, we're generating a lot of capital that needs to be deployed. And we -- if we see business opportunities we will do that. But with a 14.2% ratio, honestly speaking, we feel pretty well set up for business opportunities that should allow us to continue with our buyback rhythm. On FRTB, I think we had mentioned at the Investor Day for the purpose of planning, we actually had left that in there. Now look, if you were to ask us today with that in the absence of concrete information, that assumption probably looks a little bit conservative in terms of us assuming that, that was going to come as planned. So we remain hopeful that the right thing will be done there from a European perspective. And then -- and at that time, obviously, we will make a change. The last part on deposits, it is clear that there's been some competition and there are teaser rates that our competitors are bringing in. We're actually running a campaign on Private Bank right now. And after the third -- 3 weeks of January, actually, we're pretty confident that our planned growth strategy for deposits is going to work out. We think that our value proposition and our access is something that is not that easily replicable from people coming outside. Same thing on the Corporate Bank, we have not seen too much deposit pricing trends changing, there's been some stability in the payouts. But remember, on the Corporate Bank side, it's just not a matter of pricing. It's the capability that comes with it is do they have the operational reliability? Do they have the network to move cash around? So in that sense, with our very unique footprint on corporate -- with corporates around 60 countries, it kind of gives us some advantage of continuing to take operational deposits without having to compete on price. And last thing I'll say to you, this might be the first 3 weeks of January, but I think the good challenge that we may actually face this year would be actually an abundance of riches where we may actually have to decide which deposits do we really want to take versus turn down. So at this point, I would say we feel pretty confident about our ability to potentially meet or exceed our deposit targets. Christian Sewing: Flora, just to add one comment on the regulatory question and I completely agree with Raja. I witnessed over the last 12 weeks, but in particular, over the last 4 weeks. And this can also be an impact of all the geopolitical discussions a real reconsideration on the European side, what happens with regulation. And therefore, the word simplification, the word reduction of regulation in certain items is gaining speed. You have heard our Chancellor there were discussions also around doubles on that topic. So completely agree. While we don't have now a concrete decision on FRTB, I would be more than surprised actually if this would come into play. And therefore, we see that as an absolute cushion in our plan an absolute advantage that potentially on the side, we have also too conservatively. Operator: Then the next question comes from Chris Hallam from Goldman Sachs International. Chris Hallam: Two from me. First on CLPs. You've guided for them to come down year-over-year in 2026 and then trend down towards 30 bps. How much of a step down should we expect this consensus, I think, has around EUR 150 million. And what trends are you seeing both in Q4 last year and at the start of this year that give you confidence on that trajectory? That's my first question. And then secondly, James, taking a step back, you've been CFO since 2017. And from the outside, we can all see the change in the business over that period, not least of which the higher returns, but also the fact the bank is now distributing capital rather than raising it. But from the inside, from your perspective, what main changes you've seen during your tenure that might be a little bit less obvious to us and how do they inform the future outlook for the bank from here? James von Moltke: Thanks, Chris. So I'll take both. Raja, may want to add to the forward on CLPs, but let me just start with the fourth quarter. We said in our prepared remarks that the Stage 3 was higher than we might have expected. And as you saw, essentially run rates in both Private Bank and Corporate Bank stepped up a little bit, but we don't think those are necessarily sort of indicators of a trend. And I would put the kind of natural run rate on both on a quarterly basis, just moderately below where we were in the fourth quarter. . As we said as well, we see the overall credit conditions in both book to be reasonably stable, in fact, in some cases, improving. The Investment Bank obviously had a higher Stage 3 than we would normally have. Clearly, a big feature of 2026 is the CRE tail, how big and how long it takes to wind off, and obviously a nonrepeat as well of the single name item that we referred to as well. So short answer, Chris, is I think a normalization of Stage 3 run rates, strong credit quality generally and this sort of amelioration of commercial real estate all play into what would be at least a modest reduction in CLPs this year. Raja said trending down to 30 basis points. I think that's appropriate. We were at, I think, 38, 36. And I think there's a couple of steps perhaps still to go before it fully normalizes in that area. Thank you for the kind question about my time as CFO, Chris, it's -- I mean there's a lot to look back on. But I guess 2 points I'd make. One is we really changed the culture in the firm and this is -- Christian and myself and the management boards of the time around accountability and discipline in terms of delivery. And I think that is -- that culture will stick in the organization. So that's something, I think, that is a significant change. Obviously, the finance functions played an important role, but by no means alone. COO risk in the control functions have been very important. And then in some senses, most importantly, it's also being adopted and internalized in the first line. So I think that's a major change for the organization. Going forward, I'm genuinely excited about the impact that SVA can have on the organization, and we've talked about that a little bit in the briefings. Again, that's -- we've -- it's been, if you like, originated and led out of finance, but it's been adopted by the organization wholesale. And I think the willingness to guide decisions through the use of the SVA tools, has been embraced in the organization, and I think it will have a significant impact in the year's end. Christian Sewing: Chris, it's always hard for James to talk about himself, but let me add 2 or 3 items. I think the integrity and the credibility he has given Deutsche Bank to the market, again, is simply outstanding. We would not be there without his work, but also without his integrity and credibility without his work. So that is something where we are all benefiting from and that discipline is now so instilled in the bank, but it's one of his greatest achievements. Secondly, next to all the day-to-day work and KPI management holding us responsible. There is one other thing which makes him an outstanding CFO. And that is last year, you all remember that we took our target down on the cost/income ratio from 62.5% actually, we took it up, the cost/income ratio to 65%. And James and I, we got criticized because it was sort of say, a deterioration. We did it on purpose because we saw the long-term chances of the investments at that point in time. And you don't find too many CFOs who move voluntarily away from an own target, which is to the heart of a CFO to do the long-term better of a bank, and that is James. And that is something where, I would say, really, thank you, James, because again, that long-term thinking has really created a completely new culture in this bank. And there, we are benefiting all from it in all business divisions, and I think it's actually the secret of success of Deutsche Bank going forward. Operator: The next question comes from Anke Reingen from RBC. Anke Reingen: But firstly, thanks -- thank you very much, James, and all the best for the future. So in terms of the questions, just in terms of the -- apologies, just for the cost trends, the EUR 21 billion approximately in 2026, can you talk a bit about the trajectory in the course of the year in terms of the investments coming in and potentially leading to higher costs in the first half to second half, apart from the normal seasonality, but just in terms of your spending plan? And then secondly, on the additional capital distribution. The way you seem to be talking, it seems to be with more confidence that there is an additional distribution coming. So I just wonder when should we be thinking you could be revisiting another distribution? And are there any moving parts like regulation disposals we should be aware of that, that would help to additionally inform that decision? James von Moltke: Thank you for your question. Let me take the first one and then Christian may want to also add in his views on the second one since I express mine. I think on the investment side, look, the great part is that these are our own investments, meaning that we are deliberately and diligently making them. So we do have some control over how we pace them. That said, you would naturally expect that there will be a natural buildup over the year as the hiring gets done, as the technology dollars get deployed. But at this point, we would not expect that any one quarter would be extremely outsized one way or the other. I think you could expect to see a slow trajectory upwards and then stabilizing over the course of the year. That's the way we think about it. Obviously, the revenue environment will drive if we do better than on revenues and we expect it will drive volume-driven expenses and other related expenses, which is something that we have now projected based on our current revenue plan, but let's see how that plays out. But at least that's the path for investments. Christian Sewing: Anke, Raja indicated that with regard to share buybacks, first of all, very happy with the approval we have in hand for the EUR 1 billion. It brings us there what we promised actually above EUR 8 billion. I think it's now on us, to be honest. And like we have done it in the past, we need to deliver. Again, in my view, it's now Q1, and then also, obviously, Q2. And then I think if we do this, and I don't see any sort of say, clouds for the time being that we can't deliver then I think we have all the right to have another discussion with the regulator. I think we gained credibility with the regulators around the world, but in particular, also with our home regulator here. And if we deliver on our plan, to be honest, and if we are showing capital ratios like we do it right now, there is no reason why we shouldn't ask for another one. Now to give you a confirmation when this is exactly happening, it's too early, we should be fair. Let's deliver first, but we have done this for the last 5 years, and therefore, I'm confident that we will also do it this year. Operator: And the next question comes from Tarik El Mejjad from Bank of America. Tarik El Mejjad: Just a couple of questions on my side. First, I would like to challenge you on the EUR 33 billion revenues, more to the upside. First, on the Corporate Bank growth, I mean, you insist on modest growth, but I think you have a self-help strategy there, which you go back to the kind of some corporates that you've lost focus on and you capture this growth, which is completely independent from actually how the market will do. And also, I wanted to confirm on the Corporate Bank, how much you still price on your outlook, a potential pickup on the benefit of fiscal stimulus towards the back end of the year. I mean, same for IBCM, the pipeline was good, FIC is flat. I mean, you guided for flat, but clearly, I mean, all indicates for volatility will stay with us and January should be a good indication of what to come. And also on NII, I mean you're talking of deposit growth with Q4 as an exit rate, which basically implies that a full year guide before even considering the hedge, if you can help me as well square that. And the second question is on the capital return. Really just to confirm that the extra share buyback you could have in the second half would be as a special from '25 earnings and not an advanced buyback on the '26 earnings accrued. Just a clarification on this. And lastly, I don't know how much you can comment on the news yesterday on this remainder AML issue. I don't know how much you can say on that. Raja Akram: Thanks, Tarik. Let me take the first question, and I'll let Christian respond to the penultimate question. Look, I think we actually feel pretty good about the EUR 33 billion. The reason that I feel good about EUR 33 billion is because it is not dependent on any one business delivering outsized performance, but actually everybody is doing a little bit better than what they did. Now the Corporate Bank is an interesting question, and I fully appreciate why there's a little bit of skepticism on that. But honestly speaking, that is the one that I actually have the most conviction on because under the surface, what I see is a bank that is actually growing super healthy. Just to put some things in perspective, in the last year, we actually grew net fee and commission income in the Corporate Bank by 5%, which was almost entirely offset by the margin compression on the interest rate side. And if you look at 2026, we believe we can certainly do better than 5%, and in fact, the margin compression headwinds are now starting to subside even on a reported basis. So if you just put that together, we should see positive momentum on Corporate Bank and at what we're seeing on the deposit side, we're doing pretty well. So I think that we actually are pretty well set up. The other thing that -- the data point that I'll give you on the Corporate Bank is that we actually have underlying loan growth in Corporate Bank that was in excess of 5% to 6% last year. But based on our SVA decisions, we decided to exit or reduce our exposure to a couple of products where we actually didn't want to be in. So the underlying growth of the loan volumes, putting the German fiscal aside for a second, is actually super, super healthy. At some point, the SVA process will play its course and the loan growth even on a reported basis will be much higher. So I actually feel pretty good about the Corporate Bank because, one, the idiosyncratic FX headwinds and the margin compression, which were all a feature of 2025, which made it a very complicated story. In fact, we probably need a separate Analyst Day just to discuss Corporate Bank and its trajectory is all kind of subsiding giving us confidence that the second half of the corporate bank is going to be showing sequential growth and year-over-year growth. So let me put that aside. The other thing is on the IBCM side, we spend a lot of time with our teams, not just on an aspiration basis. The pipeline that we see today is at least double digit higher than in 2025, whether it's on investment-grade debt, it's a leverage lending or it's M&A. So there too, we are seeing signals that gives us some conviction that the revenue growth over there. Remember, we are planning for a little bit over 3% revenue growth versus what we have done in the past. So that is obviously dependent on a flat FIC, which Christian had talked about, so I'm not going to go there again. So lastly, on the interest income side, look, we are projecting to go to around from EUR 13.3 billion to around EUR 14 billion, almost half of that is already kind of baked in with the hedge rollover and alongside the deposit and loan growth that I mentioned, I think the conviction on interest rate -- interest income as it stands today, is pretty good. I think our focus now is to make sure that our investments get deployed correctly and with agility because we also want to see the one thing that you did not mention, we also want to make sure that our client assets and our net new assets get the same momentum that we want because that obviously is very value accretive for us. So all in all, I would say going from EUR 32 billion to EUR 33 billion and offsetting some of the C&O headwinds with the Corporate Bank recovering is actually something that we feel pretty confident about. James von Moltke: So on capital, just briefly, Tarik, I just want to make sure you heard us right. Our expectation is that an additional buyback request in the second half of the year would be in respect of 2026 earnings, not '25. I think as you've heard Raja speak to, that is -- and also to Anke's question, that is distinct from in time the question of whether there are excess capital distribution. So think of it as additional distribution is potentially coming from 2 different sources, accelerating of in-year earnings and at some point in time, once we've established that capital is excess on a sustainable basis, potentially excess distributions. On the last part of the question, obviously, there's relatively little we can say. We obviously confirm that the fraction prosecutor paid a visit to our offices. Obviously, we see the timing is unfortunate. The prosecutor is looking for information, as you saw in some of the reporting yesterday, on transactions that date back to the period between 2013 and 2018. And the allegation is that on that basis, there's potentially delayed suspicious activity reporting. Obviously, we need to follow the facts and work with the prosecutor on the investigation as ever, we cooperate as we're doing fully with the investigation. It actually builds on earlier investigations of a very similar nature. And so we will continue working with the prosecutor's office. The last thing to say really is we do not anticipate that it will have any impact on our financial or strategic plans. Tarik El Mejjad: And thank you, James, for all the interactions. And Raja, just to be clear, I'm actually thinking there is upside to the EUR 33 billion. I was just trying to see [ where pockets for upside ]. I'm quite above actually your guidance on '26. Just to be clear. Raja Akram: Good to hear. Operator: And the next question comes from Giulia Miotto from Morgan Stanley. Giulia Miotto: And thanks, James, also from my side for all the dialogue and all the best for the future. So I have 2 questions. One is on the Private Bank fees in the quarter. If I think -- I mean, this seems to me one of the best areas for upside going forward, given that the Postbank is now on the same systems, given the momentum in investments in Germany, et cetera, yet, it was disappointed in the quarter, it was flat year-on-year. There is no growth. So when can we expect this potential to start materializing on the private bank? And then secondly, just on SRTs, what should be a base case assumption in our model for SRTs that you plan over a year? James von Moltke: Giulia, I think Christian is going to take your private bank question. Christian Sewing: Giulia, look, as I said on the first question, overall, year-over-year, we see increase in Private Bank. And again, coming from the domestic business in the Personal Bank, in particular, on the investment side, but then also from -- in particular, the growth and the hirings Claudio is doing on the wealth management side. And that I actually expect that based also where the markets are that I expect an increase already in Q1. It is not something which is just backdated, so to say, to the third or to the fourth quarter. I see a continuous improvement on the Private Bank. And the Private Bank is in this regard, always for me, which I watch with 2 eyes, number one, the constant increase in revenues, in particular, driven by the investment business. And you see it in the assets under management continuously growing. But at the same time, and Claudio just illustrated that again, that we are working on our costs. We will have another 100 branch closures just in 2026. It is part of our plan. It is, so to say, all in implementation. And you will see that also the operating leverage in the Private Bank will further continue. And hence, I do believe that already next year or this year in 2026, you will see another nice increase in the return on equity of the Private Bank because last but not least, it's not only the Corporate Bank, which is working from an SVA point of view on certain sub-portfolios where we can do better, same is done actually by Claudio. And hence, I can see a nice continuous development in the Private Bank, and you will see it already in Q1. Raja Akram: Giulia, it's Raja again. I hope everybody is down there. I think I'll just add to Christian's point on the Private Bank, you should expect to see growth in the Private Bank throughout the year. I think that is the way we are seeing the trends develop. I think your second question was about SRTs, if I caught it right. I think, as I mentioned, we have a plan for increasing SRTs by approximately 25% over the next couple of years. We've actually demonstrated very strong access to the SRT market in '25, and we're going to continue to use and expand the use of this tool. And it obviously helps us with capital and SVAs, but the plan is the same, EUR 5 billion incremental for '26-'27. Operator: Then the next question comes from Kian Abouhossein from JPMorgan. Kian Abouhossein: Yes. First of all, James, thank you very much for your support, helping us to understand the bank a bit better. So we have a better understanding than before, so highly appreciate it. Secondly, in terms of question, the first one is on revenues again, but less around '26, we have roughly 3% growth guidance versus your target, which would then imply more like 6% over the next 2 years. And I'm just trying to understand what the acceleration would be driven by. I assume it is -- part of it is the Corporate Bank, where you clearly have a target of 8% and you're talking about a slight increase and clearly reviewing the slides of the Corporate Bank, you talk about a lot of customer acquisition, but I'm just trying to maybe understand and rationalize this higher growth case better, if you could outline that post '26, assuming your base case of 3% roughly gets achieved for this year? And then the second question is on the hedges. They've gone up in terms of contribution going forward, I think, EUR 200 million and EUR 100 million respectively, in the next 2 years? Just trying to understand what drives that? And if I may, just very briefly as well, if you could just talk about CRE U.S. briefly in terms of situation the way you see it for '26? Raja Akram: Kian, it's Raja. Let me just take the revenue questions first, and then James might contribute a little bit on the hedge question. Look, I think the '27 and '28 conviction is around basically the investments, one, that we're making. And two, we're going to see underlying growth start appearing its head when it is being masked today, especially in the Corporate Bank. So I think as you remember from our Investor Day, we have around an 8% conviction on the Corporate Bank. What you will expect to see once -- now that we are going to be over the FX headwind as well as the margin compression in the first half of the year, you can expect to see, and as I already mentioned, we had 5% net fee and commission income already in Corporate Bank last year. You can expect to see us exiting out of this year on Corporate Bank, perhaps not at the 8%, but mid-single digits to out that from a growth perspective. So that gives us the conviction that the future 5% that we have laid out is achievable. The second thing, clearly, on IBCM, we have 2 things going on. One is a different macro environment for us versus where we were. Two, what we're doing on the business side from a strategy perspective and pivoting towards corporates versus sponsors. And three, we are actually making investments in 4 target sectors where historically, we have been a little bit underweight. And we have a lot of conviction that we actually now have the ability to capture more market share even in the U.S. given the back of what Christian has very clearly laid out the macro geopolitical volatilities and the client need for an adviser. So -- so if you were to put on an investment bank, and remember, the third thing that we, at this point, are being pretty in some ways, conservative around is assuming that FIC is going to stay flattish or will have some margin compression even. So we obviously don't know how -- what the macro situation would be. But that, to me, is a little bit of a wild card in terms of opportunities. Where we are also obviously super excited about growth is in Wealth Management, because there, we're just getting started to be totally honest with you, I think we are on an early innings of getting our strategy right of attracting client assets, generating new net assets across our client base. So that growth is going to be a big contributor for our overall target. And finally, I would say Asset Management, as we just talked about, they have just recently increased their targets. So clearly, we have a little bit upside there that we were probably even 2 months ago, we would have asked the question whether it was there. So I think all in all, putting the Corporate Bank story on the side and working over the '25 dynamic, growing wealth management, increasing our market share in IB, I think that kind of gets us to the 5% and hopefully more in the future. Christian Sewing: And before James comes to the next question, let me just add one point here, and that's the German impact. You have heard in November that EUR 2 billion out of EUR 5 billion we actually planned from Germany as an increase in revenues. Actually, the smallest part, low 3-digit million number is only in our plan for 2026. The real impact of that what is happening in Germany is in our revenue plan for '27-'28, because now you can see the stimulus impact on certain areas, defense starts, infrastructure starts, but the pullover, so to say, in the corporate -- broader corporate industry is coming, and we have that in our plan for '27-'28, again, in my view, the right approach. James von Moltke: Kian, on the hedges, the biggest impact is the gap, if you like, on the rollover benefit. So if you just assume a constant portfolio of hedges of swaps and you look at today's gap in -- that is in 26. So go to Page 25 of the analyst deck and look at the gap between the hedges that are rolling over and the 10-year swap rate. You can see that right now, that gap is about 2.5%. And if you go back to the same slide in last year's Q4 results, you can see that the gap was 1.9%. So that difference is a big driver. Now obviously, volume of hedges will have an impact as well, which, over time, reflect growth in the portfolios that we're then hedging larger portfolios of deposits. And then the other thing, as we've talked about in prior calls has been whether there are any sort of overlay hedges that we do, that can also influence the hedge results. So for this year, it's a very strong benefit as much as EUR 500 million, and that's obviously a big help. It's influenced then beyond that by, as I say, deposit and loan growth that should also be a significantly supporting factor. On CRE, I'm a little snakebit having sort of thought we'd seen a bottom in this market before and then seeing, if you like, more floors broken through. And so then the question for us is, will there be really a floor put under the market this year in 2026. And as we've talked about, particularly in the West Coast office submarket. Now at the risk of yet again sort of expecting an improvement and seeing another downturn, we do think we're in the tail of this cycle. And if you look at indices more broadly, they have been stable. But we're obviously subject to a potential downward revision of the appraisals. And so that's what causes us to be a little cautious at this point in time to fully call an end to the cycle in our portfolio, and we'll wait to see how and when the full normalization of that market takes place. Kian Abouhossein: James, but you're assuming some kind of -- what are your assumptions for your provision guidance for the group on CRE values, as you just discussed for '26, I mean? Raja Akram: This is Raja. So let me just take the -- I guess overall provision guidance for the group. We do expect that on an overall basis, we will expect to continue to see downwards improvement in the CLP provision number. Now as James said, and I had said actually at the Investor Day, we do expect that we are not completely over the CRE hurdle. I think there's some tail -- small tail still left in 2026, which could be idiosyncratic. So on the whole, we expect improvement in CRE, gradual improvement in CRE. And the offsetting that potentially will be of normalization on Corporate Bank, which we actually saw very, very low defaults this year. So on the whole, trending downwards towards my target rate, CLP rate and also on CRE expecting improvement year-over-year. Operator: The next question comes from Máté Nemes from UBS. Mate Nemes: James also from my side, thank you for the dialogue, discussions and all your help in the past couple of years, and wish you all the best for the next stage of your career. As for the question, I just wanted to go back to the banking NII guidance of EUR 14 billion for 2026. It seems like a EUR 700 million step-up from 2025. And when I look at the Slide 25, the hedge rollover, that seems to indicate also roughly EUR 700 million positive year-on-year in 2026. So in that context, it seems like the over EUR 14 billion number doesn't have much in terms of benefit from either the growth in size of the hedge or loan growth, deposit growth and so on. Could you help me understand the moving parts here? And the second question would be on your EUR 21 billion cost guidance. It seems like in some areas, perhaps you have pockets of opportunities that help you outperform the EUR 33 billion on the revenue side. If that is the case and perhaps FIC revenues also end up better than flat this year, is the EUR 21 billion number slightly flexible or that is a very hard cost target for '26? Raja Akram: Let me take the second question first. Look, the cost number can always remain flexible. Obviously, given that we have significant investments in there, but we have a lot of conviction around those. And what we have -- I mean, not me, but James and Christian have demonstrated that they have the ability to be pretty disciplined around costs. So look, I think if the FIC comes out much better than what we expect, I think that's actually a great tailwind to the bottom line for us because we can manage this organization pretty nimbly. So let's see. But at this point, our best estimate is to be a little bit over EUR 21 billion, assuming that all the investments get made in the calendarization that we have now laid it out to be and the revenues -- and the revenue mix more importantly, plays out the way we have thought. So that's kind of our best view at this point. But that said, we are constantly looking for other opportunities to improve our cost base. And that work doesn't stop just when we commit to the plan. That work is going to continue to go on through the year. And if we see opportunities to take some of the productivity benefits that we actually have slated for '27 or '28 in X rate, then we'll certainly going to try to do that. So on the NII guidance, you're absolutely right that the hedge rollover, which, by the way, I consider that as a component of how we manage the overall deposit book is actually a big beneficiary -- we are a big beneficiary for that and actually that's a very well-designed hedge program. Remember, I also talked about that we are making intentional decisions on the loan portfolios of exiting out certain portfolios where we are not SVA accretive, and that also goes for -- even including the net interest income. So there are some deliberate decisions that mute the underlying operating growth of NII along with the hedge rollover. But the expectation is that as that calibration of the exiting portfolios tapers off, then you will not only have the benefits from the hedge rollover in the outer years, but you also will have a real bottom line increase in the NII from both loans and deposits. James von Moltke: Just one other thing to add is in 2026, you're going to have, if you like, a grow-over effect for both FX and the margin compression that took place through the year. So there's some other dynamics in the numbers that are harder to pick out. Operator: And the next question comes from Stefan Stalmann from Autonomous. Stefan-Michael Stalmann: James, thank you very much for everything and all the best going forward. I have 2 questions on asset quality, please. The first one on the U.S. CRE book. It does look as if you actually exited about EUR 2 billion of office exposure during the quarter. And at the same time, the average LTV on the office book in the U.S. went up quite a bit during the quarter. Can you maybe add a little bit of color on what happened? Do you actually sell NPLs? Was there a general mark up or mark down of collateral? Any color there would be useful. And the second question, there was a media article maybe a few weeks ago about your intention to hedge your data center lending exposure. And I don't recall whether you actually commented on that already or not. But if you can to the degree you can, could you give us maybe a bit of a sense of how big this book actually is and whether it actually overlaps with your U.S. CRE book or whether that's considered a corporate exposure mostly in your perspective? James von Moltke: Thanks, Stefan. And to you and all the others, thank you for your very kind words and the partnership. On CRE, we noticed that as well, and it's really mostly payoffs of loans that took place. And the effect, especially of payoffs with low LTVs has been to increase the average LTV of the remaining book. There were some -- the closings of some of the sale transactions that we first sort of announced in the third quarter and executed in the third and fourth quarter. So some of it was loan sales. Some of it were pay downs and the net effect on the LTVs was to increase them. On the data centers, we didn't make a public statement about that. It did become public, and there's truth to it. But the truth -- the wider truth is, we've been a very strong participant in this marketplace for several years. We're very proud of the franchise that was built here, but we've always operated that business under, as you'd expect, risk appetite sort of parameters for our overall exposure, both on the book and in new originations. And as you'd expect that given those parameters, we -- as we do for -- in a sense, all other financing types here, we manage those exposures carefully, especially in an underwriting period. And so that, I would just characterize as ordinary course risk management. Remember that the hyperscalers, what we do in that book is obviously seek out the highest quality loans to underwrite. And the feature is an interesting one, which is that the stronger the contract with the ultimate offtake provider, the more highly rated the underlying position is. We lend mostly to investment-grade tenants or indirectly, if you like. And so we feel very good about the strength of the portfolio, but nevertheless, manage it carefully. As to the CRE, I believe the -- if you like, direct CRE exposures -- data center exposures are treated as CRE in the same way that warehouse distribution and hotels are commercial real estate. And so it does, I believe, add to the total balances. Operator: And the next question comes from Joseph Dickerson from Jefferies. Joseph Dickerson: Most of my questions have been asked. But I guess, as you look out in your ability to deliver on your targets for 2028, the market didn't believe you on what you've achieved on this plan through 2025. And if I look out at 2028, it looks like expectations are sitting at least 100, if not 150 basis points below your RoTE target. I guess what do you think that the Street is missing in that regard about your ability to deliver the RoTE that you've outlined? Christian Sewing: Look, let me start, and my 2 CFOs may want to add the luxury this quarter still. To be honest, I think it's execution and evidence. And if we deliver again on the next step in 2026, and we committed to a gradual improvement year-over-year, we actually told the Street that we will invest a bit more in 2026 in order to capture all the opportunities. I'm absolutely sure that also the Street will move its consensus. And to be honest, if I see actually the gap between consensus 3 years ago to the 10% and where we are now with the gap to consensus to 2028, I think there is a huge amount of credibility we have already gained. It's on us to show that quarter by quarter, year by year. And we will lose nothing of the dedication and discipline we put into this company going forward. So it's actually nice to, so to say, race and beat all the time. Raja Akram: Thanks, Christian, if I may just to add. I think, obviously, the company went through a transformation internally and now that transformation has been visible to externals. I think at the same time, I think the pivot that we have from now defense to offense, while we have all internally bought off on it and understand what we are doing, that is -- there's obviously going to be a natural lag for people to get a full understanding of how we will get there. And I think that's completely understandable. So it is our job, I think from my perspective, there, we have 2 jobs. One is to deliver on what we said we will deliver on '26. But more importantly, we want to show you the underlying drivers of what is leading us up to '28 in terms of the KPIs that we shared at the Investor Day. So even if the underlying financial output of that is on a lag, we want to be able to show to you what we are actually doing on the cash side, what net new assets we're boarding, how many advisers we were able to bring in, how our volumes are increasing. So I think my hope and my expectation is that once we start delivering quarter-by-quarter in '26, show the discipline on expenses, and then start sharing the underlying drivers of where we are succeeding that gap will hopefully narrow and maybe we'll end up at a stage where we are being -- we are behind the other way around. Operator: The next question comes from Jeremy Sigee from BNP Paribas. Jeremy Sigee: And thanks and wishes to James from me as well. A couple of follow-ups. One on the NII discussion and the sort of the limited progression to the EUR 14 billion. You mentioned loan portfolio exits. You also talked earlier about negative margin impact. Are they largely done now? Or is there a bit more of the negative margin impact still to come through in '26? That's my first question. And then secondly, just a very broad question for Christian perhaps. You touched a couple of times on the German stimulus and deregulation programs. I just wondered if you could give some further perspectives on those, particularly from your conversations with corporate clients and the extent to which they're moving from kind of just thinking about it to actually doing something and preparing concrete plans for investment and borrowing and all that kind of good stuff? Raja Akram: Sure. Let me take the first question. Look, we had said out at the Investor Day that we -- it was our intention to move our SVA from 40% to 70%. Now obviously, that was on the business level. As you saw this quarter, each of our businesses on an RoTE basis was in excess of 10%. So at a portfolio level, we are obviously in a pretty good situation, but there are certainly pockets of activity inside our businesses or in geographies, which we either need to improve the SVA on or through their expenses, through better capital allocation or better pricing or we decide need to downside -- to downsize to create capacity for lending that makes sense. So that work will continue to go on over the next 2 or 3 years. But obviously, this '26 is a start for that. So it's a little bit more transparent. On the margin headwinds, we expect that we will probably -- they will subsist for the first half of the year, as James said, but we think that we will most likely grow over them in the second half of the year, especially, it will become a little bit more prominent in corporate bank where they have been the most impacted by the margin. Operator: [Operator Instructions] Christian Sewing: Sorry. Sorry, I was on mute. I just wanted to take the second question, and that is on the German stimulus. We see actually in the fourth quarter and now in the start of the year, the impact of the stimulus in particular, so to say, in 2 asset classes, defense and infrastructure financing. As I said before, we can see quite a good momentum, in particular on the defense side, also with mid-cap companies because in Germany and in Europe, it's actually the case that it's not the big defense companies who actually need lending. It's actually the mid-cap companies supporting these large-cap companies. And there, we're working not only by ourselves, but with banks like KFW, you have seen our announcement with EIB actually on a joint program where things are really developing. And I do believe from all that I can see in Germany, but also in Europe that actually the activity is slowly starting. And hence, from a planning point of view, I outlined that before, we firmly stick to our EUR 2 billion of revenue increase out of the EUR 5 billion coming from Germany. But I think for the right reasons, we have put most of that actually into the years '27 and '28 because it needs preparation. In this regard, although it sounds sometimes differently in the media, the government is doing everything they can in order to focus on competitiveness and growth. We have seen a couple of reforms. And of course, we all wish for even quicker implementation. But I also have to say that on the European level, things are moving. And therefore, I gave you the example of regulation, how the talk is there. But also the extra summit, which will take place in 2 weeks' time, which actually at the request of Germany that we need more reforms in Europe on bureaucracy, less regulation, Capital Markets union, digital investments. It all shows that something is happening. And that brings me to the last point where we obviously benefit. We should not only think when we talk about stimulus in Germany and hopefully also growth in Europe. The biggest theme in Davos last week, next to all the geopolitical discussions was actually the investors talking about redistributing their assets. And they are doing it for 2 reasons, and the beneficial is Europe for diversification, but also because they see Alpha in Europe and they see Alpha in Germany. And that's what we also see in the Made-for-Germany initiative. So therefore, I remain positive personally. Of course, I also want to have things always quicker, but I can clearly see that things are picking up. Operator: [Operator Instructions] The next question comes from Andrew Coombs from Citi. Andrew Coombs: Firstly, just all the best James. On the questions, same theme I'm afraid, but I wanted to touch upon margin in both the Personal Bank and the Corporate Bank. Obviously, you have fantastic deposit growth. It hasn't shown through in the net interest income thus far. And I know the comments that you've made on the trajectory for this year. But on the PB side of things, can I just ask what you're seeing in terms of deposit competition and any commentary you can make around household deposit meters, where they stand today, where you think they're going to trend to? And on the Corporate Bank side, you've talked a lot about the first half of this year, still having an impact from lower rates in FX, but how you plan or think you'll exit that in the second half, but can I just clarify how much of your deposit book in the Corporate Bank is dollar-denominated rather than euros? And what's the consequence of lower Fed rates on the margin there? Raja Akram: Let me start with the PB. As I mentioned earlier on, we're certainly seeing some competitors coming in with teaser rates in January for -- through all the markets for new and fresh money, a couple of outsiders in there as well. We also have some campaigns running. So at this point, from a growth strategy perspective, we don't see an impact of us basically losing out on these deposits in the short term. As I mentioned, we've done that pretty successfully in the previous year. But there's certainly some pressure, which I think there was an NII question earlier about as well as to why they were not -- why the hedge was the predominant contributor. Part of it was loan exits, but part of it also was some deposit compression. On the CB side, at this point, we are not seeing the deposit pricing trends change, but we do have the year-over-year headwind that I talked about earlier that I think is going to persist at least to the first half of the year before we start exiting out of it and start seeing sequential growth. That's kind of what we're seeing on CB. In terms of the deposit mix between U.S. and Europe, I'll may have to get back to you on that one from Ioana. But obviously, we have a pretty global franchise, and we raised deposits -- institutional deposits across the world, but I will have to get back to you on the precise mix. Operator: So it looks like there are no further questions at this time. So I would like to turn the conference back over to Ioana Patriniche for any closing remarks. Ioana Patriniche: Thank you for joining us and for your questions. For any follow-ups, please come through to the Investor Relations team, and we look forward to speaking to you at our first quarter call. Operator: Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
Francoise Dixon: And welcome to the Mach7 Q2 FY '26 Results Briefing. My name is Francoise Dixon, and I'm Head of Investor Relations for Mach7. Today, our CEO, Teri Thomas; and our CFO, Daniel Lee, will provide an overview of our Q2 FY '26 results. We will then open it up for questions. If you have a question, please submit it by the Q&A text box at the bottom of the screen. I'll now hand over to Teri. Teri Thomas: Thank you, Francoise. All right. Before I speak about the quarter, I want to briefly ground everyone in who we are and what we do, particularly for those who are newer to Mach7. So we complete the patient's picture with the patient's pictures. We get the right medical images to the right people in the right places at the right time. We do it fast and with diagnostic quality. We operate in a growing and important industry. And in my frequent conversations with our customers, I'm reminded regularly just how mission-critical our work is. While the health care industry has seen pretty solid progress organizing text-based clinical data over the years, imaging data, which goes far beyond x-rays, remains quite fragmented. Many types of images are locked in proprietary systems spread across multiple departments, stored in lots of different formats, and that causes fragmentation. That fragmentation represents opportunity and this opportunity Mach7 is well positioned to address. So our ambition is for Mach7 to become the world's imaging EMR. That ambition, big, it underpins our strategy of moving from archive to architecture, connecting imaging across the enterprise and enabling AI, improving interoperability with EMRs like Epic and Cerner and closing the gaps that still well exist to create comprehensive and unified patient records. Now turning to what you all are looking for the quarter. So today, Mach7 is providing a business update and quarterly cash flow report for the quarter ending 31 December 2025, our 4C. The quarter reflects continued and deliberate execution of the reset we outlined last quarter, sharpening our strategy, strengthening discipline and aligning the organization for sustainable and profitable growth. The quarter marked an inflection point, the strategy that we designed in September and October, and we announced on Halloween is now in motion. This is no longer about planning. It is about execution. The reset has been comprehensive. We've taken a top-to-bottom look at our structure, our processes, our technology, our commercial model, our culture, and we've brought this together into a dynamic operating model that links strategy, execution and accountability. This is hard work. As part of that work, we are taking a disciplined look across our customers, partners and contracts to ensure they support long-term profitability and strategic alignment. That includes being more selective about who we work with and in some cases, stepping back from low revenue relationships that create competitive conflicts or long-term risk to our growth and profitability. The outcome with the VHA, it was disappointing, but it also allows us to focus our resources on opportunities that better align with our core platform, our operating model and path to sustainable profitability. The VHA program required a level of custom development and service intensity that would have continued to weigh on margins over time. Now not all of these changes show up immediately in the numbers, but the foundations are now in place. We are building a performance-driven culture that values top talent, measurable outcomes and disciplined execution while balancing innovation with rigorous cost management and a respect for shareholder capital. So with that context, I'm going to hand it over to Dan, our CFO, to walk you through the financials for the quarter. Dan? Daniel Lee: Thanks, Teri. Looking at our financials for a moment, the second quarter reflects continued execution against the reset strategy that we did outline last quarter with improving discipline and operating performance. Our annual recurring revenue run rate was stable at $23 million on a constant currency basis, reflecting the underlying resiliency of our subscription and maintenance revenues. Our contracted annual recurring revenue or total CARR, closed at $26.1 million, representing a net reduction of $2.9 million over the quarter. This was primarily driven by the removal of the NTP project from our CARR backlog, partially offset by net new CARR sales. Sales orders totaled $6.8 million in the second quarter, including $3.1 million of new sales, reflecting industry confidence in Mach7's value proposition and the effectiveness of our strategy to date. Operating cash flows improved significantly over the prior quarter. Cash receipts from customers were $7.9 million, reflecting a catch-up of the majority of timing-related renewals and invoices that were delayed into Q1 and driving positive operating cash flow for Q2. On the cost side, total payments were $7.9 million, down 9% compared to the same quarter last year and 6% lower than the first quarter, reflecting the benefits of our efficiency and cost reduction initiatives. Advertising and marketing spend was $0.4 million, consistent with the prior year and higher than Q1 due to targeted investment in our primary marketing and lead generation event, RSNA. All other expense categories were on par or lower compared to both the prior quarter and prior year. We ended the quarter with $18.5 million in cash and 0 debt, maintaining a strong balance sheet that positions us well to continue executing on our strategy. Overall, the fundamentals remain very sound, and we continue to operate efficiently as we move into the second half. With that, I will hand it back to you, Teri. Teri Thomas: Thank you very much, Dan. All right. I'll now share a little bit more progress about the progress we're making on executing on our strategy. So first of all, commercial transformation, a big focus for me. It is well underway. During the quarter, we continued simplifying how we operate and lowering our cost base while selectively investing in areas that directly support commercial momentum and customer outcomes. Our primary focus has been strengthening our commercial engine. Today, our sales organization has grown, is more focused and is better supported than when I began 6 months ago with clear ownership across new customer acquisition, expansions, partners and services. We have reenergized the sales and marketing model, and we're strengthening our partner engagement through a more proactive and structured approach, including expanded partnerships with AWS, Dell and Ingram. Our new commercial leadership team is currently with me in California, translating strategy into execution plans across pipeline quality, revenue discipline, partner leverage and demand generation. Now RSNA 2025 was an important commercial activity for us. We showcased our move from archive to architecture with the launch of Flamingo, and we generated some high-quality sales leads through a more customer-grounded marketing approach, and we deepened engagement with more than a dozen partners, an increasingly important growth lever for us. We celebrated a significant product and commercial milestone this quarter with our first Flamingo architecture customer in Q2 fiscal year '26. This was our first contract for the new product and our first brand-new direct customer relationship since July 2023. It is an important signal that our refreshed commercial engine has begun executing. Expanding our commercial opportunities, Flamingo is modular by design, allowing customers to adopt capabilities incrementally, whether for existing Mach7 customers or those entirely new to us. It can be deployed alongside our VNA, our eUnity Viewer with both or independently. And over time, we will continue to expand the capabilities under the Flamingo's wings, strengthening clinical impact, AI integration, EMR connectivity and delivering seamless imaging access to complete the patient's record. While this extends beyond the quarter, January has been busy, and it represents a solid continuation of our execution. We achieved a key regulatory milestone with the eUnity Viewer receiving a new CE certificate under the EU medical device regulations, supporting continued access to European and critical Middle Eastern markets. We initiated platform expansion in Malaysia by hiring a developer, including also an experienced API integration developer, who is now fully onboarded and leading our first development work from that region. Development is underway supporting our global customer base and strengthening Flamingo's integration capabilities. We've established an intern program in both North America and Malaysia for access to fresh graduates with fresh ideas. These new staff are part of a deliberate expansion of our Asia-based team with plans to continue scaling as execution progresses. Operating discipline does remain a core focus. As Dan outlined, the organizational reshaping completed during the quarter delivered cost savings from reductions in IT, operating costs and infrastructure changes, also licensing optimization and contract renegotiations. We're moving and shaking things in a good way. Execution quality with customers also improving. Early gains in eUnity Viewer KLAS scores reflect the initial benefits of our flight crew customer engagement operating model and a renewed focus on accountability, responsiveness and consistency. This remains a top priority area as we continue to refine our model and raise that bar on the customers' experience. As we continue to shift from strategy definition into execution, leadership alignment continues to evolve. We've commenced a search for an experienced Chief Technology Officer following the departure of the Chief Innovation Officer in January. This reflects our focus on strengthening our engineering leadership, delivery of technology, platform scalability and execution excellence. We are also recruiting additional sales staff across Asia and North America to support expected demand from our expanded marketing activity, but we are doing this selectively and in alignment with demand. Looking ahead, Mach7 enters the second half of FY '26 with a clearer strategy, stronger operational foundations and improving commercial momentum. We remain focused on disciplined cost management while selectively investing in growth critical capabilities across sales, product development and platform scalability. As we shift away from the high effort Veterans Health Administration Teleradiology program, we're increasing our emphasis on capital deals in Asia and the Middle East. Over the past 2 weeks, I visited 4 customers across these regions, including one of our largest customers and was encouraged by the innovation we are seeing with Mach7 in production overseas. A parallel focus is continuing to build our transformed commercial engine. Expanded marketing initiatives are in planning and officially launched in February. The industry will see us showing up differently, and we intend to get more visibility with our target customer types. Now I'd like you to know, we are expanding our marketing capability in a disciplined way. Rather than materially increasing spend, we're partnering with an external marketing provider that brings stronger tools, deeper capabilities and greater scale. And this allows us to significantly expand our marketing output as well as our market presence and branding while keeping our investment essentially flat. The same approach applies to how we're expanding our development capability. By hiring developers in Malaysia, we can bring on 3 to 4 engineers for the market cost of 1 in the United States. Paired with our deeply knowledgeable engineering team on the ground in Malaysia, this approach allows us to expand our innovation capacity and accelerate the development of Flamingo as well as other innovations without a matching increase in our development cost base. While our industry sales cycles of 1 to 2 years means it will take time for these initiatives to produce the expected growth in revenue, we are digging in and we are doing the hard work with urgency and with focus, emphasizing not just growth of pipeline, but improved sales conversion rates. We expect Flamingo-related opportunities to begin contributing more meaningful to our ARR in the second half of fiscal year '26 and into fiscal year '27. I will provide further updates at our half year results, including additional insight into execution progress as we continue to build and gather momentum. Before I close, I want to thank our Board for their guidance and support, our employees for embracing change with energy and optimism and our shareholders for your patience and your continued belief in the company. And now time for questions. Francoise Dixon: Thanks, Teri. We have received several questions via the live chat, and I'll commence with the first one from Max. He asks, in dollar terms, what was the contribution to sales orders from renewals and separately, add-on and expansions? Teri Thomas: [indiscernible]. Go Dan. Daniel Lee: I'm happy to take that one. Thanks Teri. Thanks, Max, for that question. Renewals represented around 40% of our sales orders for the quarter. In dollar terms, that was $2.9 million. And add-ons and expansions were just over $0.9 million or 14% of total sales orders. Francoise Dixon: Thanks, Dan. Our next question comes from Andrew Stewart. I noted the comment of improvement in KLAS. Where do we sit at the moment? Teri Thomas: The best-in-KLAS results come out on February 4. And so I cannot tell you it's a few days away what they're going to look like. I do look regularly at KLAS myself as well as several of our other team members, and we put it on our corporate vital signs dashboards. Our eUnity numbers have been improving and looking great. They were tops, they went down. They're coming back up. Our VNA isn't where I wanted to be quite yet. Even this morning, I got a very nice positive comment from one of our VNA customers. So the positive comments are starting to trickle in. However, it's going to take a while before we work through some of the comments that brought our score down over time. So we're targeting the VNA. KLAS is a little challenging because it is a lagging indicator. So I see the VNA not where we want it to be yet, but we're systematically going through our customer base to engage with them in a different way than we've done before. We're executing a systematic engagement and assessment process, which will take several more months for us to complete. With the KLAS reporting lag, we expect it will take up to a year to see the benefits come through fully. So while we've had some fantastic early comments and feedback, including the comments KLAS publishes, but also the direct engagement and feedback from the KLAS staff themselves. And in fact, by the way, I'm going to share one of the most recent comments, they said they are very pleased with the results of our restructure. They love having a cockpit of people, and they're finding those people to be responsive and knowledgeable. The last part of the comment, I feel extremely confident in their ability to fix problems, which I would not have said a year ago. That's the profile I want to see from all of our KLAS comments, but it will take a while for KLAS to get a hold of those people and also for us to orient those customers to the changes underway. Francoise Dixon: Thanks, Teri. We have another question from Max who asks, can you expand on how some of these low revenue relationships were creating competitive conflicts? Teri Thomas: Yes. I'm not sure I'm comfortable sharing the actual names of the companies as that could create some legal risks. Therefore, I'm not going to name any names. However, when we acquired eUnity, some of the eUnity customers had a competing VNA and used our viewer. And that's a delicate situation. Do you want to enable a competitor to better compete with you with your own technology? So we've gone through and prioritized our partnerships, and we've looked at them carefully based on how much revenue they currently bring in, but also how strategically are they aligned with our growth expectations and the quality of the relationships. And there are a small number of those relationships that essentially cost more to maintain than they bring in for revenue and also carry some business probably not best practices. So we are doing a little bit of cleaning up the closets. Francoise Dixon: Thanks, Teri. We have another question from Max. What have you learned from customers around mission criticality? Teri Thomas: Now I've been in health care technology since 1989, and I'm a nurse. And so I understand the pain if a customer goes down or if the system isn't responsive. However, one thing I've learned is that I need the whole team to feel that pain, not just the flight crew, not just the support person. So one of the biggest things I've learned is how incredibly important it is to make sure that our staff really fully understand the impact on patients' lives and clinicians who are just trying to do their best work if our software isn't performing. And in fact, even this morning, I had a call with our team about a customer, and I said, forget the flow charts. If a customer is in trouble, you all get on the phone with them together right away. And if it means a developer is on, a developer is on. So it's creating that strong understanding across all of the roles and living our culture code, which starts with customers drive all of our decisions. So as a leader, I regularly prompt and ask the question, how would this answer feel to the customer? What does this mean to the customer? And what is the impact to the customer and training our company to think about that, not just in the customer-facing part of the business, but also product management, development and even the simple thing that we executed in our strategy, which is having someone answer the phones. Francoise Dixon: Thanks, Teri. Our next question comes from Darren who asked, if you could only focus on one weakness at Mark7 as a business right now, what would it be? And how would Mark7 fix it? Teri Thomas: That's a tough one. I do regularly sit back and think what is the most important thing for us to do. And I actually have a meeting next week to get alignment on big hairy audacious goals for the quarter because I do believe that can be an effective approach to rally our customers or rally our staff around our customers. That's actually the theme of what we're talking about. So I think what -- that last question is actually the answer to this next question. I think somehow Mach7 over time did a good job with taking care of its staff, organizing the business, but stepped away from that deep understanding of the customers' world, and we need to build that back. So in a great intentioned way, let's protect developer time, for example, developers stopped engaging with customers. They started operating on specifications that might have come from a customer to a support person to a product person to a development ops person to a developer. And it's a little bit like the phone game. You actually need to get people on the phone talking directly to be effective and not only do better quality development, but also it teaches people to really care. And it's a different level of caring when you talk to the customer than you're writing to a spec. So if I would say biggest weakness, that's the one we are attacking most heavily that I think will have the most profound impact on the work that we do as a company from top to bottom. Francoise Dixon: Thanks, Teri. Our next question comes from Scott Power who asks, can you expand on your plans to sell Southeast Asia and the Middle East? Teri Thomas: Sure. Yes, I had a whirlwind tour there last week. We have a fantastic team on the ground in Malaysia and Singapore. They're deeply knowledgeable. They actually don't have that Mach7 weakness in that they're really closely connected to the customers there, good understanding of the products. And the customers are really happy. I -- they were proud to show off what they're doing with our software. I visited 3 hospitals in Hong Kong. And I was amazed. They were telling me they were doing things that I heard from the North American team we couldn't do. And I'm like, well, are you doing this with our software? And I validated that, yes, in fact, they are. And so I thought build on where you've got success, and so my first visit there, I was impressed. This last visit there, I was even more impressed. And that's part of why I brought our founder, Ravi, back into the business. He lives in Singapore. He sees Mach7 kind of like a child of his. He wants us to grow up and be all we can be. And so he has this infectious enthusiasm and this energy and this just deep caring about the technology itself that carries a massive amount of credibility in Asia, a high context culture that really values founders. And between the new sales hire that we've got, another person that we're looking to hire, Ravi and that really strong technical team on the ground, we have several prospects in the pipeline that I think we have a great chance of closing as well as some expansion opportunities with our current customers, primarily in Qatar, in Hong Kong, but also even in Malaysia. People like to see their software being used in their country. And so there -- it's not super high profit compared to other areas, but they're right there and it makes a lot of sense. So we haven't done a lot of work on prospecting and trying to build the pipeline deliberately yet, but that will be one of the first things for both the new hire that just began and the open position that we hope to fill soon. So it's a great team. It's happy customers. That's a great recipe for that sales marketing flywheel. So I want to get that thing rolling. Francoise Dixon: Thanks, Teri. Our next question from Max is actually for Dan. Dan, what attracted you to the opportunity? Daniel Lee: Yes. Thanks again, Max. Well, I was drawn to the opportunity because really a combination of the company's reset mission, the stage of growth that the company is currently in and the mission to turn around the culture of the leadership team. The company had a very strong balance sheet. Fundamentals look very sound. And truthfully, it just felt like the kind of environment where I could make the most meaningful contributions and impact as well as continue to grow professionally. Francoise Dixon: We have no further questions on the chat, but I'll just pause a moment in case there are any final questions that crop up. Last chance for people. No, nothing has come through. I'll hand you back to you, Teri, for closing remarks. Teri Thomas: All right. I do believe in setting expectations correctly and then delivering, whether it's with customers, staff or even our investors. So with that in mind, I'm going to close by noting that we are driving a fundamental change in culture, in operating model and in execution, and that kind of change does not happen overnight. While we're pushing hard to accelerate sales cycles, the reality is the full impact on revenue, and as we mentioned, the KLAS scores will likely take 12 to 24 months to be fully visible in the form of our growth of ARR. So progress will be steady, but that kind of transformation and that acceleration of growth and profitability will take time. I'm very proud of the progress we've made, and I'm super excited by the opportunities ahead of us. I'm confident in where we're headed. Our strategy is pretty clear. The market opportunity, very real, and our balance sheet is strong. Delivery is what matters now. So I appreciate your patience as Mach7 evolves. It changes for the better, and we realize our immense potential. And with that, I thank you, and I look forward to sharing more with you soon. Thanks for joining us.
Operator: Ladies and gentlemen, welcome to Roche's Full Year Results Webinar 2025. My name is [ Henrik, ] and I'm the technical operator for today's call. Kindly note that the webinar is being recorded. [Operator Instructions] One last remark. If you would like to follow the presented slides on your end as well, please feel free to go to roche.com/investors to download the presentation. At this time, it's my pleasure to introduce you to Thomas Schinecker, CEO of Roche Group. Mr. Schinecker, the stage is yours. Thomas Schinecker: Thank you very much, and good morning, good afternoon and good evening. I'm really, really excited to share with you the update for the full year because we had an amazing fourth quarter, not only in terms of financial results, but also in terms of pipeline news. So let me get started on the normal overview slide. So group sales in 2025 grew with 7%, Pharma at 9%, Diagnostics at 2%. Again, this was due to the China healthcare pricing reforms. Without that, Diagnostics actually grew with 7% last year with a very strong operating performance with a core operating profit of plus 13% and a core operating margin plus 1.9 percentage points and core EPS plus 11%. So you may ask what's the difference between EPS and OP? Why is there a deceleration there? This is basically mostly driven through higher taxes. On the full year LOE impacts, we had impact of about CHF 700 million. Now I come really to the exciting part. We had truly an outstanding Q4 when it comes to pipeline news. From a pharma regulatory perspective, the EU approval for Gazyva in lupus nephritis, U.S. and EU approval for Lunsumio as subcut solution in third-line plus follicular lymphoma. And U.S. filing for giredestrant in post-CDKi ER-positive HER2-negative metastatic breast cancer. Now come the many positive readouts that we had. Phase III, FENtrepid and FENhance, so 2 positive studies in fenebrutinib, 1 in PPMS, the other one in RMS, a positive Phase III study just already this year in Enspryng in MOG-AD, positive Phase III lidERA giredestrant study in adjuvant ER-positive HER2-negative breast cancer, a positive Phase III PiaSky in aHUS and a positive Phase III in Gazyva in INS and another positive Phase III Gazyva in SLE and positive Phase II in CT-388 in obesity. And I know Teresa will go through a lot of these details with you, but you can see with very, very busy newsflow, and I think there are more exciting things to come also this year. On the diagnostic side, regulatory approval of the Elecsys dengue test, Matt will talk about that, the cobas BV/CV test and also the mass spectrometry extension of our menu. So exciting launches there as well. There is significant newsflow ahead in 2026. We are awaiting the second fenebrutinib study in RMS. We are awaiting persevERA, so the giredestrant in first-line ER-positive, HER2-negative metastatic breast cancer. We have other studies reading out in -- for Itovebi, but also for our divarasib KRAS medicine and further in Lunsumio and Gazyva. So again, I think very exciting. And we have a number of Phase II readouts coming. So it could again be a very busy year in terms of transition from Phase II into Phase III. And of course, everyone is talking about it, our next-generation sequencing solution. And we promised it for many years. Now here it is. So I'm super excited also personally that we are now coming with this very exciting solution to the market. And yes, I think it will cause a couple of [ waves ] in the market. Now let me go through the growth rates. And I don't think I have to cover too much on the left-hand side. But what you can see on the slide is that we have consistently strong growth in the last 2 years. And even before that, when we had the washout of COVID-19 tests and the medicine, we had a good underlying growth. So we always said we will deliver and we delivered. Now on the 2025, Pharma kept growing at 9%. Diagnostics, we did have the healthcare pricing reforms impact in China. Without that, Diagnostics would also have been growing consistently at 7% over this time period. Again, here, we just look at the full year, 9% growth, again by Pharmaceuticals division, 2% by Diagnostics. Again, without the China effect, it's 7% and the Roche Group has 7% growth. And this is really driven across our entire portfolio. I think Diagnostics, I already explained, and I know Matt will go into that further. Vabysmo, we have continued strong global growth. We do expect that we will see even more uptake in the next year when it comes to the U.S. market now that we are also supporting more on the co-pay assistance foundations, and Teresa will go into that. Also Xolair keeps growing significantly. Gazyva, we have now launching in lupus nephritis, but you will see also the other indications really contributing to the growth in this business. Oncology growing well at 6%. For Phesgo, we are now at the global conversion rates above 50%. Tecentriq, returning to low single-digit growth, Alecensa growth driven by U.S. and Japan. On the Hematology side, Polivy strong now. We are reaching a U.S. patient share of 36%. Columvi/Lunsumio, growth driven by second-line plus launch and third line plus DLBCL, strong third-line growth in follicular lymphoma. So you can see also in the Ocrevus franchise, we see now a strong uptake of the subcut solution, as we also discussed, and Evrysdi is the leading SMA solution and medicine now with more than 21,000 patients on treatment. So overall, we've achieved the upgraded guidance. On mid-single-digit sales growth, we had 7%. And you may remember in the QR -- in the IR call in Q3, you asked why are we not upgrading the guidance on sales? And my answer was because 7% is still mid-single digit, and we delivered 7%. So we delivered on what we also communicated. On core EPS, we upgraded the guidance from high single digit to high single digit to low double digit. And why did we do that? Because we already knew that we would land in double-digit range. So we wanted to include it in that range, and that's why we upgraded it at the time. And we further increased the dividends in Swiss franc. So I can say we, for the second year, upgraded the guidance during the year, and we ended up on the upper end of these 2 guidances every time in '24 and in '25. Now what's super exciting is the growth outlook. And the growth outlook has fundamentally changed based on some of the Phase III readouts that we have seen in Q4. Giredestrant, our SERD has had 2 positive readouts, one with evERA and the second one with lidERA, lidERA reading out early. We expected the readout only next year. But based on the very significant results, it read out early already this year. We're now waiting for the persevERA data, but we clearly see that we have a very active and very good molecule in hand. Not only is it going to replace the standard of care and it's going to become the new backbone in this field but it's so safe and tolerable that we do believe that this will become the standard of care. Fenebrutinib in MS, we had 2 positive studies here in RMS and in PPMS, and now Teresa will go into that. We're still waiting for the second, the FENhance 1 study in RMS in order to be able to file this. You will see the data in not-too-distant future. But again, we are very excited with the data that we have seen. Gazyva, the same. We've had already positive data in lupus nephritis. Now we have 2 more additional Phase III data, again, something that will give us momentum in the midterm. On vamikibart and in Enspryng, we had 2 trials each. And each of the 2 trials, we always had 2 arms and 2 different doses. In one trial, in both of those, it was fully positive trial. In the second trial, one dose was positive, the other one was negative. Now this was always a very close call. And based on the conversations we had with the FDA, we do believe that the FDA will support filing here. So this is the midterm. And in the long term, what's also exciting is that we had 10 NMEs moving into Phase III. That's a record for us. We've never had 10 NMEs moving into Phase III. And these are all NMEs with substantial revenue and patient impact attached to them. Now we know the other part or a topic that's on your mind is our agreement with the U.S. government. Now the agreement we reached with the U.S. government is not an LOI, it's a contract with the U.S. government. And based on this contract with the U.S. government, which is terminated for the next 3 years, we get an exemption from tariffs, and we get an exemption of the demo projects. In return, we agreed to the Medicaid rebates in some of our portfolio. We agreed to the encouragement of other wealthy nations to reward biopharmaceutical innovation and to pay their share to contribute to innovation. And we also support the direct-to-patient medication access with our influenza portfolio, Xofluza and Tamiflu and also future medicines with which we can go direct to patients. Also, we agreed to invest in the United States $50 billion over the next 5 years. This includes R&D and PP&E investments. And for example, on the red dots on the right-hand side, you can see where these investments are happening. In North Carolina, Holly Springs, we are investing $2 billion in manufacturing for our CVRM portfolio. In Indianapolis, we're investing in CGM manufacturing. And in Boston, we're investing in our research hub as well as we're going to invest more in Genentech in San Francisco. But we already have a very strong manufacturing and R&D network present in the United States. Now it's all about delivering on the next innovation cycle. So I think we have good growth momentum. We do believe we can sustain the good growth momentum and how do we keep that beyond 2030. Well, one is we've made substantial progress on our initiatives in order to prepare the company for future success. For the last 3 years, we've been talking about high-performing organization, about delivery and about execution. And I do believe we've delivered on that. We've introduced the bar so that we focus on those medicines with the highest impact. We have an intentional focus in terms of TAs and also -- and disease areas. And we look at the portfolio as an overall investment portfolio with certain risk and reward profiles that we want to balance to have the right portfolio. We're expanding into new technologies, not only in Dia, but also in Pharma, and we're implementing AI across the value chain. And we've made good progress in R&D. Now more than 60% of the NMEs are post bar, 66% of the late-stage projects have best-in-disease potential. We want to get to 80% and 60% more average peak sales per pipeline project. If you actually take not end of '23, if you take end of '22, it's even higher. And the same for the total portfolio value. Since end of '23, it's about 45%. If you look at end of '22 as a comparator, we are more than 60% higher, and this is a risk-adjusted value. So we do believe we've made a significant move when it comes to our pipeline in terms of higher rewards and also manageable risk. We have a strong on-market portfolio. In the midterm, we have great readouts that are going to help us sustain our growth, but we have many, many NMEs that will read out before the end of this decade. And many of them can be significant contributors to the sales of our company. And here, you can see the prioritization that we have done over the years in our portfolio, really taking out high-risk, low-value projects and adding higher-value projects with very strong data as a foundation that gives us more confidence into Phase III. And this has resulted in a significant shift in our portfolio value. As mentioned, this is year-end '23 as a baseline. If you take year-end '22, it's even significantly higher. And on the Diagnostics side, as I mentioned, we have been experiencing the headwinds in China from the healthcare pricing reforms. These headwinds will become a lot less in 2026 and will be gone in 2027. We will continue to grow significantly. This year, we expect mid-single-digit growth, but then back to mid- to high single-digit growth. And these products that you see here can each contribute additional CHF 1 billion when it comes to sales per year. And again, very excited about the sequence of that's coming. Now let me go through the outlook. For 2026, we again have an exciting year when it comes in terms of pipeline readouts. But then after that '27, '28, '29, we will have many different NMEs that will have Phase III readouts. In '26, I just want to highlight a couple, persevERA for giredestrant and fenebrutinib, Itovebi, divarasib, a number that can also continue to drive our growth in the next years. And of course, we have a number of Phase II readouts in obesity, 2 of them already have been positive this year. So we had a very good start. So the year ended well in terms of readouts and the year started well in terms of readouts. So we are very positive in terms of the momentum that we have and that we can continue this momentum. And these are the 19 medicines that we can launch by the end of the decade. Now it's clear that not all 19 ultimately will make it. But these are really substantial contributions that they can deliver to the future business of our company and to patients out there. So I'm very excited about what's ahead for us. Now let me talk about the 2026 guidance. In group sales, again, we expect mid-single-digit sales growth; in core EPS, high single-digit core EPS growth, and we do believe that we can continue to further increase the dividend in Swiss francs. With that, I hand it over to Teresa or to Alan, yes. Alan Hippe: Yes, welcome from my side as well. As Thomas said, great pipeline progress. And that really then combined with great financial results. I think that's really -- that's a great setup, and thanks to the whole Roche team for delivering that. So let's go into the results right away. And here's the overview. And I will focus on the right-hand side, so really the changes in constant rates. Sales plus 7%. Matt and Teresa will go into this, 9% on the Pharma side, 2% on the Dia side. As said, I think on the Dia side with the impact from China. Matt will highlight this. The core operating profit, plus 13%. So you see really good cost containment, but at the same time, we have invested where it really matters. And I will lead you through this. And then Thomas mentioned it, slower momentum on the core net income and the core EPS, yes, driven by a higher tax load, roughly CHF 600 million, CHF 579 million more taxes that we had to pay, which brought the momentum a little bit down. IFRS net income up 58%. And you know where it comes from. It comes from a base effect from last year. We had 2 goodwill impairments accounted for CHF 3.2 billion negatively. If you adjust for that, I think it would be a plus 20%, which, in my opinion, mirrors very well the operational performance. Well, now I come to the cash flow. And we can now debate quite a bit about the cash flow. I think you see it, CHF 16.2 billion, down from CHF 20.2 billion. Let me say here, we had really a very strong December when it comes to sales and quite an increase in accounts receivables. They will convert into cash. So automatically, what I'm saying, I'm expecting quite a strong cash year 2026. The other piece here is in the net trade working capital inventories. We had the situation that we had to deal with the tariffs. So we brought inventories up a little bit. That contributed to this. And last but not least, we have invested more into intangible assets, roughly CHF 600 million. I come to this, but I think that explains the number very well. As I said, I think we will recover quite well on the cash flow side in 2026. Let me say, I will also highlight this net debt came down at the same time. I will lead you through this. Good. I think when you look really at the bridge here for the sales, in constant rates, 7% up, as you can see. When you go from the left-hand side to the right-hand side, it's a plus 2% because we have the currency impact in, which is quite significant with minus 5 percentage points. Let me focus on the middle. You see Pharma and the loss of exclusivity of minus CHF 745 million, in total, a plus 9%, as mentioned. And then you see the situation in Dia, where we have a 7% growth, excluding China. And we have then an impact of minus CHF 579 million coming really from the healthcare pricing reform in China, which means a minus 24% of sales in China itself. Good. With that, let's go through the P&L. I talked about the sales growth. Other revenue, I think on one hand, we had a lower milestone income compared to last year, minus CHF 87 million, but we also had higher royalty income. That's why this is very, very stable and really looks good. Cost of sales, both divisions increased their cost of sales by 7%, but with very different dynamics. I think we in -- from a volume point of view in Pharma, plus 13%. So very, very clearly, I think here a driver for the plus 7% growth on the cost side. I think that growth was also a little bit supported by royalty expenses. And the Dia division, plus 4% on the volume side compared now to a plus 7% growth on the cost side. So what is that triggered by? Well, very clearly, the healthcare reform plays a role here, so China once again, but also higher costs related to placing of machines, which certainly fuels our future growth of diagnostics, so well invested here. We had certainly investments into the new technologies like CGM, Lumira, et cetera. And last but not least, we had a tariff impact on the Diagnostics side of CHF 64 million half year impact. So it's also something we potentially have to deal with in 2026. Core operating profit up 13%, a nice margin increase. When you look at the margins itself, I think really in constant rates, overall, plus 1.9 percentage points for the group. You see a nice progression on the Pharma division. You see a decrease of minus 1.1 percentage points in CER on the Diagnostics division side, which is explainable given that here, a significant portion of the sales in China went away. When you look at the core financial results, and really here, interestingly, I think really in CER, we have an increase. When you look at Swiss francs, we have a decrease. And I think really what that speaks for is, well, the U.S. dollar is weak, hurts us a little bit in the P&L, but helps us with the financial result. That's one conclusion here. You see the equity securities with minus CHF 88 million. I think the market has recovered, but we have some investments in the Roche Venture Fund where we wait for data. So hopefully, a better year ahead. Net interest income, we had less cash available, led to less income here. Interest expenses was plus CHF 69 million; in concentrate, it would be rather flattish. But let me say here, certainly, the weak U.S. dollar helped. And then we have really here other, and these are predominantly less hyperinflation impacts compared to last year. So with that, let's go to the tax rate. And Thomas mentioned it, I mentioned it already. Let's focus on the middle of the slide. First, you see really the effective tax rate full year 2024, excluding the resolution of tax disputes, 18.1%. And then you see really the effective tax rate full year 2025, excluding the resolution of tax disputes, 19.5%. So you really see the increased momentum here. Both years were really mitigated by the resolution of tax disputes. In 2024, that was a positive of CHF 263 million, representing a minus 1.4 percentage points. And in 2025, it was a lower effect, plus CHF 185 million in constant rates, resulting in minus 0.9 percentage points, leading to the effective tax rate full year 2025 with 18.6%. Well, for 2026, I think we will hover more to a 20% tax rate. Core EPS. On the core EPS side, this is the bridge here. I think for me, the most important point to say is it's driven by operations. The increase in core EPS is driven by operations. And I think there's nothing better to say here. Look, I think the product disposals, you've seen in the P&L, I think less income coming from that. Financial income and expenses are negative in constant rates, the slides in constant rates, that's a negative. It's roughly CHF 60 million. And then effective tax rate changes, as said, this is the once again mentioned increase on the tax side that we have seen here. So operations was the major driver. All other effects on that slide worked against us. When you look at non-core, and the IFRS income, I've mentioned the IFRS income, see it on the right-hand side, plus 58%. Core operating profit, I've mentioned as well with plus 13%. Perhaps 2 points to mention on that slide. One is the global restructuring plans. You see really the restructuring charges have increased by roughly CHF 300 million. I would argue that's a positive because that gives us savings in the future. And then I think you see the impairments of intangible assets, as mentioned, not a lot of impact in 2025. In 2024, with CHF 4.6 billion negatively, an enormous impact, very much driven by the 2 goodwill impairments for Spark and Flatiron accounting both together, minus CHF 3.2 billion. With that, let's go to the cash. And here's the story. And look at the left-hand side, CHF 20.2 billion, I've mentioned that already in 2024. And then you see in constant rates, full year 2025 with CHF 17.7 billion. Well, you see really when you go back to the left-hand side, the operating profit, net of cash adjustments. I think that's the positive momentum coming from operations, really positive. And then you see the net working capital movement. And out of that net working capital movement's, minus CHF 2.2 billion comes from net trade working capital. And as I said, predominantly driven by accounts receivables. Let me mention here that has nothing to do with extended payment terms for certain products and nothing to do with Vabysmo. This is really we have for -- especially for Vabysmo payment terms for a longer period for the last couple of years, and we have not changed them. So this is really because we had a strong December and that brought the accounts receivables up. We have the higher inventories on the Pharma side. That explains the minus CHF 2.2 billion. We have the investments in PP&E, placements in Diagnostics for the positive site investments that we have done. And then we have the investments in intangible assets, the increase of CHF 645 million, very much driven by Zealand and the deal we have done there. Then foreign exchange kicks in with minus 8 percentage points quite significantly leads us to an operating free cash flow of CHF 16.2 billion. Well, I think when you look at the margins, I think that tells the same story here. When you look for it, I can just really point back to the fact that we will recover in 2026. Now when I talk about cash, I have to talk about the net debt development and debt in total as well. And as said, I think interestingly, when you look really at net debt at the end of 2024 with minus CHF 17.3 billion. If you compare that on the right-hand side with the net debt position at the end of 2025, we have reduced by CHF 1.1 billion. So you might ask yourself, okay, the cash flow was not so strong. How is that possible? Did they invest less, especially on the M&A side? No, we didn't. I think that the numbers are really on the lower part of the slide. As you can see on the right-hand side, you see what we've invested in intangible assets and in M&A is pretty equal, CHF 4.6 billion in 2024 and even more in 2025 with CHF 5.1 billion. One driver here is the weaker U.S. dollar. And you see it really when you look really on this bar, minus CHF 10.7 billion, dividends, M&A and alliance transactions and other, there is the currency translation point with plus CHF 1.8 billion. That is a major driver here and helps us on the debt side. By the way, we have decreased gross debt by CHF 3.1 billion. And certainly, as 70% of our gross debt is in U.S. dollar, the U.S. dollar helps in that sense to bring the debt down, at least when we report in Swiss francs. Good. With that, a quick comment on the balance sheet. Not too much to say. When you look really on the left-hand side, where we have the assets, I think cash and marketable securities went a little bit down. Nothing to mention here, paid the dividend, all of that. When you look at other current assets, well, higher trade receivables, as mentioned already, mostly coming from the Pharma side. And when you look really at the noncurrent assets, that was driven by higher intangible assets of CHF 4.1 billion, mostly acquisitions accounting for plus CHF 2.5 billion. On the right-hand side, you see the liabilities and the equity. The current liabilities increased mainly due to the higher accounts of payables and bank creditors, some loans here. And the noncurrent liabilities decreased slightly due to the decrease in long-term debt. I've mentioned the CHF 3.1 billion already. Leads us to an equity increase quite nicely and now an equity ratio of 38%. Good. Leads me to the currencies. Well, yes, I think really, the volatility is certainly disturbing. And the weak U.S. dollar is something we're fighting against. You see really the result for the full year, minus 5 percentage points on sales and minus 8 percentage points on core operating profit, a minus 7 percentage points on core EPS. To be honest, if you apply today's rates, that would be basically the same picture for 2026 if we keep all that rates from today until the end of the year 2026. So I think it would be basically the same impact. When you compare at year-end 2025 and you keep these currency rates stable until the end of 2026, you see it really on the box down low. The impact would be minus 4 percentage points on sales and minus 6 percentage points on core operating profit and core EPS. This topic remains in 2026. Good core EPS. I think really we want to set the base right for you for the core EPS and what is the starting point because we have currency effects in the core EPS. So let me lead you through this. You see on the left-hand side, the CHF 19.46 per share as reported. And then I think really, we adjust for CHF 0.37 to get to the CHF 19.83 per share, which would be the starting base for your calculations in -- or if you like, for the core EPS in 2026. So let me explain now the CHF 0.37. What you see here, these are the exchange rate effects. This is a result of dividing the 2025 currency losses of minus CHF 273 million as well as the 2025 losses on net monetary position in hyperinflationary economies of minus CHF 48 million. This is shown in Note 4 of the consolidated financial statements on Page 64. So on Page 64, you find these 2 numbers. Net of taxes and noncontrolling interest by the number of diluted shares of 803 million, and this number is outlined in Note 29 of the finance report on Page 126, just to confirm that, which is, I think, quite a positive because it sets the higher bar for us, so to say. So hopefully, a little bit of a positive for the projections for 2025. Here's the guidance again. Thomas has alluded to it. Let me mention to it, the loss of exclusivity impact that we have estimated or actually that we expect of roughly CHF 1 billion for 2026. So relatively narrow to what we had for 2025 and well in line between the CHF 1 billion and CHF 1.5 billion that we've indicated to you that we will have on an ongoing basis. And with that, I have the pleasure to hand over to Teresa. Teresa Graham: Fantastic. Thanks, Alan. So I'm going to hand it back to Alan. Alan Hippe: You hand it back to me. Teresa -- it's hard to bring it to you. But let me make a last comment here. We have a change in our income statement presentation for 2026. Let me say very clearly, has nothing to do with the group in itself. So really, when you look at sales, group core operating profit and the core EPS, the metrics are unaffected. This topic is between corporate and the divisions. And basically, what we're doing is we are centralizing the legal department. That's what we're doing. And that has quite an impact. When you look at Pharma, we reduced SG&A costs in Pharma by CHF 250 million, roughly, I think, certainly in constant rates, which represents roughly 0.5 percentage point in core operating profit margin. So you should adjust for that in your calculations. On the Diagnostics side, that's roughly CHF 50 million less for the SG&A costs, which represents 0.4 percentage points in the core operating profit margin in CR. Corporate equally then would increase by CHF 300 million. Just to point that out, as I said, for the group accounts, nothing changed. This is between the divisions and corporate. Just to remind you when you project your margins forward for 2026, especially for the divisions. And now, yes, I have the pleasure to hand over to Teresa. Teresa Graham: I'm going to move forward really quickly in case they try and take it away from me again. So let's jump right in. So as Thomas shared the group perspective with you a little earlier, I wanted to provide some additional color on the key priorities for the Pharma division, starting with our focus on delivering the on-market portfolio. Q4 2025 marks our eighth consecutive quarter of growth. So today's on-market portfolio continues to deliver strong performance with 16 blockbusters across our 5 therapeutic areas. We expect this momentum to continue until 2028. And thereafter, we expect that sales become stable to fully compensate for generic erosion. Importantly, we do not expect a patent cliff. As Thomas mentioned, though, in the near term, we are expecting to deliver multiple key launches, which come on top of today's on-market portfolio. This includes Gazyva in immunology, giredestrant in breast cancer, fenebrutinib in MS, vamikibart in UME and Enspryng with additional indications in both neurology and ophthalmology. We expect that these products are going to continue to extend our growth momentum until well beyond 2028. We are currently in the process of updating our mid- to long-term outlook, and we'll be sharing that with you a little bit later this year. And so while we're very excited for these upcoming launches, we are just as excited about the progress that we've made on our pipeline. As Thomas mentioned, through R&D excellence and rigorous application of the bar, we have successfully rejuvenated our pipeline. With our post-bar NMEs, we have the potential to enter new disease areas like Alzheimer's and obesity, and we aim to bring multiple new transformational medicines to patients. As I mentioned at Pharma Day, all of our activities are really driven by 2 key tenets: discipline in the business and rigor in the science. Discipline in the business, we remain committed to keeping our COP at least stable. And rigor in the science, optimizing how we spend our R&D budget and applying our bar criteria to each and every asset progressing in the pipeline or entering it, including from partnerships or acquisitions. I am truly excited and confident for the future of Pharma, delivering transformative medicines and sustaining our growth momentum. So now let's take a closer look at how this momentum played out in 2025, and we'll start with the full year sales. So as you heard from both Thomas and Alan, Pharma sales grew at 9% at constant exchange rates, reaching CHF 47.7 billion. All regions are delivering strong performance, led by our international region with 14% growth. And overall, our volumes were up by 13%. As Alan mentioned, COP increased by 13% versus that 9% sales increase with a COP margin of 49.2%, so a slight increase over last year. Clearly, COP grew ahead of sales, which we mainly attribute to effective cost management, particularly in R&D, but I am going to drill down on the individual line items in a little more detail. Other revenue slightly decreased by 1% with higher profit share income from the higher sales of Venclexta in the U.S., which was offset by lower income from our out-licensing agreements. As Alan mentioned, cost of sales increased 7% against a 13% volume growth. R&D costs declined by 3%. This was mainly driven by savings in Flatiron as well as some other operational efficiencies. But let me say that this reduction was very thoughtful and deliberate as it gives us the oxygen that we need for the upcoming CVRM Phase III trials. SG&A costs increased by 8%, and this is primarily for 2 reasons. It was driven by some investments in our growth drivers, particularly Ocrevus and Xolair, but also increased donations to multiple independent co-pay assistance foundations. As part of our broader corporate philanthropy strategy, Genentech doubled its donations to those independent co-pay assistance foundations in 2025 versus 2024. Our corporate giving strategy is focused on supporting the patients most in need across multiple therapeutic areas, including oncology, neurology, immunology and ophthalmology. And we continually evaluate the strategy to ensure that it remains aligned to patient needs. And finally, other operating income and expenses decreased by 43%, and this is primarily due to lower gains on the disposal of products. And so now let's look at our individual growth drivers. So as always, first, I have to comment on the graph. These are all absolute values and year-over-year growth rates are presented at constant exchange rates. At full year, our top brands, Phesgo, Xolair, Ocrevus, Hemlibra, Vabysmo and Polivy generated roughly CHF 3.6 billion in new sales at constant exchange rates. For the fourth quarter in a row, Phesgo is our #1 growth driver with 48% growth, closely followed by Xolair, driven by the continued outstanding uptake in food allergy. You'll also notice the strong performance of Xofluza. And I just want to talk for a minute about that here, which is driven by the strong flu season that we saw in Q1 of 2025 in China. This may create a bit of a base effect for Xofluza in 2026, especially considering that we haven't seen a similarly strong flu season in China this year. So now let's dive into our TAs, starting with oncology. Oncology sales increased by 2% to CHF 15.3 billion, primarily driven by our HER2 franchise. As I mentioned, Phesgo posted an impressive 48% growth and the global conversion rate keeps climbing. We're now at 54%, well on our way to our new goal of 60%. This, of course, also means that Perjeta conversion to Phesgo continues to impact Perjeta sales, which is to be expected. Kadcyla growth continues to be driven by uptake in adjuvant breast cancer. Looking forward to the HER2 franchise overall, and as I've said previously, we expect the HER2 franchise to peak this year at about CHF 9 billion at 2024 exchange rates, followed by a steady decline through the end of the decade with a solid tail of around CHF 4 billion. And that CHF 4 billion is primarily Phesgo, about CHF 1 billion for Kadcyla and a bit of HMP. We do not foresee a biosimilar in the U.S. for Perjeta until the end of 2027. And let me also confirm again that we do not expect a cliff situation for the HER2 franchise. For Itovebi, we see good launch momentum in our first-line PI3 kinase HR-positive breast cancer population, and we expect 2 Phase III readouts this year with INAVO121 and 122, which could enable further indication expansion. But of course, the highlight of Q4 was the positive Phase III lidERA result for giredestrant. I am going to cover this in more depth on the next slide, but let me give you a few quick updates on giredestrant in general. We presented the lidERA data at San Antonio Breast, and we have already filed the evERA results with the FDA that happened at the end of last year, and EU filing is expected for 2026. Therefore, we expect evERA U.S. approval later this year, lidERA results will be filed with the U.S. and EU regulators this year. In the first half of this year, we expect the readout of persevERA in first-line ER-positive, HER2-negative metastatic breast cancer. Moving on to Tecentriq. Tecentriq exited 2025 with 3% growth and actually quite a nice Q4. For 2026, we expect low single-digit growth for Tecentriq, driven by the positive studies that we shared last year, such as IMforte in small cell, IMvigor in MIBC and ATOMIC in dMMR colon cancer. And finally, before I move to the next slide, let me just briefly mention that we expect the first Phase III readout for our KRASG12C inhibitor, divarasib, later this year. So now let's take a closer look at the lidERA results for giredestrant. So here are the giredestrant-lidERA results in adjuvant ER-positive HER2-negative breast cancer, which we presented last December. As you can see, giredestrant demonstrated a statistically significant and clinically meaningful improvement in invasive disease-free survival versus standard of care endocrine therapy, achieving a hazard ratio of 0.7. Let me emphasize here that this is the first oral SERD to show superior IDFS versus endocrine therapy in the adjuvant setting. And in terms of overall survival, the data was still immature, but clearly, a positive trend for giredestrant was observed with a hazard ratio of 0.79. Giredestrant safety profile remains favorable as we've seen in previously -- previous studies. And importantly, we saw a lower discontinuation rate with giredestrant versus the comparator arm. This is a significant improvement in this setting, and it indicates the improved patient experience on giredestrant compared to standard of care. So taken together, these results further underline giredestrant's potential as a next-generation best-in-class endocrine therapy in ER-positive breast cancer. To expand on this, let me dive a little bit deeper into the giredestrant development program. So now given the positive evERA and lidERA results we just discussed and the upcoming readouts, we're very excited for the future of giredestrant. Giredestrant has the potential to replace standard of care endocrine therapy in ER-positive breast cancer and become the new backbone of choice in this setting. As you can see in the treatment paradigm on the left, our clinical development program for giredestrant covers different lines of treatment and risk groups with the readout of persevERA in first-line expected mid-first half of this year. Please note that the giredestrant plus CDK4/6 combination in lidERA relates to a single-arm substudy that's still being evaluated. That's in combination with [ abema ]. We have also started a sub-study in combination with [ ribo ] as well. As you would expect, we are working at speed to complete filings and collaborate with regulators to ensure that this transformational medicine gets to patients as fast as possible. And just to reiterate, we have already filed evERA in the U.S. and expect lidERA filing in Q1. Beyond giredestrant, we also have a strong pipeline of potentially best-in-class molecules in breast cancer that give us the opportunity for numerous future combinations. For instance, our highly potent CDK4/2 inhibitor, which may overcome some of the limitations of currently available CDK4/6 inhibitors. And as I mentioned, we believe giredestrant has the possibility to become the new backbone of choice in ER-positive breast cancer. And therefore, we're exploring many combinations with some of the internal assets, as I just mentioned. Additionally, our phone keeps ringing as we are getting calls from potential partners interested in combination studies with giredestrant. We look forward to sharing future updates on our breast cancer pipeline with you in the near future. But for now, let's move on to hematology. The hematology franchise delivered strong growth of 15% in 2025, achieving CHF 8.6 billion in sales. Hemlibra closed the year with strong growth, 12% (sic) [ 11% ] driven by increasing adoption in the non-inhibitor patient population. For 2026, we expect low single-digit growth, and that's partly driven by competitor launches, which are anticipated later in the year. Polivy's growth momentum continued in 2025, reaching U.S. patient sales of 36% in first-line DLBCL. But in fact, we reached 2 significant milestones with Polivy last year. First, it is now the most prescribed regimen for IPI 2-5 patients in the U.S. And second, we have officially hit more than CHF 1 billion in sale in the first-line DLB setting alone. Shifting to Columvi and Lunsumio, our CD20, CD3 bispecifics. Launch performance remains on track for Columvi in third-line plus DLBCL with second-line DLBCL launches gearing up. For Lunsumio, we're happy to report that the subcutaneous formulation has been approved in both the U.S. and the EU. And just a reminder that, that new formulation reduces administration time from hours down to actually under a minute. Additionally, we expect 2 key events for Lunsumio later this year. We expect U.S. approval for Lunsumio plus Polivy in second-line DLBCL based on the positive SUNMO results, and we expect the readout for the Phase III CELESTIMO in second-line plus follicular lymphoma. So now let's move on to neurology. Our neurology franchise achieved CHF 9.8 billion in sales in 2025 with a strong growth of 11%. Ocrevus continues to have good momentum, delivering 9% growth globally and crossing the CHF 7 billion milestone in annual sales. We're excited to see the increasing growth momentum of our subcutaneous formulation known as Zunovo in the U.S. In Q4, more than half of global Ocrevus growth was driven by the subcut formulation. And importantly, in the U.S. and many other early launch countries, roughly 50% of Zunovo patients are naive to an Ocrevus. This represents that acceleration that we've been talking about. U.S. uptake continues to be driven primarily by community practices, which emphasizes how Zunovo is actually expanding the addressable market and can help overcome healthcare system restraints like IV capacity limitations. Overall, we now have more than 17,500 patients on Ocrevus now globally, and that's roughly 5,000 more than we had at Q3. For 2026, we expect to hit high single-digit to low double-digit growth for Ocrevus. And as a reminder, we upgraded our peak sales expectations for Ocrevus for the Ocrevus franchise to CHF 9 billion by 2029. This includes CHF 2 billion of incremental sales from Ocrevus subcut. But of course, there's also going to be some switching from IV to subcut. Staying with the MS franchise, you've seen the exciting news regarding the positive 3 results for fenebrutinib. We're going to cover that more on the next slide. But for now, let's take a minute on Evrysdi. The global rollout of the tablet formation continues, and we see great pickup from that as well as very positive feedback from the patient community. As Thomas mentioned, this remains the leader in SMA. Quick note that Q4 performance for Evrysdi in international was boosted by a tender-related buying pattern, but we are still expecting double-digit growth for Evrysdi next year. Earlier this week, you saw positive data from Elevidys in DMD. We continue to believe in the positive risk-benefit profile in the ambulatory DMD population and more than 1,050 patients have already been treated globally in this setting. Furthermore, the latest 3-year data from EMBARK shows the durable efficacy and slowing of disease progression for ambulatory DMD patients treated with Elevidys. We are working with EMA continually to find a viable path forward for EU patient access here. Quickly stopping over prasi, a quick update here where we have achieved both FPI for the Phase III study as well as we have been able to materially accelerate site activation. So we're a number of months ahead of schedule with the prasi trial, which is great news for patients. And let me close quickly by speaking a little bit about Enspryng in MOG-AD. So MOG-AD, if you are not aware, is a rare antibody-mediated autoimmune condition of the central nervous system, which causes inflammation of the brain, optic nerve and spinal cord. The Phase III study METEOROID read out positively. And we're looking forward to presenting that data at an upcoming medical conference later this year. We expect to file these results with the U.S. and EU regulators in 2026, and this additional indication could unlock an upside of approximately CHF 500 million for Enspryng. So now as promised, let's take a little bit of a deeper look at fenebrutinib. We are very excited about the positive Phase III readouts for fene. This includes FENtrepid in PPMS and FENhance 2 in RMS with the FENhance 1 readout expected mid half of this year. These results make fenebrutinib the only BTK inhibitor with positive Phase III results in both RMS and PPMS, and it has the potential to be both first and best-in-class in RMS and PPMS, which would also make it the first and only high-efficacy oral treatment for both relapsing and progressive multiple sclerosis. We see fenebrutinib as an opportunity to increase high efficacy treatment rates amongst MS patients and expand the footprint of our franchise. Ocrevus and now Ocrevus subcut have brought transformational impact to people living with MS, and we believe fenebrutinib has the potential to be that next transformational medicine for these patients. Let me also briefly remind you that fenebrutinib is differentiated by design from other BTK inhibitors. It is the only noncovalent binding BTK in Phase III development for MS and has a highly optimized PK profile that allows it to reach its target, including in the brain. So stay tuned for the FENhance 1 readout in half 1. And until then, we look forward to presenting the FENtrepid results in PPMS at ACTRIMS, where we are also inviting you to attend our IR event on the 9th of February. And so with that, let's move on to immunology. Our immunology franchise grew at 12% at constant exchange rates and reached CHF 6.7 billion in sales. Xolair's strong growth momentum continues, driven by uptake in food allergy. In 2025, we achieved 32% growth in sales of CHF 3 billion. We are also happy to celebrate a key Xolair milestone in 2025, which is more than 100,000 patients have now been treated for food allergy since launch. Regarding the 2026 outlook for Xolair, we expect around 20% growth, and this includes the impact of an expected first biosimilar entering the market in the second half of the year. You will have seen that Xolair was selected for the latest rounds of IRA negotiations. So let me provide a little bit of extra information on this. Xolair's inclusion on this list, as you know, does not change patient access or pricing at this time. Any potential pricing impact, if applicable, would not take effect until 2028 at the earliest. But CMS' final guidance provides that a selected drug will no longer be subject to negotiation and will cease to be a selected drug if CMS determines that a generic or biosimilar has been marketed by November 1, 2026, and we do expect that a biosimilar for Xolair will be launched before that date. Actemra sales declined by 2% in 2025. As predicted, we are now seeing increased biosimilar impact in the U.S., which resulted in a 10% decline in growth in Q4. This is aligned with all of our previous communications of an accelerating biosimilar impact in the second half of 2025, which will obviously continue into 2026. Just like in Q3, Gazyva is one of our key highlights for the quarter. Following the FDA approval in Q3, we achieved EU approval in lupus nephritis, and we announced positive Phase III readouts in both SLE and INS. In both indications, Gazyva has first-in-class potential. SLE results have been submitted for presentation at SLE Euro in early March, and the INS results have been submitted to WCN in late March. Both indications, as I mentioned, I think, previously, will be filed in the U.S. and EU later this year. And I'm also very happy to share that the FDA has granted breakthrough therapy designation for Gazyva in childhood onset idiopathic nephrotic syndrome, which is INS based on the positive ENSURE results. And we are not quite done with Gazyva just yet. There's one more Phase III trial, which is expected to read out in 2026, and that's MAJESTY in membranous nephropathy. And as a reminder, we see up to a CHF 2 billion opportunity for Gazyva in kidney disease. And just finally, I'd like to mention the upcoming Phase III readout for sefaxersen in IgAN, which is expected later in the year. Now let's move on to ophthalmology. Ophthalmology grew by 10%, achieving CHF 4.2 billion in sales. Vabysmo performance, as you know, was impacted by the contraction of the U.S. branded market. It landed at 12% growth for the year, which is still quite strong. We had mentioned this contraction previously. And through 2025, we saw a decline in the branded IBT market in the U.S. of about 15%. Nevertheless, Vabysmo continues to gain market share in the branded IBT market in the U.S. and across early launch countries globally. In the U.S., we now see that more than 60% of Vabysmo patient starts are from treatment-naive patients, and this further solidifies Vabysmo's position as the standard of care. Looking forward, we would expect the U.S. branded market to gradually recover in 2026. And taking this into account, we expect a growth acceleration in 2026, driven by the ex U.S. continued growth and U.S. recovery. In fact, as Thomas mentioned, there is a lot to look forward to in ophthalmology this year. We have 2 potential new medicines entering our ophthalmology portfolio. That's the vamikibart in UME, which is expected to be filed in both the U.S. and EU. Enspryng in thyroid eye disease will be filed in the U.S., and we are currently considering ex U.S. filings with the appropriate regulators. Now let's jump into our CVRM pipeline. This is one slide with a whole bunch on it, but I am very happy to share with you the key developments in our pipeline as well as provide a perspective on a very newsflow-rich 2026. So earlier this week, we shared positive final Phase II top line results at week 48 for the once weekly CT-388 in people with obesity. This is study 103. For the efficacy estimand, we achieved a placebo-adjusted weight loss of 22.5%. As a reminder, the efficacy estimand includes patients who dropped out from further analysis, so the effect size measured represents the true efficacy of the medicine tested. For the treatment regimen estimand, we achieved a placebo-adjusted weight loss of 18.3%. The treatment regimen estimand reflects a more real-world outcome, acknowledging the fact that not all patients will be able to adhere to treatment. In this case, data after treatment discontinuation, either in the treatment [ or ] placebo arm are included in the analysis. So for example, it includes data from patients who discontinued treatment early and have regained weight. Now this is a question we received a number of times over the last week. So I'm just going to take another minute here to reiterate. Generally speaking, the difference between the efficacy and treatment regimen estimands is usually driven by treatment discontinuation, either due to patients on the active treatment arm who regained weight after discontinuing treatment or patients on placebo who go on a weight loss therapy after discontinuation. There are many ways to potentially address this phenomenon in our future Phase IIIs from a more flexible dosing regimen, which allows patients to stay on lower maintenance doses in case of tolerability issues to the incentive of a long-term extension to retain more placebo patients. But these kinds of measures should serve to improve the discontinuation rate and eventually reduce the gap between the 2 estimands. In that context, I should also point out that in most of the recent Phase III trials in obesity, marked differences between the estimands greater than 5% have been observed. Let me also highlight 2 other key points in terms of the efficacy achieved in the study. First, we saw a clear dose-dependent relationship on weight loss. And secondly, and most importantly, we are pleased by the absence of a visible efficacy plateau at 48 weeks for the highest dose tested, which was 24 milligrams. Taken together, this clearly indicates that further weight loss can be achieved after 48 weeks, and it gives us confidence in CT-388's potential to deliver best-in-class efficacy for obesity. In terms of safety and tolerability, CT-388 was well tolerated and the tolerability profile was generally consistent with incretin class. The majority of gastrointestinal-related events were mild to moderate and total treatment discontinuations due to AEs in all arms were low at 5.9% for CT-388 versus 1.3% for the placebo arm. Let me also highlight here as we received this question a number of times as well, the discontinuation rate due to AEs at the highest 24-milligram dose was similar to the total discontinuation rate observed. We look forward to sharing more detail on the Phase II results with you at an upcoming medical conference later this year. Similarly to 388, we saw positive results for CT-868 in the Phase II 004 study in type 1 diabetes. And just like for CT-388, we will share the final results at an upcoming medical conference in 2026. So speaking of the outlook for the rest of the year, let's start with our Phase II and Phase III study initiations. As a reminder, we announced for both CT-388 and CT-868 that we will move them into Phase III development in 2026. For CT-388, we can now provide a first update. The Phase III trials for CT-388 named Enith1 and Enith2 are now scheduled to start in Q1. In addition, you can see that we plan to initiate the first Phase II studies for petrelintide in CT-996 as well as a Phase II combination study for CT-388 with petrelintide. In addition, we have a number of other CVRM readouts scheduled for 2026. There are multiple Phase II readouts to look forward to. For CT-388, we have data for patients with obesity and with type 2 diabetes, which will come later this year. We also expect the first Phase II readout for CT-996, our oral GLP-1 and for petrelintide, ZUPREME 1 and 2 trials in obese overweight patients with and without type 2. And finally, emugrobart and tirzepatide combination data in obesity are expected towards the end of the year. So as you can see, we continue to progress our CVRM pipeline at pace, and we are excited to share updates with you throughout the year. So last but not least, let's go to the next slide to bring us home. Here, we have the 2026 pharma key newsflow. We start the year with 4 green check marks, certainly a good omen for the year ahead. And we have discussed everything else on previous slides, so I won't go into more detail here. For any of you who are feeling the lack of the 2025 newsflow table, we have moved that to the appendix. And with that, I would say, I'll give it back to Alan but I'll be crazy and I'll give it over to Matt. Matthew Sause: That's wild. Teresa Graham: Wild. Wild times. Matthew Sause: All right. Thank you, Teresa. Good morning, good afternoon, everyone. It's my pleasure to present the full year 2025 Diagnostics division financial results. So with sales, as you heard from Alan and from Thomas, sales in diagnostics were CHF 13.8 billion. We grew 2% or CHF 292 million compared with 2024 at constant exchange rates. But as you heard from both Thomas and Alan earlier, excluding the sales in China, which I would reiterate is our second largest market, was impacted by health care pricing reforms. The growth of the diagnostics business was 7%. So now let me walk you through these results by each of our customer areas. So sales in our largest customer at Core Lab were flat, again, driven by this previously mentioned health care pricing reform. Excluding this effect, sales were plus 10%. Sales in the Molecular Lab increased 4% due to growth in our blood screening business. Now this was partially offset by reduced sales growth in the infectious disease segment, which grew at 1%. This was impacted by the USA funding stop in Q1 that caused a corresponding decrease in HIV testing, which I covered last year. Sales in our Near Patient Care customer decreased at minus 3%, mainly driven by the decline of our blood glucose monitoring business at minus 2% due to the market shift to continuous glucose monitoring as well as a decline in respiratory molecular point-of-care testing due to the late start of the 2025 respiratory season. And again, back to what you heard earlier from Thomas, we expect the CGM product to really be a driver for this customer area in the future and we continue to invest in expanding and preparing for this. Finally, sales in the Pathology Lab grew strongly at plus 14%, mainly driven by sales of advanced staining at plus 10% and our companion diagnostics business, which grew at plus 25%. So now I'd like to show the geographic performance that's behind these results. Taking through the regional view, North America, the business grew at plus 9%, well ahead of market. You saw good growth in EMEA at plus 6%, again, ahead of market. Latin America, strong growth at plus 11%. Now Asia Pacific, again, as we discussed, minus 12%, driven by the minus 24% decline in China. Excluding the effect of China, APAC grew at plus 4%. Now as you heard earlier, our consistent ambition in the Diagnostics division is to grow our sales at mid- to high single digits. However, given that we anticipate diminished but continuing headwinds in China for 2026, we would set our ambition this year at mid-single digits for 2026. Again, our consistent ambition is to grow this business at mid- to high single digits. Now I'd like to walk you through the P&L line by line. As previously mentioned, sales grew at plus 2%. Cost of sales, as you heard from Alan, grew at plus 7% but this was mainly driven by that unfavorable impact of the China health care price reforms, half a year impact of tariffs and the production ramp-up of our new technologies such as CGM and sequencing and the placement of a significant number of instruments in 2025. And I would highlight that we saw growth of some of our key platforms like our immunoassay at strong double-digit increase. And for example, our molecular workstation, the 5800 grew at over 40%. So very strong placement of instruments. R&D costs decreased at minus 2%. Now this is a result of significant and focused cost containment measures across the organization in response to China impact. As mentioned previously, we are ensuring delivery on all our key priorities, especially our investment in the key new product areas such as CGM and our AXELIOS Sequencing Solution and LumiraDx. SG&A decreased by 2%, again, reflecting focused cost containment measures across the organization. This resulted in a core operating profit of approximately CHF 2 billion, declining at 4% at constant exchange rates, which reflects the cost control initiatives. So now I would like to transition to some of the innovation that we launched in last year and really specifically focus on our cobas Mass Spec 601, which as you heard from Thomas, these are CHF 1 billion opportunities that we're very excited about and their potential to really deliver growth to the Diagnostics division. So as I mentioned before, current mass spec primarily relies on lab-developed tests and lack automation, are highly manual and require highly skilled labor. With the launch of our mass spec solution in 2024, we've introduced the first fully automated IVD platform for clinical mass spec. So throughout 2025, we received CE mark for all of our wave 1 menu composed of 39 analytes spanning the key parameters used in mass spec testing, including therapeutic drug monitoring, steroid and hormone analysis as well as vitamin D testing. These comprise the majority of parameters used in a routine clinical mass spec lab and we are going to follow that with a second wave of additional parameters. I would add that this system, which integrates with our existing serum work area platforms, strengthens our leading position in the Core Lab. And now I'd like to talk about some of the high medical value content that we launched last year for our serum work area, specifically our dengue antigen test, which received CE mark in October. Dengue is the most common mosquito-borne viral disease globally and represents a major global health burden. It accounts for an estimated 390 million infections per year. It has shifted from being a seasonal illness to a year-round risk with locally transmitted cases shifting from historical geographies such as South America to now in Europe and North America. Diagnosing dengue can be challenging as patients are often misdiagnosed due to overlapping conditions with other febrile illness. With our Elecsys antigen test, we will enable health care systems to diagnose dengue more reliably and efficiently by providing all 4 dengue virus serotypes differentially diagnosed with a rapid test that takes only 18 minutes. This will add one more test to our leading immunohistochemistry platform -- or excuse me, immunochemistry platform, which comprises of approximately 120 different parameters. So now I would like to move on to a customer who're very near and dear to my heart, the Molecular Lab and switch to discussing our cobas BV/CV assay, which we received CE mark in December. Sexual health diagnostics market is valued at CHF 1.1 billion with a yearly growth rate of 11%. Vaginitis is the primary growth driver within this segment showing a yearly growth rate of 26%. With our cobas BV/CV assay, we will provide a multiplex assay designed for the direct detection of bacterial vaginosis and candida vaginitis and expand our molecular STI offering. With the addition to our STI portfolio, we will continue to enable testing the most commonly sexually transmitted infections using a single tube and a vaginal swab. In the future, we plan to continue expanding our offering in this area with home collection solutions as well as novel molecular point-of-care assays. Transitioning to our point-of-care portfolio, I would like to discuss our recent CE mark and FDA clearance with a CLIA waiver for our liat Bordetella panel. Pertussis is a highly contagious disease that causes more than 24 million estimated yearly cases, resulting in 160,000 deaths with the majority of those in children. Diagnosing pertussis can be particularly challenging as its symptoms often overlap with those of common colds, leading to underdiagnosis. Our liat Bordetella panel offers a reliable point-of-care solution, delivering results in just 15 minutes between 3 Bordetella pathogens and again, delivers lab-like performance. This will enable health care providers to act quickly and prevent severe complications, especially in vulnerable populations such as children. As you can see from this slide, this launch, we further expand our cobas liat menu of lab equivalent point-of-care testing and we will continue to expand this in the future. And with that, I would like to transition to our key launches in 2026 and call out a few highlights. Again, I would really want to emphasize that 2026 is the year that we will launch our AXELIOS Sequencing Solution. This is a groundbreaking high-throughput solution that will deliver high accuracy, high throughput and flexible sequencing based on our proprietary Sequencing by Expansion technology. And would also again highlight that this represents a potential blockbuster opportunity for us with sales potential and above the CHF 1 billion range. I would also like to call out the expansion of our neurology menu, including the Elecsys pTau 217, which is a blood-based diagnostic for Alzheimer's disease and Elecsys Neurofilament light chain for detection of disease activity in Multiple Sclerosis, greatly expanding our offering in neuroscience. Additionally, I would like to -- I would really like to particularly mention our TB IGRA test, our assay to detect latent tuberculosis infection, which remains a global health care challenge and a significant commercial opportunity and I'm very convinced that we will offer a very differentiated, highly competitive solution here. And overall, this 2026 is going to be a very exciting year of launches and I look forward to keeping you updated over the course of the year. Thank you and now I hand it to Bruno. Bruno Eschli: Thanks, Matt. And with that, we open our Q&A session. The first question goes to Sachin Jain from Bank of America. Sachin Jain: Two, please. So firstly, on Vabysmo, I don't think you've guided to growth for this year beyond acceleration. So any color on what you're assuming within the guide? And perhaps, Teresa, you could just provide a bit more color on your funding comments. What does that doubling in '25 versus '24 mean relative to historic levels? Like where is that funding relative to sort of a 3-, 4-year average? And any color on how that flows back to patients? When we should see an impact on sales? The second question is on persevERA, if I may. It's a topic that I think has come up on prior calls but just to reiterate as we approach data. If the study hits, is any hit clinically meaningful for you, would you need to see a certain hazard ratio or absolute PFS benefit -- you used that wording in the press release. The reason for the question is, there's been speculation since your San Antonio call around passing an interim. Those are my 2 questions. Teresa Graham: Yes. Great. So in terms of Vabysmo, I'm not going to give you specifics on the amount of money that we contributed because as you have heard me say many, many times before, our charitable giving is not in any way related to our commercial expectations for the product. So those 2 things are and have to be completely separate. I can tell you that we doubled our donations last year and that was a significant increase for us over the last couple of years as you sort of alluded to. We do believe that 2025 represented sort of a rebaselining of the branded market in the U.S. And so what we are hopeful is that 2026 will now allow the underlying growth of Vabysmo to actually be more visible. And so we would expect an acceleration in 2026. I don't believe we've been more specific than that. In terms of persevERA, so clearly, the fact that we've now seen positive data from giredestrant in a number of important settings, both neoadjuvant, adjuvant and in a complex late-stage population, sort of underscores our belief in this molecule and that clinically, it is potent, it's active and it's combinable, it's tolerable. It's given us great confidence that we do have the opportunity to be really impactful for many different patients and to really become a new standard of care in hormone receptor-positive breast cancer. Reading through though, to different settings is complex. And so thinking about how we would read through to persevERA, happily, we don't have too long to wait to actually get the answer to that question. In terms of what would be clinically meaningful, we have designed the study to yield a clinically meaningful result. And so generally speaking, a 20% reduction would be considered clinically meaningful. Did I answer your question? Sachin Jain: Perfect. Bruno Eschli: Okay. Very good. Then we move on. Next one in the row would be Peter Verdult from BNP Paribas. Peter Verdult: Pete Verdult from BNP. Two questions. Teresa, just on obesity. We understand from Zealand that the amylin data is in-house and the market seems to have set the bar at sort of being low to mid-teens weight loss. Forget the market for a second. Can we just focus on Roche? What is the minimum target profile you are looking to demonstrate for amylin in obesity? And then secondly, on BTK, you sound very confident about the approvability despite recent CRLs elsewhere in the BTK class. You know the efficacy in the first relapsing-remitting study in PPMS, which we don't. Just wanted a sense or kick the tires with you. Is your confidence based on a highly skewed benefit risk profile? Or is it more because you think the 2 cases of Hy's Law that you've seen in the data set can be attributed to other or nondrug causes? Teresa Graham: Yes. So I'm going to start with your second question first because I think we've gotten a lot of questions over the last couple of weeks about tolebrutinib and read-throughs to fenebrutinib. And I think we have to be very, very cautious here. If you actually read that CRL, it is incredibly specific to the risk benefit that was seen with tolebrutinib. And unfortunately, they had a number of failed trials. They had a number of Hy's Law cases. So I think it is very difficult and inappropriate to actually take the language that was applied to tolebrutinib and actually put that forward on to fenebrutinib. Let me be really clear because I think there have been some -- there's been some confusion about what we've actually seen in terms of Hy's Law cases for fenebrutinib. We had 2 cases of elevated liver enzymes with bilirubin, which was what put us on clinical hold with the FDA. Both of those cases were in FENhance 1, which currently is a study that still remains blinded. When we looked at those 2 cases, only one case was deemed by the FDA to be a Hy's Law case. The other one was confounded due to alcohol use by the patient. And so right now, in fenebrutinib, we have only one case and it is in FENhance 1. So we are sort of blinded to any more detail. It's also really important to note that since we put liver monitoring in place in the clinical trials, we have not seen any more cases. And so I think we feel very good about the overall benefit risk profile that we have with fenebrutinib, particularly when you consider the other half of that coin, which is the benefit. When you look at the Phase II trials for fenebrutinib, you saw a significant amount of clinical benefit to patients. And the data that we've seen are sort of very consistent. And so I think when you look at that very high efficacy with a very -- what looks to be a very manageable safety profile, I think we're just in a totally different situation than what you saw with tolebrutinib. So hopefully, that kind of provides a little bit more perspective there. So in terms of petrelintide, so as a monotherapy, we believe that petrelintide holds the potential to be a foundational therapy for weight management. We are looking forward to being able to deliver a weight loss that the vast majority of people are actually looking for, which is something more in that sort of 10% to 20-ish percent with the potential to be a much more improved tolerability profile compared to the GLP classes as well as just a better patient experience in terms of titration, quality of weight loss, et cetera. So obviously, we don't, again, happily have long to wait. We'll see that data soon. You mentioned the data being in-house. We remain blinded to that data. So we have not seen it but we do -- we expect to see it very soon. Bruno Eschli: Peter, did this answer your questions? Peter Verdult: Yes. Bruno Eschli: And we move on then. Next one would be Simon Baker from Redburn. Simon Baker: Two, if I may, please. Firstly, just continuing on Pete's question about fenebrutinib. I just wonder if you could give us some idea about how we should be thinking about the relative tolerability profile of fenebrutinib versus Ocrevus ahead of the ACTRIMS data? And how do you see in light of that fenebrutinib being positioned relative to Ocrevus? And then secondly, a question for Matt. It's a little while since you unveiled to us the new sequencing offering. I just wonder if you could update us on the market feedback you've had in terms of levels of demand and where that demand is coming from, whether it's smaller scale or larger scale applications or indeed both? Teresa Graham: You want to go first? Matthew Sause: I would be delighted to go first. Teresa Graham: And I would be happy to yield the floor. Matthew Sause: Super. Wow. So yes, and I would maybe give a plug for our Dia Day in May, which will talk quite a bit more about this and Bruno will mention that at the close. Maybe I'll just say that first. But yes, we've seen a high level of demand for the sequencer, I would say in, more than we had originally anticipated ahead of launch. We're already starting commercial activities with select customers. And the feedback from our early evaluators has been extremely positive. So when you talk about applications, we're really seeing interest in a broad variety of applications from translational, such as single cell but then on to more focused clinical applications such as whole genome sequencing and germline. So what we're really seeing is the potential of an instrument with that kind of flexibility, throughput and accuracy and a dual assay format with the longest reads of Simplex as well as the very high accuracy Duplex format to have a broad applicability really across the spectrum of sequencing applications. And I think we're very confident in the potential for this technology as well as the launch. Does that answer your question? Bruno Eschli: Simon? Simon Baker: Perfect. Teresa Graham: Yes. Great. So when we think about where fenebrutinib sits, I mean, we believe that it has best-in-class potential. And together with OCREVUS, OCREVUS subcut and potentially further on -- down the line, OCREVUS high concentration, we believe, ultimately, we are going to have a range of highly efficacious and very tolerable therapies that meet every patient with MS exactly where they're at. Right now, 30% of patients are on a less efficacious oral therapy. And so that's sort of an easy place to imagine fenebrutinib starting. But I think ultimately, we believe that this is -- the combination of these 2 therapies gives us the opportunity to really sort of revolutionize the entire patient journey for MS patients. And I think we're feeling very confident about our ability to do that. Simon Baker: [indiscernible] Very clear. Bruno Eschli: Next questions go to Matthew Weston from UBS. Matthew Weston: Hopefully, you can now hear me. The first one on giredestrant. Teresa, there's a lot of debate about how the commercial potential in the adjuvant setting could be impacted by the data from persevERA. Can you give us your thoughts as to whether or not you see adjuvant as independent of that frontline metastatic result? And also, there's a lot of debate about the peak sales potential of giredestrant.. So when do we -- when should we expect to hear what Roche thinks the potential of this medicine is? And then secondly, if I can just pick up on biosimilar erosion. So Q2, Q3 of last year, you made a number of comments about delays to the entry of Xolair and now similar comments about potential delays to the entry of biosimilar Perjeta. Clearly, there are multiple patents, so you can do deals with biosimilar companies. But do you think investors should get used to a more gradual erosion of some of these biosimilars at the beginning of generic entry? Or should we still continue to expect to see like a minus 40% that has been kind of the underlying trend so far when we actually see biosimilars enter the market? Teresa Graham: Yes. So I'll take -- thanks, Matthew, for your questions. I'll take your second one first and I have a very definitive answer for you, which is that it absolutely depends. So it depends on the therapy. It depends on the part of the world. I mean, I think it -- this is one of those things where biosimilar impact is not a one size fits all. So in some parts of the world, with some therapies, you are going to see an immediate decline. With some others like Xolair, we just do expect that to be a smidge more sticky because you're dealing ultimately with a very allergic patient. And so physicians might be a little bit more tentative about switching so quickly. And so I think this is one of those areas where we are constantly monitoring the environment. We're constantly talking to treating physicians to get a sense of how they may think about the utilization of biosimilars and we give to you our best knowledge of how we believe those erosion curves will happen. But it's very difficult to give you one answer because I think it is actually quite variable, again, by therapeutic area and by geographic area. When it comes to giredestrant, so this market is somewhere between a $20 billion and $30 billion opportunity. Adjuvant is about 2/3 of that between initiation and maintenance therapy. We do think that adjuvant and first-line is pretty separate. And we think that giredestrant has the opportunity, as we said, to really be establishing itself as a new standard of care. When are you going to get a better read-through from that? Q1 is a very data-rich -- here, so the first half is a very data-rich time for us. We're in the process of updating our own assumptions. And as soon as we have a clear read-through, we will share that with you. Thomas Schinecker: Maybe just to answer your question on Perjeta as well because you had this question. So we don't expect the biosimilar for Perjeta until '28 in the U.S. and '27 in the EU. Teresa Graham: Correct. Thomas Schinecker: Just to clarify that. Bruno Eschli: Matthew, did we answer your questions? Matthew Weston: That's perfect. Bruno Eschli: Then we move on. Next one would be James Gordon from Barclays. James Gordon: James Gordon from Barclays. Two questions, please. One would be on giredestrant, actually 2 subparts. One would be, the slight delay in persevERA readout timing and I think it's now more likely to be Q2. Is that because the event rate is a little bit slower? Or could you be getting a few more events in and could that actually help the [ powering ], which has been a concern some people have had? And also on giredestrant, the lidERA Study, the [ side ] study of about 100 patients, I think they're getting on top of the CDK. How will you communicate that? And it sounds like you're filing ahead of that because you're filing the data in Q1. So is that something that then gets added to the filing package and you hope to have on the initial label? Or how does that work? And then the other one was on fenebrutinib. So you sound very confident talking about the Vabysmo upcoming launch, which is great. And there's been some talk about liver already. But in terms of other tolerability issues, I saw the comment in the original release about additional safety data that is further being evaluated. So could there be some other off-target BTK side effects you need to think about? And just on the side effect point, though, if you're comparing it to something like Ocrevus, so you've got the advantage of oral but could you have to have liver monitoring or something like that? Could that be a barrier to becoming a very big drug? How would you think about that? Teresa Graham: Great. Okay. So we'll start with the second question first. So we intend to assess the safety of fenebrutinib when we have the -- all of the studies read out and we look at -- when we look at the pooled safety. So obviously, we only have 2 of the 3 studies. So we need to wait a little bit in order to be able to step back and look at that. The data that we've seen so far, we haven't seen anything that is different than what you would see in the background rate of the overall MS population. In terms of liver monitoring, as is typical, when you get your label, usually for things like monitoring, you get what you studied in your label. So we would anticipate that we would have the same liver monitoring in our label that we had in our clinical trial. And again, I think when you look at the efficacy and the risk-benefit profile that fenebrutinib has, I think this still -- this is going to be a meaningful medicine in MS. So more to come as we get FENhance 1 data. For persevERA, just to be really clear, the timing on that has not changed. We have consistently been messaging, the first half, mid-first half of this year and that has not changed. So that is remaining consistent. And again, we do plan to file the lidERA data first. We get the [ abema ] data, I believe, the substudy data comes, is that also in Q1? Guys, someone is going to have to remind me of that. And then the [ ribo ] study, which is a 200-patient substudy is just kicking off, so that will come later. So those are data pieces that clearly, as soon as they are available, we will be making public. But the adjuvant filing is going in -- into Q1 as planned and it looks like end of 2026 for the substudies. Bruno Eschli: James, all questions answered? James Gordon: That's great. Bruno Eschli: Yes. Then next one is Sarita Kapila from Morgan Stanley. Sarita Kapila: So you addressed the study approval risk and I guess others have touched on it. But what is underscoring the confidence in the commercial potential? What's the initial feedback from the physician community being? So we've seen orals with LiverTox launch post CD20 approval, which have struggled to reach 1 billion. So I guess why is fenebrutinib different? And how are you viewing risk from Novartis' remibrutinib in RMS data in Q2 and they've had no signs of LiverTox so far? And then the second one is just on persevERA. It's also been touched on but how confident are you that you have enough patients in the trial to hit stat sig? And how should we think about the [indiscernible] study and the potential read across to persevERA? Teresa Graham: Great. So let's start with fenebrutinib. So obviously, the data have not yet been presented. So the PPMS data goes to ACTRIMS shortly, and then the RMS data will be packaged together when we have FENhance 1 as well. That having been said, we've obviously shared it with those physicians who are part of the trial. And I think people have been really impressed with the data that we've seen. And in particular, people were really impressed with the Phase II data that we've seen. So what we're talking about is the ability to get OCREVUS like efficacy in an oral treatment. And for many patients for many, many different reasons, that's a very attractive option. So again, I think in this market, a lot of it comes down to the overall efficacy that we're able to deliver. And based on the Phase II data, we believe we have a highly efficacious molecule on our hands. In terms of the Novartis data, I mean, it's important to remember, we haven't really seen anything in MS from Novartis yet. This is a dose that I think is about 4x higher than the existing dose. They had sort of second mover advantage and they started their trial with liver monitoring. So I think it's very difficult to compare because we just really haven't seen anything. We have first-mover advantage here. We've had robust Phase II data. And yes, I mean, I think we're -- it's very difficult to say anything until we actually see data. It's also, I think, important to remember that fenebrutinib is a non-covalent molecule. And in a chronic indication, that noncovalency really matters because it means that even though you're taking it chronically, if you need to stop for whatever reason, it does leave your system more quickly. And I think that really in a chronic care environment is a benefit. So in terms of read-through for persevERA, it's clear when breast cancer is dependent on the endocrine receptor for viability, giredestrant can perform very well. And we've seen that in a number of settings. So all of these patients are, by definition, dependent on ER signaling and it's worked really well here. So clearly, in the front line, the likelihood that it's successful hasn't gone down. And we should always be really cautious with cross-trial comparisons. And so I think we are -- again, as I mentioned, the benefit is, we don't really have long to wait. So we'll know really soon. And yes, persevERA is designed to show improvement over palbo plus letrozole. Bruno Eschli: Sarita, all questions answered? Sarita Kapila: Yes. Bruno Eschli: Yes. And the next one in the queue is Richard Vosser from JPMorgan. Richard Vosser: Two questions, please. First question, just to go to diagnostics for a little bit. Margins obviously hit by ramp-up of mass spec sequencing and the machine placements. Could you give us a bit of color on how to think about the margins from here? Those placements seem likely to continue as you ramp those 2 businesses up. So how should we think about '26 and then the improvement in the margins from there? And then second question back to pharma. Just going back to Vabysmo -- thanks for the comments on the foundations. Could we go a little bit further out and think about the future competition potentially from less frequently dosed injectable products? I think ocular has one half yearly. How you think about that sort of competition? And also closer to today, the biosimilars are really starting to come. They're having some impact in Europe as far as we can see. So just what's the thoughts globally, U.S., Europe on biosimilars from Eylea on Vabysmo? Matthew Sause: So in this case, maybe... Teresa Graham: No. Go ahead. I can use a break. Matthew Sause: Thank you. So maybe starting with diagnostics. So we talked about a couple of effects. There's the new technologies. There's the tariffs of which Alan said we had half the year and we'll have a full year this year. But the biggest effect on what hit us last year on the margin was really the China effect. And as you heard from Thomas, we expect to see this meaningfully diminish this year. 2027, again, we expect to decline but it will be small enough that it won't really be meaningful. And then we expect to see a recovery. In terms of specific ambition on margin this year, I think I would refer you back to the group position that Alan mentioned earlier. But I would say our consistent ambition is to grow profit faster than sales. And that is once we really get ourselves to the headwinds this year, that is our ambition going forward. And it's also our continuous ambition to improve the margin in diagnostics. That's something that is a goal for the entire organization. What I would call out, though, in 2025 is you had our second largest market with a 25% reduction. So obviously, there was an impact but that's something that you can see with our discipline on the cost line that you can also expect to see continue again in 2026 but we expect the gradual washout of that. Anything you would add to that, Alan? Alan Hippe: Well, I think for '26, I think, well, we expect kind of a stabilization. I think that's a little bit here. But we will give that additional information. Matthew Sause: Absolutely. Yes. So I would maybe just refer to what Alan said. Our goal really this year is going to be that we stabilize the margin. Thomas Schinecker: And I think on a group level, you have seen that our intention is to expand margin in 2026. And what I've said in the past still holds, which is that also going forward, we will at least keep margins stable also for the coming years. Matthew Sause: Perfect. Does that answer your question? Bruno Eschli: I think so. Matthew Sause: You go ahead. Teresa Graham: Yes. Great. So I'd like first just to start by talking about Vabysmo. So I mean, Vabysmo is highly efficacious therapy with a very well-defined safety profile where patients and physicians do have a lot of good experience in extending doses. And so -- and it is designed to do just that. When you look at -- you asked specifically about ocular, I mean, this drug is going into Phase III with a very small safety database and really no known data on long-term safety. And when you talk about something that's going to be used intraocularly over a long period of time, I think long-term safety is incredibly important. So I think it's very difficult to think about how these -- how something like that is a threat to something that has such good efficacy, such good safety and where you do actually have the ability to extend doses. So I think from a future competition perspective, just like in other disease areas, sort of the bar is high here to unseat Vabysmo. And you had one other question. Oh, biosimilars. So far, what we see is that the Eylea biosimilars are taking from Eylea. And so for those patients who are really benefiting from a new and novel treatment, Vabysmo, they were just less impacted. So yes, I mean I think we saw Lucentis take from Lucentis. We're seeing Eylea biosimilars take from Eylea and we're seeing high-dose Eylea take from low-dose Eylea. So there's a lot of trading within that space. But I think for new patients who are going on therapy, physicians are picking the best available therapy out there available to them and that is Vabysmo. Thomas Schinecker: And on ophthalmology, I would like to add that we have an amazing pipeline in ophthalmology. So when you look at all the different validated targets, I think we're the only company that actually has all the different validated targets in-house. And so if you look at our pipeline, we have trispecifics, tetrapecifics, [indiscernible] et cetera. So if I look at our ophthalmology pipeline, I think the one that's going to succeed surpassing Vabysmo, is then hopefully us. Bruno Eschli: Very good. Richard? Richard Vosser: Yes. Perfect, everyone. Bruno Eschli: And next one in the queue is James Quigley from Goldman Sachs. James Quigley: Hopefully, you can hear me. Just a couple of quick questions from my side left over. So firstly, again, on giredestrant and revisiting lidERA. What's the KOL reaction been from your side? So some of the KOLs we spoke to have been a little bit more cautious than the presenter at your SABCS event, given the more limited follow-up versus the CDK4/6 class. So how do you think this could impact the giredestrant trajectory, of course, assuming approval? Would it be more of a step up -- stepwise ramp or more a stepwise ramp as more data comes? Or do you -- or do your feedback suggest the potential for a faster, more optimistic ramp on giredestrant? So that's the first one. Second one, more a financial question. So underlying pharma growth has been pretty strong in recent years, driving operating leverage. So how is Roche balancing R&D investment with profitability? So how long can R&D expenses stay flat? This half seem to show that Roche has a strong ability to reallocate costs in R&D. But how long can this go on to support operating leverage? Teresa Graham: I mean I think what we're hearing from the KOL community regarding where they would use lidERA is pretty bullish. I mean I think what we hear from -- the lidERA population is 55% of the adjuvant breast cancer population. That's 10% more than what we saw on the NATALEE trials. So I think you are really seeing physicians believe that this could have very broad applicability in their practice. And so I think that would -- that's what leads us to be fairly bullish about the opportunity. There's a 74% overlap with the population in NATALEE and monarchE. And so I think we're very -- yes, I think we're very confident that we have something on our hands here that is quite a game changer based on the data that we've seen. Thomas Schinecker: Yes. Let me answer the second question. But first, something to add on giredestrant. I mean you look at the hazard ratio of 0.7. You can see that, that's, I would say, highly competitive to also some of the CDK4/6 trials that you've seen. But what you have on top of that is the tolerability. If you look at CDK4/6, you have quite a high amount of patients that actually stop using it simply because they cannot take the tolerability. So I think these are all the right arguments for SERDs to be used. So I do believe that the pickup will be strong. Unfortunately, I wasn't at the Congress in San Antonio but I heard there was standing innovation from the clinicians there. Then the second question on R&D. So we're working very hard to be a high-performing, very cost-efficient organization. There are still opportunities, in my view, to continue to work on that. AI, by the way, plays a big role in that. We're using AI throughout the entire development process where we want to, on the one hand, speed up using AI but also reduce costs doing that. Regarding R&D expenses, also for 2026, I would say it will be broadly flat. Again, really focusing very hard on making sure that we put the money to work in the best possible way for the sake of patients in our company and for our investors. Alan Hippe: And it all goes back to the margin point that you've made before. Thomas Schinecker: That I made before, which is, it's clear for '26, expand margin. And as previously always said, at least stable for the long term. Bruno Eschli: James? James Quigley: Thank you very much. Bruno Eschli: Okay. Then we move on to Graham Parry from Citi. Graham Glyn Parry: So one on lidERA. Thanks for clarifying the filing time line as being Q1. Just wondering if you could comment on whether you expect priority review or to use a priority review voucher or not. And when exactly do you think you would expect to see the [ ribo ] combo substudy data, 200 patients, how long does that take to recruit? And could we see something by the end of this year? Is that a next year event? And then on fenebrutinib, could you just confirm how important you think confirmed disability progression is versus annualized relapse rate reduction in showing a risk-benefit profile and differentiation versus Ocrevus to the regulator, just given the -- it's a very brain-penetrant molecule and has potentially, therefore, the ability to work on disability progression where CD20 doesn't? And then the final question is, you're technically still on clinical hold with FDA. So does that have to be lifted before you can actually file or receive approval? And what are the steps to doing that? Teresa Graham: Okay. So we expect the [ abema ] substudy by the end of the year. We would expect [ ribo ] in 2027, that is really only starting now. So we've got a little time. That's 100 patients in the [ abema ] arm. And in [ ribo ] it's 200 patients. The FDA hold will be addressed as part of the planned [indiscernible] filings, but we've obviously been in consistent conversation with the agency over time. So there -- we've been in very close contact. I won't comment on our filing strategy only to say that we plan to bring lidERA to patients as quickly as possible. In terms of confirmed disability progression, I think we are -- the annualized relapse rate is also a very good endpoint here. And we are confident that, that is giving us what we need in order to proceed. Bruno Eschli: Graham, any additional questions or -- all good? Then we move on. And I hand over to Rajesh Kumar from HSBC. Rajesh Kumar: Two questions, if I may. First, on CT-388, thanks for clarifying discontinuation rate in the highest dose was similar to the overall group. You also mentioned that you could consider a flexible dosing in Phase III trials as an option. So could you give us some color on how you're thinking about Phase III progression? Would flexible dosing or an active comparator be something you might consider? Or is it at the moment, too early to comment on that? Second, just on giredestrant, quick follow-up. You highlighted the overall TAM this class is targeting to be quite a large number. You are filing with a few -- some persevERA data is about to read. So just in terms of the market segmentation, how much of the market you think it have been risked -- derisked to some extent and how much we still depend on the data in your assessment of the market would be very much appreciated. And because I'm an analyst and I cannot count, the third question would be just on the clarification on Vabysmo. Appreciate the working capital impact has gone up and that sort of reflects a very strong December. So should we consider the exit rate of December close, the indication of how you're thinking about growth in 2026? Or should we take an overall slower growth rate going forward on Vabysmo? Teresa Graham: So I would just go back to my earlier comments. For Vabysmo, we expect to see an acceleration of growth in 2026. So more to come on that. In terms of the dosing for CT-388, so what we have disclosed is that CT-388, it will be administered once a week and we're aiming to develop it at 3 maintenance doses. We are not disclosing at this time the details of that dosing strategy. But just to avoid any misunderstanding, we have not indicated that we will be doing flexible dosing within the trial. So -- but right now, the details of that Phase III design, that specifically have not been disclosed. And then in terms of giredestrant and the market segmentation, so -- and how much do we feel like has been derisked? Well, 2/3 of the market is adjuvant and we have a positive adjuvant trial. So I mean, I think a significant portion of the -- we have a significant portion of the market that has been derisked. Bruno Eschli: Okay. And then next questions are from Michael Leuchten from Jefferies. Michael Leuchten: A question for Matt, please. Abbott said last week that the Chinese may be pursuing VBP for Core Lab oncology. Just wondering whether you've heard that and how that may or may not have been reflected in your outlook and the margin commentary you made earlier? And then sorry, Teresa, just going back to Vabysmo, just your comment about 2025 in the U.S. being reset. Q4 was still soft. It didn't really improve upon Q3 sequentially. So when you say you think that's now stabilized and it can grow from here, just wondering how you look at that Q4 versus Q3 dynamic in the U.S. Matthew Sause: Okay. 3. Wow. I know what 3 is [indiscernible]. So what I would first start off by saying is, as you may know, there was VBP for Core Lab oncology reagents last year. And so that was what you see, our China effect last year significantly represented a decrease in our Core Lab oncology reagents, which were down about 50%. So some of that effect is still pulling through this year. But I can't speak for what was said on that call but we are seeing the effect of the VBP last year and the national reimbursement reduction. So we don't anticipate additional Core Lab oncology VBP this year. Teresa Graham: So in thinking about Vabysmo, Q4 -- so 2025, we saw a big reset in the branded market in the U.S., right? With the closure of the co-pay foundations, fewer patients were put on branded drugs, more patients were put on Avastin and biosimilars. And you saw a big just sort of reset in how many new patients and continuing patients were actually going on a branded therapy and that constricted the market by about 15%. That constriction went all the way through Q4 because normally, when donations are given or grants are given, they're given 4 years' worth of therapy. What's happening right now in the oncology world is something called the blizzard. It's where every retinal specialist in the U.S. goes and reverifies the benefits for every single one of their patients. And it's at that point in time that patients actually determine what -- will they be continuing on their current medication, will they be switching, et cetera. And so over the course of the next couple of months, I think we're going to get a real sense of what is the trajectory of the branded market going to look like in 2026. But because that underlying base effect of 2024 is now washed out, you should be able to see the actual branded growth of people going on to new therapies actually come through. So I think there's a reason why we didn't see Q4 look any different than what the rest of the year looked like. I think we had sort of hoped that we might see some early signs of recovery but I think those signs of recovery really are going to come -- become a little bit more evident as we get towards the end of Q1. So Michael, I hope that addresses your question. Thomas Schinecker: Yes. And I mean, we -- the co- assistance foundations, they are separate, right, so nothing that -- in terms of influence. But what we can say is in general, that our donation was towards the end of Q4. Teresa Graham: Yes. And then again, we don't link those 2 things. It is interesting to know though that in Q4, we did see a 4% growth. So we saw... Thomas Schinecker: Quarter-over-quarter. Teresa Graham: Yes, quarter-over-quarter growth. We did see a 4% growth. So we did see a little bit of an uptick. Bruno Eschli: Michael, any follow-on? If not, then I would hand over to Paul Kuhn from Cowen. Paul? Paul Kuhn: Thanks, Bruno. This is Paul on for Steve Scala. Two questions, please. What feedback have you heard from U.S. oncologists and how they plan to initially use giredestrant in the adjuvant setting? And secondly, how did the change in Xolair biosimilar entry from end of 2026 to before November 2026 come about? Was this a change in the settlement with generic manufacturers? Teresa Graham: So with regards to Xolair, I think we have long said sort of second half of 2026 is when we expected the first biosimilars to come in for the U.S. So I don't actually think that that's a change. Bruno Eschli: I think mentioning November was just related to IRA. So that is really, we need to have a biosimilar place -- a payer in the market before the 1st of November. So then we cannot get negotiated. Teresa Graham: That is correct. So my reference to the 1st of November was purely around CMS guidance that says if you have a marketed biosimilar by November 1, 2026, then you will be removed from the negotiated basket. So that's where that date comes from. But we've always said second half of 2026, we would expect to have a biosimilar in the market. And then feedback from oncologists on where they intend to use for adjuvant. I mean, again, just to continue to reiterate, 55% of the adjuvant population was covered by the lidERA trial. And so I think you see a high degree of confidence in an oncologist to use in a very significant portion of their patients. And again, what we saw here was a very efficacious, seemingly combinable and well-tolerated therapy that I think has the opportunity to really become a new standard of care in this setting. So what we're hearing from oncologists in general is that they're pretty excited to have this in their hands and we're excited to get it to them. Bruno Eschli: Paul, if we answer all your questions? Paul Kuhn: Thank you. Bruno Eschli: Then next one would be Justin Smith from Bernstein. Justin Steven Smith: Two, please. Pharma, #1, NXT007, just wondered if you could share some thoughts on when the Phase III design head-to-head versus Hemlibra will hit ct.gov. Second one, diagnostics, Matt, just wondered if you could talk a little bit about CGM and when the finger prick recalibration will be removed and the impact that might have? Matthew Sause: Wow, 4 is new territory. So I want to first thank Teresa for generosity. But -- so starting with your question on auto calibration, which is the comparison of the CGM device with a blood glucose lancet, what we are planning to do is have that launch happen this year. I won't say exactly which quarter but that is an improvement that we expect to deliver this year. Teresa Graham: And with regards to NXT007, we would expect those trials to start in Q1, Q2 with clinicaltrials.gov entries at around that time frame. And again, these are 2 studies, one, head-to-head and one, versus [indiscernible] and one Hemlibra. Bruno Eschli: Justin, all questions are answered? Justin Steven Smith: Yes. Great. Bruno Eschli: Then I would maybe read here loud 3 questions, which I got from Luisa Hector. She had to drop off and I promised her I will go through them. There is one question on Ocrevus [indiscernible]. So the split of naive versus switch patients that we are capturing and what is the target switch rate for 2026 and at peak? What I think we have been communicating that we have 2 billion in incremental sales for Ocrevus but this is true incremental sales. And on top, basically, we would have revenues coming from switching. So we have not yet provided a detailed outlook on what the ratio, IV to subcutaneous would be at around 29%. We might do that at a later point in time. There's then a second question I found interesting on the pipeline. 66 NMEs now on the pipeline. Is this rightsized? And what we have seen now with the turnover in the fourth quarter with 4 molecules added, 5 going out -- so 5 added, 4 going out, is this now -- is there still cleansing ongoing of the pipeline? Is this now the regular run rate and the turnover? Or would we target more NMEs overall? Thomas Schinecker: Yes. I mean I can answer that question. So overall, you apply the bar not only once, you apply the bar constantly based on data that you generate but also data that you get from the outside. So clearly, I think we are at a point where we'll continue to bring in additional NMEs. We have actually -- when you look at the very early stage of our research organization, we've actually doubled the amount of molecules moving ahead there. So we do believe that we'll continue to expand on the amount of NMEs that we have in our portfolio beyond the 66. But this kind of, I would say, prioritization is just something that you have to do constantly based on just availability of data. Bruno Eschli: And then the final question here would be on capital allocation. Given your positive pipeline progress, pharma deals with the U.S. administration and with competitor developments in obesity, are there any changes to your M&A objectives and R&D investment plans? Thomas Schinecker: No, I can say there is no fundamental change. I think what we have really shown over the last couple of years that we've been very disciplined, very disciplined in terms of financials but also in terms of really screening the market for interesting molecules with good data. If you look at the amount of money that we spent compared to other companies and the kind of pipeline we've built doing that, I think we've been pretty efficient. And our intention is to continue to do the same and just continue to be quite disciplined on that. The good thing is, we are not in a situation where we have a huge patent lift, right? So we are not in a situation where we have to do late-stage deals, which are very costly. I think we are in a very good position when it comes to our late-stage pipeline. But obviously, I mean, if you look at the amount of innovation that's ongoing outside, you look at what's happening in China, we need to continue to screen the market and look at everything that's out there. I mean I looked at a statistic, for about 1,000 companies that we look at we do 1 deal. And I think that's also what I expect of our organization that we know exactly what's going on outside so that we can make data-driven good decisions. Bruno Eschli: Very good. I think with that, actually, we are at the end of our Q&A session. Let me just remind you of the 2 upcoming IR events we already have flagged. I assume there might even be more. There's on February 9, our neurology call, we will cover up the PPMS data for fenebrutinib presented at ACTRIMS. And then on May 12, we again will have our Diagnostic Day as a live event in London, where we will take you through the entire portfolio and highlight this year, I think, will be SBX sequencing. As we are now in the global launch phase, I think there is the next steps to come with pricing and so on. So I think it will be an exciting event. And with that, I hand over to Thomas for the final remarks. Thomas Schinecker: Thank you very much, Bruno and huge thanks also to the team. I would say, quite exciting times. I mean, if I see all the discussions that we've had as a team over the last 3 years and the progress we made, I think it's significant. And it's not only that, it's also a lot of fun because we get to talk about what we like to talk about, which is science, which is about progress for patients. And with people like Alan and myself who like math, also we can talk a lot about financials. So I think there's a lot of good things that are going on. And we have a good momentum both on financials and pipeline. So very proud of the team. And I do believe we've always done what we said that we are going to do and you will continue to see that going forward. We continue to move with focus. We continue to move with speed. And as always, you can count on us because we will deliver.
Operator: Good afternoon, and thank you for standing by. Welcome to the Deckers Brands Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] I would now like to remind everyone that this conference call is being recorded. I will now turn the call over to Erinn Kohler, Vice President of Investor Relations and Corporate Planning. Please go ahead. Erinn Kohler: Hello, and thank you, everyone, for joining us today. On the call is Stefano Caroti, President and Chief Executive Officer; and Steve Fasching, Chief Financial Officer. Before we begin, I would like to remind everyone of the company's safe harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the federal securities laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today, other than statements of historical fact, are forward-looking statements and include statements regarding our ability to respond to the dynamic macroeconomic environment and the impacts on our business and operating results, including as a result of changes to global trade policy, tariffs, pricing actions and mitigation strategies and fluctuations in foreign currency exchange rates. Our current and long-term strategic objectives, including continued international expansion, the performance of our brands and demand for our products; anticipated impacts from our brand, product, marketing, marketplace and distribution strategies, product development plans and the timing of product launches; changes in consumer behavior, including in response to price increases, our ability to acquire new consumers and gain share in a dynamic consumer environment; our ability to achieve our financial outlook, including anticipated revenues, product mix, margin, expenses, inventory levels, promotional activity, anticipated rate of full price selling and earnings per share; and our capital allocation strategy, including the potential repurchase of shares. Forward-looking statements made on this call represent management's current expectations and are based on information available at the time such statements are made. Forward-looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed or implied by the forward-looking statements. The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10-K and quarterly reports on Form 10-Q. Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements. On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency. For example, the company reports comparable direct-to-consumer sales on a constant currency basis for operations that were open through the current and prior reporting periods. The company believes that these non-GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to and may not be indicative of its core operating results. Please review our earnings release published today for additional information regarding our non-GAAP financial measures. With that, I'll now turn it over to Stefano. Stefano Caroti: Thanks, Erinn. Good afternoon, everyone, and thank you for joining today's call. Deckers delivered an outstanding third quarter performance, underscored by a strong composition of results that demonstrate robust global demand for our brands, fueling an increased outlook for fiscal year 2026. For the third quarter, we delivered $1.96 billion of revenue, representing a 7% increase versus the prior year. Global HOKA and UGG performance was exceptional, with revenue increasing by 18% and 5% versus last year, respectively, and each brand delivering balanced growth across DTC and wholesale. From a regional perspective, HOKA and UGG collectively drove third quarter revenue increases of 15% in international markets, reflecting continued momentum from the first half and 5% in the United States, demonstrating positive inflection relative to the first half based on our effective marketplace management initiatives. This result exceeded our expectations for both brands. Importantly, it was achieved while maintaining high levels of full price selling and demonstrated resilient price elasticity. As a result, Deckers preserved strong gross margins, which contributed to an 11% increase in our third quarter diluted earnings per share, a record $3.33. As I reflect on our progress this year and our focus to build brands for long-term sustainable growth, I'm extremely pleased with our performance over the first 9 months of this fiscal year, which contributed to total company revenue increasing 10%, HOKA revenue growing 16%, UGG revenue growing 8% and diluted earnings per share increasing 13%. Decker's year-to-date fiscal results and raised outlook demonstrate our commitment to generate shareholder value through sustained growth in revenue and earnings per share, bolstered by our share repurchase program and fortified balance sheet. Now in the final quarter of this fiscal year and looking into the next, I'm confident that we'll continue to execute on our strategic plan and deliver compelling results through the sustained strong momentum of our global brands. Steve will provide specific details on our updated guidance and third quarter performance later in the call. But first, I'll share some brand-specific highlights from the third quarter. Starting with UGG. Global UGG revenue in the third quarter increased 5% versus last year to a record $1.3 billion. UGG continues to be top of mind for consumers, growing its leadership position as a premium lifestyle brand through a combination of purposeful consumer-informed product creation that celebrates recognizable brand codes, broadening the dimensions of category acceptance and an elevated global marketplace aligned to our target consumer segments, where the brand is able to build connections and community through a tailored yet consistent brand identity. As discussed on our last call, in response to the ongoing rise in consumer demand for the UGG brand, we strategically allocated additional products to the wholesale channel prior to peak season. The results indicate that this approach has proven effective. Our strategic execution enabled improved in-stock positions for our wholesale partners, boosting fall sales and as planned, we effectively address late season demand through our direct-to-consumer channels. In terms of the UGG brand's third quarter performance across channels, DTC revenue increased 5% versus last year and wholesale revenue grew 4% compared to last year. From a direct-to-consumer perspective, our marketplace teams around the globe work closely across different departments to fill consumer demand, both in retail locations and online. Through these efforts, we drove meaningful growth in UGG Rewards membership, e-mail subscribers and retain consumers, providing ample opportunity to further strengthen consumer connections and drive repeat purchases in the future. During the quarter, we also used our DTC channel to test products with speed to market, strategically pulling forward targeted new silhouettes to generate early reads at a time where UGG historically has the greatest attention from consumers. Our new Quill franchise was a standout success through this initiative. By sharing performance insights with our wholesale partners for products like the Quill, we are able to accelerate the global expansion and adoption of new offerings. UGG has firmly positioned itself as the top premium lifestyle brand in the global market. Our ongoing goal is to further enhance UGG's presence at every consumer touch point through consistent product presentation that highlights our distinctive brand identity. While we focus on improving the consumer experience in our direct-to-consumer channels, we're also collaborating very closely with our retail partners to elevate the brand through intentional product offerings that support year-round wearability in our men's initiative. By planning strategically for shared growth, we sustain strong partnerships and nurture future opportunities, all while ensuring marketplace scarcity for UGG remains healthy. We're especially proud of how our retail partners supported the UGG brand during the holiday season, strengthening consumer connections and raising awareness and adoption across categories. Overall, this was an exceptionally well-executed third quarter and holiday season for the UGG brand. Our marketing teams did a brilliant job leveraging product collaborations, brand activations and ambassadors to drive UGG brand heat, including a feel house experience in New York City, celebrating the UGG SACAI product collaboration, pop-ups in Chicago and Berlin that featured the UGG Palace product collaboration and new male brand ambassadors across sport and pop culture in China, contributing to our strongest men's regional performance. Globally, the men's category performed very well as we continue to see healthy adoption of popular all-gender products like the Tasman, Ultra Mini and Lowmel. As well as men'-specific styles like the Weather Hybrid collection that spans across multiple silhouettes. Overall product performance was positively influenced by robust consumer response to newness, which underscores the growing demand for UGG and its diversified product range across various categories. Iconic UGG franchises continue to benefit from the addition of complementary styles such as the new Tazelle and Classic Micro, helping fuel growth for the brand with the latter even placing among the 10 best-selling styles this quarter. We also made notable progress with products aimed at supporting the UGG brand's 365 initiative. The Lowmel franchise continued to expand UGG's presence in the lifestyle sneaker segment, more than doubling its revenue this quarter and ranking among the brand's top 5 best sellers. As we approach the fourth quarter, our priority is to finish another successful year by boosting interest in new product launches that align with our brand strategies, including the Minimel, an all-new low-profile spring sneaker with/the Lowmel collection, the Otzo, an all-new Clog with a sleeker aesthetic that features elevated materials and new fashion sandal silhouettes within the Golden collection. Congratulations to Anne and the entire UGG team on a fantastic fall season and holiday quarter. We are excited for what's to come as we continue to expand consumer reach and category acceptance of our compelling product assortment and grow this amazing brand around the world. Speaking of amazing brands, let's shift to HOKA. Global HOKA revenue in the third quarter increased 18% versus last year to $629 million. This growth included strength in both DTC and wholesale with gains in the U.S. as well as international markets. The strong performance was driven by broader consumer adoption of the HOKA brand's innovative and versatile products, especially as we've refined our approach to managing the global marketplace. This helped achieve balanced growth across channels as DTC revenue increased 19% versus last year and wholesale revenue grew 18% compared to last year. As we continue to build this brand and introduce new products to the market, we are proactively maintaining a healthy pull model of demand across all channels. This approach aligns with our long-term objectives of achieving growth in every channel and region. While some fluctuations in channel growth may occur as we make strategic adjustments to distribution, we remain committed to creating a more balanced business over time as demonstrated by HOKA's performance this quarter. We continue to incorporate insights from consumers and learnings from the marketplace to refine how we go to market. A notable initiative this quarter has been our HOKA membership program, which enhanced consumer loyalty by delivering a distinct and differentiated customer experience. Our revamped membership program now includes exclusive and early product access, select opportunities for special discounts and rewards for higher purchase frequency. Though we are still early in the development of the HOKA membership program with additional consumer engagement drivers and differentiation in the pipeline for next year, we're already seeing a benefit in revenue per consumer, units per transaction and multi-category purchasing from HOKA members relative to the average consumer. These members' key performance indicators are directly contributing to our positive results, helping drive an acceleration of the HOKA brand's DTC growth in the third quarter compared to the first half of the fiscal year. In the U.S., DTC returned to healthy growth in the quarter with a meaningful improvement of new consumer acquisition online compared to what HOKA experienced earlier this year. In addition, as we look ahead to future product transitions, we see an opportunity to more effectively utilize our higher-margin DTC channel to strategically manage end-of-season inventory in a controlled manner as we tightly manage wholesale marketplace inventories to ensure a clean environment for future launches. The HOKA brand's improved DTC performance demonstrates the effectiveness of our loyalty marketing tactics, which have enabled us to enhance the consumer's journey increase brand affinity, build lasting relationships and increase customer lifetime value for a growing base of consumers. At the same time, we remain focused on driving strong performance with HOKA in the wholesale channel. We believe it's very important for HOKA to compete in a multi-brand environment, particularly in the performance category where innovation is critical to success. Our partners remain an important destination for consumers to experience the HOKA brand's unique blend of technology, geometry and premium materials directly on their feet. HOKA has continued to perform very well in the wholesale channel globally, driving healthy levels of full price sell-through and gaining additional market share. In the U.S., according to Circana, HOKA's market share increased significantly in the road running category above $140 for the 3 months ending in December. This growth further establishes HOKA as a top brand in the segment and demonstrates the strength of our full price sell-through. In Europe, the pace of sell-out continues to drive record levels of reorders with our top strategic customers averaging 90% sell-through, which is fueling future season demand. We attribute the HOKA brand's market share expansion to 3 main factors: compelling innovative products that resonate with consumers, enhanced global brand awareness and recognition and increased brand access in more locations. These developments have opened the door for a wider range of consumers to connect with the brand, not just for performance-related reasons. With more people choosing to wear HOKA as part of their active lifestyle wardrobe, the brand is well positioned to take advantage of this growing trend. HOKA is proactively advancing its lifestyle strategy, identifying this segment as a significant opportunity in terms of product development and expansion through wholesale distribution, account segmentation and differentiation. As the lifestyle category evolves, HOKA is positioned to leverage the company's global expertise in this area. As HOKA continues to tap into significant lifestyle opportunities, it's important to acknowledge the valuable growth potential within our established categories. Our main global marketplace priorities for HOKA include enhancing the brand's premium position through product innovation, engaging authentically with consumers through strategic product segmentation and expanding the brand's reach while maintaining performance integrity. As we look at wholesale distribution in the U.S. market, run specialty remains our priority segment to introduce and engage consumers with HOKA brand's innovative performance products. Our aim here is to uphold HOKA's performance credibility by continuing to lead in this segment. In sporting goods, HOKA is present in roughly half of the targeted stores we consider potential distribution points. We also see more opportunities to expand shelf space and market share in existing doors as we continue to diversify our product offering. The biggest opportunity for HOKA's expansion in the U.S. lies within the athletic specialty segment, where we are currently represented in only about 1/4 of the stores we believe will be relevant for the brand moving forward. Internationally, we're much earlier in the process of expanding HOKA's distribution. In Europe, we're making steady progress in building awareness and marketplace presence. We still have room for door and market share expansion in the European run specialty segment, where we continue to climb in brand ranking throughout various countries in the region, having captured around 80% of the opportunity we see for this segment. Furthermore, HOKA has reached approximately 40% of the European sporting goods destinations considered relevant for the brand and is available in less than 20% of suitable athletic specialty stores in the region. This illustrates the significant opportunity that remains for attractive distribution expansion. In Asia, our primary area of focus remains China, where we operate mainly through a mix of company-owned and partner-run mono-brand retail stores. Typically, we keep a 2:1 ratio of wholesale partner locations to company-owned retail stores. Currently, we occupy a little less than 1/3 of the potential we see over the next several years. All of this to say, we continue to see meaningful untapped global opportunities for HOKA. We're building this brand for the long term, and we'll continue to take a methodical approach to global expansion, maintaining a full model of demand while gradually improving the balance between DTC and wholesale channels. Our ongoing progress in international markets, along with positive developments in our U.S. operations makes us very optimistic about HOKA's promising future. From a product perspective, top franchises continue to perform very well, and we are now operating in a much cleaner global marketplace relative to a year ago. The brand's launch of Gaviota 6 is off to a great start, further bolstering our positioning in the stability category alongside the positive reception of the Arahi 8. HOKA has a number of exciting product updates to come in the fourth quarter across our key strategic priorities of winning in road, dominating trail and igniting lifestyle. The category has 2 key product stories launching in Q4. Our Pinnacle racing shoe, the Cielo X1 3.0, which is the fastest and lightest racing shoe HOKA has ever created and our completely redesigned Mach 7, crafted for responsive daily runs with tempo. Beyond the Road segment, we eagerly anticipate the launch of Speedgoat 7, which is designed to build HOKA's legacy in the trail category by offering an exceptional underfoot experience across diverse terrains. In lifestyle, we are excited to announce the launch of our first fully integrated marketing campaign for this category, featuring new ambassador partnerships, global brand experiences and products that connect with well-known HOKA franchises. Congratulations to the whole HOKA team on a well-executed quarter. We look forward to closing out the year with these exciting product launches to come. I am really proud of the success our entire team has delivered this year, and I'm even more excited for what lies ahead as I look at the opportunities for the next year and beyond. We intend to continue driving healthy profitable growth for both UGG and HOKA. We expect HOKA to remain our fast-growing brand with significant potential for international expansion and consistent progress in the U.S., supported by effective marketplace management. At the same time, we also expect the UGG brand to continue driving growth across DTC and wholesale through its men's and 365 product initiatives, similarly led by international regions alongside continued growth in the U.S. Given these growth opportunities, our disciplined management of the global marketplace to sustain strong full price sales and our strategic investments leveraging portfolio synergies, I'm confident that Deckers will continue to be a leader in our space. Thanks, everyone. Over to Steve for more details on our third quarter financial results and an update to our fiscal year '26 guidance. Steve Fasching: Thanks, Stefano, and good afternoon, everyone. Our third quarter performance exceeded expectations and demonstrated robust momentum of the UGG and HOKA brands. For the third quarter, UGG drove solid growth to deliver its largest quarter in history with balanced increases across channels and regions. HOKA delivered another quarter of strong global growth with this quarter being balanced across DTC and wholesale. HOKA growth was led by international and included meaningful contributions from the U.S. market, highlighted by the positive inflection of the U.S. DTC business. These results are a testament to the exceptional strength of our premium brands within the U.S. and internationally as our disciplined approach to marketplace management, combined with innovative product and an elevated consumer experience led to high levels of full price selling and exceptional performance during the holiday season. Now let's get into the details of the third quarter results. Third quarter fiscal 2026 revenue was $1.96 billion, representing a 7% increase as compared to the prior year. Revenue growth in the quarter was primarily driven by HOKA, which increased 18% versus last year to deliver $629 million, adding $98 million of incremental revenue over the prior year. As anticipated, HOKA performance benefited from another sequential improvement in the U.S. DTC business, which delivered healthy growth in the quarter, contributing to a more balanced result across DTC and wholesale. UGG increased 5% versus last year to deliver record quarterly revenue of $1.3 billion, adding $61 million of incremental revenue over the prior year. UGG growth also benefited from improved global DTC performance, which inflected to positive growth following a more pressured first half. Gross margin for the third quarter was 59.8%, which was better than we had expected for the quarter, primarily due to a lower-than-expected impact from increased tariffs, reflecting the timing of inventory flows and the mix of inventory sold through during the quarter, benefiting from lower tariff inventory in the pipeline. Larger benefits from our pricing actions, primarily attributable to the UGG brand and though above last year, we had slightly lower promotions than planned for the quarter. In achieving this result, both UGG and HOKA maintained a very healthy level of full price selling with each achieving an average selling price slightly above the prior year and HOKA delivering gross margin expansion in the quarter, contributing to our better-than-expected result. SG&A dollar spend in the third quarter was $557 million, up 4% versus last year's $535 million as we continue investing in key areas of the business. As a percentage of revenue, SG&A was 28.5%, which is 80 basis points below last year's rate of 29.3% with leverage primarily driven by favorable impacts from foreign currency exchange rate remeasurement. Our tax rate for the quarter was 23.3%, which compares to 21.8% for the prior year. These results culminated in a record diluted earnings per share of $3.33 for the quarter, which is $0.33 above last year's $3 diluted earnings per share, representing EPS growth of 11%. Turning to our balance sheet. At December 31, 2025, we ended December with $2.1 billion of cash and equivalents. Inventory was $633 million, up 10% versus the same point in time last year and includes tariffs paid on inventory received this year. And during the period, we had no outstanding borrowings. In the third quarter, we repurchased approximately $349 million worth of shares at an average price of $92.36. Through the first 9 months of fiscal year 2026, we have repurchased approximately 8 million shares, representing more than 5% of shares outstanding at the beginning of this fiscal year. As of December 31, 2025, the company had approximately $1.8 billion remaining authorized for share repurchases. And given our strong cash flow and cash balance and in consideration of the current market valuation, we remain committed to continue returning value to shareholders through our share repurchase program. In fiscal year 2026, we are on track to repurchase more than $1 billion in total by the end of the year, which is expected to contribute more than $0.20 of diluted earnings per share improvement. Now moving into our updated guidance for fiscal year 2026. Based on the strength of our brand's performance in the third quarter, we are increasing our full year revenue expectations to a range of $5.4 billion to $5.425 billion. For HOKA specifically, we've raised our expectation now reflecting mid-teens revenue growth versus last year. And for UGG, we now expect revenue to increase mid-single digits versus last year, which is at the high end of our prior guidance. Gross margin is now expected to be approximately 57%, which is 100 basis points above our prior guidance, primarily due to lower than previously anticipated net impact from tariffs. We still expect SG&A to be approximately 34.5% of revenue as we continue to make investments that support the long-term growth and opportunities ahead for UGG and HOKA. Our operating margin is now expected to be approximately 22.5%, which is 100 basis points above our prior guidance and remains best-in-class. We still expect an effective tax rate of approximately 23%. These updates and the continued benefits from both year-to-date and projected fourth quarter share repurchase result in a raise to our expected diluted earnings per share, which is now in the range of $6.80 to $6.85, representing a 7% to 8% increase over last year's record EPS. Regarding tariffs, based on the robust pricing power of our brands, which has not materially impacted demand to date, combined with a lower-than-expected blended tariff rate in Q3, we now expect the unmitigated tariff impact on fiscal year 2026 to be approximately $110 million. As a result of our better-than-expected price action benefits and the favorable timing of inventory sold, we now estimate a net tariff impact of approximately $25 million. Please note, this does not represent a full year impact if tariffs remain in place moving forward. Our increased full year 2026 guidance includes the following assumptions for the fourth quarter. HOKA is expected to deliver 13% to 14% growth, representing the brand's largest ever quarterly revenue based on the momentum from international regions and continued U.S. growth with both contributing to global market share gains. UGG revenue is assumed to be roughly flat to last year as some orders previously planned for Q4 shipped earlier in Q3 with the total of both quarters contributing to the brand's increased outlook for the year. Our implied gross margin assumes an approximate 200 basis point headwind, the entirety of which is expected to come from the net pressure from tariffs. Note that this is projected to be our largest quarterly net impact from tariffs in fiscal year 2026 on a rate basis as we anticipate the full 20% burden in Q4 and slightly more deleverage in our SG&A spend in the quarter as we continue to make investments while taking advantage of our overall improved outlook. We believe these targeted variable investments will help us continue to carry momentum into FY '27. As Stefano touched on, we have a high degree of confidence in our brands to continue delivering exceptional results into next fiscal year. Specifically, we believe Deckers has the ability to continue delivering meaningful revenue growth paired with a top-tier operating margin beyond this year, through operating a pull model of demand, maintaining a well-managed global marketplace that drives high levels of full price selling, utilizing shared service synergies across brands as we invest to add capabilities and remaining disciplined in our approach to portfolio management, focusing on investments in areas that we see the highest long-term returns. In closing, we are proud of the outstanding results achieved in the third quarter as our in-demand brands drove record quarterly revenue and earnings per share. UGG and HOKA are operating at a high level across the global marketplace. And I, along with the rest of our leadership team, remain confident in our ability to deliver on our increased guidance for fiscal year 2026 and continue driving healthy growth over the long term. With that, I'll hand the call back to Stefano for his final remarks. Stefano Caroti: Thank you, Steve. Deckers performed very well in the quarter, achieving record results that highlight the strength of our brands in the global marketplace. During the holiday season, UGG and HOKA drove consistent growth across channels, demonstrating success in both international markets and in the U.S. through compelling and innovative products that are meeting the demands of our consumers. Deckers has once again demonstrated resilience, gaining share and improving growth momentum in the current environment. We have visibility to continued growth, both domestically and internationally, and this gives us the confidence to raise our full year outlook. We are very proud of our company's ability to guide for another year of robust and profitable growth through our powerful differentiated brands that are operating in growing segments of the global marketplace. UGG and HOKA are both actively scaling their respective addressable audiences through category expansion, giving each brand ample opportunity to gain market share, grow in underpenetrated markets and capture new consumers globally. They remain highly complementary, allowing us to benefit from shared synergies and knowledge expertise across the organization as we maintain our best-in-class profitability profile. Before we close, I want to once again express my sincere gratitude for the tremendous work of our dedicated global teams and all we've accomplished thus far in this fiscal year 2026. In December, the Wall Street Journal recognized Deckers as one of the best managed companies of 2025, an honor made possible by the collective efforts of our employees who are the driving force behind what makes our company so special. Thank you all for joining today's call, and thank you to our shareholders for your continued support. With that, I'll turn the call over to the operator for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Jay Sole of UBS Financial. Jay Sole: Stefano, it sounds like HOKA really had a terrific quarter. It sounds like that you've seen an acceleration in the business from last quarter to this quarter. Can you maybe just dive into what has changed? What has driven the improvement? You talked a lot about product. I think you mentioned the Gaviota, the Arahi. There's a lot of newness out there. You mentioned the Cielo, the Mach, Stinson, some of these other things that have popped up. Is it product? Is it marketing? Is it just maintaining a very strong full price sell-through mentality? Maybe just explain to us what has gotten better? And do you see it as sustainable going forward? Stefano Caroti: Yes. First of all, I do see it sustainable going forward. I think we had a few learnings last year. We decided to space out key franchise launches with tightened inventories of outgoing styles, and we better leverage our DTC channel to move closeouts in a controlled manner. We see opportunity across every region every channel in every category of our business this year. So I feel confident that this trajectory will continue. Steve Fasching: Yes. I think, Jay, just to add on to that, too. I think what's also encouraging in some of where we're seeing acceleration is with some of the new product that we introduced last year, performing very well with consumers. So recall that we had some of our big franchise updates last year, early last year, and we've continued to see consumers engage with those updates quite a bit. Stefano Caroti: Yes. And as you mentioned, Jay, Gaviota 5 is off to a great start on the back of a successful Arahi introduction. Now we're a meaningful player in the stability category. Transport 2, again, launched last week, but off to a good start. Cielo X1 3.0, our fastest and lightest shoe to date, launched today, and it's already our best-selling style online. So I feel very good about the product pipeline coming. Jay Sole: Got it. Maybe if I can just follow up on that. You talked about lifestyle in your prepared remarks. I think you mentioned you're going to do a new ad campaign. Can you talk a little bit more about where lifestyle is today, what your projection is for how that business will develop? And with all the new stuff that you're talking about, Machs, Speedgoats, Cielo, Gaviota, Arahi, Stinson and Transport, I mean, how much is the diversification of the product line really changed the mix of the business from just Bondi and Clifton? Can you give us a sense of that as well? Those are really the 2 questions. Stefano Caroti: That is really one of our aims. We have boosted capabilities, as you know, across innovation, design, color and lifestyle. And this is helping us more effectively segment the marketplace and also differentiate DTC. Performance, however, remains at the core of what the brand is. And as you know, the lifestyle consumer has adopted many performance styles. At the same time, we do view this category as a huge opportunity for the brand. And I'm really encouraged by what is coming. Early reads on some of the products we launched in Q4 is very positive. [ Stinson ] 7, Bondi Mary Jane, Speed loafer are performing very well. And as I look ahead, the team has done a great job in clarifying the line architecture, simplifying designs and also hit more commercial price points. So I do believe that we have a good runway also in lifestyle going forward. Operator: Your next question comes from the line of Peter McGoldrick of Stifel. Peter McGoldrick: I was interested in the channel strategy for the UGG brand. It's encouraging to see both channels grow in tandem in the key sell-through quarter. Given the shift in strategy to prioritize retail partner in-stocks for fiscal '26, I'm curious how we should think of your plans to manage the UGG brand in fiscal '27 on a wholesale versus DTC basis. Stefano Caroti: Potential for the UGG brand across all channels. all regions and all categories. So you should continue to see a balanced growth in the UGG portfolio. We're very happy with what the brand has delivered in terms of newness. Our 365 offering has been very well received. Our -- we're now playing legitimately in the sneaker category with the Lowmel. And our classic products continue to perform very well. So you should expect continued segmentation of the marketplace, continued differentiation and growth across all channels, markets and categories. Steve Fasching: Yes. And I think, Peter, also, as you looked at this year in terms of channel strategy, I think the important thing to recall is a couple of things. that impacted timing, especially around the wholesale channel distribution. So recall, in Europe, we had a distribution center move. So we were shipping earlier product to avoid disruption on some of that business logistics change in Europe. And then I think with the strong demand that we saw coming out of last year, we saw strong wholesale orders and then reorders. And so much of those customers wanted product earlier this year. That's why you were seeing a shift of the wholesale growth more to the first half of the year. And that was really more of an indication of the strength of the demand of the UGG brand coming up to our biggest season. And so what that allowed us to do was shift more focus to DTC. So very encouraging to see how that channel played out during the course of the year because, again, we're not managing just every quarter. We're managing the business for the long run and for the season. So what's very encouraging is how well the season did. And I think some of the dynamics that you saw play out between quarters was just a way of managing the increasing demand that we're seeing for the brand. Peter McGoldrick: I appreciate that. And Steve, a follow-up for you on DTC performance. Nice to see the consolidated inflection. I'm curious how we should consider this moving forward? It seems like you've got some nice structural contributors from HOKA membership, and then we're looking at easier comparisons. Can you help us think about assumptions for traffic, conversion, ticket and basket embedded in the outlook? Steve Fasching: Yes. So we continue to see improvements. So I think encouraged with what we saw, consistent with what we've been saying for the past few quarters in terms of an expectation that we would see momentum and improvements in the DTC performance. You're seeing that continue in the current quarter that we just reported, and we're continuing to look for improvements going forward. So I think encouraged with everything that we've said. I think the other highlight was some of the things that we talked about in prepared remarks, which improved DTC and I think importantly, drove gross margin improvement on the HOKA brand, right? So it shows that the work that we're doing to improve the business, draw more full-priced consumers in and bring them through the DTC channel is working, and we'll continue to build on that. Operator: Your next question comes from the line of Laurent Vasilescu of BNP Paribas. Laurent Vasilescu: I wanted to follow up on Peter's Steve. The HOKA guide of 13% to 14%, this is despite a very, very easy compare. Any considerations there on that front? Is it just conservatism? I think you mentioned in your prepared remarks, maybe with Stefano, going forward, there's fluctuations in channel growth that may make strategic decisions. Can you maybe unpack a little bit more for the audience? Steve Fasching: Yes, sure. I'll start on that. I think the point there, right, is how we're managing both our brands for long-term sustainable growth, right? And so we're not going to get hung up on kind of quarterly compares if we believe it's kind of detrimental to the brand. So if we look at what happened this year, right, as I talked about with Peter's question in terms of how we were flowing inventory into the channel, we're making sure that we have the appropriate amount of inventory with the demand that we're seeing, but also setting up an opportunity to continue to grow our DTC, right, with a long-term target of improving the proportion of our DTC business overall, which will take several years. It's an important marketplace management setup of how you get there. And I think that's what you're seeing play out this year is a focus on balancing some of that wholesale demand out, fulfilling it a little bit earlier, placing then a little bit more emphasis on DTC growth as we get into the selling or bigger selling seasons. And that works, right? And so as we look going forward, it's about maintaining that. One of the positive things, I think, that we see is when we have these strong quarters, it's a signal of the consumer demand that's out there, right? And the demand for our brands is very strong. What it also does is it encourages some wholesale accounts to order bigger and order earlier, and we'll take advantage of that. And that's where that will play out. But again, we have a very keen focus on how we continue to develop our DTC business. You've seen some of the improvements that we've made and how that's driving more consumer engagement and more full-price consumer engagement for us. Laurent Vasilescu: Very, very helpful. And then as a follow-up second question here. I think on the last call, it was noted that you have strong spring/summer order for HOKA. I think today, I think you talked about meaningful growth. Curious to know what your order books look like. If you can maybe unpack that a little bit more in terms of dimension, like in terms of how do we think about the growth rates there because you mentioned meaningful growth. And did I hear this correctly, Steve, that you anticipate UGG to grow next year for fiscal '27? Was that in the prepared remarks? Steve Fasching: Sure. I'll take a shot at the first one, and then Stefano, you can jump in. Yes, we're anticipating growth for UGG in FY '27. I think through the quarter that we just delivered is a demonstration of how well the UGG brand resonates with consumers across the globe, including the U.S. So even as we continue to get bigger, the demand continues to grow for this brand. And so yes, we see UGG continuing to grow in FY '27. Stefano Caroti: Yes. And to the order book, we're not going to provide today fiscal '27 guidance, but I'm pleased with how the order books are coming in for both brands, especially for HOKA, given the fact that HOKA books a bit early fall than UGG does. Typically, wholesalers wait for the holiday season to end given how big that season is for UGG to place orders in early spring. And -- but we have visibility through the first 3 quarters of next year, and we're very encouraged by how the order book is developing globally. Operator: Your next question comes from the line of Paul Lejuez of Citi. Paul Lejuez: Curious within the HOKA wholesale business, if you can talk about sell-through by channel, specialty running, sporting goods, athletic specialty, what you saw this quarter? And I'm curious if you've seen any change quarter-to-date. Stefano Caroti: No major changes. Throughout the fall season, sell-through continued to outpace sell-in, which is a good indicator of brand health in the marketplace. All our major introductions for the season and the color updates on our 2 biggest franchise continue to perform well. In the athletic specialty space, our performance product has actually outperformed our lifestyle product. But in one of the 2 leading athletic specialty retailers for the month of December, we're the #2 brand in the doors we're in. So the brand is performing well really across channels. Paul Lejuez: Can you talk about the sell-through at the sporting goods channel as well? Stefano Caroti: Very similar -- my comment was for the -- for all channels. So generally speaking, yes, we continue to perform well across all channels, across every market. Paul Lejuez: Got it. And then just one follow-up. I think last quarter, you had some cautionary comments about the U.S. consumer. Just curious about your outlook for the consumer, just given that we've just got through the holiday season, how that might influence or inform how you're thinking about growth for each brand in the U.S. next year. Stefano Caroti: Yes, that's fair. We've been cautious about the economy and the consumer, but never about our brands. So the brands did show up, and this increases our optimism going into next year. Steve Fasching: Yes. I think, Paul, just on that, I think as Stefano said, our comments in prior quarters more has been just watching especially the U.S. consumer as we've seen very strong growth internationally. We knew our brands are well positioned. And I think we even said that on the call last quarter, which was, hey, if the consumer shows up, we expect our brands to do well. And that's exactly what happened. So even in the current environment, I think we see consumers choosing and buying the brands that they want. And again, with our performance, this is just an indication of the resonance that our brand has with consumers. And so that really gives us confidence going into next year. Operator: Your next question comes from the line of Sam Poser of Williams Trading. Samuel Poser: Aaron, I'm sorry, we can't go through our normal stuff. We already got all the info. Can you hear me? Steve Fasching: Yes, we can hear you. Samuel Poser: Okay. All right. A couple of questions. Can you give us some idea of how the domestic DTC business was for HOKA and for UGG? Stefano Caroti: Both UGG and HOKA performed well indeed. Steve Fasching: And I think continuing -- yes, continuing to grow positively inflecting, right, which is kind of what we said on the call. So again, as we said at the beginning of last year, we expected sequential improvement. We've delivered sequential improvement, and we've positively inflected in the U.S. Samuel Poser: So is that -- I mean, you're up 19% with your DTC. Does that mean U.S. was up like 8% and you were -- or I mean, can you give us a little warmer? And then was the UGG DTC business up in the U.S.? Steve Fasching: Yes. So both were up. Stefano Caroti: Brands were up, yes. Samuel Poser: Okay. And then you talked about lifestyle. And then, Stefano, but you mentioned like with athletic specialty, how they were doing better with performance products. How do you define lifestyle? I mean, because a lot of product over the years has -- so the product has run over the years has just always hit the it's a gray area, what's lifestyle and what's performance sometimes based on how consumers respond. So how do you define lifestyle? Stefano Caroti: We define lifestyle as product created by our category, right? But to your point, we're treating performance products also in a lifestyle manner that have been adopted by our Flex specialty distribution, and those have performed very well. So... Steve Fasching: Yes. And I think, Sam, just on that a little bit, right? I think to your point on kind of the gray area nature is we build performance product. But clearly, we have people wearing it once they experience kind of the comfort of HOKA for lifestyle applications. So we have performance shoes that are being worn in lifestyle applications. When we talk about the further lifestyle ability, it's more around the improvement on certain styles or designs where we can further amplify our ability to get into a lifestyle category. Clearly, people are wearing -- individuals, consumers are wearing HOKA product for lifestyle. That is giving us more permission to move more aggressively into a lifestyle-defined category. Samuel Poser: And one last thing. Back to the breakout, the regional breakout. Based on the information you gave us about DTC, that implies that 1 of the 2 brands, HOKA or UGG was down, the wholesale business was down in the quarter. Could we assume that, that was HOKA just because of the amount of Bondi that you shipped? Steve Fasching: No. Yes. So just to clarify on that, no, both UGG and HOKA were up. If you'll see on the press release, part of what's driving the decline is the phaseout of the Koolaburra brand. And so that's where you're seeing decline. So if you refer back to the press release, you'll see where we've broken out kind of the 3 categories, the declines there are driven by the phaseout of Koolaburra. UGG and HOKA were all positive. Samuel Poser: In both geographies? Stefano Caroti: Yes. Operator: Your next question comes from the line of Rick Patel of Raymond James. Rakesh Patel: I also have a question on HOKA U.S. DTC. So you've touched on the numbers, but can you help us understand what drove the positive inflection in Q3 relative to the first half? Because you previously alluded to consumers preferring to shop in person for new products and this weighed on D2C in the first half. So just curious what's changed in the go-to-market strategy to drive the positive outcome in Q3 as we evaluate the durability of this DTC growth. Stefano Caroti: One of the main reasons, Rick, has been the HOKA membership program that has helped us improve revenue per customer, units per transaction, multi-category purchases and relative to the average customer. That was one of the main reasons for our success. and the fact that there was less noise in the marketplace of outgoing styles. If you recall last year with the Bondi transition, and there was a lot of product in the marketplace. This year, the marketplace is a lot cleaner, and we benefited from it. Steve Fasching: Yes. And I think, Rick, to the point you made where we were saying people were finding the updates, right? People were more familiar with the updates. So as we moved into Q3, and this was part of our comment on the sequential improvements, as people became more familiar with the product having been in the market, they were responding, right, to the updates. That's to my earlier one of the questions where I talked about what's driven confidence for us is the consumer engagement with our updates. And so yes, it's Clifton, Bondis, Arahis, it's other styles, too. But that it speaks to consumers coming back to us directly through improvements through the membership program and engaging with us to buy that product. So there are a number of things there that are embedded. It's product improvement... Stefano Caroti: Exclusives, early drops, and that has definitely helped our DTC business. Rakesh Patel: Great. And then can you also help us think about the opportunity for HOKA pricing? I think the increase you took last year was a bit lower than what competitors have done. So do you see room to take pricing higher? And if so, is that a near-term event? Stefano Caroti: Selectively and strategically, as we've done, we have some price increases hitting the spring and some more in the fall. We typically, when we upgrade the product, we price it up. that has been our approach and has served us well so far. Steve Fasching: Yes. And I think the quarter demonstrates that we have more pricing power, and that's something that we can always look at. Operator: Your last question comes from the line of Dana Telsey of Telsey Advisory Group. Dana Telsey: As you think about the DTC channel, any difference by brand of e-commerce and stores? And what are your plans for opening stores this year? And then just on the wholesale channel, any more color on any specific retailers that's been working? And did you have any exposure to SAC? Stefano Caroti: On the latter, no, we have little or no exposure to SAC. Both channels, retail and e-commerce performed well. And your third question was sort of related to DTC -- on wholesale. We're very happy with really the performance of the brand really across all retailers. Journeys had a good run with the brand. Foot Locker is performing well with the brand. ESG is performing well with the brand. Run specialty continues to perform well with the brand, and we are together with Brooks, #1, 2 in the run specialty channel. So generally, the brand has performed in a balanced way across the wholesale portfolio. In the U.S. Operator: There are no further questions at this time. With that, ladies and gentlemen, concludes today's call. We thank you for participating. You may now disconnect your lines.
Operator: Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the First Quarter Ended December 31, 2025. Today's call is being recorded, and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com. At this point, I will turn the call over to David Goldberg, Senior Vice President and Chief Financial Officer. David Goldberg: Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal '26. Joining me today is Allan Merrill, our Chairman and Chief Executive Officer. After our prepared commentary, we will open up the line, and Allan and I will be happy to take your questions. Before we begin, you should be aware that during this call, we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date the statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time to time, and it is simply not possible to predict all such factors. I will now turn the call over to Allan. Allan Merrill: Thank you, Dave, and thank you for joining us on our call this afternoon. We began fiscal '26 in a stubbornly soft demand environment, but stayed focused on actions within our control that can drive timely and measurable progress toward our 2026 and multiyear goals. Our efforts were concentrated on proving the value of our differentiation, reducing direct construction costs and enhancing balance sheet efficiency. While most metrics came in at or below our expectations, the December quarter is always our slowest and we have plenty of time to make up for the shortfall. While caution is certainly warranted, we have paths to grow both full year EBITDA and book value per share. Here's how. First, since mid-December, we've seen better traffic and buyer engagement. In fact, January sales pace has been in line with the prior year after 8 quarters of year-over-year pace compression. Second, we have tangible catalysts in place that will drive higher homebuilding margins in the back half of the year. And third, we're managing our balance sheet and land spend to accelerate highly accretive share repurchases. Let's take these one at a time. On sales, we're not just hoping market conditions continue to improve. We're also benefiting from the new branding and lead generation efforts we launched in the fall. The focus of our Enjoy the Great Indoors message is a more comfortable and healthier home and dramatically lower utility bills. This is a message other builders can't deliver and it amounts to thousands of dollars in savings per year for most customers. We're also extending our leadership in utility savings by introducing solar included homes in many communities. This makes the full potential of 0 energy ready homes and easy reality for our buyers. No complicated sizing decisions, no cumbersome leases or guessing at payback periods. From day 1, our solar included homes reduce monthly utility bills to a little more than a basic service charge. Now there are two keys for making solar work for homeowners without tax credits or incentives. First, you must significantly reduce a home's energy consumption in order to shrink the size of the system. All of our homes do this. Second, you have to eliminate the many inefficiencies that have existed in residential solar business models. Working with our partners, we've been able to reduce installation costs for more than $4 per kilowatt hour to less than $2, and we know we can drive it even lower. Results thus far are promising. Homebuyer enthusiasm has been strong and margins in our fully solar communities are among the very best in the company. This is exactly the kind of offering that separates us from other builders in meeting the affordability challenge. On profitability, last quarter, we laid out a series of specific catalysts for about 300 basis points of margin expansion between the first quarter and year-end. And these remain firmly intact. So far, we've reduced labor and material construction costs by more than $10,000 per home or nearly 200 basis points, which should be reflected in our third and fourth quarter results. By the fourth quarter, we expect another 100 basis points of margin expansion from the combination of positive mix shifts within our existing communities and the increase in contributions of new communities. These newer communities, which we have defined as those that started selling in or after April 2025 were just over 10% of first quarter revenue, but are projected to account for about 50% of fourth quarter revenue. ASPs and margins on sales in these communities are both substantially above existing communities. Finally, we're seeing a modest shift toward to-be-built sales so far this year, which if sustained would be another margin catalyst. Turning to capital allocation. Our strategy remains disciplined and aligned with our multiyear goals. Within our portfolio, we continue to sell nonstrategic assets in submarkets that no longer match our differentiated product strategy or were intended for sale when we bought them. We now expect around $150 million in proceeds, increasing balance sheet efficiency and freeing up capital for higher return uses, particularly share repurchases. During the first quarter, we bought back $15 million of stock, bringing our trailing 12-month total to $48 million or about 7% of our shares. We have $72 million remaining on our share repurchase authorization, and we expect to fully execute it this year. Selling land above book value to fund share buybacks below book value is obviously highly accretive for shareholders. Of course, we evaluate all of our actions through the lens of achieving our multiyear goals for growth, deleveraging and book value per share accretion. With 168 communities at quarter end and 23,500 active lots under control, we remain on track to reach our greater than 200 community count goal by the end of fiscal '27 even accounting for the impact of our planned asset sales. We are committed to deleveraging to the low 30% range by the end of fiscal '27. With our plan to accelerate share repurchase activity, however, net leverage is likely to be flat year-over-year at or just under 40% at our fiscal year-end. Finally, book value per share finished the quarter above $41, up versus last year. Our goal remains to generate a double-digit CAGR in book value per share through the end of fiscal '27 through both profitability and share repurchases. Allocating $72 million to share repurchases through the rest of this year will certainly drive book value per share growth. Even in a challenging market, we're determined to move profitability and returns higher, by capitalizing on our differentiated product strategy, reducing labor and material costs, driving toward a higher-margin community mix and allocating capital to maximize shareholder value. With that, I'll turn the call to Dave. David Goldberg: Thanks, Allan. During the first quarter, we sold 763 homes with a pace of 1.5 sales per community per month. While part of this weakness reflected a continued tough market, we also chose not to chase volume as many of our peers discounted homes into their year-end. Our average active community count continued to grow, reaching 167, up 4% year-over-year. Our homebuilding revenue was $359.7 million with 700 homes closed at an average selling price of $514,000. Homebuilding gross margin was reported at 14%, though this included a litigation-related charge arising from an attached product community that began in 2014. Excluding the charge, which represented about 180 basis points, our homebuilding gross margin would have been about -- would have been 15.8% in line with our guidance. Looking at our mix, specs represented 70% of our closings, but only 61% of our sales. If the trend toward more to-be-built homes continues, it would add to margin in the back half of the year. SG&A was $65 million, in line with our expectations. Taxes represented a $1.5 million expense despite our pretax loss. This reflected our projected annual effective tax rate applied to our quarterly results. All told, first quarter adjusted EBITDA was negative $11.2 million and the diluted loss per share was $1.13, which again included a $6.4 million pretax or $0.23 per share impact of litigation-related charge. Now let's walk through our second quarter expectations. We expect to sell approximately 1,100 homes comparable to last year. We expect to finish Q2 with about 165 active communities, another quarter with a year-over-year increase. We anticipate closing about 800 homes with an ASP around $520,000 to $525,000. Adjusted homebuilding gross margin should be relatively flat sequentially, excluding the impact of the litigation-related charge. SG&A total dollar spend should be about flat versus the prior year quarter. From a land sale perspective, we expect to generate about $30 million of revenue. This should result in total adjusted EBITDA of around $5 million, including gains from land sales. Interest amortized as a percent of homebuilding revenue should be about 3%. Taxes are projected to be an expense of approximately $1 million, similar to Q1. This should result in a net loss of about $0.75 per diluted share. Depending on the prices paid for repurchase shares, we ought to be able to offset most, if not all, of the loss in book value per share by quarter end. Last quarter, we established the goal of generating growth in EBITDA for the full year. While the sales miss in our seasonally slowest first quarter certainly didn't help, we are still working to achieve this goal, excluding the impact of a litigation-related charge. Operationally, here's what needs to happen in the back half of the year. I'll start with the factors where we have higher visibility and more control of our outcomes. First, our average selling price will need to reach $565,000 in the second half, which is in line with our current backlog ASP propelled by our newer communities. Second, the direct cost actions and positive mix shifts Allan outlined will need to materialize and drive 3 points of adjusted homebuilding gross margin expansion by the fourth quarter. Third, we need to keep growth in SG&A under $25 million for the full year. And fourth, we'll need to execute the $150 million of land sales we've discussed. We have very good visibility on these transactions and anticipate they will generate a double-digit EBITDA margin in the aggregate. There are two other factors that will determine whether we can achieve EBITDA growth both of which depend on market conditions and competitive activity. Incentives will need to remain consistent with current levels for each community type, and we need to deliver a sales pace above 2.5% in Q3 and Q4 on a gradually increasing community count. Admittedly, we have not achieved this pace in the last 2 years, but it's a level well below historical trends. It's not going to be easy, but we do have a path to achieving EBITDA growth this year. Independent of whether we reach our EBITDA growth goal in 2026, we still expect to grow book value per share at year-end by 5% to 10% as we execute the remaining $72 million of our buyback authorization. At current prices, our full repurchase capacity represents more than 10% of the company, which would bring our total buyback to nearly 20% over an 18-month period. Because of the strength of our land position, we expect to do this and still finish fiscal '26 with a net leverage at or below 40%. We are focused on maintaining a strong balance sheet. At quarter end, we had more than $340 million of total liquidity, including $121 million of unrestricted cash and $222 million of revolver availability and no maturities until October 2027. As we said, net leverage will be flat this year as we balance our allocation of capital against our multiyear goals. During the first quarter, we spent $181 million on land acquisition and development and generated $3 million in land sale proceeds. At quarter end, our active controlled lot position was approximately 23,500 with 61% of our lots under option contracts. Over the last several years, we built a very strong land position, allowing us to maintain our growth poster even while selling nonstrategic assets. We anticipate our land sales will be above book value in the aggregate demonstrating that even if assets that no longer fit our strategy are worth more than what we paid for them. With that, I'll now turn the call back over to Allan. Allan Merrill: Thanks, Dave. To wrap up, I just want to reiterate two key takeaways. First, it was a slower start to fiscal '26 than we would have liked. But the first quarter is a small piece of the picture, and we still have a path to full year EBITDA growth. We're seeing green shoots for the spring selling season, and we've got very good visibility on margin catalysts, ASP growth and profitable land sales into the back half of the year. Whether we're able to achieve our goal will depend on stability and normalization in market conditions, but we're working very hard to make it happen. Second, we're fully committed to driving book value per share growth this year, independent of EBITDA growth. By realigning our land portfolio to accelerate share repurchases, we know we can create significant shareholder value. Let me just finish by thanking our team for their ongoing efforts to create value for our customers, partners, shareholders, and, of course, each other. With that, I'll turn the call over to the operator to take us into Q&A. Operator: [Operator Instructions] Our first question is from Alex Rygiel of Texas Capital Securities. Alexander Rygiel: Is your repurchase plan contingent on the timing of the $150 million profitable land sales? David Goldberg: No, I mean, not really, Alex. I mean, obviously, we're not going to do all at once. We talked about that we would be over the timing of the year, but it's not contingent on specifically the timing of the land sales. Alexander Rygiel: Helpful. And then generally speaking, sort of what is that gross margin spread between a build-to-order versus a spec home? Allan Merrill: It depends widely, but it has always been in the 4% or 5% range, and I would say that's probably gotten a little wider in the last year. I don't have the exact percentage because, of course, you're comparing apples and oranges between geographies and communities. But it's 400- or 500-plus. Alexander Rygiel: And then lastly, as it relates to sort of the favorable commentary about traffic in kind of the latter half of December and January. Do you see there -- is that kind of solely based upon interest rates sort of pulling back a little bit here? Or is it just because of a better mix? What are some of the reasons that you believe are driving that improved traffic? Allan Merrill: I think there are a couple of things going on. The very last slide in the appendix of our slides is a chart that we've shown for years, which is the affordability math looking at monthly mortgage payments as a percentage of income. And what's been happening slowly, I mean, imperceptibly looked at day-to-day, but it's very obvious when you look at it over years is rates have moved down a little bit. Home prices have stabilized or on a net basis have come down. Incomes have kept moving forward, so we're a lot closer to that low 20% affordability band that has characterized really healthy housing demand. So I think that we shouldn't overlook that is going on in the background. And we can get excited about rates doing this or that on a day-to-day basis, but the trend that has been underway over the last year has been very positive and improving affordability. It's still elevated, but it's getting a lot closer. Then I think the second part is just what you said, as we go from 10% of our revenue in the first quarter to 50% of our revenue in our newest communities just the demand patterns. And we talked about it before we launched them. We've talked about it since we've launched them. We've seen very good traction with communities that were purpose-built with our super high efficiency, our zero energy ready homes and an increasing share with solar included. A combination of things I think we're doing in this improving affordability backdrop, is, I think, what's contributing to what we've seen from a traffic and sales progression over the last month. Operator: Our next question comes from Julio Romero of Sidoti & Company. Julio Romero: On your introduction of solar included homes, when do you expect those homes to begin to flow through orders and closings? And then any color you can provide and how accretive those homes are expected to be to either sales or profitability? Allan Merrill: Well, right now, they're not a huge percentage of our closings, but we've got a couple of markets, and I'd highlight Las Vegas. There is some risk, I'll be wrong by a single community, but we basically had solar included across our attached and detached product in Las Vegas for the last couple of years. And that's really where we've been able to get after the supply chain and the installation protocols and sort of ring out what I call some of the excesses from the traditional solar residential solar business models. We've expanded that into Phoenix. And of course, we've got our big greenhouse community here in Georgia, the largest solar included community in the state. We've got it in a very big community in South Carolina that we're launching next month. So I think we're trending towards 20% of our business at the end of the year will be in solar included communities, but it's in our sales and closings now. In terms of the mix, all I would say is that solar included communities definitely have higher margins than not just the average, but even of similar generation communities, like they are accretive. But it's a small enough sample size that I think we start getting into basis points and they could get dangerous, but this has helped. I wanted -- having been enthused about this, and I am, I want to be a little cautious about the fact that this is also a function, the adoption of this is going to relate to utility providers and their posture vis-a-vis rooftop solar. What we've seen in the last year or 2 is kind of a 180 in some municipalities and with some public power companies where electricity demand has surged and we've all heard about data centers. And as that's happened, it has changed the dialogue with these utility providers, where all of a sudden, what had looked like competition becomes a little bit of a savior for them because now they have an opportunity for new communities to be much more self-sufficient or closer to self-sufficient, which takes some of the pressure off of the demands that they're experiencing. Now we all know that the rate of growth in electricity demand is not evenly spread, but in markets where you're seeing significant growth in demand for power, and I would point out Western markets, including Arizona, we have definitely benefited from and are changing the conversation with utility providers because that's one of the bottlenecks, right? They have to be willing and they are not just net metering things. We don't really worry about net metering, but what are the hookup charges? What are the barriers to getting your permits. And I think we are finding a more and more receptive environment, but it isn't going to be everything all at once. Julio Romero: Very helpful. And you noted that your to-be-built mix was trending favorably in 1Q orders relative to the mix in your closings. Can you talk about the drivers of that positive mix trend and if that's expected to continue trending towards... David Goldberg: I think, a, it has to do with some of our newer communities that are drawing a lot of attention. I also think the fact that inventory is coming down is creating some buyers who are willing to wait because it's not everything about get me the house immediately. I think it's probably a combination of those two factors more than anything else. Operator: The next question comes from Natalie Kulasekere of Zelman & Associates. Natalie Kulasekere: So last quarter, you mentioned that you're looking at a closings growth of 5% to 10% for fiscal 2026. And pardon me if I missed this on the call, but how exactly are you looking at it now? Are you still expecting to grow closings this year? And if so, what does it depend on? David Goldberg: Yes. Nate, what I would say is, obviously, some of it will depend on what happens in the selling season and what happens in the next 90 days. But our focus is really about our path to executing growth in EBITDA and book value per share. And we know that we have a path to go do so. And as I said in my comments, we're kind of independent of what happens from the EBITDA growth perspective. We're going to go and grow book value per share and it's to increase land sales and a little less spend, and we think that's really accretive for our shareholders. Natalie Kulasekere: Okay. And I guess my next -- just one quick follow-up. I'm just trying to figure out what happened in the first quarter. Was it particular markets that were underperforming? Or did you just see weakness across all your divisions as a whole? Allan Merrill: So we had two or three divisions where sales pace was up in the first quarter, but it means we had a dozen or more of that sales pace was flat or down. So it was pretty broad-based. But I want to put it in a little bit of context. We're probably between 100 and 150 sales short of where we thought we would be, which is less than one home per community over the course of the quarter. The other thing, and it's why I said what I said about a path, first quarter normally represents about 15% of our order volume and 10 or 15 whatever percent miss on that, it's 2% or 3% of our total orders for the year. And we know that. We know this every December, in particular, we get into this dynamic where people are discounting like crazy to hit their fiscal year-end goals. . And I understand it, but this was a year where we just decided this was not the time to be particularly aggressive and go toe to toe. And honestly, based on how the December traffic and the sales environment has changed, I'm pretty glad we didn't go ultra low in December to try and get an extra 100 sales because the repercussion across communities over the balance of the year would have been pretty significant. Operator: [Operator Instructions] Our next question comes from Tyler Batory of Oppenheimer & Company. Tyler Batory: I wanted to circle back on the guide and really the commentary about sales pace in particular in the back half in terms of the 2.5% there. Do you think that's achievable in the current backdrop? Do you think there needs to be a little bit of an improvement in the macro to hit that? And just kind of remind us what gives you confidence that there's going to be this ramp in the second half of the year versus the first half? David Goldberg: Well, look, Tyler, we certainly think it's achievable. I mean Allan kind of talked about what was happening in January and late December and improving buyer engagement, seeing more traffic, the receptivity to our Enjoy the Great Outdoors messaging. Is it what we did in '24 and '25? No. You're absolutely correct. It would be -- the last years haven't shown that. But if you look at historical trends, that's actually below what we used -- what we've done in Q3, Q4. So we think in a more normalized market with inventory levels coming down, some improvement in buyer demand that we've seen already into January, if that persists, it certainly is an achievable level. Look, I said in my remarks, and I think it's clear to say we have a path. It's not easy. It's not an easy path, but we clearly have a path. But our focus is on how we grow book value per share and get that EBITDA growth. Tyler Batory: Okay. And then my follow-up, thinking about the gross margin progression here, you're flat quarter-over-quarter, Q2 versus Q1, and Q1 was a little short of what you had guided to previously. So just talk a little bit about the shortfall in Q1 and the moving pieces sequentially into Q2? And then just remind us and help us think about the progression in terms of the ramp in gross margin in the back half? David Goldberg: So let's talk about it. First, I don't need to pick a bone, but I would tell you, we said we'd be about 16.8 -- we've got 16%, excuse me. Ex the litigation charge was 15.8%. So it feels pretty close to about 16%. I mean that feels pretty close to me. In terms of queue, what's really happening in the back half of the year that's causing that change we tried to outline it. And look, it's not about incentives going down or us assuming the market gets better. Incentives do go down because of mix shift because we have newer communities coming online. We have some higher-priced existing communities that are delivering more homes, and we have those direct cost savings that we have very good visibility to in our new starts. So it's very similar to what we said last year -- last quarter, excuse me, Tyler, last quarter about the 300 basis points. We still have good visibility into it. We obviously aren't trying to make a prediction on incentives of what happens in the back half of the year. But if incentives on like products stay the same, we've got some good improvement coming through in the back half. Tyler Batory: Okay. And then last one for me. In terms of some of these newer communities, 10% of revenue in Q1, just remind us the ASP or margin premium on those communities compared with the other 90% of revenue that was coming through in Q1? Allan Merrill: Well, you're starting to see it in the backlog ASP. I think backlog ASP is around $560 thousand. And that backlog are to be built from those newer communities. So that's giving you a flavor for what is going to happen to ASP in the back half of the year as those newer communities represent 50% or more of our revenue. On the margin progression, it's a couple of hundred basis points. I mean it is definitely material. And so moving from 10% to 50% on our revenue, picking up that kind of margin lift in addition to what we're seeing on the direct cost side, that's where our confidence in the movement of 300 basis points in margin comes from. David Goldberg: I would just add to that, Tyler. We don't give out specific ASP and backlog on new versus existing, but I would tell you, it is significantly higher. Operator: Our next question comes from Rohit Seth of B. Riley Securities. Rohit Seth: Just on the litigation expense, was that a onetime charge or is it ongoing? David Goldberg: That is a onetime charge. As we mentioned in the remarks and had to do with the community that we started construction in 2014, it's not our current product. It's not a repeating charge. It is a onetime charge. Rohit Seth: Okay. And where do you guys stand now on incentives? What was the change into the... David Goldberg: Yes. We don't give the exact incentive numbers out. It's not something we publish. But I think it's safe to say that the margin degradation that you saw from Q4 to Q1 was in part because of higher incentives around mix. Rohit Seth: Okay. And with the industry looking at clear inventory in the December quarter, you guys opted not to go that route. How is your inventory position heading into the new year? Allan Merrill: It's very healthy. We've got a combined spec position of in the 6s per community, down from in the 7s. So it's a little bit lighter like everybody else's. The finished inventory, I think, is in great spot for the spring selling season. So it's lower, but I think it gives us an opportunity. I mean we really focus on what our production universe is as we think about tracking down profitability for the year. And I think the combination of better cycle times and the inventory position we have today give us the unit inventory that -- or the unit universe that can drive the EBITDA growth path that we described. Rohit Seth: Okay. And if demand were to snap back, what are your cycle times now? Are you guys are well positioned to ramp back up pretty quickly? Allan Merrill: Yes. In the first quarter, we added a little over 2 calendar weeks or reduced our cycle time by about 2 calendar weeks. And I think in the starts in this next quarter, we'll get a little bit more. And when I think about that year-over-year, I really think about what's the last day of our fiscal year that we can sell a to-be-built home and still get it started and closed by the end of our fiscal year. And gosh, in the middle of COVID, that cutoff date was like in January. And we've been slowly pushing it further out as we've been reducing cycle time. And in most of our markets now, we're in April or May. And that really helps, right? That's the way -- it's maybe not a perfect way to think about it, but it's like adding 2 weeks to your fiscal year if you compress cycle time by 2 weeks because you've got the opportunity for that additional period to make those sales that you can get started and closed. Rohit Seth: Okay. And then final question, with the government talking about intervening in the housing market. For you guys and your customers, what do you think would be more impactful, something on the rate side or the down payment side? Allan Merrill: That's an interesting question. I mean every buyer has got their own environment. We've been really focused on affordability, this math on the slide that I referred to. So I think a combination of wage growth and monthly payment reduction, and that's why we're so focused on utility savings and mortgage rate savings and all of the things that we do, I think that's probably more important for our buyers than down payment assistance. Operator: I show no further questions. David Goldberg: Okay. I want to thank everybody for joining us on our call this quarter, and we will talk to you in 3 months. Thank you very much. This concludes today's call. Operator: Thank you. This does conclude today's conference. You may disconnect at this time. Thank you, and have a good day.
Operator: Good day, and welcome to the OSI Systems, Inc. Second Quarter 2026 Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Alan Edrick, Chief Financial Officer. Please go ahead. Alan Edrick: Good afternoon, and thank you for joining us. I'm Alan Edrick, Executive Vice President and CFO of OSI Systems. And I'm here today with Ajay Mehra, OSI's President and CEO. Welcome to the OSI Systems Fiscal 2026 and second quarter conference call. We are pleased that you can join us as we review our financial and our operational results. Earlier today, we issued a press release announcing our fiscal second quarter financial results. . Before we discuss these results, I would like to remind everyone that today's discussion will include forward-looking statements, and the company wishes to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 with respect to such forward-looking statements. All forward-looking statements made on this call are based on currently available information. and the company undertakes no obligation to update any forward-looking statements based upon subsequent events or new information or otherwise. During today's call, we will be discussing the company's results using both GAAP and non-GAAP financial measures. For more details on these non-GAAP measures, their comparable GAAP measures and a quantitative reconciliation of the 2, please refer to today's earnings press release. I will begin with a high-level summary of our financial performance for the second quarter of fiscal 2016 and then turn the call over to Ajay for a discussion of our business and operational performance. We will then finish with more detail regarding our financial results and a discussion of the increased non-GAAP EPS guidance for fiscal year '26. We delivered strong second quarter financial results. setting Q2 records across multiple metrics, and we are excited about the momentum across our biggest divisions. The company's revenues increased 11% year-over-year to a Q2 record of $464 million. Our 2 largest divisions achieved double-digit top line growth with Security up 15% and Opto up 12%. This top line performance is particularly impressive, given that last year's Q2 included substantial revenue from large security programs in Mexico. The solid revenue growth led to a record Q2 non-GAAP adjusted EPS and of $2.58. These results included a step-up in R&D, reflecting our commitment to innovation. Additionally, cash flow was solid as we generated $62 million in operating cash flow, and while this number is notable, we believe calendar 2016 cash flow may be even stronger. Before diving more deeply into our financial results and discussing our outlook for fiscal 2016. I will turn the call over to Ajay. Ajay Mehra: Thank you, Alan, and thank you, everyone, for joining us today. I'm excited to discuss our business and share our Q2 fiscal '26 results with you in more detail. We had another record-breaking quarter in Q2, and with revenues of $464 million, representing 11% year-over-year growth and strong earnings reflecting our continued momentum. Our Security division performed well. and our Optoelectronics and Manufacturing division delivered another solid quarter. Overall, we continue to see nice demand across many of our markets, and our backlog remains healthy providing confidence for a strong second half of fiscal '26 and visibility going beyond that. Let's discuss each division's performance, starting with security. In our Security division, we delivered overall double-digit revenue growth, driven by increases in both product and service revenues as we continually innovate to drive market leadership. We also continue to introduce new innovative product features. Security bookings were lower than expected during the quarter, primarily due to delays in receiving anticipated orders in part due to the U.S. government shutdown and some pushout from international customers. These high probability opportunities are still in the pipeline. During the quarter, we announced a $20 million award to deliver a comprehensive radiological threat detection solution to an international customer. This project involves deploying a wide are radiation monitoring network that operates continuously to detect and track radioactive threats. Also, while the formal announcement came after the quarter, we were informed in Q2 that we were selected to support security screening at a major global sporting event in Europe this winter. These wins further reinforce OSI's position as a trusted global printer of critical security infrastructure supporting national security and high-profile mission-critical environments worldwide. Switching to RF. We announced shortly after the end of the quarter and international order valued at approximately $30 million to deploy advanced RF-based communication and surveillance systems for naval operations. We are also gaining traction on Golden Dome, the U.S. initiative to create an integrated missile defense system. To that end, our RF business was selected to participate on a massive U.S. missile defense agency contract, known as Shield. This is a multiple award, indefinite delivery, indefinite quantity contract to support the development of Golden Dome. The contract has a ceiling value of $151 billion over a 10-year period making it one of the largest IDIQ contracts ever issued by the U.S. Department of Defense. We were one-off 2,400 awardees and believe delivery orders from the Shield IDIQ could be received in the foreseeable future. As a result of the Golden dome potential and other growth opportunities for RF solutions, including the recent International naval order, we're enhancing our RF operational footprint. We are expanding into new facilities in Texas, which significantly increases production capacity improves operational efficiency and further demonstrates our commitment to our customers and long-term innovation in this space. Our overall security pipeline includes a wide range of opportunities, both internationally and domestically, and we are well positioned with a broad range of security offerings. Moving on to Optoelectronics. This division delivered another impressive quarter with double-digit top line growth, achieving a second quarter record for revenues and adjusted operating income. This performance was driven by broad demand across our diversified product and customer base. We are seeing growth across industries ranging from medical diagnostics to semiconductors, driven by the breadth of our offerings. Opto also had a strong book-to-bill ratio this quarter. This division continues to see an expanding opportunity pipeline as OEMs are active in diversifying away from China and derisking their supply chains by shifting to other low-cost manufacturing regions. By expanding our production capacity with our newest manufacturing facility in Mexico and leveraging our operations across Southeast Asia, India and North America, we are poised to meet rising global demand and continue benefiting from this trend. Given strong bookings and consistent performance, we believe Opto is well positioned to build upon this momentum. And finally, let's discuss the Healthcare division. While Q2 was a challenging quarter for our Healthcare division, we remain focused on long-term value creation. We have intensified our sales efforts and are focusing our pipeline of new products by continuing to invest in next-generation product development. While it will take time to regain our footing. We are confident that these actions, along with the broader market recovery will improve health care's performance in the coming quarters. Overall, we are pleased with OSI's Q2 and first half results. We grew revenues and profits significantly and continue to drive efficiencies in our business. I will now return the call to Alan to discuss our financial performance further before we open the call for questions. Thank you. Alan Edrick: Thank you, Ajay Now I will review in greater detail the financial results for Q2 and then discuss our increased fiscal 2016 non-GAAP EPS guidance. As mentioned, our Q2 revenues were up 11% compared to the second quarter of the prior fiscal year, with strength across our 2 largest segments. Security division revenues in Q2 were $335 million, an increase of 15% year-over-year. This growth was driven by significantly higher service revenues, increased revenues from the RF business, which continues to be effectively integrated into our overall operations and increased aviation product revenues. As expected, and directionally similar to last quarter's trend, revenues related to our large Mexico security contracts decreased 50% to $27 million in Q2 fiscal '26 from $54 million in Q2 of the prior year. Excluding the Mexico contracts, securities revenue surged 31% year-over-year reflecting healthy demand across the broader security portfolio. Meanwhile, our Optoelectronics and Manufacturing division had another excellent quarter. Opto sales, including intercompany increased 12% year-over-year to $113 million, which is a new Q2 record for this division. This was driven by growth across our diversified product and customer portfolios and as a just suggested, Healthcare division sales were soft. Our Q2 fiscal 2016 gross margin was 33%, and down from the same quarter in the prior year as a less favorable revenue mix on product sales, outweighed an increase in gross margin from higher service revenues. Our margins can sutuate based on product and service mix and volume, supply chain costs, FX, tariffs, among other factors. Moving on to operating expenses. Expenses in the second fiscal quarter were $70.2 million, down 1% from the prior year Q2 and representing 15.1% of sales compared to 16.8% of sales in Q2 of last fiscal year. We continue to work diligently across all of our divisions to manage our SG&A cost structure efficiently. R&D expenses in Q2 were $19.8 million or 4.3% of revenues, up from $18.3 million in the same quarter last year. This increase stems from our commitment to investing in innovation, resulting in market-leading offerings, particularly in security and positioning OSI well for the future. We expect to continue our heightened R&D efforts to advance key initiatives through the remainder of the fiscal year. Even with these investments, our combined SG&A and R&D expenses as a percentage of sales have decreased annually for each of the past 8 years. and this trend is anticipated to continue for fiscal '26, underscoring our ability to drive operating efficiencies while still funding growth initiatives. Now moving below the operating line. Net interest and other expense in Q2 was $10.7 million, up from $8.6 million in the same quarter of the prior year, while net interest expense decreased from $8.6 million to $6.4 million on reduced borrowing costs, this was offset by a $4.4 million nonrecurring cost for a retirement plan amendment of the former CEO. Our effective tax rate under GAAP was 19.5% in Q2 of fiscal '20 and versus 23.3% in Q2 last year. However, excluding discrete tax items, our normalized effective tax rate, which is the rate used in calculating non-GAAP EPS was approximately 23.3% this quarter compared to 24.0% in the same prior year quarter. On a non-GAAP basis, our Q2 FY '26 adjusted operating margin of 14% and was up sequentially from Q1, but down from the prior year second quarter as expected due to the tough comp. The Security Division's adjusted operating margin was 17.8% in Q2 of fiscal '20. And compared to 19.9% in the same prior year period. Strong growth in higher-margin security service revenues was offset by a less favorable mix of product sales and the growth in R&D. The Opto adjusted operating margin increased 100 basis points to 12.9% from 12.8% in last year's fiscal Q2. We continue to anticipate efficiencies in our newest manufacturing facility in Opto to contribute to expanding margins in the second half of the fiscal year. Lastly, the adjusted operating margin of our Healthcare division was rather negligible given the sales level. Moving to cash flow and the balance sheet. Our operating cash flow improved in fiscal Q2 on a year-over-year basis. DSO in Q2 decreased 17% from Q1 and is expected to further decrease by the end of the fiscal year. We continue to receive payments from a significant Security division customer in Mexico during the quarter, marking progress, albeit at a slower pace. We expect substantial cash inflows in the second half of fiscal 2016 and beyond as we continue to collect on the Mexico receivables, which should lead to sizable operating cash flow and strong free cash flow conversion. In Q2 of this year was $7 million, while depreciation and amortization expense in the quarter was $9.6 million. Our balance sheet remains solid. Our net leverage at the end of Q2 fiscal '26 was approximately 2.2 as calculated under our credit agreement. We completed a highly successful convertible notes transaction in November in which we raised $575 million at a coupon of 0.5%. This transaction increased our liquidity and financial flexibility for future growth initiatives while simultaneously reducing interest expense through the pay down of our revolver. In connection with the transaction, we bought back approximately 547,000 shares at an average price of $267 per share under our stock buyback program. Now turning to our updated guidance. We are raising our fiscal 2016 guidance for non-GAAP EPS and while maintaining our revenue guidance. We now anticipate non-GAAP earnings per diluted share to be within a range of $10.30 to $10.55 and which would represent 10% to 13% year-over-year growth. This updated outlook factors in a challenging comp from a significant reduction of revenues from our Mexico contracts in fiscal 2016 in our Security division. This should be more prevalent in Q3 than Q2 with an expected Q3 revenue headwind of over $50 million to year-over-year revenue growth which is expected to be the highest quarterly variance of fiscal '26. Based upon the expected timing of the backlog conversion, Mexico and other factors, we anticipate the growth in our fiscal 2016 Q4 and to be significantly stronger than the growth in Q3. We note that this fiscal 2016 non-GAAP diluted EPS guidance excludes any impact of potential impairment, restructuring and other charges, amortization of acquired intangible assets and their associated tax effects and discrete tax and other nonrecurring items. We currently believe this guidance reflects reasonable estimates. The actual impact on the company's financial results of timing changes on the expected conversion of backlog to revenues, new bookings, timing of cash collections, tariffs and potential future government shutdowns, among other factors, is difficult to predict and could vary significantly from the anticipated impact currently reflected in our guidance. Actual revenue and non-GAAP earnings per diluted share could also vary from the guidance indicated above due to other risks and uncertainties discussed in our SEC filings. In summary, we are committed to operational excellence. As we continue to grow our businesses and provide innovative products and solutions to our customers. We are pleased with our performance in the first half of fiscal 2016, and we expect a solid second half as we continue to generate significant cash flow and utilize our financial strength to invest in key strategic areas with the goal of driving long-term value for our shareholders. Once again, we thank the entire global OSI team for their dedication to supporting our customers and partners, their efforts are what make our results possible. And at this time, we would like to open the call to questions. Operator: [Operator Instructions] And we do have our first question from Mr. Jeff Martin. Jeff Martin: I wanted to dive into the orders activity in Security comment, softer than expected. The overall backlog was essentially unchanged at $1.8 billion. So is it better to phrase it as the orders were not as strong as you expected rather than soft? Ajay Mehra: I think -- this is Ajay. The best way to describe it, I think we said it that we expected strong orders. And some of them got pushed to the right because of the government shutdown and a little bit some internationally, but all those are very much alive in our pipeline, and we expect a strong next 6 months. Jeff Martin: Great. And then I was curious if you could expand on the IDIQ contract of Golden dome. It sounds like you're expecting something could materialize in the relatively near future. Is this something you could theoretically see orders start to come in, in fiscal '26? Ajay Mehra: A lot of this is dependent, obviously, the funding came in for the big beautiful bill, and there's a substantial amount of funding in there. Like I said, it's the largest contract one of the largest contracts out there at $151 billion, but there are 2,400 people there. But we feel that we're in a good position with the products that we provide, especially our over the horizon radar. And we are talking to customers. We are actively pursuing opportunities really can give you a feel for when this will happen. Obviously, timing, dealing with the government sometimes takes longer. But we feel good about the foreseeable future that we'll get some orders and -- like I said, we have also expanded our facilities in Dallas, Texas, and we feel -- we feel positive. Jeff Martin: Excellent. And then Alan, how should we think about interest expense on a quarterly basis going forward from here? Alan Edrick: Yes, Jeff, good question. With the paydown of our revolver mid-Q2, we would anticipate that the level of interest expense will decrease from Q2 to Q3 a little bit. We got some of the benefit, about half a quarter benefit in Q2. And then Q3 and Q4 should be relatively comparable to one another. Jeff Martin: Okay. And then you're going to have quite a bit of excess cash comp on the balance sheet, particularly with Star anticipated free cash flow over the next 12 months, call it. What's the potential for additional share reports received from here? Alan Edrick: Well, Jeff, you're right. We have a strong balance sheet. We have nice cash on the balance sheet as of 12/31. And and with the strong expected free cash flow over the period of time you mentioned, that should only increase. Our capital allocation has always consisted of kind of 3 things: M&A, stock buyback, and any paydown of revolver, which we've already done at this point in time. And they're not mutually exclusive necessarily. So stock buyback is certainly an option for us. We did a sizable buyback in Q2 of about 546,000 shares, but the opportunity to buy back further shares is certainly available to us. Operator: And one moment for our next question. And that will come from the line of Josh Nichols with B. Riley Securities. Josh Nichols: Great to see the strong cash flow during the quarter. Just want to dive in a little bit. Obviously, we have the government shutdown that impacted things a little bit. But can you provide a little bit more detail about what you're seeing in terms of the big beautiful bill and RFP timing? Are you seeing some RFPs already in calendar '26? Or do you expect the award activity maybe pick up in like calendar 2Q or 3Q or some of those like procurement time line shifted a bit? Ajay Mehra: So I think that the shutdown definitely move stuff to the right. We are starting to see some money flow in. We expect some money will flow in, in the first 6 months of this year. But I would say most of it will be towards the latter part of calendar '26 and beyond. So it's really been more of an effect of timing than anything else. Josh Nichols: Got it. That makes sense. And then, Alan, I know you mentioned, look, the receivables on the DSO have been improving. You said Mexico was part of that. Like can you just elaborate a little bit more maybe on where we stand in terms of Mexico DSO? Or is that going to continue to be a significant free cash flow driver in the fiscal second half relative to where the rest of the business is? Alan Edrick: Yes, Josh. Good question. And you're absolutely right. though we collected some nice payments from Mexico in Q2, it still represents, by far, our largest receivable at the overall company. And we would expect, based on the due dates and when we think cash is coming in, that really over the course of the balance of fiscal '26 and really part of fiscal '27 to kind of have some potential outsized free cash flow conversion as the Mexico receivable normalizes, which will drive down our DSO quite significantly, resulting in the cash flow. Josh Nichols: And then last question for me. I know the comps aspect, right, with Mexico for the margins have been a little bit challenging, but they are easing. I think by the time we get to like the end of this fiscal year, you're probably in a pretty good position, particularly with the service revenue trajectory that we have seen. Any more detail you can provide about like the guidance outlook in terms of the margin and the growth potential for the service revenue relative to hardware from where we stand today? Alan Edrick: Yes, Jeff -- excuse me, Josh, this is Alan. Good question again. Absolutely. We're highly encouraged about where we're heading on margins. Our service revenues growth has been outstanding. Of course, we started seeing real strong service revenue growth in the third quarter of last fiscal year. So we'll start coming on to a little bit more difficult comps on the service revenue growth. but we still expect it to be growing at a much faster rate than that of products in most cases. And the service revenues carry a higher margin than our product revenues. So as a result, we see some real nice room for operating margin expansion. We see that more tilted to Q4 for the reasons I outlined during sort of the prepared remarks. But yes, we see some good opportunity for operating margin expansion in Q4 and beyond. Operator: Thank you. One moment for our next question. And that will come from the line of Christopher Glynn with Opheimer. Christopher Glynn: Alan, just was hoping you could revisit that kind of tilt to 4Q that you just referenced outlined in the prepared remarks. I missed a little bit of it. And then just in terms of a finer point, the midpoint of your guidance basically gives us exactly $1 billion revenue in the back half. Should we think about that as like 55% across the remaining 2 quarters? Or is that a little extreme. Alan Edrick: Good question, Chris. Really kind of what's driving a much stronger Q4 than Q3 are a couple of things. One, of course, is the U.S. government shutdown, which pushed a few things a little bit to the right. But the much bigger impact is Mexico. I had mentioned that the Mexico revenue variance between last year and this year of the 4 quarters is most prevalent in Q3 itself. So there's a big headwind, if you will, on the Q3 revenues related to Mexico. That then begins to subside substantially in Q4 and of course, as we move into the next fiscal year. So yes, I would anticipate when you're looking at the splits, the revenues being significantly higher in Q4 than Q3, and therefore, the same would hold true to the bottom line. Christopher Glynn: Okay. Great. And then on the expected strong second half bookings, is that essentially a CBP factor that we're talking about there? Ajay Mehra: Well -- this is A.J. Obviously, CBP is one of them. We get a lot of orders from the rest of the government. And like I said, we're pursuing a lot of international orders as well. So it's a combination of a few customers. Christopher Glynn: Okay. Great. And then I know you don't announce everything. But aviation orders, I think if we're tracking correctly been a little bit quiet. So just wondering if you could comment on the pipeline for the aviation market. And might there be some announcements in the second half in that vertical? Ajay Mehra: Well, the aviation market remains strong for us. The pipeline remains strong. And just bear in mind with Aviation. Sometimes it takes a little longer. The airport sometimes are not ready because of construction, et cetera. But we feel good about the pipeline right now. Alan Edrick: And maybe to add on to that, Chris. This is Alan. The aviation business has been very good for us. The aviation orders, we tend to get a large volume of aviation orders but sometimes they're of a lesser amount, not necessarily to the rise to the level of a press release, if you will. But the overall business has been [indiscernible]. Christopher Glynn: Okay. And sorry, if I could fit in a bookkeeping one. Someone already asked about the interest expense bridge from the refi there and the converts. Could you level set the shares, how to think about those or even give us a plug for the third quarter? I know option exercise is probably up a little bit with the really strong stock performance. Alan Edrick: Yes. So from the diluted shares perspective, with the stock buyback, it came down a bit in Q2. We'll probably see a little bit more impact of that in Q3 and then stabilize. Of course, with the rising stock price, that will have a little bit opposite effect countering that a little bit on diluted shares. But overall, we would anticipate the diluted share count will be reducing a little bit in Q3 and Q4 should be pretty comparable to Q3. Operator: One moment for our next question. And that will come from the line of Mariana Perez Mora with Bank of America. Mariana Perez Mora: Thank you so much. Good afternoon, everyone. I wanted to touch base on the radio frequency business. And you mentioned opportunities for Golden dome, and investments being made to expand to new facilities in Texas. Like could you mind given us some color around like how large is that business today? And how should we think about when we look at that business like 3 to 5 years from now? Ajay Mehra: Well, great question. I think the best way for us to answer that is you've heard in the news, what they're looking to do in Golden Dome. We have a portion of it. So we think we have a good opportunity over the next 2, 3, 4 years to really get some very good solid growth as this program continues. So I can't really get into specifics, maybe 6 months down the road, 3 months down the road, whatever as we get more color on what they're doing, we'll be able to answer that question. But right now, we feel very good about the growth prospects in that business, and that's one of the reasons we decided to expand and move into a brand-new facility that gives us the opportunity to be able to meet that demand and really showcase to the customer all the innovative technologies that we have. Mariana Perez Mora: And then I wanted to tap or like dig a little bit deeper as well on CBP opportunities. there has been like all this government accountability office reports about like how CBPs lagging in their effort to have large noninterest inspection systems, putting like the land ports. And they are -- they have been progressing just like, I don't know, 40% over the last 10 years on a goal that was like due next year. And they say that there is a problem with the civil works and that's why they have a lot of like systems in inventory. Like how that affects orders for you guys, how that affects your market share as you take care of both the systems and the civil works, how should we think about like opportunity from those efforts in the next couple of years? Ajay Mehra: So great question. I mean, keep in mind, if you've been down to the border, how complicated the border crossings can be and civil works is not an easy thing. You need to go through as far as the government is concerned, a lot of different agencies and through GSA and others. Having said that, we have been, I think, the most efficient supplier to the CBP in terms of equipment. We continue to see some of that equipment orders that we think are going to come in, not just for water crossings, but for ports for other areas, such as airports. And so we think it's going to continue. Is it going to speed up. The best way to put it is, as you put new systems in on both sides, not just from us, but from the government, you learn. So things get things get more efficient. And that's what we're hoping as we move forward. Mariana Perez Mora: Great. And last one from me is sports event. So you mentioned a European one and an award on that end, but could you mind reminding us how is the pipeline of opportunities for the FIFA World Cup this summer? And then how should we think about the Olympics as well. Ajay Mehra: So we definitely are a premier player over there, and we feel very good about the announcement we made. We feel very good about the upcoming major events in the U.S. and internationally. And as you know, we won the -- we did another major event 1.5 years ago in the summer in Europe. So we feel very good. And I think that we are uniquely qualified to do it because we've done it so many times, number one. And number two, we have a breadth of technology that is really unmatched with other people. Operator: One moment for our next question. And that will come from the line of Seth Seifman with JPMorgan. Christopher Barbero: This is Rocco on for Seth. There's been a lot of conversation of increasing international demand for the security products. Are there any specific kind of regions or countries that are leading the pack on either urgency or size of the opportunity? Ajay Mehra: Well, U.S., obviously, is one. We see a lot internationally and, frankly, in the Middle East. And we're seeing a lot of countries starting to pay more attention, especially with some of the trade issues that are going on to see can they scan more, to be able to potentially if they want share information with the U.S., so the trade becomes a little easier. So it really -- it's really across the board, but it varies depending on year by year, one country might do it and another country will do it. But it's all -- it's still in the second, third inning. It's not in the -- it's not a mature market yet. Christopher Barbero: Great. That makes sense. And then funding around DHS and CBP has become a bit more contentious after the events of last weekend ahead of the CR expiration on Saturday. Does the near-term funding have a notable impact in either the revenue or cash outlook heading into the back half of the year? Ajay Mehra: No. I think the issues there are, I'm not going to get into it, but it's really not a by border security. It's about other things related to ICE and other issues. Operator: [Operator Instructions] One moment for our next question, and that will come from Larry Solow with CJS Securities. Lawrence Solow: All right. Just a couple of follow-ups. So the bookings and security, was that essentially close to flat, about 1%. Is that about right? I know it feels like it. Do you actually give a number there. . Alan Edrick: Larry, this is Alan. They were -- it was a bit below 1.0 this quarter. Lawrence Solow: Okay. And I'm just curious, and you kind of -- I think I answered my question in your remarks, but does the somewhat less-than-expected orders and it sounds like timing related. Does that actually impact your sales in the back half, I guess, a little bit because you had a strong quarter, but you didn't raise guidance and your -- you kind of mentioned a little slower Q3, Q4 year-over-year because of Mexico, but also what you already knew about, but maybe a little bit because maybe some of these bookings would have trickled through that fast? Or I'm just kind of curious if the if there's any slower -- you have your guidance the same on a revenue basis, but would you have increased it at all if bookings matched your expectations? Alan Edrick: Yes, Larry, we -- this is Alan. We might have. We just thought it was prudent to maintain our revenue range at this time given the items that you just mentioned with some things moving a little bit to the right and any potential shutdowns and the like. But yes, overall, we feel very strong about our business. Lawrence Solow: And just the margin -- I know mix -- there's a lot of moving parts there. But I guess, is it fair to say that Mexico obviously is a driver of that. Is that the substantial driver Mexico is just better, higher-margin revenue? I know last year, Q2, you had a substantially good quarter. So I'm not necessarily looking year-over-year, but just curious with a nice revenue jump, service revenue up really nice, and you're still below full year margins from last year versus this quarter. So curious, is it really just Mexico? Are there a lot of factors? Any way you could kind of help with that? Alan Edrick: Larry, it's Alan. Yes, there are multiple factors, but Mexico plays a role in it. Of course, given the size of that contract and when we are manufacturing the same product over and over and over again, there's inherent operational efficiencies, which drive the margin up quite nicely, which is fantastic. And we recognize coming into the year that we'd be facing that sort of margin headwind. And despite that, the company has been growing quite nicely. That big impact of Mexico year-over-year comparison subsides after the third quarter, so really after the March quarter. So as we move forward in Q4 and beyond, I think that's really where you see the real opportunity for margin expansion for the business again. So only 2 months away from that. Lawrence Solow: That's fair. And on the Golden dome age, I know you can't really give much specifics and maybe there's some things you just don't know. But it feels like -- I mean, is this something that could be a over a 3- to 5-year period, a several hundred million dollar potential opportunity for you. Obviously, the $151 billion divided by 2,400 would be but I'm sure we can't do that math. But -- any color there magnitude potential size without you actually -- without putting words in amount? Ajay Mehra: Yes. I mean I think that we feel it's a substantial opportunity that's going to be meaningful overall to the company. What that number is going to be. I mean it's substantial. I don't want to get into specifics, but you may not be that far off. But at the end of the day, we'll give more color on that as we get closer on what those opportunities are. Lawrence Solow: Got you. And just switching gears real fast, if I may, just on Opto. I think it was up like 9% externally. You said the book-to-bill was greater than 1. Is it -- the same driver still onshore and companies getting out of Mexico out of China, excuse me. Is that the drivers? Any color there would be great. Alan Edrick: Yes, Larry, it's Alan. The drivers remain similar to what you just mentioned. Just a good diverse customer base, strong demand from business within our existing customers and new business within our existing customers as well as gaining traction with some new customers who are trying to move out of different parts of the world and into the manufacturing locations that we have. So we're really pleased with seeing overall 12% revenue growth in each of Q1 and Q2, which included the 9% external that you mentioned in this past quarter, and we see strong demand continuing in this business as we move forward in the next couple of quarters, the balance of the fiscal year. Lawrence Solow: Great. And just cash flow, obviously, a nice quarter. and it sounds like you have expectations for the nicer quarters in the back half. Do you think on a full year basis that could come close or even exceed net income? Alan Edrick: Larry, I think that's entirely possible. in the event that the DSOs come down to the place that we believe it could, that could very well be the case. And yes, we think there's every opportunity for that to occur. Operator: I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks. Ajay Mehra: Well, I want to thank our shareholders, of course, our customers. And last but not least, all our employees for everything that we've been able to accomplish the last months and looking forward to the next 6 months. And once again, thank you all for participating in our conference call. We look forward to speaking with you at our next earnings call. Thank you. Operator: This concludes today's program. Thank you all for participating. You may now disconnect.
Operator: Good morning, and welcome to Banco del Bajio's Fourth Quarter and Full Year 2025 Results Conference Call. My name is Anna, and I will be your coordinator today. [Operator Instructions]. Before we begin the call today, I would like to remind you that forward-looking statements made during today's conference call do not account for future economic circumstances, industry conditions, company performance and financial results. These statements are subject to a number of risks and uncertainties. Please note that this video conference is being recorded. Joining us today from BanBajío are Mr. Carlos De la Cerda, Executive Vice Chairman of the Board of Directors; Mr. Edgardo del Rincon, Chief Executive Officer; Mr. Joaquin Dominguez, Chief Financial Officer; and Mr. Rodrigo Marimon, Investor Relations Officer. They will be available to answer your questions during the Q&A session. For opening remarks and introductions, I would now like to turn the call over to Mr. Rodrigo Marimon. Mr. Marimon, you may begin. Rodrigo Marimon Bernales: Good morning, everyone. Thank you for joining us to discuss BanBajío's results for the fourth quarter and full fiscal year 2025. Today, we will review our quarterly and annual performance, analyze the key drivers and financial trends and share our strategic outlook for 2026. The industry data cited today throughout the presentation is based on CNBV's information as of November 2025, which is the most recent publicly available data. Without any further ado, let's start with the presentation. Starting on Slide 3 with a look at our key financial highlights for the quarter and full year 2025. It was a year of solid execution despite the challenging operating environment with a stagnant GDP growth and a lower interest rate. Turning to credit performance. The total loan portfolio expanded by 4.6% year-over-year. This was primarily driven by the company loans portfolio, which grew at a rate of 5.2%. On the funding side, total deposits saw a robust increase of 10.5% compared to the previous year. Regarding asset quality, our NPL ratio improved significantly to the end of the year at 1.49%, supported by a strong coverage ratio of 126.5%. This trend also drove an improvement in our risk profile with the cost of risk for the full year at 0.96%, while in the fourth quarter, it decreased further to 0.75%. In terms of profitability, we achieved an efficiency ratio of 39.8% for the full year and 43.5% for the fourth quarter. Our return on average equity stood at 19.4% for the 12-month period and 18.1% for the quarter, while the return on average assets was 2.4% and 2.2%, respectively. Net income for the full year 2025 reached MXN 9.1 billion with the fourth quarter contributing MXN 2.2 billion. Finally, our preliminary capitalization ratio as of December 2025 stands at a solid 15.5%, composed entirely of common equity Tier 1 capital. Moving to Slide 4. We examine our 2025 performance against the guidance provided to the market. We are very proud to report that BanBajío met or outperformed most of the targets established for the year. Starting with our balance sheet, loan growth stood slightly below our range, reflecting disciplined growth in a challenging year. Conversely, deposits outperformed expectations with a 10.5% increase, well above our 6% to 9% target. Our net interest margin landed right on target at 6%, while noninterest income, the combination of fees and trading income grew by 4.4%. Operating expenses grew 8.2%, close to the bottom of the guided range, reflecting our ongoing commitment to cost control. This led to an efficiency ratio of 39.8%, outperforming our 40% to 42% guidance. The significant improvement in our portfolio mentioned earlier resulted in a cost of risk that our target range of 1% to 1.1%. As for our bottom line results, the delivered net income of MXN 9.1 billion significantly exceeded the high end of our guided range. This drove a strong return on average equity, which reached the upper bound of our target. Finally, regarding our asset quality and solvency, we exceeded our guidance for the NPLs, coverage and capitalization ratios. Moving to our loan portfolio growth details on Slide 5. The total loan portfolio reached MXN 278 billion at the end of the fourth quarter, leading to the mentioned year-over-year expansion of 4.6%. This growth was primarily driven by our core business, company loans, which include both corporate and SME segments, increasing by 5.2% and now representing 86% of our total loan book. Consumer loans continued with a double-digit growth trend reported in the past quarters, growing 11.4% year-over-year. The 12.1% expansion in the government portfolio was driven by a specific exposure originated in December with good levels of interest margins, an opportunity aligned with our focus on profitable growth. This trend, coupled with a 11.4% contraction in financial institutions, underscores our strategic reallocation of capital towards our higher-margin business line. On Slide 6, I want to highlight the strategic evolution of our sales force as we move into 2026. This initiative is an enhancement of our existing business model and our competitive edges, designed to further accelerate loan growth by deepening our segment specialization and sharpening our operational agility. We are reinforcing this through 3 strategic pillars. First, we are optimizing our credit process to ensure we improve our speed and responsiveness. Second, we are increasing our regional presence in major cities with an important growth in our sales force and executive bankers. This allow our bankers to focus exclusively on the specific needs of their respective segments, ensuring a higher level of expertise and tailored service. Third, we are scaling our successful SME centers. We recently opened a new hub in Mexico City, and we have 3 more scheduled for the next quarters in Querétaro, Guadalajara and a third location in Mexico City. We expect to conclude 2026 with 11 specialized centers, keeping us on our path to 20 centers by 2030. Turning now to Slide 7. Let's examine our asset quality and risk profile. Notably, our NPL ratio improved significantly to 1.49%. This performance significantly widened the gap with the system average of 2.25% Similarly, our adjusted NPL ratio stood at 2.84% compared to the system's 4.45%. This marked improvement in portfolio health allowed us to optimize the cost of risk to 0.75% for the fourth quarter. Regarding coverage, we maintain a prudent ratio of 126.5%. And as of December 2025, we continue to hold MXN 330 million in additional reserves, which we plan to absorb over the next 6 months. These improvements allow us to enter 2026 with a healthier loan portfolio, ensuring BanBajío's position to support a more active lending environment in the upcoming year. Turning to the funding side on Slide 8. Total deposits reached MXN 273 billion in the fourth quarter, representing a robust 10.5% year-over-year increase. This performance was underpinned by an 11.6% rise in demand deposits and a 9.4% increase in time deposits. Over the last 4 years, we have maintained a resilient 10% compound annual growth rate in total deposits, a track record that remarks the strength of our franchise and the deepening of our core customer relationships. On Slide 9, our current funding breakdown shows that demand deposits remain the core of our strategy, representing 40% of our total funding mix. Notably, zero-cost deposits saw a significant increase during the period, now accounting for 19% of the total breakdown. This robust growth in noninterest-bearing funding was the primary driver behind the market decrease in our overall cost of funds in the quarter. This highlights the reversal of the upward trend observed in third quarter 2025 and the widening of the gap with the reference rate. Our cost of funds for the fourth quarter reached 4.94%, a 169 basis point decrease compared to the same period last year and 50 basis points below the previous quarter. Likewise, our cost of funds as a percentage of TIIE dropped to 64.7% in the quarter, a positive divergence from the system average that saw funding costs climbing closer to the reference rate. Moving to Slide 10. The net interest margin for the fourth quarter was 5.77%. This represents 100 basis points contraction year-over-year, primarily driven by the lower interest rate environment, which contributed 68 basis points to the decline and changes in the portfolio mix, which accounted for the remaining 32 basis points. Through active balance sheet management, we maintained rate sensitivity at around 20 basis points throughout 2025, effectively cushioning the impact of the accelerated rate cycle on our margin. While our expansion into zero-cost deposits drove a temporary uptick in sensitivity during the final quarter, we have already seen a normalization in early 2026, and we expect this stability to prevail throughout the year. You will see the overall stable performance of BanBajío's revenues on Slide 11. Total revenues for 2025 stood at MXN 25 billion, a minor 2.6% decrease despite the significant pressure on margins. This stability was underpinned by the successful execution of our diversification strategy as normalized noninterest income grew a robust 26.2% for the full year. Net fees and commissions increased 16.3% year-over-year, driven by a 39.8% surge in cash management fees and a 38.4% increase in revenues from our digital platform, Bajionet. Additionally, normalized trading income rose 18.2% during the same period. These results validate our intentions to grow recurring fee-based income, limiting the impact of economic and interest rate cycles on our long-run performance. Moving to Slide 12. Our efficiency ratio for the full year 2025 stood at 39.8%, successfully outperforming our guidance range. For the fourth quarter, the ratio was 43.5%. Despite this quarterly uptick, BanBajío continues to be one of the most efficient banks in the industry, maintaining a significant gap against the system's average of 46.3% and demonstrates the operational discipline and strict cost control that we have been anticipating to the market. Turning to profitability on Slide 13. It is important to highlight that despite the quarterly compression seen throughout the year, we successfully exceeded the upper end of our net income 2025 guidance. This performance drove a robust full year return on average equity of 19.4%, effectively reaching the top of our target range, where return on average assets stood at a sound 2.4%. Finally, on Slide 14, we closed 2025 with a preliminary capital adequacy ratio of 15.5%. This level stands significantly above our 14% commitment and well exceeds regulatory requirements. Our robust capital position provides the bank with substantial flexibility to continue with the sound levels of return of value to our shareholders while supporting our growth objectives. Lastly, on Slide 15, we introduced our guidance for the 2026 fiscal year. Beginning with macroeconomic assumptions, we estimate GDP growth at 1.3%, stable inflation at 4% and a 50 basis point decrease in the reference rate from current 7% to 6.5% by the end of 2026. Based on these drivers, we are forecasting loan growth between 8% and 10% and deposit growth from 10% to 11%. We target net interest margin between 5.4% and 5.5%, and we expect fee and trading income to continue to grow at a sound pace of 13% to 15%. Our cost control efforts will prevail. And operating expenses are projected to increase between 7% and 9%, maintaining our efficiency ratio within a 43% to 45% range. We forecast that these factors will lead us to a net income of MXN 8.25 billion to MXN 9 billion and a return on average equity between 16.5% to 18%. This guidance reflects a transition towards a more normalized interest rate environment while maintaining our revenue diversification strategy and top-tier cost efficiency. Regarding our risk profile, we anticipate a cost of risk between 80 and 100 basis points, while keeping our NPL ratio below 1.7% and a coverage ratio above 1.1x. Furthermore, we maintain our commitment to a capitalization ratio above 14%. In summary, our fourth quarter and full year results report BanBajío sound fundamentals and solid balance sheet. We are pleased to have met most of our targets for the past year and remain fully committed to delivering on the guidance provided for 2026. With this, I conclude my presentation, and we can open the call for the Q&A session. Operator: [Operator Instructions] Our first question comes from the line of Ernesto Gabilondo. Ernesto María Gabilondo Márquez: Ernesto Gabilondo from Bank of America. My first question will be on asset quality. You were mentioning that you still have excess provisions of around MXN 400 million and that you expect to consume in the next 6 months. Looking to your guidance, you're expecting cost of risk between 0.8% to 1%. So even that you are consuming the excess provisions, you're expecting that range of cost of risk. So would that be explained because you are going to have a more credit risk appetite this year as you were saying in your now -- your new strategy for the year? And my second question is on your guidance. When looking to your ROE expectations for the year, what is the dividend payout ratio we should be assuming? And when could we have more color of a potential special dividend this year? And lastly, I would like to pick up your brains and to see in which lines of your guidance do you see upside and downside risks? Edgardo del Rincón Gutiérrez: Thank you, Ernesto. Regarding asset quality, NPL, as you saw, at 1.49%, a very similar level that we reported a year ago. So we are very happy with the improvement compared with previous quarters. And also cost of risk, actually, cost of risk was the best cost of risk reported during 2025. So yes, we have not MXN 400 million, Ernesto, we have MXN 333 million of additional reserves. The idea and the commitment with the CNBV is to use them during the following 6 months. So as we mentioned in previous calls, we are going to have a coverage ratio that is equivalent to the regulatory reserves that we need to have. So for this year, we expect more stability. As we mentioned in 2025, we have several isolated cases that we already -- several of them we write off during the fourth quarter because of the low probability of recovery. Of course, we continue with the legal actions regarding those cases. But for this year, we feel comfortable with the level of cost of risk between 0.8% and 1%. We believe we are going to have less important cases transitioning to Stage 3. Actually, the 0.75% that we had during the fourth quarter in part because we didn't have any important case transitioning to Stage 3. Regarding risk appetite, we are not considering increasing our risk appetite. Actually, asset quality remains a cornerstone of the strategy. So we will have additional risk appetite. The name of the game, of course, for us is to bring customers to BanBajio. And that's why we are increasing -- I mean, we are increasing the business units we have in several places, mainly in those cities like Mexico City, Guadalajara, Monterrey in which the financial system is very, very concentrated. So that means additional bankers and additional business units. So that's why we are forecasting to recover growth and to grow the loan portfolio between 8% to 10%. Regarding dividend, Carlos, please? Carlos De la Cerda Serrano: Ernesto and everybody. Yesterday, the Board of Directors approved a proposal to be made in April to the stockholder meeting of a 50% payout dividend on the 2025 net profits to be paid half of it in May and the other half in September. Later on, depending on how the year is developing, the growth in the loan portfolio and so forth, we will consider an additional dividend, but that will be probably considered during the third Q. Edgardo del Rincón Gutiérrez: Regarding your latest question, Ernesto, about opportunities in the guidance, we are very happy with the expense level that we reported during the year. You remember in the guidance that we provide to the market in January, we were expecting between 10% to 12%. So reaching 8%, it was very good. So we feel comfortable with the expense level of 7% to 9%. The plan, let's say, is based in the middle of that range with 8%, but we could have some opportunity there. But this expense level includes also new branches and all the new positions because of the new business units we are implementing. And of course, all this additional expense will be through mainly the first semester because in getting that talent in place is not something that you do immediately. It's going to take a few months. I could say also we are very happy with the results in fees and trading income. Last year, we didn't have the volatility in FX, so we can have more volumes and better margins. we expect this to have a recovery during 2025. And I could say also that the mix of the portfolio that we are expecting in terms of growth is related to having the corporate portfolio growing between 8% to 10%, SMEs that have a better margin around 15% and the consumer portfolio between 15% to 20%. So this could provide an additional yield and better margins because of the mix of the assets. So I could say those could be some opportunities in the guidance. Joaquín Domínguez Cuenca: This is Joaquin Dominguez. Another upside risk could be in case of the sale of some disclosure assets and the recovery of some loans that we had in past due loans during the last few years. Ernesto María Gabilondo Márquez: Super helpful. Just a last question. We continue to see a super peso and a weak dollar. So what would that imply for your loan portfolio that is denominated in dollars and to your loan portfolio related to exporters. I just wanted like to understand if this could have an impact on NIM or in asset quality, for example, we have the peso at 16.5% if reaching a USMCA agreement. Edgardo del Rincón Gutiérrez: Yes. Actually, we had an impact in the loan size because of the exchange rate. The impact was a little bit more than MXN 4 billion, representing 1.6% of the loan book. So this means that instead of having a growth of 4.6% with the stability in the exchange rate, it would be 6.2%. So that impact is already in place. And we don't see additional impact in 2026. Actually, that could be an opportunity. Regarding exporters, those customers represent about 10% of the loan book, the loan portfolio. Until today, what we are seeing in the financial statements, of course, is bringing challenges, but we don't see past due loans because of that. Of course, they need to strategy looking for better expenses and better efficiency. But until today, those customers are reporting good numbers. Operator: Our next question comes from the line of Danele Miranda. Danele Miranda de Abiega: Just a very quick one from my side on loan growth guidance. I was wondering if this 8% to 10% is assuming all positive scenarios already. I mean is this your base case with potential upside? I don't know with USMCA private investment reactivating? Or is this already your positive scenario? And also, is this guidance seasonal? I mean, can we expect acceleration in the second half of the year? Or will it remain in this 8% to 10% level all year? Edgardo del Rincón Gutiérrez: Thank you, Danele. What we are seeing is, I mean, we made several changes in the organization to provide more focus. And as I said, to have additional business units. We are talking about 4 new regional corporate banking offices, one in Guadalajara. I mean, 2 in Guadalajara, 1 in Mexico City that is going to be the tier regional director and additional one in Monterrey. Of course, all of them with additional bankers. And in terms of the SME centers, we currently have 8 SME centers. Those units are to attend companies with loan sizes between MXN 30 million to MXN 100 million. We have 8 because we opened an additional one, the second one in Mexico City last December. And we are planning to open Guadalajara, Querétaro and in the second semester, an additional one in the satellite area in Mexico City to end that year with 11 SME centers. All of this will provide support to attract more new customers to BanBajío. We are talking about between 50 to 70 additional bankers for those 2 important segments that is the core business of BanBajío. So we feel confident with the pipeline that we are seeing today that we can reach the guidance between 8% to 10%. Maybe it's too soon to say if we have an upside risk, an upside opportunity in loan growth. Operator: Our next question comes from the line of Yuri Fernandes. Yuri Fernandes: Yuri Fernandes here from JPMorgan. I have a follow-up regarding margins. And I think the explanation was already a little bit more positive one. But when you think about the implied margin decrease, this year, you mentioned that some 30% of the decrease was mix, right, and 70% was rates. For 2026, for sure, we have like maybe 50, 100 bps lower rates and the average rate in Mexico should be even lower than that. But you mentioned FX volatility maybe should be less and this can help. And then the growth of the loans, they also should help, right? I think you're growing less on the financial sector, SMEs, you mentioned around 15%. Consumer portfolio also growing a little bit less. I know it's small, but it should grow more. So the question is the following. For 2026 for your guidance, how you are viewing the decrease on NIMs? Is this purely rates? Do you have some kind of mix inside that or funding was good this quarter, maybe you are baking in some funding deterioration. Just trying to understand a little bit like the drivers. I know rates is the big part of the answer. But if you can help us build the blocks for the margin decrease, that would be helpful. And then I can ask a second question. Joaquín Domínguez Cuenca: Yuri, thank you for your question. This is Joaquin Dominguez. Well, first of all, our sensitivity remains around 20 basis points for each 100 basis of change of the TIIE rate. For the 2026, maybe the impact of the mix will be more important than last year's in deposit side because as you saw, we grow much more on deposits than in the loan portfolio. That means that we accumulate some investment in the treasury with lower interest rates. If our plans of growing in terms of loan growth, we do deliver as we expected, we will change the mix in assets. We will have more loan portfolio instead of securities in the treasury, and that will provide us an improvement in the total assets. In terms of the loan portfolio, the market we are focused on has a higher interest rate than the average of the total loan portfolio. So if we do well with these SME centers, we will improve the mix of assets, and that will help to improve the NIM. And in the other side, we have been doing well in terms of deposits and increasing and especially at the end of the last year, the demand deposit accounts not bearing interest. So if we maintain that mix of the growth in demand deposits without cost, that will improve the margin, but will increase the sensitivity. And all those factors have a different result in the NIM. But at the end of the day, what we are looking for more than a specific objective in terms of margins is improve all the lines, the mix of total portfolio, the mix of loans and the mix of deposits. And what we did for this guidance is that we maintain the composition of the assets and the deposits as they were at the end of the fourth quarter. So any change of that mix could affect positively or negatively the guidance about the sensitivity and the margins. Yuri Fernandes: No, super clear, Joaquin. So let's do the blocks. Like the average rates in 2025, I think the average Banxico rate was around 8.4% maybe rates go to 6%. I'm not sure what is your estimate there, like 6%, 6.5%, maybe the average rate will decrease some 200 bps with a 20, 23, 24 bps sensitivity. This is like 40, 45. Your guidance is implying a 50 to 60 bps decrease, right, from 6% to 5.4%. So what I'm trying to get here is, is your guidance too conservative? Maybe if the mix plays well, as you mentioned, maybe the margin decrease is higher than -- it's less than the guidance is implying at this point? Joaquín Domínguez Cuenca: I could say that it's not exactly conservative. It's just the result if you make the account considering the balance sheet in the fourth quarter, not the average. I mean, there is something that you should consider that the last reduction in the interest rate was at the end of December of the last year. That impact was not captured in the fourth quarter. It will be reflected in the first quarter of this year. And that effect runs for the rest of the year. So probably that would explain what you're saying. But we are maintaining the NIM sensitivity in our forecast and in our guidance without change. Yuri Fernandes: No, no. Super clear. Just a second one on another topic, asset quality, just going back to Ernesto's questions on this. When we go to your new NPL formation, your new Stage 3 formation putting all together, right, the NPLs and the higher write-offs this quarter, it was a very good formation. It was lower. Just checking, like could we have hopes that maybe there could be a surprise on this because I think Edgardo mentioned before that you had very few cases going to Stage 3 this quarter. So just checking if there was something specific you did something different on renegotiations, reprofile of debt and this explain or sale of portfolio because it was a good number on formation. And when I look to your guidance, the guidance implies 0.8%, 1% cost of risk, slightly higher NPL. So just trying to understand if there was any kind of a one-off in the new NPL, new Stage 3 formation for the fourth quarter. Edgardo del Rincón Gutiérrez: Thank you, Yuri. Actually, no, what we saw in the fourth quarter is a reduction in the balance of Stage 3 loans and the write-off that we did is preparing us to, let's say, to clean up the portfolio. Our criteria is always those loans with low probability of recovery. We'd rather write off them and of course, continue on the recovery actions. But the level that we have at the end of the fourth quarter, let's say, is a more normalized level of NPL. And we expect to be around those levels during that year. As I mentioned before, during 2025, we have several important but isolated cases from different sectors that transition to Stage 3. And during the fourth quarter, we didn't see any important case. Of course, that could happen in '26. We don't have, in our view, any important case at this moment. But we feel well with the 0.8% to 1% that is a more -- also more regular or normal level of cost of risk for the bank. So of course, the -- as we transition and grow more the SME portfolio and the consumer portfolio that normally have higher NPLs, that could change in time. But with the guidance that we are providing, we feel very comfortable. Operator: Our next question comes from the line of Eric Ito. Eric Ito: This is Eric Ito from Bradesco BBI. I have 2 here on my side as well. The first one, I'd like to touch basically on a more strategic point here on your new sales force structure. So you are deploying a lot -- investing a lot. You have this plan of 2030 of 20 branches. So I just want to get a bit sense for, let's say, beyond 2026, 2027, what can we think about efficiency here if that should be one of the points that could continue pressuring OpEx going forward? So this is my first one, and then I can ask my second later. Edgardo del Rincón Gutiérrez: If we want to have a good efficiency ratio and a good ROE, the best strategy that we can follow is to grow the loan portfolio. That's why we decided to increase the business units and sales force of the bank at the end of the fourth quarter. So as I mentioned already, we are adding 4 regional directors for the corporate segment in Mexico, Mexico City, Guadalajara, and Monterrey. And also the SME centers, we are very happy with the results we are having. Each SME center has more than MXN 1 billion in loans. And as I mentioned, is dedicated to a segment, let's say, with loan sizes between MXN 30 million to MXN 100 million. The idea for the following 4, 5 years is to get to 2030 with more than 20 SME centers. We have 8 to date. So we are developing, let's say, a new strategy with new business units to attend that segment that is very, very profitable. But in the corporate area, we have a lot of room to grow. Our market share in commercial loans portfolio is a little bit more than 6%. So we continue with huge opportunity to attract new customers. So that is the idea. Regarding branches, during 2025, we opened 9 branches. And we already have 10 branches that is I'm completely sure we're going to open this year. That number could increase up to 15 if we have the right location, et cetera. So those, let's say, new branches are already approved, but the number of new branches is between 10 to 15 this year. And the idea for the following years is to continue with a similar number of about 10 to 15 branches. So the bank has a lot of opportunity to grow, and we need to grow also our branches and our bankers, et cetera, to capture that opportunity. Joaquín Domínguez Cuenca: Just to complement in the efficiency ratio side, we -- in our projections, we made the exercise considering the maximum number of branches and SME centers to open. So they will not surprise us in terms that we will be expanding more than we budget. So there is no downside risk in terms of not delivering the guidance in terms of expenses. Eric Ito: Okay. Super clear. And then my second one is just maybe a follow-up here, especially on the strategy to grow SMEs, which is a portfolio that you are investing a lot. How can we think about your portfolio mix? Currently, you have 50% of your book in corporate and 29% in SMEs. I don't know if you guys have a target that you could share with us, but I feel like we can continue having this much higher CAGR on SMEs. Edgardo del Rincón Gutiérrez: Yes. With the internal definition of SMEs, we have an SME portfolio or more than MXN 40 billion. That is important because, I mean, we are growing very well. But the margin that we have in that segment is much better than in the corporate segment. It's about 1.5% more margin in the loan book. But more important than that, it is easier to bring the customer and to engage the customer to all the rest of the services regarding cash management, FX, et cetera. So the revenue coming from that portfolio proportionally is very, very important. So that is the, I would say, the main segment for the bank. And I believe with these SME centers, we are putting in place a competitive advantage of BanBajío, we feel that the business model that we are implementing is working very, very well. Then that's why we are accelerating the number of SME centers in the following years. Operator: Our next question comes from the line of Neha Agarwala. Neha Agarwala: This is Neha Agarwala from HSBC. First one on the loan growth, which stands out as a bit on the higher side, especially when compared to some of the peer numbers that we have seen. What is the expectation in terms of USMCA agreement? In your budgeting, when do you expect that to be finalized as that could be a kicker in terms of loan growth? I'll go to my second question after. Edgardo del Rincón Gutiérrez: Thank you, Neha. Of course, loan demand has been affected by the uncertainty coming from the USMCA agreement and the negotiation that will happen during this first semester. In the loan growth, we are forecasting a more conservative growth during the first semester and a better second semester. So that is implied in the business plan that we are guiding. But our scenario is that we reach an agreement with the U.S. We believe that dependency that we have in those 2 markets is very important. And the best scenario for both countries is to reach an agreement. So that is the best scenario. Neha Agarwala: Okay. My second question is on the branch expansion that you've mentioned. With all of this investment to drive up the loan growth, could you compare the NIM profile for the large corporate segment and the SME segment? Because if the mix shifts more towards the SMEs, how in the next 2, 3 years should that impact your NIMs and your cost of risk? And given the expansion plan, it seems like the cost growth will probably be on an elevated level, not just in '26, but in '27, '28 as well, which could pressure the cost-to-income ratio. So how should we think about the evolution of cost-to-income ratio in the next 2, 3 years given the expansion plan? Edgardo del Rincón Gutiérrez: We don't have the NIM by segment at this moment. What I can tell you is the margin in the loan book is better, but also the mix of deposits has a better margin. And also nonfinancial income person at the size of the customer or the loan is more important. So profitability is better. The cross sale ratio in SMEs is more than 5 products and services. And the corporate is a little bit more than 3.2. So as a result, let's say, the SME is much more profitable than the corporate segment. Neha Agarwala: Perfect. And cost to income, if you could give some color on that, the impact on cost to income and how should it trend given the cost growth should be slightly higher? Joaquín Domínguez Cuenca: Neha, well, that cost to income maybe is one of the most important drivers we follow month by month. And what we saw in the last quarter is a quite increase in the cost of risk, but also an improvement in the generation of net interest income. So what we are considering for this year is that the growth on noninterest income that is well supported by a very diversified lines of products that we are offering to our clients will support the increase on expenses, even the reduction of the NIM. So we feel that we can very well supported and control the efficiency ratio due mainly to the growth of the net interest income. Operator: Our next question comes from the line of Brian Flores. Brian Flores: Brian Flores from Citi. I have 2 questions. The first one is on your NIM sensitivity because the cost of funding as a percentage of TIIE has been improving, and you've mentioned the efforts you have made on the asset side. I just wanted to maybe understand how you're positioning yourself, not for 2026 because we understand what is likely to happen. But the sensitivity for further ahead, I mean, when maybe Bajio becomes a bit more stable in the policy rate. Would you be willing by design to reduce the sensitivity for further cycles? I just wanted to understand. And also, I think in the last call -- last 2 calls, maybe you have mentioned a sustainable ROE of high teens. So do you think this guidance actually shows the, let's say, structural level ROE where we should see Bajio going forward? And then if I may, just a second one on GDP growth. In your presentation, I think you have 1.3% as a base case here. One of your peers was a bit more optimistic maybe on tailwinds from the World Cup and internal consumption in Mexico. Do you see if a scenario more similar to them, which is around 1.6% in terms of GDP plays out that there is upside on the loan growth side? Joaquín Domínguez Cuenca: Regarding the NIM sensitivity, what we are seeing is that we do not have a specific target of NIM sensitivity because that by itself do not necessarily reflects an increase in the income or the value of the bank. What it is important for us is to maintain a healthy growth even if the NIM have a reduction, it doesn't matter if the volume of business is higher. So it is quite difficult to say that we have a specific objective of reducing the NIM sensitivity because if we just have the idea to reduce it to 10 basis points, it probably will have high cost to make -- or to create that reduction and would reduce the net income. So it's not directly the relation between lower NIM sensitivity and higher income. So our focus is increased total income and margin income despite what happens with the NIM at itself. So what we are focusing is in improving the mix of assets and deposits, but not having a specific target of NIM sensitivity. Edgardo del Rincón Gutiérrez: Regarding -- thank you, Brian. Regarding ROE, as you saw, we are considering here an additional decrease in rates of 50 basis points to get to 6.50%. And we believe we are getting closer to the floor in rates with all the geopolitical situation and inflation in Mexico, we feel that we are getting close to the floor. And with that, sensitivity will be less important. We are sure that we feel comfortable in providing a sustainable ROE in high teens that is reflected in the guidance. And regarding GDP, we consider the average of the analysts. Actually, that bank that you are mentioning is one of the highest forecast in GDP growth, but the median of the different analysts in that analysis is 1.3%. Of course, if we can have a potential additional growth, more GDP growth that will help a lot in growing the loan portfolio, of course. Brian Flores: And just, I mean, do you have any sensitivity in terms of, let's say, this could add 4 bps to your base case scenario here in terms of loan growth? Edgardo del Rincón Gutiérrez: If you can repeat, it was the transmission connection. You can repeat, Brian, please? Brian Flores: Sure, sure. No problem. No, just wondering if you have a sensitivity measure as to the multiplier. So for example, if we have some upside risks here on GDP, where could we see your loan growth compared to your base case scenario? Edgardo del Rincón Gutiérrez: Actually, the multiple that we are using already in the guidance with a GDP growth of 1.3% is higher than previous years. And what we are planning to do is to gain market share and to bring more customers. So of course, with additional growth in the economy, that will help. But it's maybe difficult to forecast at this moment an upside opportunity regarding that. Operator: Our next question comes from the line of Ricardo Buchpiguel. Ricardo Buchpiguel: This is Ricardo Buchpiguel from BTG Pactual. Just have one question here. How do you see the competitive landscape in the corporate lending environment evolving? We see that BanBajío and other peers have been expanding a lot of their branches network you also have Banamex, is a big bank in Mexico came out of a change in control and eventually could become a bit more aggressive. And at the same time, as we have been discussing in this call, you have a lot of uncertainty mainly in the first half of the year because of this USMCA deal, right? So my question here, with a lot of uncertainty regarding how much the size of the market will grow and a lot of banks including ourselves increasing the number of branches and people, are you concerned in any way for potential pressures in rates? Edgardo del Rincón Gutiérrez: I believe that is a situation that always happen in this market. Competition is important. Of course, we try to compete more with service than with price. Of course, we need to provide a competitive price to the customer. But our business model is more to be really close to the customer, have a very good communication with them, understand very well the opportunity and risk that they are seen and try to help them in all the cycles. So -- but competition is huge. And I believe with the potential IPO of Banamex and they recover, let's say, the strategy that they used to have several years ago, competition will increase. But I mean, that is always happening. Normally in the corporate segment, we are always competing with at least one bank. We have less competition in the SME segment. But I mean, that is part of the regular scenario in this market. And I believe it's good for the market evolution and also for customers. Ricardo Buchpiguel: That's very clear. And just one quick follow-up. If you look at the last few months, not only in Q4, but a little bit in Q1, have you seen any changes in terms of competition, the pressures on rates or is overall stable? Edgardo del Rincón Gutiérrez: It's a huge competition environment. And I believe the fourth quarter was similar with the rest of the previous quarters during 2025. And of course, all the banks are trying to grow and to bring the best customers possible to those banks. So -- but I feel that the environment is stable. It's the same. Operator: Our next question comes from the line of Lindsey Shema. Lindsey Marie Shema: Lindsey Shema here from Goldman Sachs. I just have a quick question following up on the increase in write-offs in the quarter. Given the increase in write-offs this quarter, do you see any impacts from the change in regulation to the ability to be able to deduct write-offs from your taxes, and that's why you moved them ahead? Or is that completely separate? Edgardo del Rincón Gutiérrez: Thank you. We're expecting really the same level. If we consider write-off of 2025 plus the reserves associated with past due loans minus recoveries, we are talking about MXN 2.8 billion during 2025. And actually, that was the same number for '24. For '25 and with this NPL and cost of risk that we are expecting, we could have a small reduction in write-off during 2026. Regarding the new regulation, it will have an impact in the P&L, but will delay the capacity of the bank to deduct those write-offs. It will take at least 2 years starting in the moment that we start the legal action, let's say, to recover that loan. In terms of small loans lower than 30,000 UDIs is going to be 1 year. So it to have the P&L really, but the deduction of those write-offs will take longer. Operator: Our next question comes from the line of Federico Galassi. Federico Galassi: Federico Galassi from The Rohatyn Group. Two questions, if I may. The first one is last year, in the last part of the year was very vocal from the government that could be some caps on fees. I don't know if you have any comment on that. And the second one, maybe you mentioned that, but if you can repeat me what is the Mexican peso that are using in your guidance from the loan growth? Edgardo del Rincón Gutiérrez: Thank you, Federico. The only initiative that is on the table today is regarding interchange fees. There is not a decision yet, but it's an important reduction in interchange fees. Actually, the plan that we are proposing today to the market is not including any impact of this. But the revenues coming from interchange fees represent about 1.8% of total revenues of the bank. And as you saw in the initiative, they are putting a cap in interchange. That means that the discount rate that we are -- that the banks are charging, let's say, to the merchant, that acquiring bank will pay less interchange to the issuer. So on that regard, our acquiring business represent about 3% of total revenue. So that could imply in the short term, a benefit for the bank because of that difference, let's say, in percentage of revenue. Nevertheless, we see this initiative as negative for the market. And let's see what is going to be the final decision regarding that. But with the initiative as it is today, it has a potential positive impact in our numbers. Joaquín Domínguez Cuenca: Federico, this is Joaquin Dominguez. Regarding the second question, we have approximately $1,450 in loan portfolio. And what we are expecting is FX rate pretty close to MXN 80 per dollar at the end of the year. And that would imply a very marginal impact in the valuation of that loan portfolio. MXN 18. Operator: Our next question comes from the line of Andrew Geraghty. Andrew Geraghty: This is Andrew Geraghty from Morgan Stanley. Just a small question to clarify. When you guys said that you plan to open between 10 to 15 branches this year, does that consider the regional corporate banking offices and the SME centers? Or is that separate? Just wanted to clarify. Edgardo del Rincón Gutiérrez: Thank you, Andrew. And it's separate branches, it's that regular branch to make transactions and to sell products and services and the SME centers and the corporate regional offices are business units mainly with bankers to attend those segments. So it's completely different. Operator: Our next question comes from Brian Flores. Brian Flores: Just very quickly here, I was checking here my notes. I think one of the upside risks you mentioned here was probably a recovery of some loans, which I understand. And I think you mentioned sales of assets. Could you just give us examples as to what were you meaning by these sales of assets? Joaquín Domínguez Cuenca: Brian, as we have mentioned in several cases, we used to take warranties in most of our collaterals in more of the loans. So during the years, not specifically last year because it takes many years to recover assets. We have some disclosure assets. We should have a MXN 0 valuation in the balance. And if we sold those assets, we will have immediately an income due to that sales. And also, there are other cases also thanks to the guaranty collaterals that we are negotiation recovering before going the next step in the judicial process. So we have some cases in the pipeline in order to see that we can affirm that we will have some recoveries in this year due to the advanced process we have for those recoveries. Operator: We have not received any further questions at this point. So I would now like to hand the call back over for some closing remarks. Rodrigo Marimon Bernales: Thank you very much, everyone, for joining us today. We remain available to address any follow-up questions via e-mail and any meeting request. We look forward to speaking to you again in April 2026 when we release our first quarter 2026 results. Thank you very much, and have a nice day. Operator: That concludes today's call. You may now disconnect.
Andrew Angus: Good morning. My name is Andrew Angus. I look after Investor Relations for Fluence Corporation. Welcome to the Fluence Corporation Q4 FY 2025 Quarterly Results. With me today are Ben Fash, CEO and Managing Director; and Osvaldo Llanes, CFO. Ben, over to you. Benjamin Fash: Yes. Thank you, Andrew. Good morning, everyone. As Andrew said, my name is Ben Fash, CEO of Fluence. And I'd like to welcome everyone today to our Q4 and fiscal 2025 business and financial update. As always, thank you for your time today and your interest in Fluence. With me, I'm pleased to introduce Fluence's new CFO, Osvaldo Llanes. At this time, I would like to give Ozzie a moment to introduce himself as this is his first quarterly business update, and then I will be providing an update on our business activities for the fourth quarter and fiscal 2025. Ozzie, the floor is yours. Osvaldo Llanes: Sure. Thanks, Ben. Good day, everyone. I'm Ozzie Llanes. A little bit about myself. I spent most of my career in senior finance leadership roles, partnering with management teams and boards to support profitable growth, capital allocation and cash flow discipline. A significant part of that experience has been in the global water industry, working with project-driven businesses and recurring service models. Water is also important to me personally. It's a sector defined by long-term demand and reliability, where the work we do has a tangible impact on our communities and customers and where strong financial stewardship is critical to delivering sustainable outcomes. That combination is what attracted me to Fluence. I'm excited to be here, and I look forward to supporting the team as we continue our journey to execute and create value for our shareholders. Back to you, Ben. Benjamin Fash: Thank you, Ozzie. Three years ago, I sat in front of all of you as the newly minted CFO of Fluence, knowing that we had a challenge in front of us to turn this business around. I believe Tom compared it to turning around an aircraft carrier. Fluence was always a business that had tremendous potential, an undeniably strong portfolio of water and wastewater treatment products and technologies that also had a unique geographic footprint and operated in some of the highest growth regions in the world. Yet the company was never able to turn that potential into results. I believe Q4 2025 shows that, that aircraft carrier has finally been turned around and the financial results reflect the progress that we have made as a company. You may recall that in fiscal 2023, we decided to make a strategic shift and realign the Fluence business to focus on our SPS and Recurring Revenue products through 4 core business units, as shown here. In fiscal 2022, SPS and Recurring Revenue represented only 38% of our total revenue. Fiscal 2025, that number is now 65%. Further, our gross margins have grown from 23.9% in fiscal 2022 to 29.9% this year, and we expect that, that will continue to expand. Our realignment also allowed us to rationalize and cut SG&A costs by approximately 25% in fiscal [Technical Difficulty]. We also determined that Fluence needed to operate like the global company that it was, leveraging our existing enviable geographic footprint as well as focus on growing its presence in North America. Our One Fluence approach initially led to a significantly expanded sales pipeline, which is now converting into record SPS and Recurring Revenue orders. Our core business units started selling into new markets to them, but they were existing markets for Fluence overall. Today, our global teams are now regularly working together to secure and execute orders that cross borders and product lines, and that is leading to expanded growth opportunities. We've built a strong, experienced global management team that is laser-focused on execution, improving cash flow, contract management, controls and costs, all of which helped to lead to the strong results in Q4 in fiscal 2025 that we are delivering today. I will leave you with this before launching into the financial results. While the job is not done, I truly believe that Q4 2025 represents an inflection point in the business and that Fluence has moved beyond many of the historical challenges it has faced to embrace the potential and take advantage of the growth opportunities that lie ahead. With that, I will turn to our results. Following a strong Q3, Q4 did not disappoint and delivered even stronger results consistent with our forecast. The combination of double-digit growth in SPS and Recurring Revenue, progress on the Ivory Coast Addendum project that contributed meaningfully to revenue, continued expansion of gross margins and strong cost controls resulted in Fluence delivering fiscal 2025 EBITDA of $4.0 million on revenue of $78.4 million, meeting the midpoint of its EBITDA guidance. As noted, fiscal 2025 revenue was $78.4 million, which was $26.9 million or 52% higher than fiscal 2024. Q4 itself contributed $26.0 million in revenue, which was 22% higher than Q4 of 2024. SPS plus Recurring Revenue continued to show healthy growth of 15% compared to the prior year. However, contributions from the Ivory Coast Addendum were the largest contributor to the increase as revenue from that project was $20.4 million higher than fiscal 2024. The growth achieved in our SPS and Recurring Revenue products and services is having the intended effect of improving gross margins. Those margins finished in fiscal 2025 at 29.9%, which was flat compared to 2024. That in spite of the fact that we had significantly more revenue contribution from the lower-margin Ivory Coast Addendum project. This was really a result of strong execution by our teams and outperformance of bid margins on projects across our core business units, with all the Southeast Asia and China delivering meaningful increases in gross margin. More specifically, Municipal, Industrial Water & Reuse and Industrial Wastewater & Biogas all exceeded gross margins in fiscal 2025 by an average of more than 6% compared to the prior year. As a result of the revenue growth and margin expansion in our SPS and Recurring Revenue segments, EBITDA was $4 million, as we noted earlier, which was a dramatic increase of $8 million compared to the loss of $4 million in 2024. And all business units saw EBITDA increases in fiscal 2025, which we were the most proud of. Just to run through a few, the Ivory Coast Addendum contributed $3.4 million of EBITDA compared to $0.2 million in 2024. Industrial Wastewater & Biogas saw an EBITDA increase of $1.8 million based exclusively on revenue growth of $5.0 million as well as gross margin improvements. Municipal Water & Wastewater saw revenue and EBITDA growth of $1.4 million and $0.9 million, respectively. Southeast Asia and China revenue growth was $2.8 million in fiscal 2025, and it was able to reduce its EBITDA loss by almost $1 million compared to 2024. Industrial Water & Reuse saw an EBITDA increase of about $0.5 million, and that despite modestly lower revenue, but driven by significantly higher gross margins from positive project variances. And lastly, we were able to achieve corporate cost savings of about $0.5 million that also contributed positively EBITDA. On the cash flow side, the company had another strong quarter. Fluence ended the year with $16.6 million in cash and $4.1 million in security deposits. Operating cash flow in Q4 and fiscal 2025 was $3.8 million and $10.9 million, respectively. This is certainly higher than forecasted, and it was due to a number of Ivory Coast payables not getting settled prior to year-end. As a result, the company anticipates negative operating cash flow in Q1 2026, but forecasts resuming the trend of positive cash flow in Q2 through Q4 of 2026. It's also notable that Fluence repaid $2.5 million in debt during fiscal 2025 as a result of that strong cash flow generated by the business. And here's another good story. New orders in Q4 2025 were $24.5 million, which is an increase of $15 million or almost 158% compared to Q4 of last year. More importantly, I check back in the records, and we believe that this was Fluence's largest order quarter on record for SPS and Recurring Revenue. For fiscal 2025 overall, new orders were $64.2 million, which was an increase of $14.2 million or 28.5%. Municipal North America and Industrial Wastewater & Biogas certainly led the way with increases of 98% and 76%, respectively. Backlog closed the year at just under $75 million, of which approximately $53 million is forecasted to be recognized in fiscal 2026. The core business units of Municipal Water & Wastewater, Industrial Water & Reuse, Industrial Wastewater & Biogas in Southeast Asia and China saw an increase in backlog of $14.8 million or well over 40%. Combined with our expectations for Recurring Revenue, this gives us a very strong foundation for growth in fiscal 2026. Given the strong performance and positive momentum of the company, Fluence will not be issuing discrete guidance for fiscal 2026. Nevertheless, the company expects double-digit revenue growth even with the significant reduction in revenue from the Ivory Coast Addendum project, driven by continued momentum in SPS and Recurring Revenue segments in our core markets. Additionally, we expect continued expansion of gross margins, all of which will contribute to strong growth in EBITDA and EBITDA margins. I also want to give a brief update on the Ivory Coast project given its contribution to the company in 2025 and beyond. Through Q4 of 2025, the company continued to make progress on the addendum works. A number of activities were advanced around road construction, earthworks and drainage works. Pipeline installation has progressed to approximately 2.2 kilometers. Overall, the Addendum Works are progressing well through Q4 and revenue was in line with our forecast for the year. The project is expected to be completed in Q3 2026 with no significant deviations at this time from budget. As noted in prior updates, the Addendum Works are critical for connecting the Main Works water treatment plant to the broader distribution system, enabling treated water to reach the population of Abidjan. Fluence continues to pursue a long-term O&M contract for the plant and preliminary steps have been taken, negotiations are expected to begin soon after the technical proposal and business plan, which we have provided are reviewed by the government. Fluence is currently maintaining the plant on an interim basis, which positions us very well to be awarded the long-term O&M contract. And on the cash flow side, as of December 31, 2025, the company has collected 6 milestone payments under the Addendum contract totaling EUR 35.4 million or approximately 73% of the total payments. I also wanted to provide several additional updates on the business, including developments in our Egypt business and enhancements made to our executive management team. Just a little bit of background on Egypt itself. IWS was established in 2018 as a joint venture with several Egyptian partners, whereby Fluence was and remains the 75% majority owner and leads the business operationally. Minority partners were set up to support project acquisition, government relations and operational support where required. Since 2018, IWS has successfully executed a number of municipal and industrial water treatment projects, including the $20 million New Mansoura water treatment plant that was commissioned in 2023. IWS continues to support the New Mansoura project through an ongoing O&M contract. Unfortunately, despite efforts of local and executive management, IWS has not been fully successful in collecting outstanding amounts owing on accounts receivable across a number of accounts, most notably at New Mansoura water treatment plant. And the accounts receivable remain substantially in arrears despite the plant being operational for more than 2 years. Fluence's minority partners have provided limited support with local and national government support to support collections. As a result, Fluence has determined at this time that it is necessary to take a reserve of $4.5 million of accounts receivable at IWS. This reserve will be taken as an extraordinary item in other losses and is not expected to impact cash flow as management has not been forecasting collections from these accounts for some time. However, we will continue to take all actions available to us to collect those amounts owing. Fluence management continues to review the future of the IWS operations, including the attractiveness of the market opportunity relative to other markets where Fluence operates. Fluence is considering all available alternatives for the IWS business. Now a few updates on enhancements made to our executive management team. Earlier, you met our new CFO, Ozzie Llanes, who started with Fluence in December. We're very fortunate to have been able to attract such an experienced finance executive that brings very relevant industry experience with him from his time at Xylem. Ozzie will work directly with me to drive capital efficiency, Investor Relations and the integration of global financial processes to support Fluence's long-term growth and profitability objectives. Additionally, we bolstered our business unit leadership group when Anda Cao joined us in December. Anda brings significant water industry leadership experience from his time at De Nora, Xylem and Energia with a focus on delivering sustainable double-digit growth through operational excellence and driving a performance-driven culture, which fits perfectly with Fluence's strategy. Rick Cisterna and Spencer Smith are also taking on refined and expanded roles within the business as Chief Growth Officer and Chief Talent and Legal Officer, respectively. Rick's key areas of focus will be global key account management, rep and agent management, marketing and ensuring consistent reporting and incentives for our global sales team. We will also be responsible for establishing a global water services business unit. We'll be focused on driving growth of operations and maintenance, parts and consumables, build-own-operate and rental service models across all Fluence's product lines and geographies. And he will also take ownership of the Ivory Coast project as we look to transition it from a CES project to a long-term O&M project. Spencer will now be responsible for defining and driving Fluence's global people and culture strategy in addition to responsibility for legal affairs, compliance and risk management. This role will be a strategic enabler of growth through leadership development, organizational design, talent acquisition, training and total rewards to ensure that Fluence attracts, develops and retains the best global talent in the water industry while fostering a One Fluence approach across all our regions. Lastly, I'd be remiss if I didn't express my sincere gratitude to Tom Pokorsky, Fluence's recently retired CEO. Tom's extraordinary leadership was on full display during his time with Fluence, and he helped set the foundation from which we can now grow responsibly and profitably. He will remain on as a trusted adviser to the company and to the Board, and we will lean on his tremendous experience on a regular basis. However, we will try to allow him to enjoy his well-earned retirement after a pretty remarkable 50-year career in the water industry. To conclude, the strength of Fluence's Q4 and fiscal 2025 results demonstrate the progress that the company has made over the past few years. More importantly, while delivering a strong year was a critical step in demonstrating the revised strategy has gained traction, record orders in Q4 and a strong backlog have positioned us for an even stronger fiscal 2026. Combined with expanding gross margins, a lower cost base and better cash management practices, management is optimistic about the ability to build sustained profitability and positive cash flow into 2026 and beyond. At this time, I think we can open it up for questions from webcast participants. Thank you again for your time and your continued interest in Fluence. Benjamin Fash: So I will read out some of these questions and try to answer them as best I can. A question came in. As Applegreen is the only USA project mentioned in the recent wins, could you elaborate more on Applegreen and if there is further significance to this win? Nothing really further to elaborate on the Applegreen win. We continue to make progress as we've discussed in our organic growth strategy in Municipal USA. It was one of the stronger growth areas in terms of orders in fiscal 2025, as mentioned, with growth -- order growth of almost 100%. So we continue to make progress, and this is just another example of that. Congratulations on the Q4 results. This is just a comment on the result with Q4 EBITDA at $2.6 million and a contribution from IVC at $800,000. Does this show that we are now positive EBITDA even without the contribution from Ivory Coast? I think that's a really good question. And the answer is yes. If you look at the entirety of the year as well as in Q4, what we demonstrated was profitability even without the contribution of the Ivory Coast Addendum project. The growth -- that has really come from the growth in our SPS and Recurring Revenue from our core business units and expanded gross margins combined with a lower cost base, all of which has really contributed to a business that can and will be profitable even in the absence of the Ivory Coast Addendum project as we demonstrated in 2025. There's a question on Fluence's operating -- the plant -- the Ivory Coast plant on an interim basis. What is the ongoing revenue from this on an interim basis? At this moment in time, there has not been any revenue recognized on the interim maintenance work that has been done. We have been incurring costs through this period. We have a commitment from the client -- from the government to be reimbursed at standard market rates during -- for the maintenance work that's been done during that period. But during fiscal 2025, we did not recognize revenue as we did not have a contract in place. Question to clarify, the company expects double-digit growth on total revenue of $78 million. The answer is yes. Are we expecting more legacy write-downs in addition to IWS? Will PDVSA be any issues? So those are 2 very different questions. We do believe that IWS likely represents the -- I'll say, the last of the major legacy write-downs. We don't expect any additional ones from existing operations at this moment in time. PDVSA is a different issue altogether and obviously has become -- brought back into the limelight with the current geopolitical situation with Venezuela. At this moment in time, there has been nothing that has changed with regard to the sanctions environment and OFAC and their position on our ability to negotiate with PDVSA. So at this moment in time, there are no changes to that situation and none envisioned at this moment in time until there's more clarity provided. You have target EBITDA margin for 2026, noting your medium-term targets are noted at 10%? We are not providing specific EBITDA margin guidance at this time. Any update on the rental division? This is a good question. We are working diligently on building out our rental strategy. There'll be more updates that we can provide through the course of 2026, but there are no specific or material updates that we need to share at this moment in time. Any traction on Dow City, MABR pilot with regards to approval from the Iowa DNR. No specific updates on that other than we are leveraging that pilot and have been able to generate some opportunities around that in the Iowa area. So Iowa has sort of become one of the states that we have now put on our approved list to be able to market and develop new business. There's a question around -- there's a lot of discussion around the water usage by data centers under construction. Is this an area of interest or opportunity for Fluence? This is an excellent question. And obviously, there is a lot of buzz around AI and the water needs for data centers. And I would say both directly and indirectly, we are interested in this market and are tracking it very closely. However, what I would say is in the early days right now, the biggest opportunity that we see available to us is actually in the power generation market. You've seen that through several recent orders over the past 12 to 18 months in areas like Saudi Arabia, South America, where power generation is becoming the, I would say, the leading edge of that AI boom. The demand for power is actually going to be what leads the way, I think, in the AI build-out. And those power plants require significant amounts of water. In fact, significantly more water treatment required in those power plants than in the AI data centers themselves. There are some questions around how -- what the water need truly is in these AI data centers. There's some good research that's been -- that's come out recently on the true water requirements, which we are evaluating and have numerous commercial discussions ongoing. But I'd say where we're having some early success right now, where we're seeing the most growth is actually in the power generation market, which is kind of following on those -- the AI growth boom that we are seeing. Okay. There were a couple of questions on that around data centers. So I believe I've answered that, and there were a few other questions on guidance for fiscal 2026, which I believe I've answered. So I think at this time, I don't see any additional questions coming in. So I think at this time, we will move to conclude the Q&A and the presentation at this time. I truly appreciate your interest and tuning in, as always. If you do have any additional questions, please feel free to send them along to Andrew Angus, and we will do our best to address them. Thank you, and have a great day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Dolby Laboratories conference call discussing first quarter 2026 results. [Operator Instructions] As a reminder, this call is being recorded Thursday, January 29, 2026. I would now like to turn the conference over to Mr. Peter Goldmacher, Vice President of Investor Relations. Peter, please go ahead. Peter Goldmacher: Good afternoon, and welcome to Dolby Laboratories First Quarter Fiscal Year 2026 Earnings Conference Call. Joining me today are Kevin Yeaman, Dolby Laboratories CEO; and Robert Park, CFO. As a reminder, today's discussion will include forward-looking statements, including our fiscal 2026 second quarter and full year outlook and our assumptions underlying that outlook. These statements are subject to risks and uncertainties that may cause actual results to differ materially from the statements made today, including, among other things, the impact of macroeconomic events, supply chain issues, inflation rates, changes in consumer spending and geopolitical instability on our business. A discussion of these and additional risks and uncertainties can be found in the earnings press release that we issued today under the section captioned Forward-Looking Statements as well as in the Risk Factors section of our most recent annual report on Form 10-Q. Dolby assumes no obligation and does not intend to update any forward-looking statements made during this call as a result of new information or future events. During today's call, we will discuss non-GAAP financial measures. A reconciliation between GAAP and non-GAAP financial measures is available in our earnings press release and in the Interactive Analyst Center on the Investor Relations section of our website. With that, I'd like to turn the call over to Kevin. Kevin Yeaman: Thanks, Peter, and thanks to everyone for joining us on the call today. FY '26 is off to a good start. Revenue and non-GAAP earnings came in above the high end of the range of guidance. We are making meaningful progress on the growth initiatives we discussed last quarter, and we're raising our guidance for the year. Robert will share more details on the financials and guidance in a few minutes. Just a few weeks ago at CES, we showed how Dolby Atmos and Dolby Vision are shaping how people watch, listen to and enjoy their favorite entertainment content across movies, TV, music, sports and user-generated content. We hosted hundreds of customers and partners at Dolby Live, where we had demonstrations primarily focused on the in-car entertainment experience and Dolby Vision 2 for TVs. Automotive has become a major focus of CES, and we were excited to have partners highlight how Dolby is helping them transform the future of in-car entertainment. Attendees were able to experience Dolby Atmos in cars ranging from a 2-seat Porsche, 911 to a Mercedes SUV, an Audi e-tron and a full-size Cadillac Escalade. We also showed how Dolby is playing an important role in expanding the scope of high-quality entertainment in the car. SmashLabs demonstrated its immersive multichannel games in Dolby Atmos vehicles and attendees got a chance to listen to Audible's fully immersive Harry Potter audiobook series featuring Dolby Atmos. The Neon Horizon featuring Dolby Atmos and Dolby Vision demonstrated how the bar is being raised on the in-car experience well beyond music to include movies, TV, gaming, audiobooks and more. In addition, we announced that we are partnering with Qualcomm to integrate Dolby Atmos and Dolby Vision into Qualcomm's Gen 5 Snapdragon Automotive platform, further extending our reach into the auto ecosystem. Also during the quarter, Mahindra released the first SUV in India with Dolby Atmos and Dolby Vision, and Hyundai launched its first car with Dolby Atmos, a crossover SUV in China. Overall, we continue to be excited about the momentum in automotive, where we now have partnerships with over 35 OEMs, up from 20 OEMs this time last year. Moving on to TVs. Dolby Vision 2 was on full display at CES and was met with enthusiasm from partners, press and attendees. Building on the success of Dolby Vision, Dolby Vision 2 is designed to meet the evolving expectations of today's viewers and unlock the full potential of modern televisions from mainstream sets to top-of-the-line models. Dolby Vision 2 has a variety of features that are designed to enhance all the content consumers enjoy, including movies, sports and gaming with even more vivid pictures and brighter colors. When you see it, it just looks better. We got an enthusiastic response at CES from the content providers with Peacock announcing its support for Dolby Vision 2 across movies, originals and live sports, joining Canal+ as an early launch partner. TP Vision, the maker of the Philips brand, announced support for Dolby Vision 2 across a variety of upcoming models, joining Hisense and TCL as launch partners. The first Dolby Vision 2 TVs will be available by the end of the year, increasing our revenue opportunity from TVs. Additionally, in the quarter, we continue to make progress on our other growth initiatives, including mobile, our video distribution program for imaging patents and OptiView. Meta, which announced support for Dolby Vision on Instagram in November, has now begun supporting Dolby Vision on Facebook. Douyin, the Chinese version of TikTok has been supporting Dolby Vision on iOS and started rolling out support for Android devices this quarter. Content captured and played back in Dolby Vision drives higher engagement for social media providers and in turn, increases demand for Dolby Vision on mobile phones. In imaging patents, Roku became a licensee of the video distribution patent pool, marking the first U.S.-based streamer to sign up for the pool. As we discussed last quarter, this pool increases the addressable market for imaging patents by expanding the available licensees from device manufacturers to also include streamers of content. On Dolby OptiView, we continued our partnership with the NFL with OptiView delivering RedZone through the NFL+ app and achieving record levels of streaming quality for the service. And we continue to bring customers onto the service. including Veikkaus, Finland's national lottery and sports betting operator and SIS, short for Sports Information Solutions, a service provider of about -- over 300 sports betting companies. Veikkaus is using Dolby OptiView to reduce latency for live horse racing improving the real-time betting experience and strengthening customer engagement. SIS has adopted our video player and has made the ability to deliver content in subsecond latency available to its customers. We're encouraged by how Dolby OptiView is enabling our partners to increase audience engagement and revenue. So to wrap up, we have continued momentum in automotive, new growth drivers for Dolby Vision and TVs, and growing adoption of Dolby Vision and social media, an important use case for mobile devices. And while it's early days, we continue to expand our addressable market to new customers with Dolby OptiView and the video distribution program. We're confident in our ability to grow Dolby Atmos, Dolby Vision and imaging patents at 15% to 20% per year over the next few years. And now that Dolby Atmos, Dolby Vision and imaging patents is approaching 50% of our licensing revenue, it is having a greater impact on our overall growth rate. We remain excited about our position in the market and confident in our growth opportunities. With that, I'll turn it over to Robert, who will take you through the financials in a bit more detail. Robert Park: Thank you, Kevin, and thanks to everyone joining us on the call today. Revenue for the quarter came in at $347 million above the high end of the guidance we shared last quarter, primarily driven by the timing of deals coming in earlier than expected and a $7 million favorable true-up for Q4 shipments. Non-GAAP earnings per share was $1.06 and also above the high end of guidance, driven by higher revenue and lower OpEx. Licensing revenue was $320 million and Products and Services revenue was $27 million. We generated approximately $55 million in operating cash flow repurchased $70 million of common stock and have approximately $207 million remaining on our share repurchase authorization. We declared a $0.36 dividend up 9% from our dividend a year ago and ended the quarter with cash and investments of approximately $730 million. GAAP operating expenses in Q1 included a $10 million of restructuring charge as we continue to streamline operations and align resources with our business priorities. Detailed licensing performance by end market can be found on our IR website. As we share with you every quarter, trends are typically smoother on an annual basis as the timing of recoveries, minimum volume commitments and true-ups can drive quarterly volatility. In terms of end market performance for the quarter, it's worth noting that Mobile grew by over 20% year-over-year and Broadcast revenue was down mid-teens year-over-year, both primarily driven by timing of deals. We still expect Mobile and Broadcast to be up mid-single digits for the full year. Turning to guidance. For full year fiscal '26 guidance, we are raising the revenue range to $1.4 billion to $1.45 billion. This reflects the Q1 true-up and some of our deals coming in earlier and stronger than forecasted, partially offset by slight revisions to our outlook for the year, including potential impact of memory pricing, which varies by end market and customer. We expect fiscal year '26 licensing revenue to be between $1.295 billion and $1.345 billion, and we are targeting non-GAAP operating expenses between $780 million and $800 million. This guidance implies operating margin improvement of between 50 and 100 basis points. We expect non-GAAP earnings per share to be between $4.30 and $4.45. Our expectations for foundational in Dolby Atmos, Dolby Vision and imaging patents full year growth rates are relatively unchanged from what we communicated at the beginning of the year. With Dolby Atmos, Dolby Vision and imaging patents growing roughly 15% and comprising nearly half of our licensing revenue, we expect foundational revenue to be down slightly. We also expect end market growth rates for the full year to be similar to what we communicated last quarter with growth in other Mobile and Broadcast and declines in PC and CE. For Q2 '26, we expect revenue to be between $375 million and $405 million. Within that, we expect licensing revenue to be between $350 million and $380 million and includes a large recovery that settled in Q2. Gross margin should be approximately 91% on a non-GAAP basis and we expect non-GAAP operating expenses to be between $195 million to $205 million. Non-GAAP earnings per share is expected to be between $1.29 and $1.44. In summary, we are off to a strong start in Q1, and we are encouraged by the progress we are making across our growth initiatives. Our financials remain solid with organic revenue growth, high gross margins, expanding operating margins, healthy cash flows and a strong balance sheet. With that, we'll open the line for your questions. Operator: [Operator Instructions] Your first question comes from the line of Steven Frankel with Rosenblatt. Steven Frankel: So on this notion of some of the upside was driven by deal timing, with deals coming in earlier than expected. Do you read into that? Any change in the environment or customers' sense of urgency? Or this is just the other side of the coin that you experienced over the last couple of years where deals tended to slip? Kevin Yeaman: Yes. Thanks, Steve. I wouldn't extrapolate to any generalization in the macro. I think that we're pleased to have had some of our deals come in earlier. It has the effect of kind of derisking some of the outlook for the year. But things are coming in about what we expected, raising guidance some to reflect the true-up in Q1, one of the deals coming in a little bigger and that's -- all the normal adjustments we typically do as we come into a new quarter. Steven Frankel: And on that large true-up, could you help us understand, was that in Mobile and that's part of the Mobile upside? Or was it another area? Kevin Yeaman: The true-up was about $7 million. And Robert, do you want to cover? Robert Park: Yes, it was primarily gaming and broadcast, Steve. Steven Frankel: And the strong growth in Mobile, was that in part due to signing of new deals or renewals that drove that? Robert Park: Steve, yes, the Mobile -- you tend to want to look at these end markets for the full year because the timing of deals, recoveries, minimal volume commitments, particularly in Mobile, can fluctuate quarter-to-quarter. We still expect the full year for Mobile to be up slightly? Steven Frankel: Okay. And then one big picture question, Kevin, the spin-off of the Sony TV venture into a partnership with TCL, does that present an opportunity over the next couple of years for you to gain some material share if Sony ends up behaving like TCL, where you're basically on every SKU? Kevin Yeaman: Yes. I mean I don't want to comment on their pending transaction or where they might go with it, but we have very strong relationships with TCL. We also have a strong relationship with Sony. So they're both good partners. And of course, we're really focused across the board on increasing attach for televisions and yes, we're very excited about Dolby Vision 2 and the reception it got at CES from content providers, OEMs, really everybody who came by and we're looking to bring those first Dolby Vision 2 televisions to market by the end of this fiscal year. So as we go into next year, that's when we see that adoption cycle beginning and that's a good opportunity for us as adopting Dolby Vision 2 for those who already have Dolby Vision that's increased royalties. But we also think that it's a real opportunity to bring Dolby Vision 2 and the Dolby experience to those midrange TVs because there's a lot of discrete features of Dolby Vision 2, which upgrade the experience. But when you see two midrange TVs again at CES, we had $300 TV side by side, it's just significantly better. So we're excited about that as we approach the end of the year here. Steven Frankel: Great. And one more quick one for Robert. Cash flow generation, this Q1 looked more like Q1 of 2024 than 2025? Is this just timing and we shouldn't read anything into it. And the expectations for full year cash flow generation should be what we're used to? Robert Park: Yes. That's a good question, Steve. And you're right, our cash flow -- particularly our operating cash flow can fluctuate quarter-to-quarter depending on the timing of deals, the terms, patent pool collections and distributions. What you need to look at if you want to is go back to the last 4 quarters, it tracks very closely the non-GAAP net income. And if you look at the trailing 4 quarters, it's right about 100% of that, and that's what we continue to expect for the year. So if you want to peg a proxy for operating cash flow, look at our non-GAAP net income, and that should be a good proxy for operating cash flow. Operator: Your next question comes from the line of Ralph Schackart with William Blair. Ralph Schackart: Kevin, maybe if you could just give us an update on the new sort of patent pool monetization strategy. I think last time on the call, you said it could be 10% of revenue from a collection made within 3 years. Just maybe kind of confirm if that's still the current view? And maybe more importantly, Roku is obviously a nicest customer to have. They're largely $100 million or so active accounts. Maybe kind of give a sense of after you have Roku here, how those conversations progress as you look to commercialize with other partners? And then I think there might be some discounts available, if I'm not mistaken in the market up until midyear, maybe June 30 from recollection. And how is that sort of influencing some of the conversations you're having along those lines? Kevin Yeaman: Yes. Thanks, Ralph. Let me start with the reference to the 10%. So remember that one of the things that we're excited about is the opportunity to expand our addressable market to content service providers -- for 60 years, we provided technology know-how, experience to content creators, content distributors and OEMs monetizing, of course, at the OEM level. And so we have a couple of areas where we're adding new value that we're providing to content service providers, and that's based on more of a consumption-based revenue model. So it was the combination of the video distribution program, which is reported in imaging -- image patent licensing, which your -- the rest of your question is about. And Dolby OptiView which is the 10% of revenue coming from content service providers in 3 years. Now as it relates to your -- the video distribution program question, so yes, so remember that the pool was introduced because of the growth of the streaming industry and the recognition that modern video codecs are critical to the future success of these providers. And we feel it's off to a good start with a handful of licensees last quarter, including some large ones in China. As we said this quarter, the pool signed its first U.S. streamer in -- with Roku. So that is -- we've obviously seen a lot of these patent pools develop over the years. So we feel good about the progress, good engagement across the industry. And yes, it sounds like you've maybe been doing some good research on our website or elsewhere. There are some pricing incentives to -- that the pool that we go through is -- offers to incent early sign-ups. Ralph Schackart: Great. Maybe just one for Robert. Just in terms of the guide being at the high end, was that just a combination of good stuff going on in the quarter as well as the favorable true-up? Or was that maybe tilted a little bit more in favor of the favorable true-up getting the revenue to come in towards the high end of the guide? Just trying to get a sense of that. Robert Park: Are you talking about the full year, Ralph? Ralph Schackart: For the quarter, yes. Kevin Yeaman: The quarter, Robert? Oh for Q2? Q1 -- or it was in Q1 or Q2. Now I guess I don't know. I'm not sure... Robert Park: Yes, Q1 is the $7 million of favorable true-ups and deals coming in earlier than expected, as we talked about before in terms of the performance for Q1. I'm sorry. I thought you were talking about guidance. Ralph Schackart: No, I said guidance, but maybe just give a sense outside of NVIDIA favorable true-up and how about [indiscernible] was relative to expectations of [indiscernible] was in the quarter? Robert Park: So Ralph, you were a little bit choppy on that. Can you repeat that question? Kevin Yeaman: Yes, could you? Ralph Schackart: Can you give me a sense of -- yes, sorry. Can you just give me a sense of how the quarter progressed relative to expectations as the true-up? Just kind of want to get a sense from a macro. I know Kevin said, much hasn't changed, but it would just be helpful, just a little bit more color there if you could please. Robert Park: Yes. I would say it's fairly small. It's nice that it's favorable in terms of units being a little higher than we estimated for last quarter. But the deals coming in earlier than expected, deals can ebb and flow, but it's always nice to have them in earlier. As Kevin said, it does derisk our pipeline for the full year and gives us a little more confidence about our ability to execute for the rest of the year. But I'd say other than that, it's pretty close to what we thought it would be, and that true-up of course is something we don't plan for. So that's more so for the full year. Operator: Your next question comes from the line of Vikram Kesavabhotla with Baird. Vikram Kesavabhotla: I guess I'll start first on CES. I'm curious if you can just talk more about your takeaways from the event this year. Obviously, you talked about all the demos that you had available there. I guess what was some of the feedback from the partners and customers throughout the event? And what do you think resonated the most from some of your latest innovation? Kevin Yeaman: Yes. Well, first of all, it's just a great opportunity for us to engage with partners from across our ecosystem. I mean, of course, we had OEMs coming through, but also our content service partners and content creators. And, as you know, we're -- we have our own space at Dolby Live, which is pretty well equipped to demo the Dolby experience. And it's just a great opportunity to show them what are -- what's new and we were really focused on the automotive in-car entertainment experience in Dolby Vision 2. But of course, it's also an opportunity to talk to them about what they're seeing, what their -- how they see their opportunity and how we can partner together. So we had hundreds of groups of customers and partners coming through. On the floor, it was mostly about the automotive experience, a lot of energy, a wide variety of cars and use cases. We also saw at Dolby Atmos, Dolby Vision car. So whereas we started with -- our story several years ago when we started was music in the car. Now it is fully the complete in-car entertainment experience with Dolby Atmos, early days of Dolby Vision, but you're seeing examples of gaming content in the car, TV and movies. Audiobooks is also a really attractive use case for our Atmos partners. Dolby Vision 2 was just -- has just been -- we were already getting a good reception. We got to show it to a lot more people. And as I said earlier, you can just really see the difference. So there's a lot of excitement about that. So we're heads down, working with our partners to get those first TVs out the door toward the end of this year so that we can then begin to increase the availability of that in the marketplace. So that's some of what we were -- that's kind of what we say good -- it was a really good show for us. Vikram Kesavabhotla: Okay. Great. And then I also wanted to follow up on some of the recent announcements that you highlighted in the press release. So first on Peacock, you said that's the first streaming service to integrate your full suite of premium picture and sound innovations. Could you talk more about the significant -- significance of that announcement? I mean, what do you think moves the needle in that conversation with Peacock? And what does this mean for your future relationships across the streaming landscape. And then similarly, you also highlighted Meta now supporting Dolby Vision on Facebook following the announcement on Instagram recently as well. I guess, could you talk more about how that's influencing your broader efforts in social media and your discussions with the mobile OEMs? And I'll leave it there. Kevin Yeaman: Yes. Thanks for the question. So yes, so Peacock did announce that they're embracing the entire suite of Dolby technologies AC-4, Dolby Atmos, Dolby Vision 2, they've become one of our first two launch partners for Dolby Vision 2 which obviously will come to -- you'll be able to experience when TVs are available later this year. And with Peacock, that's, of course, across movies, it's across TV, it's across sports, they've started with Dolby -- starting Dolby Atmos, so you'll be able to experience the Super Bowl and the Winter Olympics in Dolby Atmos through Peacock. So we're really excited about them leaning into the full Dolby experience. And yes, on Meta, we shared last quarter that they had adopted Instagram for iOS users. They've now expanded to Facebook. And that's important to us for a couple of reasons. I mean, first of all, obviously, it's a primary use case on mobile devices. So having the ability to experience Dolby Vision over your favorite social media and video sharing websites, applications are -- that creates demand for Dolby on mobile devices. We also mentioned last quarter that Douyin in China began supporting Dolby Vision and that they are now expanding support to their Android users. So that's also a really strong development. But yes, we're very excited about Instagram and Facebook, and we're excited about our relationship with Meta. I mean, they now have embraced Dolby Atmos and Dolby Vision on the Oculus headset and it's just being able to engage with them across multiple aspects of their business. It is just a great opportunity to learn where we can help going forward in terms of new opportunities. Operator: Your next question comes from the line of Patrick Sholl with Barrington Research. Patrick Sholl: Maybe just another question on the guidance. Can you talk about like whether on the foundational of the Atmos and Vision side of things. Just how you're seeing OEMs respond to any kind of the macro issues, whether it's on tariffs or on memory in terms of how they're kind of adjusting their time shipment views? Kevin Yeaman: Yes. Yes, thanks for that. I think -- look, I think everybody is probably on a daily basis trying to find the signal through the noise because there's obviously a lot of things going on. As it relates to our adjustments, there weren't -- not material adjustments, but we update our outlook every quarter. The reference to memory pricing, in particular, obviously, that's a hot topic. I would say -- that was some -- like I said, it wasn't a significant adjustment, and we ended up raising guidance given the true-up and some of the strengths in the pipeline. As it relates to memory pricing and our end markets, it looks to us like the Mobile end market is the one that's most directly impacted. As that relates to us, it varies quite a lot by customers. Some customers have done more forward purchasing or other things to kind of hedge the impact. And then, of course, most of our Mobile business is driven by minimum volume commitments. So the timing of renewal cycles also plays into that. So it's not a material effect overall, but there were some adjustments there. In terms of TVs, memory is not as much of a percentage of the bombs. We don't see a lot of impact. And one other area where we've heard more noise around what the impact would be, would be PC and that's one of the markets that Robert highlighted as being down for the year for us. Patrick Sholl: Okay. And then you addressed in the press release that the continued progress on adoption in audio manufacturers. So I'm just kind of curious with changes around U.S. policy, if you're seeing any sort of impact and how that flows through to -- like around EVs, if that has any impact on the adoption of the various in-car offerings? Kevin Yeaman: Well, because of the stage of the opportunity we're at, which is getting a lot of new wins and getting a lot of new models. We haven't noticed any impact. It's still -- it's one of -- it's our highest growing area and within, the other is licensing. And I would also say that we are beginning to see more diversification geographically. We were -- we started very strong in China with EVs. We've expanded to Mercedes, Audi, Porsche, Cadillac and the top 3 manufacturers in India, and we're also beginning to see more gas-powered vehicles coming with Dolby Atmos as well. So far, that's not been top of mind for us. We're continuing to focus on getting more manufacturers, help them get deeper into lineups. And as I said earlier, really excited about the opportunity now to expand into the full in-car entertainment experience with Dolby Vision and all the types of content that people are going to enjoy in their car. Operator: Ladies and gentlemen, that does conclude our question-and-answer session, and that does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Good afternoon, and thank you for standing by. Welcome to Western Digital's Second Quarter Fiscal 2026 Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now I will turn the call over to Mr. Ambrish Srivastava, Vice President, Investor Relations. You may begin. Ambrish Srivastava: Thank you, and good afternoon, everyone. Joining me today are Irving Tan, Western Digital's Chief Executive Officer; and Kris Sennesael, Western Digital's Chief Financial Officer. Before we begin, please note that today's discussion will contain forward-looking statements based on management's current assumptions and expectations, which are subject to various risks and uncertainties. These forward-looking statements include expectations for our product portfolio, our business plans and performance, ongoing market trends and our future financial results. We assume no obligation to update these statements. Please refer to our most recent annual report on Form 10-K and our other filings with the SEC for more information on the risks and uncertainties that could cause actual results to differ materially from expectations. In our prepared remarks, our comments will be related to non-GAAP results on a continuing operations basis, unless stated otherwise. Reconciliations between the non-GAAP and comparable GAAP financial measures are included in the press release and other materials that are being posted in the Investor Relations section of our website at investor.wdc.com. Lastly, I want to note that when we refer to we, us, are or similar terms, we are referring only to Western Digital as a company and not speaking on behalf of the industry. With that, I will now turn the call over to Irving for introductory remarks. Irving? Tiang Yew Tan: Thanks, Ambrish, and good afternoon, everyone, and thank you for joining us today. The growth and impact of AI continues to accelerate across numerous industries. As generative AI models become the norm and agentic AI scales to drive business productivity, it is clear that AI is becoming a true strategic enabler of business transformation. AI inference has also begun to take hold in many ways becoming the true AI workload with deployment to chat bots and virtual assistants and customer relationship management tools. Further innovations in physical AI are also accelerating quickly, generating increasingly larger multimodal models propelled by advancements in autonomous vehicles and robotics. In all cases, it is data that is needed to fuel the entire AI process from training to inference to enable stronger models and sharper inference results. And as more data is generated and the value of data increases, the demand to store it is expanding at a rapid rate. As AI capabilities expand, cloud continues to grow as well, and both are driving the surge in demand for higher-density storage solutions. In this new era where AI and cloud dominate, Western Digital has taken a customer-focused approach to managing the strong demand by working closely with our hyperscale customers, ensuring that we deliver reliable, high-capacity drives at scale to give them the best performance and total cost of ownership. We are doing this by continuing to focus on increasing our drives areal density and accelerating our HAMR and ePMR road maps as well as upshifting our customers to accelerate adoption of higher capacity drives and UltraSMR technology. This last quarter, we shipped over 3.5 million units of our latest generation ePMR products, offering up to 26 terabyte CMR and 32 terabyte by UltraSMR capacities, representing strong confidence and adoption by our customers. We have also started qualification of our HAMR and next-generation ePMR products, each with a different hyperscale customer. These drives will offer our customers the higher capacity and improve total cost of ownership that they are looking for. In addition, we continue to accelerate our HAMR innovation. To support this, we recently acquired intellectual property assets and talent that will help us in the development of our internal laser capabilities. Also this past quarter, in partnership with software ecosystem partners, we announced our UltraSMR-enabled JBOD platforms, expanding UltraSMR adoption to a broader customer set. These platforms deliver significantly higher storage density compared to conventional drives. giving customers hyperscale-like performance and make mass scale data analysis more sustainable and efficient. We are truly seeing our approach resonate with our customers, and this is reflected in longer-term agreements and better visibility into their requirements. We have firm purchase orders with our top seven customers through calendar year 2026. We also have in place robust commercial agreements with three of our top five customers, two through calendar year 2027 and one through calendar year 2028. These agreements indicate a strong trust that we have built with our customers and confidence in our ability to meet their exabyte needs. We are hosting an Innovation Day on February 3rd in New York next week, where we will share updated road maps for our HAMR and ePMR products as well as further details on core innovations that we are developing to improve our drives performance, energy efficiency and throughput. We will also provide an update on our financial model. In keeping with our strategy to incubate new growth vectors based on our intellectual property and core capabilities, last month, we announced a strategic investment in Qolab, which combines our expertise in material science and precision manufacturing with Qolab's breakthrough approach to quantum hardware design. Working with Qolab, we aim to advance next-generation nanofabrication processes that improve qubit performance, reliability and scalability. Looking ahead, we see our positive momentum continuing and we will remain focused on supporting our customers' exabyte storage requirements while completing qualifications and launching our next-generation HAMR and ePMR drives. I will now hand it over to Kris to share our Q2 results and outlook for Q3. Kris Sennesael: Thank you, Irving, and good afternoon, everyone. Western Digital delivered another quarter of strong financial performance, reflecting disciplined execution across our organization and our ability to meet the customers' growing demand in the AI-driven data economy. During the second quarter of fiscal 2026, revenue was $3 billion, up 25% year-over-year, driven by strong demand for our nearline drives. Earnings per share was $2.13. Both revenue and EPS were above the high end of the guidance range. We delivered 215 exabytes to our customers, up 22% year-over-year. This includes over 3.5 million drives or 103 exabytes of our latest generation ePMR with capacity points up to 32 terabytes. Cloud represented 89% of total revenue at $2.7 billion, up 28% year-over-year, driven by strong demand for our higher capacity nearline product portfolio. Client represented 6% of total revenue at $176 million, up 26% year-over-year. Consumer represented 5% of revenue at $168 million, down 3% year-over-year. Gross margin for the fiscal second quarter was 46.1%. Gross margin improved 770 basis points year-over-year and 220 basis points sequentially. The improved gross margin performance reflects continued mix shift towards higher capacity drives and tight cost control in our manufacturing sites and throughout the supply chain. Operating expenses were $372 million. As a percentage of revenue, operating expenses declined 120 basis points sequentially, primarily due to operating leverage in the model. Operating income was slightly above $1 billion, translating into an operating margin of 33.8%. Interest and other expenses were $45 million, and our effective tax rate in the fiscal second quarter was 15.1%. Taking into account the diluted share count of 378 million shares, EPS was $2.13, an increase of 78% year-over-year. Turning to the balance sheet. At the end of our fiscal second quarter, cash and cash equivalents were $2 billion and total liquidity was $3.2 billion, including the undrawn revolver capacity. Debt outstanding was $4.7 billion, translating into a net debt position of $2.7 billion and a net leverage EBITDA ratio of well below 1 turn. Operating cash flow for the fiscal second quarter was $745 million, and capital expenditures were $92 million, resulting in strong free cash flow generation of $653 million for the quarter, which reflected a free cash flow margin of 21.6%. During the quarter, we made $48 million of dividend payments and increased our share repurchases to $615 million, repurchasing 3.8 million shares of common stock. Since the launch of our capital return program in the fourth quarter of fiscal 2025, we have returned $1.4 billion to our shareholders by way of share repurchases and dividend payments. Also, today, we announced that our Board has approved a quarterly cash dividend of $0.125 per share of the company's common stock, payable on March 18, 2026, to shareholders of record as of March 5, 2026. I will now turn to the outlook for the third quarter of fiscal 2026. We anticipate revenue to be $3.2 billion, plus/minus $100 million. At midpoint, this reflects a growth of approximately 40% year-over-year. Gross margin is expected to be between 47% and 48%. We expect operating expenses in the range of $380 million to $390 million. Interest and other expenses are anticipated to be approximately $50 million. The tax rate is expected to be approximately 16%. As a result, we expect diluted earnings per share to be $2.30, plus/minus $0.15 based on a non-GAAP diluted share count of approximately 385 million shares. To wrap up, Western Digital achieved another strong quarter with performance ahead of expectations. Our guidance for the next quarter underscore continued favorable trends in our business alongside our disciplined approach to free cash flow, capital returns and long-term value creation for shareholders. With that, let's now begin the Q&A. Ambrish? Ambrish Srivastava: Thank you, Kris. Operator, you can now open the line to questions, please. To ensure that we hear from as many analysts as possible, please ask one question at a time. After we respond we will give you an opportunity to ask one follow-up question. Operator? Operator: [Operator Instructions] Operator? Our first question today comes from Aaron Rakers with Wells Fargo. Aaron Rakers: And I will stick to one, Ambrish. On the gross margin line, the guidance that you're giving for 47% to 48%, I guess the back of the envelope math would suggest that you're maintaining what looks to be like a 70%, maybe 75% incremental margin flow-through. So, I guess, my question is, how do you think about the durability of that incremental margin? Or maybe taken another way, how do you think about the cost curve down on a per terabyte basis as we look out over the next, call it, several quarters? Kris Sennesael: Yes, Aaron, thanks for your question. And so, first of all, I'm really happy with what's going on with the gross margin. We delivered 46.1% gross margin, up 220 basis points quarter-over-quarter, up 770 basis points year-over-year. And we are guiding to 47%, 48%, so 47.5% at the midpoint, which is up 740 basis points on a year-over-year basis. And Aaron, I think your math is working. The incremental gross margin is on or about 75%, depending on how you look at it on a year-over-year basis or a quarter-over-quarter basis. So I've stated before, I'm very comfortable with an incremental gross margin higher than 50% and definitely 75% is higher than 50%. I mean in gross margins, there's two sides to the equation. On one hand, you have pricing environment. On the other hand, you have the cost environment. In pricing, I've talked about that before. We see a stable pricing environment with prices on a price per terabyte kind of flattish to slightly up. Actually, last quarter, it was up 2%, 3% on an ASP per terabyte basis. So that clearly demonstrate the value that we continue to deliver to our customers. And on the cost front, the teams continue to execute really well. We continue to upshift our customers to higher capacity drives, which gives us a cost benefit. And then there is great execution as well on driving down the cost in our manufacturing assets as well as throughout the supply chain. And when you look at it last quarter, the cost per terabyte was coming down on or about 10% on a year-over-year basis. And so when you put this all together, we continue to drive further gross margin expansion. And we believe in the next couple of quarters and beyond, we will continue to be able to do that. Operator: The next question is from Erik Woodring with Morgan Stanley. Erik Woodring: Irving, just given the tightness of the HDD market and kind of the significant inflation that NAND is going through right now, can you maybe just talk about maybe your patience in being able to sign purchase orders further into calendar '27 to extract better economics just relative to maybe how you were approaching signing POs last year? Is that making any difference in the economics you're able to extract? And then -- thank you. Tiang Yew Tan: Yes. Thanks, Erik. As we highlighted, we're pretty much sold out for calendar '26. We have firm POs with our top seven customers. And we've also established LTAs with two of them for calendar year '27 and one of them for calendar year '28. Obviously, these LTAs have a combination of volume of exabytes and price. And in relation to pricing, I think first, it's important to recognize that our customers actually have value that there's actually a structural shift in the value that we deliver to them, especially in the impact that we have to their total cost of ownership as the business moves more and more towards inference where monetization is happening. So, in this case, the pricing that we've provided there reflects the value that we're delivering to them. And so as Kris mentioned, we continue to see going forward, a stable pricing environment that gives us an opportunity to continue to extract more value as we deliver both better TCO value to our customers and to better support their supply-demand needs as well through higher capacity drives. Ambrish Srivastava: Do you have a follow-up, Erik? Erik Woodring: Sure. Just very quickly, Kris, would just love to know how you're approaching the SanDisk share ownership. Do you still plan to monetize before, I think it's the February 21 deadline? And more importantly, how do you expect to leverage those proceeds? Kris Sennesael: Yes, Erik. As you probably know, we still have 7.5 million SanDisk shares, and it's our intention to monetize those shares before the one-year anniversary of the separation. likely in a similar transaction that we have done before, meaning it's a debt for equity swap. And so the proceeds will be used to further reduce the debt. Operator: The next question is from C.J. Muse with Cantor Fitzgerald. Christopher Muse: I guess could you speak to how customer engagement and contracts are evolving in this very tight environment? Tiang Yew Tan: Yes, C.J., this is Irving. Thanks for the question. One of the things that we've been very focused on over the last year is really develop a much more customer-centric approach. As we've shared in the past, we've really pivoted our organization to be centered around our big hyperscale customers with dedicated teams for each of them. That's really deepened the relationship that we have with them in terms of both technology road map development, in terms of getting better visibility of their demand requirements, and you see the result of that in the longer-term LTAs we've been able to structure with them. We're also looking forward to sharing with all of you the innovations that we are going to be delivering to support the AI needs -- workloads needs going forward at our Innovation Day next week. But definitely, the relationship has improved, as I highlighted, they definitely see the value and the structural -- that's resulting in the structural change that we're seeing in terms of pricing with them that's also resulting in the longer-term contracts that we have. Ultimately, what we want to do is to be able to ensure that it's a fair value exchange, deliver predictable pricing to them because one of the things that they are concerned about is the high volatility of some tiers of the storage space, right, and to ensure that there's sustainable value creation, both for them and for us along the way. Operator: Do you have a follow-up, C.J.? Let's go to the next. Sorry, C.J., go ahead. Christopher Muse: Yes, sorry about the numbers. I guess just to follow on the SanDisk share comment. Can you talk about your plans thereafter? Are you going to focus more so on share repurchase or other? Kris Sennesael: Well, we are already focusing on share repurchases since we've announced the $2 billion share repurchase authorization in May of 2025. We already have repurchased $1.3 billion or we have used $1.3 billion of that program, repurchasing on or about 13 million shares, and there is no hesitation. We will continue to use that program. Operator: The next question is from Wamsi Mohan with Bank of America. Aisling Grueninger: This is Aisling Grueninger on for Wamsi. Congrats on the results, guys. Just one question for me. minds on the mix of UltraSMR. Just given your order book LTAs, how is this mix trend on UltraSMR trending? And how does this mix shift play a role kind of as a driver of gross margins moving forward? Tiang Yew Tan: Yes. That's a really great question, Aisling. Thank you for that. Well, last quarter, we crossed on the nearline portfolio, 50% mix on UltraSMR, and we actually see that increasing. As we've highlighted, one of the things that we're doing to better support the growth in demand from our customers is really to upshift them to higher capacity drives. A big part of that is the upshift to UltraSMR-based drives, and we see more and more customers adopting UltraSMR. We have our top three customers fully on board. with UltraSMR drives already today, and we have another two to three more that are moving into a process of adopting UltraSMR. So we are likely to see the UltraSMR mix of our total nearline exabyte base continue to increase going forward. That's actually very important for us because, one, we are better able to serve our customer demand needs. As you recall, UltraSMR gives a 20% capacity uplift over CMR and a 10% capacity uplift over the standard -- industry standard SMR. But equally important from a gross margin standpoint, UltraSMR is a software-based solution. So it's very accretive for us from a margin standpoint as well. So a higher shift higher mix of UltraSMR is definitely going to be beneficial both to our customers and to our ongoing profitability as well. Ambrish Srivastava: And Aisling, one thing in Irving's prepared remarks, we mentioned the JBOD that we have launched, which also expands our UltraSMR customer reach beyond what we have been targeting so far. So thanks for your question. Maybe we go to the next question, please. Operator: The next question is from Asiya Merchant with Citigroup. Michael Cadiz: It's Mike Cadiz at Citi for Asiya today. So I have a question and perhaps a follow-up. So the first is, could you provide any color or additional color on yields and reliability? I know that is -- those are a couple of points that Irving has brought up over the past couple of quarters in relation to the multiple rollouts. Is there any implication to cost per bit declines that we can think of? Tiang Yew Tan: Yes. Thanks for the question, Mike. So our yields on our ePMR products continue to be very, very they continue to be yielding very well in the low 90s percentage yield range. And obviously, from a reliability and quality standpoint, we received very good feedback from our customers. The fact that we've been able to, last quarter, deliver over 3.5 million units of our flagship ePMR drives is a testimony to the confidence that they have in terms of the reliability and the quality. In terms of the cost related to the cost down, obviously, as we get yields up, cost continues to decline as the UltraSMR mix goes up within those new products as well, that's also going to be a driver of cost down as well. Ambrish Srivastava: Okay. Do you have a follow-up? Michael Cadiz: I did. So can you talk more about any progress or the progress from your Rochester test and integration site how you're leveraging perhaps those efforts to accelerate maybe in the existing customer transitions? Tiang Yew Tan: Yes. One update that we shared in the prepared script is actually we -- last quarter, we indicated that we would start HAMR qualification. We pulled it forward to the first half of calendar '26. We actually have started qualification of those drives already this month for HAMR. On top of that, we've also started qualification for our next-generation ePMR drives as well. And obviously, our Rochester SIT Lab plays a critical role in ensuring that we have a very smooth, quick qualification. And equally important, as they move into production environments that they deliver the same reliability and quality. that our customers have been used to our previous generations of products. Again, on this one, we look forward to sharing a lot more on the 3rd of February in our Innovation Day, we'll be highlighting the updated road maps for both our ePMR and HAMR portfolio. And so we look forward to sharing more of that exciting news next week. Operator: The next question is from Amit Daryanani with Evercore. Hannah Liu: This is Hannah on for Amit. I was just wondering, are there any notable investments related to HAMR that are currently flowing through COGS or operating expenses? And should we expect those costs to roll off or normalize as HAMR begins to ramp? Kris Sennesael: Yes, we have been working on HAMR for the last 10 years, and the engineering teams are making good progress. So there is no change there. We will continue to work on those programs, and we will, in general, continue to innovate and make performance improvements to our programs, continue to drive higher capacity drives and those investments will continue. As it relates to the gross margin, we haven't started the HAMR ramp yet, but we are confident once we start ramping HAMR that will be neutral to accretive to our gross margins. Tiang Yew Tan: Yes. Maybe just to add on to what Kris said, even with the HAMR ramp that we anticipate will happen at the start of calendar year '27, our CapEx as a percentage of revenue on a run rate basis will still be within the 4% to 6% range. Ambrish Srivastava: Did you have a follow-up? Hannah Liu: No. Operator: The next question is from Karl Ackerman with BNP Paribas. Karl Ackerman: Rose mid-teens in 2025 and is projected to advance double digits again in 2026 as agentic AI is supposed to drive a cyclical recovery in front-end conventional servers. But in your case, because hard drive units are highly correlated to demand for conventional servers, and you're also seeing a content uplift from these new drives. Do you believe Agentic AI demand can enable you to exceed your long-term exabyte growth CAGR of low 20s? Tiang Yew Tan: Yes. Thanks for the question, Karl. Well, I think we've definitely seen exabyte growth over the last few quarters in the low 20s, as you've highlighted. Actually, we see as the AI value changes from model training to inference, more data is going to get created as a result in order to enable the inference delivery, more data needs to get stored as a result of that data getting generated as well. And if you look at the economics of being able to deliver inference at the right cost structure to drive mass scale adoption, again, a lot of that data that's getting generated and require storage will be delivered -- will be stored on hard drives as they are, as we've highlighted in the past, where hyperscalers really are masters of managing the economics and moving data across the different tiers of SSDs HDDs and tape as well. So from our perspective and the conversations that we've been having with our customers, inference is definitely going to drive a significant amount of data storage requirement, and that's really positive for HDDs going forward. Ambrish Srivastava: Do you have a follow-up, Karl? Karl Ackerman: If I may, Ambrish, just going back to HAMR, it sounds like you've pulled in the progression of HAMR, at least your first primary customer. Can talk about the interest beyond your initial customer given the robust hyperscaler demand for exabyte capacity? Tiang Yew Tan: Yes. Thanks for the question, Karl. As we've mentioned, we are starting qualification in the first half of this year. We've already started that with one hyperscale customer already this month, and we will be initiating another one -- initiating qualification with another hyperscale customer relatively soon. Operator: The next question is from Thomas O'Malley with Barclays. Thomas O'Malley: Just a follow-up on some of the comments from the preamble about acquiring some IP, I think, on the laser side. Could you maybe give us a little more detail on that, maybe the size of the purchase? And then what in particular you needed to add on the laser side that you felt like you need to go out and do a deal? Tiang Yew Tan: Yes. Thanks for the question. Well, unfortunately, the terms and conditions of the deal are confidential. So we can't really share too much about that. But we are excited about acquiring this technology. We'll share again more of that next week at our Innovation Day. But what I will say is it's definitely going to give us the benefit of taking much less real estate in the drive, right? And that will actually help with manufacturability in terms of reliability. And we also see that with this innovative technology, energy requirements to support the lasers will also be reduced compared to the conventional laser diodes. So we're quite excited about the -- both the IP and the capabilities that we've acquired. Ambrish Srivastava: Do you have a follow-up, Tom? Thomas O'Malley: I do. With NVIDIA's addition of the KV cache offload and the NAND attach that's thought to go with that, I was curious if you guys have been engaging with any large hyperscalers or any large procurers of storage for any kind of solution that would maybe attach on to custom silicon deployment, say, something that brings the hard drive a little bit closer to some of the accelerators, if there's a road map for those or if you're engaging in that way with any customers? Tiang Yew Tan: Yes. No, thanks for the question. Again, I think the initiative that NVIDIA has been driving is really to help accelerate inference capability. And as I've highlighted, as a result of that, the velocity and the volume of data is going to get generated much more rapidly. And the benefit from us, obviously, will be able to require -- it will require a lot more storage, which obviously HDDs are well suited with the superior economics. We are working on, as we've highlighted in the prepared remarks on interesting innovations to improve both our bandwidth and throughput of our drives. Again, something we are looking forward to be sharing with all of you next week as well. Operator: The next question is from Vijay Rakesh with Mizuho. Vijay Rakesh: Kris, pretty phenomenal numbers here. Just a quick question on the HAMR side. Are you expecting to pull in the HAMR road map time line given how tight supply is, et cetera? Tiang Yew Tan: Yes. We've pulled in the qualification already by half year. And we've started the qualification process with one customer. As I just mentioned earlier to Karl's question, we will be starting a qualification with a second customer imminently on qualification. Obviously, getting HAMR and higher capacity drives to our customers are a key part of the approach that we're taking to meet the strong demand for exabytes from our customers on HDD. But it's also very important to remember, we also have started the qualification of our next-generation ePMR drives. And those products have shown the ability not to only deliver very high capacity per drive, but also to be able to support a high degree of scalability and manufacturability where we are able to deliver large volumes of drives to our customers. So, last quarter, we delivered over 3.5 million drives. And this quarter, we're looking to deliver close to 4 million drives. Vijay Rakesh: Got it. And then on the gross margin trajectory, I guess, with the incremental 50% drop-through, when you look at HAMR ramps, any thoughts on how we should look at those margins? I guess you might call it on the Innovation Day, but any preliminary thoughts there? Tiang Yew Tan: Yes. I mean, as we've consistently highlighted, we see the transition once HAMR gets to the same scale as our ePMR portfolio, the gross margins for HAMR will be neutral to accretive from what we have with ePMR. Operator: The next question is from Steven Fox with Fox Advisors. Steven Fox: I was wondering if you could maybe talk about the revenue per exabyte in the quarter compared to last quarter and a year ago in the sense that how much of the change quarter-over-quarter and year-over-year is related to change in mix? And then I had a follow-up, if I could. Tiang Yew Tan: Yes. Maybe I can start off here, and Kris might want to add in. Look, the big driver of our sort of revenue per exabyte both year-on-year and quarter-on-quarter is related to our cloud segment. So, our big hyperscale customers, we see very strong demand from that segment. So, obviously, that's driving a lot of the bits and the revenues associated with that. And in that segment, as Kris has highlighted, the pricing is stable. So, in fact, it was up single digit last quarter and year-on-year as well. So that's a positive trend that we continue to see, and that's going to be a growth driver for the business for the year and probably for the next two years as well. Steven Fox: And if I could just quickly follow up. Can you just -- is there any commentary on how successful you were in terms of maybe getting out more exabytes during the quarter than originally planned for or whether through quicker customer qualifications or your own efficiencies? Any update there would be helpful. Tiang Yew Tan: Yes. Well, last quarter, we delivered 215 exabytes, right? That was up 22% year-on-year. And again, a lot of it is being driven by our cloud portfolio. As we've highlighted, we shipped over 3.5 million units of our current ePMR products that go up to 32 terabyte. So it's a clear recognition of the stability, quality and scalability of that product. So we will continue to do that, and we look forward to ramping the next generation of ePMR and HAMR in the coming quarters to better support the customer demand. Operator: The next question is from Ananda Baruah with Loop Capital. Ananda Baruah: On cost down, you mentioned that I think, Kris, December quarter was 10% year-over-year down. And with UltraSMR becoming a larger portion of the ship and then with HAMR coming on sort of margin neutral to positive, do you think that cost down, I think it's classically been about 10% year-over-year. Do you think that can increase in coming years, cost out increasing per exabyte ship? Kris Sennesael: Yes. So, currently, it's on or about 10% cost per terabyte or exabyte reductions. Obviously, we will continue to innovate, continue to push to higher capacity drives, continue to upshift our customers to adoption of those higher capacity drives, including UltraSMR. And all of those actions will lead to further cost reductions on a cost per terabyte. I think it's fair to say that's on or about 10% is a good number. And as we potentially accelerate our road maps, we could potentially drive that higher. Ananda Baruah: That's super helpful. Ambrish Srivastava: Do you have a follow-up, Ananda? Ananda Baruah: Yes, quick. This may be one for next week actually. But just interested in understanding how far up the areal density stack do you think you can get CMR and UltraSMR before you really get HAMR going? Tiang Yew Tan: Yes. I think that's something we are looking very much forward to sharing with you next week. So we look forward to seeing you there. Operator: The last question is from Krish Sankar with TD Cowen. Hadi Orabi: This is Eddy for Krish. You mentioned you had three LTAs for 2027 and 2028 that are volume and not price based. I do wonder what is the reason these contracts are not locked in price, especially given the very tight supply? Is it the customer who prefer not to lock in price? Or is it you guys who prefer to have the flexibility? Any high-level color would be helpful. Tiang Yew Tan: Yes. Thanks for the question. Just to clarify, we have two customers that have LTAs through calendar year '27, one customer that has an LTA through calendar year '28. These LTAs have both price and volume conditions in them. Hadi Orabi: Okay. Noted. That's great color. Operator: This concludes today's conference call. Thank you for joining. You may now disconnect.
Operator: Greetings, everyone, and welcome to the Calix Fourth Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nancy Fazioli, Vice President of Investor Relations. Nancy, please go ahead. Nancy Fazioli: Thank you, Daryl, and good morning, everyone. Thank you for joining our fourth quarter 2025 earnings call. Today on the call, we have President and CEO, and Michael Weening and Chief Financial Officer, Cory Sindelar. As a reminder, yesterday, after the market closed, Calix issued a news release, which was furnished on a Form 8-K, along with our stockholder letter, and was also posted in the Investor Relations section of the Calix website. Today's conference call will be available for webcast replay in the Investor Relations section of our website. Before I turn the call over to Michael for his opening remarks, I want to remind everyone that on this call, we will refer to forward-looking statements, including all statements the company will make about its future financial and operating performance, growth strategy and market outlook, and that actual results may differ materially from those contemplated by these forward-looking statements. Factors that could cause actual results and trends to differ materially are set forth in the fourth quarter 2025 letter to stockholders and in the annual and quarterly reports filed with the SEC. Calix assumes no obligation to update any forward-looking statements, which speak only as of their respective dates. Also in this conference call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in the fourth quarter 2025 letter to stockholders. Unless otherwise stated, all financial information referenced in this call will be non-GAAP. With that, Michael, please go ahead. Michael Weening: Thank you, Nancy, and good morning. We closed 2025 with the best performance in the company's history, expanding our strong foundation that we have invested 15 years building with team members, customers and partners. Record revenue. Our sixth quarter of consecutive revenue growth while guiding higher in first quarter. Record gross margin. Our eighth quarter of consecutive margin improvement, expanding RPOs driven by excitement around our third-generation platform and continued operational discipline yielding our 11th consecutive quarter of 8-figure free cash flow and ending the year with record cash. These results underscore the strength of our platform model as we contribute to the success of our broadband experience provider customers. We also launched the third generation of our Calix platform in December with more than 300 customers already migrated as of today, and we are working to complete all customer migrations by the end of first quarter. This marks a significant milestone for Calix and our customers as Calix's agent workforce integrates into everything that we do, while our partnership with Google Cloud allows our platform to be deployed to any customer in the world, whether Calix hosted or as a private instance for a large customer. Last, we continued to improve the culture that supports the success of our customers every single day. As evidenced by our 44 culture and 20 innovation awards, adding 16 awards in fourth quarter alone. Our team is particularly proud of these awards as success starts with people. The Q4 results, our strong culture and the successful launch of the third generation of our platform that adds capacity and capability for existing customers through agent workforce cloud. The opportunity in the MDU market with SmartLife and the ability to address new global markets and large customers with private clouds as our team entering 2026 very confident and our ability to continue our track record of enabling customers to simplify operations in go-to-market, innovate across residential, business, MDU and municipal segments, which enables them to grow for their members, investors and the communities they serve at a faster and faster pace. As we exit 2025, it also marks the end of the early adopter phase of the market disruption and with demand visibility at an all-time high, our entrance into a sustained growth phase for 2026 and beyond. Cory, over you to walk through the specifics of our Q4 performance. Cory Sindelar: Thank you, Michael. In the fourth quarter of 2025, Calix delivered record revenue of $272 million, marking a sequential increase of 3% and a robust 32% year-over-year growth. This capped off a milestone year, which we surpassed $1 billion in annual revenue, reflecting 20% growth over 2024. Our results were driven by continued strong demand for our platform among broadband experience provider customers, who are leveraging our appliance-based platform, cloud and managed services to attract new subscribers, minimize churn, raise NPS scores and ARPU and expand their footprints. The addition of 25 new customers this quarter further demonstrates the broad-based adoption of our solutions. Remaining performance obligation reached a record $385 million, up 9% sequentially and 18% year-over-year. Current RPOs were also a record at $152 million, representing an 8% sequential increase and a 26% rise from the same period last year. These robust metrics underscore the visibility we have into the ongoing strength of our business model as we see more BXP customers adopt our platform, cloud and managed services, add incremental offerings and win new subscribers. The accelerating interest in Agent Workforce Cloud is another clear indicator that the BXP-led disruption is past the elbow and we have left the early adopter phase and are now in a sustained growth phase. To that end, we have aligned our publicly disclosed financial metrics to reflect the growth and value of our model. We have split out our clients' revenue and gross margin from our recurring software and services revenue and gross margin. Simultaneously, we have ceased providing metrics such as platform adoption and customer size that were proxies for our progress during the early adopter phase. The combination of our customers' ongoing subscriber growth with our platform and the strength of appliances deployment resulted in another record non-GAAP gross margin of 58%, representing our eighth consecutive quarter of margin improvement. The continued expansion is primarily due to the adoption of our platform by new broadband service providers and the success of our BXP customers. While gross margin may fluctuate quarter-to-quarter depending on customer and product mix as well as memory costs, we remain confident in our ability to drive further gross margin growth as our platform, cloud and managed services scale. Regarding memory costs, we will remain proactive and as we did during COVID, we will partner closely with our customers to ensure continuity of supply and address any cost increases resulting from higher memory pricing. Our balance sheet remains strong. DSO at the end of the fourth quarter was an industry-leading 35 days. Inventory turns were 3, reflecting investments to address robust demand. We generated record free cash flow for the quarter of $40 million. We have now produced positive quarterly free cash flow for over 5 years including 11 consecutive quarters with 8-figure amounts. We ended the year with record cash and investments of $388 million, an increase of $48 million sequentially and $91 million year-over-year. This strong cash position reflects our ongoing profitability and disciplined operational execution. Also during the fourth quarter, we deployed $17 million to purchase 300,000 shares of our common stock. As we have discussed, we have a disciplined capital allocation process and we remain a disciplined buyer of our own stock. That said, as visibility increases, our internal valuation models have moved up and this is illustrated by our fourfold increase in share buybacks from the third quarter to the fourth quarter. Furthermore, our Board of Directors has authorized an increase of $125 million in our stock repurchase plan. Given the robust demand environment and the strong pace at which our customers are adopting our model, we expect to continue delivering sequential revenue growth, including in the first quarter, which has traditionally experienced slower growth due to seasonal trends. Our revenue guidance for the first quarter of 2026 is between $275 million and $281 million representing a 2% increase at the midpoint over the prior quarter. This outlook reflects our confidence in the multiyear growth opportunity ahead, as more service providers recognize the value of transforming into a broadband experienced provider. Regarding progress on BEAD, we now have a clearer view of the size and timing of the program. The available size of the opportunity for Calix is between $1 billion and $1.5 billion. While we have already seen orders from BEAD recipients, we expect deliveries of appliances later this year and meaningfully ramping into next year and beyond, providing a tailwind to our growth. Strategically, the BEAD awards also give insight to the practical differences between fiber-to-the-premise technology and low earth orbiting satellites. The vast majority of funds, some 85% went to fiber-based deployments but only 5% of funds went to low earth orbiting satellites. This speaks to pure physics -- this speaks to physics pure and simple. Fiber has the highest bit rate pairing capacity, a multi-decade life cycle and the lowest cost, operating costs. In short, it is financially practical to get fiber to the premises you will. For those sites that are too far away, alternate technologies such as fixed wireless or low earth orbiting satellites are a good solution. As such, one should quickly realize to the extent that competition exists, it exists between fixed wireless and satellite, not between fiber and anything else. For the first quarter of 2026, we expect non-GAAP gross margin to remain strong with some near-term impact due to customer mix and from overlapping cloud costs as we transition to our third-generation platform. I would also note that while we are making this investment in running dual cloud, the transition to the third-generation platform is on track and progressing well. Regarding non-GAAP operating expenses, we expect a sequential increase in the first quarter of 2026, primarily related to accelerating the development of AI functionality and capabilities across our platform, cloud managed services. Importantly, we expect to return to our target financial model for operating expenses by the end of 2026, positioning us for sustained long-term profitability and growth. We are entering 2026 with strong visibility and confident in our growth trajectory. We are excited to host our Investor Day at the New York Stock Exchange on February 24, where we will share more about our strategy and long-term growth opportunities. We look forward to seeing you there. Michael, thank you. Michael Weening: Thanks, Cory. At a time when the pace of change is accelerating at a rate that has never been seen before, we entered 2026 ready to make that pace of change our advantage and, in turn, an advantage for our customers. We have successfully launched agent workforce and demand visibility is at an all-time high. We have executed with operational rigor to ensure that we have the financial strength to continue to invest and grow by winning new customers and helping our existing customers differentiate and dominate in the markets they serve. Last, our team culture is ready for the opportunity that we have invested and worked so hard towards our better, better, never best cultural mantra will ensure that our internal teams make the most of AI to improve how we operate while our platform delivers incredible results for our customers. The next step in Calix' journey is here. I'm excited to lead the team as we speed our ability to transform the broadband industry and enable the success of our customers and partners. I would like to close by thanking our team, customers, partners and shareholders whose passion, grit and trust have brought us to this exciting next stage in the Calix journey. Nancy, let's open the call for questions. Nancy Fazioli: Daryl? Operator: [Operator Instructions] Our first questions come from the line of Samik Chatterjee with JPMorgan. Joseph Cardoso: This is Joe Cardoso on for Samik Chatterjee. Maybe for the first one, I think last quarter, you talked about a revenue growth outlook for '26, tracking to the low end of the 10% to 15% range ex-BEAD. One, curious if that range is still fair to think about for modeling assumptions here? And then second, just in regards to the better visibility now that you have around the BEAD program, any update on how you're thinking about the contribution for 2026. And how we should think about that layering into the financials here as we progress through 2016 and into '27 and then I have a follow-up. Cory Sindelar: Yes. I think with our high visibility and understanding where BEAD is coming in, I think we'll be somewhere in that range of 10% to 15%. I don't think we'll be at the low end. Michael Weening: And we're confident. Demand visibility is high. And the other part is for an update, that's one of the things we intend on walking through, right, Cory, at the Investor Day at length because a lot of our investors are asking questions with regards to how we achieve those growth rates. So we're very confident. Joseph Cardoso: Got it. I appreciate the color there. And then maybe just a follow-up in a similar vein, I think you've been referencing new market expansion, including the international opportunities. Any updated thoughts there? Like as we think about the new markets and Calix going out there and trying to cultivate these opportunities, like how should we think about that as part of the 2026 growth story? And I think last quarter, too, you referenced that, that's not necessarily in the numbers, but how tangible is that in terms of contribution for 2026? Or should we think about this being longer in the tooth as you try to like kind of do the block and tackling in terms of opening up these opportunities for Calix. Just curious big picture there, like how we should think about that coming into the Calix story. Michael Weening: It's a great question. So the first part of it, as we were -- when we had this call last quarter, we were also coming up to the launch of our platform, and therefore, we wanted to ensure that it was out. So from a confidence point of view, for us to actually understand how we'd potentially open up new markets, we had to get over the hump of actually getting the platform out because that's the grand enabler, and that means we have to move our customers over. So the great thing is that in December, we started those transitions. And as I said on the call, we have over 300 customers already over. I believe we're going to load another 100 over the next week. And by the end of the quarter is our goal to actually have all of our existing customer base onto the new platform. So that, in essence, is kind of the first gate and we're through that and very confident with regards to the trajectory on that transition. So that's the first part, which is great, which is why as we look out to 2026, we can feel confident with regards to the expansion in international markets and the ability to go after large customers with dedicated private clouds. What is the revenue in 2026? We actually haven't really built that. We have not added that into the numbers. primarily because, as you know, as you go after large customers or open new markets, you have a lot of investment work to do and that you have to build it out. That being said, if you look at my LinkedIn, you'll notice that yesterday, I announced that I will be keynoting at Mobile World Congress in Barcelona in March. This is the first time we've really showed up at that event, which is the largest communications events in the world, I think it's like 140,000 people attended. They take over Barcelona and I've personally been there 10 times when I was at Microsoft and [ Bell ]. But for us to be keynoting should be a very good indicator that everybody goes and talks to them about what is your story and when they heard what we're doing with regards to artificial intelligence and how far ahead we are, which is enabled by our platform, they were quite surprised and gave us an opportunity. Again, I would encourage you to look at who's speaking. We're in the architects of AI section, which is Keynote 6. Go look at the speakers in there and you'll see that the CEO of Qualcomm amongst others, that these are the leaders in AI. And so -- and we're right in the middle of that. And as we go and accelerate through '26, while we haven't layered that into the revenue numbers, we will be getting a lot of attention because what we've done is groundbreaking and we're way ahead of the competition. So there is no one doing what we're doing in the segment. The last part I'll say on that is the value of artificial intelligence is yet to be seen. So when I go back to 5 years ago, I was in a course at Wharton, and I was talking to their AI and data scientist leader, and he said, as I look at artificial intelligence over the long term, the real value in that is how we drive business outcomes, not necessarily the AI engines. And so as we're working through our platform, the value is, how we actually work with agent workforce and provide value to our customers. And that is the ultimate value of what we're doing with the platform as it unlocks at the end of the quarter for all of our customers and future prospects. Operator: Our next questions come from the line of Ryan Koontz with the Needham & Company. Ryan Koontz: Mike, if you could expand a little bit on -- you just spoke to your traction upmarket with Tier 1s. Can you maybe unpack where your entry points there are upmarket, where you see the most exciting opportunities with the new platform? Michael Weening: Well, so what I stated was that we're starting that pursuit. And so the entry points into Tier 1, there's really 4 vectors to it. So the value of our platform is that we can -- when we talk to a large customer, we can code broadly with our sales organization around what are the problems that you currently have. And so the vectors are you have to find your beachhead into an account. So the first vector is you talk to their enterprise organization around what they're doing in business, so small business in MDU that represents a significant opportunity. MDU as an example, is a significant issue inside every single large customer and small customer frankly, which is why we built that ground breaking product to help them succeed. And that opens up a significant market opportunity, both in our existing base and in Tier 1s. So that represents a beachhead. The second beachhead is what we're doing around networking. That's much more traditional based upon what we built with AXOS and how we won Verizon 7 years ago, and that really comes down to the insights that we provide from an automated platform. And obviously, when you put artificial intelligence on it and because we understand end-to-end from a networking point of view, what our customers do, not only from an access but also from a subscriber management, all the other component parts,, we can automate that at a level that no one else can, which drives significant value. And as evidenced by the reason why we got sole-sourced at Verizon all those years ago is because we represented an 80% reduction in operating costs. And the way they really acquired that operating cost benefit as they had to build a lot of their own clouds, we now have that inside our cloud with our AI engines through Operations Cloud and those capabilities. So that's the second way in. The third and most important one is actually demonstrating a model for how you provide subscriber experience. So how do you win that consumer and residential market, and the value we offer there is evidenced by all of our existing customers who can achieve NPS as high as 94, they can offer incremental services. But more importantly, they can move at a really fast pace with new product launches as evidenced by Bright speed, who is able to get to market in 2 days, where I was talking to a Tier 1 the other day, they launched a small business product. It took them 2 years and $20 million. We could have launched that small business product with our platform for $50,000 or less, no integration costs, no IT work and they could have been in market in 30 days. And so that represents a significant opportunity. And if you look at the challenge inside large customers, the challenge that they have is how everyone's talking about network automation and cost cutting, well, the real growth, path to growth is how do I add subscribers, how do I grow revenue per subscriber? And how do I reduce churn? And that's something we do all day long. And when you layer in agent workforce, as we build out our Agentic Army, we're going to automate those capabilities to help them drive it at significant fast rate. And then the last one is an opportunity for us to speak to them around Agentic at a higher level. If you look at the platform that we've built, and we all go in-depth in this in -- at the Investor Day, so I'd encourage everybody to come on Investor Day, and we walk you through our broad architecture with regards to AI. Our architecture is not constrained to our cloud and what we do. We can actually take our knowledge and orchestration layer and apply it to the entire business and use Agentic framework that could provide knowledge across the company and help them drive efficiencies way beyond our existing business. And so those are the 4 beachheads that we have with the customer. Those are the conversations that I am personally having, yes, with the sales teams and the product team as we talk to our customers. And that's why we will be at Mobile World Congress for the first time. I haven't been there for 5 years. We will be there speaking to the large Tier 1s because frankly, what we've done is unmatched. No one is doing what we're doing. And so that's the opportunity ahead. But as I said, come to the Investor Day, and we will go through that in depth. Ryan Koontz: That's great. We'll be there and hope to see you over in Spain, too. And Cory, just in terms of gross margins and memory costs, you've kind of mentioned partnering with customers and passing through some of these transitionary costs. Can you maybe unpack that a little bit for us about your thoughts. Cory Sindelar: So Ryan in the first quarter, we're really not having any of those costs. Remember, the advantage of our supply chain team is we got ahead of this. And so we're doing really well in that regard. So no immediate near-term impact. And it's one of those things that as we progress through the year, we'll partner with our customers to deal with what we see coming down the pipe. Operator: Our next questions come from the line of Michael Genovese with Rosenblatt Securities. Michael Genovese: So I wanted to talk about some of the new disclosure numbers that we have in the shareholder letter, systems and software versus appliance. I guess, to begin with, I mean, it seems like as a percentage of revenue, Software and Systems has gone down over the past year, which is somewhat surprising since we're not in a BEAD like build more footprint type of environment. So can you just help clarify the reason for that? Cory Sindelar: Sure. As we have said all along, our software is tied to subscriber growth, and that happens in a consistent and upward trajectory all of the time. Where you're going to get volatility is going to be on the appliance line, where it can grow and shrink it in a given period. And so what you saw this year is obviously reacceleration of the appliances from 2024. Meanwhile throughout that entire period of time, the software and services number continues up into the right and grows every day. It's the reason why we say our margins are going to continue to expand over time, because that's unrelenting in terms of its growth, and that's what you're seeing. Specifically, if you look at the tables or the charts related to software and services, you'll see that there was a bit of a downtick from Q2 to Q3. The one anomaly inside of the software line that can create quarter-to-quarter fluctuations, the amount of AXOS licenses. As you know, those are recognized immediately upon signing and they are not ratable. And in Q2, we had a little bit more AXOS licenses than any other period in the first quarter or third quarter. Consequently, you see that bump up. Michael Genovese: Great. And then a related type of question. I guess the other thing that surprised me about those charts is how high your appliance gross margins are and how the software and services gross margins are only a few points higher than the appliances. So the questions that follow from that are, how are the appliance margins so high? But secondly, as you sort of -- as the clouds mature and you move to cloud versus hosting on 2 clouds, where -- could you just give us a sense of where those software margins should be headed over time? Cory Sindelar: Sure. Sure. If I take a look at the software margins, we're going through the transition currently. And so they are temporarily depressed due to the dual cloud cost but once we lift that yoke off, those margins will continue. Ultimately, they probably go past 70% and beyond. We ultimately don't know what the upper limit is to the software and services margin because it depends on success at Tier 1s, where the amount of that will likely be just software-only revenue with no hardware or appliances attached good to it. And so the more of that you mix in, it's hard to say where that ultimately adds and touches to, but they should clearly move beyond 70%. Michael Genovese: Great. But appliance -- on the high appliance margins, just how you accomplish that? Michael Weening: But we accomplished it because of the fact that if you look at the $2 billion that we've invested in our platform, a big part of that is that we built 2 operating systems, which are fully abstracted from the silicon and give us significant flexibility with regards to components. The reason why a customer can turn up a system like Wrightspeed, who has older back-office systems that are very complex from they brought those over from Lumen initially. The reason why they can actually do what no one else in the industry can do is because of our platform. You -- because everything is abstracted, the complexity sits inside the software, not at a hardware layer, which allows us to actually transition at a very fast pace. It also allows us to simplify our SKU count. If you go back to where Calix was when I first started 10 years ago, we had almost 4,000 SKUs, and that means that you have all of this component complexity if you can actually build out an abstracted operating system from the systems and the appliances, what you gain is massive scale with regards to buying single components and putting them across all of your systems, which means that you get higher margins. And so that is ultimately our silver bullet is that we have built truly abstracted in the network. We're the only ones who have done it. And on the other side with regards to our premises, it's the same thing. And that's why we have a low SKU count, maximize inventory and simplify significantly. Cory Sindelar: And I'll add a couple of things to that. I mean clearly, the appliances show the differentiated value in our model. And there's a couple of other added. We've got a very tight fit to the market requirements. That allows us to obviously reduce SKU count but also allow us to reduce the power consumption, that's an add too on the [ access ] Side. And on the premises side, we've got some clever design that allow us to cover a number of use cases, further shrinking SKU count. When you shrink that SKU count, not only does that create benefits for Calix in terms of the amount of SKUs that we have to manufacture, right? It reduces the risk to E&O, excess and obsolete inventory reduces the overhead. So our OCOGS could be lower. But that lower SKU count also translates to a benefit to the service provider in terms of them managing inventory, the number of SKUs that are on the trucks, the amount of their components in terms of the spares depot. So all of that simplification that we're driving through our platform translates to a differentiated value on behalf of the service provider as well. So I would add those points to what Michael said. Operator: Our next questions come from the line of George Notter with Wolfe Research. George Notter: For the disclosures on the software side of the business, I think it's terrific. I'm just wondering, when I look at software and services together, wondering how much of that is the services piece. If I go back to like 2022, you guys used to break out services. You think back then about $10 million or $11 million per quarter was in the services line. was a services-only line. I assume it's still at that run rate or maybe a bit bigger given the growth in the business. So I'm just curious on what how much is software and how much is services. I've got another question as well. Cory Sindelar: Yes, George, we're not going to go into further breaking that down. But you can use that as a proxy and... Michael Weening: Service is a small component of our business. We're a software company and a cloud company and we're not a services company. George Notter: Okay. And then also on the software piece, I guess I'm wondering how much of that software is recurring versus perpetual. Any sense for what that might look like? Cory Sindelar: It will fluctuate from quarter-to-quarter, George, like I said, with AXOS. But the majority -- large, large majority of it is recurring. George Notter: Okay. Great. And then I also was just curious on kind of where you are with the Agent Workforce Cloud. Obviously, you're rolling it out. You're putting the platform out there, which is terrific. And I guess I'm just curious on what that looks like in terms of the timing of the revenue ramp, how you guys are monetizing it? Anything you can say there would be great. Michael Weening: Yes. We're -- that's something we'll cover at the Analyst Day. And in depth, we'll actually have demos and those elements, we'll be able to show those things. Again, the most important part of it was, we had to actually get the platform out, which enables it to happen. That's in progress right now. And therefore, what you're going to see is a rapid -- what happens is that once the platform is out, think of it as like building a house, right? The plumbing is done, the walls are in, and now we can actually do what agents are, which is the cool stuff, put in the windows, paint the house, all those different elements, which is, add a ton of agents. And so you're going to see a very active ramp of our capabilities. And that means that the customer value will start to roll in as we go through Q2 onwards. And so let me give you a simple example. I was speaking to a customer who actually signed an AI contract with us just after Christmas. They went all in. And one of the things, the reason why he said that was he is a very good customer who believes that we will deliver quickly, and he actually -- we showed him when he's going to be transitioning over and how that rolls out for him. And he said the greatest problem that he has is that he had never bought Engagement Cloud, which is our Marketing Cloud because of the fact that he did not have the capacity and capability to do it. His team members were not sophisticated enough to do some of the microsegmentation that it provides. And he said, "Now I'm super confident because agents and as I shared at Connections, where I walked through -- and so I would encourage anyone on the call who hasn't actually watched my Connections keynote, you can go look at the marketing element and walk through what is our view of how an Agentic workflow works, segmenting down to the individual of one, parsing out what is their social media preferences. So where do you place the ad, allowing for very low-cost ads, but more importantly, understanding all the white space through agents and what the upsell, cross-sell opportunity is. By having that in an Agentic framework and an agent workflow, he can now take somebody who's not sophisticated enough to actually do that on their own because they're not a data scientist, et cetera. And in his real market, he can now aggressively go after those customers in a very different way. And so he's all in. And so I think from the end of the quarter, as we roll off, you're going to see our resources also roll out of the plumbing element of our project and those resources free up to go hard at building agents and expanding it quickly. And the agent part, frankly, when you talk to our product team, building an agent is easy. It's a bunch of Python code. The magic is in understanding the workflow. And if you look at our 3 clouds, Operations Cloud, Engagement Cloud, which is marketing and Service Cloud, all those are is hard-coded workflows. And so we actually know exactly what agents to build and how to assemble them in an orchestration layer to deliver the value. And you're going to see that in spades at a pace that no one can match starting at the end of the quarter as we finish up the migration. Again, come to Investor Day, we'll cover that in depth. Cory Sindelar: You're going to see it first in the RPO number. Operator: Our next question has come from the line of Tim Savageaux with Northland Capital Markets. Timothy Savageaux: I wanted to come back to the discussion and appreciate the quantification of the opportunity here which I assume, I don't know, stretching over, what, 3 to 5 years, and they can be pretty significant on an annual basis, and you mentioned a bigger ramp into '27. And I guess my question is, as you look at that opportunity, I guess is it apparent at this point, would that be fully incremental to your current run rate business? Would it add to it? How should we think about layering in what could be, I don't know, a couple of hundred million dollars a year relative to your current run rate business? And would you expect another step function into a higher growth rate in '27, something maybe in the 20s relative to your 10% to 15% target? Cory Sindelar: Thanks, Tim, for the question. I would say if you want to start talking about 2027, please come to the Analyst Day. That's where we might provide some color on that. As it relates to additive revenue, you got to remember that there's a limited number of resources that the industry has to go do this work. Crews are not just sitting around waiting for BEAD. They're going to go do projects. So some portion of that would come at the cost of other work being done because these crews would do locations that they would be otherwise built, and now they'll go do some BEAD. And so there's some of that. So ultimately, for this to be additive, you're going to have to increase your capacity and rates at which you're going to go deploy. But the important part is this opens up more of the premises revenue, right? As they go out and build these networks, you're going to then start hanging new subscribers off alone. And so that's the aspect that kind of adds to the acceleration of revenue, which we're more excited about in addition to the BEAD revenue alone. Operator: Our next question has come from the line of Scott Searle with ROTH Capital Partners. Scott Searle: Nice to see the RPOs continue to hit record highs and continue to post good year-over-year growth numbers. Maybe to follow up on George's question, and I suspect you might be referring me to the Analyst Day, but as we start to get full commercialization across the installed base of the third gen platform and Agentic workforce and SmartLife, I'm wondering if you could talk a little bit to the time to monetization of when you're expecting to see that start to ramp? It would appear kind of given the features and functionality of the platform that we might start to see some of that contribution starting to accelerate in the second half of '26. And I wondered if you could also kind of put that in the context of historically, we've talked about going from $1 to subscriber to $10 per subscriber. Kind of how you're thinking about that? And do we start to see software and services in late '26 and '27, starting to inflect above RPO growth, particularly as RPOs, I believe, are just reflecting minimum contract revenue levels and not as we start to see incremental monthly subscriber revenues on top of that. So a bunch of things rolled into there? Basically, when do you think we start to see the monetization of the third gen platform and kind of the inflection point of when that sort of hit more critical mass? Michael Weening: Scott, I think you're right. I think second half, you start to see that, and it will be reflected in RPOs. I also think that as we stated, we're entering a sustained growth period because we have this significant monetizable base that's already in place. And one of the things that has been constraining later adopters is the fact that they don't have the capacity and capability to actually deploy the technology and win in their markets. And so if I go back to the example that I just provided in the previous one, when I talked about it was a customer who did not have the capacity in the form of -- I don't have a data scientist, I don't know if that's some of those capabilities or the capability in the form of -- if I think about marketing, you can do broad -- most service providers regardless of size, small ones to large ones to very, what I would call, unsophisticated marketing, it is brand-based or it is price and speed. And I don't really customize my offerings to the needs of the individual. What we're introducing with Agent Workforce is the ability to go through and do significant micro segmentation of a customer base and get down to a segmentation of one. So looking at a household and understanding all the behaviors and the needs of that household and then at a very low cost hitting a button and providing a custom campaign into the social media that is relevant for them. So as opposed to spending $10 and blasting it out on to everyone, I can spend $0.05 and buy an ad on Instagram from 8 till 9 p.m. which is a social media channel of preference with an ad that actually hits the sweet spot of their white space. So these are -- represent significant opportunities in the past for barriers because you needed to be a large company with a data scientist team and all the other things. And frankly, even if you were a large company, the truth in this industry is that all of these companies have tons of data scientists and they generally serve the C-suite. They do not have the capability to do that either because you can't actually do a mass segmentation down to a small level to serve the sales and marketing team we're trying to close deals with customers, win new subscribers and drive upsell and cross-sell. Best example I can give is that when I was an executive running a $900 million business at a large Tier 1 telco, we had 27 data warehouses, and I had to go like something like 1,000 scientists and inside of my $200 million P&L, I had to go build out a $10 million data warehouse for my team because I couldn't get the data that I wanted. And so this -- our ability to unlock the data in their business and automate it so that they can do the most important thing in their business, which is not cut costs. It is win new subscribers and grow revenue per sub while reducing churn is our magic. And so this is a huge enabler for us as we go, just like you said, in the latter part of '26 and through '27, more importantly or as importantly, at the same time, opening up new markets. And so when I'm at Mobile Congress and other -- in these events, those are the conversations we're going to have because everyone is talking about how to cut costs. The magic is how to make money. And this is what we're really good at. We're going to help them make lots of money. And in the past, we had to convince them to do the actions based upon best practices. Now we can say, here's what the data says across 1,100 customers, 1,200 customers, here's what the agent -- here's the trained agents to make it happen, press the button, press the button and it works. And so this is a seismic shift in what's possible in our industry, and we are at the forefront of it, which is why we've been quiet about it since November of '23 as we've been building it all out, and now we're guns to go. Scott Searle: That's very helpful. And if I could just from a follow-up. Given the third-generation platform and now that you could start to address larger customers with private clouds, you also have an evolutionary path with the hybrid architecture, no stranded assets for those customers. I'm wondering 2 things. How is that conversation and dialogue going now with the Tier 2s and the Tier 1s in terms of what you're able to offer now with the new platform? And what's the timing of when we should expect to see some incremental customer contribution and/or monetization of those Tier 1s, Tier 2s and potentially international customers? Michael Weening: With the Tier 2 customers, that's been happening because the Tier 2 for the most part, is a super regional. Like if you think about Tier 2 is that they're generally across 5 to 20 states, they're not global in nature and really a lot of their needs. They still have -- they also have some of the constraints that you see in the smaller customers in that their ability to invest, do I invest my dollars and building more fiber or am I going to be building out all these data science teams and all the other things? So I think those conversations are happening very actively. For larger customers, as we said, we talked about the Tier 1s that we've already actively engaged with, and that's going to take a step up as we basically unveil what we're doing at Mobile Congress to the world and to the Tier 1s in partnership with Google. So the other part of this is that we've transitioned ourselves away from AWS and everything that we're doing is on Google Cloud. And Google is an incredible partner. Not only are they interested in our go-to-market strategy because of the fact that we offer workloads on their Google Cloud that they can talk to their customers about, our insights and capabilities, specifically our business insight on how to run a business represents a market shift and an ability for them to differentiate against their competition when it comes to cloud. And so we will be at Mobile Congress in the Google booth, demoing and partnering with them, talking to large customers. The revenue stream on that is, sorry -- time line is that large enterprise accounts, I've been doing this all my life, and those are 18- to 24-month sales cycles. So you're talking -- we're going to be going into a lot of [indiscernible] through '26. We're going to be demonstrating it and educating them because that's the other part. The large customer mindset is I'll build it myself and generally very siloed. So they'll take an individual use case and they'll build a silo and then another area of the business will take a use case of the problem that they have and build their own silo, whereas we represent a significant shift in mindset and that we step into a large Tier 1 with here is our Agentic library that's fully trained, pointed out your data and it goes. Oh, by the way, here's our agent toolkit on how you build out your own agents and build those into the orchestration layer. So it's going to require a lot of education. So it's latter part of '26 and definitely growth trajectories for 2027 on top of the earlier questions with regards to the tailwinds on BEAD. I mean at the Analyst Day. Operator: Our next questions come from the line of Christian Schwab with Craig Hallum. Christian Schwab: Most of my questions have been answered. But just a quick follow-up on the BEAD. Given your historical strength in the smaller of the regional telco companies, would you assume that you would get 50% market share over a time frame in the TAM that you guys outlined for BEAD is 50% a good starting point or now that you've probably gotten more color exactly who has money that it could potentially be bigger than that? Cory Sindelar: Christian, thank you for the question. As you know, we do very well in that segment, and I suspect we'll continue to do very well as it relates to BEAD. Michael Weening: By the way, let me expand on the BEAD thing, right? So BEAD is the infrastructure that goes in to pass a home. A home pass is not a home run. So we have incredible technology to provide the lowest operating expense to run a network and to automate it. And the third generation of our platform takes what we can do for network automation to the next level. Everybody else is -- no one has an abstracted operating system. No one has built subscriber management into the platform, all the different capabilities that are critical to run a headless network. And we can run a headless lights out network top to bottom and significantly eliminate power issues because you're taking 3 or 4 boxes, classing them down to 1 box and at the same time, give the highest level of reliability because the data path is inside the operating system, not service chain across multiple. All those things come together to run great networks is what Calix does. But then the other part, and this is the most important part, is that as BEAD rolls out, they still have to go and win the subscriber. That just puts in place that I can get the network in place, but I have to go win the subscriber. And so regardless of whether -- what our market share is for BEAD, whether or not we win the network or not, what our value proposition, which is going to get significantly stronger, especially in these early stages for our regional customers is the capability to win new subscribers. And with this capability of allowing our customer success organization to transition from saying to Cory, if he's a service provider, Cory, here are the things that you need to do to win more subscribers, grow revenue per subscriber and reduce churn and then beg Cory to listen because we're not the ones who actually come up with this advice. It's best practices based upon looking at 1,200 customers and then that's the advice we give Cory based upon seeing everybody's successes and failures and then begging Cory to do something and Cory saying, "I'm stubborn, and I don't want to do it." We can now transition to our success organization saying to Cory, here is the best practices. Here are the yields it can provide. By the way, press the button. This is what the Agentic workflow will actually do for you, so that you don't have to do the work for yourself. And so this marks -- this in the end is the promise of agents. This is the promise of what you can do with deep insight with regards to how to run a business and then apply Agentic on top of it. No one cares about the LLM. The LLM is a commodity. And we can use all the LLMs. We can pick whoever is best for whatever the use case is. But the value here is the business insight and then saying to Cory, push the button. And this is the marked transition. I talked about crossing the chasm forever. We have crossed the chasm. We're on the other side because we now have the capability to, in essence, help them automate their business and take the capacity and capability constraints off the table, which is a market opportunity for us to accelerate growth because in the end, if you want to talk about software and cloud, our goal is to help our customers win subscribers and grow revenue. And when they do that, we get a portion of it. And so unlike everybody else, that's what our goal is, help them win by driving money. Operator: Thank you. We have reached the end of our question-and-answer session. And with that, I'd like to turn the call back over to Nancy Fazioli, for closing remarks. Nancy Fazioli: Thank you, Daryl. Calix will participate in several investor events during the first quarter, most importantly, hosting our Investor Day at the New York Stock Exchange on February 24, as Cory and Michael referenced. Please register to join us. Information about these events, including dates and times and publicly available webcast will be posted on the calendar page of the Investor Relations section of calix.com. Once again, thank you to everyone on this call and webcast for your interest in Calix, for joining us. This concludes our conference call. Have a good day.
Operator: Good morning. This is Laura, welcoming you to ING's 4Q 2025 Conference Call. Before handing this conference call over to Steven van Rijswijk, Chief Executive Officer of ING Group, let me first say that today's comments may include forward-looking statements such as statements regarding future developments in our business, expectations for our future financial performance and any statement not involving a historical fact. Actual results may differ materially from those projected in any forward-looking statement. A discussion of factors that may cause actual results to differ from those in any forward-looking statement is contained in our public filings, including our most recent annual report on Form 20-F filed with the United States Securities and Exchange Commission and our earnings press release as posted on our website today. Furthermore, nothing in today's comments constitutes an offer to sell or a solicitation of an offer to buy any securities. Good morning, Steven. Over to you. Steven van Rijswijk: Thank you very much, operator. Good morning, and welcome to our results call for the fourth quarter of 2025. I hope you're all well, and thank you for joining us today. As usual, I'm joined by our CRO, Ljiljana Cortan; and our CFO, Tanate Phutrakul. And today, I'm proud to walk you through another year of outstanding commercial growth and financial performance driven by [audio gap] and I will also share our updated and upgraded outlook for 2027, which further underlines the strength and resilience of our business. After that, Tanate will give you more insight into our income and cost expectations for 2026 and present the quarterly financials. And as always, we will be happy to take your questions at the end of the call. And with that, let's now move to Slide 2. This slide highlights the continued commercial momentum we saw in the fourth quarter with outstanding growth across all key markets. We added more than 350,000 mobile primary customers during the quarter, bringing total growth for the year to over 1 million, fully in line with the ambitious target we set at our Capital Markets Day. Loan growth was also robust with absolute growth doubling versus the prior year and resulting in an 8.3% increase since the start of the year. In the fourth quarter alone, Retail Banking delivered EUR 10.1 billion in net core lending growth, driven mainly by residential mortgages. Wholesale Banking added EUR 10.3 billion, supported by strong demand in lending and working capital solutions as our clients' financing needs increased. We also saw healthy deposit development. Core deposits rose by EUR 38.1 billion for the full year or 5.5%. In the fourth quarter, Retail Banking contributed EUR 11.3 billion, benefiting from targeted campaigns and normal seasonal inflows and Wholesale Banking recorded a small net outflow, mainly due to lower short-term balances in our cash pooling activities. Fee income also continued the positive trends. For the full year, fees grew by 15%, supported by continued customer growth and increased cross-sell, essentially doing more business with more customers. And the fourth quarter also included a one-off benefit of EUR 66 million. All of this translated into very solid financial results. Our return on equity for 2025 was 13.2%, well above the guidance provided at the start of the year. And finally, we remain fully committed to supporting our clients in their sustainability transitions. Our total sustainability volume mobilized reached EUR 166 billion for the year, representing a 28% increase versus 2024. Now let's move to the next slide to look at how the commercial momentum drove our financial performance. On Slide 3, you can see that commercial NII remained very strong at EUR 15.3 billion. This result was supported by the significant increase in customer balances, both on the lending side and in liabilities. The volume growth largely offset the expected margin normalization. Fee income was also strong, increasing 15% compared to 2024, and they now account for 20% of total income. And this reflects structural drivers such as customer growth and increased cross-sell. Investment products performed particularly well with strong increases across all metrics, the number of customers, assets under management and the number of trades. And taken together, the strong NII and fee performance fueled total income growth, which reached a record level for the third consecutive year. And with that, let's now move to Slide 4. On this slide, we highlight actions taken to strengthen operational leverage, reinforcing our disciplined approach to cost management. We continue to invest in growth and diversification while increasingly leveraging new technologies. We were able to offset these investments by enhanced operational efficiency as the model becomes more scalable. In 2025, for example, we reduced customer friction by increasing the share of customer journeys handled without any manual intervention. We also introduced our chatbot in several retail markets, providing customers with faster and more accurate answers in their questions and resulting in annual savings as a large part of the chats are resolved without any human support. These improvements have contributed to a customer experience that is highly appreciated as reflected in our strong NPS positions across all markets. In retail banking, we maintained our #1 position in 5 out of 10 markets. And in Wholesale Banking, we achieved an NPS of 77, demonstrating both the quality of our client service and the value of our continued investments in expertise and sector knowledge. And our investments in scalability are also translating into higher efficiency, and this is visible in our FTE over customer balances ratio, which has improved by more than 7% since 2023. Then we move to Slide 5, where we show how our robust commercial growth, strong development of total income and proactive cost measures have resulted in strong capital generation. Over the past year, we delivered more than EUR 6.3 billion in net profit, contributing almost 2 percentage points to our CET1 ratio. And of this EUR 6.3 billion, 50% is distributed as a regular cash dividend, offering shareholders an attractive and predictable cash yield. Around 50% of the capital we generated has been used to fund profitable growth across our markets, and this percentage would even have been higher without the steps we took to optimize capital efficiency in Wholesale Banking, such as the 2 SRT transactions completed in November. Finally, we announced additional distributions to a total amount of EUR 3.6 billion, which also helped bring our CET1 ratio closer to our target level. And on the next slide, I will show how these distributions have resulted in a higher, highly attractive shareholder return. And then we move to Slide 6, where we summarize the total distributions to shareholders, and I will build on what I just discussed. In line with the distribution policy, we have consistently paid cash dividends and have been executing share buybacks for several years. Together, these actions have consistently delivered a highly attractive yield, including in 2025, a year in which our share price increased by almost 60%. The share buyback program we announced in November is currently underway and is expected to be completed in April 2026. And in addition, we paid out EUR 500 million in cash earlier in January, which helps us to meet the cash hurdle for this year, now finalized at EUR 3.3 billion. Looking ahead, we remain fully committed to delivering strong shareholder returns, and we will provide an update on our capital planning with our first quarter 2026 results. And now starting on Slide 8, I will guide you through how our strategy continues to accelerate growth, increase impact and deliver value. Now on this slide, I'm talking about Slide 8, we highlight our key strategic priorities supporting our Growing the Difference strategy, building on our successes over the past years. Firstly, we will continue to grow and diversify our income by adding more customers and doing more business with them. And a good example is the further expansion of our investment product offering. We have also introduced a subscription model for retail clients in Romania, and we will roll out this concept in other markets as well, which will help grow income from daily banking services. Our affluent customer base continues to grow rapidly, and we see further growth potential, and we're targeting this with dedicated propositions designed specifically for their needs. We're also stepping up our engagement with younger generations. For example, we introduced new products for Gen Z, including an investment fund focused on improving financial awareness within this group. And in business banking, we successfully launched our propositions in Italy and Germany, where we are seeing strong and ongoing customer growth. And in Wholesale Banking, we are expanding our range of fee-generating capital-light products to support sustainable and diversified revenue growth. Now secondly, we will further improve our operational leverage by scaling processes, people and technology while maintaining strict cost discipline to further utilization and scale of Gen AI will enhance efficiency and will help us to reach our FTE over customer balances target ahead of schedule. Finally, we remain firmly focused on generating strong capital going forward, and our allocation priorities are well defined in that regard. We will maintain an attractive shareholder return supported by a 50% payout policy. Secondly, we will continue to invest in value-accretive growth, diversify income streams as fund the loan book and a capital-efficient way and consider M&A opportunities that meet our criteria. And thirdly, we will return any capital structurally above our CET1 target to shareholders. We will also further increase the capital we allocate to retail banking and optimize the capital usage in the Wholesale Bank and note that we have already increased the capital allocated to retail banking to 54%. And with our strategy, we are confident in our ability to become the best European bank. And with this confidence, we have raised our expectations for the coming years. And then we move to Slide 9. And then I'll present our outlook for '26 and '27. And for 2026, we expect total income of around EUR 24 billion, and this outlook is supported by continued volume growth and an anticipated 5% to 10% increase in fee income. Total operating expenses, excluding internals -- sorry, incidentals are projected to be in the range of EUR 12.6 billion to EUR 12.8 billion. We will continue to manage our CET1 capital ratio at a target of around 13%. And in addition, we will transition from a return on equity metric to return on tangible equity. And for the full year 2026, we expect an ROE of 14% and ROTE to be higher than 14% and note that the delta between the 2 metrics was around 40 basis points, 40 basis points in 2025. Then looking ahead at 2027, we are introducing a new outlook for total income. We now expect it to exceed EUR 25 billion, which is at the upper end of our previous target range. This income number includes a higher fee income outlook, which we now expect to exceed EUR 5 billion in 2027. And we've moved away from the cost/income ratio and instead provide a clear hard outlook for operating expenses, again, excluding incidentals of around EUR 13 billion, 13. And this reinforces our continued focus on cost discipline and operational efficiency. And taken together, this outlook translates into a return on equity of 15% and a return on tangible equity of more than 15%. And now I'll hand over to Tanate, who will give more insight on our outlook for 2026 and who will walk you through the fourth quarter financial results in more detail, starting on Slide 10. Tanate Phutrakul: Thank you, Steven. As this is the last time I'll talk you through these numbers as the CFO of ING, I'm very pleased that I can close on such a strong result and provide you with an upgraded outlook. On Slide 10, let's start with commercial NII, which will benefit from increasing support from the replication portfolio. We also assume continued customer balance growth of around 5% per year, above the guidance that we gave at Capital Markets Day and reflecting the commercial momentum in our franchises. The liability margin is expected to be at the lower end of the 100 and 110 basis point range, while the lending margin is assumed to remain stable compared to the fourth quarter. Fees are expected to grow by a further 5% to 10%, building on the strong performance we achieved in 2025. All other income is expected to be around TRY 2.8 billion, excluding incidental items. This is driven by continued strong performance in financial markets, while in treasury, we expect less income from foreign currency hedging given the current lower interest rate differential between the euro and other currencies such as the U.S. dollar and the Turkish lira. Based on the current rate environment, taking 2024 last quarter as a run rate would be a fair starting point. Taken together, total income is expected to reach around EUR 24 billion in '26. And then on the next page, I'll walk you through the drivers behind the expected cost development. We expect total annual cost to be in the range of EUR 11.6 billion to 11.8 billion, excluding incidental and regulatory costs. The main driver of the increase remains inflationary pressure, which will again predominantly impact staff expenses. We will also continue to make selective investment to support business growth and further improve efficiency, as Steven highlighted earlier. These investment costs will be more than offset by operational efficiencies driven by increased scalability of our processes, people and technology, further utilization and scaling of Gen AI and continued optimization of our footprint. Given the strong income outlook, this modest cost growth results in a positive jaw for the year. Now let's move to the quarterly financials starting on Slide 13. On Slide 13, you can see that our commercial NII increased driven by very strong volume growth and a slightly higher lending margin, while the liability margin remained stable. Fee income continues its upward trend, driven by customer growth and strong performance in investment products and insurance. This is more than offset by lower fee income in wholesale lending. As a reminder, fee income in the fourth quarter included a EUR 66 million one-off in Germany. All other income was supported by continued strong results in financial markets, although seasonally lower compared to the previous quarters. As a whole, total income came in 7% higher than the same period last year. Now moving to Slide 14, where we will show the development of customer balances. As you can see, we delivered another quarter of strong loan growth across both retail and wholesale banking. Net core lending increased by EUR 20 billion. Retail banking contributed EUR 10.1 billion, driven by continued mortgage growth. increases across both business lending and consumer lending portfolios. Wholesale Banking also posted strong growth of AED 10.3 billion, reflecting strong performance in lending and somewhat elevated client demand in working capital solutions. On the liability side, core deposit increased by 9.5 billion. Retail banking drove the bulk of the growth, particularly in the Netherlands, Spain and Poland, which benefited from targeted campaigns and seasonal inflows. Wholesale Banking saw a small net outflow as increased deposit volume in PCM were more than offset by lower short-term balances in our cash pooling business. The other category of deposits were impacted by seasonal reductions in treasury. On Slide 15, you can see that the commercial NII grew by more than EUR 100 million quarter-on-quarter and was almost 5% higher than last year. Lending NII was up EUR 75 million in the fourth quarter, driven by volume growth and a 1 basis point improvement in lending margin to 126 basis points. The liability NII also increased by EUR 30 million, supported by sustained volume growth in retail banking and higher net interest income from our cash pooling business and PCM in Wholesale Banking. Turning to Slide 16. Fee growth remained strong, increasing 22% year-on-year. Excluding the EUR 66 million one-off retail banking fees in Germany, fees grew by 17% compared to last year. This was driven by structural factors such as continued customer growth, significantly higher insurance fees and increase in daily banking fees. Investment products also performed really well across several metrics. For example, 9% growth in customers, 16% growth in assets under management, of which roughly half came from net inflows and 22% more trades. Although wholesale banking fees decreased sequentially, wholesale still delivered a strong quarter, supported by solid results in Financial Markets and Corporate Finance. Slide 17 shows the development of all other income. Income in Financial Market is mostly driven by client activity. We continue to support our clients through volatile market conditions, mostly with foreign exchange and interest rate management. Treasury was impacted by lower results from foreign currency hedging. Next, Slide 18. Expenses, excluding regulatory support growth. The decrease is mainly driven by structural savings from previous restructuring and VAT refunds recognized in the fourth quarter. These effects more than compensated for wage inflation and ongoing investments in customer acquisition and product development, including expanding our offering for new customer segment. Regulatory costs include the annual Dutch bank tax, which is always fully recognized in fourth quarter and then allocated across segments. Incidental item related mostly to restructuring provision for planned FTE reductions in corporate staff and retail banking. Once these are fully implemented, these measures are expected to generate approximately EUR 100 million in annualized cost savings. When excluding these incidental items, we ended the year with expense below the outlook range we provided earlier. Now let's move on to risk costs on the next slide. Total risk costs were EUR 365 million in the quarter, equivalent to 20 basis points of average customer lending. This is in line with our through-the-cycle average. Net addition to Stage 3 provision amounts to EUR 389 million, mainly driven by individual Stage 3 provisioning for a number of new and existing funds in the wholesale bank. This was partly offset by releases of existing provision due to repayments, secondary market sales and structural improvements. As a result, the Stage 3 ratio increased slightly. For Stage 1 and Stage 2, we recorded a net release of $24 million, reflecting a partial release of management overlays and updated macroeconomic forecast. Overall, we remain confident in the strength and quality of our loan book. On Slide 20, we show the development of our core Tier 1 ratio, which declined compared to last quarter. Core Tier 1 decreased, reflecting the 1.6 billion distribution that was partly offset by the inclusion of our quarterly net profit. Risk-weighted assets increased by USD 4.5 billion this quarter. Credit risk-weighted assets rose by 1.5 billion, excluding FX impact, driven by volume growth. This was offset by the risk-weighted asset relief from 2 SRT transaction executed in November. Operational risk-weighted asset increased by EUR 2.2 billion, while market risk-weighted asset increased by EUR 0.5 billion. We'll pay a final cash dividend of EUR 0.736 per share on the 24th of April 2026, subject to our Annual General Meeting's approval. Now I hand back to Steven to wrap up today's presentation. Steven van Rijswijk: Yes. Thank you, Tanate. And for the ones who have been here longer with us, this is Tanate's last analyst presentation. We have been knowing each other today for more than 25 years, and we've been in the Board together already for 7 years and more. So thank you very much for working with us all these years. Tanate will still be with us until the AGM of 2025, which will take place in April. But I just want to take the opportunity also here to thank Tanate, also for the friendship, also for the leadership and the sharp mind that you have here with us. And I'll come sure visit you when you're back in Thailand at some point. So prepare for that. Now we move to Q&A, but let me recap the key takeaways from today's presentation. We have delivered another strong quarter end year, successfully executing our strategy, accelerating growth, increasing impact and delivering value. We achieved a record total income for the third consecutive year. We maintained cost discipline and operational efficiency gains, and they more than offset our investments in business growth. And we delivered another strong year of capital generation and returns, enabling continued attractive shareholder distributions. And with our strategy, we remain confident in our ability to stay on track to become the best European bank. And with this confidence, we have upgraded our expectations for the coming years with a very strong outlook for 2026 and a more ambitious but realistic outlook for 2027. And with that, I would like to open the floor for Q&A. Operator, back to you. Operator: [Operator Instructions] We will now take our first question from Benoit Petrarque of Kepler Cheuvreu. All the best. I guess you will not miss the Dutch winter, but in Thailand. Benoit Petrarque: So it's an interesting time to live actually. It's the first quarter I actually see the volume growth benefiting fully the commercial NII as the negative effect of lower interest rates is getting smaller. I was wondering on the guidance of EUR 25 billion total income, what type of assumption do you take on growth? I think you've put somewhere in the slide 5% volume growth. I was wondering if that's the right number, given you are growing actually more than 5%. And also second question is on liability margin assumptions in your more than EUR 25 billion total income. Wondering where you stand on '27 on liability margin. And then maybe on Wholesale Banking, where are you on the risk-weighted assets growth plan for the wholesale? I think you were planning some optimization there. But I do see wholesale growing quite sharply again in the fourth quarter. So where do you see growth in wholesale going forward? Steven van Rijswijk: All right. I'll take -- thanks, Benoit. And yes, Tanate, for sure, will not miss the Dutch winter. Neither would I, by the way, if I would go to Thailand. But in any case, I'm here. If we look -- I will talk about the question about RWA and Wholesale Banking and also -- and then Tanate will talk about the NII and the growth for '26 and '27. So if you look at Wholesale Banking there we have been seeing good lending growth in the second half of this year, and the pipelines are also filled well now. So we want to continue to grow there as well. At the same time, to your point, we did 2 SRTs in November that had an impact of around 12 basis points on our CET1. For '26 and '27, by the way, we want to continue to do these SRTs. So we have just started with our more improvements that we have been making. So the first ones we did at the end of last year. This year, we continue to do SRTs, and we expect that to have an impact -- a positive impact on CET1 of 15 to 20 basis points, so a bit higher than we realized over 2025. Tanate? Tanate Phutrakul: Yes. Thanks, Benoit. I think in terms of the major assumptions we use in terms of giving out outlook, we have assumed 5% balance growth, and you say that, that is potentially conservative given what you see in Q4. I think what Q4 shows us is it gives us more confidence in achieving our target. That would be the first answer. The second one is really what curve did we use in terms of our projection. We use the December curve to do that projection, which is quite constructive in our view. And then the third margins. I think the 3 impacts that you see is really the continued reduction in the short-term replication negative impact on our results, the continued positive accretion because of long-term replication and the effect of deposit rate cuts that happened in 2025 that affects '26 and will continue to be accretive going into '27 as well. Our forecast for liability margin is on the lower end of the 100 to 110 basis points. Benoit Petrarque: This is also for '27? Tanate Phutrakul: I think we don't give that outlook there. But I think if you see the replication on Page 30 that we show, the momentum continues to accrete in '26 and '27. Operator: And we'll now take our next question from Benjamin Goy of Deutsche Bank. Benjamin Goy: My first question is on loans versus deposit growth. So another strong quarter of loan growth in particular, and I think it's the third quarter where your core lending growth has clearly outperformed core deposit growth. Is that something that you need to work on to be more balanced? Or are you happy to increase your loans faster as there are opportunities? And then secondly, on the costs, for the underlying cost guidance, but there has been historically a bit of incidentals every year. Should that now be smaller than in '25 going forward? Or what's best to assume for the incident that come on top of the cost guidance? Steven van Rijswijk: Yes. I think that on the loans versus deposit growth, I mean, if you look at 2025, the loan growth was about 8%. The deposit growth was about 6%, so EUR 57 billion against about EUR 38 billion. We've also seen years where that was the other way around. In the end, you want to balance the balance sheet. So long term, we want to approximately have same growth over a longer period with loans and with deposits. But 1 year can be a bit higher in loans and 1 year can be a bit higher in deposits. I think on both sides of the balance sheet, we see continued good growth with people continuing saving. Also, if you look at the deposit growth projections macroeconomically in the markets in which we are active, we continue to see that. And we do see significant loan growth in the different segments in which we're operating, most notably mortgages. But there, in the end, we want to balance the balance sheet, and we will always work on that. When we talk about the incidentals, yes, look, we will -- we continue to work on our cost discipline as we do. So on the one hand, we want to grow our customers, and we want to grow and diversify the activities in which we are active. And you've seen us doing that. We invest in more specific segmentation in existing retail segments. We have been rolling out business banking, for example, in Germany and Italy. We have been investing in diversifying our capital-light income in wholesale banking and transaction services and in financial markets. At the same time, we have seen since 2023, our FTE over balances decreased with 7%, and we believe we can reach our target that we gave in the Capital Markets Day in '24 of a decrease of 10% earlier than we anticipated what we then said in 2027. So we'll work towards this year. So we will work on both levers. But we always do this in a buy-side thing. So what you've seen, for example, with restructuring costs in 2025, those restructuring costs should deliver us a benefit of EUR 100 million in 2026. And each time that we have a process or area where we can realize better servers, better process optimization, better digitization, better use of Gen AI, then we will announce it because I just want to make sure that front to back, once we announce it, we can execute and we can execute while continuing to grow, and that's how we have been operating for the past 5 years, and we will continue to do so. Operator: And we'll now move on to our next question from Giulia Miotto of Morgan Stanley. Giulia Miotto: Thank you for your patience answering our questions and all the best for the life after ING. But now I have 2 questions, please. So the cost outlook beyond '26, '26 looks quite a bit better. I think it's encouraging to see operating jaws being able to grow the costs much less than the revenues. Should we expect this trend to continue also in 2027? Consensus has got 3% year-on-year growth. I guess, I don't know what we are seeing could suggest something better than that. And then separately, Steven, I wanted to pick your brain on M&A. We have seen some headlines on Romania, but also Spain and Italy have been in focus in your comments, although we don't see much actions. So any comments on what you're thinking strategically on the M&A front? Steven van Rijswijk: All right. On M&A. So look, we show good growth. You see that both in existing activities and also in diversification on the various fronts, both in lending and in fees, by the way, on investment products and insurance. Still, and I've said this before, we've also started with filling in the blanks in countries where we don't have all activities, such as business banking and private banking and certain types of investments in asset management in certain countries. Still, if we can accelerate that growth by means of acquisitions, then we will look at it. You've seen us taking a financial stake in private banking of [indiscernible] last year. In the fourth quarter, we announced buying the majority and thereby in the end 100% of an asset manager in Poland, integrating that asset manager into ING, we bought that from Goldman Sachs, the 55%. And we continue to look. We don't comment on individual markets. Also in Romania, what I can say is that the business is successful. We have been increasing the numbers of customers that we serve. We have been growing, again, also lending deposits and fees. And we have a very strong return on equity there. We consider ourselves one of the most successful, if not most successful bank in that country. But also there, if we can have opportunities to increase scale or add segments that we do not have, we will look at that as in any other market. And then the caveat, it needs to fit. It needs to add to that local scale and diversification, and we want it also to be accretive for shareholders, and that's the construct in which we're working and which we are willing to consider M&A. Tanate, the jaws. Tanate Phutrakul: Yes. I think given the outlook, we have now turned the corner in terms of positive jaw for '26, and we're confident that we'll continue that positive jaw in 2027. If you look at the 3 drivers of our cost growth in '27, the first one is inflation impact, which we expect that the stickiness of inflation impact should moderate in '27 compared to '26. We will continue to invest in our franchise in client acquisition. In fact, if we can do more, we would do more in terms of accelerating our client acquisition. We have some big programs in terms of investment, financial market infrastructure, payment capabilities, investing in segments that we are not currently present, as Steven has mentioned. And if you have seen in our '26 guidance, we upgraded our ambition in terms of cost reduction from 2% to 3%. So that trend is expected to continue into 2027 as well. Giulia Miotto: So I take away that probably growth will be more modest than what is to be expected in '27? Tanate Phutrakul: You can do your analysis, Giulia. We've given our guidance. Steven van Rijswijk: Tanate Didn't even blink when he asked that question. Operator: And we'll now move on to our next question from Tarik El Mejjad of Bank of America. Tarik El Mejjad: Tanate, thanks for the very interesting interactions we had all these many years and good luck for what's to come. Just from my side, 2 quick questions, please. With a follow-up one on the liability margins more in 2027. I mean just trying to back solve a bit what market expects, assuming asset margin are quite stable or growing a bit the volumes, we can put your assumptions with even some extra buffers and replicate portfolio, we kind of understand now how it works and so on. It's just the -- in my view, is it fair really to think that the gap between -- I mean the downside potential risk is for the market expect consensus is too optimistic, perhaps, assumptions of rate cuts or no rate raise in the core saving deposits in '27? Because if you use the forward curve as of December, clearly, you would also take a view on what's your ability to navigate the core savings deposits in Netherlands and other markets. And the second question is on costs is more really to want to understand how you think about the investments because, I mean, you have some headroom now created on the revenue side, higher growth and very comfortable to reach your targets. And then on the cost, the pressure from salary negotiation should come down with inflation. So that extra headroom, I want to understand how you think about the next 2 years in terms of investments in AI and tech. I mean, yes, you have the machine learning and with the compliance aspect, the Gen AI that you've already started to roll out with some early benefits we see. But what about the next step in AI and tech? And how much of more investments needed to deliver your ambition on that front? Steven van Rijswijk: Let me take the question, Tarik, on AI and then Tanate will talk about the margins. Look, I mean, we do clearly see benefits of AI coming through. I mean we have been working with AI already for a decade and then with Gen AI, we work with that in the last couple of years. But there, you see both on, let's say, the -- on the client side and on the operational leverage side benefits coming through. And let me give you a few examples. If you look at [ PI ] onboarding, the STP increased last year from 66% to 79%. So that means that close to 90% of our private individual clients were onboarding through STP. We do end-to-end [indiscernible] delivery. We increased that approvals with 11% last year. So the time to [indiscernible], therefore, improved. We do about 60 million in customer lending without manual intervention. So you see a number of customer benefits coming through. When we talk specifically about GenAI and also in chatbot, we have better scores, CSAT scores, which are sort of satisfaction scores for our customers. So we do see benefits coming through for GenAI, both on the revenue side, doing more with our customers and having more satisfied customers and on the operational leverage. We do that in 5 areas at current. So we took the 5 big wins that we see starting with contact centers, in IT, coding, in lending, in personalized marketing and in KYC. So those are the big areas. We do these benefits, we see them coming through. Every quarter, you see announcement, you've seen announcements whereby we say, okay, what impact does it have on our staff, what impact does it have on our operations? And you see it also coming through in FTE over balances. And we're actually quite optimistic on the impact it will have on our operational leverage going forward for '26 and also in 2027. And we will make announcements as we move along and when we can say this is now the next step that we will take, including, of course, good reskilling of our staff and making sure we can grow and continue to grow our franchise sustainably. Tanate Phutrakul: And Tarik, to your second question, I think we also see based on the December curve that the accretion and replication in '26 going to '27 and '28 are quite strong. The real debate is what -- how do you balance that additional revenue in terms of margins and in terms of mix, right? And what we see is that we are looking at the dynamics of maintaining growth in customer growth in volumes and making sure that we take into account the level of competition we see in the market. And if you look pre negative rates environment, ING operated on a liability margin of around 90 to 100 basis points. We have updated our guidance to 100 to 110. And we think we're comfortable with that rate given the balanced dynamics of growth, competition and to be remaining competitive while at the same time, being accretive to our shareholders. Tarik El Mejjad: I mean I don't want to put words in your mouth, but basically, to deliver on the consensus or market numbers means that market has to be much more bullish on the volume growth and lending and probably be less positive on the margin side. But I'm just trying to reconcile a bit what your guidance outlook, which is very helpful versus where market is positioned. Operator: And we'll now take our next question from Delphine Lee of JPMorgan. Delphine Lee: Also I want to take the opportunity to send my best wishes to Nate, thank you for everything. So my 2 questions. First of all, sorry, I just want to follow up on Tarik and other questions around NII. But -- so if we look at your guidance for 2026, which implies about EUR 600 million increases for liability margins. But if you look at the repricing actions that you've done in '25, I mean, the impact on '26 is already EUR 700 million. And then on top of that, you have some small benefits from -- well, your replicating income as well on '26 more, but like still. So I'm just kind of wondering like what is your current assumption and in terms of the deposit cost and deposit pass-through from 42% in Q4? And if you could just sort of elaborate a little bit on what are you seeing on competition on deposits at the moment? What do you expect for '26 and onwards? My second question is on cost. So you've done a good job of trying to kind of contain a little bit of inflation with the savings. I'm just trying -- just trying to understand a little bit if 2%, 3% is really kind of like the run rate that we should expect like even beyond '27. Is that something that you're trying to achieve in the long run? Yes, just trying to understand a little bit the moving parts of that cost number, you've provided this for '26, but even beyond that, like what are the savings? You've mentioned a couple of benefits from FTE reductions, but just kind of trying to quantify a little bit what else can we expect in the long run? Steven van Rijswijk: All right. Thank you very much. I think that on the costs, you see the effects of our digitalization and scalability now really seeing take shape. And we saw that now also in the fourth quarter, but also I'm pointing again at FTE over balances. You also now see that when we look at 2026 about the operational leverage and efficiencies that we have compared to the increase in investments. So the operational efficiencies are higher, and that's where we want to be. We want to make sure that when we make additional investments, we can have operational leverage that is higher than that. So that's maybe a little bit of direction to give you or guidance to give you in terms of where we want to end up. And indeed, therefore, you will see in '26 and '27 improved cost to income to what we have been showing and positive jaws territory that we have now been gotten into and I want to stay in that territory. And at the same time, we continue to want to grow our investments where we can grow our clients for long-term clients and shareholder benefit. But that's a bit of guidance towards the cost. Then Tanate, on the deposit cost of margins? Tanate Phutrakul: I think we gave a bit of detail on Page 20 of our presentation showing the movements in terms of commercial NII. I think the lending NII is driven by basically stable margin and approximately 5% loan growth. And similarly, for liability NII, we also assume 5% liability growth. Of that EUR 600 million we show, part of it is due to volume, about half. The other half is through the improvement in margins. As you say, the replication is getting better, but there's some short-term impact that still need to feed through our numbers and the EUR 700 million is factored into that guidance. Operator: And we'll now take our next question from Namita Samtani of Barclays. Namita Samtani: The first question I have is on German retail. There's quite a lot of cost growth in 2025 there. I think it's around 11% year-on-year, and it's a lot higher than other regions. So I wondered what are you exactly spending on in Germany? And is this defensive spend given the new players entering the market? And then I think about your liability margin, which is, of course, at group level, but are you telling us that we're at peak earnings for Germany in retail given high expense spend and [indiscernible] spend to gather deposits? And my second question, based on your updated '27 targets today, the cost to income implied in '27 is maybe 51%, 52%. It's hardly a standout amongst European banks, even ABN is now going to below 55%. I just wondered, given the digital model ING has or aspires to have and the use of AI, what's holding the group back from delivering a better cost to income target? Steven van Rijswijk: Yes. Thank you very much. On the cost to income side, our main opportunity is to grow our revenues, our revenues over our client balances, our diversification in Wholesale Banking, our revenues over RWA and as a result, but that's then a consequence of it also that will have a positive impact on our cost to income. But what we need to do, that's why our strategy is called Grow the Difference is grow our revenues because that's where we can make the biggest difference in further improving our returns and then indirectly also our cost to income. And so the digital model has brought us a lot in terms of presence in markets, but that's why we're talking about doing new activities in these markets or doing more with customers in these markets because that is the next step in our evolution, what we're currently doing. Tanate? Tanate Phutrakul: Yes. The German cost/income ratio is a robust one despite the increase in investments that we make in Germany. One thing that you have to remember is that the client growth that we have, 1 million customer per year, a very significant portion comes from Germany, which is our main market. So that's why the investments in client acquisition, in creating new products, creating new segments is very strong in Germany. very, very much like the rest of ING seeing a turnaround in terms of the momentum in terms of revenue and cost in Germany. And we do expect that the positive jaw will return to Germany in 2026, while continuing to invest in our franchise, both in terms of the fundamental platforms as well as client acquisition. Operator: And we'll now take our next question from Cyril Toutounji of BNP Paribas. Cyril Toutounji: So I've got 2. One on lending margin. So we had an improvement this quarter, which is welcome and I think pretty good news. And you're saying it's due to mortgages. I'm just curious in which market has happened? And if you can give us more indication whether this can continue maybe a bit? And the second one would be on deposit campaigns. Can you update us on the ongoing campaigns right now? And I don't know if you can give this indication as well, but should we expect more or less campaigns versus the 2025 run rate? Steven van Rijswijk: Yes. Thank you, Cyril. I'll take the question on deposit campaigns and Tanate talks about the lending margin. So yes, about the deposit campaigns, look, we have these campaigns regularly. We had them also in the fourth quarter with Black Friday in some markets or in Germany, as they call it Black Friday. So we will continue these campaigns, and we typically see that there's a good response in getting either new money from existing clients or getting new clients in. And then typically, we see that we get money to stick to around 2/3 of the money that after campaigns will stick with ING and therefore, we can gain new primary customers and increase our deposit levels. So for us, that works well. And what we work on every time is we make them more bespoke to certain customer segments and we make them more data-driven, so we can target them more and more. So we are very happy with the approach we've taken. We are confident about what we are doing, and we will keep on having these campaigns and we make them more bespoke about a year. Tanate, about the margins? Tanate Phutrakul: Yes, So I think we are also pleased to see that we have stabilized our lending margin and that it's improved by 1 basis point. And to your specific questions on mortgage margin, it's been stable or increasing across the board. I think some of the markets where the new production margins are improving is in Belgium, increasing in Germany, increasing in Italy and Spain. So it's quite widespread in terms of margin improvement, but we do see a bit of pressure in terms of new production margin in the Netherlands. Operator: We'll now take our next question from Johan Ekblom of UBS. Johan Ekblom: Thank you for everything, Tanate, and best of luck. Just most questions have been answered. But at the Capital Markets Day, we spoke a lot about the business banking opportunities, and I guess, in particular, in Germany. How should we, from the outside, try and measure your success there? Because it's very difficult to track where you are in terms of the rollout and I guess also when you are expecting to see volumes start to come through in a more meaningful way. So any update on kind of how the business banking rollout in Germany is going would be much appreciated. Steven van Rijswijk: Yes. Thank you very much, Johan. Indeed, business banking is one of the levers that we pull to diversify. To give you a few data points, we -- the third largest growth we had in business banking customers in terms of number of customers this year was Germany. So that already shows you that we're starting to grow quite well in Germany. It starts from a very small base, obviously, because we started from virtually 0. So that's one. Two, we also get very good deposits in from our business banking customers in Germany, so also there. So increasingly, that will become more sizable. But compared to our business banking franchises in the Netherlands and Belgium, for example, of course, it is very minimal because we have EUR 114 billion business banking lending book. And in Germany, we're just starting. So that will take time. But it is almost like you saw with the insurance fees there you see in the fee income line, as an example, it was not even a separate fee line. And there you see step by step by step, it's almost like a snowball. We do more and more and more. And at some point, it will become a sizable business, and that's also what we see happening in business banking in Germany. Operator: And we'll take our next question from Shrey Srivastava of Citi. Shrey Srivastava: Thank you, Tanate, for answering all the questions over the previous quarters. I just want to look more top down because obviously, following on from previous questions, we've talked about the upside on the replicating income versus your guided liability margin still at 100 to 110 basis points. A, is your sort of 5% volume growth guidance predicated on further deposit campaigns to get you within this 100 to 110 basis points? Or is any sort of upside to volume growth from that incremental to the 5%? And secondly, what are sort of the hurdle rates you have in mind when thinking about going forward with a new deposit campaign? Because obviously, as you've heard sort of many of us to get from the assumptions we have when plugging your replicating income into the model to the liability margin of 110 basis points would require some sort of pretty significant deposit campaigns. So what are some of the things you think about when deciding to give up that short-term upside for sort of longer-term growth? Steven van Rijswijk: All right. Tanate, can you give the elements of our replication income or lease liability margin again? Tanate Phutrakul: Yes. I think the 5% deposit growth, I think it's a good base number, right? And I think you look in the context of 2025, where the growth is around 5%. So that trend line, we expect to continue despite competition, despite quantitative tightening. So I think it's a good number to assume 5% growth. Does campaign play a big role in that? It continues to be the case, right, that we have campaigns in many markets we operate in. We continue to use that as a tool, but we also get additional flows coming into the bank all the time. And what I look at really is the growth in our primary customer, the intensity of which we have a relationship with our customer is there. And I think looking at the replication, it's still the 3 moving parts, right? It's really the impact of the short-term replication still having a tail impact is continued accretion of long-term replication coming through and the actions that we would take in terms of rate increases or decreases over time. And I think we like to reiterate that we don't give guidance for '27 in terms of liability margin, but we expect it to operate in '26 at the lower end of the 100 to 110, and we're comfortable that we can achieve our target with that guidance. Operator: And we'll take our next question from [ Seamus Murphy ] of [indiscernible] Seamus Murphy: Sorry, I'm coming back again to a lot of the questions that have been asked in one sense just in terms of the guidance. So I suppose you've guided 16 to -- sorry, EUR 16.3 billion to EUR 16.5 billion for commercial NII in 2026. But in Q4, it was [ EUR 3.928 ] billion. So that suggests an exit rate of just over EUR 4 billion into Q1 2026. That's already in the bag. And if I annualize that, I'm kind of getting EUR 16.2 billion at the start of the year, just before anything else happens and the upper end of your guidance, therefore, only needs 2% growth to achieve the 16.5%. And obviously, we have -- so I suppose question one, is there anything wrong with the math as you start the year that you have kind of EUR 16.2 billion of NII heading into the -- sorry, EUR 16.2 billion into this year at the start? And the second question then is, obviously, we have growth, so there's only limited growth needed. But the second question then is, you mentioned earlier on the call that the long end of the replication portfolio is a positive further into '26 and '27. Two things have happened. Your current account balances have grown EUR 5 billion, I think, to [ EUR 175 billion ] now. And secondly is that, obviously, the curve has deepened. So it would be super useful if you could tell us how much the long end of the replication portfolio will contribute in '26 and '27. And the last question, I asked this also on the Q3 call because it's becoming more and more important for banks, I think, is that do you expect FTEs to fall as we look into '27 and '28 at the group level? Steven van Rijswijk: Thanks, Seamus, for your questions. Well, we do expect FTE over balances to fall. So this is about, of course, a continuous focus on growth and then on a marginal basis, doing that with less marginal cost. And that's why we use the metric FTE over balances, whereby we continuously accept -- sorry, see an improvement or expect an improvement based on our digitalization and AI and GenAI and better process management as we have been doing over the past years. And that trend we see continuing. At the same time, we want to grow because we need to diversify and grow our revenues over our balances and our RWA. But from an FTE over balancing perspective, we should see further improvements. Tanate, how does it work with that? Tanate Phutrakul: Yes, Seamus, we will see each other in London, so we can go into a bit more detail. But I think it's a dangerous game to take Q4 and then extrapolating it. But I think if I look at full year to full year, the impact is over EUR 1 billion, right? That's a 7% growth in net interest income, which I think is a strong number and strong guidance. And I also -- we don't give replicated income in such details of how much the long end would contribute, except that we have disclosed in our presentation that 55% of our replication is long dated. And I also noted the fact that the drive of our primary customer is driving increasing current account and that increasing current account means better margin. So we do recognize that. Operator: [Operator Instructions] And we'll now move on to our next question from Anke Reingen of RBC. Anke Reingen: But firstly, thank you very much, Tanate,and all the best. And then to questions. So firstly, can you just talk a bit about your expectation on lending volume growth in 2026? I guess the 5% applies here as well, but I suppose, Q3, Q4, you've seen very strong growth. So where do you see sort of like the mix falling into 2026? I mean I hear your margin comment, but maybe just more a bit in terms of the mix. And then you commented earlier on about the SRTs of 15 basis points benefit. Can you just clarify, is that per year? Or is that over the 2 years, '26 and '27... Steven van Rijswijk: Thank you very much, Anke, for your questions. If you look at the SRTs, the impact in '25 was 12 basis points and that impact remains there. So once we have taken, let's say, the first loss piece of our balance sheet, it will remain [indiscernible] of our balance sheet. But in '26, we're going to do an additional number of SRTs that should benefit an additional 15 to 20 basis points on our CET1. And we, of course, will then also continue for '27 and thereafter. But on those years, we haven't yet given guidance. When we talk about lending growth, we see good growth across the board, like you've seen in the third and the fourth quarter that both in and mortgages and in Business Banking and Wholesale Banking, we continue to see good growth. The pipelines are good. Clearly, especially with the underlying macro drivers, there is shortage of housing in many of the markets in which we operate, in this case in the Netherlands, that is the case in Belgium, that is in Germany. That is the case in Spain. We are -- we have a total mortgage book of EUR 370 billion. So we are a top 3 mortgage provider in the region in Europe. And in many of the markets in which we are active, we see there are good macroeconomic fundamentals to continue that growth, low unemployment levels, good salary increase over the past couple of years, shortage of housing, lower number of people in individual households, so an increase in the number of households and those fundamentals continue to be there. And that's why that is going to be a significant driver of the loan growth in 2026 and '27. Operator: And we'll now take our next question from Matthew Clark of Mediobanca. Jonathan Matthew Clark: So firstly, coming back to this EUR 25 billion target for 2027 revenues or greater than EUR 25 billion. I mean, are you trying to talk down consensus there, which is EUR 25.8 billion, I think? Or do you think that's still consistent with the greater than component of that target? So I just want to understand your thinking for framing that target that way against the context of a higher consensus? And then secondly, on wholesale lending, why is now the right time for you to be putting your foot down on wholesale lending? What's changed in terms of risk reward, et cetera? And I guess asking that in the context of an uptick in credit losses on wholesale this quarter. Steven van Rijswijk: Yes. Thank you very much. Well, let me put it this way for 2027. So we said that the revenues are larger than EUR 25 billion. So we are confident about our growth, and we're also confident about '27. So don't forget the larger then sign in EUR 25 billion for '27, but yes, that's where we currently are. And we're very comfortable with that level. When you talk about Wholesale Bank lending, well, look, we had slow quarters in the first half of 2025, and then it picked up very well in the second half of the year. In the end, what we want to realize in Wholesale Banking is higher revenues over RWA and a higher return over RWA. And in that regard, we have been investing and we are continuing to invest in Transaction Services and Financial Markets. That will help us to drive the diversification in Wholesale Banking and do more with our customers next to lending, but lending, of course, is also good. And secondly, we're attacking, let's say, our capital there. Our capital was about 50-50 in '24. Now we said for '27, we had a target of 55% in retail and then 45% in Wholesale Banking. It's already at 54% for retail and 46% for Wholesale Banking. So we're on a good path quicker than we initially anticipated. And that's why we continue also to work on the SRTs to make sure that also on the capital side in Wholesale Banking, we can do more with less capital to help with return going up. So it's not a particular focus on lending alone. In the end, we're focused on return. Operator: And we'll now take our next question from Farquhar Murray of Autonomous. Farquhar Murray: Obviously, congratulations, Tanate and best wishes for the future. Coming back to the day job though for now, 2 questions, if I may. Firstly, please, can you reconcile the indication of EUR 0.4 billion of hedging tailwinds into '26 of 4Q with kind of flat replicating income on a year-on-year basis on Slide 29. Is that simply a matter of how things came through in the quarters? And perhaps can you just flesh that out through '25 and into '26? And also, is there a quarterly pattern to that hedging impact and also maybe the short-term effects you mentioned earlier? And then secondly, if we look last year, lending outpaced deposits, if we look at the 8% versus the 5% I know you said the kind of planning assumption as a kind of balanced 5%, but what's your general sense about where customer demand is at present? Steven van Rijswijk: I think that -- so on the customer demand at present, I mean, we -- actually, we do see continued good mortgage growth, again, because we see the macroeconomic elements that we saw in there, we see them continuing. And therefore, if you look at the number of houses being sold last year in a number of our main markets in the Netherlands, Belgium and Germany, they all have increased. And also, we see increases in a number of these housing markets to continue in 2026 and '27. So again, we're very positive towards that end. I think in business banking, we have also been improving our processes, and therefore, we've made it easier for our customers to borrow with us. So I think there, it's also an improvement of capabilities that we have had and by the way, rolling out business banking step by step by step in Germany, Italy and potentially also in other markets that we're looking at. We've spoken about Spain before. And then in Wholesale Banking, it's always more lumpy, funny enough, whereby you do see geopolitical uncertainty on the one hand and the PMI index being relatively low, we've seen sort of a catch-up demand of Wholesale Banking lending in the third and fourth quarter. The pipeline is still good. Yes, probably that Wholesale Banking in that sense is always a bit more choppy in terms of growth than the other elements. But the main consistent element in the lending growth sits in the mortgage side. Then on the hedging tailwinds, there, I want to give the floor to Tanate. Tanate Phutrakul: Thank you very much, Farquhar. I think what we see is that if you look at our quarterly commercial NII, it reached a trough in Q2, improved from EUR 3.7 billion to EUR 3.8 billion and from EUR 3.8 billion to EUR 3.9 billion during the course. So you already see signs of that replication impact. I think what the EUR 400 million refers to is the fact that the short end pressure that we see is decreasing. We see the fact that in Q4, we also have the benefit of the rate cuts already materializing into the numbers and that 55% of the long end is already positive. So it's a combination of all these 3 factors that drives the EUR 400 million tailwind. Operator: And we'll now take our next question from Chris Hallam of Goldman Sachs International. Chris Hallam: I just have one question left. And obviously, good luck, Tanate. I'm sure you're going to miss all these questions on replicating income and liability margins when you're relaxing in Thailand. But just on this question on the corporate side, you talked about increasing levels of working capital lending and lower deposits. Are those 2 points linked, i.e., are corporate customers building up working capital and therefore, draining their cash balances in anticipation of higher activity later in the year? And if so, how long should that working capital cycle last for? And would we notice any impact on NII through this year as and when it reverses, either on the lending margin or on the liability margin? Steven van Rijswijk: Yes. Thanks, Chris. And yes, Tanate will miss those questions. But luckily, we have Ida Lerner, our new CFO, and she already told me yesterday, said she's really looking forward to all these questions. So next quarter, you can expect her to answer these. On the working capital side, yes, I mean, on the wholesale side, you saw that EUR 10.3 billion lending and working capital solutions growth. So part was indeed working capital solutions. That had to do with a couple of large deals, very large companies doing very large deals, and we were leading those deals. So that doesn't necessarily have a link with each other that those are, let's say, seasonal swings that sometimes you have and sometimes you don't have. Clearly, those working capital solutions deals because they are typically short term and self-liquidating or collateralized or they have a borrowing base behind it. They have lower margins. But we have many of these. And so that doesn't have a particular big impact on the lending margin. When we talk about the cash pooling business, that's the pooling both in our payments and cash management and the notional pooling business, typically, clients at the end of the year, they will consolidate their positions and net them off. And because they net them off, they net them off in our accounts, and therefore, you see a lower amount coming in there. So a seasonal pattern. Operator: There are no further questions in queue. I will now hand it back to Steven Van Rijswijk for closing remarks. Steven van Rijswijk: Yes. Thank you very much. I think we can -- we are very proud of our 2025 numbers and also very confident about '26 and '27, hence, the improved and heightened outlook. And I want to thank you for all your questions and observations today, and again, Tanate, for the fantastic collaboration, and you are a great friend and a great colleague. Thanks very much, everybody, and I hope you have a great Thursday. Operator: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the DXC Technology Third Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions] Thank you. And I would now like to turn the conference over to Roger Sachs, Vice President, Investor Relations. You may begin. Roger Sachs: Thank you, operator. Good afternoon, everybody, and welcome to DXC Technology's Third Quarter Fiscal 2026 Earnings Conference Call. We hope you have had a chance to review our earnings release, which is available in the IR section of DXC's website. Speaking on today's call are Raul Fernandez, our President and CEO; and Rob Del Bene, our Chief Financial Officer. Here's today's agenda. First, Raul will update you on our strategic initiatives. Rob will then cover our quarterly financial performance as well as provide thoughts on our fourth quarter and fiscal full year guidance. Raul and Rob will then take your questions. Please note, certain comments on today's call are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from those expressed on the call. Details of these risks and uncertainties are in our annual report on Form 10-K and other SEC filings. We do not commit to updating any forward-looking statements during today's call. In addition, when we refer to year-over-year or quarter-over-quarter revenue growth rates, we will be discussing organic revenue changes on a non-GAAP basis, which exclude the impact of foreign exchange and any inorganic activity. We will also be discussing certain other non-GAAP financial measures that we believe provide useful information to our investors. Reconciliations to the most comparable GAAP measures are included in the tables included in today's earnings release. And with that, let me turn the call over to Raul. Raul Fernandez: Thank you, Roger. Last quarter, we committed to a dual-track strategy to stabilize our heritage businesses while building new AI native revenue streams. For the first time, DXC has a clear unified strategy and the infrastructure to deliver it. This quarter, we moved from design to deployment, launching our refreshed brand, standing up our first centralized sales enablement function and advancing our Fast Track initiatives. On the core track, we launched a refreshed brand in Q3, a clear story and new visual identity that articulates why customers choose DXC and stay with us. This wasn't cosmetic. We retooled our solutions positioning, rebuilt our sales materials and created a consistent message across every customer touch point. The early signals are encouraging, where our teams are using these new tools and leading with our differentiated message, we're seeing it resonate. Customers and influencers respond positively when we lead with clarity and confidence about what makes DXC distinct. To scale that message across the organization, we've established a high-impact sales enablement team, the first centralized function of its kind at DXC. They've rebuilt our onboarding process, created integrated sales plays for priority offerings and established baseline metrics we're now tracking across regions. That said, we are a company of considerable scale and driving consistent execution across a global sales organization takes time and discipline. But where we've deployed the new approach, it works. At a recent ISG Provider Summit, third-party advisers told us DXC showed up differently than expected, clear story, strong presence, memorable and distinct from competitors. Our focus now is making that consistent across the organization. What's not changing is what our customers consistently tell us, DXC delivers. Our delivery excellence remains a competitive advantage and the foundation we're building upon. The opportunity in front of us is helping our sellers translate that operational credibility into more transformative conversations, moving from trusted partner to strategic adviser in our customers' AI innovation agendas. A good example of how our go-to-market strategy is working is a significant new logo win with the London Metropolitan Police, a master vendor engagement to lead their enterprise transformation. We're replacing core ERP and resource management platforms, integrating modern SaaS and AI into mission-critical operations. We won this engagement because of deep public sector expertise, disciplined execution and a repeatable blueprint we can scale across U.K. police forces. We're closing the gap between our best performers and the broader organization through these targeted talent and enablement investments, and I'm confident we'll generate results from these initiatives. Conversely, our Fast Track initiatives are progressing well with development time lines and early client interest tracking ahead of our initial plans. Fast Track is about acceleration. It's focused on AI-infused solutions, repeatable IP and productized offerings that deliver higher growth, higher margins and durable differentiation. Fast Track is possible because of how we've architected AI inside DXC. Our approach starts with a fundamental insight. Legacy systems aren't liabilities. They're assets. They contain decades of battle-tested business logic and institutional knowledge. Rather than ripping them out, we connect them to AI through an intelligent orchestration layer that roots work across multiple providers, enforces security and governance and maintains complete audit trails. We built this approach for ourselves first. We've deployed AI at scale across all 115,000 employees, integrating every major AI provider and routing work to the best model for each task, giving us full technical portability, and we're putting 60 years of institutional knowledge to work, pricing, contract intelligence, competitive insights, project data, all surface through roll-aware platforms that deliver the right information to the right people at the right time. This approach lets us move from idea to production in weeks, not months, and we're applying the same architecture we're building for clients to accelerate our own product development. As customer zero, we prove it works inside DXC before we offer it to the market. Here's how that customer zero experience is translating into fast-track offerings. In security, our agentic security operations center powered by 7AI protects DXC from 4.5 million threats daily with over 90% resolved automatically. We're now offering this proven capability to banking, health care and government clients who are overwhelmed by alert volume. They see our operational results as proof it works. In banking, we own and operate Hogan, one of the most trusted core banking platforms in the world. It processes over $2.5 trillion in transactions per day across 300 million accounts. Rather than forcing customers into risky multiyear core replacement projects, we built Core Ignite. Core Ignite embodies our enterprise AI philosophy, connect, don't convert. Core Ignite allows banks to connect to fintechs, launch new digital products and modernize customer experiences while preserving the security and performance of the mainframe underneath. We know our banking customers want to innovate, but when the stakes are this high, they cannot risk their core ledgers. We are bringing the innovation to them through a curated ecosystem of partners. We partnered with Ripple to integrate enterprise-grade blockchain digital asset custody and real-time global payments directly into Hogan. We partnered with Euronet to bring the Ren payments platform to our clients, enabling instant card issuing and payments. We partnered with Aptys to give our banking partners immediate access to FedNow and real-time payments, and we partnered with Splitit to allow banks to offer buy now, pay later options. We believe our Fast Track initiatives can achieve 10% of our run rate revenue by the end of Q2 fiscal 2029. We are deliberately structuring our Fast Track products and contracts to preserve strategic flexibility that gives us multiple paths to create shareholder value as these businesses mature, including scaling them inside DXC, partnering or pursuing other value-enhancing outcomes. The focus is straightforward, build high potential businesses and retain the flexibility and choose the option that delivers the strongest return for shareholders. For decades, this industry operated on a linear equation. To grow revenue, you had to grow headcount. That era is ending. AI allows us to build and deploy solutions faster with lower incremental capital and less dependency on labor growth. Our strong free cash flow allows us to self-fund these initiatives while maintaining balance sheet discipline. We're excited to share more about these opportunities at our upcoming Investor Day in New York City, the second week of June. Specific details will be announced shortly. The strategy is clear. The architecture is in place. The work ahead is delivery, and that's exactly what DXC does best. One final note, this script was written by me, but delivered using my custom AI voice model built with ElevenLabs. We can now share translated versions in Spanish, French, German, Portuguese and Arabic instantly. This is exponential in action, AI that amplifies human capability and it's a preview of what we're bringing to clients. Let me turn it over to Rob to review the third quarter results. Robert Del Bene: Thank you, Raul, and good afternoon, everyone. Today, I'll go over our third quarter results and provide guidance for the fourth quarter and our updated full year fiscal 2026 outlook. Now starting with the third quarter results. Total revenue was $3.2 billion, declining 4.3% year-to-year within our guidance range with all 3 business segments performing consistently with the first half of the year. From a geographic perspective, we experienced declining performance in the U.S. with the rest of the world improving from the first half of the year. As expected, our bookings improved from the levels we saw in the first half with a book-to-bill ratio of 1.12, which brings our trailing 12-month book-to-bill to 1.02. This marks the fourth consecutive quarter with our trailing 12-month ratio above 1. As a reminder, last year's third quarter bookings were our strongest in several years at $4.3 billion, which creates a more challenging year-to-year comparison. As we mentioned last quarter, we had a robust list of new large opportunities in the pipeline, 3 of which closed in the quarter, and we have good line of sight for others to close in the months ahead. We attribute the building pipeline of opportunities to our foundation of delivery excellence and deep engineering skills, coupled with our investments in new offerings and AI-based solutions, deepening our relationships with third-party advisers and our new brand positioning. All of these factors are repositioning DXC as a strategic partner to the market. Adjusted EBIT margin was 8.2%, coming in slightly above the high end of our guidance range, driven by continued disciplined spending management and the timing of onetime benefits that were not included in our guide. On a year-to-year basis, adjusted EBIT margin declined 70 basis points, primarily reflecting planned higher investment levels in offering development and marketing initiatives to support future revenue growth. Non-GAAP EPS was $0.96, above the high end of our guidance range, consistent with our adjusted EBIT performance and up from $0.92 in the third quarter of last year, largely driven by a lower share count, net interest expense and taxes and partially offset by lower adjusted EBIT. Now turning to our segment results. The CES book-to-bill for the quarter was 1.2, which brought the trailing 12-month book-to-bill to 1.13. Bookings continue to be strong in long-term strategic projects with continued pressure on short-term discretionary engagements. CES revenues, which represent 40% of total revenue, declined 3.6% year-to-year. This reflects the discretionary booking dynamic I just mentioned, which has been impacting revenue for the last several quarters. Our expectation is that the strength of the longer-term bookings will lead to improved CES revenue performance in fiscal 2027. In addition, as we have mentioned, we are investing in building AI-based offerings such as Core Ignite, AMBER and our new AdvisoryX consultancy. As these new offerings scale, they will contribute to the performance of CES. Driven by large deal wins, the quarterly GIS book-to-bill ratio improved to 1.09, up from the first half of the year. The trailing 12-month book-to-bill is now just below 1. GIS, which represents 50% of total revenue, declined 6.2% year-to-year, which is in line with our full year expectation. Insurance, which represents 10% of total revenue, grew 3.2% year-to-year, largely due to growth in our software business. This growth has been driven by strategic customer migrations to our cloud-based Assure software platform and associated offerings. We are also continuing to invest in our software capabilities. For example, we have introduced a suite of AI-enabled smart apps that help insurers drive revenue growth and productivity without changing their core systems. While these investments have near-term margin impacts, they will drive incremental revenue growth over the long term. In addition, in 3Q, we anticipated closing a couple of large BPS opportunities that have now been delayed to 4Q and will impact our 4Q revenue forecast for insurance. Now turning to our cash flow and balance sheet. We generated $266 million of free cash flow during the quarter, bringing our year-to-date total to $603 million, up from $576 million during the same period last year. We're on pace to deliver our full year guide of approximately $650 million. During the quarter, we took proactive steps to further strengthen our balance sheet. We refinanced our EUR 650 million bond that was scheduled to mature in January of 2026. In addition, we prepaid $300 million of our $700 million bond due to mature in September, consistent with our commitment to maintain a strong balance sheet with the appropriate debt levels. While continuing to strengthen our balance sheet and fund investments for long-term growth, we have been returning capital to shareholders following a disciplined and balanced approach. Year-to-date through the third quarter of fiscal '26, we repurchased $190 million worth of our shares, including $65 million in Q3. We also remain focused on our commitment to lower our capital lease liability. During the quarter, we paid down $47 million, which brings total reductions to more than $450 million since the start of fiscal 2025, which is when we amended our financial practice to significantly reduce new lease originations. In that time frame, we held new originations to $33 million. With these efforts and after accounting for currency movements on our euro-denominated bonds, our total debt declined by $465 million to approximately $3.6 billion. Our ability to consistently generate strong free cash flow enabled us to increase our cash balance by more than $500 million since the start of fiscal 2025, bringing it to $1.7 billion. As a result, we have reduced our net debt by approximately $970 million. Looking ahead to Q4, we expect to repurchase $60 million worth of shares, bringing our full year total to approximately $250 million, up from our initial guide for the year of $150 million. With strong free cash flow and expected proceeds from asset sales, we anticipate exiting 2026 with approximately $1.7 billion in cash. Given this projected cash position, we are providing an early perspective on capital allocation for the first half of fiscal 2027. Along with continuing to make growth investments in our business, we expect to deploy $400 million to retire the remaining U.S. dollar bonds that come due in September. We also plan to repurchase $250 million worth of shares in the first half of the upcoming fiscal year, which is equal to our total projected share repurchase in fiscal 2026. I'll provide further details on our full year fiscal 2027 capital allocation expectations during our year-end call in May. Now let me provide you with our fiscal 2026 fourth quarter guidance. We expect total organic revenue to decline 4% to 5%. From a segment perspective, we expect CES revenue to decline year-to-year at a similar rate to the past couple of quarters. Previously, I had commented that we would see slight improvements in CES revenue performance in the fourth quarter. While our bookings for the quarter were strong, short-term project bookings were below expectations and have delayed revenue improvements to fiscal 2027. For GIS, we expect revenue to decline mid-single digits, in line with prior quarters. And finally, insurance revenue growth is expected to be consistent with the prior quarter results, which is a reflection of continued software growth and flat insurance business process services performance impacted by the delay of bookings we experienced in 3Q. We anticipate adjusted EBIT margin in the range of 6.5% to 7.5%. And finally, our non-GAAP diluted EPS of $0.65 to $0.75. This fourth quarter outlook implies updated full year fiscal 2026 guidance as follows: total organic revenue decline of approximately 4.3% and at a segment level, we expect CES to decline at a low single-digit rate. GIS is anticipated to decline at a mid-single-digit rate and insurance is expected to grow at a low single-digit rate. We expect adjusted EBIT margin to be approximately 7.5%, and we expect non-GAAP diluted EPS to be approximately $3.15. Our full year free cash flow expectation remains at approximately $650 million. And with that, let me turn the call back over to Roger. Roger Sachs: Thank you, Rob. We'd now like to open the call for your questions. Operator, would you please provide the instructions? Operator: [Operator Instructions] And our first question comes from the line of Jamie Friedman with Susquehanna. James Friedman: Clearly, a lot of creativity and work going on here, and it is welcome by the investment community. I'd like to get your perspective, Raul, about the fast-track attributes that you're contemplating. So if you look at one of the engagements you currently have or prospectively have, when you say things like repeatable, scalable IP, could you go in a little bit to what sorts of services it is that you're providing or how the platform works? I know it's early, but I feel like at this point, some sort of more detail about what it is that you're doing would be helpful. Raul Fernandez: Yes. No, great question. So let me just start that the key to doing this is obviously being in a position to understand where we have some value, existing value in the work that we do with our customers. So Hogan is a great example. It's been around for a long time from the '80s, really wasn't invested in, cared for, nourished. And our customers, some of them stayed on, some of them left, but there's still a tremendous amount of a user base there. And so as I've brought in new product teams, these are more entrepreneurial focused teams that have an ability to quickly look at an opportunity and now with AI scale from Sandbox to MVP in a fraction of the time that it was before. We've been targeting the areas that we want to invest in because, again, I think the biggest limiter I have is product teams that can execute. So we've chosen where we have some legacy leverage, where there is something in what we do and what we did that provides some sort of defensible moat on the defense side and then gives us some offensive capability that somebody just can't enter and leapfrog us. So Hogan is a great legacy platform. This CoreIgnite is a great light layer, call it a gateway that connects new products that banks want in a very technology, easy, friendly way to connect. And then from a standpoint of value, we are creating value and we are sharing that value in a nontraditional way. So this is not rates times hours. This is not services. This is -- in this case, it will be sharing transaction fees. And in this scenario, transaction fees are at a high rate, click rate, right, per day, per customer per item that we are bringing to the table, meaning financial product that we're bringing to the table. And so the attributes are replicability, scalability, IP, some defensive and offensive IP and architecture. And then frankly, having the right team with the right background to quickly build and prototype and launch. And I think this is a great example where we have started building, we've started talking to our customers. We've started engaging with partnerships. We've started announcing those partnerships before the product is ready to go. But we're talking quarters, not years. We're talking months, again, not years. And so the attributes across the board, and that's one in CES. There's another offering within GIS called Oasis that we're going to launch. Our June Investor Day will be a day that we go into heavy detail. We will have demos there. We will have product teams there. We'll have customers there. And then Rob and I, in June, we will have a much more detailed look at the next 24 months or 28 months, whatever is left in the 36-month time line and be able to give you a better sense as to the revenue ramp. Personally, as I look back and I look at the development schedules that I originally approved and funded and I look at where they are today, a, they're running ahead of schedule from a development standpoint, again, use of AI tools to get things done. and b, their time to revenue is faster than I originally thought. And so the time between now and June will let us fine-tune the model, let us look at what the ramp-up is going to be. But I think everything that you see in terms of the AI high fliers of incredible fast penetration and growth, we have an ability if we select, if we invest and if we build the right AI products to benefit from that much stronger rise in revenue and adoption. And again, I think we've targeted really well. We've got 6 right now. There's another probably 3 to 4 that are in the queue. Again, the biggest issue I have is the right teams to execute on this and picking the right projects, right? So we're going to -- they all have a shot at being super successful. As long as 4 out of 6 are successful, it's a win for us. And even if some aren't, we're going to learn along the way. James Friedman: Okay. I'll drop back in queue. I'm going to come back if there's room at the end. Raul Fernandez: Yes. And I'm happy to go into -- this is a higher gross margin or net margin profile, how we're pricing it. So happy to follow up on questions there as well. Operator: And our next question comes from the line of Bryan Bergin with TD Cowen. Bryan Bergin: Maybe start on the guide. Just curious on the underlying drivers and assumptions you made on the growth rate within the underlying segments and businesses as far as CES, GIS and insurance. Just how much of the CES improvement is in hand already? And then just talk about as far as the insurance side of the equation, just what may have changed there in some of those ramps? Robert Del Bene: Yes. Brian, it's Rob. Thanks for the question. So our guide for all 3 segments, pretty consistent from a quarter-to-quarter perspective. Now we did -- I mentioned last quarter that we were expecting a little bit of an improvement in CES in the fourth quarter. The booking dynamics, as I said in the recorded remarks, the booking dynamics in CES were strong in strategic longer-term projects, different duration profile than the short-term projects. And that -- based on the beginning pipeline for 3Q, we expected to do a little better there. And the pattern of the first half of the year continued into the third quarter. So that delays the improvement. In the insurance business, where software is growing nicely consistently all year, the business process services segment of insurance is about flattish range in terms of revenue for fourth quarter. That's the prediction. Now we -- again, coming into the quarter, we had a robust pipeline. A couple of deals we expected to close that would have driven incremental revenue in Q4 has got pushed to booking in Q4 instead of booking in Q3. So that is also a bit of a delay, which dampens the growth rate we had previously expected in insurance for Q4. Bryan Bergin: Okay. Understood. My follow-up just on the margin side. So maybe talk about the performance in 3Q and the guide for the 4Q. Is there any kind of expense timing shifts there? And as you think about drivers for margin improvement and cost takeout and maybe even beyond the 4Q, just as you ramp deals that you do win, how should we be thinking about that as you get into the early part of next fiscal, too? Robert Del Bene: Yes. So we -- in the quarter, we did a little better than we had expected. We had good resource management and savings from that. And then we had some onetime pennies that we didn't exactly know the timing. We didn't have it in our guide and they hit in 3Q. So that is the part of the decline from quarter-to-quarter going into fourth quarter. And then the absolute revenue comes down a little bit quarter-to-quarter, and that's the remainder of the quarter-to-quarter underpinning of the guide. Now we have -- extending out into fiscal '27, the 4Q guide is a good launching point heading into '27. And we are going to be pulling together all of our cost takeout as we normally would do, all of our cost takeout plans heading into the new year during the next 60 days or so. And we'll have a much better picture of the cost takeout detailed plans in 60 days. But I would say that we have plenty of room for cost improvement and spending management. We are utilizing our AI capabilities internally, which will help us drive cost reductions next year and into the future. So we feel confident in our margin profile heading into next year, but the particulars, we'll know more in 90 days. Operator: And our next question comes from the line of Jonathan Lee with Guggenheim Partners. Yu Lee: What have you seen across your client conversations in January as it relates to calendar '26 spending intentions? And how does that compare to last year? And in those conversations, what gives you confidence around any potential improvement in pipeline conversion going forward given some of the deal delays you've highlighted? Raul Fernandez: Yes. Let me hit it first, and then I'll let Rob comment. One thing that has been a factor that we've noticed in the last quarter is that we are getting a lot of opportunities that are driven by corporate spinouts, restructurings and breakups. We have existing customers and new customers that are going through the business rationale and then the actual execution of those spinouts. Those spinouts require a tremendous amount of support from a system standpoint. And we are getting a good amount of opportunities, both existing clients and new clients. And again, that is a step-up that I think is reflected by the macro environment where it's easier now to potentially do deals and get things approved in various governments around the world. If you remember, April last year, the tariff, we started the year with a lot of hope and promise. Then we had the tariff issue. I think those have been internalized as kind of a normal operating mode where people understand that their tariff situation is what it is, and it will change over time, but it is almost like a volatile factor that is now factored in as part of a normal planning. That definitely provided some pause last year in the spring and summer. We're beyond that. I think that the realization that AI has a huge unlock of economic value and potential far beyond anything that we've been through before is absolutely resonating across C-suites. And -- but they're also being thoughtful about how to take the right approach with the right parts of the business with the right partners. So while I think in some instances, it may delay some decision-making, the delay isn't about stopping any sort of investment in innovation. not that whatsoever. It's really about thinking how big their AI agendas will be rolled out and at what pace and sequence. Robert Del Bene: And just, Jonathan, to add to what Raul just described, just looking at the data, our pipeline for 4Q is robust. The win rates we experienced in the third quarter were very stable with the rest of the year. Pricing is -- I'll describe that as stable as well. So indicators are pretty consistent for the 3 quarters of this year. There was definitely this mix impact of longer-term projects versus shorter-term projects, which the longer-term projects are -- I think the close rates have been pretty stable. So the shorter-term projects, they haven't. The closed, there's been more delays and there's been more carrying over from one quarter to the next in the pipeline. So that pattern, which has existed for all 3 quarters, we see it -- I see it continuing into the fourth quarter, and that's what's baked into the guide. Yu Lee: That's really helpful context. And just as a follow-up, I want to dig into the Connect and Converge strategy. On that and sort of connecting the AI and solutions, how do we think about any risks or potential client hesitancy there? And how do you convince clients around the benefit of essentially not modernizing their tech stacks? Raul Fernandez: I think it's about optionality. Many clients have tried to do big lifts and shifts and have failed. I think a lot of factors are now coming together. One, much better AI-based tool sets for code conversion, which does 2 things. One, allows you to revisit the old legacy systems. And of course, we could be players in that scenario. But more importantly, being able to build lightweight offerings that are AI-based that can be delivered very quickly that can also be priced from our standpoint in a more disruptive and value-based way. I think it's a win-win. I think that the era of rates times hours is ending, and now we're moving into a new era of value-based pricing. It will take longer than we all think because we have huge organizations, purchasing organizations, procurement organizations that have grown up doing that. So I think it's less of a tech challenge than it is a bid process challenge and a procurement and thinking challenge in terms of who do you want your partner to be and how do you want their business model to work side-by-side with your business model. But we're taking a very creative, innovative and disruptive approach to all of this. As you know, we've had a history and we own it of having since these companies came together, a decline in revenue. We are committed to solving that issue to getting it to 0 and then to growing again. And we think AI is an incredible tailwind for us to do that if we position ourselves correctly. And the investment that we're doing in Fast Track is exactly that to position us as great partners in their AI journey. Operator: And our next question comes from the line of Brendan Biles with JPMorgan. Brendan Biles: Thanks for sharing the results with us today. I love the refreshed look and the branding in the slides. It looks awesome. Question for me is on free cash flow. It seems like you outperformed versus at least what we had penciled in for free cash flow in the quarter. So I just want to confirm, is that consistent with your expectations? Or did you outperform your expectations as well? And then what's the thinking on the full year number staying at $650 million, I take it to the extent you outperform, is that just going -- allocating that cash flow into these kind of these fast-track initiatives to the extent there was outperformance? Robert Del Bene: Yes. Thanks, Brendan. I'll take that one. So we did a little bit better than we anticipated in the quarter. And just to step back, for the full year, our pattern of quarterly free cash flow this year is different than the last several years in that we normally would have flat free cash flow in the first half and produce 90% of our free cash flow in the second half of the year. We pulled -- and that was because of working capital dynamics. This year, we pulled forward the benefits of working capital into the first half of the year. So it changed our normal SKU. In the third quarter, we did -- also did a little better than we anticipated in a couple of areas, not materially. And I do think that is more of a pull forward from 4Q into 3Q rather than adding to our full year guide. Now we always try to do better, right? So we will keep working all elements of free cash flow and try to outperform. But right now, what I can see is we'll be on our original guide. And the deployment -- to answer your question on deployment, we were really clear in our script where we're deploying our cash in the first half for the fiscal year. So we gave color on both repurchase and debt repayments. Operator: And our next question comes from the line of Antonio Jaramillo with Morgan Stanley. Antonio Jaramillo: I want to go back to your comments on the pricing environment. How does pricing vary for like each of the business segments? And where do you see like the most change? Robert Del Bene: Our pricing dynamics are different in each segment depending on the profile of the engagement. So let me just take it step by step here. In GIS, where there are longer-term commitments, including at some engagements have capital, some engagements don't. So the pricing would vary depending on the level of upfront commitment being made by DXC. Some engagements require more transition and transformation. So the pricing structure of those contracts would look very different than a consulting contract, right, where it's people related and skills related and the value you're bringing to that engagement. So really, the -- and the same the insurance business is different even within insurance, you have a software component to insurance, which is priced as typical software providers price their products. And there's a BPS component to insurance that's priced more typically like an outsourcing contract. So each of the 3 segments have different dynamics and the level of upfront investment will determine part of those pricing dynamics. I will say that for all 3, this year, our pricing has been stable for all 3 segments. Antonio Jaramillo: Got it. That's helpful. And then I wanted to follow up on the cap allocation priorities. It looks like the share buybacks will be ramping up in the first half of fiscal year '27, which is matching what you guys are going to do for this fiscal year. Yes. Like how do you balance that with investment as well? Robert Del Bene: Yes. So our first priority is investing to grow the business. So that is our #1 priority. We've also -- the other 2 priorities are equally important to us, maintaining the right debt profile, strong balance sheet and return to shareholders. So we -- once we set our investment levels that we require and determine how much incremental cash we have to deploy to the other 2 priorities, we will balance the right debt profile with what we feel like is the appropriate return to shareholders. So it's judgment. So you could see from all the actions we've taken for the last 2 years that we've been applying judgment along the way. And we -- with our cash balances we currently have and project to have through the end of the year -- fiscal year, we feel confident in those -- in the cash generation and the cash projections. So we thought it was appropriate this year to give guidance for the first half of next year, which is a little unusual for us, but that should be a signal of confidence in our cash projections. Raul Fernandez: And let me just give a little bit of color. As investors and builders of AI products and services that we're bringing to market, we are benefiting from the incredible amount of compute that is available to us. I think what's happened in the last 2 years is that you've got a democratization, small D of compute and an ability to have access to that -- for anybody to have access to that as a user, as a consumer and as an enterprise. We clearly see the benefit and value and the fact that you can build incredible solutions in a fraction of the time at a fraction of the cost. And so we are super confident in our ability to continue to invest. And as I said before, the issue isn't the ability to invest in these, the issue is about having the right number of teams ready to go out and build them, sell them and deliver them. So I think it's just the backdrop of the environment today as a big company building solutions or as an entrepreneur and a start-up building solutions in an AI world, it's an incredibly faster, cheaper way of bringing value to market. Operator: And our next question comes from the line of Keith Bachman with BMO Capital Markets. Keith Bachman: I wanted to go back to some of the initiatives to try to stimulate growth. And a couple of questions. One is, how do you think about promoting Core Ignite and others while also balancing margin expectations. And as you mentioned, you have to build it, you have to promote it, and that usually means an investment profile. And I think it is the right thing to do to try to stimulate the top line. But how do you balance those initiatives? And I think, Rob, you started to address some of these new initiatives. How are you pricing them? Are you moving into consumption-based models? And then I have a follow-up, if I could. Raul Fernandez: Yes. So I think, first and foremost, the ability to build these, again, in a very quick and capital-light and investment-light way kind of underpins our financial flexibility in terms of how we price and how we capture value. I think we're moving towards value-based pricing. We're moving towards an ability, and we are absolutely going to be doing that. The other thing to not forget is that these start-ups inside of DXC have the benefit of a $12 billion company with 115,000 colleagues around the world with fully spun up marketing and sales organizations. So we are investing in product. We are investing in solutions that are new and AI-centric, but then they get to benefit from the new branding, the new positioning, all the human capital that we've built around it. So those shared services that are here to support the corporation as a whole also support these new initiatives. So we're benefiting from being large and from being legacy, but we're also benefiting from being fast and then the ability to go and use these tools to quickly build solutions and bring them to the marketplace. And frankly, it gives us an ability to be more disruptive versus our competitors in pricing and to think about this as long-term value capture for ourselves and for our customers. Keith Bachman: And then as you think about -- you guys have done an admirable job certainly on lowering your net debt and some trade-offs have existed. And at this juncture, I think part of it was also you wanted to clean up the business. But at this juncture, I appreciate the capital allocation description you've given in the slide deck. But how do you think about M&A to try to also use as a source to spur growth within that context of capital allocation? Raul Fernandez: So we've said that we'd be open if we have the infrastructure that's ready to be able to have an accretive acquisition of a company that would help accelerate the business goals of 1 of our 3 offerings, we would absolutely look at it. We are looking at it. But the ability to create products and services inside of our organization and bring those to market, a, we control more of it. There's less risk, there's less friction, and we just have more control on all sides of the equation. To the extent we can find a company with a solution or value proposition that clearly adds value to one of our offerings and clearly adds value to where we want to double down and invest in, we will absolutely look at that anywhere in the world, and we have active teammates that are working on that every day. But I'm -- a, I want to make sure that the foundation that we bring anything into is solid and good and accretive and it will grow faster than it did independently. I'd say we're probably 80% of the way in that journey from an organizational structure standpoint. And b, we have an ability to create new offerings. we should continue to fully do that and then selectively look at where M&A can help us accelerate our business [Audio Gap]. Keith Bachman: Okay. And I'm going to get in trouble with Roger, but I'm going to ask a third question in terms of asset dispositions, you guys did make a comment on during the course of the prepared remarks. Is there -- are these smaller type of things or anything more material that you would think about? I know you don't want to get specific, but just broadly speaking. Robert Del Bene: Yes, Keith, they're small. It's older data centers, office space that we -- that are -- everything that's underutilized, we put on the market and try to sell. So it's -- they're really small problems. Raul Fernandez: Nonstrategic. Robert Del Bene: Yes, nonstrategic, yes. Operator: And our next question comes from the line of Darrin Peller with Wolfe Research. Paul Obrecht: This is Paul Obrecht on for Darrin. Rob, you mentioned the improvements in the rest of the world, but declining performance in the U.S. Can you just provide a bit more color on what you're seeing geographically? Robert Del Bene: Yes. Yes. The results in the U.S. are -- have decelerated a bit, and you could see that in our Q. So you could see that over the course of the year. The rest of the world has been on an improving trajectory across the board. And so that is true of all 3 segments improving, again, on an improving trajectory in the rest of the world. So we're very encouraged by that. The phenomena of longer-term projects being the focus is more pronounced in the U.S. So the short-term projects have been slower in the U.S. And so it's partly the market, partly execution on our part. But there is a pronounced difference in performance between the U.S. and the rest of the world. And by rest of the world, I should add that Europe and our APAC region are both on the right trajectory, have both done better. Paul Obrecht: That's really helpful. And then as a follow-up, you've discussed the continued discipline around cost management. Can you provide a bit more detail on the productivity and cost savings you've seen over the last year as you've increasingly embedded AI internally? Robert Del Bene: Yes. And that -- and Paul, that -- we have seen benefits internally. Our resource reductions, our headcount reductions have kept pace with the revenue profile of the company. So good discipline management that we've had in prior years has continued. I'd describe AI as an enabler to let us continue that good profile and disciplined management. And we see that accelerating in the future, not slowing down because specifically because of AI, we will see that trajectory accelerate. Operator: Our next question comes from the line of Jamie Friedman with Susquehanna. James Friedman: So if you were to look, Raul, at Hogan engagement before and after the AI say Core Ignite migration or do you think of this as an add-on to the current installation, like a totally new de novo type work? Or is it more a new delivery or engagement mechanism? How should we be thinking about the before and after as this initiative evolves? Raul Fernandez: So I think you should think about it is we have an installed base of customers, and there's a kind of run rate set of professional services and limited other services that we provide for them around the Hogan product. This is all net new. This is all additive. This is all accretive. This is absolutely no negative impact to anything that we're doing today. The other thing I want to point out, as I said, we're building on some legacy assets. We also have some very favorable IP rights and contract rights in many of these instances where not only do we know the code, do we have proprietary hooks and APIs, et cetera. But in many cases, we're the only ones that can touch the code. So it's a great position to be in. You keep all the business you have, you create a new set of products and services on top of that old legacy and you create new revenue opportunities for DXC in a more value-based way, and you create new products and offerings for our bank partners, our bank customers that have invested and have been with this product for many, many years, and you're giving them more things to sell. So it's an absolute win-win. James Friedman: In terms of the architecture of Hogan, my assumption, correct me if I'm wrong, is that probably a lot of that is still either mainframe or client server on-prem. And if that's wrong, just stop me. But is that an obstacle to an AI transformation? Like don't you need to modernize it before you apply it? Raul Fernandez: No. No, that's the beauty of this, that it's a light layer gateway that sits on top of the existing infrastructure regardless of where it's housed, on-prem, off-prem, hybrid cloud or any combination. The way we've architected the ability to add new products to our bank customers. Essentially, what we're doing is we're creating a gateway where on one side, we connect to our bank customers, 300 DDAs. On the other side, we sign up new products and offerings that people -- that the bank wants to offer to its consumers, you name, stablecoin, buy now, pay later. And by enabling it without having to touch that core infrastructure, it's a total win-win, win-win for us and a win-win for the bank customer. James Friedman: All right. All right. I'll back in the queue because this covers -- I'm sure you have a lot to talk about. Raul Fernandez: I'm looking forward for you to come to demo day because you'll see it all there on our Investor Day, and we can go as deep as you want. James Friedman: Yes, me too. Operator: [Operator Instructions] And our next question comes from the line of Rod Bourgeois with DeepDive Equity Research. Rod Bourgeois: You mentioned earlier that AI can help you drive better revenue growth. I just wanted to see if you could point us to what are your main AI solutions that you're currently driving revenue at clients? And if you can give us any sense of what your overall AI revenue mix is at this point? Raul Fernandez: Yes. So look, there's AI revenue that is infused, and I'll use insurance as an example. A lot of the applications and capability that we are building for our insurance customers are built on top of a ServiceNow AI infrastructure that we can add more value by adding business process, business flows, business logic to that underlying AI code. In other cases, we're using other language models and putting those in place. So if you think about it as a layered cake, we play at all layers of the cake. -- and we have an ability to do so. Each offering is different. So Core Ignite within CES is, again, a lightweight layer that sits on top of a legacy system. We are building within GIS an ability to have an orchestration and visibility platform that we call Oasis that we're just about to start in pilot phase with a few lighthouse customers. So we will monitor and we will report on our Fast Track metrics, and we'll give more color on that in the June Investor Day. But today, throughout all of the organization, we are using AI to do many different things to port code, to write code, to check code. So the ability to go, okay, what part of this bill is AI and what part is not, that becomes more and more difficult as you're using AI for every part of the life cycle. But specifically, what we want to call out and especially on the 10% reference that I had before, those are going to be tied directly back to these very specific offerings that are branded, that you'll read a lot about and that the offerings and all of those project teams will have a chance to discuss in further detail in our June Investor Day. Operator: And that concludes our question-and-answer session. I'll now turn the conference back over to Mr. Roger Sachs for closing remarks. Roger Sachs: Thank you, everybody, for joining us today, and we look forward to speaking with you again next quarter and at our June Investor Day. Operator: Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
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