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Operator: Good afternoon, and thank you for joining us today for Ryan Specialty Holdings Fourth Quarter 2025 Earnings Conference Call. In addition to this call, the company filed a press release with the SEC earlier this afternoon, which has also been posted to its website at ryanspecialty.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements. Investors should not place undue reliance on any forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed today. Listeners are encouraged to review the more detailed discussion of these risk factors contained in the company's filings with the SEC. The company assumes no duty to update such forward-looking statements in the future, except as required by law. Additionally, certain non-GAAP financial measures will be discussed on this call and should not be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most closely comparable measures prepared in accordance with GAAP are included in the earnings release, which is filed with the SEC and available on the company's website. With that, I'd like to turn the call over to the Founder and Executive Chairman of Ryan Specialty, Pat Ryan. Patrick Ryan: Good afternoon, and thank you for joining us to discuss our fourth quarter results. With me on today's call is our CEO, Tim Turner; our CFO, Janice Hamilton; our CEO of Underwriting Managers, Miles Wuller; and our Head of Investor Relations, Nick Mezick. In many ways, 2025 was a strong year for Ryan Specialty, particularly considering the significant headwinds the industry faced. Our results are a testament to our team's ability to outperform in a challenging environment. Our conviction in putting our clients first, our unwavering focus on specialized expertise, commitment to attracting and retaining top talent, and dedication and excellence in everything we do. For the quarter, we delivered organic growth of 6.6%. I'm pleased with our performance especially taking into account the volatile property market conditions, increased competition and select casualty lines and continued delays in certain project-based business, all of which Tim will provide more color on shortly. For the full year, we surpassed revenues of $3 billion, up 21% year-over-year, driven by organic growth of 10.1%, on top of 12.8% in 2024, and significant contributions from our M&A strategy. We marked the seventh consecutive year of growing the top line by 20% or more and our 15th consecutive year of double-digit organic revenue growth. Adjusted EBITDAC grew 19.2% to $967 million. Adjusted EBITDAC margin was 31.7% compared to 32.2% in the prior year. Adjusted earnings per share grew 9.5% to $1.96. We completed 5 acquisitions with trailing revenue of over $125 million. I'd like to make a few comments on the overall market. Having lived through multiple of insurance pricing cycles, I've seen hard markets come and go. What distinguishes this cycle is simple. It was harder for longer on the way up and much faster on the way down, particularly as it relates to the property. Throughout my career, I've never witnessed market sentiment shifted this rapidly. We are currently operating one of the most volatile and reactive insurance markets, I've seen across my more than 60 years in the industry. Throughout this time, I've learned that volatility and market cycles is inevitable. And what sets us apart that's rooted in the very vision this company was founded on, brick by brick. We carefully constructed an intentionally diversified platform to deliver innovative solutions to brokers, agents and insurance carriers. To deliver for our clients and shareholders, when the times get tough, regardless of the market cycle. We didn't build Ryan Specialty for the easy years. People do for years like this, the power through transitioning markets. Diversified specialties, diversified products and diversified earnings, all backed by world-class talent, all by design. That's what makes us different. While we could not predict the precise timing or magnitude of this turn in the pricing cycle, we have long understood that the pricing cycle would eventually move from a tailwind to a headwind. From the very beginning, we made a deliberate decision to build more than a wholesale broker. We invested heavily in delegated authority, including both binding authority, and underwriting management. The benefits of this strategy are clear, deepened specialty presence and enhance the ability to bring products to market quickly, improve geographic balance through our international expansion and a significantly expanded total addressable market. Importantly, these strategies have underscored by alignment with our carrier trading partners and enhance the strength of our relationships with the capital providers who support us. Our delegated authority business generates meaningful revenue through contingent commissions, which are directly tied to the underwriting performance we deliver on our carriers' behalf. In softer markets, these contingent commissions act as a natural hedge, thus providing further diversification and balance to our total company earnings. Our numbers tell the story. Over the last 2 years, we've doubled our delegated authority revenue to $1.4 billion, now reflecting 47% of our total. A remarkable rise from $700 million and 35% of our total just 2 years ago. We've invested nearly $2.7 billion towards 12 acquisitions. We have grown a number of products on our platform by 50% to over 300. We've expanded our international presence now with 24 offices, up from just 6 in 2023. And still believe we're in the early innings. We've increased the size and capabilities of our central underwriting team to help support our efforts to deliver underwriting profits, growth and scale. We have dramatically increased the breadth and depth of Ryan Re, our reinsurance MGU. We have established in-house alternative for capital management solutions. We built a benefits division with distinguished capabilities and products, which are largely uncorrelated to the P&C cycle. And we've invested significant resources into all aspects of alternative risk including captive management and structured solutions. The diversification that we've achieved is significant, born out of the needs of the thousands of retail brokers with whom we trade, our enhanced offering has opened the door to additional opportunities across all our specialties and positions us well for a wide range of market outcomes. This evolution is exciting but it also introduces greater complexity to our business. As a result, we are launching Empower, a 3-year restructuring program designed to improve efficiency across the firm, particularly within delegated authority and create headroom for additional investment, despite the success we've achieved in many ways because of it, we are not yet as efficient as we need to be. And Empower is about more than just efficiency. It's about enabling our people to do what they do best, more tools, faster innovation and an even greater ability to deliver for our clients. AI will be a key enabler, allowing all our people to focus less on process and more on deepening client relationships. We're confident that Empower will deliver meaningful benefits for our colleagues, trading partners and shareholders. Tim and Janice will provide more details in their remarks, but we anticipate a cumulative special charge of approximately $160 million through 2028. We expect the program will deliver approximately $80 million of annual savings in 2029. The efficiencies we gained through Empower will enable us to continue making strategic investments in growth, top-tier talent, the novel formations and address the rapidly evolving needs of our clients, allowing us to maintain industry-leading growth in the years to come. We expect these savings will help contribute to our goal of modest margin expansion in most years, while maintaining the flexibility to continue investing in our business. As a result, we believe our industry-leading organic growth and accelerated efficiencies across all of our specialties will lead to enhanced earnings growth. I also want to provide an update on capital allocation. We are pleased to announce that our Board of Directors has authorized a $300 million share repurchase program. The scale of our platform, combined with our robust free cash flow generation gives us increased flexibility to expand how we deploy capital. This decision reflects our view that there's a meaningful dislocation between our current valuation and our confidence in the near and long-term outlook of our business. We remain committed to strategically investing for the long term, organically and inorganically while also opportunistically purchasing our shares when we believe it to be the best use of our capital. The added option of share repurchases is aligned with our goal of enhanced shareholder returns over the near and long term. As a coach of this terrific team, I'm incredibly proud of our ability to deliver exceptional results in a challenging environment. Our performance is a testament to the depth, expertise and determination of our people to provide value for our broker, agent and insurance carrier partners in the face of numerous challenges. All of these efforts will drive significant additional value for our shareholders and ensure we remain the leading specialty insurance services firm in our industry. I'm pleased to turn the call over to our Chief Executive Officer, Tim Turner. Tim? Timothy Turner: Thank you very much, Pat. Ryan Specialty delivered our 15th consecutive year of double-digit organic growth, once again, setting the standard for the specialty insurance industry. In a year where there have been significant pressures across the insurance broker landscape, our performance speaks to the resilience and differentiation of our platform. I am incredibly proud of how our team navigated what was, without question, the most challenging property environment, the insurance industry has faced in decades. We capitalized on specific areas of accelerated growth as evidenced across many products and lines of business, most notably in high-hazard casualty and transportation. We launched innovative solutions like Ryan Re's expanded relationship with Nationwide. RAP Re, our first-of-its-kind collateralized sidecar and numerous real-time de novo formations to meet the emerging needs of the market. As you've seen us do repeatedly, when we see an opportunity, we organize and we move at the speed in which our clients and trading partners demand. Turning to our results by specialty. Our wholesale brokerage specialty demonstrated remarkable resilience in 2025, led by our exceptional talent and the continuation of secular trends like panel consolidation. In property, our team executed on behalf of our clients in the face of an exceptionally difficult pricing environment. For the full year, our Property business declined only modestly. The fourth quarter was particularly challenging. We saw a further decline in property pricing as the quarter progressed. It was most notable in the month of December, particularly on certain large accounts where pricing was down 25% to 35%. Additionally, an albeit in pockets, we saw instances of admitted carriers stepping back into certain segments particularly on smaller accounts. Based on this continued softening in pricing, combined with January 1 reinsurance renewals and the widely held view of rate adequacy and property, we expect there could be similar pricing declines in 2026. We are not standing still. Our team of experts are focused on delivering the best solutions to our clients, winning head-to-head against our wholesale broker competitors. And our goal remains clear: return to growth in property as soon as the market allows. That said, we remain optimistic about property beyond the near term. The frequency and severity of cat events, increasing populations in cat-affected areas and continued demand for E&S solutions all support our belief that property will remain an important contributor to our growth over the long term. Meanwhile, our casualty practice had a very strong year. Underlying trends are moving in different directions across lines, but the net result remains favorable for Ryan Specialty. In high hazard lines like transportation, health care, social and human services and habitational, we continue to see significant price increases in many cases, exceeding 10%. Across these difficult lines, we are seeing carriers tightened distribution re-underwrite, change appetites, raise prices and focus on limit management, our professional lines team significantly outperformed the market despite continued pricing pressure aiding our growth for the year as well as social inflation and litigation trends, which continue to support the need for adequate pricing. At the same time, we are seeing a more constructive tone from carriers looking to grow in Casualty, which introduces additional competition beyond what we've been seeing in small commercial and middle market. This is leading to a slight moderation of pricing in certain pockets. Lastly, parts of the large construction industry remain a headwind as project-based business faces continued delays. But we're seeing early signs that activity may pick back up. And given recent interest rate cuts, we're optimistic heading into 2026. Taking these trends together, we're anticipating strong yet moderating casualty growth in 2026. On data centers, we're growing increasingly optimistic as the leading wholesale broker in construction, we are in a great position to assist our clients as they navigate this rapidly evolving risk landscape. But it's not just construction as we bring deep expertise across builders risk, environmental, architect and engineers, and other complementary lines as well as within the energy field, making us a natural partner for these complex placements. With many projects in the planning phases, and demand for insurance capacity only building, we believe we are well positioned to assist our retail broker clients. While these projects can be lumpy, our enthusiasm as well as our pipeline continue to grow. As we've said repeatedly, retail brokers use us when they need us. And here, we're honored to play an important role. Zooming out on wholesale brokerage, we believe the secular trends that have fueled our growth over the years remain intact. One worth highlighting is panel consolidation. The largest retail brokers continue to narrow the number of wholesale broker intermediaries they work with. We see this playing out in real time in 2026 and 2027 and for years to come. Our scale, track record and relationships with the top 100 retail brokers positions us well as this trend continues. Now turning to our delegated authority specialties, which include both binding authority and underwriting management. Our binding authority specialty continues to perform well, driven by our top-tier talent and expanding product set for small, tough to place commercial P&C risks. We continue to believe panel consolidation and binding authority remains a long-term growth opportunity, and we are well positioned to capitalize. Our underwriting management specialty, Ryan Specialty Underwriting Managers, delivered excellent results for the year, with strong performance across transactional liability, casualty and transportation. Our transactional liability practice performed exceptionally well, supported by the investments we've made over the past few years and the more constructive global M&A outlook. Velocity, our Tier 1 property cat MGU continued to expand its distribution through RT and ended the year with impressive year-over-year growth numbers. Conversely, while our builders risk MGU, U.S. Assure faces near-term pressure from project delays due to the heightened interest rate environment. We remain confident in the long-term opportunity as the housing market normalizes and construction activity picks up. Let me spend a moment on Ryan Re. Over the last 6 years, we've created a remarkable business strategically positioning us to capitalize on an expanded opportunity set. We are very proud of our ability to execute on our strategic partnership with Nationwide on the Markel Reinsurance book. We are driving increased brand awareness, deeper relationships with clients and diversification into niche specialty markets, enabling us to deliver on a very strong January 1 renewal season. Stepping back, our delegated authority strategy is a key differentiator for us. Our exceptional M&A activity over the last 2-plus years, cements Ryan Specialty underwriting managers as the preeminent delegated underwriting authority platform in the industry. As we've demonstrated, each of these acquisitions support our strategic vision of aligning specialized underwriting products with our distribution expertise across industries, expanding our capabilities, and offering clients diverse innovative solutions. Today, our delegated authority business manages north of $10 billion in premium across more than 300 products and has been recognized by business insurance as the largest delegated authority platform. What sets us apart is our consultative approach. We create bespoke solutions because our broker, agent and insurance carrier clients and trust us to solve problems alongside them. Our scale allows us to build markets and launch de novo programs with speed and efficiency in response to our clients' individual needs. We are here to add value and complement our trading partners, filling niches where needed and strengthening their distribution model, not to compete with them. Our skill and discipline to manage these businesses through the insurance cycle bolsters our ability to deliver consistently profitable underwriting results, growth and scale over the long term. Now turning to price and flow. We have repeatedly noted that in any cycle, as certain lines are perceived to reach pricing, adequacy, admitted markets historically reenter select placements. While we saw small pockets of this dynamic playing out in property during the fourth quarter, particularly on smaller accounts, the standard market has not meaningfully impacted rate or flow in the aggregate across our portfolio. As we've consistently said, we continue to expect the flow of business into the specialty and E&S market more so than rate to be a significant driver of Ryan Specialty's growth over the long term. Turning to M&A and capital allocation. We completed another exceptional year of acquisitions, closing 5 transactions with trailing revenue of over $125 million, including Velocity, USQ, 360 Underwriting, J.M. Wilson and SSRU to name a few. M&A has been and continues to be a top capital allocation priority for us. We remain disciplined in our approach to M&A, only moving forward when all of our criteria are met, a strong cultural fit, strategic and accretive. More broadly on capital allocation, we are excited to announce our first share repurchase program, adding another tool to our tool belt. Given the current dislocation that Pat mentioned, combined with our confidence in our near and long-term outlook, we believe now is the right time to act. The addition of this lever gives us more flexibility in how we return value to our shareholders. To sum up 2025, our colleagues performed exceptionally well, particularly in the face of a complex and rapidly evolving insurance and macro environment, which is a testament to the resilience and durability of our people and this platform. With that being said, we have built an intentionally diversified platform at Ryan Specialty, one that is able to not only withstand the ever-changing landscape but power through it, A platform that provides us with many avenues for expansion, designed to deliver industry-leading organic growth. As Pat mentioned, over the last 2 years, we've invested nearly $2.7 billion towards 12 acquisitions, significantly diversifying our platform with new products, geographies, capabilities and businesses. This transformation has been exciting, but with scale comes complexity. As a result, we are focused on further positioning the business to adapt and are excited to discuss Project Empower, our 3-year restructuring program. Empower is designed to streamline our broking and underwriting operations, optimize our scale, accelerate our data and technology strategies, and enhance efficiencies across all our specialties. Empower isn't just about efficiency. It's about enabling our people to do what they do best, more tools, faster innovation and an even greater ability to deliver for our broker, agent and insurance carrier partners. The efficiencies we gain through the Empower Program will enable us to continue making strategic investments in growth, top-tier talent, de novo formations, and address the rapidly evolving needs of our clients, allowing us to maintain industry-leading growth in the years to come. We will continue to invest in our business, in talent, innovation, technology and AI, investments that will lead to margin expansion over time, while maintaining flexibility to capitalize on strategic opportunities like our talent initiative late last year. Our scale, scope and intellectual capital thoughtfully crafted over our 15-year history is unmatched. It is the foundation of our ability to continue winning and expanding our market share over time. This platform is exceedingly difficult to replicate and the diversification we've achieved is significant. We continue to improve upon our competitive moat and we will continue investing to widen the gap between Ryan Specialty and the rest of the specialty industry. With that, I will now turn the call over to our CFO, Janice. Thank you. Janice Hamilton: Thanks, Tim. In Q4, total revenue grew 13% period-over-period to $751 million. Growth was comprised of organic revenue growth of 6.6%, contributions from M&A, which added over 5 percentage points to our top line and contingent commissions as we continue to deliver strong underwriting profits for our carrier trading partners. As Tim discussed, the fourth quarter reflected an intensification of the trends we've been navigating throughout the year. Adjusted EBITDAC grew 2.9% to $222 million. Adjusted EBITDAC margin was 29.6% compared to 32.6% in the prior year period. Adjusted diluted earnings per share of $0.45 was comparable period-over-period. Our full year 2025 results reflect the resilience and diversification of our platform. Total revenue grew 21% to over $3 billion, driven by organic revenue growth of 10.1% and strong contributions from M&A, which added 10 percentage points to our top line. Adjusted EBITDAC grew 19.2% to $967 million. Adjusted EBITDAC margin was 31.7% compared to 32.2% in the prior year. As we've discussed throughout the year, our margin was impacted by significant investments, principally in talent, operations and technology. Our talent investment was broad-based. We added key data and AI-focused resources within our central underwriting teams to support our expanded underwriting businesses, integrated strong talent to support Ryan Re and hired top-tier talent within alternative risk. We recruited at scale in wholesale brokerage, which heavily impacted our fourth quarter results. Adjusted EPS grew 9.5% to $1.96 per share. Our adjusted effective tax rate was 26% for both the quarter and the full year. We expect a similar tax rate in 2026. Based on the current interest rate environment and at current debt levels, we expect to record GAAP interest expense net of interest income on our operating funds of approximately $210 million in 2026 with $55 million in the first quarter. We ended the quarter at 3.2x total net leverage on a credit basis. We remain well positioned within our strategic framework and willing to temporarily go above our comfort corridor of 3x to 4x for compelling M&A opportunities that meet our criteria. More broadly on capital allocation, the Board of Directors approved an 8% increase to our regular quarterly dividend for our Class A stockholders now at $0.13 per share. We are pleased to grow our dividend at a modest and sustainable level. Additionally, our Board has authorized Ryan Specialty's first share repurchase program of $300 million. We have consistently demonstrated our ability to manage this business with an unwavering focus on strong free cash flow generation. It's 1 of the many great attributes of our firm and the broader insurance brokerage sector as a whole. Our free cash flow affords us the ability to deploy capital strategically, whether in organic investments, acquisitions, dividends and now opportunistic share repurchases. This repurchase program is a reflection of our confidence in our near- and long-term outlook and an opportunity to create additional value for shareholders. Turning to Project Empower. As Pat and Tim both mentioned, over the last 2 years we've invested nearly $2.7 billion towards 12 acquisitions, significantly diversifying our platform. As you would expect, an expansion of this magnitude has increased the complexity of our business. As a result, we are launching the Empower program, designed to: number one, streamline our broking and underwriting operations by standardizing processes, integrating operating platforms, increasing automation and driving efficiency and product innovation. Two, optimize our scale by eliminating redundancies to fully leverage and further monetize the investments we've made over the last several years. Three, accelerate our data and technology strategies by building a single unified ecosystem that harnesses advanced analytics and AI to improve client outcomes and drive operational excellence. Four, enhance efficiencies across all our specialties, leading to more consistent interactions across our 30,000-plus retail and wholesale broker relationships and deepen interactions with our 180-plus delegated authority carrier relationships. And finally, create headroom for additional investment. We anticipate a cumulative special charge of approximately $160 million through 2028. We expect the program will deliver approximately $80 million of annual savings in 2029. We expect the savings to ramp up over time. We expect these savings will help contribute to our goal of modest margin expansion in most years while maintaining the flexibility to continue investing in our business. Looking forward, we believe our industry-leading organic growth and accelerated efficiencies across all of our specialties will lead to enhanced earnings growth. Turning to guidance. We are guiding to organic revenue growth in the high single digits for 2026. This reflects our current view of market conditions, including continued property pricing pressures, a more moderate pace of casualty growth and broader macroeconomic uncertainty. From a seasonality perspective, we expect Q1 to be our strongest quarter for organic growth, aided by Ryan Re, as Tim mentioned. As a result of business mix changes and external trends, we expect organic growth to fluctuate quarter-to-quarter, but we remain confident in our full year outlook. We believe we will consistently deliver industry-leading organic growth on an annual basis moving forward. For the full year 2026, we are guiding to an adjusted EBITDAC margin of flat to moderately down as compared to the prior year. Embedded in this guide are a few headwinds. Notably, the impact of lower interest rates on fiduciary investment income, stable contingent commissions following an exceptional 2025, and higher health care and benefit costs. More importantly, we are continuing to absorb the significant talent and technology investments we made in the fourth quarter. As we close out 2025, I'm incredibly proud of the results we've delivered, another year of industry-leading growth particularly in the face of a very challenging environment is a testament to the depth, breadth, expertise and determination of our team. Looking ahead to 2026, we are well positioned to further differentiate Ryan Specialty as the destination of choice for the industry's top talent, powered by our commitment to innovation, our empowering culture, and the scale and scope we've built over the last 15 years. With that, we thank you for your time and would like to open up the call for Q&A. Operator? Operator: [Operator Instructions] Our first question will come from Elyse Greenspan with Wells Fargo. Elyse Greenspan: I guess my first question, I just want to spend more time on the organic guide, right? So it sounds like for '26, you guys are expecting that the property price declines will be at the same level as in '25, yet the organic guidance is now high single digits versus right this year where the guide or -- sorry, in '25 where the guide had been double digits. So what's the driver of that just in relation to property as well as just the overall change in the guide for 2026? Janice Hamilton: Elyse, I'll start this, and then Tim might want to add a little bit more on the property color. As you probably picked up on from our remarks, the fourth quarter really marked an intensification of some of these property pricing trends. We saw particularly in the large accounts, rate decreases to 25% to 35%, which was higher than what we were seeing earlier in the year. We're currently expecting that to continue. We did see some small -- smaller commercial business starting to head back towards the admitted market, but not necessarily in a meaningful way. So I wouldn't necessarily call that out as a significant headwind in any way for 2026, but it's really the continuation of the property pricing declines that we saw intensify within the fourth quarter. On top of that, Tim mentioned the fact that in casualty, there are a number of different pricing conditions that are going in a lot of different directions. All of that, we expect to be favorable to us. But that strong growth that we experienced in 2025, we expect to moderate within 2026. So those are the 2 things that I would call out. We had -- for the fourth quarter of 2025, we also had timing related to some of the construction business. That for us was stronger within the third quarter. We also had a stronger third quarter as it related to transactional liability, all headwinds or potential headwinds that we had called out in the third quarter as we headed into the fourth. But really, the 2 trends that we're looking at for '26 that are continuing is around property and moderating casualty growth. Tim, anything you'd want to add on either of those? Timothy Turner: Sure. Elyse. I would just add that, obviously, property is the big headwind here, but we have several niche firming phenomenons going on in casualty and professional liability. So the flow itself up 8% in the stamping offices remains very opportunistic for us. We're capturing a significant amount of new business coming into the channel, and we're winning in head-to-head competition with other wholesale brokers. So we believe there's plenty of new business for us to capture this year, and we continue to look for new innovative ways to broker that business and underwrite it. We can name a few niche firming phenomenon as you can take with you, but sports and entertainment would clearly be one of them, lots of consumer product liability, loss leaders in the reinsurance world, tough casualty risk with latency issues, public entity and municipality business really firming up for us, and social and human services and transportation. So lots of opportunities with increased flow and demand for our services, and we feel really good about '26. Elyse Greenspan: And then my follow-up question. We've seen the broker sector really underperformed this week just on some overall concerns about AI really hitting the group. I would just love to get your views just relative to AI impacts on Ryan and just the brokerage sector at large. Patrick Ryan: This is Pat. We look at AI as an ally, not as an adversary. Lots of opportunities for us to embrace AI and improve as we mentioned, the tools for our people to serve our clients even more effectively. We also believe that there's going to be some significant efficiencies through AI. We can't quantify them at this time. We're very excited about them. I've had experience over the years or people have always said brokers are going to be disintermediated. What I want to emphasize is that the brokers and we are leading this in the organic growth phenomenon that we have, a timeless value of advice and advocacy, and we're going to get efficiencies but specialty skills that our underwriters and our brokers have in these practice group verticals. They have the trust and relationship with the markets and with the clients in terms of the dynamic changes that are occurring, both in carrier appetite and frankly, in new risks and new ways to design, but also a clear understanding of which are the markets to take those 2. And that appetite changes fairly quickly. So we've got tremendous tailwinds in improving our productivity, improving our speed to market. Speed to market in our space is critical. And we know that when we get a great design product with competitive rates and terms and conditions. And we do that promptly. That accelerates our growth because the brokers are smart, they see the opportunity and they want to serve their clients. So we advocate every day, all day long on behalf of our clients. And so AI is going to help us serve our clients more effectively and faster. So that's how we feel about disintermediation. I've been resisting that term for over 30 years. Operator: Our next question will come from Alex Scott with Barclays. Taylor Scott: I had for you is on the app for construction. I know you mentioned there's still a lot of projects that haven't started up yet. But can we think about some of the comparisons when we consider the '25, I think, already began to have maybe a little softness in the growth in construction. As you lap some of that, does it become a little bit easier and less drag as we get into '26? I'm just trying to understand that part of your business and also just thinking through the acquisition you did. Timothy Turner: Yes. The construction segment and practice group for us remains very, very strong. Keep in mind that a large percentage of our construction business is renewable. So we write artisan subs, GCs, all the New York construction lines, they're renewable. What you see and what the headwind is all about are these large infrastructure projects, including residential construction projects, there's been a slowdown, not in flow. Our flow is very strong. We believe we're industry-leading. And we're getting them quoted, we're getting them teed up. But the macroeconomic pressure and the interest rates have slowed down the timeline between submit to quote to bind. So these projects are quoted, they're teed up, and the financing is just taking a little bit longer. So you saw a lumpy '25 as a result. We had some unbelievable victories in large construction projects, data centers. And then there was a slowdown. So we're still very bullish on it. We believe it will grow exponentially, and we believe we're the leading intermediary and underwriter in the construction industry in the U.S. Janice Hamilton: I would just add from an outlook perspective for 2026, just given the continued uncertainty from a macroeconomic perspective, it is still early -- too early to tell effectively how that will play out in '26. So we have a very strong pipeline, but those macroeconomic headwinds and visibility there do give us pause in terms of the timing of when some of these might hit. Timothy Turner: Absolutely. Taylor Scott: That's helpful. And the share repurchase authorization, can you talk a bit about that and just how you're viewing the M&A environment currently, particularly in light of, I guess, sort of the currency and your own stock valuation and what you're seeing for private equity valuations and how that all plays into capital management. Patrick Ryan: Well, I want to start off by saying the share repurchase is not in any sense diminish our commitment and enthusiasm for M&A. We're committed to -- that's the #1 priority for our capital allocation. But quite frankly, with the compression of our stock, and we look at the true value as we look at what we're going to -- how we're going to grow in the near term and the long term -- intermediate term and long term, we consider it to be a great investment for our shareholders and that improve shareholder returns. And so we're easing the opportunity, simple as that. Janice Hamilton: And then from an M&A perspective as well, you mentioned that it is our top capital allocation priority. Right now with the transitioning market that we face, we need to continue to be very disciplined in evaluating potential M&A criteria, all of our criteria to ensure those are met before we move forward with any acquisitions. So it's really about ensuring that we balance and utilize this program opportunistically because we do believe, as Pat said, given the dislocation in our valuation compared to our confidence in our outlook that this is the best use of our capital at this time. Operator: Your next question will come from Brian Meredith with UBS. Brian Meredith: Two questions here. The first one, more short term. The second 1 is more longer term. In the underlying growth guidance, I'm just curious if you can kind of give us a little sense of what client demand you're expecting? I mean are you seeing clients buying additional coverage with some of these price decreases? Or is the fact that you're seeing some economics uncertainty, you're not quite sure that's going to happen. I thought that would have been a nice offset. Timothy Turner: Brian, I would say this, that most commercial buyers of property and casualty insurance are connected to lender agreements and loan covenants. And so those limit requirements are prequalified early on in our approach to marketing these accounts. So we don't really see a change so much in the limits that they're buying, but the structure demands are a little bit different. So higher retention levels in certain accounts, alternative risk, as Pat mentioned many times, comes into play on the most difficult risks in the United States. So having the ability to be flexible for us to be able to structure these accounts in such a way that meets the unique needs of these buyers is important. And so we feel very confident that we can answer the bell on even the most difficult risks that we see in America. So I would say this that we don't see any measurable trends of buying less. It happens, but there's not really a trend that we can put our finger on. Brian Meredith: That's helpful. And then from a longer-term perspective, is the, call it, high single-digit organic growth that you're looking for in 2026, call it maybe a more normalized environment. And how are you thinking about these talent investments that you talked about last quarter factoring into organic growth, obviously look into the latter part of this year and into 2027? Janice Hamilton: Brian, I thank you for the question because I should have highlighted. From our perspective, high single digits. We are pleased with that expectation for '26. We believe that, that will be industry-leading growth. And our expectation, as we outlined last quarter, is the continuation of producing industry-leading growth going forward. When we think about talent, I commented last time that we expect that these will -- these new talent hires will contribute to margin pressures in the short and medium term. 2026 will represent effectively the first full year of that investment. We anticipate that they will begin to contribute to our organic growth from effectively day 1. But obviously, we need them to continue to abide by the restrictive covenants. So we anticipate that our ability to see the accretion from these investments that we've historically seen that are the most accretive investments we can make do take from 2 to 3 years. Tim, anything you'd want to add? Patrick Ryan: I'd like to add that we are guiding for 1 year forward. And we want to make sure that we're clear that this diversification of our offering to our clients has improved our ability to serve our clients greatly. But it's also -- is adding a lot of balance to our portfolio. So for example, we are strongly committed, and we're growing quickly as you're aware, in reinsurance, reinsurance underwriting. And that's a de novo. That's all just huge capital returns on capital, I should say. And more and more of our business is involving reinsurance, underwriting, managing underwriting. We're not a broker on that, managing underwriting. But alternative risk is something that we've been talking about. Those projects got pushed forward and not enacted as anticipated in Q4. But we're positive that there's going to be good growth on alternative risk. And those are reinsurance relationships. Additionally, our benefits start-up has gotten really good leverage. So as we go into '26 and on through '26, the diversification beyond and to help balance the E&S volatility, we're very excited about that. And so we're guiding high single digit because all brokers are under pressure right now. But as I said, that's for 1 year. We're not giving up. We're built for double digit. And that diversification is going to be a factor and down the road and getting to that, back to that. Operator: Your next question will come from Meyer Shields with KBW. Meyer Shields: So up until recently, I guess, there's a 35% margin guide for 2027, and you've been very clear about what's postponing that. But I'm wondering how we should think about the longer-term potential as good as the $80 million of savings is by 2027, that's probably, I don't know, less than 200 basis points of margin expansion. I was hoping you could just tie those ideas together? Janice Hamilton: Meyer, thank you for the question. This is Janice. So you're absolutely right. Last quarter, we deferred the goal of the 35% margin target beyond 2027. What we've talked about before is the expectation of modest margin expansion in future years -- in most years, right, allowing us to continue to invest in the growth of the business. Project Empower is intended to support the efficiencies that we've talked about to contribute to that modest margin expansion in most years. But at this point, we're not putting a time line around it. We continue to focus on ensuring that we're investing in talent, de novo formations, new product opportunities, and ensuring that we're delivering the right solutions to our clients. So we believe that 35% is still a realistic target for us, but we're not putting a date around when that may come to fruition. Meyer Shields: Okay. That's fair. I understand that. And I guess the question for Tim, I'm not sure how to answer this. But we've obviously heard a lot about significant rate decreases in -- during 1/1. And I'm wondering whether the perception of margins that will exist in primary property taking into account cheaper reinsurance, do they really support another full year of 25% to 35% rate decreases, especially in the back half of the year? Timothy Turner: Meyer, I would say this that it's hard to even conceive that the market could continue to cut rate at that level. But we're forecasting that. We're looking at it conservatively. There seems to be no let up. It's been a weak storm season, 2 years in a row, and we're not counting at it. But what we are counting on is fighting head-to-head to win new business and capture any new business that comes into the property channel. As you know, we've made some key acquisitions like Velocity. It strengthened our practice group vertical. So whatever is available, whatever we can capture in property, we'll do that. But like professional, you witnessed it a couple of years ago when cyber and public D&O took a dive our professional liability brokers were resilient, and they found other business, health care business, social and human service business, and now they're in a great double-digit growth trajectory. So we expect that from our property brokers. We expect them to find convective storm, sensitive business and flood sensitive business and to scrap and claw and find a way to grow. So we're very, very proud of the performance in the space of the headwind that they had, and we expect a similar performance in '26. Operator: Your next question will come from Andrew Kligerman with TD Cowen. Andrew Kligerman: I'd like to follow up a little more on the AI question. I've gotten quite a number of investors asking me, why wouldn't it be easy for a smaller wholesaler to create an app with AI, that's very speedy, and it would enable that smaller broker much smaller than Ryan to reach out to multiple specialty carriers as many as Ryan and they could go toe to toe. And I have my own thoughts on it, but I'd love to hear why and how there would be barriers that would keep Ryan front and center versus the startups and the smaller players that now have these AI apps to help them along? Patrick Ryan: Well, the AI app is one thing. It's the intellectual capital and it's the relationship with the market and the broker, the trust of that relationship, you can't just walk in and say, "Hi, I've got an AI app and I can now compete with the big guys. The AI app is an enabler. It's not anything more of an enabler. Can replace the trust, the adaptability, the flexibility, the understanding of what is the best market to place that risk in. We're not worried about the smaller guys coming in and leveling the playing field. It's all about our delivery, our delivering with our AI, and we're confident that we're going to be very effective with it. Andrew Kligerman: My follow-up is around the contingent and supplemental commissions. They were up quite materially year-over-year. They represent about 6% of revenue. How do you -- how are you thinking about -- in this pricing environment, contingent and supplemental commissions. Is it likely to be a headwind as you head into '26? I thought I heard Janice say it was actually a natural hedge in softer markets. But what are your thoughts there? Patrick Ryan: Yes. I'll let Janice add to this. But I think broadly speaking, these PCs represent years of measurement of profitable underwriting. And you're certainly seeing it emerge in the publicly reported carriers. We feel we're driving those great results for our partners. You've seen them profit commissions grow steadily with us. I believe our entire public life cycle. And based on our underwriting performance of the last several years, we do expect continued strong results. Janice Hamilton: And I think I also noted in my remarks -- sorry. Happy to just fill this one out, a touch more. So for 2026, we're expecting profit commissions and supplemental effectively to be relatively stable. The benign storm season that we saw within 2025, obviously produced some opportunities for additional profit commissions. As Miles said, these span a number of different years. So it is a number of playing at different times. But we're obviously going to start the year with an expectation that we would have a normal cat season effectively and there would be some anticipation of not having that same level of exceptional profit commissioning from '26. So the difference between being a natural hedge and what we're expecting for '26, I think that they will align over time. Operator: Our next question will come from Rob Cox with Goldman Sachs. Robert Cox: I just wanted to follow up on the organic growth guidance, high single digits for 2026. I'm curious what you think the E&S market as a whole will grow embedded in that organic guidance? And if you expect as we -- if we get into the outer years, would Ryan Specialty still be growing in excess of the E&S market as you look to deliver on the industry-leading organic growth? Timothy Turner: Well, we just received the stamping results and they're 8%. And so we try to outpace the growth and the flow of that business, the new business coming in, by capturing existing E&S business. So it's always a combination of that. And -- but we don't see the flow of E&S business subsiding much more. We believe there will always be loss leaders in the reinsurance world and dumping and shutting in these high-hazard specialty areas and property and casualty, Rob. So a big advantage we have is this lens and this optic that we have. When something creates problems for the standard markets, we see it very quickly, early on, and we can formulate these underwriting solutions, and broking expertise is very quickly in the verticals and capture the businesses that's being dumped. So we're certain that '26, '27 will bring more of those kind of incidents in situations where there's more dumping and shedding. We see it right now in public entity and municipalities, higher education, just tremendous losses in the reinsurance world that cause the dumping and the shedding. So we're counting on that. It's never let us down and we're faster, nimbler and quicker to create these solutions than we've ever been. So we welcome it. Janice Hamilton: And Tim, I might just add. The E&S market may not grow in the teens or 20s every year, but we believe it will continue to outpace the growth of the admitted market over the long term. And [ again we cannot count on our ] ability to take market share from our wholesale competitors. Robert Cox: Yes, indeed. That's helpful. And I just wanted to follow up on some of the casualty business. It seems like in spots is getting incrementally a bit more competitive. I was just curious on what you would chalk that up to? Is it just carriers incrementally less optimistic on property giving rate decreases? Is it trend has been behaving better in recent years. Just curious your thoughts. Timothy Turner: Well, Rob, I would kind of carve it up like this. You've got low to medium hazard casualty business and then medium to high casualty business. The softer part of the casualty market is medium hazard. So some of that is getting rate cuts, some of that's going back into the admitted market. Not a lot, not hardly measurable, much more in small commercial. We're seeing some movement there. But the main practice group verticals that we're known for and where we're needed the most, that would be construction, that would be transportation, sports and entertainment. I've mentioned a number of them. Those high-hazard niches that, again, are loss leaders in the reinsurance world and have a latency to the IBNR part of the risk. They're continuing to stay solidly placed in the E&S market. And so we're very bullish that we'll capture more and more of that business in '26. Patrick Ryan: I would add one other point. The profitability that carriers have realized in property because of the benign storm seasons have driven them to get more competitive on casualty risk. So some of that capital is being shifted in the casualty market and making that more competitive. But we have time for one more question. We've gone over a little bit. Operator: Your final question will come from Matthew Heimermann with Citi. Matthew Heimermann: A couple of questions. One was, it was noticeable to me that the wholesale growth you accelerated a lot. And I think accelerated more than some of the aggregate statistics would suggest for what's happening in the E&S market. So I wasn't sure if that was disproportionately the property we're talking about or flow or just unexpected volatility within just how the number is sorted out. Timothy Turner: I would attribute most of that Matthew to the property market, that's really slowed those numbers down. But again, we believe there's professional liability. There's a casualty business that I've mentioned that continues to firm and hence the 8% increase in stamping fees in the fourth quarter. So we're watching those niches carefully. And we -- as we said, we can move faster than our competitors to capture that business when these situations occur. Matthew Heimermann: I was curious with respect to the change in the outlook and the uncertainty and given that it looked like it was traditional wholesale brokers that was kind of a softer piece of the quarter and I think the focal point of most of your discussion on the call, is there any change to how you're thinking about the delegated underwriting side of the house or the binding authority side of the house? Or is it disproportionately the wholesale brokerage business and where that macro uncertainty piece and the property is not vested. Miles Wuller: Matt, it's Miles. Thank you for the question. I'll open the response. So we were proud of the results of the quarter and the year. I think Pat and Tim and Janice have been clear that over the last 18 months, we see an ongoing opportunity set and delegated both in utilization, but also a bit of a penetration into balance sheets that have not previously delegated. And I want to emphasize some comments Pat made earlier about the diversity of our underwriting portfolio. So when you see that specialty in our financials, that really represents 2,000 colleagues dedicated to P&C insurance, treaty and facultative reinsurance, health and benefits, alternative risk and alternative capital. And we have been recognized by the industry press as one of the largest -- or the largest provider, and we think the feedback is sustained from our partners that we are a leader in capability and sophistication and results. And the reality is we have really parlayed those advantages, the investment in the platform and the results to continue to develop new products, meet the needs of the wholesale community wherever possible, and manage incremental carrier capital. So we continue to have an exciting outlook for our delegated practice. Patrick Ryan: Okay. Well, thank you for excellent questions. Your support. Apologies for going over time, but there were a lot of great questions. We look forward to talking to you again in the near future. Thank you.
Operator: Good day, everyone. Thank you for standing by. Welcome to the Vistagen Therapeutics Fiscal Year 2026 Third Quarter Corporate Update Conference Call and Webcast. Please note that today's call is being recorded. At this time, I'd like to turn the call over to your host, Mark McPartland, Senior Vice President, Investor Relations at Vistagen. Mark? Mark McPartland: Thank you, Lisa, and good afternoon, everyone, and welcome to our conference call and webcast. Earlier this afternoon, we filed our quarterly report on Form 10-Q and issued a press release for our fiscal year 2026 third quarter, which ended December 31, 2025, and provided an update of our progress across our clinical stage neuroscience program. We encourage you to review the PR and 10-Q which are both available in the Investors section of our website. Before we begin, please note that we'll be making forward-looking statements regarding our business during today's call based on current expectations and information. These forward-looking statements speak only as of today. Except as law requires, we do not assume any duty to update any forward-looking statements made today or in the future. Of course, forward-looking statements involve risks and uncertainties, and our actual results could differ materially from those anticipated by any forward-looking statements we make today. Additional information concerning risks and factors that could affect our business and our financial results are included in our fiscal year 2026 third quarter Form 10-Q and for period ending December 31, '25, and in future filings that we make with the SEC from time to time. Again, all of which are available in the Investors section of our website or, of course, on the SEC's website. With the formalities completed, we warmly welcome our stockholders, sell-side analysts and others interested in our programs in progress. I'm joined on our call today by Shawn Singh, our President and Chief Executive Officer; Josh Prince, our Chief Operating Officer; and Nick Tressler, our Chief Financial Officer. Shawn will provide a brief business and clinical update, and Josh and Nick will be available to provide additional feedback during the Q&A portion of our call. After our remarks, we'll take questions from the sell-side analysts participating on the call. A replay of the webcast will be available in the Events section of the Investor page of our website. With that taken care of, I'd now like to turn the call over to our President and CEO, Shawn Singh. Shawn Singh: Thank you, Mark, and good afternoon, everyone. It's been an important quarter for our team with the completion of the randomized portion of our PALISADE-3 Phase III trial in social anxiety disorder, as guided, and focused efforts to learn from the study's results and drive high-quality and efficient execution of our ongoing PALISADE-4 Phase III trial. We have reviewed available data from PALISADE-3 and implemented moderate refinements, including retraining, site rationalization and operational enhancements to PALISADE-4. We've also been working with third-party collaborators on the implementation of innovative approaches to analyze the available data sets, not only from PALISADE-3, but also from the fasedienol studies across the PALISADE program, including both the randomized and the open-label trials. Our objective is to better understand the drivers of both fasedienol and placebo response using the substantial data collected from these studies to potentially inform optimized statistical models that consistently incorporate covariants and explanatory variables across all PALISADE studies, which could anchor future weight of evidence discussions with the FDA. The analyses are ongoing with our collaborators and involves the use of their proprietary artificial intelligence and machine learning technologies to identify nonspecific responses and understand and predict susceptibility to placebo response and likelihood of response to active drug in the context of the public speaking challenge study design. Overall, the full complement of ongoing work is focused on delivering practical operational understanding, predictors of response and enhanced statistical models with the potential to impact both PALISADE-4 and our regulatory strategy based on the totality of data from the PALISADE program. The open-label extension portion of PALISADE-3 and PALISADE-4 remains ongoing and is designed to evaluate the safety and tolerability of repeated as-needed intranasal administration of fasedienol in adults with social anxiety disorder, but in real-world daily life situations. In addition to safety assessments, the study includes exploratory longitudinal measures using validated instruments such as the clinician-administered Liebowitz Social Anxiety Scale, or LSAS, and the patient-reported Social Phobia Inventory, or SPIN. While open-label data are inherently in controlled and exploratory, the OLE portion of the PALISADE-3 Phase III study could provide important context on patient experience with repeated use over time in real-world anxiety-provoking situations the patients encounter. Together with our broader analytical work across the PALISADE program, insights from open-label studies should contribute to our enhanced understanding of fasedienol drug effect and usage patterns. Once again, we'd like to thank the patients who participated in our PALISADE studies as well as the clinical investigators, the site staff and our contract research organization for their ongoing dedication and professionalism as we complete PALISADE-4 and advance our broader analytical efforts. As we've previously stated, PALISADE-4 is successful, together with PALISADE-2. In the broader body of evidence generated across the PALISADE program, these data may support a potential new drug application submission to the U.S. Food and Drug Administration for the acute treatment of social anxiety disorder in adults. The significant unmet need in social anxiety disorder, where effective treatments are very limited, continues to guide our work and our long-term focus. Turning to our women's health program. We received an official USAN adoption statement, designating PH80 as refisolone. Refisolone is our hormone-free, nonsystemic intranasal product candidate with potential for the treatment of moderate to severe vasomotor symptoms, commonly referred to as hot flashes due to menopause. We believe refisolone may also have therapeutic potential across other women's health indications. We are currently preparing to submit our U.S. Investigational New Drug Application, or IND, for refisolone to the U.S. FDA and with a planned submission in the first half of 2026. This IND is intended to support further potential Phase II clinical development of refisolone in the U.S. for the treatment of moderate to severe vasomotor symptoms due to menopause. Building on a previously completed placebo-controlled exploratory Phase IIa clinical trial conducted in Mexico by Pherin Pharmaceuticals, which is now our wholly owned subsidiary, and that trial demonstrated clinical benefit in the vasomotor symptoms indication. We believe that indication in women's health represents a significant area of unmet need, and we remain committed to advancing refisolone as a nonsystemic, hormone-free product candidate with a disciplined data-driven approach as we prepare for the potential next phase of clinical development. Turning briefly to our financial position as of December 31, 2025, we had $61.2 million (sic) [ $61.8 million ] in cash, cash equivalents and marketable securities. During the quarter, we implemented company-wide cash preservation measures intended to enhance our operational efficiency, extend our runway and maintain strategic flexibility across our Pherin pipeline. We believe we are well positioned to complete PALISADE-4 and to advance preparations and planning for our Pherin pipeline. In closing, our mission remains unchanged, to deliver transformative treatments and improved lives. The path forward requires discipline, rigor and thoughtful analysis, and we believe the steps we have taken and are taking position Vistagen to make informed decisions and responsibly advance programs with the potential to deliver meaningful value to patients and to shareholders. So I want to thank you for your continued interest in the company and your support, and we look forward to updating you on our progress in the quarters ahead. Mark McPartland: Thank you, Shawn. Operator, we would now like to open up the call for questions from the sell-side analysts joining us today. Operator: [Operator Instructions] The first question today is coming from the line of Andrew Tsai of Jefferies. Lin Tsai: Thanks for the update. So maybe in the PALISADE-3 data, you had a chance to look at it maybe descriptively, how did the individual curves look at every interval out to 5 minutes? Was there a separation at all across any of those time points with fasedienol versus placebo? Shawn Singh: Thanks for the question, Andrew. Josh? Joshua Prince: Andrew, we -- at this point, what we've released publicly is the top line results. So we're still looking into a lot of that data. We haven't released the individual curves publicly. We do know that there's what really -- where we find information is looking into individual respondents and subgroups of respondents. And again, that analysis continues. So that's where we do see definite differences. Lin Tsai: Okay. And it sounds like you're looking at ways for PALISADE-4 to tweak around the SAP planning, let's just say you did, would you need to notify and then talk to the FDA to potentially get an official buy-in from them that the changes can be done? Is there a risk to modifying the SAP plan, basically? Joshua Prince: Yes, great question. Go ahead, Shawn. Shawn Singh: No, you can go ahead. That's fine. Joshua Prince: Great question. The SAP, just like with PALISADE-3, already been submitted and approved, no feedback from FDA. So that's set. So any future changes, to your point, would absolutely require a resubmission and alignment with the FDA before we locked the database and got the top line results. Lin Tsai: Understood. And then my last question is, should you modify the plan, would you need to backfill back to the original enrollment target of around 236 or 238? Or are there no changes to the enrollment? Joshua Prince: Yes. The change to the SAP would not change the enrollment or the planned enrollment for the study. The key there is that it's whatever that SAP in is, like I said, locked in before you get to database lock and then applied to the total population for the study. Operator: Next question is coming from the line of Emily Chudy of Stifel. Jo Yi Chudy: This is Emily on for Paul Matteis from Stifel. We just had a quick question. Maybe could you remind us where you guys are in terms of enrollment for PALISADE-4? And if you like plan on telling -- or plan on PR-ing once that has completed or like dosing has completed? And then also, could you maybe share on like what details you saw in PALISADE-3 that kind of led you to refine -- to the refinements that you outlined in the PR? Shawn Singh: Thanks, Emily. Appreciate the question. So it will be consistent with the pattern for PALISADE-3. Once we hit the last patient's last visit and then proceed towards top line. So that will be -- we're on track with guidance that we've previously given with respect to PALISADE-4 TOR, the randomized portion of PALISADE-4. Josh, you can address the second part. Joshua Prince: I'm sorry, I missed the second part. Can you rephrase that? Jo Yi Chudy: For -- you guys discussed like refinements, including like retraining of some sites. Could you maybe provide any color on what details you saw from PALISADE-3 that kind of led to that decision? Joshua Prince: Yes. I don't think -- we can't go into too much detail given PALISADE-4 is ongoing. But at a high level, one of the things that made PALISADE-3 different than PALISADE-2 was a higher placebo response. So as one example, making sure that our training is reinforced and up-to-date with sites in terms of potential ways to minimize that, in particular, kind of how the protocol is followed, the script is followed to the letter, making sure that there's no chatting with the subjects as they come in, anything that could potentially lend to a comfort for a subject that can drive a higher placebo effect. Those types of things that we're able to implement quickly based on what we see from PALISADE-3. And also because we're listening to what's happening at each site through the audio recordings that we've talked about previously, it gives us the opportunity, again, to be hyper-focused on feedback and any intervention where we see something deviating from the prescript that we've put in place. Shawn Singh: In addition to that, some -- a focus on centralized recruitment and making sure that gets and stays completely tight or rationalized. So the kinds of things that can impact in stream execution especially, as Josh noted, with high focus on placebo mitigation strategies and best practices across -- especially from really experienced sites. Operator: Our next question is coming from the line of Myles Minter of William Blair. John Boyle: This is John on for Myles. I was wondering if you could talk a little bit more through your regulatory path forward and your confidence in it in the event that PALISADE-4 hits and you have a 50% program success? And alternatively, if PALISADE-4 misses, do you see any regulatory path forward with PALISADE-2 alone? Shawn Singh: Thanks, John. Appreciate the question. So look, they -- fundamentally, we believe that the regulatory outcomes always depend not only on FDA regulations and guidance, but the totality of data, the weight of evidence, the risk benefit, the nature of the in-need population. So these kinds of assessments, this is what we align our regulatory strategies to accordingly. So we're not really in a position to speculate on any approval scenarios, but what we can tell you, of course, is we're very mindful not only of the evolving -- the way that AI is evolving within the agency and how that is emerging is part of and factoring into the regulatory decision-making be on top of that and very closely focused on that. But also just, again, the weight of evidence, once we see where we are with the randomized portion of PALISADE-4, we'll be able to look across the totality of the program. And the primary objective in the primary regulatory strategy remains, as we've said, which is complementing if PALISADE-4 is successful, complementing PALISADE-2 with a broader base of information from the totality of the program for the acute treatment of social anxiety disorder. If PALISADE-4 doesn't hit and separate from placebo, it's still the same. It's the totality of evidence focus. It's the weight of evidence focus across the program and what we see from all data, we can possibly see and analyze relating to the drug. John Boyle: Helpful. And a quick follow-up. Is there anything that you're seeing in the blinded data of PALISADE-4 that gives you a little bit more confidence in that study over PALISADE-3? Shawn Singh: No comment on the blinded data, John. Operator: [Operator Instructions] And the next question is coming from the line of Elemer Piros of Lucid. Elemer Piros: Shawn, have you noticed any impact on enrollment since the announcement on December 17? Enrollment patterns? Shawn Singh: Josh, you can address that. Joshua Prince: Sure. The quick answer is no, definitely have not. Enrollment has continued as planned and projected for PALISADE-4. Elemer Piros: Okay. And so what I'm trying to understand is how could the PALISADE-3 outcome, and potentially PALISADE-4, be different by amending the SAP? Would that mean that you would include some covariates that may influence the separation between the 2 arms? If you could just help me conceptually understand this a little bit better. Shawn Singh: Sure. I mean part of what we're doing with AI and the machine learning, it's potential, it's not -- certainly not guaranteed. And if they're -- what you're looking for are there any covariates that may have a potential fixed effect on the ANCOVA. And that's -- that may or may not evolve and emerge from the work that we're doing with our collaborators with their proprietary AI and ML. But it would be those kinds of things. Are there covariates that you notice when you look through the patient populations in each arm in prior studies in PALISADE-3, in particular, that may give you some sort of signal? So the answer is we don't know yet. And as noted earlier, if we do make a modification to the SAP that's already been signed off by the agency, then we'd have to go back to them and socialize it with them. So that's part of what we're trying to find out. If there isn't, then again, we've got operational efficiencies and observations based on what we've seen across the studies that are being implemented into the PAL-3 or PAL-4 execution. Josh, anything you want to add on that from the teams? Joshua Prince: No, I think that captures it. Elemer Piros: So just to summarize, you're looking at PALISADE-3 and maybe even PALISADE-2 for some covariates. If you find them, then you modify the SAP, take it to the FDA before you were to analyze PALISADE-4 hypothesizing that those same covariates will be applicable to PALISADE-4. Am I understanding it correctly? Shawn Singh: Yes. It has to be whether -- not only whether it's timely, obviously, got to be timely before you lock the database, but it's also got to be appropriate. And there may also be potential changes that wouldn't be FDA regulatory appropriate. So it's got to be something that could be impactful, at the same time something that is reasonable with rigor and review from the FDA. Joshua Prince: Shawn, I would just add that we're actually -- we're looking across all the PALISADE studies. So PALISADE-1, 2 and 3 to see what we can learn. We've built -- now that we've had a third study complete. We've built continued size of data to examine, which gives you more power when you're digging into different things. But you're 100% correct that it's essentially the covariates or the correction factors that you would apply in your statistical model. Elemer Piros: I understand. And just a silly housekeeping question, if you may -- if I may. At the end of December, you had 39.7 million shares outstanding but the weighted average for the quarter was 42 million. Can you help me to understand that? Shawn Singh: Nick, are you on? Nick Tressler: Yes, I am. Yes. So it's shares are outstanding at the end of the quarter. It's how we measure our earnings per share. Elemer Piros: Okay. So shares, I would say -- but there are higher number of shares outstanding because they have reduced 42 million? Shawn Singh: That includes the prefunded warrants, Elemer. Mark McPartland: Operator, I believe that's all the time we have for today. We can wrap up the call. So thank you, everyone, for joining today and for your continued interest and support in Vistagen. Again, with our diverse, innovative pipeline, we are encouraged about the future prospects of the company. If you have any additional questions, please don't hesitate to reach out to us at -- via e-mail, ir@vistagen.com, or through the Contact Us section of our website. We also encourage you to register for e-mail updates and stay informed about the latest news and developments from Vistagen via our regular updates. We appreciate your time, engagement and ongoing support, and we look forward to keeping you updated on our continued progress. This concludes our call today. Have a great day. Shawn Singh: Mark, one more thing, real quick. I just want to clarify. I think I misspoke. I think I said $61.2 million at the end of 12/31/25, it was $61.8 million as reflected in our Q. Mark McPartland: Thanks, Shawn. Operator: This concludes today's program. Thank you all for joining. You may now disconnect.
Operator: Good afternoon, and welcome to Corsair Gaming, Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recordings. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, with that, I would like to turn the call over to David Pasquale with Investor Relations. Please proceed. David Pasquale: Thank you, operator. Good afternoon, everyone, and thank you for joining us for Corsair Gaming, Inc.'s financial results conference call for the fourth quarter and full year ended 12/31/2025. On the call today, we have Corsair Gaming, Inc. CEO, Thi La, and CFO, Michael G. Potter. Thi will review highlights from the quarter and the year. Michael will then review the financials and our outlook. We will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion, may include forward-looking statements related to the expected future results for our company. Including our 2026 financial outlook and other statements that are not historical in nature, are predictive in nature, or depend upon or refer to future events or conditions such as our expectations, estimates, predictions, strategies, beliefs, or other statements that may be considered forward-looking. These forward-looking statements are based on management's current expectations and assumptions. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Note that until our 10-K has been filed, these numbers are preliminary, and are subject to change. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information, to the GAAP financial information, is provided in the press release we issued after the market closed today prior to this call. With that, I will now turn the call over to Corsair Gaming, Inc.'s CEO, Thi La. Please go ahead, Thi. Thank you, David, and thank you all for joining us today. Thi La: We closed 2025 with strong execution across the business and meaningful progress on the strategy we have been building over the past year. In the fourth quarter, revenue came in as expected, while profitability exceeded the upper range of our forecast. We delivered strong gross margin expansion and meaningful operating leverage despite a very dynamic operating environment. For the full year, revenue grew 12% to approximately $1,470,000,000. Gross profit increased 30%, and adjusted EBITDA grew more than 80%, reaching over $100,000,000. We also delivered our highest full year gross margin as a public company. That combination of growth, margin improvement, and discipline is what we set out to achieve in 2025. In addition, I am excited to welcome Michael G. Potter as Corsair Gaming, Inc.'s new CFO. Michael joined us in December 2025 and he is already making a positive impact with our leadership team. He brings deep experience in scaling global consumer technology businesses, and leading successful transition toward platform and recurring revenue models. Just as importantly, as a public company CFO, Michael shares our focus on building clear, transparent financial reporting and stronger investor communications for Corsair Gaming, Inc. You will hear directly from him in a few moments. Turning to our business performance, in gaming components and systems, we delivered strong growth for the full year, led by memory and core components, supported by solid demand for the segment as enthusiasts continue to upgrade their performance PCs. Corsair Gaming, Inc. strategically invested in memory inventory to protect consumer demand despite broader market concern about semiconductor supply constraints. In gamer and creator peripherals, we delivered full year growth driven by demand from both creators and sim racing enthusiasts. Fanatec and Elgato were important contributors and both brands continue to strengthen their position in their respective markets. In line with the broader market, we did see softer holiday demand in North America in gaming peripherals, offset by stronger international performance. We expect demand to improve as we move through 2026 especially with the highly anticipated GTA VI launch in Q4. Fanatec in particular, is integrating extremely well. During 2025, we strengthened Fanatec's operations, improved quality and support, and advanced our roadmap with technologies that raise the bar for performance and usability. Product availability has improved. Channel engagement is increasing, and consumer adoption continues to accelerate as we drive growth in one of the fastest expanding areas of our business. Looking forward, I want to spend a moment on what we showcased at CES 2026 because it directly reflects where Corsair Gaming, Inc. is going. We had one of the strongest CES product lineups in our history, and the customer and partner response was extremely encouraging. At the center of our showcase was Stream Deck, which is positioned as a must-have control layer across gaming, content creation, productivity, and emerging AI workflows to voice control Stream Deck. We introduced the Galleon 100 SD, our CES Innovation Award-winning keyboard that integrates Stream Deck directly into a high performance mechanical keyboard, to deliver an immersive and customizable experience. This has quickly become one of the most successful launches in our portfolio, and represents certainly validation that our black based strategy can make an impact. We also demonstrated early support for AI-enabled workflows, deeper software integrations, and new local AI computing platforms to our workstation and edge AI systems. What stood out to us most at CES was how much our ecosystem strategy resonates with customers. We are reducing friction for users, and making complex workflows whether for gaming, streaming, production, or local AI easier to access and control. Another very important milestone for us this quarter was the opening of our first Corsair Gaming, Inc. retail store, we opened our first experience-driven retail location at Westfield Valley Fair Mall in Santa Clara. This is not a traditional retail store. We designed a fully immersive and fun experience showcasing the Corsair Gaming, Inc. ecosystem across gaming, sim racing, and creator workflows. The response has been outstanding with strong opening day demand, and consistent healthy traffic and conversion since. Strategically, this store represents an important step in our plan to deepen consumer engagement and grow brand awareness. Now I would like to share our top priorities for 2026. First, improving the quality of growth through mix, integrated platforms, and innovation. We are prioritizing growth in higher margin gaming, sim racing, and creator categories and ecosystem platforms, supported by a steady cadence of innovative product launches. At the same time, we will continue to leverage both our scale and execution strength in the components and system segment to drive revenue and grow market share. Our foundation continued to be strengthening each quarter giving us a diverse platform to scale and capture incremental David Pasquale: opportunities. Thi La: Second, driving margin expansion through operational discipline and creator marketplace. We are focused on driving margin expansion through smart inventory management, to navigate a tight semiconductor landscape, combined with a nimble manufacturing strategy to improve cash flow. We also plan to scale the Elgato marketplace with the goal of growing recurring revenue for both Corsair Gaming, Inc. and our community of makers while tapping into new sources of revenue as we expand into new industry verticals. David Pasquale: Third, Thi La: scaling our direct-to-consumer business to deepen engagement. In 2025, we made strong progress expanding our direct-to-consumer business to nearly 20% of our revenue, with double-digit growth in web traffic, and impactful social engagement, alongside the launch of the immersive retail store. These efforts are strengthening consumer relationships, improving conversion rates, and generating insight that support product development, and go-to-market execution. With that, I will turn it over to Michael to walk through the financials. David Pasquale: Thank you, Thi, and good afternoon, everyone. Michael G. Potter: Before I get into the numbers, I want to briefly say how excited I am to be here. What attracted me to Corsair Gaming, Inc. is the combination of strong global brand, a highly engaged customer base, and a clear opportunity to work with Thi and the leadership team to evolve the business into a high quality, more predictable, and increasingly platform driven company. Since joining, everything I have seen has reinforced my belief in the opportunities that lie ahead of us. I look forward to working closely with our investors and analysts to provide consistent insight into our business. David Pasquale: Our brands, Michael G. Potter: and our long-term growth opportunities. Transparency and regular communication will be an important focus for Thi and me going forward, as we build on the company's history of innovation and product excellence. Now turning to our results. We ended 2025 in a strong financial position. For the full year, revenue increased 12% to approximately $1,470,000,000. Gross profit increased 30% to approximately $426,000,000. Adjusted EBITDA increased more than 80% to approximately $101,000,000, and exceeded the high end of our guidance. These results reflect the strength of our core business, M&A success, and growth in our direct-to-consumer business, which we plan to build on in 2026. In the fourth quarter, revenue increased 6% year over year to approximately $437,000,000. Gross profit increased more than 30% year over year, adjusted EBITDA increased more than 60% year over year. These results reflect strong execution across our supply chain and continued operating discipline. From a segment perspective, gaming components and systems delivered strong double-digit growth in both the fourth quarter and the full year, driven by strength in memory and core components. Gamer and creator peripherals delivered single-digit full year growth, led by continued momentum in sim racing and creator products including Fanatec and Elgato, while lower demand in the North American market was largely responsible for the low single-digit revenue decline in the fourth quarter. Turning to the balance sheet. During the fourth quarter, we increased our cash balance by just under $33,000,000 while strategically investing in inventory, which we believe positions us for profit momentum in 2026. Financially, we will continue to focus on three priorities. First, margin expansion and profitability through product mix, platform-led offerings, and disciplined operating expense management. Second, working capital discipline, which allowed us to make strategic inventory investments in 2025 which we believe will position us well for early 2026, and which we believe will also enable us to capitalize on other opportunities in the future. David Pasquale: Third, Michael G. Potter: disciplined capital allocation. During 2025, we reduced our debt by over $50,000,000 and continue to strengthen our financial flexibility. Today, we also announced Corsair Gaming, Inc.'s first share repurchase authorization of up to $50,000,000. The repurchase program is effective immediately, does not have an expiration date, and is subject to market conditions, applicable laws, and regulatory guidelines. This reflects our view that Corsair Gaming, Inc. shares represent an attractive use of capital alongside continued investment in both organic and acquisition-led growth. David Pasquale: Now turning to our guidance. Michael G. Potter: For full year 2026, we expect net revenue to be in the range of $1,330,000,000 to $1,470,000,000, adjusted EBITDA to be in the range of $100,000,000 to $115,000,000, non-GAAP EPS to be in the range of $0.58 to $0.74 per share. For the 2026, Thi La: we expect Michael G. Potter: net revenues to be in the range of $335,000,000 to $365,000,000, adjusted EBITDA to be in the range of $25,000,000 to $30,000,000, and non-GAAP EPS to be in the range of $0.18 to $0.22 per share. For the assumed midpoint of the ranges that are giving as guidance, for both the first quarter and the full year 2026 this reflects about a 5% decrease in revenue year over year, with expected double-digit growth in our gamer and creative peripheral segment offset by a more cautious outlook for our gaming components and systems segment, driven by the current global semiconductor shortage. Adjusted EBITDA is expected to grow year over year as we focus on margin expansion and operating expense management. To close, I would emphasize that Corsair Gaming, Inc. has proven that its model can generate attractive margins and operating leverage. The opportunity ahead of us is to scale that model more consistently through platforms, recurring revenue, stronger execution, and clearer communication with the investment community. Operator, that concludes our formal remarks. You can now open up the call for Q&A. Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Operator: Thank you. Thi La: Our first question comes from the line of Aaron Lee with Macquarie. Please proceed. Aaron Lee: Hey, guys. Thanks for taking the question and congrats on the strong quarter. Thi La: Thank you, Aaron. Thank I wanted to start with Unknown Analyst: yes, starting with guidance. I appreciate you guys giving the full year guidance range. That is helpful. Last quarter, you talked about embedding some conservatism in guidance. Is that something you have done with the guidance ranges provided today as well? And how much visibility or confidence do you have in the full year 2026 guidance range just given everything that is going on in the market currently? Thank you. Michael G. Potter: Yes. That is a great question. With respect to the guidance, I would say we as we just described, we are looking at double-digit growth in the peripheral segment. We are taking certainly what we consider to be a conservative outlook for the component segment just in light of the semiconductor shortages. I think if you look at the guidance ranges, I think at difference between the high end and the low end is really how that plays out. So Unknown Analyst: yeah. Michael G. Potter: Hopefully, that answers your question. But, yeah, we are applying a forecast methodology and approach to guidance that I adopted at previous companies that was pretty successful. So yeah, Unknown Analyst: Okay. Perfect. That is helpful. Appreciate that. And then you obviously had really strong components margins during the quarter. Is that mainly reflecting the higher margin you are getting on memory products? Or were there any other drivers to call out there? How sustainable do you think those margin levels are going forward? Thi La: I wanted to Operator: yeah. Thi La: Answer this question. So I am just trying to coordinate with Michael a little bit. Thank you. So actually, throughout the year, our components margin as a segment continued to improve year on year. And we do see benefits from a number of fronts. So we see especially with the growth of sim racing, that is really helped contributing positively to the for the quarter. Memory, of course, was the major contributors to the margin lift in in the quarter. Because the price has gone up substantially starting from October to December. And every time you see an acceleration like that, we tend to see favorable inventory margin. But on the other hand, you know, we also do see great traction on the rest of the product lines in terms of NPIs, in terms of mix shift, between components and gaming peripherals Operator: segment. Unknown Analyst: Okay. Got it. Thank you very much. Congrats on the quarter again. Thi La: Thank you. Thank you. Thank you. Our next question comes from the line of Anthony Stoss with Craig-Hallum Group. Please proceed. David Pasquale: Hi Thi. Hi Michael. Just following up on that Unknown Analyst: last question. Maybe can you give us the memory revenue in the quarter? And then I have a couple of follow ups. Michael G. Potter: Yeah. Sure. Happy to. Memory revenue grew 24% year over year to a $156,000,000. And the gross margin was 35% Got it. Unknown Analyst: We have had this conversation, I think, over the last couple months, and clearly, having an inventory memory I have the big steep increase in prices helped you folks. Douglas Creutz: How much inventory do you have left of, let us say, cheaper than current market rate memory? And do you have enough maybe to carry you deep into 2026? Thi La: I think this situation for us right now, the way that we view our business from memory, as we are pretty much, you know, running the memory business for the past thirty years now. We believe we have a stronger position than most others in the consumer space to maneuver through challenges or tough market like what we see today. And our goal is really to continue to acquire inventory to support the demands from our enthusiasts. As we are probably one of the bigger brands now, since the exit of a couple of other brands from consumer memory. And the number is reflected in our forecast, for 2026. So, you know, that is probably does not, you know, include any potential upside that we might be able to work through. For the rest of the year. So you should just look at our 2026 forecast as reflective of where we think we are. Douglas Creutz: Got it. Thanks, Thi. And then last question for Michael. Maybe you can, help fill out some of the for your full year guide. Do you expect total OpEx to be maybe for 2026 like, a range? Same thing. What is the expected gross margin for the full year to kind of get to the midpoint of your EBITDA guide? Michael G. Potter: Yes, sure. On the gross margin side of the quest, I think we are probably looking at relatively flat gross margin within the actual segments. We are going to see some mixed benefit, obviously, because we guided double-digit growth in peripherals, which is obviously the higher margin segment. So we will see some nice benefit to gross margin there. More than offsetting the tariff headwind the full year tariff headwind, which is about another $12,000,000 year over year. So I would see a little bit of upside in gross margin, and then on the OpEx side of things, we are probably looking around 3% to 4% reduction in OpEx year over year. We are getting some pretty good operating leverage with that incremental gross profit year over year. Yeah. And I want to add to that that Thi La: within 2025, as we shared before, one of the key initiatives for us is really to control OpEx and really optimize all of the M&A that we went through in the past few years. And I think we have done a good job in terms of reducing OpEx and really driving revenue with what we already have within our investment. Douglas Creutz: Thank you for that, Thi. Thank you. Operator: Thank you. Thi La: Our next question comes from the line of Andrew Crum with B. Riley. Please proceed. David Pasquale: Okay. Thanks. Hi, good afternoon. And Michael, welcome. You discussed accelerating investment, support your peripherals business in Elgato. Is this all organic? Does it contemplate M&A? And with Rian Bisson: presumably a positive mix shift, is there a longer term or notional gross margin you think this business capable of achieving given this approach? Thi La: I can take this question. So, definitely, the growth for gaming peripherals and creator segment came from organic investment, and that came from just expanding the product categories for sim racing, for example, and growing recurrent revenue through the Elgato marketplace. And the second thing is, we will continue to evaluate opportunity for M&A if it makes sense, and then growing our D2C business and our D2C business is is beneficial from a number of points. First is consumer engagement and getting valuable data to help build better products. The second thing is it is just, you know, generating more margin in general because know, we control the channel. Got it. Rian Bisson: Thanks, Thi. And then maybe just one follow-up. Thi, I think in your your preamble, you you mentioned Grand Theft Auto VI providing a benefit to the peripherals business. Understanding that the majority of your mix is sourced from PC and the fact that Take-Two is yet to announce a PC version of the game. Can you just help us understand, you know, what parts of your business should see a lift from that launch in 2026? Thanks. Yes. Thi La: There are two part of our business. One is the controllers business through the Scuf brand. And that is basically all console related space. We have PC controllers, but, you know, the bulk of the business is console. The other part of the business is video capture through Elgato. For example, with the recent Switch 2 launch in the 2025, we did see a very nice lift for our capture card business because people are streaming more new content. That is an opportunity for us to leverage that engine and drive more 4K capture cards. Operator: Got it. Okay. Thanks, guys. Thanks. Thi La: Thank you. As a reminder, please press 1 to ask a question. Our next question comes from the line of Doug Creutz with TD Cowen. Please proceed. Douglas Creutz: Thank you. Just in terms of the semiconductor situation that is creating pressures across the industry. What kind of forward visibility do you have into that? Is it something where, you know, you see it getting better or worse in real time and that is the amount of visibility you have? Or, you know, presumably, at some point in the future, things start to loosen up, are you going to know a few months ahead of time when that is going to happen? Thanks. Thi La: Thank you for the questions. For us, the visibility in terms of the the bigger pictures, we are getting this very similar information to everyone else in terms of fab capacity and AI data center consumption. And current projection, I think everyone probably already see the same data is that the market will continue to be tight for the next couple year, couple years. But for us, you know, we do not just rely on output of semiconductors alone. We basically have you know, a lot of ways to acquire inventories and produce inventory as we do have a manufacturing center in Taiwan that built Operator: DRAM modules Thi La: and the visibility that we use is basically just you know, market intel out a couple quarters, and we have continued to operate based on the information that we use for the past past thirty years, and that seems to be working so far. Unknown Analyst: Thank you. That is helpful. Operator: Thank you. Thi La: Our next question comes from the line of Matthew McCartney with Wedbush Securities. Please proceed. Douglas Creutz: Hi. This is, Matt on for Alicia Reese. Unknown Analyst: Just want to clarify a couple of things on guidance, specifically on the memory side. Operator: Just Douglas Creutz: am I understanding correctly that you are not embedding a margin lift on the memory side for the 2026 guide? Michael G. Potter: We are looking at relatively flat margins in our component segment year over year. So we have got near-term visibility into 2026. We are assuming only kind of modest gross margin lift compared to steady state in the latter part of the year. So we are forecasting what we have near-term visibility into which nets out to roughly flat gross margin year over year for the segment. That answer your question? Okay. Unknown Analyst: Yeah. Yeah. I just understood I understand that cadence. Right? It is flattish in the back half. Is that correct, or or is it something else? Michael G. Potter: Flat for the year. Unknown Analyst: Flat for the year. Okay. We have Operator: yep. Okay. Douglas Creutz: Then just as far as, like, your inventory position right now and, I guess, going into last quarter, I know you are pretty pretty strong there. It looks like shortages did increase. Can you just talk about where you stand today terms of your memory inventory? Thi La: We are you know, I think we did a Q1 and also full year signal. And we are comfortable with where we are right now with the projection we provided. David Pasquale: Okay. Great. And then just last question. Just Unknown Analyst: on Elgato and and recurring revenue stream that you want to build there. Can you give us a baseline of where that business today in terms of recurring revenue, what sort of percentages? And Douglas Creutz: if possible, targets with where you are looking to get Thi La: Yes. In terms of recurrent revenue, model that we are working on, a lot of the visitors that we have on the Elgato marketplace, downloading content and using contents. We have, you know, over two millions users active actively posting content and downloading content. Now the the task force in the next you know, six months is really to construct with Michael's health a, basically, a recurrent revenue model to to basically drive that, and we will not be able to get into further details, I would say, until probably in a couple quarters from now. The current, revenue is meaningful to the point where it is what the effort for us to actually kick this off as as a a longer strategy. We do solution that is already selling into the B2B channel today as well. And a lot of interest in terms of using our Stream Deck solution. So that is, exciting for us. Operator: Great. Thank you, everyone. I will pass it off. Thi La: Thank you. Thank you. Thank you. As a reminder, it is star 1 to ask a question. There are no further questions at this time. I would like to pass the call back over to Thi for any closing remarks. Operator: Thank you, everyone, for joining us on the call Thi La: today and for your continued support. If you have any follow-up questions, please contact our Investor Relations department. We look forward to updating you next quarter. Thank you, and have a good evening. Operator: This concludes today's teleconference. Thi La: You may disconnect your lines at this time. Thank you for your participation.
Operator: Greetings. Welcome to the Electrovaya Inc. Q1 2026 financial results conference call. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press. Please note this conference is being recorded. I will now turn the conference over to your host, John Gibson, CFO. You may begin. John Gibson: Thank you. Good afternoon, everyone and thank you for joining today's call to discuss Electrovaya Inc.'s Q1 2026 financial results. Today's call is being hosted by Dr. Rajshekar DasGupta, CEO of Electrovaya Inc., and myself, John Gibson, CFO. Today, Electrovaya Inc. issued a press release concerning its business highlights, financial results for the quarter ended December 31, 2025. If you would like a copy of the release, you can access it on our website. If you want to view our financial statements and Management Discussion and Analysis, you can access those documents on the SEDAR+ website at www.sedarplus.ca, the SEC's EDGAR website at sec.gov/edgar, or at our updated website at www.electrovaya.com. As with previous calls, comments today are subject to the normal provisions relating to forward-looking information. We will provide information relating to our current views regarding market trends, including their size and potential for growth, and our competitive position within our target markets. Although we believe that the expectations reflected in such forward-looking statements are reasonable, they always involve risks and uncertainties, and actual results may differ materially from those expressed or implied in such statements. Additional information about factors that could cause actual results to differ materially from expectations, and about material factors or assumptions applied in making forward-looking statements, may be found in the company's press release announcing the Q1 fiscal 2026 results and the most recent Annual Information Form and Management Discussion and Analysis under Risks and Uncertainties, as well as in other public disclosure documents filed with Canadian and U.S. securities regulatory authorities. Also, please note that all the numbers discussed on this call are in U.S. dollars unless otherwise noted. And now I would like to turn the call over to Raj. Thank you, John, and good evening, everyone. It is a pleasure to speak with you today as we review our first quarter fiscal 2026 results. Q1 provided a strong start to the year. Historically, this has been our weakest quarter due to seasonality in our core material handling vertical. Despite that, we continue to demonstrate meaningful momentum. Revenue increased nearly 40% year over year, Operator: Margins improved materially John Gibson: and we maintained profitability Operator: delivering approximately $2,000,000 in EBITDA Dr. Rajshekar DasGupta: and over and about $1,000,000 in net income. I will begin by highlighting key operational developments during the quarter and year to date followed by updates on our product and manufacturing initiatives. During the quarter, we further strengthened our balance sheet through a combination of solid operational performance, support from our financial partners, and the equity raise completed in November 2025. We ended Q1 with the financial foundation to execute the next phase of our strategy, including expansion of manufacturing capacity in Jamestown, New York, expansion into new verticals, and continued development of next-generation products and technologies. Within our core material handling vertical, we continue to make strong progress. Our new OEM integrated high-voltage battery systems developed over the past two years are now scheduled to begin commercial deliveries in March 2026. We also made deliveries during the quarter to an existing global defense contractor for our new vehicle platform, expanding our relationship to two distinct applications with that OEM. We expect defense to become a meaningful contributor to revenue this fiscal year and a strategic priority for the company over the long term. In robotics, we initiated commercial deliveries of our latest modular 48-volt battery system to a robotic OEM partner this January. We view robotics as a high-growth vertical aligned with our technological sense, and we expect deployments to accelerate. Testing of our initial airport ground support equipment battery systems continues across multiple locations and climate conditions at a leading U.S. airline. While this process has taken a bit longer than initially anticipated, we remain optimistic and believe this product line represents a meaningful long-term opportunity. We also established a Japanese subsidiary during the quarter to support growing demand across Japan and the broader Asia Pacific region. We are seeing encouraging interest across multiple verticals and believe this presence will support long-term growth in the region. Turning to some product development activities. Demand trends in automation, robotics, advanced mobility, and energy storage for data center infrastructure are increasingly aligned with Electrovaya Inc.'s core strengths which include safety, cycle life, and high power capability. We are making strong progress on several key initiatives including the rapid charging version of our Infinity technology, and new energy storage systems focused on high power, especially 800-volt DC architectures. Our ultrafast charging power cell development is advancing well. This product integrates a next-generation anode technology with our Infinity platform, including our ceramic separator technology, to deliver enhanced safety and long cycle life while targeting five-minute charge and discharge capability. We have seen significant application potential ranging from high-intensity robotic systems to data center infrastructure support, and we are targeting commercialization in 2027. In parallel, we are developing energy storage systems designed for emerging 800-volt DC data center architectures. These systems are intended to provide short-duration ride-through capability and manage rapid power fluctuations associated with workload shifts and generator transfers. We are currently in early-stage discussions with potential partners in this area. To support these initiatives, we recently hired a head of energy storage, a new head of energy storage with extensive industry experience, to help guide our technical and commercial strategy for this key area. We are also advancing our next-generation John Gibson: ceramic Dr. Rajshekar DasGupta: separator technology, which is expected to further improve energy density and thermal stability beyond our current platform. We are already seeing strong results and are moving forward with plans to domestically scale up this strategically important technology. Closer to market, we plan to launch new products for class three material handling vehicles as well as next-generation software and analytics solutions at MODEX 2026 this coming April. Finally, regarding our Jamestown expansion, we have commenced both interior and exterior facility upgrades. Initial dry room equipment required for cell manufacturing has been delivered, and we have begun hiring key personnel to support equipment installation and automation activities. This expansion remains a critical component to our strategy to increase capacity and support domestic production. With that, I will now turn the call back to John for a detailed review of our financial results. John Gibson: Thanks, Raj. Electrovaya Inc. continued its steady growth into 2026. As Raj mentioned at the top of the call, the company has historically had lower revenues in this quarter due to customer seasonality. However, Q1 showed significant growth year over year. We entered Q2 fiscal 2026 with a strong balance sheet and capital to continue our engineering focus on new market verticals and support organic growth. Revenue for the quarter was $15,500,000 compared to $11,100,000 in the prior year, year-over-year growth of 39%. Our gross margins for the quarter were 32.9%, an increase of 240 basis points over the prior year gross margin of 30.5%. As is the case with previous quarters, gross margins are primarily driven by product mix. However, managing suppliers, prices, and tariffs continues to be at the forefront of our activities as we scale. Management believes the company is well positioned to maintain strong margins as we continue through 2026. Operating profit increased significantly year over year. Operating profit for Q1 was $1,400,000 compared to an operating loss of $200,000 in the prior year, and the company generated a net profit of $1,000,000 in the quarter, a significant increase from the net loss of $400,000 in the prior year. Q1 now represents the fourth consecutive quarter of net profit and positive earnings per share, and we believe we can continue this trend of profitability into fiscal 2026 and beyond. Our adjusted EBITDA was $2,000,000 for the quarter compared to $500,000 in the prior year, an increase of $1,500,000 or 300%. EBITDA grew in the current year due to improved margins and managing operating costs. Adjusted EBITDA as a percentage of revenue was 13% for the quarter. The company generated positive cash flow from operations of $1,700,000 after accounting for net changes of working capital, compared to cash used in operating activities of $300,000 in the prior year. The company ended the first quarter with positive net working capital of $51,900,000 compared to $12,600,000 in the prior year. Our current ratio is 6.0 compared to 1.6, a clear indicator of improved financial performance, and management is committed to continuing this positive trend. At December 31, our total debt was $27,300,000 compared to $15,300,000 in the prior year. This debt includes both working capital debt and debt from the Ex-Im facility. The working capital debt was $10,900,000 at the end of the quarter, a decrease of $4,400,000 over the prior year. This improved debt balance was driven primarily from cash flows from operations. At the end of the quarter, we had drawn $16,400,000 from the Ex-Im loan. We are still in a period of no cash payments with Ex-Im, with interest payments starting on 03/30/2026 and principal payments starting 03/31/2027. During the quarter, the company raised gross proceeds of $28,000,000 from an equity issuance. The company has utilized some of this cash for engineering and R&D efforts. At the end of the quarter, the company had cash on hand of $22,700,000 and availability within its banking facility of $9,000,000. We believe we have adequate liquidity to support our expansion into these new verticals and our anticipated growth as we continue through fiscal 2026. Dr. Rajshekar DasGupta: The company made a solid start to fiscal 2026, maintaining disciplined progress across operations. John Gibson: Which we see continuing into Q2. We would expect to build on this momentum as we continue through the remainder of the fiscal year and are reaffirming our revenue guidance of 30% growth for fiscal 2026. Finally, I wanted to elaborate on one of the items detailed in the AGM material relating to the redomiciling of the company. Dr. Rajshekar DasGupta: After our equity financing in November, John Gibson: and based on trading activity being substantially higher on the Nasdaq than the TSX, the company expects to lose its foreign private issuer status and be treated as a U.S. domestic filer under SEC rules. This change will subject the company to the full domestic reporting and governance regime, but absent a change in corporate domicile, the structural and legal advantages typically available to U.S.-incorporated issuers. In addition, the U.S. domestic issuer company will become eligible for inclusion in certain U.S. equity indices. Taken together, these changes position us to broaden our investor base, improve trading liquidity, and ultimately enhance long-term value for our shareholders. That concludes our financial overview. Raj and I would now be pleased to hold the question and answer session. Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Once again, please press 1 if you have a question or a comment. Our first question comes from Colin Rusch with Oppenheimer. Please proceed. John Gibson: Thanks so much, guys. You know, could you give us a bit of an update in terms of the scope and scale of the customers that are moving into your sales funnel? And then how quickly they are moving through and how quickly they are getting qualified on the product. We are just curious about the velocity of some of that sales activity. Dr. Rajshekar DasGupta: Well, thanks, Colin. How are you afraid to just in general or specific John Gibson: verticals? Dr. Rajshekar DasGupta: Yeah. Specific to material handling, just related to numbers. Yeah. Material handling, we are, so in terms of the end customers, there are, it is, it is dominated by a number of large Fortune 100 and Fortune 500 companies. The largest two buyers have given us very good of their demand over the next for the for the full fiscal year, which is partly how we determined our guidance for the, and they are large retailers. Generally, of course, like to take delivery in in John Gibson: in the quarters outside of this reported quarter. Dr. Rajshekar DasGupta: So there, we have very good visibility. At the same time, we have a pipeline of new customers in various stages. Sometimes they are just testing solutions. More often, they have already done that, and they are ordering small batches of systems to get to pilot and then John Gibson: full full distribution scale. So there are various stages there, and that is a pretty Dr. Rajshekar DasGupta: good place to be in in that segment. So we are seeing good from there. We have, we are also now starting to add some additional sales resources to broaden that pool. But in the other verticals, I will talk about robotics there a bit. So we already have a number of partners we have. And we are already now shipping growing numbers of batteries to a couple of these OEMs. Instance, if you visit our plant today, you will see quite a large number of smaller 48 battery systems under various stages of assembly, and that is for robotic applications. But in addition to that, we are, we are in discussions with approximately three or four additional OEMs in that space. Of course, you know, when you are working on OEM projects, it takes, there is a time quotient, which is a little longer than a standardized product, which is the material handling product. The long answer to your question. No. That that that is super helpful. And then I am just curious about preparation John Gibson: for a pilot on the stationary storage project. Or product. How those are proceeding, if you had any incremental interest since announcing the new product with a little bit different, you know, characteristics and performance specs. It seems like it is, it is really well tuned to what we are seeing on the data center side in terms of what the real needs are. So just curious about the timing on those pilots and growth in potential customers there. Dr. Rajshekar DasGupta: Great question. So essentially, we are coming out with two products for the energy storage space. One is more of a standardized product, which is based on the existing cell that we currently manufacture. And it is a design for high power applications still, 30 minutes to one hour energy storage. And for that product, we have pilots scheduled. One is a government-backed U.S. government-backed project, which we will hopefully announce soon. And then we are planning some internal pilots as well before we put them at customer sites. The second product, which I mentioned in our prepared remarks, is that 800-volt DC system. And that is something that we have been in discussions with, with let us say, some electricity generation companies. So if you look at these data centers, they are often putting diesel gensets and turbines on-site for power generation, but those devices Operator: need Dr. Rajshekar DasGupta: when you are looking at the 800-volt architecture, they need an energy storage component to deal with the seconds, the minutes, of demand response there. And so that is the system we are, we are very excited about that is under development right now. And that system will utilize this ultra high power cell that we are developing. John Gibson: Great. Thanks, guys. I will hop back in queue. Operator: Next question comes from Daniel Magder with Raymond James. Please proceed. John Gibson: Afternoon. Thanks for taking my questions here. Just curious as it relates to these new verticals, Daniel Magder: given the announced deliveries in the defense sector, do you still expect robotics will be the second largest revenue driver in the near term or defense potentially leapfrog it? Dr. Rajshekar DasGupta: We are expecting robotics this year to be larger than defense, but they will be, they will both be present in a material way. John Gibson: Okay. Got it. Daniel Magder: But the robot is delivering that just just started in the current Dr. Rajshekar DasGupta: quarter, so there is zero deliveries in John Gibson: in fiscal Q1. Daniel Magder: And I guess just a follow-up here recognizing you have the Ex-Im loan and the New York State grant John Gibson: incentives. Daniel Magder: Given, obviously, the growth in defense and the current administration's focus on it, are there other potential government programs you think you could potentially be able to tap into? Dr. Rajshekar DasGupta: We, we think so. This is, that we are starting to look at. Currently, we are, our number one focus is, of course, getting the John Gibson: partners, the right partners here. Dr. Rajshekar DasGupta: So we already have two very good, well-established defense contractor customers. We are in discussions with another two. One of them is to finance test our products. So I think that is the route we are going at. It eventually is perhaps look at some of those opportunities you just mentioned. Daniel Magder: Got it. And, I guess, lastly for me, given all the positive progress in other areas, is energy as a service still a key initiative for you? And just wondering if you could provide any color on how it is progressing. Dr. Rajshekar DasGupta: It still is a key initiative. It is, we are, we have, what we have seen is some of the customers we thought were going down that route decided to make purchase orders instead, which is great, of course. However, we are looking at a couple partnership opportunities to support energy as a service. One route is partnering with a group who has a John Gibson: a Dr. Rajshekar DasGupta: large company who has a long history supporting similar type of activities. That is something we are considering pursuing. Got it. Alright. Well, Daniel Magder: that is it for me for now, and I will jump back in the queue. John Gibson: Thanks. Operator: The next question comes from Eric Stine with Craig-Hallum. Please proceed. This Eric Stine: jumping around between calls. I apologize if I am touching on things you already have. But maybe Operator: just Eric Stine: material handling, I know that is the lion's share or the majority of your outlook here in fiscal 2026. But when you think about that growth and when you think about the opportunity going forward, how do you think of that between existing versus adding new customers? And, you know, maybe penetration level with those existing customers that you have currently got? Dr. Rajshekar DasGupta: So today, Eric, we are already supplying at various stages of penetration level the world's largest companies. So you could not have a better pool of end customers than we have. They all are relatively early in adoption rates. Right? So if you look at the addressable market within our existing customers, it is massive. Right? So the need to bring in new end customers is actually not, you know, it is important, but it is, the larger opportunity is selling more to the folks who are already buying the product. In terms of penetration rates, I would say we are still early days. The largest operator of our system has a very large number of distribution centers John Gibson: globally. So Dr. Rajshekar DasGupta: I would say we are, we are early innings with the existing customer base. Eric Stine: Got it. And maybe following up on that, you know, I know that your thought process has been that your solution is really applicable to, you know, all sizes of facilities for those existing customers, and has it, has that come to fruition? You know, are you thinking any differently about the opportunity? And I guess that speaks to the size of the overall opportunity. Dr. Rajshekar DasGupta: Yeah. The number of solution battery systems we deploy at a typical distribution center can vary widely. There does not seem to be limit to how large a site we can support. John Gibson: I mean, there is, so I would say that is not really a Dr. Rajshekar DasGupta: a factor. Yeah. And we would, we would say, Eric, with John Gibson: over 300 batteries deployed. In vehicles. Yep. I was actually getting at it the other way, Eric Stine: there are some solutions out there that are, you know, it is tougher to go to the medium and smaller sizes, which is obviously a big part of the market. Whereas that is an area where, you know, I would think that you do quite well in? Dr. Rajshekar DasGupta: For sure. So, you know, there are plenty of sites operating our solution with probably under 10 systems. So Eric Stine: there seems to be a broad range that we can service. John Gibson: Okay. Eric Stine: See. Maybe last one for me. Just on the side. So just so I am clear. So what you are, what you called out is just, you know, expansion with one of, I think you currently have two defense contractors that you have been working with. So I guess, first, just confirming that, and then secondly, when you talk about the two plus two additional you are talking with, I mean, are these, I know it is hard. You cannot disclose a whole lot, but are these similar applications with those contractors? Or is it using your solution in a wide range of things? Dr. Rajshekar DasGupta: It appears that, you know, we only know so much, but it appears these are different applications. So with the defense contractor we discussed in our prepared remarks, they had initially, and they continue to use our solution for an autonomous land-based application. And the second application, which we just made initial deliveries for, is for a hybridized Eric Stine: vehicle system. Dr. Rajshekar DasGupta: The second defense contractor is submersible. John Gibson: Application. Dr. Rajshekar DasGupta: But in general, you know, we see defense as a good vertical for this technology given the safety and high power of our technology. Yep. Absolutely. John Gibson: Thank you. Operator: The next question comes from Craig Irwin with ROTH Capital Partners. Please proceed, Craig. Dr. Rajshekar DasGupta: So, Raj, I have a bunch of small questions around Jamestown that would be really, you know, important to understand as we shape the future. So the first one is the CapEx outlook for this year. Can you maybe shape that as far as the quarterly tempo and what your expectations are in this fiscal year? And then, associated with that, you know, where do you stand on the hiring and training of the workforce that would be necessary sort of in tandem with the installation and commissioning of that equipment? Yes, Craig. I will let John answer the first part, and I will jump on the second. Daniel Magder: Part. Yeah. Hi, Craig. So John Gibson: essentially, where we were at the end of the quarter was we had drawn $16,000,000, over $16,000,000, of the full $50,000,000 Ex-Im loans. So we expect Eric Stine: to John Gibson: spend that money before the end of the fiscal year, or at least, Dr. Rajshekar DasGupta: you know, 90% of it John Gibson: kind of before the end of the fiscal year. So from a CapEx perspective, you are going to see an increase strongly within Q2 and Q3. The majority of it will be within Q3 and Q4, though. So, yeah, fully spending or at least spending 90% of that loan and including that CapEx within the fiscal year. Dr. Rajshekar DasGupta: Yeah. And on the second question, Craig, we are hiring people right now. So about six months ago, we hired a senior individual from LG Chem who was closely involved with one of their large-scale giga plants. And more recently, we have been hiring other employees, some will be located at the site, who have or have experience with other battery manufacturing sites in the United States. John Gibson: Some of which may have been closed down. Dr. Rajshekar DasGupta: We also hire great talent. Hope that, you know, there is a long list of folks we are in process of giving offers to. And it seems to be an opportune time to bring in these types of individuals. If we were building this plant a year ago, it would have been much harder to find this level of talent that we are seeing in the market today. Understood. That is, that is, that is a good thing. So, next question is, can you maybe give us some color on the revenue contribution out of the Jamestown facility this year. I know your manufacturing is supposed to start at the end of the year. If you could just confirm the timeline for that. But do you expect any cell revenue in 2026 from the Jamestown facility? And, you know, roughly what percentage of revenue would you expect this facility to contribute? Yeah. Craig, all along, we were anticipating Jamestown, especially at the cell level, contribution starting from fiscal 2027. So fiscal 2026 for us ends September 30, and there will be no cell contribution to revenue. Battery systems, on the other hand, that is different. You will likely see some revenue generation out of that plant in our fiscal fourth quarter, both probably on a module and system side of things. Sorry. I meant calendar year. So I am assuming that all of the cell manufacturing equipment will be in place in your fiscal year before September with commissioning work underway. But do you expect cell production in that facility in the first quarter of your fiscal 27, the last three months of this calendar year? Potentially. Correct. Potentially, yes. Of course, it is going to, it does not start out. We will, we will make sure the output of the plant is matching what we need, of course. Right? There is a bit of a start-up period associated with that. But we could most definitely see some contribution in that quarter. Understood. Then last question, if I may. Can you update us on 45X, what you think the benefit will be on equipment purchases, whether or not you are seeing tariffed equipment impacted, and what do you think the potential contribution is once you are manufacturing your own cells in Jamestown in fiscal 27. So there will be, there is two parts of 45X that we, $10 per kilowatt-hour associated with module production, and then there is $35 a kilowatt-hour associated with cell production. And under the new rules, under the Inflation Reduction Act, you can only get one or the other. So what we anticipate is we will start off with the $10 a kilowatt-hour as we manufacture modules, and when the cell production hits a certain speed, we will transfer to the $35 a kilowatt-hour. John Gibson: And for the cells. And sacrifice the modules. Dr. Rajshekar DasGupta: Excellent. Thank you for that. Congrats again on the progress. Thanks, Craig. That is great. Operator: Up next is Amit Dayal with H.C. Wainwright. Please proceed. Thank you. Good afternoon, everyone. Most of my questions have been asked, Amit Dayal: But just with respect to the outlook for the year, you know, the backlog still is at $100 to $125 million. So the, you know, the top line guidance seems a little conservative. You know, can you maybe provide any color on what could drive upside to the 30% growth you are targeting this year? John Gibson: Yeah. So the growth is based on not just the backlog, but the front log as well. So that number you quoted as backlog, plus front log. So essentially, we are taking purchase orders we have received, purchase orders that we know are coming in, confirmation from customers of demand, and then our, you know, our estimates of run rate. And then what we do is we take that number and discount it back based on historic experience with customer delays or purchase order changes, etcetera. So, yeah. And, Amit, Dr. Rajshekar DasGupta: you know, 30% growth is not a bad number. I think there, as you can see in our Q1, right, and some people forget this, there is some seasonality on our core material handling vertical. Sometimes distribution centers open a little later than they plan to if they are new sites. So there is some of that activity you have to take into account. But, of course, there is some upside. You know, we have not taken into account meaningful revenue from the airport ground equipment space, which could most certainly come into the current fiscal year. But overall, we are very focused on maintaining growth, maintaining the profitability, and these new product developments and new technology developments, in addition to the Jamestown setup. Amit Dayal: Understood. Thank you. And then on the solid state side, any, you know, important milestones you are targeting to hit this year? Do these include maybe any pilots that could begin with customers? Dr. Rajshekar DasGupta: Yeah. Good question. I did not discuss the solid state battery much in the prepared remarks, but we had reached a certain level of developments, I think, back in the summer, which was looking good. But we were somewhat hamstrung by equipment in terms of to get it to a pilot scale. We ordered the equipment several months back. It has arrived at our lab site already. It is being installed. So we will start scaling up cells using our solid state battery technology really from April onwards. And at that point, if things look good, we will start looking to sample them as well. So there is definitely activity there. We have added a couple key researchers to our team. Most definitely, we have not forgotten about that technology. On the IP side as well, we are close to being awarded some patents around our solid state technology, but, you know, we are in the back and forth with the examiners at the moment. Amit Dayal: Okay. Thank you, guys. That is all I have. Operator: Next question comes from Jeffrey Campbell with Seaport Research Partners. Please proceed. John Gibson: Good afternoon, gentlemen. Dr. Rajshekar DasGupta: Raj, my first question is, I assume the OEM integrated high-voltage batteries refers John Gibson: to Toyota heavy duty MHE, but you can correct me if I am wrong. But if so, Dr. Rajshekar DasGupta: can you give us some color on how many models are integrated at present and what it might look like the next couple of years? Yeah. You are probably correct. You are correct, Jeff. The model I referred to is the high-voltage system, which is going into, there are a couple models of batteries and is going, we believe, into two distinct vehicle systems. And so there are orders for those vehicles already. The reason production is starting in March is it coincides with certification. Okay. Great. John Gibson: My next question was regarding the solutions. You mentioned I think you are going to have a place where you are going to display your solutions targeting class three MHE. I was wondering, is this going primarily Dr. Rajshekar DasGupta: to robotics applications, or will you also support more traditional class three equipment? Because I believe in the past, you have tended to identify class three as generally unable to support your margins. It is the latter, so it is already expanding in the material handling vertical with a class three product, which we normally had shied away from. We believe we can maintain those margins. The reason we are developing that product is it has been customer driven. And, but we will be able to maintain the margins with that product. It takes advantage of some aspects of the robotic battery systems that we have developed. So there is some overlap in the design of the system. John Gibson: Okay. Yeah. That is very interesting. Dr. Rajshekar DasGupta: And I guess my last question Eric Stine: for today is John Gibson: kind of a more open ended one. Regarding the generate the Dr. Rajshekar DasGupta: next generation ceramic separator John Gibson: development undergoing. I was just wondering what are the specific areas Dr. Rajshekar DasGupta: that you see demanding improvement here. I am not Operator: trying to be coy, but the existing tech is class leading. So I am interested in your insight here. Dr. Rajshekar DasGupta: Yeah. So that is definitely a valid question. So the current technology is working well. Very well validated. Of course, you want to continue to improve that technology, and that is one aspect of what we are doing here. Improvements will be to make it Amit Dayal: thinner. Dr. Rajshekar DasGupta: Make it even higher thermal stability, use new novel materials, which we are working on. And also, the current separator is working very well. It is being manufactured under contract in Japan. This one will be manufactured domestically. So that is another John Gibson: I would say, benefit is just in addition Dr. Rajshekar DasGupta: but it supports some activities, like, for instance, a super high, ultra high power cell. It has a benefit there. Potentially, this new material can also be utilized in other cell formats. That would be a major breakthrough for us. But that is too early to say. John Gibson: We will stay tuned for that. That sounds provocative. Dr. Rajshekar DasGupta: Thanks very much. I appreciate it. Eric Stine: Thank you. Operator: We have a follow-up coming from Colin Rusch with Oppenheimer. Please proceed. John Gibson: Thanks so much, guys. You know, I was missing asking around the ground service equipment opportunity. Dr. Rajshekar DasGupta: And how we should think about the cadence of that moving forward, going from John Gibson: piloting into a more substantial order? Eric Stine: Kind of the order of magnitude of that opportunity set for you guys right now. John Gibson: So the what we are looking at is Dr. Rajshekar DasGupta: to go to that more substantial order. We have already received some pilot orders, which have essentially already been delivered, or some of them are mostly been delivered. But this would be to go to scale right away. And so the opportunity we are looking at with this first airline is for reasonably large-scale deployment. John Gibson: Okay. Great. I will take the rest offline. Thanks, guys. Operator: Once again, if you have a question or a comment, please press 1. The next question comes from Graham Tanaka with Tanaka Capital Management. Please proceed. Hi, guys. Thank you. I am just putting this all together. You have a lot of moving parts. And I just wonder if you could summarize for the next two years what are the main areas that can increase gross margins and operating margins versus decreasing. Graham Tanaka: And on the decreasing side, if you could address your semiconductor content and what kind of cost increases you are getting in semiconductors? Thank you. Dr. Rajshekar DasGupta: So overall, in this current quarter, margins improved, going from about 30% to about 32%. We expect to maintain that level of activity, that level of improvement in the coming quarters. Sort of what we are anticipating. So I would say relatively modest improvement in margins, but John Gibson: comes with Dr. Rajshekar DasGupta: you know, it correlates to improved financial results. The bigger change in margins will occur following Jamestown cell production coming online. That will be due to, a, you know, the vertical integration, but, b, the ability to leverage the 45X production tax credits. And the second part of your question on, I guess you mean semiconductor Eric Stine: materials. Dr. Rajshekar DasGupta: We are, you know, Electrovaya Inc., our batteries are generally more expensive already. So input material price variations have an impact, of course, but probably have a more nuanced impact than it does on our commodity-driven rivals. Graham Tanaka: So I just want to make sure that if there are any issues on supply or cost increases in semiconductors we are seeing across all the Silicon Valley companies, whether you can cover any cost increases and can secure all supply that you think you might need in semiconductors. Thank you. Dr. Rajshekar DasGupta: So in terms of material inputs, the one that has fluctuated is lithium carbonate pricing, but it has not fluctuated enough for us to have any noticeable impact on margins. We, of course, can also update pricing to our customers if we have not needed to, if those prices do go in the wrong direction enough. The only materials which probably are common with the semiconductor space is maybe alumina. But there again, it is not substantial enough in our bill of materials to have a major impact. Graham Tanaka: Right. That is great. I do not know if you have added up, but what percent of your business is going to be coming from military spending? You addressed defense, but it kind of goes into a few different areas. I am just wondering if that is going to rise as a percentage of the mix and that the margin is going to be lower in defense? Thank you. Dr. Rajshekar DasGupta: So I will start on the last part. Margins in defense would be expected to be higher. Now the defense space, at least from our experience, it moves slowly in terms of qualification. And they are very, very careful. A lot of testing goes John Gibson: a lot of testing validation goes into this. There is also a certain Amit Dayal: certifications. Dr. Rajshekar DasGupta: I do not want to get too deep into it, but there is MIL and Navy certification levels that you have to change sometimes. So it moves. It is a sticky space. Once you get designed in, you are designed in. But in terms of how quickly it scales in volume, my anticipation is it scales slowly. Operator: We have no further questions in the queue. I would like to turn the floor back to management for any closing remarks. Dr. Rajshekar DasGupta: That concludes our call. Evening, and thank you for listening. We look forward to speaking with you again after we report our second quarter 2026 results. Have a wonderful evening. Eric Stine: Goodbye. Operator: This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
Operator: Ladies and gentlemen, thank you for joining us and welcome to the JFrog Ltd. Fourth Quarter and Fiscal Year 2025 Financial Results Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. I will now hand the conference over to Jeffrey Schreiner, Head of Investor Relations. Jeffrey, please go ahead. Jeffrey Schreiner: Thank you, Nicole. Good afternoon, and thank you for joining us as we review JFrog Ltd.'s fourth quarter and fiscal year 2025 financial results. They were announced following the market close today via a press release. Leading the call today will be JFrog Ltd.'s CEO and Co-Founder, Shlomi Ben Haim, and Eduard Grabscheid, JFrog Ltd.'s CFO. During this call, we may make statements related to our business that are forward-looking under federal securities laws and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance and including our outlook for the first quarter and full year of 2026. The words anticipate, believe, continue, estimate, expect, intend, will, and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. You are cautioned not to place undue reliance on these forward-looking statements. They reflect our views only as of today and not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainty that could cause actual results to differ materially from expectations. For discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-Q for the quarter ended 09/30/2025 which is available on the Investor Relations section of our website, and the earnings press release issued earlier today. Additional information will be made available in our Form 10-K for the year ended 12/31/2025 to be filed with the SEC on 02/13/2026 and other filings and reports that we may file from time to time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures, which are used as a measure of JFrog Ltd.'s performance, should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. Please refer to the table in our earnings release for a reconciliation of those measures to the most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog Ltd. Investor Relations website for a limited time. I will now turn the call over to JFrog Ltd. CEO, Shlomi Ben Haim. Shlomi? Shlomi Ben Haim: Thank you, Jeff. Good afternoon, and thank you for joining our call. 2025 was a remarkable year for the frogs. We did not just fire on all cylinders, we set the pace. JFrog Ltd. paved the way for securing and managing the software supply chain in the era of AI, expanded our product portfolio, innovated at a faster pace than ever before, and built deep partnerships with the world's leading companies to strengthen our value to enterprise customers. We delivered quarter after quarter, exceeding our commitments and pairing solid growth and expansion with strong business and operational efficiency. This is what strategy, focused execution, and shared belief look like, and it is what makes this journey special for us. On today's call, Ed and I will walk through our fiscal year 2025 results in more detail, share our fourth quarter performance, and discuss our outlook and guidance for 2026. In fiscal year 2025, JFrog Ltd.'s total revenue was $531,800,000, up 24% year over year. Cloud revenue for 2025 was $243,300,000, representing 45% year over year growth. In Q4, greater than $1,000,000 customers grew to 74 compared to 52 in the year-ago period, equaling 42% year over year growth. Customers spending more than $100,000 annually grew to 1,168 compared to 1,018 in the year-ago period, equaling 50% year over year growth. These strong, consistent results reflect our alignment with modern enterprise market needs as software continues to transform how the world operates. JFrog Ltd.'s 2025 performance highlights a clear trend: as human developers and AI agents generate software at a massive scale, the resulting surge in binaries demands a trusted platform to manage, secure, and govern them end to end. This reinforces JFrog Ltd.'s leadership as the foundational infrastructure for software delivery in an agent-driven world. Now, I will discuss our success in Q4 in security, cloud, and AI. Security first. In 2023, we set out to support our customers by giving them a complete chain of cyber trust from code creation to production. When we launched JFrog Advanced Security and JFrog Curation, we evolved rapidly from securing artifacts within JFrog Artifactory with JFrog Xray to offering end-to-end trust and governance. JFrog Ltd. has now established itself as a complete system of record for software supply chain security that protects companies' binaries, software packages, and AI models even before software enters the organization. We strategically challenged the security point solution market by unifying security and DevOps on a single platform built on one source of truth. We believe that is the only scalable way to protect our customers' software supply chain. The pain was real, the threat was growing, and our results in 2025 reaffirm that this approach was the right one. In today's AI-driven software environment, that source of truth becomes mission critical. Organizations need a secure center of gravity and a foundational platform that stores, manages, and governs all artifacts, whether created by humans or machines. Against this backdrop, we will continue to build JFrog Ltd. as the system of record, single source of truth all developers and code agents rely on to securely manage and govern every binary and AI artifact in the software supply chain. Just as we reported strong early results for JFrog Ltd. security in 2024, our 2025 annual reporting reflects another year of significant momentum and success of our security solutions. In 2025, JFrog Ltd. security core products, excluding contributions from JFrog Xray, became an even more meaningful growth engine for the company. As of 12/31/2025, JFrog Advanced Security and JFrog Curation comprised over 10% of our total ARR. This past year, we built on strong RPO growth momentum driven by increased cloud usage, DevOps adoption, and our security core products. We are pleased to report that in 2025, security core comprised 16% of our ending RPO compared to 12% in the prior year, and nearly doubled long-term revenue commitments. This growth highlights not only the rapid adoption of JFrog Advanced Security, JFrog Curation, or both by hundreds of our customers, but also the broad opportunity ahead to provide value to the thousands of existing enterprise customers over time. JFrog Ltd. security solutions, tightly coupled with JFrog Artifactory, enable end-to-end software supply chain protection and are now offered as a bundled add-on with our enterprise subscriptions, increasing ASP, expansion in cloud usage, and triggering multiyear commitments. This approach resulted in tangible growth for JFrog Ltd. Cohort data indicates that customers adding JFrog Ltd. security drove strong account expansion with growth extending beyond security and into broad product portfolio usage. We are pleased with our financial performance and the execution of our enterprise go-to-market teams. Our security RPO and pipeline numbers show strong momentum carrying into 2026. Our success in security also reflects the deep alignment with the evolving threat landscape. Attackers are increasingly targeting the software supply chain through software packages. Our customers and community described the recent npm Shaykhulud incident as a mega attack on the software supply chain, exposing millions of JavaScript developers, echoing the impact of Log4j, PyPI, and other recent security events. JFrog Ltd. customers using JFrog Curation as their firewall remained protected. From the world's leading enterprises with tens of thousands of developers to a small development shop, JFrog Curation enforced policies, secured the software supply chain, and prevented business impact. Expanding our security offerings in 2025, we also announced the availability of AI Catalog and agentic remediation capabilities to address emerging challenges created by the introduction of AI models and agent-generated code into the software supply chain. JFrog Ltd. is the mission critical infrastructure of a company's primary software assets, their binaries. As more code is generated by human developers and AI coding agents, a tsunami of binaries is being created. More binaries, artifacts, and models lead to a greater need for trusted infrastructure that manages, secures, and governs the software supply chain at scale. We anticipate these growing needs will drive sustained customer adoption of our holistic security solutions through 2026. Second, cloud. As we noted earlier on the call, 2025 was a year of high-quality, sustained growth in our cloud business. We delivered 45% year over year growth while remaining highly disciplined in usage management and continuing to migrate customers toward annual commitments. In addition, we drove a higher volume of security deals in the cloud, strong new logo wins, and deeper marketplace partnerships. During the year, we strengthened our partnerships with all major cloud providers, improved our commercial terms, and established a stronger long-term gross margin strategy. Our cloud momentum was also supported by focused investments in service performance and availability, the continued build-out of our global SRE organization, enhanced sales incentives, and the consumption-based pricing model aligned with the market standards. Customer purchasing decisions changed in 2025, as CIOs were less focused on mega cloud migration initiatives and instead increasingly emphasized building fit-to-purpose hybrid and multi-cloud architectures as they adopted new AI solutions. Looking ahead, we see trends that we believe will continue to mature. First, clarity. While cloud remains the preferred deployment environment, CIOs are seeking greater clarity, cost predictability, and ROI as they assess the full impact of AI adoption at scale, along with the evolving security and regulatory requirements that come with it. As AI adoption matures and clarity improves, we anticipate CIOs will increase investments in cloud infrastructures. Second, AI-driven software package ecosystems such as PyPI, Hugging Face, npm, Conda, or Docker are driving consumption spikes from both developers and AI agents, in some cases going beyond customers' commitments. This has the potential to be a tailwind for JFrog Ltd., and we expect customers to align commitments once usage patterns stabilize. We will continue to provide guidance based on customers' annual commitment and proactively de-risk exposures to volatile user-driven and sizable deals. Our go-to-market strategy will remain focused on converting usage overages into annual commitments. Looking ahead, we believe that in 2026, we will continue to deliver durable growth in the cloud. Finally, I will address AI and MLOps. In 2025, we strategically built the foundation of JFrog ML as part of our platform to deliver the capabilities enterprises will increasingly require to automate speed, trust, and control across the model life cycle. At the same time, we introduced advanced functionality and integrations that extend beyond traditional B2B workflows into the emerging business-to-agent market. We released JFrog's MCP server as a core integration layer, enabling AI agents and LLMs to securely interact with the JFrog Ltd. platform. We introduced the JFrog AI Catalog for model discovery and governance, extending the platform to manage AI and ML models like other software packages. We also announced agent-based security and remediation, leveraging agentic capabilities to drive detection and automated recovery. To strengthen our position as a system of record for all AI artifacts, we partnered with NVIDIA Enterprise AI Factory to serve as its secure model and artifact registry, while also partnering with Hugging Face to secure the world's leading open-source hub for models, supporting trusted enterprise consumption of AI. Looking into 2026, our roadmap includes capabilities designed to expand our growth and to support JFrog Ltd. users' needs, whether human, machines, or hybrid engineering teams of developers and AI agents. This expanding use case represents a significant opportunity for JFrog Ltd. The market is experiencing a tsunami of binaries accelerated by AI. JFrog Ltd. was built from day one to handle exactly this asset at this scale, and we are fully committed to providing the infrastructure modern software organizations need to confidently embrace the AI-driven revolution. I will now turn the call over to our CFO, Eduard Grabscheid, for an in-depth recap of Q4 and fiscal year 2025 financial results, as well as our updated outlook for Q1 and the fiscal year of 2026. Ed, thank you. Shlomi, and good afternoon, everyone. We are very pleased by the results of the fourth quarter, exceeding the high end of the range Eduard Grabscheid: on every metric we guided for the quarter. It was a strong finish to an outstanding year, highlighting our consistent execution, operational discipline, and durable business model. During 2025, total revenues equaled $145,300,000, up 25% year over year. For fiscal year 2025, total revenues were $531,800,000, up 24% year over year. Fourth quarter cloud revenues grew to $70,200,000, up 42% year over year, and represented 48% of total revenues versus 43% in the prior year. Our growth in the cloud was driven by customers expanding annual commitments and increasing demand for JFrog Ltd. security core as ongoing npm incidents during the quarter accelerated customer adoption. For the full year 2025, cloud revenues equaled $243,300,000, up 45% year over year. Full year cloud revenues equaled 46% of total revenues, versus 39% in the prior year. During the fourth quarter, our self-managed, or on-prem, revenues were $75,100,000, with full year 2025 equaling $288,500,000, up 11% year over year. Aligned with our strategy, we continue to proactively engage our on-prem customers to migrate DevSecOps workloads to our cloud or explore solutions better aligned with their specific use cases, including hybrid and fit-for-purpose deployments. We experienced another year of strong customer adoption of the complete JFrog Ltd. platform, driven by customers looking to consolidate their technology stack and secure their software supply chain. In Q4, 57% of total revenues came from Enterprise+ subscriptions, up from 54% in the prior year, while delivering year-over-year revenue growth of 33%. Driven by the ongoing execution of our enterprise go-to-market strategy and broader customer adoption of the JFrog Ltd. platform, revenue contributions from Enterprise+ subscriptions grew 36% year over year in 2025. Our security core products, which exclude any benefit from JFrog Xray, continue to gain momentum as customers actively consolidate point solutions. For the full year of 2025, security core revenue was 7% of total revenues, with our security core products now comprising more than 10% of our ending total ARR. Driven by an increasing number of large, multiyear commitments to JFrog Ltd., our security core represented 16% of remaining performance obligation, or RPO, as of 12/31/2025, compared to 12% in the prior year. Net dollar retention for the four trailing quarters was 119%, an increase of one percentage point from the prior quarter, highlighting the continued adoption of our security core products and increased cloud data consumption resulting in higher customer commitments. We continue to demonstrate that our customers view JFrog Ltd. solutions as mission critical to their software supply chain, with gross retention that equaled 97% as of 2025. Our customer count in fiscal year 2025 equaled approximately 6,600. During the year, we continue to execute on our strategy focusing on our go-to-market initiatives around the enterprise. We further matured our approach by refining our customer logo methodology to eliminate friction for our customers and sales teams. This resulted in the consolidation of approximately 300 lower ASP subsidiaries into their parent entity. Our team also prioritized new customer acquisition, specifically targeting opportunities that land with higher value and greater expansion durability. Now I will review the income statement in more detail. Gross profit in the quarter was $121,600,000, representing a gross margin of 83.7%, versus 83.2% in the year-ago period. We remain focused on cloud hosting cost optimization as we anticipate a larger share of our revenues being generated from the cloud. Given our expected increase in cloud revenue contribution to total, we estimate annual gross margins to be in the range of 82% to 83% in 2026. Operating expenses in the fourth quarter were $95,800,000, equaling 66% of revenues. This compares to $75,600,000, or 65% of revenues, in the year-ago period. We remain focused on expense discipline while we continue to invest in strategic initiatives. Our operating profit in Q4 was $25,700,000, or an operating margin of 17.7%, compared to $20,900,000 and an 18% operating margin in 2024. For the full year 2025, we delivered non-GAAP earnings per share of $0.82, a 26% increase year over year, assuming approximately 122,000,000 weighted average diluted shares. This compares to $0.65 in the prior year and 115,000,000 weighted average diluted shares. Cash flow from operations equaled $50,700,000 in the fourth quarter. After taking into consideration CapEx requirements, our free cash flow reached $49,900,000, or a 34% margin, compared to $48,400,000 and a 42% margin in the year-ago period. For the full year 2025, we generated $145,700,000 in operating cash flow and $142,200,000 in free cash flow, a 27% margin. Now turning to the balance sheet, we ended 2025 with $704,000,000 in cash and short-term investments compared to $522,000,000 at the end of 2024. As of 12/31/2025, our RPO totaled $566,000,000, a 40% increase year over year. This performance highlights the successful execution of our go-to-market strategy as customers continue to make larger multiyear commitments to our DevSecOps offering. And now let's turn to our outlook and guidance for the first quarter and full year of 2026. As we enter 2026, we are encouraged by the strength in our pipeline and a stabilized purchasing environment. While we are monitoring the increased cloud usage and early AI workload trends that could result in a tailwind for JFrog Ltd., our guidance philosophy will remain unchanged as we continue to de-risk our largest deals due to timing uncertainties and any benefit from cloud usage above contractual commitments. Our outlook reflects growing contributions from our JFrog Ltd. security core products, ongoing adoption of our full platform, and cloud growth driven from higher annual customer commitments. We estimate full year 2026 baseline cloud growth to be in the range of 30% to 32%. Given the anticipated contribution from our security core and baseline cloud growth assumptions, we expect our net dollar retention rate to be 117% for 2026. Turning to operating expenses, we will remain focused on investing in innovation across our platform, reinforcing JFrog Ltd.'s role as a system of record for all binaries and AI models. The weakening U.S. dollar against global currencies has created a year-over-year headwind for our operating expenses and is reflected in our operating profit guidance. We remain committed to a disciplined spending philosophy and are confident in our ability to manage expenses in line with prior execution. For Q1, we anticipate revenues to be in the range of $146,000,000 and $148,000,000, with non-GAAP operating profit anticipated to be between $25,000,000 and $26,000,000 and non-GAAP earnings per diluted share of $0.20 to $0.22, assuming a share count of approximately 127,000,000 shares. For the full year of 2026, we anticipate a revenue range of $623,000,000 to $628,000,000, representing 17.5% year over year growth at the midpoint. Non-GAAP operating income is expected to be between $106,000,000 and $108,000,000, and non-GAAP diluted earnings per share of $0.88 to $0.92, assuming a share count of approximately 128,000,000 shares. I will now turn the call back to Shlomi for some closing remarks before we take your questions. Shlomi Ben Haim: Thank you, Ed. In today's market, nearly every company is looking to capitalize on AI. But in 2025, when the world's leading AI-native companies select JFrog Ltd. as the core infrastructure for the software supply chain, it was clear validation of our strategy. They became JFrog Ltd. customers not only for our industry-leading platform, but because we have become the trusted system of record for binaries, the foundational asset powering modern software delivery. The adoption of our platform indicates that our roadmap is strongly aligned with where the industry is headed. As VIBE engineering and coding agents accelerate software creation, enterprises are facing a massive surge of binaries that must be managed, automated, secured, and governed across the software supply chain. This dynamic clearly differentiates JFrog Ltd. as the trusted enterprise platform in the age of AI. 2025 is now in the rearview, and I am proud to say what we committed to our partners, customers, and shareholders was consistently delivered. Despite significant macroeconomic and geopolitical challenges, the JFrog Ltd. team rose to new heights. This period has also carried personal weight for many in our Israeli team. After years of pain, finally, all hostages are back at home. We move forward with renewed hope for peace, stability, and a better future for the region, and the world. To my frogs, thank you. 2025 was a challenging year of uncertainty, yet a remarkable one for us. You did not just live through it, you won it, and for that, I am proud and grateful. As we step into 2026, we remain committed to quality growth, responsible investments, expanding our solutions to meet emerging needs, and bringing us all one leap closer to realizing our liquid software vision: a world where every software flow is effortless. And with that, thank you for joining our call, and may the frog be with you. Operator, we will now open for questions. Operator: We will now begin the question and answer session. Please limit yourself to one question. If you would like to ask a question, please raise your hand now. If you have dialed into today's call, please press 9 to raise your hand and 6 to unmute. Your first question comes from Sanjit Kumar Singh with Morgan Stanley. Your line is open. Please go ahead. Sanjit, a reminder to please unmute yourself by pressing 6. Sanjit Kumar Singh: Hi. Can you hear me now? Yes. We can, Sanjit. Sorry about that. This is Oscar Savedra on for Sanjit. Thank you for taking my question, and congrats on the great results. Really nice to see the continued growth on the cloud. I wanted to touch maybe on the, you know, the customer count. I understand the intentionality of, you know, you are focusing more on the higher propensity to spend, larger customers, and, you know, we see that on the $100,000 customer adds. But, you know, how should we think about that going forward? And how far along we are in that transition? So should we continue to expect that count to come down while larger customers go up? Any additional color there would be helpful. Thank you. Shlomi Ben Haim: Yes, thank you. This is Rami. I will take this first question. So we are focused on our strategy, building for the enterprise as we said three years ago, and you can see the results on the over $1,000,000, the significant growth there. You can see the results on the customers that are spending over $100,000 and the increasing spending over there. This is our strategy. This is where our go-to-market is focused, and sometimes it means that we will have to let go of low ASP customers and be focused on our enterprise. We also noted that we have made our internal consolidation to avoid friction in our go-to-market team and to focus our team on the big enterprise opportunities. And that, by itself, was approximately 300 logos. And also, I should note that this includes the geographies regulation like churning China, Russia, and other regulatory decisions. So we are very pleased with the stability and the growth. More important than that, the fact that the customers that we brought in, hundreds of new customers that we brought into our portfolio, are spending much more on ASP, growing faster, and adopting not just DevOps, but also DevSecOps and other services in the cloud. So, in the bottom line, it is very much aligned with our strategy and reflects our commitment as we enter 2026. Operator: Your next question comes from the line of Ravi Shankar with UBS. Your line is open. Please go ahead. Eduard Grabscheid: Awesome. Thanks for taking my questions. Ravi Shankar: My question is for Shlomi. It seems like every quarter we are seeing another security incident. You had the npm attacks in Q3 and Q4. You mentioned another one. Are these becoming less like one-time events and more just structural growth drivers? Are we just permanently in a higher threat environment and maybe we should be penciling in a more consistent contribution from these types of incidents going forward? Or how should we think about the long-term contribution from the higher threat environment we are in today? Shlomi Ben Haim: Ravi, this is a great call out of what is happening today. There are more and more attacks over the software supply chain. Attacking the software supply chain by hackers means that they are going after the software packages, the binaries. It started three years ago, this trend, with Log4j, then Python, then MCP, and now npm and Chai Hulud in three different incidents. Every customer, every enterprise, every software organization understands now that the software supply chain is not protected if the software packages, if the binaries, are not protected. Putting aside this threat that is kind of floating over every company now, code agents become far faster in how they create code and therefore create more binaries using more open-source packages. So this threat and this trend is something that we anticipate will only grow, and therefore, we built our JFrog Ltd. security suite to tackle this threat. Operator: Your next question comes from the line of Michael Cikos with Needham. Your line is open. Please go ahead. Jeffrey Schreiner: Hey, team. Thank you for taking the questions here. Michael Cikos: Some very encouraging data points, and I appreciate especially the RPO growth and ARR contribution when thinking about security as far as demonstrating that this truly is a platform and the attach you are seeing. One of the things I wanted to come back to and we have been fielding on our side: with the heightened threat environment and some of these hacks, which unfortunately feel a little bit more commonplace now, is there a general rule of thumb where we would be able to draw parallels between a hack of the npm size and what that would equate to in revenue? Is there any broad parallels we could draw from, or is it really just happenstance depending on what part of the ecosystem is being hacked? Anything there would be beneficial. And thank you so much. Shlomi Ben Haim: Thank you, Michael. I will take this one. The only responsible way to look at the potential revenue growth is to look at the amount of enterprise customers in our portfolio that still did not adopt JFrog Ltd. security. And while we are growing by hundreds every year, and the ASP is growing significantly, there is still a lot of room to grow within our portfolio. JFrog Curation in the last two quarters is exploding, mainly due to the fact that the threat is real, the scale is required, and you have to move fast. Big companies are not taking any risks, especially in today's changing environment. Second thing that I should note, Michael, is that most of our new enterprise landers—what I referred to before when we spoke about new logos—are already adopting the JFrog Ltd. platform with security. So there are three avenues of growth. Number one, customers that are still not using security and will hopefully adopt. Number two is with new logos that are joined enterprise logos. Again, we are not buying logos; we are going after the enterprise logos that are subscribing from the get-go with security. And number three is the number of projects within the companies that already adopted JFrog Ltd. security, and we still have room to grow there. Operator: Your next question comes from the line of William Miller Jump with Truist. Your line is open. Please go ahead. Michael Cikos: Awesome. Alright. Thank you for taking the question, and I will echo my congrats for the acceleration this year. William Miller Jump: So, Shlomi, I wanted to come back to your comment about the tsunami of binaries, accelerated by AI. For the customers that have increased their commitments, are you still seeing them grow and consume beyond these re-up commitment levels? And can you give any more color around the consumption change for customers that have leaned into coding agent deployments versus the broader customer base? Thanks. Shlomi Ben Haim: Great question, Miller. This is going to grow, and we call it a tsunami because this is what we see. When we are reviewing the data on a weekly basis, we see how many more software artifacts are being created, how many binaries are being compiled, and that is mainly because of the fact every developer now became a super developer, and we hear how well the code agents are doing: Anthropic, OpenAI, Gemini. These agents are faster than developers. They are powering developers, and therefore, creating more binaries. You create more binaries, you need a single source of truth to go to, whether you are an agent or developer, and this is where JFrog Ltd. comes into the picture: to secure, to govern, to build a trusted software supply chain for you and for your agents. So think about the number of developers—call it millions of developers in the world today—powered by millions of agents, and therefore, the result would be many more binaries, and then, hopefully, we would see it also in the scale of JFrog Ltd. Operator: Your next question comes from the line of Mark Charles Cash with Raymond James. Your line is open. Please go ahead. Sanjit Kumar Singh: Yes. Thank you. I think, Shlomi, if I could ask, with all the co-gen tools we were just talking about there creating more software and you have new bottlenecks emerging in the software pipeline, I am just curious if you are thinking about AppTrust in 2026 being maybe the next catalyst to alleviate governance and regulatory pressure in adopting AI and specific tools in that organization they are going through right now. Thank you. Shlomi Ben Haim: Most of the very important highlights in our roadmap throughout the years since we established JFrog Ltd. came from a real enterprise need. Our customers told us last year, listen, we are faster now with DevOps and we are more secured with DevSecOps, but there is a new bottleneck, which is governance, and this is going to be even more painful when it is not only humans that are building code and compiling it to binaries, but also agents. So AppTrust is tackling that exactly. We are addressing this pain of automated governance with all the evidence again stored in JFrog Artifactory as a system of record. Whether this code was generated by a developer or by a code agent, the governance and the regulation before the binary goes to production will come out from a single source of truth, and this is what AppTrust is addressing to solve. Operator: Your next question comes from the line of Zachary I Schneider with KeyBanc Capital Markets. Your line is open. Please go ahead. Ravi Shankar: Great. Thanks for taking my question, guys. I am on for Jason Celino today. I wanted to ask about your AI-native customers. In the past, you have talked about having three of the top five AI natives, which is obviously great. But for the other two, or maybe any of the adjacent players that are not using JFrog Ltd., what would they be using? And how confident are you that you can eventually win them as well? Thanks. Eduard Grabscheid: This is— Shlomi Ben Haim: Every company now wants to call itself a native AI company. When I am speaking about the big players, I am speaking about those that are moving the market and calling the trend and setting the standard. And they chose JFrog Ltd. to be their power grid, to be the solution that will run their software supply chain. They build around Artifactory as the system of record, and they are using JFrog Xray to scan that and to collaborate and integrate with the ecosystem. The other two, I do not know if it is two or more, I do not know what they are using. But from what we hear, some of them are evaluating tools, and some of them are building their own tools. Slowly, as we are going over a list that our go-to-market team built together throughout the year, we are bringing them one by one by one. So I hope that every quarter I will report another one that chose JFrog Ltd. not only as a partner or an ecosystem player, also as a customer. Operator: Your next question comes from the line of Kingsley Crane with Canaccord. Your line is open. Please go ahead. Michael Cikos: Hey. Thanks for taking my question. Shlomi, you have had JFrog Fly in beta a bit now, and you have had MCP server integrations out for a bit now. I am just curious what kinds of usage trends you are seeing with either Fly or the MCP server, and just what that tells you about how customers' workflows are changing, and then how you are positioning around that. Thank you. Shlomi Ben Haim: This is, Kingsley, a very important move that we have done during the year. We understand—and I called it out on the script—we understand that the business-to-business is how we built JFrog Ltd. so far. In the future, it would be a business-to-agent market. And if I want agents to become my persona, my customers, then I need to give them access to interact with my platform. This is where the MCP server comes in. But it is even greater than that. MCP itself is also a binary. So we start to see more and more of our customers using JFrog Artifactory as the single source of tools for all MCPs in the market. So it is not only that agents will use JFrog Ltd. as the blessed area to pick up binaries from, but also other players will use JFrog Artifactory to place their MCP servers in. Now, if you do that, if people work with one system of record, then consistency happens, a secured solution, a governed software supply chain before the release to production is important. And with the MCP server, agents can now interact with the JFrog Ltd. platform as well. Operator: Your next question comes from the line of Brian Essex with JPMorgan. Your line is open. Please go ahead. Ravi Shankar: Hi. Good afternoon, and thank you for taking the question. Maybe one for Ed. Bit of an acceleration in both sales and marketing and R&D in the quarter. I would love to get a framework of how you are thinking about investment on both sides of those and how you expect that to materialize through fiscal 2026. And maybe as part of that, if we can get the FX impact both for the quarter as well as what you are thinking about contemplating in your guide. Thank you. Eduard Grabscheid: Sure. Let me first start with Q4 and the sales and marketing. What you are seeing is end-of-the-year bonuses that flow through in our expenses, and that is what is actually happening there in Q4. But as we step forward into 2026, the reason we called out the weakening U.S. dollar is, as you know, more than 50% of our headcount is distributed globally, so we wanted to call that out. We have a very strong hedging program, so most of that risk is already covered, and it is captured in our operating margin guide already. We also have very disciplined operational execution in terms of maintaining expenses. So we continue to invest, but we continue to make sure we are doing it smart. Anything that we see in terms of the potential outperformance on the top line, we would still consider a meaningful portion of that to flow into operating margins. Operator: Your next question comes from the line of Shrenik Kothari with Baird. Your line is open. Please go ahead. Sanjit Kumar Singh: Great. Thanks a lot for taking my question. Shrenik Kothari: Apologies for my bad voice. But just beyond the foundational models that you touched upon, you are now a secure model registry for NVIDIA AI Factory and for Hugging Face, arguably two of the most strategic on-ramps to model consumption. Just curious, Shlomi, how are these top-down partnerships driving new logos for you? Number one. And two, when it comes to monetizing this unique position, where are they on the adoption curve for the additive logos that you have described in terms of AI Catalog adoption and AppTrust and agentic remediation? Thanks a lot. Shlomi Ben Haim: Yes, Shrenik. We managed to expand our platform so successfully with security and with MLOps and with DevOps and distribution that every time that we have another partnership powering the community, it spreads across all of these elements of the platform. Specifically with NVIDIA, beyond the fact that it validates JFrog Ltd. as the single source of truth for all AI tools and for models, it is also aiming to the enterprise, as we mentioned before. This is our strategy. NVIDIA is being used by the enterprise. They are selling GPUs. We are providing them with a secured area for models interaction, and this supports the enterprise. Hugging Face, however, is a different scenario. Hugging Face can be a top of funnel for JFrog Ltd. because it is the open-source hub. It also supports most of our customers that are using Hugging Face as a local repository for the models that they bring from outside, so they will have a secured environment. Now when we are looking forward into 2026, the too integrated to fail philosophy is something that we are not only collecting feedback from the market on what they would like to see, but also how we can serve them better—not just the human developers, but also the agents. How can we serve Anthropic Opus 4.6 better? How can we serve OpenAI agents better? Because these are the new tools that are now using JFrog Ltd. as their system of record. Operator: Your next question comes from the line of Ittai Kidron with Oppenheimer. Your line is open. Please go ahead. Sanjit Kumar Singh: Thanks, and congrats, guys. Ittai Kidron: Real nice solid finish for the year. I have a couple of questions, one for each of you. For you, Ed, nice to see the progress there on the security and appreciate the disclosure there. If one would do a back of the envelope and strip out your security out of your business, what would that imply that the core business excluding security is growing? Is there acceleration there, leveling off, deceleration? Any color there would be great. And then for you, Shlomi, I would love to think about 2026. What from your perspective are the greatest risks to your business right now? And maybe, clearly, with what is going on in the world right now in the context of AI and how it could potentially do everything, including our laundry, my question is to you: in what way could AI be a risk to your business? Thank you. Eduard Grabscheid: Thank you for the questions, Ittai. I will start here, and then Shlomi can finish. We gave you the results at the end of the year for the revenue contribution that is coming from security, and it is still a relatively small piece in terms of that contribution to the top line. We go to the market as a platform, selling together both Artifactory and security. So we do not want to carve that out. The results that we show you on the top line were impressive. That included security. We are very happy with the direction that it is going. The sales team are instructed to sell together the solution and the offering, which we believe, when you go to the market together with Artifactory and security, you secure your software supply chain at scale—what is needed for today's customer. Shlomi Ben Haim: I will answer the risk question, Ittai. We are all standing at the edge of a cliff. Some people will tell you that we are going into a world of productivity—you mentioned laundry; some people gave us other examples. And some people will tell you that we are all going to be replaced by robots. I think that for the business, and this is my job as the CEO, to make sure that we are focused, that JFrog Ltd. is differentiated and brings value to our enterprise customers, and what we see now is that we keep building for the future with them. Just a few days ago, Elon Musk tweeted that code is going to be replaced. The only outcome will be binary. It reinforces again what we keep saying for the last fifteen years. Binary is the primary asset. This is where we should be focused. And my biggest risk is that I will get confused and start to follow trends and not serve my enterprise with what we do best: being the system of record. Operator: Your next question comes from the line of Jason Noah Ader with William Blair. Your line is open. Please go ahead. Sanjit Kumar Singh: Yeah. Hi, guys. I hope I could squeeze in as well. One quick one for Ed, one for Shlomi. For Ed, just trying to understand that $800,000,000 FY 2027 revenue target. Is that just kind of aspirational at this point because it would require pretty massive revenue acceleration in 2027? And then for Shlomi, I know you guys price Artifactory on capacity. So it should, logically, follow that the tsunami of binaries that you called out should accelerate growth in your core solution. Are we seeing that at all yet, or is that still to come? And when do you think that could come? Eduard Grabscheid: I will start with the question regarding the $800,000,000 on the long-term model. At the end of the day, we are focused on delivering and executing in 2026. That is what we are guiding to at this point. When we look at the results over the last three years, we are on track with that number. It does not reflect our conservative or responsible guidance philosophy, but the focus right now is on delivering in 2026. Shlomi Ben Haim: I will take it from here, speaking about conservatism. We see—as we mentioned in the call—a rise in the AI-related binaries being consumed by our customers. We manage PyPI, npm, Docker, Conda, and others. But, you know, Jason, we are not promising magic. We are being very disciplined with our guidance. And we commit when the customers commit, then we guide the market. We guide you by commitments and not by usage. So yes, we see spikes and, yes, it is an uplift to our performance, but we will not guide based on this data transfer until it will follow a customer commitment. And customer commitment usually comes when usage is stabilized and not based on trends. Operator: Your next question comes from the line of Andrew Michael Sherman with TD Cowen. Your line is open. Please go ahead. Mark Charles Cash: Oh, great. Thanks. Hey, guys. Shlomi, is demand for Curation to accelerate post the second npm attack in late November? Did this pull any deals forward into Q4, and how much is the pipeline for that up year over year? Shlomi Ben Haim: Curation—listen, we are not celebrating these attackers coming after our customers, but obviously, we benefit from it because there was very clear value that Curation brought. Curation is a tool that is out in the market for almost two years. It is mature and it was ready, and it was ready not only in terms of the risk but also in terms of the scale. So not only did we perform amazingly in Q4 because of the npm incident, but we also built the pipeline moving forward, as I mentioned in the call. Jason Noah Ader: Great. Thanks. Operator: Your next question comes from the line of Jonathan Blake Ruykhaver with Cantor. Your line is open. Please go ahead. Andrew Michael Sherman: Yeah. Hey. Jonathan Blake Ruykhaver: Congrats on a fantastic 2025, guys. Shlomi Ben Haim: So, Shlomi, I would love to hear more details around what you are seeing in terms of the potential convergence of the DevOps toolchain to address MLOps. And, specifically, are they seeing the benefits of, or do they understand the benefits of, a potential unified pipeline, particularly around security and governance? And I guess lastly, as a part of that, what are you seeing in terms of adoption trends for JFrog ML and your expectations for that in 2026? Shlomi Ben Haim: JFrog ML was included in—I think it was Q2 or Q3 this year—in our platform. Some of our customers are already using JFrog ML to manage their full model life cycle. We treat the model as a package. A model is yet another binary. So by providing them with these capabilities, we are reinforcing the fact that JFrog Ltd. is the central, trusted source of truth, not only for the legacy artifact but also for the new artifacts, which are models. I think that this will evolve as the market evolves. MLOps will not stay as it used to be before the days of LLMs. What we see now is that code agents are also starting to interact with the JFrog Ltd. platform for any push and pull of binaries. So overall, it is growing, it is evolving. This entire landscape is changing, and we are tracking it and we will keep you posted on it. Operator: Your next question comes from the line of Eamon Robert Coughlin with Barclays. Your line is open. Please go ahead. Kingsley Crane: Hey, guys. Thanks for taking the question, and congrats on the continued execution. I just wanted to go back to the MLOps motion and how to think about that opportunity. Can you help us understand that consumption profile—what that would look like for an LLM maybe compared to a traditional binary? And then what makes JFrog Ltd. well positioned to be the default LLM repository for these enterprises? Thanks. Shlomi Ben Haim: The MLOps solution is actually going after providing the CI/CD experience for models. It started with small models, and then the world in the last year evolved, and so did our tools and our platform. The idea around it in terms of consumption is that if you treat a model as a binary—which it is—then we should see more data transfer. We should see more storage. I think that there is a better potential for monetizing on storage because models, by definition, are bigger binaries than the others. Since our pricing model is a consumption-based model, if we drive models to use the MLOps capabilities of JFrog Ltd. together with the security and the storage, you should see our consumption going higher, and therefore, the commitment of the customers will go higher. This is something that we are tracking closely and looking forward to see the results. Operator: Your last question comes from the line of Jeffrey Allan Schreiner with D.A. Davidson. Your line is open. Please go ahead. Eamon Robert Coughlin: Can you hear me now? Eduard Grabscheid: Yes. We can hear you, Jeffrey. Eamon Robert Coughlin: Perfect. Thanks for taking my question, and congrats on the strong results here. Jeffrey Allan Schreiner: If I look at cloud revenues, they seemed a little bit more stable quarter to quarter this year compared to historically. Maybe just on the seasonality side, as cloud revenue becomes a bigger portion of revenue, should we expect a little bit more stable seasonality, or is it still the same as you target large enterprises in these larger deals? No change on that front? Eduard Grabscheid: Hi, Jeffrey. When you think about the cloud, you need to think about three different things. First is our guidance philosophy, which we de-risk for those largest deals, as well as usage over minimum commitments, including emerging AI trends. That is what creates variability on a quarter-over-quarter basis, and that is excluded from there. As you mentioned, it is also now a greater portion of our revenue. But when you think about sequential growth today, it would be linear until we start to layer in any usage if that potential continues or these large deal wins. Operator: There are no further questions at this time. I will now turn the call back to Shlomi for closing remarks. Shlomi Ben Haim: Thank you, everyone. 2025 was a great year. We are looking forward to 2026, and we are very excited about the changes in the market and the new players in the market that we are looking forward to collaborate with. May the frog be with you, and may you have a wonderful Valentine's Day. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good afternoon, and thank you for joining us for Rivian's Fourth Quarter and Full Year 2025 Earnings Call. Today, I'm joined by RJ Scaringe, our CEO and Founder; Claire McDonough, our Chief Financial Officer; and Javier Varela, our Chief Operations Officer. Before we begin, matters discussed on this call, including comments and responses to questions, reflect management's views as of today. We will also be making statements related to our business, operations and financial performance that may be considered forward-looking statements under federal securities law. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and the shareholder letter we filed with the SEC. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of historical non-GAAP to GAAP financial measures is provided in our shareholder letter. Just before the earnings call, we published and filed our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we will cover on today's call. Following our prepared remarks, we will be taking questions from sell-side analysts. In the interest of keeping the call to 1 hour, we would ask these analysts to limit any follow-on questions to one. With that, I'll turn the call over to RJ. Robert Scaringe: Thanks, Chip. Good afternoon, everyone, and thanks for joining us for today's call. 2025 was a year focused on execution at Rivian as we laid the foundations for scaling our business. Our team progressed the development of our technology road map in R2, while simultaneously driving continued improvement in our customer experience and our path to profitability. In founding Rivian, I wanted to demonstrate how a clean sheet technology-focused vehicle could eliminate long accepted compromises and provide consumers choice. Our goal with the launch of our R1 products was to establish the Rivian brand by delivering a combination of efficiency, on-road performance, off-road capability, functional utility and product refinement that simply didn't exist in the market. The first vehicles established Rivian as a brand that enables people to do the things they love, enable adventure as well as transcend different segments, form factors, use cases and geographies. In the fourth quarter of 2025, the R1S was the best-selling premium electric vehicle priced above $70,000 in California, New York, New Jersey, Oregon, Virginia and Washington, D.C. And it was the best-selling SUV EV or non-EV, over $70,000 in the state of California. Now I'm excited that we are months away from starting customer deliveries of R2, our first mass market vehicle. One of the things that's often overlooked around EVs is that there is a surprising lack of high-quality choices at prices around or below $50,000 for a new vehicle in the United States, there are only a few compelling EV choices as compared to hundreds of internal combustion or hybrid options that have a wide range of form factors and design aesthetics. From the lens of the customer, if you want to buy a midsized SUV with robust technology, autonomous capabilities and a reasonable price point, you've really only got one choice, and it's been that way for a long time. This is a reflection of a market that's being underserved. We believe R2 is going to change that. R2 is an extension of the experience we delivered in R1 with design elements and performance to inspire adventure, but in a smaller form factor and importantly, at an attractive lower price point. Launch Edition R2 variants will be well equipped with a dual motor all-wheel drive setup that provides more than 650 horsepower and over 300 miles of range. In mid-January, I was thrilled to drive our first R2 manufacturing validation build off the production line in our factory in Illinois. As you've seen from the extremely positive, media reviews of our preproduction vehicles over the last few days, R2 is an exceptional vehicle, and I believe will be a game changer for our customers, our company and the industry. One reviewer said, the R2 is an exceptional vehicle, quite possibly the best all-around electric vehicle I've ever driven. We look forward to getting investors and more media in R2 for demo drives so they can experience the capabilities of the vehicle. We plan to provide additional product, pricing and lineup details on March 12. Turning to our AI and Autonomy Day. It was great to see so many of our stakeholders at our offices in Palo Alto this past December. We were excited to showcase our innovation across our vertically integrated hardware, software and autonomy teams and unveil RAP1. Developing our own chip was driven by the need for velocity, performance and cost efficiency and is a key development of our autonomy platform. Near the end of last year, we released universal hands-free, which expanded our advanced assisted driving capabilities for Gen 2 customers to more than 3.5 million miles of roads across North America. Since its release, customer utilization of our autonomy features has doubled. Rivian is also making significant progress in making software and AI core to everything we do from the way we design, develop, manufacture and service our cars to the way our customers interact with their vehicle. This is enabled by the Rivian Unified Intelligence, a common AI foundation that understands our products and operations as one continuous system and personalizes the experience for our customers. It also defines how applications will integrate in our vehicles in the future. We were excited to demo the Rivian Assistant at AI and Autonomy Day and expect to launch this feature early this year. Finally, we continue to see the extensibility of our electrical hardware and software platform with the work happening in our joint venture with Volkswagen Group. I'm very pleased that we have delivered vehicles for winter testing for multiple Volkswagen Group brands, 13 months after the formation of the joint venture. In closing, 2025 was a foundational year for scaling Rivian, and I could not be more excited for the year ahead. I believe 2026 will be an inflection point for our business. As an American automotive technology company that develops and manufactures incredible electric vehicles, we believe that the future of the automotive industry will be fully electric, autonomous and AI defined. I've never been more confident in the opportunity ahead for Rivian than I am today. I firmly believe Rivian's technology, along with our direct-to-customer ownership experience, position our company to build a category-defining brand with a strong mass market product portfolio for the U.S. and global markets. With that, I'll pass the call over to Claire to discuss our financial results. Claire McDonough: Thanks, RJ, and good afternoon, everyone. As RJ discussed, we believe 2026 will be an important year as we scale our business. Launching R2 will extend our brand to the mass market, and we expect R2 will drive meaningful automotive segment growth and profitability over time. Now before I dive into the quarter, there are a few key financial metrics that I'd like to highlight for 2025. First, on a full year-over-year basis, we delivered nearly $5,500 of improvement in average sales price due to the introduction of our second-generation R1 quad models, a higher mix of R1 units and increased base prices for the 2026 model year. Second, on a full year-over-year basis, we achieved an approximately $9,500 improvement in automotive cost of goods sold per unit due to material cost reductions and operational efficiencies. Finally, the improvement in unit economics in our Automotive segment, when combined with our strong software and services performance, resulted in greater than $1.3 billion of improvement in full year gross profit, making 2025 our first full year of positive gross profit. Additionally, our gross profit performance, coupled with our focus on cost management, enabled our adjusted EBITDA for 2025 to be at the favorable end of our guidance. All of these metrics represent our continued progress in the operational efficiency and profitability of our business, which sets a strong foundation for 2026 and beyond. We expect the gross profit per unit for R1 and the commercial vans to be further enhanced as we ramp up production and deliveries of R2, coupled with the gross profit contribution of R2 over time. Turning to the results of the fourth quarter. Our consolidated revenues were approximately $1.3 billion. Consolidated gross profit was $120 million, and our gross profit margin was 9%. Gross profit included $108 million of depreciation and $26 million of stock-based compensation expense. Adjusted EBITDA losses for the fourth quarter were negative $465 million, $137 million improvement from Q3 2025 due to higher gross profit and lower operating expenses. Now looking at our Automotive segment. During the fourth quarter, we produced 10,974 vehicles and delivered 9,745 vehicles from our manufacturing facility in Normal, Illinois. This was the primary driver of the $839 million of automotive revenue. Automotive gross profit for the fourth quarter was negative $59 million, a $71 million improvement from Q3 2025 due to a higher mix of commercial vans, which resulted in the lowest cost of goods sold per unit in our history. Our Software and Services segment reported another strong quarter with $447 million of revenue and $179 million of gross profit. $273 million or approximately 60% of software and services revenue was attributable to our joint venture with Volkswagen Group. We also experienced strong growth from our marketing and vehicle repair and maintenance. Looking at our balance sheet, we ended the year with approximately $6.1 billion of cash, cash equivalents and short-term investments. In 2026, we expect to receive an additional $2 billion of capital as part of our joint venture with the Volkswagen Group. $1 billion is an investment subject to the successful completion of winter testing, which RJ discussed earlier and $1 billion is nonrecourse debt, which we expect to receive in October. Finally, for our 2026 guidance, we expect to deliver between 62,000 and 67,000 total vehicles across R1, R2 and our commercial vans. We expect total deliveries of approximately 9,000 to 11,000 per quarter in the first half of 2026. We plan to start production of the R2 launch variant with a single shift and expect to add a second shift towards the end of the year. While we believe our gross profit will increase year-over-year, we expect the complexity of a new vehicle launch to negatively impact our automotive gross profit in the second and third quarters before becoming a benefit to our overall operations in the fourth quarter as we ramp production and deliveries. As a reminder, we believe this is a transition year for the Automotive segment's profitability. Delivering a strong exit rate for R2 production and deliveries will be a key focus for our team. For 2026, we expect an adjusted EBITDA loss of between $2.1 billion and $1.8 billion. Our adjusted EBITDA guidance also includes a step-up in R&D spend as we accelerate investments in our autonomy road map and look to deliver LiDAR, our first RAP1 chips and limited point-to-point functionality for our customers by the end of the year. We believe autonomy will be a key fundamental long-term differentiator for our business. We also plan on the continued growth of our SG&A, driven by the expansion of our service and sales footprint as we scale with R2. Finally, for 2026, we expect capital expenditures of $1.95 billion to $2.05 billion related to finalizing construction and tooling for R2 and normal, kicking off vertical construction for our greenfield plant in Georgia and the continued build-out of our sales, service and charging infrastructure. In closing, thank you again to the team for delivering a great 2025. As we look forward to 2026, we remain steadfast in our belief that R2 and our technology road map will be truly transformative for our growth and profitability. I'd like to turn the call back over to the operator to open the line for Q&A. Operator: [Operator Instructions]. Our first question comes from Emmanuel Rosner with Wolfe Research. Emmanuel Rosner: My first question is on the cadence that Claire, you just highlighted with the 9,000 to 11,000 units per quarter in the first half and then obviously, 62,000 to 67,000 on a full year basis. Is that 10,000 per quarter or so, is that your expectation for R1 plus EDV for this year in 2026? And then the upside in the second half would be essentially delivering the R2? Claire McDonough: Thanks, Emmanuel. As you think about the cadence, as RJ articulated in his prepared remarks, we expect first deliveries to begin for R2 in the second quarter. Like any ramp, the number of deliveries will be rather small as you think about the Q2 impact of R2 contribution to the 9,000 to 11,000 units per quarter that we anticipate in the first half of the year. And then as we get into the second half of the year, we expect to see the continuation of the ramp of R2, coupled with the ongoing deliveries of our commercial van as well as R1. So on a full year basis, you can think about the R1 commercial van being roughly in line with our 2025 total volumes. Emmanuel Rosner: Okay. And then another one on the cadence side, but more from a financial point of view, I think in the past, you had targeted, I think, by the fourth quarter of this year, some level of profitability on R2 to sort of like demonstrate essentially the potential. Is that still the expectation for this year? Claire McDonough: Yes. As I mentioned, we expect 2026 will be a transformational year for our automotive gross profit, and we expect that both R2 [Audio Gap]. Operator: Our next question comes from Dan Levy with Barclays. Dan Levy: First, I wanted to start with just a question on the R2 volume assumptions, which you just talked about a moment ago. As you're going into the launch, do you have a feel for what the aggregate demand is? And maybe you could just talk to the question of your confidence on people wanting to take delivery of R2 before the new ADAS platform or hardware is put into the vehicle? How much of a current the lack of that new hardware will be on deliveries? Robert Scaringe: Dan, thanks for the question. With regards to R2, I've had chance to spend a lot of time in it over the last several months and really over the last month or so, driving our validation vehicles that are produced in our plant off of our manufacturing validation build. And the vehicle is just absolutely incredible. It's the combination of features, the packaging, the vehicle dynamics, the steering wheel, we're incredibly bullish on. And as I talked about a lot in the past, we ultimately think the market is really hungry for some choice in this segment. As I said in my opening remarks, just the lack of choice that exists in and around this $50,000 price point has led to very high market share concentration of one vehicle. And so this is the first time there's going to be a real alternative. And this is important for folks that are in internal combustion vehicles today, midsized SUVs and looking for something that fits their form factor needs, their aesthetic needs, their packaging needs. And so we're very, very focused on putting this together. And with that said, we have a lot of confidence in the overall demand of course, that's why we leaned so much into the program and lean so much into what we're about to launch. Dan Levy: And just the issue of the ADAS platform, people taking it before the new hardware comes in? Robert Scaringe: Yes. With new technology, there's always -- especially for us as a business, given that we've got an enormous focus on developing new technology, there's always something new coming and recognizing that there are a lot of customers that are just waiting to get a great midsize SUV. And so given the enormous backlog of demand we have as well, the short period that we have where we'll be launching with essentially an upgraded version of our Gen 2 autonomy stack before our Gen 3 autonomy stack comes -- we don't think that's going to be a significant issue for those that want to wait for it, they certainly can and for others that are going to be excited the vehicles in a short time frame, be available prior to that. Dan Levy: Okay. Great. As a follow-up, I wanted to ask about partnership or licensing deals with other automakers. And maybe you could just give us a sense of the tone or tenor of discussions on licensing the network architecture to others. And you said at your Autonomy Day that one of the opportunities on your in-house processor was not only that it could be used for your vehicles, but you could also sell this to others. It's a better, what you said, bang for buck. So I know it's early days, that still isn't out and the initial units of that process are going to need to be for you. But what types of discussions are you having with automakers on potentially selling that or licensing that to them? Robert Scaringe: So as I said in the opening remarks, we've had in the first 13 months of establishing a joint venture with Volkswagen, we've testing on multiple VW Group products. And I think the true demonstration and existence proof, if you will, of the scalability of our technology in terms of being able to work across multiple form factors, different price points, different brands and importantly, be productized into a platform that can go across a large existing OEM. This relationship is really important for that. And so that's our focus. But of course, we have relationships with a broad spectrum of other manufacturers. And I've said this in the past, but I deeply believe that over the course of the next several years, every manufacturer has to make the decision as to whether or not to get to a software vehicle or they're going to develop it themselves, secure it from a third source of which we will be the only demonstrated example of having scaled this technology outside of our own products or accept that without the technology, you will lose market share. And so we're quite bullish on the potential for this technology platform, and we see it as really an important part of our portfolio going forward. Operator: Ladies and gentleman, we are having further technical issues, please standby, we will resume the Q&A as soon as possible. Thank you. [Audio Gap]. Our next question comes from Ben Kallo with Baird. Ben Kallo: Congrats on all the progress so far. Maybe first, can we talk about just the VW relationship and there was an uptick in revenue from that. And just if you give us a sense of how that progresses and the potential to expand the relationship or how we should think about it growing? And then the second question is just around Georgia, the DOE loan guarantee, how you're looking at that and maybe just liquidity in general as you start working on that. Robert Scaringe: Thanks, Ben. And I spoke a little bit about this in the previous response, but I understand we've had a few technical difficulties here. So at risk of repeating myself, I'll just say -- cover a few things that I said earlier. The Volkswagen relationship continues to progress. We're now 13 months since the joint venture started. We've -- with that, we've started winter testing on several different Volkswagen Group products. And of course, we're working towards the first launch of those vehicles in 2027. And the relationship has been very, very strong. We had a great session, in fact, coincidentally last week with a broad set of the Volkswagen Group leadership team. And seeing this be used and deployed across not just vehicles of similar price point to Rivian's vehicles, but across the price point -- across a wide band of price points and across a range of form factors is really important. And it really demonstrates the scalability of the technology. And so ultimately, we're going to continue working towards delivering multiple Volkswagen Group products, but this does, of course, open the door for opportunity with other manufacturers as well. Claire McDonough: And then to put some of the financials behind the software and services outlook as a whole, we anticipate seeing that we'll approach about 60% year-over-year growth in our software and services business, and it will be a significant driver of our gross profit outlook as well with margins that we expect to be in the mid-30% area as a whole. Then as your second question, which was on the capital road map, as I mentioned in my prepared remarks, we ended 2025 with $6.1 billion of cash, cash equivalents and short-term investments. We expect that we'll receive another $2 billion from Volkswagen Group throughout the course of 2026. There's still roughly another $0.5 billion payment associated with the original joint venture transaction as well that will happen, we anticipate in 2027. And then as it pertains to our broader capital road map, we'll continue to remain opportunistic as well on that front. On the DOE loan question, similar to what we've shared in the past, we certainly share the President's desire to bring jobs back to the United States. We're excited to keep up our work on creating new American manufacturing jobs. We'll be adding approximately 2,000 new jobs at our Normal, Illinois plant for the ramp-up of R2, an additional 7,500 jobs at our future Georgia plant as well. And similar to the comments RJ just made, Rivian is working to help drive innovation and technology leadership in the U.S. automotive industry for consumers and also associated with our joint venture with Volkswagen Group, enabling this technology for the industry as a whole. Operator: Our next question comes from George Gianarikas with CG. George Gianarikas: As it relates to your guidance for vehicle sales this year, to the extent you see a strong conversion in your backlog for the R2, could you see upside to that? Or are there certain production bottlenecks that you'll have to work through towards the end of the year? Robert Scaringe: Thanks, George. The process of ramping a vehicle is something we've spent a lot of time talking about in this forum, but certainly internally, we're really putting a lot of effort on making sure we have a very smooth production launch and then associated ramp. And we often think of the plant as being the bottleneck for the ramp. But in fact, we have to remember there's hundreds of other companies that are providing components into Rivian that ultimately really contribute and are a key part of the ramp. And ramping our supply base is something that we're very focused on and planning around. And you can only ramp as fast as your slowest part, so to speak. So with that said, we've -- as you heard earlier, we're starting with a single shift. We're bringing on a second shift that will be happening near the end of the year. And then in 2027, we'll be adding our third shift. And this has been very methodically laid out to make sure that we're ramping consistently and evenly across the supply chain. And so certainly, and as you alluded to, there's going to be a large demand backlog that we're working through and a tremendous amount of excitement for the R2 vehicle. And as more reviews come out about it and more people get exposure to it, we expect that to continue to expand and grow. It's worth noting some of the preproduction reviews that came out last week, the feedback has been universally super positive. And so we're acutely aware of that, but we are working very carefully to coordinate the ramp and coordinate the growth of output with our supply base. George Gianarikas: And maybe as a follow-up, as you sort of crystallized your selling prices and your cost structure for the R2, can you just maybe speak to the guidance you gave at your Analyst Day last year about reaching EBITDA positivity in 2027 and your long-term vision around having 25%-ish gross margins and high teens EBITDA margins? Claire McDonough: Thanks, George. As prepared -- as discussed in our prepared remarks, we believe that 2026 is going to be a transition year for the automotive gross profit segment. And our North Star for the normal plant is going to be getting our production and deliveries up to about 4,000 units per week. While there's a lot of execution required, as RJ just walked through from the team in order to achieve that outcome, if we're successful, we believe it would put the company in a strong position to achieve our adjusted EBITDA goals. And as we look at the broader outlook, we certainly see there being 20% gross profit target for our automotive segment. As we think about the overall contribution of software and services, there's many outcomes or licensing deals that [ Rubin ] could do that could allow gross profit to be much higher than the 25% in our end state as well. Operator: Our next question comes from Joseph Spak with UBS. Joseph Spak: Just a couple of questions. Claire, I know you said the second shift starts in the back half. Does the guidance contemplate like exiting the year at a full 2-shift rate for the R2? I just want to sort of understand how we should think about a jumping off point for '27. Claire McDonough: Sure. As you can imagine, Joe, we'll be in the process of ramping up the second shift. So as you think about the exit rate of 2026, we won't yet be at full production across 2 shifts. We'll be getting there as we continue to progress all of our operational efficiencies and get the team ready to ramp up throughout the course of 2027. Joseph Spak: And then I guess, RJ or Claire, just you mentioned more details on March 3. I'm assuming that's also when reservation holders will be invited to configure. But is there any update you could give us on that order book? And then on the pricing side, one of the things we've seen, again, not Rivian specific just to the industry and the world really is the cost side between metals and memory. So curious to sort of wonder how you're thinking about that impacting either your pricing for the vehicle or whether that's contemplated in the EBITDA guidance for the year? Robert Scaringe: Yes. So on March 12, we'll be providing the full picture around the overall portfolio of products that will exist for R2, and that will include the launch configuration, which, as I've said, is a dual motor performance variant with a premium trim. The different combinations of trim, powertrain performance and battery size are what we'll be describing in detail on the 12th. And then along with that, allowing customers to start configuring their vehicles and allows us to start getting ready to be making deliveries later in Q2. I think important here, as you think about the overall demand profile for the vehicle, we've put a lot of time into thinking about the different combinations and recognizing what different folks are going to want and having the benefit of having lots of conversations and also the benefit of seeing what are the most popular trims and configurations in R1. And so we're really excited to go through that, but it's something that we do want to go through as -- present it as the full meal as opposed to giving little bits and pieces. So other than talking about the launch configuration, the rest of the configuration is going to be something we talk about in detail in about a month. Claire McDonough: And then Joe, our adjusted EBITDA guidance does contemplate some of the increases that we've seen in raw material costs and the current supply chain backdrop as well. Operator: Our next question comes from Mark Delaney with Goldman Sachs. Mark Delaney: I was hoping to speak more about automotive COGS. Maybe you can help us better understand what led to the reduction in cost per vehicle, both sequentially as well as year-over-year. And then as you look forward, clearly, you just alluded to some of the supply chain challenges around DRAM and other input costs that are embedded into your guidance. But where do you ultimately think the R2 cost can get to? And is the 50% reduction in the BOM cost compared to R1 still the right level to think about? Claire McDonough: Sure. For Q4, we were able to deliver $92,000 of COGS per unit, and that was about a $4,000 per unit improvement relative to the third quarter. One of the key drivers was associated with the mix shift. So we had higher penetration of commercial vans in the fourth quarter relative to the third quarter. And then beyond that, the ongoing operational efficiencies that we continue to execute across our normal operations as well that also contributed to the reduction in our COGS per unit. As we look at the full year-over-year improvement, the biggest driver that we saw was associated with the reduction in our material cost, that was both the transition for us to move fully to Gen 2 vehicles. We also, in addition, saw a significant step down in terms of a lot of our raw material costs and importantly, a step down in the cost of our lithium prices that was another contributor for us as well as we looked over at the full year-over-year step down in terms of COGS per unit, coupled with the ongoing operational efficiencies that we continue to progress throughout the course of the year. As we look forward to R2, one of the key factors for us with R2 is the opportunity for us to have also over the course of the last year, started to see some meaningful benefit from our joint venture -- joint sourcing opportunities associated with our low-voltage electronics that we're sourcing for the R2 vehicle. And that's really been a key enabler for us to continue to progress the material cost trajectory of the R2 product as well. And then as we approach the Georgia plant, we'll have further opportunity to drive additional synergies or efficiencies as we start to source future vehicle volumes as well that will share the fundamentals of the midsized platform as a whole. So those are a couple of the puts and takes. The other callout that I would highlight as well is we do anticipate seeing a reduction in terms of our tariffs per unit. So we didn't have the full benefit of the Section 232 offsets for the entirety of the fourth quarter. So we'll see further benefit from a tariff per unit standpoint as we progress forward, and R2 will also benefit from that in the future. Mark Delaney: My other question was on EDV, and I understand probably flattish volumes there for 2026 based on your comments earlier on the call, but you did speak to a plan for some additional variants, including one with more range for Amazon. So maybe help us better understand when to expect that new product for the commercial segment and what that might mean for van deliveries and the broader commercial opportunity going forward? Robert Scaringe: We do expect some growth in our EDV demand in 2026. And as you called out, there's an all-wheel drive version of the van and a larger battery pack variant as well. And both of those are to help unlock specific use cases within the Amazon network. We're working really closely with Amazon in defining the requirements of those and excited to get those launched. And the relationship with Amazon continues to be very positive. And certainly, the EDV continues to perform extremely well. Operator: Our next question comes from Chris Pierce with Needham. Christopher Pierce: As you talk about adding the second shift, then adding the third shift, can you kind of just walk through setting up hiring for these workers in the normal area? I'm just not sure if we should think about that as a barrier or a burden or just kind of -- is it already in motion? Or do you already have these and you kind of move people from one shift to another? Just kind of any detail around that, please? Unknown Executive: Yes. Chris, thank you for your question. Hiring process is in place, is proceeding according to plan. We have enough candidates. At the beginning, it was even spontaneous candidates that wanted to work for us. So we are good from that end. There's part of the team that will populate the R2 line that is coming from the existing flows, but it's an important part as well that is hired from outside. We have reinforced our training programs. We have even before hiring the people pre-hiring activity, just to let them know what is working in the lines and what they should expect there. And so far, we are very happy with the response of the talent pool and the people pool that we have seen there. So... Christopher Pierce: Perfect. And then just -- I guess, I just kind of want to understand, you've had the reviews this week. You're kind of flipping over the card as far as first trim and other trims in a month. And then we could see initial deliveries sometime in the second quarter. I guess I'm just kind of curious I'm just thinking about maybe Apple and the iPhone or the iPad, and it's just sort of boom, here it is, you can buy it now. I guess I'd just love to hear about why the spacing? Is there a psychological effect or it just comes down to what you can produce, when you can produce it at the plant, but just the timing of the cadence as you move towards the launch. Robert Scaringe: Well, thanks, Chris. One of the amazing things about the R2 program is there's an enormous backlog, but that does create a challenge for us with making sure essentially how do we select who receives our vehicles first and having a processor on that. And so opening up the reservation or opening up the configuration process allows us to start taking this demand backlog and organizing around when we make deliveries and who gets the vehicles first. It's not as if you could like press a button and instantly have thousands and thousands of vehicles available. So we start producing, we are ramping production, but the demand will outpace our ability to produce. And so that process allows us to organize in a thoughtful way and learning a lot from some of the past launches we've had, how do we prioritize and how do we sequence deliveries to our broad base of customers. Operator: Our next question comes from Itay Michaeli with TD Cowen. Itay Michaeli: I wanted to actually ask on the universal hands-free. Curious how initial feedback has been since December, how we should think about feature improvements and OTA updates this year? And maybe what you're also assuming for paid subscriptions this year? Robert Scaringe: We're really excited to talk about this. This is a huge effort within the business and autonomy and AI was, of course, focused on all the work that we're doing here. But our Universal Lands Free is really think of it as the first step in a whole series of steps that expand the capability. And so Universal Lands Free expanded the number of miles where you can drive with hands off the wheel, but eyes on the road. It's around 3.5 million miles, essentially any road with marked lanes. And later this year, we'll be unlocking the ability or enabling the ability for the vehicle to drive point to point. So you put your address into the vehicle and the vehicle navigates to that address. And then the next steps ultimately are driving towards what we think of as personal Level 4. But between point-to-point and personal Level 4, we'll have hands-off eyes off, so you'll be able to take your eyes off the road and do other things starting first on the highway and then expanding from the highway. And then following that, we'll have our first Level 4 applications within a geofence area to start, but ultimately expanding over time. And our view and really strong conviction is that over the course of the remainder of this decade, we're going to see autonomy go from something that today with hands-off capabilities certainly is a nice feature to have. But as we start to move to hands-off and eyes off and then ultimately to Level 4 where the vehicle can operate itself entirely on its own, including driving empty, it really creates a whole new customer experience, and we think it becomes a critical part of the purchase decision. And this will -- this is going to drive significant change in how we think about the business model. It's going to drive significant change in how consumers think about what vehicles they want to purchase. Itay Michaeli: That's very helpful. As a quick follow-up on the financials, any sense of how we should think about working capital flows this year, particularly as you go through the initial R2 ramp? Claire McDonough: Sure. We will see working capital be an outflow of cash for us over the course of 2026. And that in part is driven by the buildup of our inventory balance associated with the launch of R2. Operator: Our next question comes from Andrew Percoco with Morgan Stanley. Andrew Percoco: I actually just want to come back, RJ, to what you just said on autonomy really driving the value proposition and driving experience over the next few years. And I guess I'm just curious, like can you share your thoughts around whether or not there will be a retrofit opportunity for existing or new R2 customers that don't have Gen 3 with LiDAR and existing R1 customers? And any thoughts of when you'll introduce LiDAR onto R1 production? Robert Scaringe: We're not -- in terms of retrofit, this isn't something that's contemplated or planned. Certainly, there will continue to be over their updates for our Gen 2 vehicles, our R1, Gen 2 vehicles and our launch R2 vehicles. But in terms of hardware upgrades, those are not planned. The hardware upgrades that we've talked about in the past, we talked about at our autonomy and AI Day, these are going to be on vehicles in the early part of 2027. And certainly very, very excited about those. But the capabilities and even the demo that we had at our Autonomy AI Day, which was a point-to-point demo, that's being done. That demo was on a Gen 2 of our R1 vehicles. So that's -- that will be available on any Gen 2 R1 vehicle as well as the R2 vehicles we'll be launching with. Andrew Percoco: Got it. Okay. And can you get to -- is the plan to get to eyes off point-to-point with Gen 2? Or is that something that's going to require Gen 3? Robert Scaringe: I think the important thing to keep in mind on our upgraded architecture, which is, as I said, coming in '27, is that has a few really important purposes. One, of course, is it raises the ceiling on what's possible. So it grows the opportunity to add even more capability beyond point-to-point, but it also serves as an even more enhanced part of our data flywheel where we have enhanced cameras, higher level of inference in vehicle, but importantly, we add a LiDAR, as you referenced, which turns essentially every vehicle into part of our ground truth fleet, which is really helpful for training our end-to-end model. And so the way that the model continues to improve is we're benefiting from the thousands and thousands of drivers that are on the road and the vehicles that are on the road, pulling interesting and unique events back off the vehicles and allowing us to feed that into the overall training loop that we have for what we call our large driving model. Andrew Percoco: Got it. Okay. And just one quick clarification. When you say Gen 3 will be available early 2027, will that include R1? Or is that just still R2? Robert Scaringe: This is for R2. Operator: Our next question comes from Edison Yu with Deutsche Bank. Yan Dong: This is Winnie on for Edison. Can you guys hear me? Claire McDonough: Yes. Yan Dong: My first question is on the relationship with VW as it matures. I was wondering if the topic of how to best utilize vehicle data come up. And more asking this in the context of VW naturally having a much larger fleet and Rivian being able to potentially benefit from getting access to that data for training. So just curious your thoughts on that topic. Robert Scaringe: The Volkswagen fleet and what ultimately we're delivering to Volkswagen from a technology platform doesn't include our autonomy platform. So it's our embedded software platform, our topology of ECUs, including our zonal architecture, but it doesn't include our self-driving architecture. Yan Dong: Got it. And then maybe just on the RAP1 chip. Curious to hear your maybe longer-term inspirations for that. Is this something you think that will be limited to Rivian? Or do you envision maybe this being used by some of your partners or other OEMs and whether it could be potentially applied to nonautomotive products like [ humanoid? ] Robert Scaringe: I guess I'll answer it really broadly. This is -- when we think about our self-driving and autonomy efforts, this is an enormous focus for the business and represents our most significant area of capital investment from an R&D point of view. And so when we look at this through the lens of the next several years, we do believe that as we continue to demonstrate progress and work towards that growing capability set that I talked about before, ultimately culminating in Level 4, this is a platform that certainly beyond Rivian has applications. And so we do envision a world in which this becomes something that we can monetize through a few different ways. We can monetize it through increased market share and growing number of vehicle sales. We can, of course, do that through new and unique business models and new ways of thinking about consuming transportation, and we can do that through selling and providing the technology to other manufacturers. Now specifically to our RAP1 processor as well as its future variants of that processor, we do see applications for vision-based robotics well beyond the vehicle. Of course, the vehicle is a great near-term vision-based robot. But even within Mind Robotics, which is a new company that we created, that is also an example of a great customer application and a great use case application for our RAP1 processor. Operator: Our next question comes from Tobias Beith with Rothschild & Co. Redburn. Tobias Beith: May I ask what Rivian's management's latest thoughts are on captive battery cell manufacturing and assembly are considering the recent development in the price of lithium salts. I know that this activity was contemplated at one point at your forthcoming plant in Stanton Springs. Robert Scaringe: Well, thanks, Toby. We've found great working partnerships with our battery cell suppliers and have taken a very active role in securing and sourcing some of the upstream precursor materials. So you called out lithium. That's a really great example of an area that we, from a sourcing point of view, spend a lot of time on. But being able to work with these key battery partners and leverage the investments they've made in production capacity and in their own cell construction and cell design has been really helpful for us in terms of efficiently deploying capital. Operator: Our last question comes from James Picariello with BNP Paribas. James Picariello: Can you hear me? Claire McDonough: Yes, James. We can hear you. James Picariello: Great. [ Vista ] curious on your thoughts regarding R1's potential to see additional demand from one of your major competitors announcing the end of its 2 high-end models next quarter, right? We're talking about 20,000 annualized units essentially up for grabs in the U.S. It just seems like the R1 can be a natural home for many of those buyers. Just curious your thoughts. Robert Scaringe: Yes. The Tesla Model X, which, as you said, will stop production, at least what's been said is next quarter. The Model X is a really important product from an electrification point of view, and it was one of the first more at-scale products to show customers how exciting electrification can be. And so as that leaves the market along with the Model X, it does create an opportunity. There's -- I've talked about this a lot in the context of R2, the lack of choice, but this also is true in the case of R1. And R1 as it stands, our R1S is -- I called out in my opening remarks, it's an enormously successful product in this premium price category. So it's the best-selling premium SUV, electric or nonelectric in the state of California. And then it's the best-selling premium electric SUV in the United States and the best-selling premium electric vehicle, SUV or non-SUV in a number of states across the U.S. And so with even less choice now in that price category, it does represent an opportunity for us. But I'd just say very broadly that the overall lack of choice, and this is really true in the price category of R2, we think is an enormous opportunity for us to capture market share and, of course, provide something really exciting to customers. James Picariello: Yes, makes a lot of sense. My follow-up, just for the strong gross profit contribution slated for this year, can you help dimension at all what the expected contribution might look like from VW as we think about that 60% year-over-year growth? Claire McDonough: Sure. As you think about the Software and Services segment, roughly half of our revenue comes from revenue streams associated with our joint venture with Volkswagen Group, and we expect that to largely remain true as we look ahead to 2026 as well. And it is a more disproportionate share of the overall gross profit dollars that we earn out of the [ Safran ] Services segment as a whole. Operator: This concludes the Q&A section of the call. I would now like to turn the call back to RJ Scaringe for closing remarks. Robert Scaringe: Well, thanks, everybody, for joining the call, and we apologize for some of the technical difficulties that we had at the start. But -- we are -- hopefully, a takeaway from this is just how excited we are about R2. As I said, I've had a chance to spend a lot of time in the car and in a variety of ways, whether it's taking my kids to sports games or loading up the back with gear, and it is just such an incredible embodiment of the Rivian brand and captures so many -- so much of the essence of what makes R1 a special vehicle, but at a price point that, as we said, starts at $45 and will allow a much larger number of customers to access the vehicle. And so as we think about the next couple of months, we, as a company, remain incredibly focused on the launch ramp of this vehicle, along with the continued development of the technology we're building, both on the software side, which we talked a bit about, but certainly on -- also on our autonomy side. And so with that, thanks again for joining the call, and we're looking forward to a lot of folks being able to experience the R2 themselves.
Operator: Good day, and welcome to the Federal Realty Investment Trust Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jill Sawyer, Senior Vice President, Investor Relations. Please go ahead. Jill Sawyer: Thank you, [ Ayisha ] Good evening, everyone. Thank you for joining us today for Federal Realty's Fourth Quarter 2025 Earnings Conference Call. Joining me on the call are Don Wood, Federal's Chief Executive Officer; Dan Guglielmone, Chief Financial Officer; Wendy Seher, Eastern Region President and Chief Operating Officer; and Jan Sweetnam, Chief Investment Officer; as well as other members of our executive team are available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results, including guidance. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued tonight, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and operational results. Given the number of participants on the call, we kindly ask you to limit to just one question during the Q&A portion. If you have additional questions, please requeue. With that I will turn the call over to Don Wood. Donald Wood: Thank you, Jill, and good afternoon, everybody. Strong quarter, strong year, strong 2026 guidance, 6.4% bottom line FFO growth in the quarter, 4.3% for the year and guidance close to 6% at the midpoint for 2026. All those numbers, of course, eliminate the impact of the onetime new market tax credit last year as reflected in our new Core FFO metric. More to come on that from [ Dan]. Business is good with strong demand for our assets in both our historical locations as well as the newer markets. We ended the year with the overall portfolio 96.1% (sic) [ 96.6% ] leased, 94.1% occupied (sic) [ 94.5%]. About 50 basis points higher than that, excluding newly acquired centers. No surprise that leasing drives these and future results. With 601,000 feet of comparable deals done in the quarter at 12% rollover and 2.3 million feet of comparable deals done for the year at 15% rollover, an incremental $11 million of new rent is under contract. Starting rent on the new 2025 leases was $37.98 compared with ending rent on those same spaces after years of contractual bumps, by the way, of $33.12. We also did 20 noncomparable deals in 2025 at an average rate of $48.18, resulting in an incremental $6.3 million of new rent under contract and the deal pipeline continues to look strong. Wendy will talk more about that in a little bit. Leases signed in the fourth quarter included weighted average contractual rent bumps of 2.6%. A strong as operations were, transaction activity was equally robust in the fourth quarter and thus far into 2026. We closed the Annapolis Town Center in Maryland and Village Pointe in Omaha, adding nearly 1 million square feet to the portfolio for $340 million at an initial cash-on-cash yield in the low 7% range. Remerchandising and rents commensurate with the strong sales of these locations are the focal points of these 2 A- quality assets over the next 5 years with targeted unlevered IRRs approaching 9%. Both have started out as we've underwritten. Acquisitions completed early in the year -- earlier in the year, including Del Monte Center and 2 Leawood, Kansas properties are looking like excellent additions, particularly in Leawood, where tenant demand and expected rents are exceeding our underwriting. On the disposition side, we closed on the sale of Bristol Plaza in Connecticut and Pallas, the peripheral residential building at Pike & Rose in the quarter for a combined sales price of $169 million. Just last week, we closed on Misora, the peripheral residential building at Santana Row for proceeds of nearly $150 million, along with another small asset sale for [ 10 ]. The overall combined cap rate of these dispositions was in the low 5s. As we've talked about over the last several quarters, we're also finding opportunities to intensify our properties with development, usually residential product that is complementary to our shopping centers with little to no incremental land cost, the math works in the right locations. If 2025 has taught us anything about value, it's that high-quality apartments adjacent to great shopping environments in strong suburban locations create a more desirable living environment. That translates into higher residential rents, stronger growth and ultimately lower cap rates on sale. The 2025 and 2026 sales of Levare and Misora at Santana Row and Pallas at Pike & Rose, unlocked an unmatched cost of capital for us to reinvest in material amounts at sub-5% overall. We've previously disclosed the allocation of a total of $280 million for new residential development of the Blayr at Bala Cynwyd, which is nearly complete and ready for lease-up beginning this quarter, 301 Washington Street, Hoboken and Lot 12 at Santana Row, which together will add more than 500 units to the portfolio. And just this quarter, we've added another residential project to our development schedule that you can see in the 8-K. Willow Grove Shopping Center in suburban Philadelphia will be completely redeveloped and include an additional 261 apartments to complement a modernized and remerchandised shopping center. Our experience with residential development at our retail-centric properties is a skill set developed over 25 years and is certainly a unique differentiator of our business plan. After enjoying the 6.5% to 7% or higher income contribution from each of these residential additions for a period of time, we have the optionality to take advantage of cap rates well inside those yields and reinvest them tax efficiently, just as we've done so effectively last year and this. 2025 is a very special year for the Trust, and 2026 and 2027 look to capitalize on that. First of all, core leasing was exceptionally strong and looks to remain that way in 2026. Our expanded geographical reach is proving particularly fruitful with strong retailer demand anxious to be part of our property improvement effort. Lastly, the COVID era office leasing effort has been largely completed with meaningful rent starting in '26 and '27. In fact, at the mixed-use properties, we should have 0 office product available for lease, and that means 100% leased within the next 30 to 45 days. Our asset recycling effort is validating the long-term value creation that our business plan has created. And all of this is wrapped in a relatively stable interest rate environment that could result in lower rates as the year progresses. We'll see. The refinancing of our 1.25% bonds, up 1.25% this month represents the last major component of our debt portfolio with such a large market rate adjustment likely. And even through that, we're guiding to near 6% growth. Later this spring, we'll showcase our plan through an Investor Day at Santana Row. Jill has the details, and I think to save the dates have been sent out. Really looking forward to seeing most of you there. Enhanced internal and external growth using all the tools at our disposal, the name of the game. Quarters like this fourth and in fact, all of 2025 increase my confidence of our ability to do so. Let me now turn it over to Wendy and then to Dan to provide additional color. Wendy? Wendy Seher: Thank you, Don. In 2025, our leasing platform achieved record-breaking volume, delivering the highest annual square footage leased in company history, alongside the strongest comparable rent spreads achieved in over a decade. As we head into 2026 with over lease -- with an overall lease rate of 96.1% (sic) [ 96.6% ] our strategic focus will continue to be all about driving rent growth, disciplined expense management and capitalizing on our quality real estate to provide continuous opportunities for multiple year growth. For the quarter, we signed 105 comparable deals achieving 12% rollover, 15 anchor leases and 90 small shop deals drove a 90 basis points increased in our total comparable lease rate sequentially. Looking ahead, the breadth and durability of demand across all categories remains strong, reinforcing my confidence in our outlook for the year ahead. Increased leased and occupied rates in Q4 drove our signed not occupied spread to 200 basis points, representing a contribution of an additional 27 million to our in-place portfolio. Robust anchor demand, particularly in California, is fueling momentum. While we anticipate seasonal occupancy shifts in the first half of 2026, while anchors transition, most of these deals are already executed at higher rents, positioning us for improved occupancy levels by the end of the year. Mall shops remain a highlight at 93.8% leased, up 50 basis points, providing mark-to-market opportunities to drive rent growth while continuing to Prune and Tweak a premium merchandising mix. Leasing production from our expanded acquisition initiatives over the last few years continues to exceed expectations. In 2025, we executed 49 deals nearly 200,000 square feet at 34% increase from prior rents. Over the next 24 months, we are targeting accretive capital allocations to better align these centers with our core operating standards and the high income profile of the respective submarkets. Top-tier addition to these centers since acquisitions includes names such as Solid Core, Alo, Design Within Reach, Lovesac, Free People Movement and State and Liberty. More to come in 2026. Turning to our suburban portfolio in the Greater Washington, D.C. area, we continue to see -- we are continuing to be encouraged by the resilience across our Maryland and Virginia assets. Foot traffic momentum remains strong with quarterly traffic increasing 3% and up overall for the year. Annual sales moved higher year-over-year, while the fourth quarter sales remained stable from a strong prior quarter comp. What is especially encouraging to me is the outperformance of the hard goods category. We saw robust demand in furniture and home furnishings from premium brands such as Serena & Lily, West Elm, Sur La Table. We view this as a strong indicator of the underlying health of our consumer base. Given that home furnishings are highly discretionary, our core customer in this regions -- in this region continues to invest in their home, signaling confidence in their personal financial position. Now let me turn it over to Dan to dive into the numbers. Daniel Guglielmone: Thank you, Wendy, and hello, everyone. Our FFO per share of $1.84 for the fourth quarter reflects 6.4% growth versus last year and highlights a really strong underlying quarter operationally. This result came in slightly below the midpoint of our guidance range, solely due to a noncash charge related to Saks filing for bankruptcy post year-end. Comparable POI growth, excluding prior period rent and term fees, averaged 3.8% for the year and 3.1% for the fourth quarter. On a cash basis, this metric was 3.6% and 4.3% for the full year and fourth quarter, respectively. Now let me move quickly to the balance sheet. Liquidity at year-end stood at $1.3 billion under our available bank facilities and cash on hand. During the fourth quarter, we closed on an additional $250 million delayed draw term loan, providing us with enhanced financial flexibility. The facility has a 5-year maturity into 2031 and an interest rate of SOFR plus 85 bps. With respect to our $400 million bond maturity next week, we will utilize this term loan and available capacity on our revolving credit facility to refinance it on a near-term basis. A possible unsecured note or convertible bond offering remained under consideration for later in 2026. As lease-up of the larger commercial components of our redevelopment pipeline nears completion with Huntington Shopping Center fully stabilized, 915 Meeting Street a 100% leased and One Santana 100% committed, our free cash flow after dividends and maintenance capital is expected to exceed $100 million in 2026 and head higher in '27 as we convert straight-line rent to cash paying rent. With these $600 million of projects behind us and essentially complete, our ongoing redevelopment pipeline moving forward stands at about $500 million. This pipeline includes 780 residential units, all at existing retail properties. During the fourth quarter, we closed our asset sales of $169 million and added another $159 million subsequent to year-end at a combined blended low 5% cap rate. We also have an additional $170 million of sales in process with expected closings in the first half of 2026 with cap rates targeted in the low 5% range. While we have been active over 2025 deploying capital externally through our disciplined asset recycling program, we continue to maintain strong leverage metrics. Fourth quarter annualized adjusted net debt to EBITDA stood at 5.7x at year-end but is now inside 5.6x pro forma for the most recent asset sales and should trend further to the low to mid-5x range over the course of the year. Fixed charge coverage now stands at 3.9x and should eclipse our target metric of 4x over the course of the year. Now on to a discussion of our new Core FFO metric and guidance. After much discussion with the analyst and investor community over the course of 2025 regarding recurring FFO and significant one-timers, on a go-forward basis, we will be reporting both Nareit FFO and Core FFO. Core FFO is defined in our 8-K financial supplement on Page 10. It is also outlined in the table on the fourth page of the press release. It will be GAAP-based and simply adjust our Nareit FFO for nonrecurring onetime items in order to provide an enhanced comparability across periods for Federal's underlying operating results. Such onetime items include new market tax credit transaction income, executive transition costs, collection of COVID era prior period deferred rent and other items such as gain or loss on early extinguishment of debt. As we look forward to 2026, our guidance for both Nareit and Core FFO is $7.42 to $7.52 per share with no onetime adjustments in the forecast. At the midpoint of $7.47 per share, this represents about 5.8% growth for Core when compared to 2025 and 3.5% for Nareit defined. 2025 Core FFO is $7.06 per share and Nareit FFO is $7.22 per share with the material difference being the $0.15 of new market tax credit income. Guidance drivers to 2026 include comparable POI growth forecasted at 3% to 3.5%. This assumes the trajectory of occupancy in the first half of 2026 moves into the mid-93% range before returning above the current 94% level and up into the mid and upper 94% range by year-end 2026. As a result, we are set up well for a strong 2027 on a comparable basis. Comparable lease rollovers are forecast in the low to mid-teens. Incremental POI contributions from our development and expansion pipeline is forecast in the $13 million to $15 million range. Please see some additional disclosure that we've added in our 8-K at the bottom of Page 29 with respect to the quarterly cadence of POI for 2026 from the development pipeline. And guidance reflects a full year's contribution from the $750 million of dominant high-quality assets acquired in 2025 at roughly a 7% blended cash cap rate and a 7.5% GAAP cap rate. We are assuming our 1.25% unsecured notes are refinanced at a 4.25% to 4.5% interest rate under our available bank facilities. Please note that this represents a 170 to 180 basis point financing headwind, without which our midpoint Core FFO for 2026 would be growing at roughly 7.5%. We've assumed a total credit reserve of roughly 60 to 85 basis points of rental income in 2026, given our limited exposure to credit issues and additional guidance assumptions that we usually talk about here are outlined for capitalized interest, redevelopment spend, G&A and term fees on Page 29 of our 8-K supplement. This guidance does not include any acquisitions in 2026. None are probable enough at the moment. With respect to asset sales, it assumes only the dispositions announced last week, Misora and Courthouse Center. For all other acquisitions and dispositions, we will adjust our guidance likely upwards as we go. With respect to quarterly cadence of FFO in 2026, the first quarter will start with a range of $1.80 to $1.83 with the normal 1Q seasonality and asset recycling activity impacting sequential cadence from 4Q. The second and third quarter will be in the mid-180s and the fourth quarter in the mid $1.90s per share. And with that, operator, please open the line for questions. Operator: [Operator Instructions] The first question comes from Michael Griffin with Evercore ISI. Michael Griffin: Maybe just turning to the investment pipeline. Don or maybe Jan, can you give us a sense of what deals in the hopper are looking like today? I realize you're not guiding to anything this year, but is this more of what we've seen at Town Center in Kansas City or at the Village Pointe in Omaha? Is it stuff in kind of your core coastal markets? What are you really targeting, I guess? And do you have a feeling that we could see some deals close at some point this year? Jan Sweetnam: Michael, you're well. Thanks for the question. Look, we're still targeting large dominant shopping centers. We're focused on new markets in the middle of the country. We're still also trying to acquire in the coast in our existing markets. So right now, there's a couple of acquisitions that we're working on. We expect to see a lot more opportunities coming in the next several months, larger transactions. So some real reason to be optimistic. It's a little too early to kind of forecast how much we'll be able to buy this year. But based on where we are today and similar to last year, I would expect that the bulk of our activity will occur in the second half of this year. So from my perspective, reasons to be optimistic. Operator: The next question comes from Cooper Clark with Wells Fargo. Cooper Clark: I wanted to talk about the multifamily development and also ongoing recycling plan. Curious how much more peripheral multifamily you could potentially market for sale this year if you're able to source attractive opportunities on the acquisition side and also where yields stand today on the entitled multifamily development pipeline? Donald Wood: Sure, Michael. Let me start on that -- or Cooper rather, sorry. Let me start on that. It's such a kind of unique thing that we have here by having that value in there. There is -- there are still opportunities for us to monetize some residential product. And I'm not going to go into the specific ones right now, but you could probably guess. Again, they are peripheral to our primary mixed-use assets and our shopping center assets. But that stuff is at 5% or lower in terms of those cap rates. And that's just -- it's just a real advantage. Now in total, there's probably another $400 million or $500 million to be able to do of that ilk. Not sure that we will do that. We don't have them in the marketplace yet. But I'm pushing hard, frankly, to start doing that come the second quarter or third quarter and fourth quarter of this year to the extent we find the assets that Jan was just talking about a minute ago. You have one other -- you had a follow-up -- you had a backup question, I don't remember what it was. Anyway? Wendy Seher: Yields on development pipeline. Donald Wood: What's that? Wendy Seher: Yields on residential development pipeline. Donald Wood: And on the -- basically, we're able to underwrite the new development pipeline is somewhere between 6.5% and 7% on most of them. The reality is those are low 5s cap rate assets today. If what happens as what I think will happen is while we enter into it 6.5% and 7%, you'll see strong growth in those assets. The one thing that is crystal clear is at fully amenitized shopping centers, those rents are higher. They tend to have more retention and they tend to grow faster. So I'm just really encouraged about this program, which I don't think anybody got the expertise than we do on the shopping center side to be able to do this kind of stuff. We've been doing it for a long time. I think you should look hard at that portfolio, and we'll be talking to you more about that in the quarters to come. Operator: The next question comes from Andrew Reale with Bank of America. Andrew Reale: Wendy, you highlighted that 2025 delivered the strongest rent spreads and I believe, over a decade. I'm just wondering, is that pricing power being driven by any specific property types or regions? Or is that really truly broad-based? And do you view these levels of pricing power across the portfolio as sustainable throughout 2026? Wendy Seher: Thank you for the question, Andrew. I do consider them broad-based. It's a good time to be in a COO position with this high demand that we're having across the board and limited supply and the kind of premier properties that we own. So it doesn't get me better than right now. I will say that what you're seeing on being able to drive rents, if you look at our last 3 years, we are consistently overall driving rents higher and higher percentage-wise every year for the last 3 years. So I'm really thrilled with that. And then when you look at the demand on the anchor side, you're going to see that our occupancy is going to be kind of driving up as we head into the latter part of the year. So yes, all metrics are good right now. And I do think -- although Dan is going to look at me, I do think given what I know of today and we look at our rollover for next year, we should be able to be equal to where we are today. Operator: The next question comes from Greg McGinniss with Scotiabank. Greg McGinniss: Dan, I was just hoping that you could kind of give us the breakdown on the same-store NOI growth and then the primary pieces that are kind of adding on top of that to get to the 6% growth, that would be appreciated. And if there's anything in the term fee, which is bigger this year than last year, that's like known and in particular, it'd be appreciated. Daniel Guglielmone: Yes. No, with regards to kind of getting to the 6% FFO growth, roughly, and I have been talking to folks, the 3% to 3.5% that I've been talking to folks about over the course of 2025, roughly about $0.30 of growth there represents probably a good -- more than half of the growth in FFO drivers there. And then with probably net from acquisitions and net from redevelopment, you've got about $0.12 each there. So very, very consistent with kind of the guidance we have been giving. The refi headwind is kind of roughly $0.12 in terms of refinancing the 1.25% bonds, the way we're planning them out, that gets you to kind of almost that 6% FFO drive. And our comparable growth is pretty broad-based. It's rent bumps. It is rollover, it is parking. It is across the spectrum of kind of what we create in terms of a comprehensive shopping center growth profile. Nothing stands out there. And with regards to term fees, it's slightly higher than last year. We're just under $6 million. We're guiding to $7 million to $8 million. And we kind of feel like there's some things that are identified. We'll see how that comes out. That's an estimate, and that's why we give a range. But kind of in line, our 20-year history is probably in and around $7 million or $8 million. The last 10 years, probably more in the $5 million to $6 million. So you are kind of right in line with historical levels on term fees. Operator: The next question comes from Craig Mailman with Citi. Craig Mailman: Just curious, Don, as you guys ramp up the sales here and acquisitions take a little bit longer or more back-end weighted in a given year. Just from a timing perspective, do you have enough cushion in the dividend to either 1031 at least from a timing perspective or absorb some of the gains? Or could there be a bit of a special potential here as we move on later through the year? Donald Wood: I think, Craig, that you can count on us managing tax efficiently through the dividend and sales of gains and 1031. All of those tools are available to us to manage our taxable income and our dividend in line with what we've been doing for a bunch of years. That's what you should expect, not a special dividend. Operator: Our next question comes from Alexander Goldfarb Piper Sandler. Alexander Goldfarb: Don, you were among the standouts sticking with the Nareit FFO not going to Core. Real estate has a lot of -- there's a lot of cost, there's a lot of benefits, right? Sometimes you win on revenue, sometimes there's added costs from various things. But as you run the company and look at your team, you don't judge them and say, "Oh, we'll take out these items, take out those items, I'll give you -- I'll let you hit your number." You judge your team based on how they perform. So when you switch to the Core, I get it that there's volatility, but at the same time, isn't the whole point to judge the company based on the results they deliver as sort of the ball lies, not where you'd like it to be? Donald Wood: Alex, the -- adding on a Core FFO metric is truly simply a tool that's aimed not having anything to do with this team at all, but everything to do with being able to better analyze the financial results of the company, making it easier for you to see kind of missing some of the step -- missteps that we've had with -- in the past with simply using Nareit FFO. And so that is completely what this is all about. What is important in our view is that this is not used as a nickel-and-diming, if you will, of the Nareit FFO result, but rather big items, consequential items that just plain old distort the operating results of the company. That's all that's about. This team is judged on their performance based on what they do day in and day out and changing to a Core FFO metric will have no impact on that whatsoever. Operator: The next question comes from Michael Goldsmith with UBS. Michael Goldsmith: Comparable POI growth in 2025 of 3.8% initial guidance for 2026 of 3% to 3.5%. So just a couple of questions on this. Can you bridge the gap from '25 to 2026? Any headwinds that would drive a deceleration? And then is that 3% to 3.5%, is that the right way to think about the steady-state run rate of the business? Or as you continue to reposition the portfolio to higher growth assets, can it accelerate from here? Donald Wood: Yes. The big driver in terms of the deceleration is just we will be turning over, as Wendy alluded to, in her comments, a significant amount of anchor space that's already leased at much higher rents, but there will be downtime as leases end and we position the spaces to give to the incoming tenants at higher rent. That's about a 75 basis point drag of comparable POI. So the 3% to 3.5% is [ Scott ] 75 basis points of drag from that temporary disruption in occupancy. And so we'll see a spike in SNO as a result over the course of the year. So we're at 200 basis points. It's been increasing as both metrics increase occupied and leased. So we expect that to balloon a bit in the middle of the year and then come back down by the end of the year as occupancy levels get up into the -- back up into the 94%, mid-94s, upper 94s from the 94% level today. That's probably the biggest driver. The second question? Steady state, yes, I would say, look, I think historically, when you look back, we're in the 3% to 4% range. I think with some of the acquisitions, $2 billion of acquisitions, and we're seeing that we're operating these assets, I think, better than we had expected and with growth rates that are higher than the kind of 3% to 4% that we've historically seen in our portfolio. I would hope that, that would move up into the upper end of kind of the 3% to 4% range. And I think next year, 2027, we're well positioned to kind of be in and around that 4% level from where we sit today. Operator: The next question comes from Ravi Vaidya with Mizuho. Ravi Vaidya: I wanted to ask about tenant credit. Seems like the reserves are a bit conservative. Can you provide a bit more color here? What was the amount realized in full year '25? And are there any tenants or categories on your watch list? Can you add color on the mark-to-market opportunity for some of the recent bankruptcies, Container Store. Donald Wood: There were too many questions in there. So let me just start here with regards to the tenant credit. 60 to 85 is lower than we were at the start of the year last year at 75 to 100. We were about 80-ish finishing up the year, kind of in that ballpark. It's not very a precise number. But yes, that's kind of where we end up kind of 80 to 85 in 2025. The 60 to 85 we don't have a lot of exposure to tenant credit issues. We just don't. We do have Saks, Saks has got 2 exceptionally strong locations. One, we're getting back or expect to get back or it's closed for going out of business sales, and fifth at Assembly Row, which is a great box facing the power center right on a corner. It's probably got a 100% roll-up in rent from its current rent to where market rent is. So it's a huge opportunity. And the other location is a Saks Fifth Avenue store, a flagship location on Greenwich Avenue, hugely productive in the over affluent submarket of Greenwich, Connecticut, arguably one of the best pieces of real estate in the portfolio. So we'll see how that all plays out, but really, really great real estate with respect to that. The other thing that we keep an eye on is -- and we've talked about it is Container Store, both -- all 5 locations paying rent. All 5 locations, we feel good about. I think that, that's kind of the color we can give there. We'll see how this all plays out. I think we're well covered in the 60 to 85 basis point range that we've given. Operator: The next question comes from Rich Hightower with Barclays. Richard Hightower: I want to go back to one of the comments Wendy made in the prepared commentary about California being especially robust, I guess, enough to make it into the comments. So just tell us what's going on there. I guess we're hearing that from other property types as well. So perhaps it's all sort of singing the same cord, but I'd like to hear what you guys are seeing. Donald Wood: Can we tee up Jeff Kreshek to answer that, Jeff, I'd love you -- Jeff runs our West Coast operations as our President. Jeff, I'd love you to talk about that. Jeff Kreshek: Yes, sure. Rich, thanks for the question. Simply put, California is going to be our largest source of growth for the next few years given the backlog of leasing and development activity and the strategic capital recycling we're seeing out of Santana Row and Grossmont. So California is going to be a big, big contributor going forward for a number of years. Operator: Next question comes from Linda Tsai with Jefferies. Linda Yu Tsai: Just a question on timing. In terms of the $13 million to $15 million for the development expansion pipeline, what's the timing of that? Donald Wood: Yes. We've given some additional disclosure that hopefully will make it easy for everybody to understand at the bottom of Page 29 in the -- our 8-K supplement at the bottom of the guidance page, there is sequential quarterly cadence of the increase over the course of the year. It will be pretty pro rata. It will be pretty close each quarter. And you'll see the ramp-up from the $17 million coming from the properties in the development pipeline up to roughly a midpoint range that gets you to kind of $30 million to $32 million or $31 million midpoint. And so that $14 million, the cadence is outlined there. Anybody have any questions with regards to this additional disclosure that I think would be welcomed by most of you. Feel free to give me a Jill a call. We'll walk you through it. Operator: The next question comes from Floris Van Dijkum with Ladenburg. Floris Gerbrand Van Dijkum: So it seems like some people, based on the questions you've had, the comp NOI growth perhaps is understating the true growth that you expect to get from this portfolio and from this portfolio in '26. maybe -- and I know that in the past, your comp NOI as a percentage of overall NOI was actually pretty robust and pretty high. What percentage of your NOI is being captured in your comp pool today? And how does that impact the SNO pipeline as well? Donald Wood: Yes. I would estimate that kind of what's in the comparable pool is probably 85%, 90%. We can kind of refine that, but that feels about right. With regards to SNO, yes, sorry. With regards to SNO, our SNO within the existing pipeline is growing and significantly growing with the commencement of the PwC lease and beginning to recognize that in the fourth quarter, what's coming from the development portfolio is not going to be as high as it was in the past year. So SNO is probably around $27 million in the existing portfolio and another $5 million or $6 million in the development portfolio. And so the cadence, about 75% of that will come on next year, so roughly, call it, about $25 million and roughly kind of $10 million to $11 million in the first half of the year and call it, $14 million to $15 million in the second half of the year and then the balance in '27. Operator: The next question comes from Juan Sanabria with BMO Capital Markets. Juan Sanabria: Just hoping you could talk a little bit about the anchor movement, kind of what's driving that? Is that proactive by you? Or is that something else that's going on? And then you kind of mentioned a onetime hit that otherwise you would have hit your expectations related to Saks. If you could just quantify that dollar amount, that would be helpful. Donald Wood: Yes. Juan, first of all, on the anchors, simply timing. The way the expirations were working, particularly on the West Coast assets, there was -- there were expirations that were coming due a lot of last year and in the first half of this year, et cetera. So we've been on top of that to try to make sure that we've got either new tenants coming in Grossmont is basically a redevelopment of the entire asset there that's happening. Best Buy at Santana Row, which you may remember going out after an extremely productive period of time for a new lifetime deal there. It's simply the timing that we've got all leased up, but there'll be a hit in the meantime, but we're plowing right through that, and it's still going to grow, hopefully at 6% next year. So that's what's going on with respect to the anchors, nothing more than timing. The tax charge was a noncash charge writing off straight-line rent at roughly around $0.03 a share. Operator: The next question comes from Paulina Rojas with Green Stat. Paulina Rojas Schmidt: My question is about acquisitions. So while acquisitions are shaped really by what comes to market, if you had full discretion, would you cap your exposure to new secondary or tertiary markets? Or are you truly taking a fully market-agnostic approach, assuming property quality meets your standards? Donald Wood: First of all, Paulina, I love that you started this off with. Of course, it depends on how much supply is available because that's a really important point. The acquisitions get lumpy. We are so completely committed to the plan that we talked about last year, which is a combination of the new markets that we talked about. And I think you've seen our buy box of what markets effectively apply to that. And it's 1 million people in a marketplace and very affluent, all of the stuff that we've talked about. But yes, I would be agnostic to whether we find those assets in those places or in our existing markets that we have because real estate is local, and it really comes down to the submarket. And so to the extent we find those opportunities in places that we know inside now, and we're looking at some right now, frankly, that are adjacent to our existing assets, love that kind of stuff. In addition to the new markets that fit the buy box, yes, we're agnostic as to which of those opportunities come to fruition. I hope that helps. Operator: [Operator Instructions] The next question comes from Mike Mueller with JPMorgan. Michael Mueller: I think you mentioned you had another $400 million to $500 million of non-peripheral residential left that you could sell to fund acquisitions. And it seems like the acquisition opportunity is greater than that. So what's next on the pecking order after those remaining resi assets? Donald Wood: No question. And it's not even next. It's in conjunction with, Michael. It would be those assets, retail assets where we've done all we can. And to the extent we've done all we can and we can get a strong price, for those retail assets. We'll use those to recycle into better growth opportunities. So having the opportunity to have both resi and strong assets, strong retail assets that have limited growth opportunities, all of those things are considered. So it's not which one is -- it's not using up the resi and then moving to those. It's a combination based on market conditions and what it is that we -- where we think we can effectively get paid best for. So you should see a combination of both as we move forward. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jill Sawyer for any closing remarks. Please go ahead. Jill Sawyer: Thanks for joining us today. We look forward to seeing many of you in Florida in a few weeks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, and thank you for joining Airbnb's earnings call conference call for the fourth quarter of 2025. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Andrew Slabin, Vice President of Investor Relations. Please go ahead. Unknown Executive: Good afternoon, and welcome to Airbnb's Fourth Quarter of 2025 Earnings Call. Thank you for joining us today. On the call, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of 2025. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll provide some brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I'd like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I'm pleased to turn the call over to Brian. Brian Chesky: All right. Thank you, Andrew, and good afternoon, everyone. Thanks for joining. I'm going to start with a quick recap of our Q4 results, and then I'm going to spend a little more time on what's driving them because that's really where the story is. Now in Q4, we delivered strong results across the board. Revenue grew 12% year-over-year to $2.8 billion, exceeding the high end of our guidance. Gross booking value grew 16% year-over-year to $20.4 billion. This was our highest growth quarter in more than 2 years. Nights and seats booked grew 10%, our strongest quarter of the year. But what matters most is the momentum that we're gaining. In a marketplace, reaccelerating growth isn't as simple as stepping on the gas pedal. It's more like turning a cruise ship. It takes time and discipline, and you don't always see it from one quarter to the next. The acceleration that you're seeing didn't happen by accident. It's a result of a deliberate path that we've been on for the past few years. So let me walk you through it. Airbnb grew incredibly quickly in the years leading up to our IPO, faster than we'd ever imagined. We were like a public -- we were like a company built to be a 2-story house. But we went public, we want to keep building, but you can't add 10 floors to a house that wasn't designed for it. You need a stronger foundation. So we rebuilt our tech platform. We rebuilt the app cab by cab. And over the last few years, we improved nearly every part of the guest and host experience. So rebuilding the foundation wasn't enough. We also need to innovate faster. Now when I look back at what drove Airbnb's early success, it wasn't just the idea. It was how we worked. In the early days, Joe, Nate and I would sit in our apartment and obsess over every detail. We'd shift something, learn quickly and double down on what worked. That cycle, focus, shift, learn, scale is what compounded our initial growth. As companies grow, they often lose that speed and focus. So 2 years ago, we made a deliberate decision. We are going to recreate the same innovation formula inside Airbnb, but at a global scale. We called it Project Hawaii. We created a small elite team and gave them a really clear mandate, make it easier to find and book a home on Airbnb. We start with the little things that make booking harder than needed to be, simple improvements like better search filters and small tweaks to the booking flow. When those changes work, we went bigger. We improved how we convert high-intent visitors into long-term users using simple web prompts to drive more app downloads. We made search more flexible, helping guests discover homes they wouldn't have seen before. That drove an even greater impact. Eventually, we tackled bigger opportunities like completely redesigning the checkout flow to make bookings simpler and more intuitive. Now these are just a few of the hundreds of improvements the team shipped, driving hundreds of millions of dollars in revenue in 2025 alone. And we believe Project Hawaii will deliver hundreds of millions more this year. Now once we saw this blueprint work, we began applying it across the company. So what I want to do is highlight 4 areas where the Hawaii innovation model is driving growth. The first is pricing. Hidden fees are one of the biggest friction points in travel. So we created a pricing team with a clear goal: make pricing simple and more transparent. The first major step was showing the total price upfront to guests. In the U.S., we are the first major travel platform to do this. The price transparency was just the beginning. We launched dozens more updates for more flexible cancellation policies to better pricing tools for hosts. These changes stacked. Then we made the biggest move of all, Reserve Now, Pay Later. For the first time, guests in the U.S. could book eligible stays paying $0 upfront. The response is immediate, driving booking acceleration in Q4, especially for larger high-priced homes. We're now expanding this to new markets, and it's a key part of the strength we're seeing in Q1. Now we believe that pricing initiatives will drive as much revenue this year as Hawaii and will remain a strong tailwind for years to come. Next up, supply. Most of our supply growth is organic with hosts coming directly to us. But we've also built a supply engine that lets us be surgical about where we grow. And the best example is how we lean into large events. For example, in Paris, we added over 40,000 listings for the 2024 Summer Olympics. Now we're repeating that same playbook for the biggest event on Earth, the 2026 FIFA World Cup across 16 cities in North America. At the same time, we're also improving quality. We've removed over 0.5 million low-quality listings, while guest favorites, the very best listings in Airbnb grew 30% in 2025 compared to 2024. And in Q4, guest favorites made up nearly half of all bookings on Airbnb. We also apply the Hawaii model international growth. Airbnb operates in nearly every country in the world, but roughly 70% of our revenue comes from just 5 countries. Now that's a massive opportunity, and we're unlocking it by going deep in a small number of priority countries. And Brazil is a great example. A few years ago, Brazil was a smaller market for us. We put a focused team on it. We introduced features that we know matter to the Brazilian market like interest repayments and local payment methods, and we leaned into the cultural moments like Carnival. We also invested in local campaigns to build relevance. The results have been incredible. Brazil moved from a top 10 market to a top 5 market on Airbnb. In Q4, it was our second largest contributor to first-time bookers behind only the U.S. This shows what happens when you pair global scale with local execution, and we're applying the same playbook to our highest priority countries in every region. Finally, we're applying the Hawaii model to new businesses. We launched services experiences globally in May, but to better scale them, we're taking a city-by-city approach. We're going deep in one place, reaching product market fit and expanding from there. We started with Paris for experiences in L.A. for services, and we're really seeing great results. We're also starting to test new services like grocery delivery and airport pickup to make each trip better from the very beginning. And to capture even more trips, we're bringing boutique and independent hotels onto the platform so that no matter what kind of stay a guest wants, they can always find it on Airbnb. Now it's still early, but the opportunity with hotels is massive, and we plan to share more about our approach later this year. But the big idea here isn't just building a bunch of stand-alone businesses. These are all part of a much larger vision, the Airbnb trip. We are one app and one brand, where every part of the trip makes the other parts stronger. There are multiple entry points in Airbnb and multiple ways to drive more bookings. A guest might book a service or experience, then discover a home for the trip or they might book a hotel for a business trip, then come back here for me to book a home for a family vacation. Each part of the trip reinforces the others. The final piece that accelerates everything we do is AI. Now we've taken a really intentional path here. While other companies rush to build chatbots into their existing apps, we started by solving the hardest problem, customer support. We built a custom AI agent trained on millions of our support interactions. It's already resolving 1/3 of the support issues without needing a live specialist and resolution times are significantly faster. It's live across North America, and we're planning to roll it out globally. But that's just the beginning because we're building an AI-native experience where the app doesn't just search for you. It knows you. It will help guests plan their entire trip, help us better run their businesses and help the company operate more efficiently at scale. That's a big reason we brought in Ahmad Al-Dahle as our CTO. Ahmad is one of the world's leading AI experts. He spent 16 years at Apple and most recently led the generative AI team at Meta that built Llama models. He's an expert at pairing massive technical scale with world-class design, which is exactly how we're going to transform the Airbnb experience. This approach is also our strongest defense against disretermediation. A chatbot can give you a list of homes, but it can't give you the unique points you find in Airbnb. A chatbot doesn't have our 200 million verified identities or our 500 million proprietary reviews, and it can't message the host, which 90% of our guests do. It can't provide global payment processing, customer support or insurance. By layering AI over the entire Airbnb experience, we believe we're building something that's impossible to replicate. So you can see why we're so excited about the year ahead and our guidance reflects that. We expect revenue growth to accelerate to at least low double digits in 2026. We expect adjusted EBITDA margins to be stable year-over-year. And we'll do all of this without investing billions or tens of billions of dollars. We don't need massive capital investment to grow. We don't own homes. We don't operate experiences, and we're not building data centers. What we're doing is finding small wins and scaling them profitably. That's why we've been able to generate free cash flow at nearly 40% of revenue and nearly $19 billion of cumulative free cash flow since our IPO. It gives us the ability to reinvest back in our business while strengthening our balance sheet and maintaining healthy margins. Now as you look ahead to 2026, we can't predict every quarter with precision. Travel is influenced by everything from currency to macroeconomic conditions to global events. But what we can control is the speed of our innovation. In the long run, that's what leads to more growth. So in summary, we rebuilt major parts of the company. We adopted a new blueprint for innovation, and now we're seeing increased momentum. That doesn't happen by accident. It's a result of an incredible team growing in the same direction at global scale. So to everyone in the Airbnb team is listening, thank you. The business is stronger because of you. With that, I'll turn it over to Ellie to walk through the financials in more detail. Ellie Mertz: Thanks, Brian, and good afternoon, everyone. As Brian just shared, we're seeing increased momentum in our business. I'll start with Q4 financial results, and then I'll cover our outlook for Q1 and the full year 2026. Q4 was a great quarter for Airbnb. Gross booking value grew 16% year-over-year to $20.4 billion, driven by strong growth in both bookings and price. Nights and seats booked increased 10% year-over-year, an acceleration from Q3 with strength seen across all regions. By region, Latin America grew in the high teens. Asia Pacific grew in the mid-teens. EMEA accelerated in the high single digits and North America grew in the mid-single digits. Now going into the quarter, we expected a tough comp given a particularly strong Q4 in 2024. And as the quarter played out, we saw a slightly better macroeconomic environment than anticipated. But more importantly, our product road map delivered material lift to the business. As Brian shared, we've been steadily making it easier to find and book a home on Airbnb. In Q4, a few updates in particular helped drive our acceleration. The launch of Reserve Now, Pay Later, updates to our cancellation policies and the beginning of our migration to a simplified fee structure. Reserve Now, Pay Later saw significant adoption among knowledigible guests in Q4. It's also led to longer booking lead times and a mix shift towards larger entire homes, especially those with 4 more bedrooms, contributing to the increase in ADR. And as Brian mentioned, given the positive results, we've decided to roll it out to more guests globally and to cross-border stays in the U.S. Our updated cancellation policies and simplified fees also contributed to both NIKE and GBV growth in the quarter. As a reminder, beginning in October, we started simplifying our fee structure, which we believe will help our host price more competitively. We began migrating our API host to a single service fee and now plan to migrate more hosts in 2026. Hosts on a single service fee can adjust their prices to maintain the same net earnings while guests continue to see the full price upfront. In total, we estimate these 3 features delivered over 200 basis points of growth in NIKEs book and roughly 300 basis points of growth in GBV in Q4. In 2026, we'll continue iterating to simplify pricing, improve transparency and help our hosts stay competitive. Now turning to our Q4 financials. Revenue was $2.8 billion, up 12% year-over-year and exceeded our guidance, driven by the impact of our product updates. In terms of profitability, we generated $786 million of adjusted EBITDA, representing a 28% adjusted EBITDA margin, also exceeding guidance. Finally, net income was $341 million and was negatively impacted by roughly $90 million of onetime non-income tax. For 2025, our full year effective tax rate was 20%, including onetime discrete items that increased our provision for income taxes in Q3. Now starting in 2026, we expect the One Big Beautiful Bill Act to materially reduce our effective tax rate to the mid- to high teens, primarily due to how foreign earnings are taxed, which will benefit our consolidated earnings. Next, to our balance sheet and cash flow. We continue to generate significant cash in Q4, delivering $521 million of free cash flow. In 2025, we generated $4.6 billion, representing a free cash flow margin of 38%. At the end of Q4, we had $11 billion of corporate cash and investments as well as $7 billion of funds held on behalf of our debt. Our strong balance sheet allowed us to repurchase $1.1 billion of our common stock in Q4, up from $857 million in Q3. And in 2025, we repurchased $3.8 billion of our common stock using over 80% of our free cash flow. Returning capital to shareholders remains a key component of our capital allocation strategy. Since introducing our share repurchase program in 2022, we've reduced our fully diluted share count by about 9%. Now let's shift to our Q1 and full year 2026 outlook. We're encouraged by the momentum we've seen so far this year and excited about our road map to drive growth in 2026. In Q1, we expect to generate revenue of $2.59 billion to $2.63 billion, representing year-over-year growth of 14% to 16%. This includes an approximate 3-point FX tailwind after factoring in our hedging program. We expect gross booking value to increase in the low teens year-over-year, driven by high single-digit growth in nights and seats booked and a moderate increase in ADR due to price appreciation and FX. On profitability, we expect Q1 adjusted EBITDA margin to be approximately flat year-over-year. And for the full year 2026, we expect year-over-year revenue growth to accelerate to low double digits with an ambition to grow even faster than that. While FX tailwinds should fade as the year progresses, we're encouraged by healthy demand and execution across our growth initiatives. We're also excited about major events this year, including the Winter Olympics happening now in Milan and the FIFA World Cup coming this summer. Cities continue to look to Airbnb to help meet demand around large events, and our global supply positions us well to support that demand. Overall, we believe continued progress against our product optimization pilots and new offerings, together with broader macro conditions will support incremental growth in 2026. And finally, across the full P&L, we're continuing to drive efficiencies in our platform. We plan to reinvest most of these efficiencies into marketing, product and technology to support our growth. As a result, we expect our 2026 adjusted EBITDA margin to be stable year-over-year. And to close, 2025 was an exciting year, and I'm incredibly proud of what the team delivered. We're carrying that momentum into 2026 with an ambitious set of goals. We'll continue strengthening our core business while accelerating innovation to drive growth. And with that, I will open it up to Q&A. Operator: [Operator Instructions] Your first question comes from the line of Richard Clarke from Bernstein. Richard Clarke: I guess AI is the topic du jour, and you gave some helpful remarks about why the AI bots today can't match what Airbnb do. But given the sort of speed of innovations going on, why do you think those AI platforms couldn't launch a short-term rental platform over time? And maybe secondly, do you see any risk that you'll have to share your economics with an AI platform at some point going forward? Or do you expect you'll be able to retain the same level of direct traffic you have today in an AI world? Brian Chesky: Yes. I mean it's a great question. Let me start by saying this. The vast majority of what is Airbnb is not the app that you see. First of all, we have a whole host app, which is really critical, and we've built this over 18 years. We handle more than $100 billion in payments through the platform. Customer service is one of the most difficult problems in Airbnb. We don't have SKUs. People -- we need to adjudicate between people speaking different languages. We provide insurance and protection for everyone. We do a lot of verification. 90% of people who book on Airbnb send a message. You can't send a message without verified ID. We have 200 million verified IDs, which is more than U.S. passports in circulation. The vast majority of our homes and our unique inventory is only on Airbnb. We're adding more offerings over time, and we think people are going to want to put them together into an itinerary that they could bring on in their phone with them when they're traveling. I think these chatbot platforms are going to be very similar to search. They're going to be really good top-of-funnel discoveries. And in fact, what we've seen is I think they're going to be positive for Airbnb. And I'm very, very deep in this space. And what we see is that traffic that comes from chatbots converts at a higher rate than traffic that comes from Google. But the other thing to know, and this is the most important point, is that these models are not proprietary. The models in ChatGPT, the models in Gemini, the models in Claude and the models like Kiwi are available to every single company. And so pretty soon, every company becomes an AI platform if they make the shift. We will be able to build everything everyone else will have if we use their models. And we believe specialization will win in travel because if somebody wants to find an Airbnb or have a trip, we can take their model, the same model they use, we can post train it and tune it based on our million interactions. We can connect it to our customer support agents. We can connect it to our host. And that's fundamentally what we think. It's why we've hired Ahmad Al-Dahle, one of the foremost leading experts in AI. Ahmad Al-Dahle, in fact built one of the models. He built the Llama model. And we want to build a team to make our company much more of an AI-native company. So I think that for chatbots or AI companies to win, we don't need to live in a world where everyone else has to lose. I don't think that one company is going to own everything. I think we're going to be able to work together. And these companies will be very helpful top-of-funnel traffic generators for Airbnb just like Google. Operator: Your next question comes from the line of John Colantuoni from Jefferies. John Colantuoni: Okay. I wanted to ask one on Asia region. NIKEs growth was still strong at the mid-teens and mid-teens, but did moderate from recent quarters. I know it's your smallest region, but I was hoping you could talk to what drove the slowdown and how you think about growth -- the growth opportunity in Asia Pacific over time. And second, I was curious on the services and experiences, have you seen any signs that they're helping you acquire new customers that you can convert to accommodations given that over half of your experiences weren't attached to an accommodation bookings. Ellie Mertz: Let me start with the Asia question. So when we look at our performance on APAC from a destination perspective, overall growth has been, I would say, relatively stable over the course of 2025. That being said, we see a tremendous amount of opportunity in terms of future growth for the region. What I would say in terms of APAC is that, obviously, there is different pockets in terms of where we have seen substantial growth. As you're probably aware, we have relatively high levels of penetration in Australia, which we factor into that number, whereas we're relatively nascent in some of the, I would say, continental countries, in particular, places like India, Southeast Asia, Korea, et cetera. What we shared in the letter is that we're seeing nice performance in those markets that we have begun focusing on. So in particular, what I would call out is domestic Japan. That's a market and segment that we began our expansion playbook back in Q4 of '24 and have seen some nice results. Second, I would call out India, which we mentioned in the letter, a huge market where we are seeing really substantial growth. So 50% growth in the last quarter, very strong, and we see opportunities to accelerate that growth in '26. So the broad story in APAC is stable. We are seeing some very positive signs in particular markets that we're leaning into, and it's the focus of our international markets expansion strategy going forward. Second question. Yes. I mean what we called out in terms of the dynamics of where we are finding experience booking, the call out in the letter that we provided is about 50% of our experience bookings today come from guests that are unattached to a homes booking, meaning they are not already staying with us in a home and therefore, attached to the trip an incremental experience. They may be staying in a hotel in that market. They may be not traveling at all. And what I would say there is it's a very exciting opportunity for us in a couple of forms. One is it provides a new segment of guests that we can, in the future, convert to home guests. It also gives a sign that with these new products and offerings, we have the opportunity to have a higher frequency guest usage beyond just a big trip. So for example, something that we see in Paris is that there's been a really nice uptick in terms of, in particular, our Airbnb original experiences by local Parisian, which tells us that, that category of inventory, albeit highly differentiated, is a great opportunity for us to attract global crowds to our app. Brian Chesky: Yes. I think one of the things that I called out in my opening remarks is we're seeing a lot of momentum about getting new offerings off the ground and piloted. And our basic idea is it's not dissimilar from Amazon in the late '90s where they started as a book retailer. The unifying idea of Amazon, though, probably was the cardboard box. In other words, everything that you could send in a cardboard box. And so you could send all these different things and they added one category at the other. I think the unifying idea for is the trip. We take a very, by the way, broad definition of the trip, including 30-day stays and even longer. But there are so many different components that we can offer. And the basic idea is we want every new offering to be strong enough to stand alone, but better together. And so the hotel is a great example. There are some people that only stay in Airbnb. There are some people that only stay in hotels. Most people are [indiscernible] and some trips are better in Airbnb and then some trips, if you need a last minute stay, you're traveling for business, you're doing more night, it's really good for hotels. So we think that all these components can make the overall offering better. There's a lot of synergies. Lee Horowitz: I guess can you give us a sense of how Reserve now, pay later cancellations have been pacing relative to your expectations, perhaps particularly in the face of weather disruptions in the 1Q? And then how you're thinking about baking in cancellation expectations to your full year adjusted EBITDA guide? And then secondly, in the past, you've talked about how AI search will preclude your deployment of sponsored ads. Can you maybe just unpack that a bit more and explain how AI search particularly may help you bring sponsored ads to market a bit more quickly? Ellie Mertz: So first, on the question of Reserve now, pay later and the impact of cancellations. If we stack up for a moment, before we launched Reserve Now, Pay Later in the U.S. back in the summer of 2025, we extensively tested the product to ensure that by the time the cohorts opting into the product had reached their check-in date that it was net beneficial to the business, meaning that the growth in bookings was larger than the net increase in cancellations before check-in. We're doing that level of testing for each incremental segment. We are considering expanding Reserve Now, Pay Later out to ensure that the net benefit is obviously positive for the business. What I should say is that in the segments that we have launched this offering, the cancellation curves have been very close to what we saw from a tested perspective. And so we feel frankly, quite good about the progress and the performance of that offering. In terms of its impact over the full year, obviously, there is a bit of a pull forward in terms of when people make their bookings, but we are already absorbing the elevated level of cancellations from that product. I think one piece of perspective is that in terms of the aggregate nominal increase in cancellations rate, it's approximately 1%. So an average of maybe 16% cancellation rate historically going to 17%. It's obviously higher within the cohort that chooses that product, but it's not hugely material relative to the broader cancellations on the platform. Final thing I would just note on Reserve Now, Pay Later, as we've called out, it is lengthened lead times, which we think is good from a competitive perspective. And second, it has a modestly positive impact in terms of increasing ADR as consumers who don't need to extend a huge purchase on their credit cards are more likely to choose a slightly [indiscernible] listing. Brian Chesky: Yes. And then on the AI search and how would it impact sponsored listings, I've been asked quite a few earnings calls about sponsored listings. And one of the things that being really clear with the -- after the launch of ChatGPT was that traditional search was going to become essentially conversational AI search. And that what we wanted to do is really design AI search, really see how that works. And then if we are going to do sponsored listings, we design that ad unit in that form factor. So we're focused, first and foremost, on the most perishable opportunity, which is AI search. Actually, funny enough, we are doing tests as we speak. So AI search is live to a very small percent of traffic right now. We're doing a lot of experimentation. The way we do things with AI is much more rapid iteration, not big launches. And over time, we're going to be experimenting with making AI search more conversational, integrating it into more of the trip. And eventually, we will be looking at sponsor listings as a result of that. But we want to first nail AI search. Operator: Your next question comes from the line of Brian Nowak from Morgan Stanley. Brian Nowak: Brian, maybe to go back to that last question on AI search. Maybe as you sort of another bigger picture one. As you sort of sit here in early 2026, if we're sitting here a year from now, what are the areas you're most focused on or seeing improvements to the platform using AI this year? That's one. And then two, maybe one just on the P&L impact. Any help at all on how you're thinking about the impact on gross margins from increased AI investment this year versus last year? Brian Chesky: Yes. I can answer -- I can answer both of them. And I'll start with the second one. I think one of the great things about Airbnb is that we have a very, very cost-efficient innovation model. So unlike other companies, we're not building models. We do not have a huge CapEx cost base. So our investment in AI will not affect the P&L. I don't think you'll see it in the P&L. That's number one. Number two, it's a year from now, if we're successful AI would it be seen, I think 3 or 4 things. Number one, let's start with customer service. Right now, nearly 30% of tickets in North America that are English-based are handled by an AI agent. A year from now, if we're successful, significantly more than 30% of tickets will be handled by a customer service agent in many more languages in all the languages where we have live agents and AI customer service will not only be chat, it will be voice. You can actually call and talk to an AI agent. We think this is going to be massive because not only does this reduce the cost base of Airbnb customer service, but the kind of quality of service is going to be a huge step change. Not only can you get responses in seconds, but the agents using AI are going to be significantly more productive. That's number one. Number two, it's going to make our engineers and everyone at Airbnb significantly more efficient. More than 80% of engineers are now using AI tools. That soon will be 100%. But of course, that metric is a bit of a bandy metric. The real question is, what's the culture of the company? Are you a start-up? Are you highly adaptable to the changing currents of AI? And I think Airbnb, certainly within our space is the most adaptable. We are designed to adapt to not move like a cruise ship, but to move very nimbly. So that's partly why we hired Ahmad Al-Dahle. We wanted to be on the frontier of AI, at least for the non-native AI companies. And I think you're going to see a lot more productivity and a lot more innovation velocity. The third is you're going to start to see AI through the booking experience and the listing experience. AI search will eventually -- I can't put a time line on it because AI is obviously highly unpredictable. But we want to be -- we would love to be the first company in e-commerce that really nails AI search, conversational search. I think it's really hard not just to travel but all e-commerce. One of the reasons that chatbots are really hard for commerce is because they're very visual. They're photo forward. You need to be able to compare. You need to be able to open different tabs. So a text forward chatbot interface is not the ideal. So we have to actually innovate on the user interface. We're also using AI across the board, like being able to list your space much more easily. So if we are successful 1 year from now, in summary, AI customer service will be voice and chat across all languages. It will penetrate many more ticket types. That -- it will be -- it will massively accelerate our innovation and will be as AI native as any other company in our space or more. And then finally, the experience for guests and hosts will be materially better. Operator: Your next question comes from the line of Doug Anmuth from JPMorgan. Dae Lee: This is Dae Lee on for Doug. I have two. First of all, looking at the 2025 revenue acceleration guide, could you help us think through the acceleration drivers across the core markets, expansion market services and perhaps any tailwinds from major events like the World Cup and Olympics? And are you anticipating any top line benefits from some of these AI innovations that you discussed? Ellie Mertz: Certainly. So when we think about the growth outlook for 2026, we are certainly taking into account the momentum that we've seen coming off the launches that we've mentioned driving the Q4 results. We anticipate those will continue to benefit the top line in the beginning of '26, and we're obviously looking to expand upon them. Beyond those that I mentioned, we're obviously continuing to invest in several other growth levers. In particular, we're investing in incremental supply. We're investing in our expansion markets and several other key initiatives. In terms of the back half of the year, we'll obviously be comping some of the launches that we had in Q4. So we'll lap those, but intend to have incremental growth levers throughout the year to support that. You asked just about the major events. Obviously, the Milan Olympics is happening right now, and we're looking forward to FIFA this summer. I would say those two events, in particular, they are large events on the platform, but in scale are very small portions of the overall business. So we're looking forward to them. They will be additive in the quarters that they hit. But I would say on the larger events, the benefit of those events is not just the bookings during the period of the event instead of the benefits we get from increasing overall awareness of the brand, driving incremental supply in those markets and more broadly, the brand halo we get from connecting our brand with such beloved global events. What we've seen actually for the current Olympics and the past Olympics is that guests who know of the brand partnership between Airbnb and the Olympics have a more favorable impression of the brand. So many reasons that we do those only one is the in-period impact to the business. And then in terms of the contribution from AI, I would say, as Brian shared, we will be -- we are currently piloting AI search. We have nothing baked into our outlook in terms of the benefit from that deployment. Operator: Your next question comes from the line of Lloyd Walmsley from Mizuho. Lloyd Walmsley: Two, if I can. First, just on hotel. When we talk to hotels and connectivity partners, we hear like an enthusiastic response on working with you guys, but there's also -- it sounds like a lot of friction with the connectivity APIs and sort of supporting multiple rates. It seems like there's a lot of friction today. Just wondering, are you sort of committed to building or rebuilding those connectivity layers? And what other things are you guys doing to sort of build foundations on hotel? And then second question, just stepping back, opening up the aperture of inventory, whether that's more mainstream hotel or experiences, it would seem like you could unlock significant TAM by just going a bit more mainstream. Brian, how do you feel about having more of that type of content on the site and the trade-off between sort of keeping things unique versus addressing bigger and bigger portions of the market? Would love to just hear how you think about that. Brian Chesky: Yes. It's a great question. Again, I've gone back to Amazon as a pretty good reference point for us. They started with one category books. They became synonymous with that single category and eventually, they rebuilt their platform to expand in many categories. That's our strategy. And so the answer to your question, yes, we are opening the aperture. We're opening the aperture and accommodations. We're opening the aperture beyond accommodations and beyond places to stay. One of the reasons we are able to do this is AI allows us to personalize. Some people come to Airbnb and all they want to see our unique homes. And before AI, like personalization was a little more primitive. So if they saw a hotel, it might be jarring. Now we can really personalize. So people who just want to see Airbnbs can see Airbnbs. People just want to see hotels, we can eventually personalize, they can just see hotels. If people want to see both, we can know if you're booking last minute, night, then we're going to show you a hotel. If you're booking a family of five in Italy, we're going to show you a home. So it really goes back to personalization. The more personalized we are, the more types of inventory we can offer. So this then, I think, goes to our broader strategy. What is our strategy for hotels? Our strategy for hotels used to be that we thought of them as filling in network guests when a home is booked and when homes are high occupancy, you can get a hotel. What we've now evolved to is a much bigger strategy, a much more expansive strategy. It turns out, obviously, as we spend a lot of time with our guests that a lot of guests love to book homes and hotels. And we ran an ad campaign, some trips are better on Airbnb, but it also means some trips are better in hotels. And so if you're booking last minute, if you're booking 1 night, if you're booking for business, if you're staying for a conference, this might be a really good reason for the hotel. But also, we're really focusing on boutiques and independence and a large percent of the inventory -- in the hotel inventory in the world are boutique and independent. They're providing threat hospitality. I mean these hotels really fit the ethos of the Airbnb brand. And these are not niche. This is a huge percentage of the hotels in the world. And as we spoke to these affiliates, they've been very, very enthusiastic. They want to list another channel. They like their local mission. They love the merchandising. We love the type of travel work we have. So we think as we get more aggressive hotels, not only do we open up the aperture to a huge TAM of hotels, it actually strengthens home. Operator: Your next question comes from the line of Stephen Ju from UBS. Stephen Ju: Great. So Brian, can we revisit the halo effect that you might have seen following the Paris Olympics and how that might have helped you from either an awareness or greater user, I guess, experience or comfort perspective and how that might ripple through after the World Cup here in the United States. And Ellie, even at the low end of your revenue guidance to keep margins flat, you have to figure out a way to spend some $800 million more year-over-year. So just wondering where the larger spend buckets are going to be for this year. Brian Chesky: All right. So let's start with the Paris Olympics and how it may -- what it might portend for the World Cup. The Paris Olympics was massive for our business, not just in Paris, but really all over France and globally. One of the things that happened was events are likely the very best way for us to add new supply. And one of the great things about adding supply for events is it's usually everyday people listing homes that are often exclusive to Airbnb. So this is really, really compelling. And in fact, this is how we started Airbnb. As many of you know the founding story, we started to provide housing for events. And we've designed and built our platform for -- from the very beginning. The great thing about events in Airbnb is a lot of people have no intention of becoming a host. They have no intention in doing this year around. But an event comes to town and they want to make money 1 week and they list their place and they introduced the concept of hosting and they realize they like it and they continue hosting. 40,000 people who list their homes in Paris have continued hosting, and that's been really, really powerful for us. So the other thing was really powerful from a policy standpoint I think Airbnb goes from sometimes a problem cities have to deal with to a solution to the problem. And what we know is these large events, hotels can't accommodate everyone. So it's a bit of a reset moment where we can actually come and tell cities that we actually can be a solution to your challenge. And it is just a great way to experience Airbnb because it's a great way to bring cultures together. And the thing about the World Cup that's so powerful is, obviously, as you know, it's in 3 countries. And so it allows us to handle really important markets, not only important markets in the United States, but like Toronto and Mexico City, 2 of our most important markets in the world. So I think the World Cup will be massive. We have the Milan Olympics happening right now. The Milan Olympics was not only great for Milan, not only great for Northern Italy, but was great for our relationship with the Italian government. And I think that we don't just need the World Cup. We don't just need the Olympics. We actually can work with smaller events like Lollapalooza. We can work with really local events. So the event strategy scales from big global events down to local events, and we think they're one of the best ways to recruit supply, and that's what we're going to do to grow our supply in Airbnb. Ellie Mertz: Let me answer the second question about EBITDA. As we look at the construction of the '26 P&L relative to '25, obviously, the top of our P&L in terms of cost of revenue and cost and support will scale somewhat linearly, we'll have some efficiencies there, but they will scale somewhat linearly with obviously, the growth in revenue. where you will see some incremental investment to drive growth is obviously in sales and marketing. This is both in the form of programmatic marketing, but more so in terms of our go-to-market efforts. What this means is all of our efforts around acquiring supply, not just homes, but obviously also for experience services and hotels. And then we will also continue to grow our investments in product development to allow for a greater accelerated pace of innovation. I would say more broadly, talking about the '26 P&L, hopefully, it was clear in our opening remarks as well as in the letter -- our ambition is to accelerate the top line, and we're giving ourselves the flexibility within the stable margins compared to last year to invest to achieve that acceleration. We're quite proud of the level of profitability that we have achieved historically. And the focus right now is, again, accelerating growth within those very strong stable margins. Operator: Your next question comes from the line of Justin Post from Bank of America. Justin Post: Brian, in your prepared remarks, you talked about app improvements and obviously improving supply. Are you seeing any improvement in repeat rates or customer service scores? Or what kind of feedback are you getting on that? And then, Ellie, maybe you could talk about the U.S. room night growth. It definitely has got back to mid-singles. What's your outlook for that as we look forward? Brian Chesky: Yes. I mean I could start with -- one of the things we noticed is the repeat rate of Airbnb is pretty much -- you can simplify it down to the satisfaction of the guest. The satisfaction of the guests first and foremost, the satisfaction of the home and then if something goes wrong, the satisfaction of customer service. That's why we focus, first and foremost, on host quality. Now that guest favorites are approximately half of our bookings, the quality -- the trip quality, which is a score we look at, has gone up significantly. That means satisfaction has gone up. That means that repeat use is stronger -- is really strong, and I think that explains a bunch of our re-acceleration. And customer service is better than ever. We track NPS, and it's the strongest it's been since the pandemic by far, and it's accelerating. And I think, again, it's not just the hard work the team is doing. But again, I think the quality of the management of our marketplace, all the supply management we do. We think it's unprecedented in our category, what we do. We removed more than 500,000 listings via guest favorites. We're really, really tight on quality control. And then the customer service that we have, which is best-in-class, we think, in our category and with AI supporting it, I think it's going to continue to improve. So yes, it's been a huge tailwind for us. Ellie Mertz: Speaking to the U.S. or more broadly North America, certainly, at the beginning of '25, so Q1 and Q2, the growth in that region was quite modest, low single digits. We're excited to be able to accelerate that in Q3 and then once again in Q4. That is a byproduct, I think, one of a slightly stronger macro, but more importantly, the product changes that we have discussed in the letter and on this call. I would say heading into '26, we continue to see great momentum for North America at large, and it is one of the underpinning points of our optimism around '26. Operator: Your next question comes from the line of Mark Mahaney from Evercore ISI. Mark Stephen Mahaney: Two questions, please. When do you think -- what's a realistic expectation for when hotels will be big enough to actually start moving the needle in terms of that revenue growth acceleration? Or do you think that, that is one of the factors behind the revenue growth acceleration this year? And then secondly, could you just talk about the take rate dynamics in Q1? What's embedded in your guidance here? Your revenue growth is sort of accelerating versus Q4, but your room night growth seems like it's slightly decelerating or similar growth and your bookings growth ex FX is slightly decelerating. So is there something that's boosting take rate in Q1 that caused that revenue growth to accelerate? Ellie Mertz: Sure. In terms of hotels, just to size hotels today, so as of Q4, hotels was a single-digit percent of total nights booked but growing nearly double that of the overall platform. So it will take some time for that business to scale to have a meaningful contribution to growth, but the current momentum is quite strong. We'll be -- as Ryan shared previously, we'll be expanding the hotel supply over the course of the year and intend to exit '26 with hotels being a meaningfully larger percent of the overall business going forward. In terms of the take rate expansion in Q1 and what's going on with the, I would say, high level of growth in Q1 relative to Q4, a couple of dynamics. First is the impact of ADR and FX. As we called out in the letter, the realized tailwind of FX in Q1 will be quite strong at nearly 3 percentage points. We're also getting the benefit of earlier lead times of bookings in Q4 that will realize in stays and hit revenue in Q1. And then in terms of the implied take rate, it should be modestly above where we were in Q1 of last year, mostly due to some timing consideration. One other small component to give you the laundry list is Easter this year is on the kind of in the middle effectively, it's on April 5. So you don't see as big a quarterly swing as we have seen in prior years when Easter moves materially in and out of Q1. But we anticipate it will support about 50 basis points of incremental revenue in Q1 and 50 basis points less revenue in Q2. Operator: Your next question comes from the line of Jed Kelly from Oppenheimer. Jed Kelly: Just, I guess, going back to hotels. And I get how the company was built, unique supply. But can you just talk about like why not lean into more brand hotels just because it could give the user and open up more supply and potentially bring in more new users to the platform? Brian Chesky: Yes. I mean, we're -- a large percent of the hotels are boutiques and independent. And we want to just start there. We're not saying what we will or will not do in the future, but we think that we want to like just start with a huge number of boutiques and independents that are typically paying a higher commission than the chain and have been really aggressive with us reaching out saying that they would love to have another channel. So that's our starting place. We're not saying where we're eventually going, but this is where we're focused right now. So we're focused on our top markets in the world where there's a proliferation of great boutiques, great independence. We have more than 100 hotels in New York with more than 20,000 rooms available on the site just in New York City alone. Operator: Your next question comes from the line of Kevin Kopelman from TD Cowen. Kevin Kopelman: Great. I wanted to ask about the new all-in commission structure for PMS connected host. What are some of the benefits you're seeing from that change? And could you see Airbnb moving all of its hosts over to that structure longer term? Ellie Mertz: Yes. So I think you're probably aware of our historical structure. The business was set up with a dual fee structure where there was a 3% host fee and then variable guest fee on top of that. What we found over time is that, that dual fee structure makes it difficult for hosts to effectively price their listing. It's frankly a little bit complicated. And in particular, for those listings that are cross-listed and in particular by property managers, it often leads to incorrect pricing, meaning what the guest sees is not what the host intends. And in many cases, that means that a listing can sometimes be more expensive on Airbnb when it's cross-listed somewhere else. So from the migration that we completed back in October, which was to migrate all of our API connected hosts to the single service fee, we've seen great results. Number one is we obviously very delicately manage the communication with our host to ensure that they did not perceive this as a fee increase. And in making the migration, what we found is that many of the hosts did not take up their rate. Instead, the effective ADR to guests came down modestly, which obviously you can conclude is really great from an affordability perspective as well as elasticity and that is the reason that has been a driver or contributor to growth in Q4. We are currently piloting in certain countries a further migration for our individual hosts, again, from the dual fee structure to the single service fee. We think a more expansive migration, number one, allows it to be easier for the host to understand what they should price. It allows us to make sure that we are pricing all of our listings competitively. And we also think it's a foundational move that will allow us to, one, be more dynamic with our pricing tools as well as our fees. Operator: Your next question comes from the line of Ken Gawrelski from Wells Fargo. Kenneth Gawrelski: Two, if I may, please. First, with on loyalty. Brian, could you talk a little bit about -- you on past calls, have talked a little bit about a different approach to loyalty. It really hasn't come up as much, I don't think on this call, and I apologize if I missed it. But could you talk a little bit about your vision for loyalty and how that spans across the different products and services that you aspire to offer on the platform? And the second thing is maybe referring back to the shareholder letter where you talk about the speed and I think you called it the Project Y in terms of the speed of decision-making and new product releases, will this impact at all the way you think about -- you've been on a bi-annual or every 6-month cadence for new product releases, consumer -- either to the consumer or to the host. Could you talk a little bit about how maybe what you've learned or the experience you've had with this new more efficient decision-making has could inform the product release going forward? Brian Chesky: Yes, sure. Maybe I'll start with the second question and over to the first. So we're still going to do biannual product release moment, but our methodology is going to be a little bit different. Last May was kind of a onetime like rebuilding of the platform. We had to basically rebuild our app from a home platform to a platform you can book any part of your trip. Hence, the now you can book more than -- you can need more than Airbnb. Basically, every tab in the app changed. What we're now doing is we're not waiting for a release to shift. We're really shipping every minute in every hour of every day. So the teams are shifting. We still will have the May release where we'll showcase the stuff we're doing, but we're not holding stuff back. When they're ready, we will shift them. And we use May as a bit more of a showcase of what the product improvements are you can expect this summer. So if that makes sense, it's more of a essentially marketing showcase, a product marketing showcase versus us holding back features. But we still do think telling a story a couple of times a year to our guests, our host and our shareholders about the improvements in innovation we make is a really good thing. I think releases are a really good way for us to tell the story. But again, why it means that we don't wait for release to shift. We shift the moment it's ready. And especially in the age of AI, giant moments aren't the way to do it. Do you want to iterate consistently. I think the second question was on loyalty, right? That was the first question. So yes, so we -- I think the thing that I would like to point out is the results we've had without loyalty and without sponsor listing. So I think that with loyalty, we think that could be a massive accelerant for our company. We are absolutely looking at this. I've said before that if we do a loyalty program, we wouldn't want to do an out-of-the choose points program. We want to do something much more unique. And we are actually testing a lot of different tracks. So we're testing different benefits that could be in the loyalty program. And based on the results of those tests, we'll eventually package them and release the loyalty program. But right now, we are in testing. So I think that was the last question. I think now we can go to closing remarks. So we are at time. I just want to thank everyone for joining us today. I just want to say also, I'm incredibly proud of what our team here at Airbnb delivered in 2025. We develop a blueprint for innovation that we're now using across the company, and you're starting to see that in our results. As this momentum builds, we believe the opportunity ahead is even bigger than what you're seeing today. I look forward to seeing you next quarter. Thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Bio-Rad Fourth Quarter and Full Year 2025 Results Conference Call. At this time, I would like to hand things over to Mr. Edward Chung. Please go ahead, sir. Yong Chung: Good afternoon, everyone. Thank you for joining us. Today, we will review the fourth quarter and full year 2025 financial results and provide an update on key business trends for Bio-Rad. With me on the call today are Norman Schwartz, our Chief Executive Officer; Jon DiVincenzo, President and Chief Operating Officer; and Roop Lakkaraju, Executive Vice President and Chief Financial Officer. Before we begin our review, I would like to remind everyone that we will be making forward-looking statements about management's goals, plans and expectations, our future financial performance and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Our actual results may differ materially from these plans, goals and expectations. You should not place undue reliance on these forward-looking statements, and I encourage you to review our filings with the SEC where we discuss in detail the risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Finally, our remarks today will include references to non-GAAP financials, including net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles. In addition to excluding certain atypical and nonrecurring items, our non-GAAP financial measures exclude changes in the equity value of our stake in Sartorius AG in order to provide investors with a better understanding of Bio-Rad's underlying operational performance. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release. We have also posted a supplemental earnings presentation in the Investor Relations section of our website for your reference. With that, I will now turn the call over to our Chief Operating Officer, Jon DiVincenzo. Jonathan DiVincenzo: Thanks, Ed. Good afternoon, everyone, and thank you for joining us. In 2025, we delivered results within our revised guidance for both revenue and operating margin. However, gross margin did not meet our expectations or frankly, what Bio-Rad is capable of delivering. Throughout 2025, we made tangible progress in lowering our cost base through restructuring and tighter expense discipline while navigating global trade uncertainty and tariff headwinds. In the fourth quarter, gross margin was pressured by higher-than-anticipated supply chain costs. These pressures are execution-related rather than structural. We have initiated actions to strengthen operational rigor, improve forecasting and planning and drive greater consistency across manufacturing, procurement and logistics. Turning to our segments. Diagnostics returned to growth in the quarter. Performance was driven by successful fulfillment of large customer orders in our quality control portfolio that were planned for the fourth quarter as well as the annualization of the diabetes testing reimbursement change in China. While we're not currently seeing portfolio-specific reimbursement or VBP headwinds in China, we remain appropriately cautious and continue to closely monitor policy development. In Life Science, we are particularly encouraged by the traction from our execution on the Stilla acquisition and the launch of the QX700 Droplet Digital PCR family of products. Customer response has been strong, and we saw a meaningful acceleration in QX700 instrument sales during the fourth quarter. We're entering 2026 with an expanding order funnel for our ddPCR instruments despite overall softness in our end markets. Importantly, adoption has been driven by both qPCR conversions and competitive wins. These data points reinforce our belief that QX700 is enabling Bio-Rad to expand its served market and gain share in the entry-level digital PCR segment. More broadly, the early success of QX700 strengthens our conviction that digital PCR will remain a core growth pillar for Bio-Rad over the long term. With the broadest digital PCR instrument portfolio, the most comprehensive assay menu and more than 12,000 peer-reviewed publications, we believe Bio-Rad is well positioned to sustain leadership in this market. Turning to our end markets. Cautious spending persisted throughout the fourth quarter continues to weigh on instrument demand in academia and government. While the recent passage of the NIH budget may support improved sentiment over time, we believe academic institutions remain focused on maintaining staffing levels and sustaining ongoing research rather than purchasing capital equipment. Within biopharma, funding conditions improved during the second half of 2025, though funding is skewed towards later-stage biotech companies. We are anticipating a modest recovery of our core Life Science portfolio from the biopharma end market in 2026. Our process chromatography business delivered over 20% growth in 2025. Our current niche position in the polishing step of bioprocessing contributes to revenue concentration from a select number of commercial therapeutics and vaccines. This can show up as lumpiness from quarter-to-quarter. As our portfolio broadens over time, we expect to see less volatility, more comparable to the broader bioprocessing peer group. Bio-Rad remains focused on disciplined innovation, it is core to our long-term growth strategy. In 2026, we plan to advance several product launches, including an IVD version of the QX600, additional high-value ddPCR assays across oncology, and incorporate artificial intelligence in our -- into our future platforms. Our sharpened focus on R&D accelerates the innovation engine for Bio-Rad, prioritizing areas that reinforce our high-value segments and support our portfolio optimization. In closing, we are executing actions to improve operational performance, expand margins and focus investments in our most attractive growth platforms. We are confident these actions will translate into improved financial results over time. And with that, I'll turn the call over to Roop, who will take you through our financial results in more detail. Roop Lakkaraju: Thank you, Jon, and good afternoon. I'd like to start with a review of the fourth quarter and full year 2025 results. Net sales for the fourth quarter of 2025 were approximately $693 million, which represents a 3.9% increase on a reported basis versus $668 million in Q4 of '24. On a currency-neutral basis, this represents a 1.7% year-over-year increase and was driven by our Clinical Diagnostics segment. Sales of the Life Science segment in the fourth quarter of '25 were $268 million compared to $275 million in Q4 of 2024, a 2.6% decrease on a reported basis and a 4% decrease on a currency-neutral basis, driven by the constrained academic research and biotech funding environment. Currency-neutral sales decreased in the Americas, partially offset by increased sales in EMEA and Asia Pacific. Our ddPCR portfolio posted mid-single-digit year-over-year growth in Q4, driven by the success of our QX700 platform, which met our revenue expectations. The Stilla acquisition will be accretive by mid-2026, 6 to 12 months earlier than our initial view. Our process chromatography business, as expected, experienced quarter-over-quarter and year-over-year declines due to the timing of customers' orders. Excluding process chromatography sales, core Life Science segment revenue increased 0.7% year-over-year and decreased 0.7% on a currency-neutral basis. While overall core Life Science consumables revenue grew mid-single digit in Q4, we note that consumables in the Americas were flat year-over-year, reflecting the protracted U.S. government shutdown. Sales of the Clinical Diagnostics segment in the fourth quarter of 2025 were approximately $425 million compared to $393 million in Q4 of '24, an increase of 8.4% on a reported basis and 5.6% on a currency-neutral basis. The increase was primarily driven by higher sales of quality control and blood typing products. On a geographic basis, currency-neutral sales increased in all three regions. Q4 reported GAAP gross margin was 49.8% as compared to 51.2% in the fourth quarter of 2024. On a non-GAAP basis, fourth quarter gross margin was 52.5% versus 53.9% in the year-ago period. Note that the Q4 2025 non-GAAP gross margin excluded $13 million in onetime inventory and other write-offs associated with product portfolio rationalization on top of restructuring and amortization of purchased intangible charges. Specifically, due to the extended U.S. government shutdown, which shifted sales to later in the quarter, we effectively had to do 90 days of work in 30 days to support our customers. As a result, we incurred higher expenses for expedited freight and service costs, including overtime, resulting from compressed time lines for instrument delivery and installation. Moreover, we saw slower-than-expected progress on our procurement initiatives that were back-loaded in our forecast. SG&A expense for the fourth quarter of 2025 was $221 million or 31.9% of sales compared to $204 million or 30.6% in Q4 of 2024. Fourth quarter non-GAAP SG&A spend was $215 million versus $200 million in the year-ago period. The year-over-year increase in SG&A expense was primarily due to higher employee-related costs. Research and development expense in the fourth quarter of 2025 was $70 million or 10.1% of sales compared to $80 million or 11.9% of sales in Q4 of '24. Fourth quarter non-GAAP R&D spend was $66 million versus $68 million in the year-ago period. Q4 operating loss was approximately $119 million compared to operating income of approximately $58 million in Q4 of '24. In Q4 of '25, our GAAP operating loss included in aggregate, $173 million of impairment charges for purchased intangibles and other items. These charges resulted from our decision to discontinue and reprioritize certain R&D programs as part of our ongoing portfolio rationalization. On a non-GAAP basis, fourth quarter operating margin was 12% compared to 13.8% in Q4 of '24, reflecting the impact from the lower gross margin. The change in fair market value of equity security holdings and loan receivable, primarily related to the ownership of Sartorius AG shares, contributed $800 million to our reported net income of $720 million or $26.65 per diluted share. Non-GAAP net income, which excludes the impact of the change in equity value of Sartorius shares, was $68 million or $2.51 diluted earnings per share for the fourth quarter of '25 versus $81 million or $2.90 diluted earnings per share for Q4 2024. Now for the full year results. Net sales for the full year of 2025 were $2.583 billion, which represents a 0.7% increase on a reported basis versus $2.567 billion in 2024. On a currency-neutral basis, sales were essentially flat compared to the same period in 2024. Sales of the Life Science segment for 2025 were approximately $1.021 billion compared to $1.028 billion in 2024, which is a decline of 0.7% on a reported basis and 1.3% on a currency-neutral basis. Currency-neutral sales decreased in the Americas, partially offset by increased sales in EMEA and Asia Pacific. Sales of the Clinical Diagnostics segment for 2025 were $1.562 billion compared to $1.538 billion in 2024, which represents a 1.6% increase on a reported basis and 0.8% growth on a currency-neutral basis. Growth of Clinical Diagnostics was primarily driven by higher quality control and blood typing product sales, partially offset by lower reimbursement rates for diabetes testing in China. On a geographic basis, currency-neutral sales increased in the Americas and EMEA, partially offset by decreased sales in Asia Pacific. Overall, full year non-GAAP gross margin was 53.3% compared to 55% in 2024. The year-over-year margin decline was driven mainly by reduced fixed manufacturing absorption and higher material costs. Full year non-GAAP SG&A expense was $809 million or 31.5% of sales compared to $799 million or 31.1% in 2024. The increase in dollars of SG&A expense was primarily due to higher employee-related costs. Full year non-GAAP R&D was $257 million or 9.9% of sales versus $282 million or 11% in 2024. The lower year-over-year R&D was primarily due to in-process R&D charges associated with an acquisition in 2024, which resulted in a $30 million IP R&D expense in '24 and an $8 million charge in '25. Full year non-GAAP operating margin was 12.1% compared to 12.9% in '24, which primarily reflects the impact of the gross margin headwinds. Non-GAAP net income was $271 million or $9.92 diluted earnings per share for full year '25 versus $291 million or $10.31 diluted earnings per share for 2024. Moving on to the balance sheet. Total cash and short-term investments at the end of Q4 '25 were $1.541 billion compared to $1.665 billion at the end of 2024. Inventory at the end of Q4 was $741 million, down from $760 million at the end of 2024. Moving on to cash flow. For the fourth quarter of 2025, net cash generated from operating activities was $165 million compared to $124 million for Q4 of '24. For the full year of '25, net cash generated from operations improved to $532 million versus $455 million in 2024 and was driven by the focused efforts in improving working capital efficiency. Net capital expenditures for the fourth quarter of '25 were approximately $46 million and full year net capital expenditures were $158 million. Depreciation and amortization for the fourth quarter was $36 million and $141 million for the full year. Free cash flow for the fourth quarter was $119 million, which compares to $81 million in Q4 of '24. For the full year of '25, free cash flow improved to approximately $375 million versus $290 million for '24 and represents a free cash flow to non-GAAP net income conversion ratio of 138% for 2025. During 2025, we retired 1.2 million shares through our buyback program at a total cost of approximately $296 million. We did not repurchase any shares during the fourth quarter. Since Q1 2024, we have spent $494 million to repurchase 1.9 million shares at an average price per share of approximately $261, which represents a 6.6% reduction in our share count. Moving on to our non-GAAP guidance for '26. We are guiding currency-neutral revenue growth for the full year to be between 0.5% and 1.5%. Q1 is expected to be down low single digit on a year-over-year basis and then sequentially improving each quarter. The Life Science segment year-over-year currency-neutral revenue growth is expected to be between 0 and 0.5%. We are anticipating growth of nearly 4% for our core Life Science business, excluding process chromatography, with the ddPCR business expected to grow mid-single digit. Process chromatography is projected to decline approximately mid-teens and reflects recent changes to government regulations on certain therapeutics usage and vaccines as well as our customers' improved production efficiencies. Long term, we expect process chromatography to be a mid-single-digit growth area for us. For the Diagnostics segment, we estimate currency-neutral revenue growth to be between 1% and 2%. We project mid-single-digit growth for our quality controls business, while the remaining Diagnostics portfolio ex quality controls is expected to be in the low single-digit growth range. Full year non-GAAP gross margin is projected to be between 54% and 54.5%. On a quarterly basis, we expect Q1 2026's gross margin to step up a net 100 basis points from Q4 of 2025 as the elevated freight and service costs from Q4 do not recur, partially offset by the impact of lower revenues in the first quarter. Subsequent to Q1, we are targeting sequential improvement that reflects expected productivity and efficiency benefits from our operational initiatives. Full year non-GAAP operating margin is projected to be between 12% and 12.5%. This reflects the improvements to gross margin, partially offset by approximately a 50-basis-point impact from the reduced process chromatography sales. Our 2025 restructuring was effectively completed, and the savings are reflected in our 2026 outlook. We estimate the non-GAAP full year tax rate to be approximately 23%. We anticipate full year free cash flow of approximately $375 million to $395 million for 2026. Regarding share repurchases, we will continue to be opportunistic and have approximately $285 million available for additional buybacks under the current Board authorized program. Finally, we are deferring our Investor Day to a later time. We continue to make progress on our business transformation, including an assessment of our product portfolios to reinvigorate our top line growth rate and to define an improved cost structure, but more remains to be done. With that, I'll turn the call over to Norman. Norman Schwartz: Okay. Thanks, Roop. So I just thought I'd take a few minutes to close today's call with a few thoughts. Maybe to start out, I think as we enter 2026, we are seeing early signs of stabilization across several of our core markets with NIH and the related funding set and steady improvements in biopharma funding. Also on the Diagnostic side, there's a return to growth. And in particular, we are seeing stronger demand for our quality control reagents. So if we take all that together, I think we believe these early trends set an encouraging tone for 2026. We do remain highly focused on driving long-term value and are already seeing the impact of an intentional performance-related approach. Kind of against the dynamic backdrop of last year, Bio-Rad delivered results that reflect both the challenges of the environment, but also, I think the resilience of our business. The team, I think, successfully mitigated much of the impact on our supply chain from what we saw as shifting trade policies and tariffs. And we delivered as a result, really strong free cash flow of $375 million for the year, as Roop mentioned. So kind of building on our strong foundation, we're continuing to invest in innovation across our portfolio, not only ddPCR and quality controls, but other products areas, all in an effort to maximize overall growth opportunities. And I would say, supported by a strong balance sheet. We're also looking for additional assets to help accelerate the top line and certainly margin expansion. Just as one example, I think our recent success with the Stilla acquisition, this concept of measured scale, it's an example of our renewed focus here. Overall, I guess, top of mind is driving continuous revenue growth and margin expansion through improved sustainable operating performance and cost structure management. And I think by committing to these kind of strategic priorities, Bio-Rad can and will achieve enduring success, deliver value to stakeholders and maintain a strong competitive position in the marketplace. I think you should see continued actions from this team around the operational rigor, simplification and prioritization that we've initiated. We are moving quickly. But I would say we're also moving thoughtfully to ensure that these changes at the end of the day are durable. So that concludes our prepared remarks. Operator, we're now open to take questions. Operator: [Operator Instructions] We'll go first to Jack Meehan from Nephron. Jack Meehan: I wanted to start by asking about the ddPCR business. So if my math is right, always got to be careful with that. But looks like this was the strongest quarterly growth in at least a couple of years. So I was wondering if you could unpack the Stilla contribution versus the legacy portfolio? And why is mid-single digits kind of the right rate continue into next year? Jonathan DiVincenzo: Yes. Jack, it's Jon. I appreciate the call. First of all, we have a large installed base, which means the ongoing reagents assay business is the largest part of our portfolio. So we certainly saw a very strong success in the sales of QX700 platform kind of right on target, what we're hoping for in the fourth quarter and planning for. It was also indicative of the fact that we're able to convert some qPCR applications to ddPCR and continue to move along kind of our legacy QX200 to 600. I'd say it was dominated by the QX700. There are three instruments in that platform. We had -- we moved kind of what -- we were, historically, seeing revenues about 80-something percent coming from assays and 20% from instruments during the last kind of soft quarters to last year. It actually moved up to about, I guess, 2/3 assays and then about 1/3 coming from instruments. So it can kind of show you the growth there. And because of that large [ base ] is exactly why we're guiding towards mid-single digit because we think that overall, the consumables will continue to march along at kind of maybe mid-single-digit growth, which dominates the overall growth of that platform with some optimism that maybe we can move up those numbers as the year progresses and as the kind of marketplace stabilizes. Jack Meehan: Got it. That makes sense. And then, Jon, on process chrom, I forgot if it was Jon or -- you mentioned there were some recent changes in terms of guidelines around vaccine and production efficiencies embedded in the process chrom forecast. Can you just elaborate on what that is and the impact? Jonathan DiVincenzo: Yes. I mean we can't share, obviously, the customer that we're supporting, but there's a family of vaccines, which -- the expectation of who is going to be vaccinated by certain geographies has changed and as our customers' demand changed, they obviously demand the manufacturing strategy that they have has changed as well. So we were notified towards very end of last year as we were getting ready for the 2026 plan that they were changing some of their strategies due to that shortfall in demand, and that's what the impact is on our business. Jack Meehan: Okay. And then maybe the last one for Roop. I was trying to do like a bridge from 2025 to 2026 on op margins. So you ended the year at 12.1%. You have the in process [indiscernible] go away. That was -- I think you called out the fourth quarter GM issue, I was thinking that could be like 40 bps for the full year. So it just feels like the EBIT range you provided of 12% to 12.5% seems pretty conservative. Maybe there's some headwinds from process chrom in there, but what else am I missing? Can you just help us with that? Roop Lakkaraju: Yes. Jack, I think you netted it out pretty well. I think we're trying to be very realistic. The process chrom impact is 50 basis points to the op margin. And so as we said that some of the Q4 costs that we incurred, we don't expect to recur. And we are seeing improved operational improvements as we go through. There's some mix improvement, but that process chrom is 50 basis points, which is a headwind that brings it down just a bit in terms of that range. But with that said, as we talked about, and Jon mentioned, as we think about the ddPCR platforms, especially the QX700, opportunities for further growth there. That gives us possible margin enhancement because those are strong margin products. Norman Schwartz: Operator, are you still there? Roop Lakkaraju: Sorry, operator, we couldn't hear you clearly. Operator: Your next question comes from the line of Dan Leonard with UBS. Daniel Leonard: I wanted to circle back on the process chromatography comments. I appreciate that there are near-term issues there. But that long-term forecast of mid-single-digit growth, what would drive that view? Is there a mix issue there? Or why wouldn't you otherwise think that, that product line for you could be faster growing long term? Roop Lakkaraju: Yes, Dan, I appreciate the question. And I think there's a couple of different things here. One, with the changing conditions that we saw occur late in the fourth quarter from government regulations and some of the efficiencies that our customers are driving. I think one, we're trying to be conservative about it. The second part of it is, and we've talked about this before, when we look at the growth in our customers in the clinical phases, we do have strength there, and it's a growing pipeline of potential customers that can move to that commercial range. And so we kind of are looking at it with all of these conditions concurrently operating, if you will, and trying to set it towards a mid-single digit longer term. I think there is the potential, depending upon how some of these customers move through clinical to commercial that it could be a higher growth rate, but at this time, I think as we think about all the different moving pieces, we were trying to be -- set a reasonable growth rate there. Daniel Leonard: Understood. But Roop, is it fair to assume that maybe your portfolio in aggregate is over-indexed to vaccines compared to the average of the bioprocess industry and that's part of the pressure here in the midterm framing? Jonathan DiVincenzo: I think that's fair to say, although the projects, which are still in clinical trials, I think it has a normal balance, but our commercial product, yes, I think that's a fair statement, Dan. Daniel Leonard: Okay. And then just a quick follow-up. Is it possible to frame when thinking about the outlook -- growth outlook here, what's the organic forecast in comparison to what the acquisition contribution would be before Stilla is annualized at mid-year? Roop Lakkaraju: Yes. I mean if you think about -- as we said in the fourth quarter, Stilla would be mid-single-digit millions of revenue in the fourth quarter, and that was achieved. And outside of that, we had some negative growth rate in some of the other platforms. So when you think about ex Stilla overall, you're looking at just slightly under 1% negative on LSG, but that's driven by the process chromatography impacts to that, if you will. Operator: Your next question comes from the line of Tycho Peterson with Jefferies. Tycho Peterson: I wanted to touch on Clinical Diagnostics, guide of 1% to 2%. This was a 2% to 3% growth business pre-COVID. I'm just curious why it's not doing better, especially as China headwinds are abating potentially. So maybe just talk a little bit about why the growth is muted relative to where you were pre-COVID. Jonathan DiVincenzo: Tycho, thanks. This is Jon. Yes, I think it's a mix of the portfolio overall. We see leading the way with our quality controls, largest part of our Diagnostics business doing well. Others, we have some platforms where the markets aren't as strong overall and some of that relies on China. So I think it's a mix of our product mix and geographies. Tycho Peterson: Okay. I'm going to ask the process chrom question a third way because it is a big swing, and I think we're all going to get a lot of questions on this tomorrow. But kind of the guide for this year, obviously assumes no recovery, no recapture of that business. But when you talk about mid-single digit longer term, how do we think about when you could get back there? Is that a '27 story or further out? Roop Lakkaraju: I think it's a possibility to get back to low single-digit growth rate in '27, and then it's maybe a year or 2 out from there, Tycho, to get towards that mid. But with that said, I mean, it could accelerate faster depending upon how folks are moving through the clinical phases and how that might evolve, right? So there's a number of moving pieces there, but '27 is probably low single, if we were to think about it that way, flat to low single. I think what we would seek is beyond that to try and drive back towards that mid-single digits. Tycho Peterson: Okay. And then last one, how should we interpret the lack of a buyback this quarter? I know you did $300 million almost for the year, but you do have $1.5 billion of cash in the balance sheet. Are you signaling anything here? I mean you have talked about potentially doing M&A. So I'm just curious if there's anything to read there. Roop Lakkaraju: No, I don't think there's anything to read. I think we try and look at things opportunistically, Tycho. We are actively looking at assets, as Norman said, and we've said previously. But I wouldn't have that be a leading indicator of any particular thing happening. Operator: And that concludes our question-and-answer session, and that also concludes our call today. Thank you all for joining, and you may now disconnect.
Anil Gupta: Good afternoon, and welcome to the Coinbase Fourth Quarter and Full Year 2025 Earnings Call. My name is Anil Gupta, and I'm Vice President of Investor Relations at Coinbase. Joining me on today's call are Brian Armstrong, Co-Founder and CEO; Emilie Choi, President and COO; Alesia Haas, CFO; and Paul Grewal, Chief Legal Officer. During today's call, we may make forward-looking statements, which may vary materially from actual results. Information concerning risks, uncertainties and other factors that could cause these results to differ is included in our SEC filings. Our discussion today will also include certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the Shareholder Letter on our Investor Relations website. Non-GAAP financial measures should be considered in addition to, not as a substitute for GAAP measures. We'll start today's call with comments from Brian and Alesia and then take questions. And with that, I'll turn it over to Brian. Brian Armstrong: [Audio Gap] crypto prices, but Bitcoin remains the best-performing asset class of the past decade. We've been through cycles like this many times at Coinbase and adoption continues to grow, regulatory clarity is on the horizon, and more bullish than ever. Moreover, we've successfully diversified the business where stablecoins, subscription and services revenue and now trading of other asset classes like stocks, prediction markets and commodities means our revenue is less correlated to crypto price fluctuations. We launched the Everything Exchange in Q4 and are seeing early signs of success. Global trading volume and market share doubled year-over-year, reaching new all-time highs. Just last week, as crypto prices fell, gold and silver futures drove record notional volume on our exchange. We hit our highest 24-hour trading volume in over a year, in fact, and Base set a new transaction all-time high with AI agents adopting stablecoin wallets. Base is quickly establishing itself as the onchain home for AI. So looking ahead, our strong balance sheet and progress on the Everything Exchange gives us the ability to continue investing in these market conditions. We'll keep buying Bitcoin. We'll continue to buy our stock back, and we won't stop building. Now I want to talk about how we're going to win in 2026. Financial services is a massive industry, and there's multiple trillions of dollars of revenue up for grabs. Crypto is updating the financial system from trading to payments to lending, and Coinbase is the best positioned company in the world to capitalize on this transformation. Here are four reasons why. Number one, we store more crypto than any other company. We're the most trusted brand in crypto, and we work with thousands of institutions, including 5 G-SIB banks and 150 government agencies. Just as one example, we store 12% of all crypto in the world, more than the next four competitors combined. Assets on platform has grown about 3x over the past 3 years, and these assets are very sticky as we connect more products into them. So that's the first reason. Number two, we've doubled our trading volume and market share year-over-year. We started off as the leader in the U.S. And now as regulatory clarity has emerged around the world, we're growing our share internationally as well. Number three, we've diversified our revenue streams so that it's not just trading specific. We now have 12 products doing over $100 million in annualized revenue. Subscription and services revenue hit all-time highs, up 5.5x from the peak in 2021, and we generated positive adjusted EBITDA in any market condition, and consistently profitable on the adjusted EBITDA and adjusted net income basis over the last 2 years. And finally, number four, we have deep crypto expertise at Coinbase. This manifests in the unique products that we've been able to offer. So for example, we were early to offer DEX trading, which now allows us to have millions of crypto assets available to trade. We were early on DeFi borrow or lend. We were early on building out the base chain. We've even migrated to our multiparty computation cold storage system, the next generation of it, which has allowed us to accelerate the speed at which customers can complete transactions. So this deep crypto expertise really is one of our core strengths. So for these reasons, we're best positioned to win this transformation as more and more financial services are updated by crypto in this big secular trend. Now in 2026, we have three top priorities that we're focused on, and I'll quickly run through those. So the first one is to grow the Everything Exchange. In Q2, last year, we introduced our Everything Exchange vision, which is one platform for all tradable assets, whether that's crypto, equities, prediction markets, commodities and more. Now thesis here is simple. For customers, the ideal experience is to have access to every investment and trading product that they want in one trusted place, wherever their assets reside. Stocks and prediction markets are natural extensions of our core business, providing a clear path to increasing product stickiness and revenue generation, and it's working. Early feedback from our customers is very positive. And we see a number of users crossing over to trade commodities and equities alongside their crypto. We hit all-time highs in derivatives volume and revenue in Q4. A few weeks ago, we rolled out prediction markets to 100% of our customers. Soon, we'll add more markets and a dedicated sports hub for prediction markets. Equities have rolled out. We'll have almost 10,000 tickers live this month. In Q4, we even acquired Echo to enable more efficient onchain capital formation. This can offer unique investment products to our customers on our Everything Exchange from the private market. We're working on shipping tokenized equities, which will be a major positive change to the financial system. And with the crypto forward leadership of the SEC, we believe there's a path to get there. We'll also be expanding the Everything Exchange to more countries around the world. So that's -- our #1 priority in 2026 is growing the Everything Exchange. Our second priority is that we're scaling stablecoins in payments. Stablecoins are the second killer app in crypto, and most are still underestimating the potential of a digital dollar. In Q4, we hit an all-time high in USDC stored in Coinbase products which helped USDC reach an all-time high market cap of about $75 billion. In 2026, we're focused on expanding stablecoin utility with deeper product integrations, scaling out our payments infrastructure in Coinbase developer platform and Coinbase business. We're even protecting the ability to pay rewards to customers using stablecoin to ensure customers can benefit from this and that regulated U.S. stablecoins remain competitive with offshore or unregulated offerings. If you were designing money from scratch today, you'd get crypto and stablecoins where you can transfer funds anywhere in the world and under a second for less than $0.01. With the unrivaled efficiency gains, all signs point to stablecoins continuing to grow. We're even seeing these AI agents adopt stablecoins for payment, and I believe that stablecoins will be the default payment method for AI agents. Okay. So that's our second priority, stablecoins and payments. Our third and final priority in this 2026 time frame is to bring the world onchain. Now onchain is a key part of our business strategy and our mission, and this is the broad term that we use for DeFi, self custodial wallets and full adoption of decentralized technology as opposed to centralized intermediaries. We're seeing growing adoption of self custodial wallets around the world, which let people store their funds and instead of trusting a third party. With just a smartphone and an Internet connection, anyone can get access to more financial services, improved financial services and participate in the global economy. We have a winning onchain strategy. And in 2026, you'll see more DeFi integrations in the Coinbase app. You'll see scaled adoption of the base app with its new focus on trading. We'll continue to increase transaction volume on the base chain and all of the above will increase the percentage of onchain activity powered by Coinbase infrastructure. So in closing, as crypto continues to update the financial system, Coinbase is the best positioned company to capitalize on this transition, and bring more economic freedom to the world. Now I'll turn it over to Alesia. Alesia Haas: Thanks, Brian. Good afternoon, everyone. 2025 was a strong year for Coinbase, both operationally, as Brian just highlighted and financially. We executed consistently against our goals. We delivered or outperformed our revenue and expense guidance that we provided every quarter. Our 2025 total revenue was $7.2 billion, a 9% year-over-year increase. Subscription and services revenue reached $2.8 billion, up 23% year-over-year and more than 5.5x higher than the prior cycle peak in 2021. As Brian noted, we are pleased to see the growth of the number of products generating $100 million of annualized revenue. And equally, if not more pleased to see many of these products scale. And we are working hard to see more products join the $250 million, $500 million and $1 billion annualized revenue club. Turning to our Q4 results. I'm going to start with some highlights. We did have quarter-over-quarter softer market conditions. Crypto market cap was down 11% quarter-over-quarter. However, we outperformed the market on total trading volume, driven by strong derivatives volume growth. Deribit saw another all-time high quarter. Q4 marked our ninth consecutive quarter of native unit inflows. This is inflows to our assets on platform, where customers then in turn stake, they custody, they engage in USDC. So we're seeing growth in native units despite the price headwinds. It was our 12th consecutive quarter of adjusted EBITDA profitability. We are a business that is prepared for volatility. We have diversified over the last 4 years. Our transaction revenue is diversified and will continue as we execute against the Everything Exchange. As we mentioned, we have 12 products with over $100 million of annualized revenue, and we are scaling them. Half of those are over $250 million. As we enter the first quarter and see even more volatility, what we are pleased to see is that our retail customers are HODL-ing like they always have, but those who are in the market, they are buying the dip. Every week, we've seen net buying versus selling on our platform as we've entered this year. And as Brian mentioned, Coinbase is buying the dip. We've deployed $1.7 billion to repurchase shares. We fully offset our 2025 dilution from stock-based compensation, and we're buying Bitcoin. So let's dive into the details. Q4 total revenue was $1.8 billion, down 5% quarter-over-quarter. Q4 transaction revenue was $983 million, down 6% quarter-over-quarter, while subscription and services revenue was $727 million, down 3% quarter-over-quarter. Turning to expenses. Total operating expenses were $1.5 billion, up 9% quarter-over-quarter and in line with our outlook. Technology and development, general and administrative and sales and marketing expenses collectively increased 14% quarter-over-quarter, primarily driven by costs associated with the recently closed acquisitions of Deribit and Echo and higher USDC rewards, reflecting the record USDC balances held in Coinbase products. When you exclude deal-related costs associated with our M&A activity in 2025, tech and dev, G&A plus sales and marketing would have increased 11% on a quarter-over-quarter basis. We ended the year with 4,951 full-time employees, up 3% quarter-over-quarter as we continue to invest in product team development, customer support and compliance infrastructure. Adjusted EBITDA in the fourth quarter was $566 million and adjusted net income was $178 million. On a GAAP basis, we reported a net loss of $667 million, primarily driven by a $718 million unrealized loss on our crypto investment portfolio and a $395 million loss on strategic investments, which includes our investment in Circle. As I mentioned, we're adding to our crypto investment portfolio on a weekly basis. We've modestly increased the size of our weekly purchase to build positions in these price markets. Importantly, we remain in a very strong capital and liquidity position. We ended the year with $11.3 billion in cash and cash equivalents and total available resources of approximately $14.1 billion when you include our crypto assets held for investments and collateral. As our stock price declined during Q4 and through early February, we took the opportunity to begin repurchasing our stock within our previously approved authorization. As of today, we have repurchased $1.7 billion of our common stock, fully offsetting dilution from stock-based compensation for the year 2025. We secured an $815 million notional discount to the average price we issued that stock-based compensation in 2025. In January, our Board approved an additional $2 billion share repurchase authorization, which we plan to continue to deploy opportunistically when we see price dislocations and to manage down our future dilution from stock-based compensation. Now I'm going to touch briefly on our Q1 outlook. Through February 10, we have generated approximately $420 million of transaction revenue. Markets have experienced heightened volatility as we began the year. And so while we always caution extrapolation, it's even more important when we see volatility spikes. For the first quarter, we expect subscription and services revenue to be in the range of $550 million to $630 million, reflecting the lower average crypto price environment we are in, lower interest rates and lower staking protocol rewards rates compared to the fourth quarter. On the expense side, we expect technology and development plus general and administrative expenses to be flat quarter-over-quarter in the same range we guided last quarter in the range of $925 million to $975 million. Similarly, we expect sales and marketing expenses to be flat to down quarter-over-quarter in the range of $215 million to $315 million, with our performance in the range largely depending on performance marketing opportunities and the USDC balances on our platform. Overall, while crypto markets remain cyclical, we believe Coinbase enters 2026 from a position of strength. We have a more diversified revenue base. We have a scaled global platform and with the balance sheet that we can be flexible to continue and invest through the cycle. With that, let's go to questions. Anil Gupta: All right. We'll take our first questions submitted to us on X. Our first one comes from [ @MikePob65 ], who asks, are you making any headway on positive outcomes regarding the CLARITY Act? Brian Armstrong: Yes, I can take that one. So the answer is yes. We're -- I'm actually quite optimistic that we'll get something through here in the next few months. And I just want to say a big shout out of appreciation to everyone in the Senate and the administration. I think they're doing all the hard work here really to help bring this to a good place. And there's lots of constituents around the table. I'd say the crypto industry is united in their asks and the things that are important to them. Other constituents are around the table, of course, as well. And I think there's an opportunity to make a win-win outcome here for everyone, for banks and crypto companies and the U.S. citizen and everyone. And so what we've really focused on is what matters most to our customers, preserving the benefits of crypto, making sure that there's not any kind of protectionism happening for incumbents, but we just want to have a good level playing field. And I think that everyone understands that, and they're all leaning in to try to create a good outcome here. The GENIUS Act was just passed 6 months ago. So we're careful to make sure that nothing is being relitigated there. But I think there's a good path to get something through. And really, others are doing the majority of the work here, and we try to add in commentary where helpful, but hopefully, we'll get to a good outcome in the next few months. Anil Gupta: Our second question is from @InternetToken who asks, with Base TVL and sequencer revenue growing strongly in late 2025, what percentage of overall subscription and services revenue do you expect Layer 2 activity from Base and partners to contribute in 2026? And are there plans to further incentivize builders there? Alesia Haas: I'll start with this one, Brian, and then hand it over to you. So first, I just want to a little bit correct the question. Base revenue, we monetize both directly and indirectly. Directly, we're monetizing Base through sequencer fees. And those sequencer fees are recorded in other transaction revenue, not in our subscription and services revenue. However, Base benefits us indirectly as well. And indirectly, we are using Base to monetize throughout our stack, both for Coinbase builders and our own products. And so for example, USDC on Base does drive USDC revenue through subscription and services. We don't have a forecast that we're offering today, but our goal throughout all of our products and services is to continue to drive quality, drive users to our platform to monetize through the stack of products and services we offer. But Brian, do you want to touch on incentives? Brian Armstrong: Yes. So for the second part of the question about what incentives we're putting out there to build -- for builders on Base. So we're doing this in a number of different ways. We do give out grants called Base grants for builders. We're improving our developer tools all the time just to make it simple for folks to onboard. And we're getting distribution from any of these builders through our apps. So an example of this recently is like these AI agents that have been spinning up, we put out some really useful tools for developers to just get any AI agent a crypto wallet and begin to make stablecoin payments and begin to complete agentic commerce essentially. And that started to get quite a good amount of traction. We're exploring a Base token as well. which we've mentioned in the past. And then the Base app itself, which is taking this more trading-focused approach, we think it can help driving distribution for builders on Base. So yes, these are all ways that we're growing adoption. And the Base chain itself is -- works well across payments, trading, DeFi, a multitude of use cases. So it's -- our goal is to help it be really like the primary utility layer for crypto, all built on Ethereum. Anil Gupta: And our third and final question from X comes from [ @ChiefSkirp ], who asks, what product or platform initiative are you most excited about that investors may be underestimating today? Brian Armstrong: Yes. Well, I think the two I'd draw folks' attention to are the Everything Exchange, right? I think it's a big vision that how do we get all tradable assets onchain. And the end state of this is that we'd want to see 24/7 global markets, anybody can come in and participate. There's a more level playing field, democratizes access to a lot of this. And it will just make it much easier to do capital formation, price discovery. I think the ideal outcome here is we'd be one of the top exchanges in the whole world across any asset class. That's really the vision for the Everything Exchange. And because we are -- we have this deep crypto expertise, I think -- and crypto is the most important technology updating the financial system right now, I think we'll have an advantage there. The second one I'd point people to are stablecoin payments. I mean I think we're still in the very early days of this. Stablecoins are already -- have already gotten pretty big, but I think that we're just scratching the surface and payments globally would -- they flow to the path of least resistance. And stablecoin rails are just -- they're faster, they're cheaper, more global. And so today, about half of 1% of global GDP runs on crypto rails. I don't see any reason why that couldn't be 10% or 20% in the next decade. And so we think there's a lot of room to run there as well. Anil Gupta: All right. We'll now take questions from our research analysts. Questions were submitted to us in writing, and we'll take one question per analyst and optimize to cover as broad a range of topics as possible without being repetitive. Our first question comes from Andrew Jeffrey at William Blair, who asks, please discuss line of sight to Everything Exchange monetization. What are your thoughts on the timing about revenue diversification? Alesia Haas: Thank you for this. Diversification has long been a focus of ours. So when I look at 2026, what I would focus on is diversification of tradable assets under the Everything Exchange. Derivatives will be a big growth driver, we believe, in 2026. We have good momentum both across the U.S. and our international markets. We have momentum coming from the integration of options into our platform from the Deribit acquisition that we did in late 2025. So we believe that this can be a large part of our future story and strategy. In addition, within the last few weeks, as Brian shared, we have rolled out prediction markets and we have rolled out equities. There's early encouraging signals, but we don't want to get ahead of ourselves. So we will share more updates at the end of Q1 when we have more than weeks and days of data under our belt. We're really proud that historically, we've had achievements in driving diversification. We have 12 products, as we mentioned, with over $100 million of annualized revenue. Derivatives is included in that. We're working hard to scale, and we see more and more of these products able to graduate and hope that they will join the $250 million tier of annualized revenue, where we already have 6 of those 12 products. Ultimately, the goal of all of these products is that we are driving assets on platform on our platform. We are growing those native units, driving that flywheel where customers hold their assets, we hope they will trade more products and the more tradable products we give to them, that will drive the monetization on trading. And underpinning that with our subscription and services, we store those assets. We provide platforms like USDC, which is a clear benefit to be able to trade in and out of various markets and other horizontals that will really support that trading growth. Anil Gupta: Next question is from Ken Worthington at JPMorgan, who asks, could your economic relationship with Circle change depending upon language in a market structure bill? In particular, could passage of a bill such as CLARITY that eliminates promotional payments to stablecoin holders directly eliminate or directly curtail Coinbase's participation in Circle reserve fee income? Brian Armstrong: Yes. So the short answer to your question is no. We don't see any way that this market structure legislation would change our economic relationship with Circle. The part that's being debated in the Senate draft for clarity is actually the House draft already received a strong bipartisan vote and didn't have any restrictions on these stablecoin rewards. But some drafts we saw, actually more like amendments, I would say, in the Senate banking draft, were contemplating that and thus prohibiting rewards essentially in various ways. And the irony actually is if that were to go into law, it would actually make us more profitable because we would just continue to receive the economics from Circle, but we -- today, we pass the majority of that along to the customer. If we were prohibited from doing that, ironically, it would just make us more profitable. But we actually don't want that to happen for a number of reasons. One is that we think it's better for customers. We think it's better for the United States of America so that these regulated stablecoins can be competitive on a global stage. And it's already allowed under the GENIUS Act, which just became law 5 months ago. So our strong point of view is that, that should continue to be allowed, and we'll keep fighting for that. Anil Gupta: Our next question is from Owen Lau at Clear Street, who asks, the valuation of the whole sector, including tokens and equities has come down. How does Coinbase think about the opportunities in larger-scale buybacks and M&A? Alesia Haas: Thanks for the question, Owen. So we're very focused on it. As I mentioned in my opening comments, we ended the year in a strong financial position with over $11 billion in cash and cash equivalents. We are focused on buybacks. As I mentioned in my prior comments, we've deployed $1.7 billion to repurchase 8.2 million shares under our buyback program. That includes Q4 through February 10. 2025 was an incredible year for us on the M&A front. We completed 10 acquisitions/acqui-hires, and each one helped us enable acceleration in our product road map, including Deribit, which is the largest crypto deal of all times. We're deploying our money into Bitcoin purchases. We significantly grew our portfolio in 2025. We doubled the number of BTC native units we held in our investment portfolio. So we are going to continue down all those paths. We're going to continue buying Bitcoin, continue buying back, continue to look at opportunistic M&A and continue to really dynamically manage the opportunities that we see ahead of us. We feel very proud that we've delivered 12 consecutive quarters of positive adjusted EBITDA. And so we've proven that we can drive profitable -- profits in any market environment. We will continue to do so in 2026 and then allocate that capital with the highest ROI to our business. Anil Gupta: Our next question is from Patrick Moley at Piper Sandler, who asks, what have you seen in terms of prediction market adoption to date among Coinbase customers? Do you have plans to build your own prediction market venue? Or are you comfortable continuing to act as a retail distribution for existing venues? Brian Armstrong: Yes, I can take that one. So our prediction markets really just rolled out to 100% of customers about a couple of weeks ago. So it's early days, but so far, the interest has been great. Super Bowl weekend was a really great moment where a lot of customers got to experience it for the first time. And we're making lots of improvements rapidly on both the UX, adding more markets, having a dedicated sports hub where people can see live scores and things like that. And frankly, just marketing and getting the word out. I think a lot of Coinbase customers are delighted to find out that this is available in the app because they already store quite a lot of assets with us. And so we just need to make them aware of it, and I think it's going to be a really good outcome. We launched it with our partnership with Kalshi, and they've been a great partner. It's not an exclusive arrangement. We also have the ability to launch our own markets. Nothing to announce on that at the moment, but we're keeping all options open. Anil Gupta: Our next question is from James Yaro at Goldman Sachs. Do you think we're heading into another crypto winter? How long until the cycle could begin to recover? And how should investors think about the KPIs suggesting that the cycle could begin to turn? Brian Armstrong: Yes, I can touch on that. So in general, we don't try to predict the future too much here. We see our job as just building great products and services for our customers, and then we leave the investment decisions to them. I will say that in general, I kind of enjoy these periods sometimes when the market is down ironically just because it allows us to keep building. There's opportunities in every market, whether it's up and down. And so it gives us a chance to buy Bitcoin. It gives us a chance to buy back our stock. And we've been through so many cycles like this in crypto. I actually don't think it's that connected to core KPIs like you asked about or some sort of fundamentals. There's a lot of kind of Monday morning quarterbacking happening where people will look backwards and say, "Oh, it must be because of Kevin Warsh is an inflation hawk or quantum computing is on the horizon or something." And I actually think markets are a little bit more like psychological things where people think someone else is going to think something, so they try to get ahead of it. And I don't think this market correction is that connected to any fundamentals. We're still seeing good growth of stablecoin adoption and other kind of indicators. So I'd say in this environment, we are seeing traders on our -- like at these prices, we're seeing people on our platform who are net buyers. But I would leave the investment decisions to you all on this call. Anil Gupta: Next question is from Ben Budish at Barclays. Can you talk about your 2026 spending plans? Given a variety -- given a wide variety of potential top line outcomes in 2026, how do you think about need to spend versus want to spend? And where is there most flex in the cost base? Is it marketing, venture moonshot type investments, et cetera? Alesia Haas: Thanks, Ben. I love the way you frame this as need to spend versus want to spend because I would definitely say there's lots of employees who want to spend. That's our job to figure out the right investments for the company and making sure that we're deploying our capital prudently. So 2025 was an investment year. We included a chart in our shareholder letter that showed that the majority of our year-over-year increase went into, first and foremost, sales and marketing. USDC rewards were the single largest contributor to year-over-year expense growth in connection to the year-over-year all-time high we saw in USDC held in Coinbase products. Another 16% of the year-over-year increase was driven by M&A, the majority of which was deal-related expenses and not core to our operations. When you look at our Q1 expense outlook, the range in the outlook is flat to our Q4 expense outlook. So while we had growth in 2025, right now, as we enter 2026, we are focused on flat for the first quarter. While we take into consideration the conditions we operate in, it's very dynamic as we've just rolled out a number of new products and services. And so we are going to be nimble as we go through the year and look at the opportunities that we have ahead of ourselves versus our expenses. And so we are keeping our eye on the ball. But right now, for Q1, flat to Q4. Anil Gupta: Our next question is from Robbie Bamberger at Baird. Yesterday, a Wall Street Journal article said that BlockFill was suspending customer withdrawals. And today, Coinbase has reportedly had issues with customers trying to buy, sell and transfer. Was the Coinbase issue just a tech mishap and not a more severe issue? Does the amount of leverage in the crypto ecosystem increase the risk that we may be more prone to customer freezes during quick pullbacks? Alesia Haas: I'll take this one. If anyone wants to add, please jump in. We did have an event yesterday where some users briefly experienced interruptions in their ability to buy, sell and transfer crypto on our retail and prime platform. Derivatives and equities trading remain undefected. This was a result of a technical issue, unrelated to trading volume, unrelated to any market conditions. The issue is now resolved. We've made significant investments in our platform to hopefully mitigate these types of events and outages that historically have been driven by volume changes and feel very proud of our investments, but we will still have technical bumps at points in time. Anil Gupta: Next one is from Alex Markgraff at KeyBanc Capital Markets. As you work to scale the Everything Exchange, can you describe the strategy for bringing customer assets to Coinbase? To what extent do you believe -- do you expect equities and prediction markets to act as a front door to net new users? Brian Armstrong: Sure. So our strategy overall, we call it the asset accumulation flywheel. And it starts with being the most trusted brand in crypto. That causes people to store more assets with us. We store more crypto than any other company in the world, as I mentioned in my opening comments. So when people are storing their assets with us because of this trust, we have an opportunity to connect more and more products into those assets, right? And whether that's Coinbase card or they have a loan or they're earning rewards on staking or USDC, and they're also getting access to more and more trading products through the Everything Exchange. We see that the more products people connect into those assets, the more sticky they are. And we use the monetization from that to really complete the flywheel and we invest back in being the more trusted brand and adding more products. And so as we've added in some of these asset classes like equities and prediction markets and commodities into the Everything Exchange, the first step is it just makes the product more valuable for our existing users, but we're also seeing it help attract more traditional investors who want to come in and onboard and just have an easiest place to trade every asset class in one spot, maybe get better rewards on their credit card, maybe get a better rate lending out their money. And ultimately, crypto is going to be here to update financial services more broadly and just make better financial services. So that's a little bit about our asset accumulation flywheel strategy. Anil Gupta: Next one is from Ramsey El-Assal at Cantor Fitzgerald. You guys have made some key acquisitions in 2025. Can you help us think through your M&A strategy at this point? What parts of the business are you looking to bolster with M&A? And what types of assets are you looking at? Emilie Choi: I can take this. Yes, I think 2025 was a fantastic year for M&A at Coinbase and included some great marquee pickups, Deribit and Echo and others. We made 10 acquisitions and acqui-hires, and each of them accelerates our product road map. In 2026, we're obviously being very selective as usual, but we're going to be aggressive where assets meaningfully pull forward the road map. And thematically, we're looking for incremental M&A opportunities in advancing the Everything Exchange, owning more onchain infrastructure and bundling stablecoins and payments infrastructure. Anil Gupta: Our next one is from Crypto Pete Christiansen at Citi. There's a recent debate that the original version of L2s as branded shards for scaling is no longer entirely valid as Ethereum L1 is improving its own capacity and L2 decentralization has been slower than expected. The debate further argues that L2s should focus on value-added features, including AI, privacy, et cetera. What's Coinbase's view on the Base L2 value prop going forward in this respect? And how might potential DeFi regulations shape Base's future? Brian Armstrong: Yes, sure. So Vitalik had a great post on this recently. And I think in some ways, he's right, Ethereum doesn't need dozens or hundreds of different L2s. We've seen that Base has rapidly become the #1 L2 on Ethereum. And it's really -- it's a broad utility that makes it attractive to developers, right? It's really great for payments. It's great for trading. It's great for DeFi. People wanting to build different types of applications can come in. And Base, it does have amazing scale, right? It's been able to move really fast, have great speed of execution and frankly, move a little faster than the Ethereum L1, which is by design. I mean, they should be a little bit -- they're probably even more decentralized, a little more cautious, right? But we can inherit a lot of the security constraints from the L1 and then the L2 can move a bit faster. So the scale, speed of execution on Base has been really good. We're also working on adding novel features like you mentioned privacy. I think private transactions or optional private transactions will be a big differentiator. And the Base app is good for distribution, like the Base token we're exploring, et cetera. So there's a lot that we can do there. Longer term, I do think the line between L1s and L2s could be a little blurry. And it's not entirely clear that there's a definition -- a hard definition of one versus the other. So anyway, we'll continue to build Base in rapid succession and just -- I think we can attract a lot of development activity and adoption. Anil Gupta: Next question is from Devin Ryan at Citizens. Stablecoin adoption is a 2026 priority, but we've seen market cap flatline for the last couple of months. Why has that been? And what gives you confidence around growth in 2026? And can you give any color around incremental adoption trends? Alesia Haas: I'll start here, Brian, if you want to add on. So I think there's 2 things that are happening. One is we've seen risk appetite be relatively range bound. And when you think about stablecoins, first and foremost, product market fit was as a trading pair to enable global traders to move money across the exchange ecosystem. They used it against the longer tail of assets. We've seen a shift now where there's not as much risk appetite for those longer tail. And so we've seen speculation activity come down a little bit. And as a result, stablecoin market cap has not been expanding because there was no risk and leverage expansion. The second thing that we see is higher velocity of stablecoin payments, settlements, remittances. So we've seen more transaction volume, but not necessarily a higher market cap as a result of that. So we're monetizing stablecoins in incremental and new ways. I think we still have confidence and optimism for 2026 because we are more deeply embedding stablecoins in our products and services. What we've demonstrated is that we have been a key driver of USDC's market cap growth and a key driver of our growth in assets on our platform due to our ability to embed and create differentiated experience with USDC and our products and services. And so we're excited about our ability to continue to do so and to more deeply create value through the payments priorities that Brian articulated as our second growth area and through just the growth of the Everything Exchange, where we believe that using USDC on our platform will become a great experience for our users. Brian Armstrong: Yes. I guess the only thing I'd add is that one of the things that gives me confidence about continued growth is just the GENIUS Act passing in the U.S. And we saw, I think, 150 companies in the 3 months following that piece of legislation going into law that came out and announced stablecoin integrations. And it's just -- it's faster, it's cheaper, it's more global. There's no company in the world that wants to pay more money for moving their money, right? So I think that, that's an incredible tailwind to the continued adoption of stablecoins. And in particular, it's important that these stablecoins preserve the ability to have rewards programs. There are -- the U.S. regulated stablecoins don't exist in a vacuum. In fact, today, they're the minority of all dollar issued stablecoins globally. And now that we have this legislation, we need to make sure that the U.S. regulated ones can actually remain competitive, right? Like the Chinese Central Bank digital currency came out and said they're going to pay interest on stablecoins. Some of the offshore regulated ones would love it if the regulated ones in the U.S. couldn't pay rewards just because it would make them preserve their profit margins, right? And so for the U.S. regulated stablecoins to be competitive, bring this industry -- repatriate those reserves and bring it within the U.S. regulatory perimeter, they're going to have to be competitive and paying rewards is a big part of that. Anil Gupta: Our next question is from John Todaro at Needham. Can you provide an update on how much USDC market cap is currently on the Coinbase platform, i.e., a January average or February number? Alesia Haas: We don't provide January, February data on the USDC balances. So I'd point to our Shareholder Letter for our end of year balance in our products as well as any details on the revenue that we earned on USDC in that period. Anil Gupta: Next one is from Bo Pei at U.S. Tiger. Can you quantify the effective take rate compression from simple to advanced and Coinbase One users? Structurally, where do you see normalized consumer take rates settling over the next 2 to 3 years? Alesia Haas: Thank you, Bo, for my quarterly take rate question. What we saw in the quarter was a mix shift with more volume going to our advanced product and more trading volume coming from Coinbase One users. So as we grow our Coinbase One members, an increasing amount of trading volume we expect to shift under the Coinbase One membership umbrella. And they benefit from up to no trading fees, although we do still generate a spread on those transactions, which is showing up recorded as retail transaction revenue. So I don't have a view, and I can't tell you when the take rates will need to compress from simple to advanced. What I can say is we are very focused on growing Coinbase One membership. And I think with the growth of Coinbase One membership, what you will see is more and more trading occur under that membership umbrella. Anil Gupta: Our next one is from Gus Gala at Monash Crespi Hart. Adoption on commerce and developer rails, you talked about on Page 19 of the Shareholder Letter. How do you work with Circle and USDC on real-world volume commercialization? Can you give us an update on the time you expect it takes to get up the S-curve in B2B payments? How is this different from potential revenue S-curve? Contrast that with USDC on base for more consumer-centric volumes via x402. Alesia Haas: So what I will share with you is that we work on our own products as it relates to driving payments on USDC. We partner with Circle on overall items, but we also compete with them. And our goal is to drive a payments vertical, as Brian shared in our goals for 2026, where we create the best place for businesses to come transact in USDC on Base to enable their payments businesses. You'll see more about this as we go through the year. This is early in our product journey, but we're really pleased with the advancements in Q4 to build out the product set and APIs, and now we're working on go-to-market and driving customer growth and adoption. Anil Gupta: And our final question comes from Dan Dolev at Mizuho. How should we think about the strength of the casual crypto trader in this winter? Any pattern you can call out for when they come back eventually? Alesia Haas: I guess I will take that one, too. I think that we -- I've been in this seat now, it will be 8 years, come April. Emilie has been here in over 8 years. Brian has been here 12 plus. We've seen lots of crypto market price cycles at this point in time. What continues to be true for at least the last 8 years is that the majority of retail consumers on our platform HODL through price declines. They tend to be more active in periods of high volatility. What we're pleased to see in Q1 is for those who are active, they are in a net buy versus sell position. Consumers are tending to be buying a dip right now. But we are seeing more pullback as markets move to a risk off. We've seen this before. It speaks to our goals of diversification, both in the growth of our subscription and services business, but also in diversifying the assets so they can trade anything under the sun and not limited to crypto assets. We're really pleased with what we've released so far. And as we go through the year, we're hoping to demonstrate to you that we can continue to diversify those revenue streams. Anil Gupta: All right. Well, that does it for today. Thank you for joining us, and we look forward to speaking to you again on our next call.
Operator: Good day, and thank you for standing by. Welcome to the Instacart Fourth Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, the Vice President of Investor Relations, Rebecca Yoshiyama. Please go ahead. Rebecca Yoshiyama: Thank you, Carmen, and welcome, everyone, to Instacart's Fourth Quarter and Full Year 2025 Earnings Call. On the call with me today are Chris Rogers, our Chief Executive Officer; and Emily Reuter, our Chief Financial Officer. Before we dive in, I want to provide an update on our approach to earnings communications. Beginning with Q1 2026, we will not publish a quarterly shareholder letter and instead, we will move to an annual shareholder letter. We believe this approach allows us to better reflect the long-term nature of our strategy, step back to assess our progress more holistically and focus on the sustained value we're building. We plan to continue to provide regular updates through our quarterly earnings call, a detailed earnings press release and supplemental materials. Now on to today's call. We will make forward-looking statements related to our business plans and strategy, developments in the grocery industry and our future performance and prospects including our expectations regarding our financial results. These forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. You can find more information about these risks and uncertainties in our SEC filings, including our last Form 10-Q. We assume no obligation to update these statements after today's call, except as required by law. In addition, we will also discuss certain non-GAAP financial measures which have limitations and should not be considered in isolation from or as a substitute for our GAAP results. A reconciliation between these GAAP and non-GAAP financial measures is included in our shareholder letter, which can be found on our Investor Relations website. Now I'll turn the call over to Chris for his opening remarks. Chris Rogers: Thanks, Rebecca. Hello, everyone. I hope you've all had a chance to read my annual shareholder letter. I am incredibly proud of what we delivered in Q4. We closed out the year with our strongest GTV growth in 3 years, ads and other revenue grew 10% year-over-year. And based on our strong conviction in how the business is performing, we repurchased $1.1 billion worth of shares in Q4 alone. Looking ahead in Q1, we're guiding to the strongest year-over-year GTV growth we've ever provided as a public company, and we're doing it while continuing to expand profitability. The performance gives us confidence not just in the quarter ahead, but in our ability to drive durable, profitable growth over the long term. It's clear that we have real momentum. And today, I want to focus on what's driving that. It starts with the category that we operate in. Grocery is massive, still early in its online journey, highly fragmented and one of the most operationally complex categories in all of retail. Those dynamics have historically slowed online adoption, but they're also exactly why our differentiation matters and why we're continuing to extend our lead. Because we stayed relentlessly focused on grocery, we have purpose-built technology, deep retailer integrations and ongoing systems designed specifically to handle that complexity at scale. Just as important, these systems work together. So our advantage is compound with every order we fulfill, which is now up to more than 1.6 billion lifetime orders. That's why, as I said in the letter, we're now in a position to press our advantage. Our strategy is clear, be the platform consumers trust for all of their grocery needs, provide the technology grocers rely on to power their omnichannel business and be the advertising ecosystem brands prefer on Instacart and across many other services. And with generative AI accelerating execution across our platform, we are increasing our velocity, compounding our advantages and driving greater efficiency, all while strengthening the value of our first-party data. Our momentum is showing up across multiple engines for growth, starting with marketplace. Today, more than 2,200 retail banners spanning nearly 100,000 locations are accessible on the Instacart app or instacart.com. As we've expanded selection, we continue to raise the bar on convenience, quality and affordability. And because our marketplace fundamentals are strong, we're able to reinvest in marketing and incentives efficiently, driving even more growth in operating leverage. Enterprise is our next growth engine. Enterprise is not just another channel for us. It's how we build deeper, more durable partnerships with retailers. This includes custom integrations, shared planning and road maps, joint OKRs so that we're aligned on what success looks like with real mutual upside. And today, we now power more than 380 grocery e-commerce sites, and we see a lot of runway ahead, both to launch with new partners and to expand with existing partners as they adopt more of our solutions. Costco is a great example of how this progression works. We started with our marketplace and storefront experience, building trust and driving growth and from there, we upgraded Costco to Storefront Pro and to Costco business centers and launched additional fulfillment options like priority delivery. More recently, we worked together to launch a benefit for Costco executive members who are their most valuable customer segment, and we expanded internationally with the launch of Costco's first-ever same-day site in France and Spain. Sprouts is another strong example. We began by launching e-commerce on our marketplace and by building a storefront on sprouts.com. From there, we expanded fulfillment with curbside pickup, where we put our picking technology directly in the hands of Sprouts associates. As the partnership deepened Sprouts upgraded the Storefront Pro with Carrot Ads unlocking new incremental revenue streams. Today, we're leaning in even further together with in-store experiences like Caper Cart and FoodStorm, and we're now getting ready to launch AI solutions starting with Cart Assistant. And these examples are not isolated cases. We see this again and again. Partnerships start with e-commerce capabilities, they expand through fulfillment and ad monetization and they deepen with in-store and AI capabilities over time. Each step helps retailers accelerate growth and allows us to participate in that growth as well. In addition, Enterprise unlocks system-wide value for us in the same way that marketplace learning drives enterprise innovation, enterprise also makes our entire platform better. We can start with whatever our retailer needs and we can build from there. And as our partnership deepens, consumers get a better experience. They engage more, they place more orders. And that scale lowers our cost to serve and improve efficiency across marketplace and enterprise allowing us to invest even more in the shared technology that powers the entire platform. This is why our enterprise platform is a growth engine and why I'm so confident that we have multiple years of profitable growth ahead of us. Our growth and momentum across Marketplace and Enterprise also strengthens another part of our business, our ads ecosystem and our data solutions. Brands and agencies want strong performance and they want measurements that they can trust at scale and that's exactly what we deliver. In addition to ads on Marketplace, we've expanded our advertising technology and demand to more than 310 retailer-owned sites through Carrot Ads, up from 220 a year ago. As our reach has grown, we've pulled in more demand. In Q4, more than 9,000 brands advertised on Instacart, up from 7,000 last year. And this diversification makes our ads ecosystem stronger and more resilience. We're also starting to unlock advertising inside physical stores through shoppable display ads on Caper Carts. Early engagement has been encouraging. For example, a simple got everything you need prompt is driving a nearly 1 percentage point lift in basket size on average. And this is just one data point that reinforces our belief that Caper will be one of the most powerful in-store advertising platforms over time. We're also investing in incremental advertising and other revenue opportunities built on our first-party data. For example, with our off-platform partnerships, where we can help brands reach consumers beyond Instacart, whether that's through search, social, recipe or video and in many cases, connect that activity back to real purchases on our platform. We're also creating additional ways to monetize our data, including with the consumer insights portal, which now has a dozen paid subscribers in just a few months. Finally, I want to spend a few minutes on AI because it's no longer about just about making teams faster or more productive. We're seeing fundamental shifts in how work gets done and how platforms create advantage. AI shifts may pose a risk to certain businesses, but we believe these shifts favor platforms like Instacart, that combine technology with real-world operations and unique data at scale. This is where we win and why we think we will excel and be a net gainer in an AI-driven world. Grocery isn't a digital-only problem. It's physical. It's operational. It's relationship-driven, and we operate at that intersection with deep retailer integrations and experienced shopper network and a constant presence inside stores. That operating model gives us one of the richest grocery data sets in the world. For example, our orders on average, include at least one replacement. That means we don't just understand what people buy we know what they intended to buy and what's acceptable when that item isn't available. And those insights can only be earned by having a network of shoppers inside stores, solving real-world inventory problems at scale. Put simply, our physical operations make our data better, and that data makes our technology smarter, more unique and more effective, exactly what's required to succeed in a category as complex as grocery, and it underscores why we win as the leading grocery technology partner for the industry. Internally, we're also leveraging AI to accelerate our execution. Over the last year, we invested heavily in connecting our tools, data and infrastructure. So AI can operate across our systems, not in silos. As a result, our teams are using AI not just to move faster on a single workflow, but to solve broader problems and execute across multiple initiatives in parallel. You can see the impact in how we're executing. Over the past year, average output per engineer is up nearly 40%, which includes 10% of our team increasing output by 80%. This momentum is already accelerating into 2026. And for new projects, we believe AI is now enabling us to build production-grade software more than 4x faster than before. And we're doing all of this while improving quality. System reliability is up even as engineering throughput has increased significantly. That's not incremental improvement. It's a fundamentally different pace of execution, and it's fueling momentum across our business. For example, on our enterprise platform, we're onboarding more retailers faster while delivering more customized white glove solutions at scale, which was not possible before. You can also see it in the breadth of what we're delivering from improvements in quality and fulfillment efficiency to new customer experiences like our Smart Shop technology to our white label AI assistant, known as Cart Assistant, to building physical AI capabilities in-store with Caper Carts and Store View and to expanding retailers' e-commerce capabilities internationally. And then on ads, AI is powering more relevant consumer interactions and simpler, more efficient tools for advertisers. It's fair to say that we are using AI across the board to accelerate and improve all aspects of our business. Overall, 2025 was a defining year for Instacart. More than 26 million customers trusted Instacart and engagement continues to deepen with approximately 10 million customers placing at least 1 order in December alone, a new high for the company. That's a clear signal that our strategy is working, our operating fundamentals are strong. Our teams are executing at a high level across our growth engines, and we're well positioned to be the clear winner with AI. And as we look ahead to 2026, my mindset is clear. This is the moment for us to accelerate. It's time to press our advantage, extend our lead, further scale our platform and unlock new opportunities to drive long-term profitable growth. We're still early in the omnichannel transformation of grocery. Instacart's earned the right to lead it, and I'm determined to make that happen. With that, I'll turn it over to Emily to walk through the financials. Emily Maher: Thank you, Chris, and hello, everyone. Our business is operating with tremendous momentum across multiple growth engines powered by a strong operating foundation and Instacart's distinct advantages. That foundation and the large underpenetrated market ahead of us is exactly why we're continuing to invest across a balanced portfolio of short-, medium- and long-term growth initiatives to extend our category leadership. We're doing this with discipline, guided by clear guardrails, return expectations and deliberate trade-offs across investments. And we continue to drive efficiency and leverage across the P&L. We've been consistent with this approach and it's working. Over the past few years, we've accelerated GTV growth while expanding adjusted EBITDA. That track record gives us confidence in our strategy and our ability to deliver even more profitable growth over the long term. Now let's dive into our Q4 results. We ended the year with momentum. GTV was $9.85 billion, up 14% year-over-year, marking our strongest growth in 3 years. This performance was driven by orders reaching $89.5 million, up 16% year-over-year. And as we expected, average order value decreasing by 1% year-over-year, reflecting growth in restaurant orders. Transaction revenue grew 13% year-over-year and represented 7.1% of GTV, which was flat year-over-year. This was driven by investments into affordability to drive customer engagement, largely offset by increased fulfillment efficiencies. As a reminder, we manage multiple levers across our P&L, so transaction revenue may fluctuate quarter-to-quarter as we intentionally reinvest in growth. Advertising and other revenue grew 10% year-over-year, reflecting our strong GTV performance, our onboarding of more Carrot Ads partners throughout the year, diversification across more than 9,000 active brand partners and the extension of our data advantage through off-platform partnerships and new data solutions. This momentum helped Q4 advertising and other revenue outperformed our expectations even as certain large brand partners continue to navigate macro uncertainty in their businesses. Some of our advertising and other revenue growth is also driving higher payments to publishers, which includes what we pay certain Carrot Ads partners for the benefit of advertising on their sites and incremental ad budgets that we optimize and deploy on behalf of brands on certain off-platform partnerships. While this shows up as higher cost of revenue, it's intentional and incremental growth by design. That's because these initiatives deepen our relationships with brands, unlock additional ad budgets and strengthen the broader platform by delivering value to retailers and consumers. While payments to publishers scale throughout 2025, we expect its year-over-year growth to moderate in 2026. In Q4, we also continued to demonstrate financial discipline and operating leverage. GAAP net income was $81 million, down 46% year-over-year. This decline was primarily due to higher G&A expenses related to nonrecurring legal and regulatory matters, including a $60 million settlement with the FTC. Absent these nonrecurring expenses, Q4 GAAP net income would have increased year-over-year. Adjusted EBITDA grew 20% year-over-year to $303 million. We also generated operating cash flow of $184 million, up 20% year-over-year. Because of our confidence in the strength of our business today and in our ability to keep investing, scaling and pressing our advantage, we opportunistically repurchased $1.4 billion of shares in 2025. This included $1.1 billion of repurchases in Q4 alone, which included our $250 million accelerated share repurchase program. We ended 2025 with approximately $1 billion in cash and similar assets and $671 million of remaining buyback capacity. Now on to our Q1 outlook. We're encouraged by the momentum we're seeing across the business and are starting the year from a position of strength. We anticipate GTV to range between $10.25 billion to $10.275 billion. This represents year-over-year growth between 11% to 13%, with GTV growth expected to outpace orders growth as we lap the full launch of our $10 minimum basket feature for Instacart Plus members in the prior year quarter. We expect advertising and other revenue to grow 11% to 14% year-over-year reflecting the ongoing benefits of diversification across supply and demand across our platform, in addition to a positive start to the year across large, mid-market and emerging brands. We are also guiding to Q1 adjusted EBITDA of $280 million to $290 million, up year-over-year by 15% to 19% and down quarter-over-quarter, primarily due to advertising seasonality. As we look ahead to fiscal 2026, we remain committed to steady annual adjusted EBITDA year-over-year growth at a rate that outpaces GTV growth. Similar to prior years, we expect this rate of expansion to moderate year-over-year as we reinvest to accelerate across our multiple growth engines and lap some of the more significant operating expense efficiencies realized in 2024 and 2025. Overall, we finished 2025 strong and are off to a great start in 2026. Our momentum is building, and we have multiple engines for growth and levers in our P&L to drive durable, long-term profitable growth and accelerate omnichannel grocery adoption for the industry. With that, we'll open up the call for live questions. Operator, you may begin. Operator: [Operator Instructions] Our first question comes from Douglas Anmuth with JPMorgan. Douglas Anmuth: You discussed in the letter how grocers come to you for technology and not just as a demand channel. How should we think about the scope of the opportunity here in terms of both marketplace as well as enterprise adoption? And how do you think about kind of the addition of new retailers versus deeper penetration with existing? Chris Rogers: Yes, that's a great question. Thank you, Doug. I'll explain how we think about these -- the marketplace and enterprise side of our business. And I'll start by saying both of those have been growing and both are healthy. We do see enterprise as a real strategic advantage and also, in my view, a very underappreciated side of our business. And I know I made many of these points upfront, but I want to reiterate why enterprise is such an important part of our growth story here. It's, first and foremost, Enterprise enables much deeper strategic conversations and much deeper technical integrations with retailers. It's ultimately what's getting us on the same side of the table, and it's becoming the foundation for the relationship that we've built with retailers. So we're truly innovating there. We plan together based on everything that a retailer is trying to achieve. So it helps us drive growth through their owned and operated but also helps with the overall relationship back on our marketplace. So that -- the enterprise relationship that we have leads to improvements in the consumer experience that are felt on both sides. And I would say the other benefit of enterprise, which I want to call out is that is driving overall efficiency for us. It's increasing our order volume and density, it's lowering the cost to serve through shared infrastructure. It's allowing us to reinvest even more in share technology and capabilities that benefit everyone. And as far as future opportunity goes, I believe that there is significant future opportunity on the enterprise side in 2 ways, even though we've launched so many new partners on Store from Pro in 2025, we launched 70 versus just 30 the previous year, we're at 380. I do believe that there's quite a bit of room headway here, including internationally. We just launched our first partners internationally with Costco in Spain and France. So there's expansion opportunities with new retailers, signing and launching them but also by expanding with more products and services with existing retailers. That's the Costco example that I provided in the Sprouts example, where we call it land and expand internally where we have the opportunity to continue to serve solutions to retailers to drive growth for both of us over a longer time period. So our focus is really to grow both marketplace and enterprise, and we believe that there's substantial runway ahead. Operator: Our next question, Nikhil Devnani from Bernstein. Nikhil Devnani: Nice to see the GTV numbers and order growth. What do you think has driven the acceleration in the business as you look across core metrics from users to frequency and retention. And then related to that, maybe you could just step back a little bit. There's obviously a lot of focus on competition right now from Amazon, DoorDash and others, but your business is improving. So -- what are you seeing on the ground in markets where there is more competition? And are we just at an inflection point in grocery e-commerce adoption right now? Is that what you think is helping here? Chris Rogers: Yes. Thanks for the question, Nikhil. I'll start with some of the drivers of our Q4 results because we're certainly very proud of our results. As mentioned, GTV was up 14% year-on-year, which is the strongest we've delivered in 3 years. From a consumer perspective, we are seeing growth in demand for our service. And look, the core drivers of our Q4 results were strong user growth and strong engagement with our customers. Last year, in 2025, 26 million customers used Instacart with approximately 10 million unique customers placing at least 1 order in December, which was a record. In addition, GTV from our 2025 new customer cohort was the largest that we've added since 2022. And what we're seeing is that we're retaining those customers at higher rates year-over-year. So we saw very strong new user metrics and at the same time, we deepened engagement with existing customers, converting annual customers to quarterly and quarterly to monthly at faster rates year-over-year, and we steadily increased spend per customer through 2025. But when I back up and look at the kind of the total picture of what's driving growth, it's not just one thing. The performance is reflecting multiple growth initiatives working together, including continuous enhancement across products and selection, quality, affordability, convenience. We also have real momentum with the enterprise platform, as I just stated, and we also have momentum in the club channel, including deeper integrations with Costco with our executive member benefit and with new and existing partnerships, which drove growth for us, including with restaurants, our restaurant integration with Uber Eats as well as our embedded experience in Grubhub. So it's really not one thing that's driving our performance, a compounding effect of a strategy that is working across multiple vectors, and we're executing very strongly against that strategy. From a competition perspective, I'll start by saying none of the competition activity that we're seeing surprises us at all given the size of the market opportunity for online grocery. And also, I have to say, I think that the sentiment around the competitive impact to Instacart is very overblown. Obviously, we monitor competition extremely closely. But if you take a look at the facts on the field, as you mentioned Nikhil, our GTV growth accelerated through 2025. Q4 was our strongest quarter in 3 years. And we guided to 11% to 13%, our strongest guide. That's despite all of the Amazon headlines and expansions and despite restaurant delivery marketplaces expanding with grocery retailers. We continue to have the leading share among digital first players. We are exceptionally strong in large baskets which is 75% of the market. We lead in large basket activations. We lead at converting small baskets to large baskets and look, we do pay attention. We are watching what others are doing and others are going to have their strategy. But there is definitely a market for us here, and we feel good about our points of differentiation, including our leading experience across selection, quality, affordability and convenience and with the entire enterprise platform, which, really, it's a part of the market that others just aren't participating in and is actually helped by intense competition as retailers that we partner with or force to react. So overall, I'm confident in the size of the market opportunity for online grocery. There's lots of room to grow. I'm confident in our ability to compete in this market in the long run. Operator: Our next question comes from the line of Jason Halsen with Oppenheimer. Charles Larkin: This is Chad on for Jason. Advertising came in a little bit stronger in the fourth quarter than maybe kind of initially feared. Could you maybe talk about the puts and takes of that? Was -- were you able to drive better adoption? Or was like kind of macro impacts better than expected? Chris Rogers: Sure. Thank you for the question, Chad. So yes, we did deliver strong adds and other revenue performance at 10% in Q4. And I'll pull apart the drivers here. So first of all, we are growing GTV, which does help fuel investment from brands. That strength was coming from all segments, emerging, mid-market and large accounts even though we had highlighted some uncertainty around large brands on our last earnings call. But overall, if I take a giant step back, I think it's fair to say that our diversification strategy across supply, meaning new surfaces where we place ads and demands with more advertisers and larger budgets from existing advertisers, that is working. Carrot Ads expanded to over 310 partners, which is getting us to really significant scale. We now have over 9,000 brands advertising on Instacart. As of Q4, that's up from 7,000 a year ago. And all of that diversification makes our on-platform add stronger and more resilient. And at the same time, we're continuing to scale our off-platform ads and data offerings. So we're now partnered with Meta. We're now -- we're partnered with the Trade Desk, Google. Most recently, we partnered with Pinterest and TikTok, and we are successfully gathering incremental budgets for campaigns on these surfaces where CPGs can use our first-party data to target our high-intent audiences, measure their performance and drive conversion back on Instacart. So overall, I would say our stated strategy of building one of the most powerful and relevant ads ecosystem is working, and we're executing well against that strategy. Operator: Next question that comes from the line of Shweta Khajuria with Wolfe Research. Shweta Khajuria: Let me try 2, please. The first one is on international growth. As you think about medium to long term, how are you thinking about unlocking that opportunity? And are those markets structurally different when you think about grocery delivery? That's my first. And then second is on local commerce. So is there an opportunity and an unlock in addition to smaller baskets where perhaps you add on local merchants in addition to grocery, that could be the next leg of growth? Chris Rogers: Thank you for the question. I'll start with international. Yes, what we're finding is the markets are -- they do operate differently, but we continue to be very excited about our plans to take our technology to new markets. And we believe that it's a promising future growth vector for us, which we've been busy validating. So the more time that we spend in new markets, speaking to retailers, the more convinced we are that this product market fit for our tech because retailers in these markets abroad are all trying to solve the same problems as retailers in North America. Meanwhile, in many of the markets that we visited, grocery e-commerce is still quite underdeveloped. Many retailers don't have an online presence at all or their current website isn't shoppable and retail media is just getting started in many of these markets. We're also seeing interest in our -- for our in-store solutions in markets abroad like Caper and FoodStorm as retailers look to digitize their in-store experience. So as we've learned more, we're feeling really great about our stated approach. Our approach to going international as we're exploring major markets, the top countries in Europe and in Australia. We're entering with our existing enterprise technology like Storefront Pro, Caper Carts, FoodStorm. We're not building a new suite of technology for these markets. We're leveraging the best-in-class tech that we already have and localizing it in a way that we believe will be scalable. Our Costco launch in Spain and France is a great example of that approach. Spain and France are attractive markets. It's Storefront Pro. It's a trusted partner with Costco. All of that said, I will also say that while we have ambitious expansion plans, we're also extremely focused on being disciplined on expenses. So that we expand in a way that aligns with our profitability objectives and our ability to deliver annual EBITDA progression. On your second question around local commerce, we, as of today, we already serve all use cases. We excel in big baskets, but we're also quite strong in small baskets as well. One of the things that we did a prior year was we reduced the minimum basket for Instacart+ users to $10, which is a lead offering and that is to attract smaller baskets. In terms of merchants and the types of merchants, our primary focus is grocery. It has always been grocery. We do offer other types of retailers on the platform for the convenience of our customers, but we are primarily focused on the grocery industry. Operator: Our next question comes from the line of Bernie McTernan with Needham & Company. Stefanos Crist: This is Stefanos Crist calling for Vernie. I just wanted to follow up on the international expansion. How many of your other partners like Costco have international business? And is that the main strategy? Or are you also approaching new customers as well? Chris Rogers: Yes. Great question, Stefanos. So it's a mix. Many partners that exist in North America also exist in Europe, Costco is not alone in that. Many of our partners have a presence there. And it would be easy to kind of like look at which ones those were. For us, we're doing both. We're talking to existing partners about expansion like what we did with Costco because that's -- we've already got established trusting partnerships and we think that, that's strategically wise and oftentimes, North American retailers are looking for expansion plans because other markets are less developed from an e-commerce perspective, but we are also in these markets, meeting new retailers, selling to new retailers, making new relationships in the major markets in Europe. A great example of that was we spent time with Morrisons on in-store technology and now we're launching Caper Carts very soon in a Morrisons pilot market. So yes, we are -- we do have a sales presence in the market. We are talking to net new retailers and it's a big part of our strategy. Operator: Our next question comes from the line of Josh Beck with Raymond James. Josh Beck: I wanted to ask a little bit about price parity initiatives. Certainly, it seems like when grocers have adopted this pricing philosophy, you've seen a real nice elasticity benefit. So maybe how those discussions are progressing? And then you obviously shared a lot about agentic, which I felt very helpful. How do you think about the tailwinds to your business with respect to maybe on platform, so maybe easing the creation of large baskets? And then how do you think about perhaps the economics and opportunity off platform? I would assume there's a potentially much larger pool of customers. I just would really like to kind of hear your thoughts on those topics. Chris Rogers: Thank you for the questions, Josh. I'll start with price parity. So we work closely with retailers on all strategies, including on their pricing strategies. In the case of price parities or not applying a markup, we do work with retailers on that because we believe it's in their best interest, and there's a positive short- and long-term ROI for them. We consistently see price parity retailers outperform marked up retailers on Instacart. We see better retention price parity retailers. And this is important not just because we have a very large platform. Retailers obviously want to win share on Instacart, but also because they don't want to lose share to some of the largest digital players who are increasingly vying for market share. So we talk to our retail partners about -- the full strategic approach when it comes to digital, pricing is one of those. We think it's strategically wise for retailers to consider this. We've seen some movements so far this year, Hy-Vee just went to price parity, Rales just went to no markups as well on the platform. So we have seen traction. You're going to see us continue to focus on that going forward. When it comes to AI and the influence of agentic consumers, so we're innovating here, when it comes to agentic experiences. We're focused on building agentic experiences directly on Instacart in a seamless way that's very additive. We're designing agentic shopping experiences and deeper personalization that's driving better end-to-end outcomes for customers. In fact, we think that we can build the best and most relevant agentic experience because of our -- the unique data advantage that I talked about upfront. And it's not easy. Grocery is extremely complex as a category. It is highly personal, especially for the big weekly basket. You can imagine how many preferences or dietary restrictions come into play when you're working on a family's weekly shop. But we continue to believe that we're in the best position to solve for that complexity directly on Instacart and with our first-party data from 1.6 billion lifetime orders and our understanding of the grocery consumers. So you'll see us continue to do that. We're also partnering off platform with third-party platforms like OpenAI and Google and Microsoft to be wherever customers want to shop. So the example was with OpenAI, we were the first grocery partner to launch native checkout directly on ChatGPT and we see this as a channel to attract incremental demand and make it easy for customers to find Instacart, land on Instacart, transact with Instacart. That's our approach there. Operator: Our next question comes from the line of Eric Sheridan with Goldman Sachs. Eric Sheridan: Maybe a few just on Instacart+. Any update on the adoption rate you're seeing in terms of people coming into the program? How do you think about investing incrementally in growing Instacart+? And any differences you're starting to see or that are widening in terms of frequency, engagement or cross-platform usage from Instacart+ users? Chris Rogers: Yes. Thank you for the question, Eric. Yes, we continue to be pleased with the results of Instacart+. Instacart+ continues to represent the majority of GTV and orders on our platform. Paid Instacart+ members continue to grow, and Instacart+ customers are more engaged and they retain better than nonmembers. And all of that strength we reflected in our overall operating fundamentals that we shared, where we're seeing user growth and strong new customer retention metrics and deeper engagement with existing customers. From a strategy perspective, to the second part of your question, Instacart+ is designed to unlock customer value and drive engagement anchored by the $0 delivery but as well as several additional benefits like the $0 delivery minimum, which we lowered to $10 for grocery and $25 for restaurants. Also access to new use cases and services like restaurants with our Uber Eats integration, New York Times cooking, Peacock Premium. We expanded family accounts to 3 members. We also have in-app credits through select Chase partnerships. I'll also mention, which is relatively unknown, that the value of Instacart+ member extends beyond just our marketplace with the majority of our storefront retailers also using Instacart+ and offering $0 delivery there as well. So overall, Eric, we're pleased with the performance of the program. And yes. Operator: One moment for our next question, comes from the line of Colin Sebastian with Baird. Colin Sebastian: Great. I guess first, maybe just a follow-up on competition. I know you said that you studied this in a lot of detail. So I guess, are you seeing that there are distinct use cases for consumers on Instacart compared to how they may be using the traditional retailers or e-commerce platforms for grocery? Or is it just that the market is so large and online penetration is so low that there's just room for multiple players. And then my second question is actually on Caper Carts and sort of in-store monetization and maybe ultimately that ties as well to enterprise. But given the lift in basket size from the prompts on Caper Carts and even beyond that, I mean, what is the appetite you're seeing for advertising within the carts or demand for the carts and ultimately, the pipeline for that? Chris Rogers: Yes. Thank you, Colin. On the competition point, Yes, I do think that some of the competition is pulling in incremental use cases, small basket use cases. We continue to perform well in small baskets and large baskets, but we do continue to win where it matters most, which is big baskets. Baskets over $75 represent 75% of the digital market. And given the nature of some of the other offerings that we're seeing out there from Amazon and others, I mean, Amazon is an example, in their same-day experience, there's a few thousand SKUs and 4- to 5-hour delivery windows. To me, their experience is inherently geared towards smaller fill-in orders and not the weekly shop with over a dozen items. And we see that play out in the data that we see some of the same-day grocery baskets appear to be well below $50. And also, we are seeing that as Amazon has ramped up their same-day perishable expansion. The biggest source of their grocery customers are coming from in-store and it's not a share shift from us. And on that point, I do want -- I don't want to underestimate what that means for our business because as companies who -- as a company that works with hundreds of retailers that compete with some of these large players, it's the ultimate rallying cry for the rest of our partners. The rest of the market needs a technology partner to help them compete and win, and we are that trusted partner. From an in-store perspective, at the highest level, we believe deeply in the opportunity for technology in the physical store with e-commerce at low double digits, the vast majority of transactions are still happening in store for the foreseeable future and there's a massive opportunity to modernize and digitize that experience with seamless operations and advanced personalization, wayfinding, advertising to help customers discover products and to help customers save money while they're shopping. From a Caper perspective, we think Caper is an ideal solution to this, and it's an ideal way to engage the consumer. We're seeing great momentum. We have thousands of cart commitments with retailers, big and small. We're now live in nearly 100 cities across 15 states. We launched new pilots in the second half of 2025 with Sprouts and Wegmans and globally with Coles in Australia. And as I mentioned, with Morrisons in the U.K. From a scale perspective, we're also continuing to expand with Wakefern, where we're now live at about 20% of their stores and where we've recently launched shoppable display ads, which is our first foray into the ads business. So overall, our learnings are that customers love the experience. Retailers love it for the operational benefits and the potential to digitize their customers and turn them into omnichannel customers. And then, of course, we're all encouraged by the early signals we're getting from an ad revenue perspective. So I remain optimistic about the future of Caper and incredibly focused on accelerating our momentum here. Operator: Our next question comes from the line of Andrew Boone with Citizens. Andrew Boone: I wanted to ask about your ChatGPT partnership. Now that Instant Checkout is live, can you talk about the advertising intensity that you're seeing with those orders? Is there anything that we should think about as we think about the evolution of retail media now as those channels start to mature? Chris Rogers: Sure. So when it comes to ChatGPT, maybe I'll just back up and say our approach with the AI platforms right now is to ensure that we are served up in a high-quality way in a way that respects our data, but we are anywhere where a consumer wants to shop. And so our -- in fact, our goal is to help define what grocery shopping looks like across the next generation of digital agents, including Adiform. So we want to show up while we want to help kind of co-create the experience. on OpenAI, our partnership with OpenAI allows for consumers to shop, pay and now transact directly inside ChatGPT's app experience. So no switching or additional steps are required. We were the first company to do that. But we're also partnering with others. We're partnering with Google and Microsoft. In fact, we expect every generative AI company will connect into our grocery engine to drive demand for our retailers. From an ads perspective, I think like our immediate priority here is going to be to make sure that we're discoverable wherever customers choose to shop and that, that experience is incredible and that we're able to drive more users to our platform. And we think if we nail that there will be lots of opportunities to monetize that down the road. But more broadly, we are very excited about the opportunity of AI and ads together. That intersection, we think, long term, is going to be a benefit to our business. And there's a few reasons for that. One is on Instacart. So as you know, we're building conversational commerce and agenetic experiences. At the exact same time, the ads team is innovating alongside our consumer team who are building those genic experiences, and our ads will be directly informed by how consumers engage in agentic shopping. So our overall agentic ad strategy here is to build trust and utility with consumers that leverage everything that we've already learned from online in-store and in store. And the other thing that we're doing is we're using AI to improve all aspects of our ad technology, including behind the scenes with ranking and relevance and personalization. We're making all sponsored product ads more relevant, driving stronger engagement and more items added to the carts. That we're improving advertising to tooling and efficiency, making it easy for advertisers to manage and drive performance of campaigns, especially when it comes to emerging brands. Most notably, we've expanded our set of AI-powered recommendations for advertisers. So for example, where in a campaign is there headroom to raise your ROAS target while delivering your campaign goals or where can you increase new-to-brand coverage within the campaign? So we are highly engaged. We think we can be a leader here, and we look forward to the role that AI can play broadly in our advertising product down the road. Operator: Our next question comes from the line of Deepak Mathivanan with Cantor Fitzgerald. Deepak Mathivanan: Chris, obviously, I think grocery is one area where the way consumers shop can have a meaningful change with all the AI tools. I know you launched Cart Assistant basically for cart planning and things like that. And you also have integrations with ChatGPT and others. Are you seeing meaningful change in how consumers are doing grocery shopping, maybe starting with what they need for the week or for a specific recipe instead of kind of like staying with the typical routine for grocery shopping. And when do you expect some of the cart assistance and other AI experiences to be more broadly available? And then perhaps one more question on competition. What are you seeing specifically on retailers where Uber and DoorDash rolled out in the last few months. Are you seeing any consumer behavior changes? Chris Rogers: Yes. Thanks for the question. What I would say on all grocery engaged agentic experiences is, first of all, I'm a believer that consumer behavior is going to shift over time, but it's still very, very early here. If we look at some of the referral traffic that we get from outside platforms, it's all very -- it's all kind of like not material at this point in time. We are investing because we do believe that consumer trends are going to change over time. So we want to make sure that we're there. However, it's still very early days and very -- relatively small relative to the size of our overall business. We are extremely excited about Cart Assistant, which is being built on top of our kind of very large and proprietary data sets, which is key here. We're making progress, significant progress. We're not racing to get this out the door. Our goal is to make our Cart Assistant the absolute best. The most relevant experience for consumers, especially since we're going to be extending this on to partners like Sprouts and Kroger. So in our view, many early genetic experiences are going to be limited in scope, operate as single step interactions which can potentially create friction. Our goal is to have a comprehensive agent out in market. We're in beta testing now, Deepak. We're moving quickly. We're learning a lot. We have plans to roll out on Instacart marketplace by the end of Q1. To the second part of your question on Dash and Uber specifically. So look, when it comes to retailers sitting on other marketplaces, marketplace expansion, first of all, is not unexpected at all. And again, we grew despite to use the DoorDash example, DoorDash and Kroger launched at the beginning of Q4, we just had our best quarterly growth in 3 years. And these launches to us really reinforce what I've been saying all along, which is when a retailer goes non-exclusive, that's steady state. We see other platforms growth plateaus and their basket size stays small, it's under $75. We remain the share of sales leader versus digital first players on these retailers. And we're also now seeing that as other marketplaces add retailers, the incremental growth that they see from each additional retailer diminishes. Their growth is increasingly coming from other retailers on their own platform. So at the end of the day, I don't loose sleep over any of this because our marketplace is strong, our enterprise platform makes us even more resilient. And it gives us a seat at the table with retailers that a stand-alone marketplace does not have. And if you look ahead, although I mentioned last earnings that 80% of our GTV already comes from non-exclusive retailers, I just want to be clear that our model has always assumed that retailers would sit on multiple marketplaces. That dynamic is fully embedded into our guidance and into our long-term strategy. Operator: Our next question comes from the line of Ross Sandler with Barclays. Ross Sandler: Great. Going back to advertising, you guys, I think, said that for 1Q as you're going to grow 11% to 14%, which is a nice acceleration off of a 4-point tougher comps. So could you just talk about what you're seeing thus far in the quarter and then the pipeline? Are we finally through the rough patch with large CPG? And then Emily to bring you in, you mentioned that COGS might leverage in 2016 on the publisher fees. So could you just talk about that leverage there? And then is that material enough to have an impact on overall incremental margins in 2016? Chris Rogers: Yes. Thanks, Ross. I'll address advertising, and then we can pass it over to Emily. So yes, we are very happy. We're off to a very strong start in 2026. As you pointed out, we just guided to 11% to 14% for Q1. What I'll say is that we believe we have the right strategy here and we're executing well against it. We're already a top 5 retail media network and we're continuing to expand our scale and our reach across our growing marketplace across our expanding Carrot Ads footprint, off-platform and with our data solutions. So our strategy is sound. Looking ahead, we're not providing guidance beyond Q1, and there's still some macro uncertainty that we're seeing in the market and some ongoing changes in consumer preferences as an example. But overall, our plan and our approach is to focus on driving strong year-on-year growth by continuing to diversify in terms of supply and demand and ensuring that we're building the largest and most effective ads ecosystem. We have a very clear set of building blocks, which involves continuing to innovate on platform with advanced personalization and relevancy and all of the AI tooling I described, driving exceptional performance and measurement for brands as our goal and then extend all of that innovation to Carrot Ads, which is again, we're at 310 Carrot Ads partners now, which gives us real scale and then extend in-store on Caper Carts, which we just launched, and I continue to believe that this is going to be one of the most interesting in-store advertising opportunities out there. And then we're going to use our first-party data to extend off platform. We're still early with off-platform, but we've built a strong foundation here. We have the right set of partners, and we're excited to scale that further. So with the strategy, like we're confident in this space and our ability to deliver our long-term targets here. But we do believe that we're -- I am optimistic about what we can achieve in ads. Emily Maher: Ross, thanks for the question. So just to get a little more specific on what I was trying to call out is that if you look at adjusted cost of revenue through the course of last year, you did see a little bit of a modest step-up in Q4 related to cost of revenue. And so I wanted to call that out because while the majority of cost of revenue is going to be from credit card transaction payments that do sort of scale relatively with GTV. There is a component of cost of revenue that we do call out in our filings, which is payments to publishers. And so I wanted to specifically give some context of what that includes. It's effectively 2 things. One is what we pay certain of our Carrot Ads partners for the benefit of advertising on their surfaces, as well as the budgets that we get where we're optimizing and deploying ad dollars on behalf of brands for certain of our off-platform partnerships. So it's not all of our off-platform partnerships. Now to your question around, is this going to cause sort of overall impact to margins at large. What I'd say is that first of all, what I wanted to highlight is that while payments to publishers specifically did scale throughout 2025, we do expect that year-over-year growth to moderate in 2026. Now when I think about the P&L as a whole, I would say 2 things. So first of all, that was a relatively modest impact. And we think that we have multiple levers across the P&L to drive profitability over time. And you've seen us drive that pretty effectively over time. Now we did say that our expectation is that the expansion of EBITDA, while we look to continue to expand EBITDA, grow EBITDA faster than GTV through the course of 2026, that rate of expansion we do expect to moderate, and that is because you've seen quite a lot of OpEx leverage as one example over the course of the last couple of years. We do have a number of great opportunities to reinvest in growth that we're seeing in terms of both short, medium and long-term bets. So I wouldn't necessarily tie those 2 thoughts together. I think we have great opportunities to drive growth. and continue to have many levers at our disposal to turn that into profitable growth over time. Operator: Our next question comes from the line of Michael Morton with MoffettNathanson. Michael Morton: Maybe if I could just follow up what we were just talking about, and I really appreciate the detail on the cost of revenue. Could you maybe speak a little bit about the contributors to advertising growth between on-site and off-site in the guide. Does that imply maybe some improvement in the on-site growth rate because we were trying to do some of that math that you talked about with the publisher payments as well? And then also, I think, probably for Emily, could you quantify the contribution that you're seeing from Kroger's decision to change some of the fulfillment because business models, I would say, and what will then flow to cart and maybe how much of that is included in your guidance? Emily Maher: Sure. I can jump in and Chris, feel free to add any detail. So in terms of contribution to ads from on-site versus off-site, so we think of on-site, just to clarify, as a combination of the ads that we serve on our marketplace as well as through Carrot Ads. If you come to Instacart to advertise and you deploy dollars, those are deployed across that full suite of services. And so just to be clear, while we've talked about off-platform because there is something that stands out specifically in the cost of revenue line, really, what we're talking about is an ads business that is primarily comprised of that on-site or we call it on-platform internally, ads revenue, and we're continuing to see growth driven by on-platform. So off-platform is a smaller contributor overall, but it is something that is starting to see some growth and some benefits, so definitely worth calling out. In terms of specifically quantifying contribution from Kroger, we don't call out sort of specific retailers, but we're definitely happy to see that what we're able to provide in terms of same-day logistics, something that we thought was always a really critical benefit in terms of understanding the desire from consumers to get their groceries when they want it, when they need it, which in the majority of cases is on demand that we're able to step in and provide that service for our partner. Operator: One moment for our next question comes from the line of Mark Zgutowicz with Benchmark. Mark Zgutowicz: I was just curious how you see the time line for the ads opportunity in Europe developing given the lack of 1P data in the region? And do you anticipate the incremental ads benefit here to come largely from net new brands or your existing global partners? Chris Rogers: Thank you for the question, Mark. Our approach to Europe, when we take a step back and we look at which technologies we're taking to Europe, we're primarily focused on Storefront Pro, which oftentimes has ads embedded directly into it. So we'll have ads capabilities over time. Caper Cart, which is also -- has an advertising surface area that we think is going to be monetizable over time and then FoodStorm, which is our catering software. So our approach is going to be take our technology, work with retailers, start to solve complex problems and start to build new relationships with retailers abroad. And then advertising will be like a fast follow-on once we have the service areas that are at scale to advertise in those markets. Operator: Thank you. Ladies and gentlemen, this concludes our Q&A session and conference for today. Thank you all for participating. You may now disconnect.
Mike Bishop: Hello, everyone, and welcome to Atomera's Fourth Quarter and Fiscal Year 2025 Update Call. I'd like to remind everyone that this call and webinar are being recorded and a replay will be available on Atomera's IR website for 1 year. I'm Mike Bishop with the company's Investor Relations. As in prior quarters, we are using Zoom, and we will follow a similar presentation format with participants in a listen-only mode. We will open with prepared remarks from Scott Bibaud, Atomera's President and CEO; and Francis Laurencio, Atomera's CFO. Then we will open the call to questions. If you are joining by telephone, you may follow a slide presentation to accompany our remarks on the Events and Presentations section of our Investor Relations page on our website. Before we begin, I'd like to remind everyone that during today's call, we will make forward-looking statements. These forward-looking statements, whether in prepared remarks or during the Q&A session, are subject to inherent risks and uncertainties. These risks and uncertainties are detailed in the Risk Factors section of our filings with the Securities and Exchange Commission specifically in the company's annual report on Form 10-K filed with the SEC on March 4, 2025. Except as otherwise required by federal securities laws, Atomera disclaims any obligation to update or make revisions to such forward-looking statements contained herein or elsewhere to reflect changes in expectations with regards to those events, conditions and circumstances. Also, please note that during this call, we will be discussing non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in today's press release, which is posted on our website. Now I would like to turn the call over to our President and CEO, Scott Bibaud. Go ahead, Scott. Scott Bibaud: Thanks, Mike, and good afternoon to everyone. In Atomera fourth quarter, we made great progress moving existing customers forward in our targeted segment, achieving very strong technical advantages, commencing new customer engagements in nontraditional areas and made our first foray into the world of government-funded collaborative developments, all positioning us strongly for commercial execution in 2026. Today, I will give you an update on all of our activities as we set the table for our business prospects in the new year. Technology news recently has been dominated by the rapid advancement of artificial intelligence and the associated semiconductor challenges that AI entails from the allocation of limited GBU supply, the enormous stresses put on our energy infrastructure and the associated surge in memory prices. Atomera's technology is positioned to assist with each of these industry issues as we deliver materials, which help to relieve each pain point. So let me start off with our recent exciting progress on Gate-All-Around transistor technology, which is the foundational architecture used in AI GPUs, CPUs and bleeding edge network components. The challenges with manufacturing these next-generation transistor devices at 2-nanometer and below are widespread and a concerted effort by the full ecosystem of industry players is required to manufacture them at scale with economically viable throughput and yield. This has been the focus of our recently announced strategic partnership with a large equipment OEM. Target customers or TSMC, Samsung and Intel, who are in production and [indiscernible], a new Japanese manufacturer, which is deep in development. Atomera's MST technology delivers some very compelling solutions in this space, in particular, for diffusion blocking. These tiny Gate-All-Around on transistors require extremely high phosphorotoping levels constrained to a very small area in the source and drain of the nanosheet. Under the intense semiconductor manufacturing environment, it's difficult to keep these [ dopant atoms ] in their proper positions and just a small amount of migration into the channel can severely impact performance, efficiency and yield. Atomera's MST is uniquely well suited to hold these roving phosphorus atoms in place. Although this MST characteristic is well proven in older technologies, implementing MST in devices that are around 2 nanometers, while maintaining its efficacy is something that industry players insist must be validated on silicon at real world scale, and we've been working hard to do so. Our target customers have been looking into two results to prove high-volume manufacturability. First, that MST can be effectively deposited into the actual nanosheet structure. And second, that the diffusion blocking characteristics are better than other methods, the industry is currently evaluating or using. Obtaining these results is not straightforward and requires access to advanced structures that are not generally available are very expensive and frequently proprietary. But we've been able to make steady progress with the help of Gate-All-Around customer and our strategic partner. Just in the last month, we obtained very exciting silicon results in both targeted areas, which we believe provides the definitive proof to drive adoption of MST at all four of the world's Gate-All-Around customers in the future. Not only can MST be deposited into those structures using existing tools and standard gases but it is a far superior diffusion blocking material than those currently used by the industry. We anticipate that we will be able to implement this technology with leading industry players over the next few quarters. Of course, we're quite excited by these recent results since our advanced node, our Gate-All-Around business segment has extremely high revenue potential. But we're also making convincing progress in our other customer areas, so let me provide a short update there. In DRAM, the technology road map is at a key inflection point as DRAM finally follows other logic and memory architectures in making better use of the vertical dimension. We are getting involved in offerings to enhance the performance of next-generation architectures in addition to solutions for products currently in production by the major memory suppliers. During the last few months, we have had two major solution offerings that we're working hard to validate since their market potential is very high. Notably, these are both wafer-based solutions, which are easier to adopt and test, avoiding many of the integration complexities required in some of our other applications. And with the current robust market for memories, we believe our potential customers will have a generous R&D budget to pursue these ideas. Atomera is currently conducting many wafer runs with our various customers. Most of these are processing through their fabs, so we will expect more information soon. One customer has just gotten preliminary results, which look promising. But we will get a better view when the final data is available in about a month. If the results look good, we'll be pushing for a joint development agreement and a license to advance this technology to production. In the RF-SOI space, our offering is very strong, considering that it can provide performance improvements for multiple important areas, including for the RF switch and the low-noise amplifier. Because we are working with so many of the key players in this industry, including foundry and fabless suppliers, we hope to drive adoption broadly. Again, in this space, our solution can be implemented with a wafer-based solution, meaning our customers can choose to deposit it on wafers themselves before starting their full manufacturing process or they can even buy RF-SOI MST wafers from a third-party supplier. Our license structure supports both of these approaches. In power, we are working with some very large players to ultimately be incorporated into their product offerings. Although we had a setback with ST last year, we continue to work with them on MST solutions across multiple business units. In addition to our traditional BCD business opportunities, this quarter, we had several other inbound interests emerge for power applications. Through our own internal analysis and modeling, we have uncovered an opportunity for MST entrench bets, which are an important component in optimizing energy efficiency in AI data centers. Our simulation show the potential for MST to improve performance by more than 40%. We got this to result after Christmas and already have a customer interested in kicking off development. Similarly, using our MST [indiscernible] simulation capability, we have demonstrated how MST can improve HBT devices, which are high-speed transistors frequently used for amplifying and switching signals in RF communication systems. Discussions are underway with a potential first customer in this application as well. In GaN, I'm happy to report that our first customer -- commercial customer has now started running wafers for GaN on silicon with MST technology. For many reasons, this is exciting. This large customer can grow their own GaN wafers and manufacture electrical devices on them, which means they can move even faster than our in-house work with Sandia National Labs in Texas State. So we expect that we will actually move ahead of our own internal development efforts over the next few quarters. Second, they are exploring GaN in both RF and power technologies. These independent efforts by multiple industry and scientific partners frequently can accelerate time to revenue, which is what we're hoping to accomplish. Last month, we announced that our GaN on Silicon concept paper had been approved to move to the proposal stage for a project with Power America to advance the state-of-the-art and wideband GaN materials. We announced this for a variety of reasons. First, we wanted to show the widespread interest from customers, the science community and industrial organizations for an MST solution for GaN on Silicon. Indeed, we've already received several letters of support for multiple future customers showing interest in this solution. Second, this concept paper was our first application for outside development funding. And although the funds sought for this first effort are modest, they put us in the pathway for a variety of future material development funding opportunities, which can provide us assistance going down the path we are planning to travel anyway. By engaging in these joint development opportunities, we are promoting our technology, receiving financial assistance and assuring a customer base all in one project. To summarize, the past few months have been an incredibly productive time in terms of technical development and the buildup of a variety of new customer opportunities that I believe will lead to business deal announcements later this year. Finally, as we close out 2025, let me give you a thought on -- a few thoughts on our accomplishments. Last year, we took our early development and simulation results on Gate-All-Around and converted it into what I now believe is our greatest company opportunity. We did that through working with a lead customer and with a strategic partner who is also a major equipment OEM. This is a significant departure from how we've approached the market in the past. The industry has a long history of relying on this OEM to deliver them material solutions for their problems. So we truly believe that their influence will help us to convert our recent strong technical results to licenses and revenue. We made technical breakthroughs in our other core markets to enable tiller applications like LNA for RF-SOI, a new architecture for BCD and next-gen DRAM solutions. Using AI, our development team has gotten better results more efficiently than ever before. We kicked off a record number of wafer runs without leading customers, initiated several new projects and solidified the business talent on our team, which should lead to further contract announcements over the course of this year. And much of this work was done, emphasizing wafer-based products, which we believe will result in faster time to revenue. In short, 2025 efforts have set us up well for commercial announcements later this year. With that, I'll turn the call over to Frank to review our financials. Francis Laurencio: Thank you, Scott. At the close of the market today, we issued a press release announcing our fourth quarter and full year results for 2025. This slide shows our summary financials. Revenue in 2025 was $65,000 and consisted of NRE fees for wafer deliveries and MST CAD licensing. Our GAAP net loss for the year ended December 31, 2025, was $20.2 million or $0.65 per share, compared to a net loss of $18.4 million or $0.68 per share in 2024. On a non-GAAP basis, 2025 net loss was $16.1 million or $0.52 per share. And 2024 net loss was $15.4 million or $0.57 per share. GAAP operating expenses were $20.9 million in 2025, which was an increase of approximately $1.5 million from $19.3 million of GAAP operating expense in 2024. The main driver of the increase in GAAP operating expense was a $1.1 million increase in stock compensation expense due to a change in our executive equity-based compensation. In Q1 2025, we implemented PSUs for executives which vest based on the performance of our stock price as compared to the Russell 2000 Index. These PSUs vest over 3 years whereas the options and time-based RSUs that had been granted to executives in prior years, vested over 4 years. Although the vesting period is shorter, executives only vest in PSUs based upon our stock price performance. With the exception of stock compensation expense, the drivers of GAAP and non-GAAP expenses are substantially the same. And therefore, the rest of my remarks will only refer to non-GAAP results. Please refer to the slide presentation for a reconciliation between GAAP and non-GAAP expenses. Total operating expenses in 2025 were $15.9 million, an increase of $429,000 from $15.4 million in 2024. R&D expenses increased by $794,000 from $9.4 million in 2024 to $10.2 million in 2025, primarily due to a $676,000 increase in outsourced engineering as we utilize various new device fabrication vendors replacing TSI semiconductor. G&A expenses decreased by $272,000 from $5.1 million to $4.8 million, primarily due to a $421,000 decrease in compensation expense, offset in part by $118,000 increase in professional fees for legal, IP and audit fees. Sales and marketing expense decreased by $94,000, reflecting lower head count but offset by some recruiting fees. Company-wide, our compensation expense, again, on a non-GAAP basis, excluding stock compensation, declined by $582,000 in 2025 compared to 2024. The reduction in compensation expense reflects our Board's pay-for-performance discipline. While we achieved important technical milestones in 2025, the Compensation Committee determined that payout of the full executive bonus was not justified by commercial progress made during the year. Therefore, the committee withheld approximately $669,000 in executive bonus compensation affecting the full executive team. The withheld amount may be earned in 2026, based on achieving rigorous commercial objectives. Turning to our quarterly results. Fourth quarter 2025 non-GAAP net loss was $3.3 million or $0.10 per share, compared to a net loss of $4.4 million or $0.14 per share in Q3 and a net loss of $3.9 million or $0.14 per share in Q4 2024. Non-GAAP operating expenses decreased by $1.1 million to $4.3 million -- sorry, from $4.3 million in Q3 2025 to $3.2 million in Q4, primarily due to the reversal of our bonus accrual, which occurred in Q4. Our balance of cash, cash equivalents and short-term investments on December 31 was $19.2 million compared to $26.7 million at the end of 2024 and $20.3 million at the end of Q3 2024. We used $14.9 million of cash in operating activities during 2025, $3.2 million of which was used in Q4. During 2025, we sold approximately 1.6 million shares under our ATM facility at an average price per share of $5.15, resulting in net proceeds of approximately $7.6 million after commissions and offering expenses. As of December 31, 2025, we had 32.4 million shares outstanding. After year-end, we've raised an additional $3.2 million of net proceeds by selling approximately 1.3 million shares at an average price of $2.47. For Q1, we expect to recognize revenue in the range of $50,000 to $100,000 from shipment of MST wafers to customers. Consistent with our usual practice, we are not providing revenue guidance beyond this quarter. Our 2025 non-GAAP operating expense was $15.9 million, which is well below the guidance range I provided last quarter. That's primarily due to reversing $669,000 of accrued bonus. For 2026, we will continue to aggressively control costs, and we've limited our expense growth to those areas directly related to revenue and near-term commercial progress. Those increases mainly consist of adding two senior go-to-market leaders. The first of those was our VP of Sales, who came on board in October, and the next will be a new Head of Marketing. The comparison of our planned spending in 2026 versus 2025 looks distorted by the potential payout this year of the executive bonus withheld from 2025. And because withheld amount will have to be accrued this year on top of accruing 2026 bonus. As a result, we expect our non-GAAP operating expense to be approximately $18.5 million in 2026. Now on paper, this is a 17% increase. But if normalized for the timing of the executive bonus accrual, it is more in the range of 8%. I would point out also that earning back deferred executive bonuses as well as earning 2026 bonus will require us to execute against aggressive, commercially focused milestones. With that, I will turn the call back over to Scott for a few summary remarks before we open the call up to questions. Scott? Scott Bibaud: Thank you, Frank. The entire focus of our efforts in 2025 is getting to commercial agreements. The work we've done up to now have positioned us well to close on those opportunities and I look forward to sharing our successes with you as the year progresses. Mike, we will now take questions. Mike Bishop: [Operator Instructions] And right now our first question comes from Richard Shannon of Craig-Hallum. Richard, go ahead. Richard Shannon: Great, Mike. Can you hear me? Mike Bishop: Yes. Yes, we can. Richard Shannon: Okay. Great. I'm in the airport here. A little bit of noise, so apologies for that. I don't have a ton of time before I got to run to my plane here. But let me ask just a few questions here. Scott, some really interesting statements regarding Gate-All-Around here. If I caught your comments correctly here, you said that you're expecting some -- I forgot the exact language you used, but some sort of important next steps here in the next few quarters. typically, you've been reticent to give somewhat definitive time frames for getting to major milestones and that you are here. So maybe give us a sense of why you're saying this. Your confidence level is clearly quite high. So help us understand this level of confidence and why? Scott Bibaud: Yes, I would say on the Gate-All-Around technology, let me -- do you mind if I just share this slide to answer your question, Richard? Richard Shannon: Please do. Scott Bibaud: Okay. On the right-hand side, you can see where MST is deposited around the source and drain structures. That is an incredibly hard thing to do. We've been talking with our Gate-All-Around customers about using MST to block dopant diffusion like where these little red arrows going to 1 of the biggest problems that people have is that the phosphorus opens get into these channels here. And the channels can only handle a couple of phosphorus atoms before they really start to agree very significantly, which affects yield and performance and so forth. So all along, they've been saying, okay, that's interesting. We know MST can block the phosphorus. But first of all, can you even deposit it in these tiny little structures that are -- they're 2 nanometers. And just to give you an idea, it takes about 100,000 nanometers to get to the width of a hair. That's how small these are. And so we had to prove that, and we spent a long time in the lab building devices like this to show that we can deposit MST with high quality there, and we have done that. Second thing is when we put that tiny layer of MST, does it really still block the phosphorus in that very, very small space because they're using something else right now that isn't very effective at blocking it, but are we better than that of the thing? And the answer to that question is, yes as well. We've recently just gotten the technology -- gotten the test data to prove that. And so it's early days. We've gotten that in the last month. We haven't been able to get out and talk to each of the data all around customers yet, but with our partnership, with our strategic partner, we really think we're going to talk to those guys, and they're going to immediately want to start testing that and trying it. So I'd say that's why my confidence is much higher. I would say we've rarely been as excited about some technology results inside the company as we are by what we have right now. Richard Shannon: Okay. Great deal. I'm sure I'll follow up a little bit on that one. Second other -- second question here is, you mentioned some -- you mentioned two things you have to prove, you are better than alternative solutions. We haven't really heard you talk about what other -- what your potential customers are considering here. Any way you can describe what those are, whether they're internal developments or something looking from other research organizations and to what degree you have visibility into how well those are doing as well? Scott Bibaud: Yes. So they're not -- we're not really talking about some lineup of other technologies. But what the industry has tried using in the past is silicon arsenic, and silicon arsenic is effective at just putting a spacer between the phosphorus and the channel, but it doesn't really prevent the dopant diffusion very well at all. And so we've actually done a lot of testing of our MST technology against silicon arsenic and proven that we have vastly better diffusion blocking results. And the second thing is that the industry does not like to use arsenic in its manufacturing process -- that can help it. It's expensive to use and dangerous and therefore, offering a solution that removes that material is probably considered good by the industry. Richard Shannon: Okay. Fair enough. Very interesting here. My last question before I've got to run here, Scott, is you talked about a number of inbound calls here in the power space, which I know it's a space that you've been pushing for a while. And obviously, STMicro was aiming towards that before it's, call it, set back. You'd characterize this in the RF-SOI space a few years ago about having significant coverage, I think, more than half of the market share of the space here. Anyway to characterize how much of the power space you're covering with -- when you add up all these new companies that are coming to you? Any way you'd characterize that? Scott Bibaud: Yes, it's a little bit harder. I think on RF-SOI, it's a pretty compact group of companies, and we feel very confident that we're working with the vast majority of them. On power, it's a much bigger market. It's a much more diverse customer base. So I wouldn't say we're working with most of the people, of course, -- we -- like we talked a little bit about the work we've done in TrenchFET when we did do some work on TrenchFET. We reached out to the leaders in TrenchFET and some other folks that we know are interested in advancing their technology and started talking to them and that worked well and the same thing with HBT. And so yes, I think we're expanding -- and then a lot of the GaN work that we're doing is in power as well. So we're talking to a lot of companies working in the power space, but I can't really give you -- I can't really say it's the vast majority in that case. Richard Shannon: I wasn't expecting the vast majority, but since the power space is very large. Well, I thought if there was -- I mean, if you even had 10% or 20%, that would be a pretty good coverage there. But I appreciate that characterization. I've got to jump out of line, Scott. Scott Bibaud: All right. Thank you, Richard. Mike Bishop: All right. Thank you, Richard. We have some questions coming in on the Q&A line. Although I will start with one, Scott, do -- can you give an update on the progress for your Vice President of Sales, Wei? Scott Bibaud: Sure. Wei joined in October, and he's been coming up to speed and generally very, very helpful. I'm super enthusiastic about having someone who's pushing the team as hard as he is on the sales side. He's not only driving our efforts very specifically with existing customers and helping us find some new ones. He's also targeting a bunch of relationships that he's had in the past that he's bringing in with us and that does allow him to -- for us to engage with customers from kind of a different angle, and that's been very positive. So I think so far, so good. Mike Bishop: Great. And a number of questions about wafer activity at the fab. And as it relates to general activity level, how would you characterize that? Scott Bibaud: Yes. So I think just starting earlier in the middle of 2025, we started to get a lot of customers coming in with wafer run simultaneously, which is quite busy for us to get them into our fab and deposit MST on a very high-quality basis and they get it back out, so they can start running the wafers. Today, we're still running things in our own fab, but for the most part, we've shipped out a lot of that stuff out to our customers. And now we're kind of in a waiting game, it takes 6 to 9 months for customers to run their wafers once we send them back to them and then get the test results, and then we'll review those and we'll figure out the next steps from there. But we really feel confident that what we have done in these runs is good stuff. We use MST CAD simulation software to figure out what we expect the outcome of these runs to be and we're really hopeful that our TCAD has been accurate. And if we get the results that we hope for, that our customers want to move forward into a productization effort. Mike Bishop: Okay. And generally speaking, I have a question here, and I think we've covered it on prior calls, but can you describe why selling blank wafers makes it easier to go to market? Scott Bibaud: Yes, absolutely. Okay. I just showed this graphic of a Gate-All-Around device, and that is a really, really hard device to integrate into. But you can imagine when -- if we're trying to integrate into that device, the customer starts a starting wafer, they build up a whole bunch of structures. And then at some point, they make a hole in those structures and they say, okay, put your MST in here. And then we'll have to figure out how to fill around it and all of the different layers that surround it affected, right? That's called integration engineering, it's very challenging. But for many of our applications, we talk about wafer-based products, that would be when the customer buys a wafer, and they put MST on immediately, the blank wafer. And then they start processing their -- all of their -- the rest of that process on top of it. Therefore, we don't have to work through all those challenging integration issues that we would have for something that where MST gets deposited in the middle. So today, I talked about a couple of applications we're looking at for DRAM that would be wafer-based products, where we're shipping them to wafer. I mean, obviously, we won't be wafer manufacturers, but we would help the most solution that would go right on the wafer. RF-SOI, our solutions that are wafer-based products and also our gallium nitride, our GaN solutions are wafer-based products. So we've talked about it before. We're excited about those because they're easier to integrate, and therefore, we think faster time to revenue. Mike Bishop: Okay. Great. Here's another one. Can you please explain more about power saving in AI than how MST can help achieve that? Scott Bibaud: Yes. So it's a lot of ways. I just showed you the Gate-All-Around transistor. So fundamentally, in semiconductor manufacturing like that, if you can bring a performance improvement, you could also probably trade that off to get lower power if you chose to do so. So that's one way. Another way is with our power solutions like on our BCD products or our TrenchFET products or our GaN products. Those are targeted for the type of electronics that will be developed that go into AI data center to help lower the power in the racks. So I'll give you one industry dynamics that we're tracking in AI data centers. They have historically used a 12-volt power supply on the rack. But recently, the industry is moving away from 12 volts and they're moving to 48 volts because 48 volts is 4x more efficient at saving power when you're providing power to the racks for all of those servers. The 48-volt power supplies use a lot of TrenchFET devices. That's the primary device that they use in there. And so we are trying to offer solutions for TrenchFET, so we can help to address that. The other thing is gallium nitride obviously, a very power-efficient devices. Those of you who have the small power supplies that go into your backpack or suitcase like they weren't able to do before you understand that those are much more efficient, and that's why we're trying to engage in gallium nitride. Mike Bishop: Interesting. Thank you. Okay. Can you give us an update on your JDA1 and JDA 2? Scott Bibaud: Yes. So and JDA 1, I have to be careful that I'm not kind of divulging too much about what they're working on. But we continue to have to be working with JDA 1, and I'm hopeful that some of the technologies that I talked about today will kick them into high gear to -- in a business unit to kind of move that forward towards a production development effort like we've been waiting for, for -- honestly, for a little bit too long. JDA 2 is one of the customers that is currently running wafers with us. And so I can't say too much about exactly where they are right now, but they're running wafers. Mike Bishop: Great. And going back to the Gate-All-Around, is MST being evaluated at the customer's fab at this point? Scott Bibaud: Yes. So we mentioned that we're working with one Gate-All-Around customer today who helped us -- so when I showed that structure, and I showed that we had to do deposits inside there, you really need to work with someone to get access to those wafers to try out things on those structures. And the good news is we have been working with one of the Gate-All-Around potential customers to evaluate MST today. So yes, we are in one of them. I hope to be in all four of them. Mike Bishop: Okay. And when do you expect an evaluation to be completed of the wafers. Scott Bibaud: For Gate-All-Around or? Mike Bishop: Yes. For Gate-All-Around. Scott Bibaud: For Gate-All-Around, it's very hard to say with some of the customers we're planning our visit to show them all this data that we have. We believe that the data that we have is good enough that they may not even require us to do deposition inside their Gate-All-Around structure because we've proven that we can physically do it. And then what we'd be trying to do is to convince those customers to install MST in their fabs and have their R&D team take over and start implementing this. How fast that will happen? It's hard to say, but I will say the people that are working on Gate-All-Around are working very fast -- and if they adopt, they're going to be pushing us as hard as we ever been pushed by a customer in the past. Mike Bishop: Okay. Great. And just one last question here is on how MST can help or improve quantum computing. Scott Bibaud: It's interesting. That's something we're working on right now. I don't really -- I can't really talk about the way that our MST technology will address quantum, but I can tell you that's something we're working very hard on right now. In the past, we had a theory about MST's ability to improve the purity and availability at a cheaper price of Silicon-28, which is a critical wafer type that's used for quantum wells. But we -- yes, that really just didn't pan out. So we're working on other technologies right now. And I hope we'll be able to talk to you guys about that later this year. Mike Bishop: And Scott, you can proceed with any closing comments. Scott Bibaud: All right. Well, I guess -- I want to just thank you all for joining us to hear the progress being made here at Atomera. Continue to look for our news, articles and blog posts, which are available along with investor alerts on our website atomera.com. Should you have additional questions, please contact Mike Bishop, who will be happy to follow up. Thanks again for your support, and we look forward to our next update call. Mike Bishop: Thank you. This concludes the Atomera Fourth Quarter Conference call.
Operator: Good day, and welcome to the Franklin BSP Realty Trust Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lindsey Crabbe, Director of IR. Please go ahead. Lindsey Crabbe: Good morning, and welcome to FBRT's Fourth Quarter Earnings call. Thank you, Megan, for hosting our call today. As the operator mentioned, I'm Lindsey Crabbe. With me on the call today are Richard Byrne, Chairman of FBRT; Michael Comparato, Chief Executive Officer of FBRT; Jerome Baglien, Chief Financial Officer and Chief Operating Officer of FBRT; and Brian Buffone, President of FBRT. Before we begin, I want to mention that some of today's comments are forward-looking statements and are based on certain assumptions. Those comments and assumptions are subject to inherent risks and uncertainties as described in our most recently filed SEC periodic reports and actual future results may differ materially. The information conveyed on this call is current only as of the date of this call, February 12, 2026. The company assumes no obligation to update any statements made during this call, including any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, we will refer to certain non-GAAP financial measures, which are reconciled to GAAP figures in our earnings release and supplementary slide deck, each of which are available on our website at www.fbrtreit.com. We will refer to the supplementary slide deck on today's call. With that, I will turn the call over to Rich Byrne. Richard Jan Byrne: Great. Thanks, Lindsey, and good morning, everyone, and thank you for joining us today. Before we begin, I'd first like to share some important management updates with you. We announced all of these the other day. First, I'm pleased to announce that Mike Comparato, who many of you already know very well, has been appointed Chief Executive Officer. This is effective immediately. Mike currently leads our commercial real estate practice at Benefit Street Partners and has been instrumental in building and scaling that platform to what it is today. He brings deep commercial real estate expertise, a strong command of capital markets and, of course, a proven track record. Concurrently with that, with Mike's promotion, Brian Buffone will assume the role of President. Brian is a seasoned real estate veteran and a long-standing member of our investment team. His experience, institutional knowledge and investment acumen will continue to be invaluable as we execute our strategy and serve our investors. Together, these appointments represent a natural progression of FBRT's leadership, and I am excited to say, leave the company well positioned to execute its strategy in a dynamic market. I will remain actively engaged as Chairman, focused on strategic oversight and supporting Mike and Brian through this transition. So with that, let me turn the rest of the call over to Mike. Michael Comparato: Thanks, Rich. Good morning, everybody. And before my prepared remarks, I want to thank Rich for his years of service as FBRT's CEO. Rich has been an integral part of the company becoming a middle market leader in the commercial real estate finance market, and we all appreciate his dedication over the years to the company's success. I also want to take a brief moment and congratulate Brian on being promoted to President of FBRT. Brian has been a long-time leader within Benefit Street and will now be playing a much more prominent role in FBRT. Now on to the company. For several quarters, we have discussed our earnings under covering our dividend. After a thoughtful analysis, we decided it was no longer prudent to sacrifice book value to pay that dividend. Accordingly, management has recommended and the Board has approved a reset of the quarterly dividend to $0.20 per common share beginning the first quarter of 2026. The company continues to have earnings power to support a meaningfully higher dividend than $0.20. That has not changed. But in the near term, rather than returning capital to shareholders by over distributing, we want to stabilize our book value and better match our current earnings to our dividend. Our priorities are sustainable dividend coverage, book value growth and building more consistent durable earnings. The dividend reset is driven by several factors. The recent declines in SOFR, the timing of our originations and repayments and the overall size of our loan portfolio has impacted short-term returns. In addition, spreads are at multi-decade tights, which means that new loans coming into the portfolio are generally making lower returns than loans that are paying off. REO liquidations are taking longer than originally anticipated, keeping equity locked in underperforming investments. We continue to make very good progress on the REO liquidation front, unfortunately, just at a slower pace than desired. Lastly, but most importantly, with our acquisition of NewPoint, we made the intentional decision to no longer be a pure-play mortgage REIT. Today, we are a commercial real estate investment platform. This means a lower overall dividend yield, but significantly more earnings stability and stronger long-term book value growth. This cannot be overstated. We are a different company today than we were 6 or 9 months ago. In acquiring NewPoint, we have intentionally traded some higher near-term returns from credit investments for steadier recurring servicing and fee revenue. This type of revenue typically trades at a lower yield than pure-play mortgage REITs since it produces a much more consistent and predictable ongoing cash flow stream. When looking at our company and dividend yield today versus where we have been, the overall picture should be viewed based on a blend of our mortgage REIT operations plus that recurring revenue stream business. As we scale NewPoint, its contribution over time will continue to increase and be accretive to overall earnings. We have also recently made a few strategic investments in commercial real estate equity investments. In the current market environment, equity investments yield lower current returns in credit investments, but should provide longer-term growth and upside in earnings. An agency servicing platform and select equity investments are key to a strategy that delivers stronger long-term growth in book value for our shareholders over time and creates a company where the total return should be more meaningful than just our dividend returns to shareholders. We fully recognize we must demonstrate FBRT's repositioning to the market, and the team is working around the clock to do so. Again, FBRT should no longer be compared to pure-play mortgage REITs. We are positioning the company with a differentiated mix of dividend yield, stability and growth, which traditional mortgage REITs do not provide. Looking ahead, our focus is on balancing attractive current income with disciplined book value growth. We believe this approach strengthens the durability of our model and better aligns our yield strategy with the business we are building. Before turning the call over to Jerry and Brian, I want to take a minute just on overall market conditions. Market conditions overall continue to improve. Liquidity is abundant and virtually any capital markets transactions from CMBS to SASB to CRE CLO is met with a deluge of orders, driving spreads tighter. As a result, we are witnessing spreads that are the tightest we've seen since pre-GFC days. We are also seeing regional banks slowly return to the market, primarily in the multifamily space. Their financing quotes typically come with large depository relationships and recourse, but we are hearing about banks quoting whole loans with the same pricing as AAA-rated bonds on CRE CLOs. We are reluctant to chase spreads to the levels that are currently being bid in the market today for commodity multifamily loans. The returns are anemic. And if SOFR continues to fall, they only get worse. However, saying all of that, given the breadth of our product offerings, we are still able to originate ample loans that fit not only our credit criteria, but also generate returns that are significantly more interesting for our investors. Brian is going to address a few of our watch list positions as well as provide some updates on the REO portfolio. But first, I'll turn the call over to Jerry to walk through our financial results in more detail. Jerome Baglien: Great. Thanks, Mike. I appreciate everyone being on the call today. I'm going to go through the financial results for the quarter. FBRT reported GAAP net income of $18.4 million or $0.13 per fully converted common share. Distributable earnings for the quarter were $17.9 million or $0.12 per fully converted share. Turning to distributable. We had earnings -- we had distributable earnings, which included $9.8 million of realized losses. Now $7.7 million of that was related to debt extinguishments and the balance to REO sales. If you take these out, our distributable earnings was $0.22 per fully converted share or nearly flat to where we were last quarter. Timing was the primary driver of the quarter-over-quarter change in distributable earnings. Early in Q4, we completed a $1 billion CLO, FL12 that increased our nonrecourse financing capacity. With this transaction, we called several older CLOs that were past the reinvestment periods, which produced a debt extinguishment charge that I mentioned of $0.07 per share. The new CLO should lower financing costs in 2026 and additionally add meaningful origination capacity. We grew the core portfolio slightly in Q4 as originations outpaced payoffs. The principal balance rose modestly as we originated about $528 million of new commitments while receiving roughly $510 million of loan repayments, a small, but important reversal from Q3 when the core portfolio declined as we conserve liquidity for the NewPoint acquisition. During the quarter, we recorded a net CECL benefit of $4.8 million. However, that included $3 million of loan-specific reserves for 4 watch list loans. One of those loans was subsequently transferred to REO and the associated specific reserve was charged off. Importantly, we continued our share buybacks in Q4, repurchasing $14.4 million of common stock, which contributed $0.05 to book value. Subsequent to quarter end, our Board reauthorized the company's share repurchase program, providing $50 million available for future share repurchases through December 31, 2026, to further support the stock price. Book value per share ended the quarter at $14.15, reflecting our dividend outpacing our earnings. Net leverage remains well within our targets, ending the quarter at 2.5x with recourse leverage standing at 0.81x. We have ample financing capacity and liquidity with reinvest available on 2 of our CLOs. As we redeploy the capacity created by our financing actions, we expect earnings to benefit in 2026 as our core loan portfolio grows and we see a more stabilized contribution from NewPoint. Turning to Slide 11 for updates on NewPoint. NewPoint contributed modestly in Q4. This was expected given a lower origination cadence in the quarter and paired with higher tax reserves at the TRS that reduced NewPoint's reported earnings in Q4. We expect NewPoint's distributable earnings contribution to operate at a run rate of approximately $25 million to $33 million per year. Agency volume came in at $1.1 billion of new loan originations in the quarter. We expect agency volumes to be between $4.5 billion and $5.5 billion in 2026. At quarter end, the MSR portfolio was valued at approximately $220 million and generated $8.8 million of income in Q4, reflecting an average MSR rate of approximately 82 basis points, and the implied life of that portfolio was 6.4 years. NewPoint managed a servicing portfolio that was $47.8 billion at quarter end. The NewPoint BSP integration work continues to move forward. We've made significant progress on the migration of BSP's loans and that servicing book onto NewPoint, and we're on pace to complete that transition by the middle of the first quarter. The addition of the BSP loans will increase NewPoint's servicing book by approximately $10 billion and help to contribute to the increase in earnings power of NewPoint in 2026. We remain confident NewPoint is very accretive over the long term as origination and servicing volumes grow and integration synergies continue to build. With that, I'll turn it over to Brian to give you an update on our portfolio. Brian Buffone: Thanks, Jerry. Good morning, everyone. I just quickly want to start by saying thank you to Rich and Mike for their kind words and support earlier. And as I step into this role, I look forward to continuing to execute our strategy alongside Mike and the broader FBRT team. I'll start on Slide 15. Our core portfolio finished Q4 at roughly $4.4 billion with about 77% of our loans backed by multifamily assets and very limited office exposure. During the quarter, we originated 37 loans at a weighted average spread of 284 basis points with multifamily representing 76% of our new loan originations. Our pipeline is robust, but given current spreads, we are selective on pacing, as Mike mentioned earlier. Our conduit business had an incredible quarter, one of the largest in the history of the company, and that reflects an improved CMBS market liquidity and healthy investor demand. Our pre-rate hike book represents roughly 32% of the total loan commitments of $1.3 billion in multifamily or 82% of that pre-rate hike book. Credit mix remains steady. 76% of those legacy loans are risk rated 2 or 3 at quarter end, and we're continuing to work through the positions that need extra attention on the watch list. Importantly, the office loan exposure is now only $57 million across 3 loans with an average loan size of $19 million. That's down from $130 million in the prior quarter due to 2 office loans paying off in full during the fourth quarter. Credit quality across the portfolio remained stable with an average risk rating of 2.4 at quarter end. And during the quarter, 2 loans were removed from the watch list. One was repaid in full and the other was taken as REO and subsequently sold while 2 new multifamily assets were added. Borrower engagement remains high, and we are actively working towards resolution on each position. A notable change on our watch list was the Georgia office loan that was extended 18 months in exchange for a 5% principal paydown. That original loan amount of $27.5 million has now been paid down to $21.1 million, and the borrower continues to make monthly debt service payments. That loan will stay on nonaccrual. On Slide 19, I'll cover our foreclosure REO portfolio. Our foreclosure REO balance declined to 7 positions at quarter end, down from 9 in the last quarter, reflecting continued progress resolving those legacy assets. During the quarter, the team moved 3 assets off the REO list, selling them at our adjusted debt basis. Remaining reserves related to those assets were charged to distributable earnings this quarter, which contributed to our realized loss. We added a new property to our foreclosure REO in Q4, a Texas multifamily asset. However, it is already under LOI, and we expect resolution to that asset in the first half of this year. We remain highly focused on resolving the remaining positions so we can redeploy that capital into our core loan portfolio. And with that, I'd like to turn it back over to the operator to begin the Q&A session. Operator: [Operator Instructions] The first question comes from Matthew Erdner with JonesTrading. Matthew Erdner: Rich, congrats on a great run as well and Mike and Brian, you guys also. I want to touch on spreads and kind of the compression there. You guys have mentioned or kind of hinted at laying off the gas a little bit there. It looks like conduit was pretty successful. So how should we think about capital allocation this quarter if the core portfolio has, I guess, muted originations somewhat? Michael Comparato: Matt, thanks for the question. I don't want to take the prepared remarks out of context. We have the pedal to the floor on origination. Our goal is to get assets up to a level where we're meaningfully growing earnings, and we can only do that by closing loans, obviously. I think the point of the message was we are not actively chasing the commodity 88-mile an hour fastball over the part of the plate, multifamily loan. We're kind of focusing on the other aspects of our business where we can originate as well, whether that's construction lending, some other areas that we're active. So we've got -- I think we've got a $1.7 billion under application pipeline. So we are by no means slowing down. We're just kind of changing the mix of what the origination looks like so that we aren't dropping to the tightest spreads that the market is. We have to selectively pick a few where we compete there. But generally, we're trying to play a little bit wider. Matthew Erdner: And then I guess turning to kind of the dividend reset, should we kind of expect that to be a good baseline for run rate earnings going forward? And then I guess within that, following up on the last question, what's an ideal portfolio size that you're looking to get that core back to by the end of the year to get back to that $0.20 coverage? Michael Comparato: Well, we're at -- we're above $0.20 today. And so let me answer the question backwards. I think our goal by year-end would be to have the book -- our core book between $4.8 billion and $5 billion overall. With respect to earnings, look, we fully expect this to be 1 or 2 trough quarters, right? That is the earnings potential of this company hasn't changed, right? We laid out the path to getting back to $0.35, $0.36. We still believe with conviction that we have that earnings ability to get back to that level. The issue is it's just taking us a little bit longer to get there than we had hoped. So I'm expecting that we are fully growing earnings over the course of the next several quarters on this path back to that kind of mid-30s. We just did not want to continue shrinking the size, the balance sheet of the company paying out cash over distributing because it just makes it even harder to get back to that level. So we've talked about for several quarters, the borrower behavior and the unpredictability of borrowers. The same, unfortunately, has been true on the REO disposition. We have made tremendous progress. And just when you think you're selling another asset or 2 or 3, a buyer zigs instead of zags. So we're navigating what I would say is a significantly better market than what it was 2 years ago, but it's still just taking us a little longer than we had hoped. So very long-winded answer. I apologize for that. But no, I would not view this as the steady-state earnings of the company. I think earnings are going in one direction from here, and that is higher. Operator: The next question comes from Steve Delaney with Citizens JMP Securities. Steven Delaney: Congratulations on all the promotions that we heard about last night, well deserved. Just looking at the -- where you're trying to allocate capital, and I hear you loud and clear about the excessive competition and maybe traditional bridge loan products. You have -- you're primarily a lender, I guess, as we think about it, while some of it is maybe more like the multifamily and doing the NewPoint business like maybe like a WD or somebody like that, I think that's certainly value added. But the one -- you have one investment REO -- is that going to be a one-and-done thing? Or should we expect that going forward, you will have some percentage of your capital in direct real estate investments or the carry plus the potential capital gain? Michael Comparato: Thanks, Steve. A lot there. Let me try to answer it. So we actually have more than one equity investment on the books. We bought 2 large assets, I think, both in 2025 that are in joint ventures. So they might be booked slightly differently, but I believe those -- I believe we have roughly $400 million to $500 million of gross assets that own. I don't know the percentage off the top of my head, but we do have more equity investments on the book today than just that one Academy Sports distribution facility. We appreciate you pointing out Walker & Dunlop, and I think that's part of my message in the prepared remarks, they're trading at a 4% dividend yield. So what we're trying to get the market to view us as really this conglomerate within the commercial real estate, right? Like let's put a dividend yield of 4% or 5% on the NewPoint operations. Let's put a dividend yield of 8% to 10% on our mortgage REIT operations, and let's put a dividend yield of 4% or 5% on the equity investments that we have because that's where equity REITs trade, but those also are positions for growth in the company. It's going to take us time to educate the market on that front and let them see that, and we have to prove it, and I think we'll do that. But yes, we are primarily a debt shop. That said, we do make a lot of equity investments in other vehicles outside of FBRT. I think we bought close to $1 billion of commercial real estate assets in the last 18 months. So again, a longer-winded answer here. But yes, I think that you should expect to see a slightly higher allocation of the book to some equity -- select equity investments over the next few years. Steven Delaney: No, that's very helpful. And it was a twisted kind of question to begin with, but I appreciate the color on the -- especially on the investment side on the investment REO. Michael Comparato: Yes. And I would just add, you're not going to wake up one morning and see FBRT have 25% of its equity invested in equity investments, right? That is not happening anytime soon. Could we have 5%, 10% a few years from now? Possibly. But yes, we are not on the path to Starwood. I think they're at like 50% equity investment. That is not the goal or expectation. Steven Delaney: You're still going to be a finance company primarily. And on your agency business with NewPoint, will we be -- I have not -- forgive me, but I haven't been through the deck yet. But will we be able to kind of look at that operation in terms of its origination sale and servicing business to Freddie and Fannie, et cetera. Will we see sort of what your little WD component of the company looks like in terms of the TRS? Michael Comparato: Jerry, do you want to take that? Jerome Baglien: Sure. Yes. There's a page in the Supplemental deck, and there's obviously going to be more information in the 10-K that will give you more segment information on the details within that operating segment for us. So you'll be able to see some of the volume information. We break out the income by component, servicing, gain on sale, and you could see the cost structure as well. So hopefully, that should be helpful in answering some of the questions. And additionally, we gave kind of a high-level range for volume and expected income contribution in '26 as well to just help put a guidepost out there for kind of where we see things. Steven Delaney: Well, congrats on the progress, and we applaud what you're doing. We've got 22 plain vanilla commercial mortgage REITs, and I think that's enough. So it will be exciting to see how you guys position the company over the next year or 2. Operator: Our next question comes from John Nickodemus with BTIG. John Nickodemus: First of all, Rich, all the best in your role as Chairman. Congrats, Mike and Brian, in your new roles. Earlier in 2025, you estimated that there was $0.08 to $0.12 of DE per quarter that could be unlocked from reinvesting equity tied up in nonperforming loans in REO. Based on progress your team has made since then, where do you estimate that figure stands today? Michael Comparato: I think we're actually slightly higher than that today. I don't know if I have the number, Jerry, I don't know if you have the number at your fingertips. But John, I think you've hit the crux of exactly why we concluded to a dividend cut is that it's -- that earnings is there. It's black and white. It's not questionable. It's just a matter of when do we recoup it. And unfortunately, it just taking a little bit longer than we had anticipated. So Jerry, I don't know, do you have the number? I know obviously, we have the numbers, but I don't know if you have them at your fingertips. Jerome Baglien: We have the numbers. I would say the range has not substantially changed, and Mike is right. It's been -- it's not that the quantum has necessarily changed. It's the timing to unlock that the balance of that earning power, whether its resolutions have taken longer, we've kind of cycled through additional assets as we kind of work down through the balance of our legacy portfolio. Our ability to kind of take that back and redeploy in our core portfolio is still there. We're really working with time more than we're working with a change in potential earnings power with that equity that's there. John Nickodemus: Great the timing being the key driver makes a lot of sense. And then, Jerry, something that you touched on earlier just about the 2026 full year guidance for the volumes and distributable earnings contribution from NewPoint. I noticed the volume had come down a bit and then the earnings contribution had come up from the deck you put out in September. Just curious what was driving those changes as we look toward 2026 NewPoint. Jerome Baglien: I think we were guiding '25 before. And in '25, I think we're kind of middle of that range. So essentially, we bumped it up a little bit from where we are today, kind of what we hit in '25 kind of based on all the scaling that we've talked about plenty of times on our calls over the last year or so. The range is also, again, it's up a little bit from where we were this year. I think this year, we were at the high end of what we provided for everybody on a 2025 year-to-date total. Obviously, it's a little chunkier in how it came in the 2 quarters. And one of the reasons we give annual projections is because this business will have some chunky quarters, right? We wanted to kind of give a bit of a range there. And then the reason we kind of simplified it into 2 line items is just the mix can obviously change quite a bit in terms of the end distributable performance. So rather than kind of be overly specific, we want to put a decent range on there to kind of cover the various outcomes. I think in terms of one of the other upsides is the servicing integration that I mentioned, putting that $10 billion of our own book on to the business is going to be a pretty big driver in terms of additional income growth that we should see through the balance of '26. Operator: Our next question comes from Timothy D'Agostino with B. Riley Securities. Timothy D'Agostino: Congrats on the quarter and the promotions and transitions. Looking at the results for '25 at Fannie Mae, understanding kind of that multifamily volume was a lot higher this year compared to years past. I just wanted to get the overall sense of how that business is progressing year-to-date in '26, if that momentum from '25 is still carrying over? And if you could provide any color on kind of how you're feeling about the year ahead in that channel. Michael Comparato: So I think, unfortunately, we're living in a world that is highly, highly tethered to rates and the slightest of move. I mean this is probably more so than ever in my career. I was talking about this with someone the other day when the 10-year is at 4.25%, I said, if the 10-year dropped to 4% flat, I think you would see volume just go through the roof. And if you see the 10-year go to 4.5%. I think things are going to come to a screeching halt. And it's just shocking that a 25 basis point move in either direction could have that outcome. We are in an incredibly rate-sensitive environment, and everybody has been sitting and waiting and waiting and waiting for rates to go lower. And if they go lower, I think you're going to see just a massive, massive amount of volume come through the market. And unfortunately, if they go higher, we're going to see the opposite. So if you could tell me where the 10-year is going for the next 6 to 12 months, I could give you a much better answer. But it is just incredibly rate sensitive at the moment. And I think that's for all of our businesses. Timothy D'Agostino: And then sorry if I missed it earlier in the call, but regarding the loan portfolio, payoffs persisted at a pretty high rate. However, funded volume obviously came in just above that. Are most of these repayments behind you? Do you think we could still see some higher figures in the first half of '26? Just kind of any color on repayments of the portfolio. Michael Comparato: Yes. So repayments are obviously a blessing and a curse. We are cycling through the legacy portfolio. I think we are head and shoulders above the balance of the industry in terms of addressing that legacy portfolio. As Brian mentioned, I think we're down to 32% of the portfolio being backward looking. And look, honestly, I think this is just where the market is completely mispricing and misunderstanding FBRT. We talked about it a few earnings calls ago. But the market right now is looking at a dividend yield, albeit a lower one given the cut, but it's just not factoring in the overall return. And if you look at the company as a collection of loans, if you took a loan portfolio of this quality out to the market today, it would trade at $0.97. Look at ARI. I mean, look at what they sold, what Athene bought ARI loans for. The disconnect between our book value and our share price is it's inexplicable. So we will just continue to do what we do. We will continue to deliver on the REO portfolio. We will continue to just recycle out of those legacy positions. But we re-underwrite this portfolio and risk-rate it every single quarter. And short of a black swan event that I cannot predict, there is absolutely no way that the book value disconnect is anywhere close. It's not even a fraction of what the losses we will realize as we cycle through this. So we're going to have to show it to the market, which we plan on doing in 2026. I have the highest of conviction that we are right in that regard, but we got to get through it, which we will do in the next few quarters. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Lindsey Crabbe for any closing remarks. Lindsey Crabbe: We appreciate you joining us today. Please reach out if you have any further questions.
Operator: Good day, and welcome to Pacific Biosciences of California, Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call. All participants will be in listen-only mode. Please note that today's event is being recorded. I would now like to turn the conference over to Kelly Gurrow with Investor Relations. Please go ahead. Carrie Mendivil: Good afternoon, and welcome to Pacific Biosciences of California, Inc.'s Fourth Quarter and Full Year 2025 Earnings Conference Call. Earlier today, we issued a press release outlining the financial results we will be discussing on today's call, a copy of which is available on the Investors section of our website at www.pacb.com or as furnished on Form 8-Ks available on the Securities and Exchange Commission website at www.sec.gov. A copy of our earnings presentation is also available on the Investors section of our website. With me today are Christian Henry, President and Chief Executive Officer, and James Gibson, Chief Financial Officer. On today's call, we will make forward-looking statements, including, among others, statements regarding predictions, estimates, expectations, and guidance. You should not place undue reliance on forward-looking statements because they are subject to assumptions, risks, and uncertainties that could cause our actual results to differ materially from those projected or discussed. Please review our SEC filings, including our most recent Form 10-Q and 10-Ks, and our press releases to better understand the risks and uncertainties that could cause results to differ. We disclaim any obligation to update or revise these forward-looking statements except as required by law. We will also present certain financial information on a non-GAAP basis, which is not prepared under a comprehensive set of accounting rules and should only be used to supplement an understanding of the company's operating results as reported under U.S. GAAP. Reconciliations between historical U.S. GAAP and non-GAAP results are presented in our earnings release, which is available on the Investors section of our website. For future periods, we are unable to reconcile non-GAAP gross margin and non-GAAP operating expenses without unreasonable effort due to the uncertainty regarding, among other matters, certain acquisition-related items that may arise during the year. A recording of today's call will be available shortly after the live call in the Investors section of our website. Those electing to use the replay are cautioned that forward-looking statements may differ or change materially after the completion of the live call. I will now turn the call over to Christian. Thank you, and good afternoon, everyone. Christian Henry: Our fourth quarter results exceeded expectations and were highlighted by all-time record consumable revenue and strong instrument placements for both the Revio and the Vega platforms. Our strength in consumables also drove gross margins higher. We believe that the momentum we built as we exited 2025 will continue in 2026 and that we are well positioned to execute on our strategy to drive both revenue growth and gross margin expansion in 2026. As previously announced, fourth quarter revenue grew 14% year over year and 16% quarter over quarter to $44.6 million. Our sequential step up was driven by increased Revio and Vega sales as well as record consumables reflecting meaningful traction across a range of clinical sequencing applications. For the year, we recorded $160 million in total revenue representing 4% growth over 2024. Consumable revenue drove the majority of our growth both on a quarterly and full year basis. In Q4, consumable revenue grew 15% year over year reaching another record, and in fact three of the past four quarters were record consumable quarters. We were especially pleased by the 55% growth in consumables for clinical and hospital customers in 2025. Our growth in the clinical market was largely driven by a combination of whole genome sequencing applications in rare disease, and targeted applications that leverage our PureTarget kit. This traction has helped offset the continued significant pressure that our customers are experiencing with regard to the academic funding environment, which has adversely impacted our instrument sales in 2025. Turning to instruments, we shipped 21 Revio and 42 Vega systems in the fourth quarter, bringing our cumulative shipments to 331 and 147 systems respectively. Taking a closer look at Revio, placements were impacted throughout the year due to a challenging funding environment, particularly in the Americas. That said, we were pleased to see strong momentum in the fourth quarter with an increase in both shipments and pull through per system compared to the third quarter. In 2025 approximately 20% of Revio orders were for customers who bought more than one system, and these multi-system orders give us confidence that our customers believe they will be scaling up in 2026. We also saw solid ordering trends for our Vega platform in the fourth quarter, particularly in EMEA. Some of the strength in Vega was due to orders that were delayed in the third quarter, but we are also seeing momentum in the Vega sales pipeline which should result in placement growth in 2026. One of the key strategies behind the development of the Vega platform was to create a more accessible HiFi sequencing platform so we could reach new customers. We are pleased to see that that strategy was working, as approximately 65% of the Vega placements in 2025 were to new-to-PacBio customers, demonstrating this instrument is successfully expanding the ecosystem for HiFi long-read sequencing users. From a regional perspective, Americas revenue increased 3%, Asia Pacific revenue increased 4%, and EMEA revenue increased 45% year over year in the fourth quarter. Each region benefited from higher Vega instrument shipments and Revio consumables, and we are particularly pleased with the strong growth in EMEA as more of our clinical customers shifted from pilot testing to broader clinical adoption. As we look ahead into 2026, we believe that our growth will accelerate as clinical adoption of HiFi continues. However, we are not anticipating that the academic funding environment will improve significantly. Considering these factors, we expect 2026 revenue to be in the range of $165 million to $180 million, representing approximately 8% growth at the midpoint of $172 million. James Gibson will share more details on our outlook and our underlying assumptions later on. Now let us take a closer look at our consumable growth over the last couple of years. In 2025, we delivered 19% consumable shipment growth supported by our human-focused markets. When looking at our performance across non-human markets, we have grown in the low single digits, primarily due to funding challenges in the academic segment, as well as the industrial and agricultural markets, which has historically been a meaningful portion of our business. We expect to see growth in this segment accelerate as these end markets start to recover. Within our human-focused markets, we have delivered a strong three-year CAGR of 23%, driven primarily by the launch of the Revio system, which offers greater scale than previous systems, and our focus on driving the adoption of clinical applications, including the launch of our PureTarget family of products. As I mentioned earlier, we delivered 55% growth in consumables to clinical and hospital customers in 2025. We plan to continue investing in this area in the years ahead with an initial focus on rare disease, oncology, and carrier screening. Rare disease genomics represents one of the largest and most historically underpenetrated opportunities in precision medicine. More than 300 million people globally are living with rare disease, yet for decades a significant portion of patients have remained undiagnosed or misdiagnosed due to fundamental limitations in existing sequencing approaches. HiFi is increasingly becoming a trusted backbone for rare disease genomics because it delivers highly accurate comprehensive views of the genome that can capture substantially all classes of variants in a single assay. As a result, researchers and clinicians are now able to move beyond incremental improvements and meaningfully improve diagnostic yield, disease understanding, and therapeutic development. Importantly, this opportunity is still in its early innings. We believe adoption today represents only a small fraction of the potential patient population, but momentum is building as institutions validate the clinical and economic value of long-read sequencing. I will briefly walk through a few examples that demonstrate the value of HiFi and how it is helping these customers. At University of Washington Medicine, HiFi is being used to study sudden unexplained death in childhood with the goal of preventing the loss of hundreds of children per year. The program has begun sequencing 200 families supported by the Sudden Unexplained Death in Childhood Foundation out of a broader cohort of more than 2,000 families. At Ambry Genetics, HiFi is being implemented in the ONCE study this quarter to assess the impact of long-read sequencing on diagnostic yields in patients with previously negative exomes and genomes. Ambry expects to enroll approximately 1,000 patients in 2026, highlighting the growing role of HiFi as a diagnostic tool. Through our collaboration with N=1 Foundation and Esperare, HiFi is being used to comprehensively characterize the genomes of patients across dozens of ultra-rare diseases and to support the development of targeted antisense oligonucleotide therapies. This demonstrates HiFi's role not only in diagnosis but enabling truly individualized treatment strategies. And this morning, we announced the addition of HiFi to the IHOPE initiative, which brings long-read genomic sequencing to one of the world's largest equitable rare disease genomic testing networks. With more than 1,000 patients supported annually through 25 clinical sites across 14 countries, HiFi will continue to expand the diagnostic possibilities for thousands of families worldwide. Taken together, we believe these examples illustrate why HiFi is uniquely positioned to become the leading sequencing technology in rare disease genomics. We look forward to continuing to support our customers as these programs scale. As I mentioned, we are also focused on supporting the carrier screening market. The Babies in Focus project aims to sequence at least 2,000 samples across selected long-read technologies. We anticipate that our service partner, European Genomics UK, will sequence 1,000 of these samples between April 2026 using PacBio technology. This work is a vital step in demonstrating the feasibility of scaling long-read sequencing for a potential national newborn screening program. We believe our performance in this cohort will help build the evidence base for the UK's 2026 to 2030 spending review, positioning our technology for long-term growth within the NHS. Furthermore, the contract includes an optional extension for up to 1,000 additional samples through early 2027, providing a clear path for continued participation in this landmark study. HiFi also delivers a meaningful productivity and economic advantage by consolidating what has historically required multiple sequential tests into a single assay. Today, many rare disease patients undergo years of serial testing ranging from single gene tests and panels to exomes, short-read genomes, repeat expansions, and methylation assays. This results in long turnaround times, fragmented workflows, and a significant cost for our customers. With HiFi whole genome sequencing, customers can replace many of these individual assays with one comprehensive test that captures substantially all variant classes upfront. This reduces time to answer from years to days, simplifies laboratory workflows, and lowers total testing costs meaningfully while also generating a high-value dataset that can be reanalyzed as new insights emerge. Taken together, this combination of speed, workflow efficiency, and improved economics reinforces why HiFi is increasingly being adopted as a frontline solution in rare disease genomics. We are also making great progress with respect to our population sequencing. In 2025, we saw studies like the All of Us study publish their first datasets on long-read sequencing in October; the Long Life Family Study that is targeting to sequence up to 7,800 samples; and the Asian Pan-Genome Consortium, which is targeting to sequence more than 10,000 samples and creating the most comprehensive pan-genome reference ever created. We look forward to enabling many more of these large-scale studies in the future. We are also seeing rapid momentum in the scale of data being generated on our HiFi platform alongside a growing body of peer-reviewed evidence that reinforces its value. In 2025, our customers generated more than 60% year-over-year growth in HiFi data, making HiFi one of the fastest growing datasets in life sciences. Importantly, this growth has effectively doubled over the past 18 months and is significantly outpacing the broader market. In parallel, cumulative peer-reviewed publications have grown to nearly 12,000, with publication growth accelerating year over year. We believe this combination of rapidly expanding data output and evidence is critical, particularly in areas like rare disease where diverse, high-quality datasets are essential to uncover complex biology, improve diagnostic yields, and ultimately drive new insights for patients. Now I would like to turn to SparkNex, our next-generation consumable chemistry built around the multi-use SMRT Cells. We believe that SparkNex represents a fundamental step forward in our ability to deliver high-quality HiFi at a highly competitive price point. By enabling reuse of the SMRT Cell—historically the most expensive component of our sequencing workflow—we can amortize that cost across multiple runs, lowering the price per genome for customers while simultaneously expanding our gross margins. SparkNex is designed to deliver the most complete view of the genome: whole-genome HiFi sequencing at scale for less than $300 per genome. Importantly, SparkNex also increases system throughput, delivering approximately 25% higher output per SMRT Cell, as validated through customer-generated data in our beta program. This represents a major inflection point for our business as we deliver improved performance, higher throughput, and better economics all at the same time. Today, we are pleased to share new and encouraging data from multiple customers participating in our SparkNex beta program. On the left, you can see a slide with data showing SparkNex has higher yields than Spark when sequencing high-quality human DNA libraries. The SparkNex runs have longer insert lengths, which likely contribute to the yield difference, and also higher read quality. We continue to evaluate the chemistry across additional sample types and will share the results as they become available. On the right, one of our customers generated data supportive of long-read sequencing providing a higher diagnostic yield, shorter turnaround time, and fewer required tests, making HiFi a great choice for clinical use. Given the success of the early beta program, in a few weeks we will expand the beta program to more customers both domestically and internationally. We look forward to launching SparkNex broadly later this year. As we look ahead to the launch of SparkNex in 2026 and its potential to further strengthen our financial profile, it is important to recognize that this progress is building on a foundation that we have already established. Over the past few years, we have made meaningful improvements in our financial profile with improved non-GAAP gross margins and operating expenses as well as significantly lower cash burn. Non-GAAP gross margin has improved from 27% in 2023 to 40% in 2025, representing a 1,300 basis point improvement since 2023 and 700 basis point improvement in 2025 alone. Non-GAAP operating expenses have been reduced from $355 million in 2023 to $230 million in 2025, representing a 35% reduction since 2023 and a 20% reduction year over year. Cash burn, excluding financings and acquisitions, improved from $214 million in 2023 to $105 million in 2025, representing a 51% improvement since 2023 and a 44% improvement year over year. We ended the year with approximately $280 million in cash and investments. These actions have significantly improved the underlying economics of the business and we believe position us for a strong year ahead as we prepare to launch additional products and drive adoption in the long-read sequencing market. I would also like to take a moment to thank our team for their hard work and dedication over the last few years, which has made these transformational improvements possible. Last week we announced the sale of our short-read sequencing assets for net proceeds of approximately $48 million. This transaction meaningfully strengthens our balance sheet and further extends our cash runway. This action is a continuation of the strategic plan we outlined last April to sharpen our focus and concentrate our resources on our differentiated long-read sequencing portfolio. We believe this transaction positions us to execute more effectively on our mission to develop the world's most advanced sequencing technologies. With greater flexibility to invest in the areas where we can have the biggest impact, we are now better positioned to accelerate adoption of our long-read platforms across attractive growth markets and execute with confidence as we enter our next phase of growth. We remain committed to supporting our current Onso customers through this period with ongoing commercial support and consumable supply this year. With that, I will now turn the call over to James Gibson to provide more details on our financial performance and outlook for 2026. James? James Gibson: Thank you, Christian. I will be discussing non-GAAP results, which include non-cash stock-based compensation expense. I encourage you to review a reconciliation of GAAP to non-GAAP financial measures in our earnings press release. Unless otherwise noted, all growth rates are year over year. Total revenue for the fourth quarter grew 14% to $44.6 million compared to $39.2 million in 2024. Consumables revenue increased 15% to $21.6 million in the fourth quarter with annualized revenue pull through per system at $242,000. The consumables growth was driven by an increase in our installed base as well as consistent system utilization, despite the difficult funding environment. Instrument revenue increased 13% in the fourth quarter to $17.3 million, primarily driven by an increase in Vega systems, which had initially commenced shipment in Q4 2024. We ended the quarter with 331 cumulative Revio system shipments and 147 cumulative Vega system shipments. In the fourth quarter, we placed several Revio instruments with key institutions at lower prices, and we believe these strategic accounts will ultimately drive higher utilization and above average consumable pull through. As a result, the ASP for Revio in Q4 was approximately $482,000, which was roughly flat compared to the third quarter. Service and other revenue increased 11% to $5.7 million in the fourth quarter, primarily driven by an increase in service contract revenue related to Revio. From a regional perspective, Americas revenue increased 3% to $20.7 million in the fourth quarter, primarily due to an increase in Revio consumables and higher Vega instrument shipments. Asia Pacific revenue increased 4% to $9.3 million in the fourth quarter, primarily due to increased sales related to Berry Genomics, following the regulatory approval for clinical long-read sequencing in China as they enable routine clinical testing in hospitals for thalassemia, as well as higher Vega instrument sales, which again partially offset lower Revio instrument shipments. EMEA revenue increased 45% to $14.6 million in the fourth quarter. This strong growth was driven by an increase in Vega instrument shipments as well as higher Revio consumables as more of our clinical customers shifted from pilot testing to broader clinical adoption. For the full year 2025, total revenue grew 4% to $160 million compared to $154 million in 2024. Consumables revenue increased 16% to $82 million, primarily due to an increase in our installed base. Instrument revenue decreased 18% to $53.8 million, primarily driven by lower Revio system shipments, partially offset by an increase in Vega systems as we commenced shipping this platform late last year. Service and other revenue increased 36% to $24.2 million, primarily driven by an increase in service contract revenue related to Revio. From a regional perspective, Americas revenue decreased 8% to $72.8 million, Asia Pacific revenue increased 6% to $43.2 million, and EMEA revenue increased 27% to $44 million, with similar trends to what we saw in Q4. Moving down the P&L, non-GAAP gross margin was 40% in the fourth quarter of 2025, compared to 31% in the fourth quarter of 2024. This significant increase was driven by product mix, with consumables contributing a higher percentage of our total revenue, as well as the realization of cost improvement initiatives for Revio and Vega, and continued high yields for Revio SMRT Cells. We also saw an improvement on an annual basis with full year 2025 non-GAAP gross margin of 40%, compared to 33% in full year 2024. Non-GAAP operating expenses were $56.2 million, including $8.6 million of non-cash share-based compensation, compared to $68 million, including $14.8 million of non-cash share-based compensation in 2024. This 18% reduction year over year was largely driven by lower headcount due to our restructuring efforts and lower non-cash share-based compensation. We have been highly disciplined in our spend as we sharpen our strategic focus on long-read sequencing, including the recent sale of our short-read assets. On a full year basis, non-GAAP operating expenses were $229.9 million in 2025, compared to $289.2 million in 2024. Operating expenses in full year 2025 included non-cash share-based compensation of $37.7 million, compared to $65.3 million in 2024. Regarding headcount, we ended the year with 485 employees compared to 490 at the end of the third quarter of 2025, and 16% lower compared to 575 at the end of 2024. Non-GAAP net loss was $37.6 million in the fourth quarter of 2025, representing $0.12 per share, compared to $55.3 million in the fourth quarter of 2024, representing $0.20 per share. Non-GAAP net loss was $158.8 million in full year 2025, representing $0.53 per share, compared to $228 million in 2024, representing $0.83 per share. We ended the year with $279.5 million in unrestricted cash, cash equivalents, and investments, compared with $389.9 million at the end of 2024. Turning to our outlook for 2026, we expect full year revenue to be in the range of $165 million to $180 million, representing approximately 8% year-over-year growth at the midpoint. At the midpoint, we assume consumables remain the primary driver of growth, supported by increasing utilization by our clinical and hospital customers as well as further expansion of the Revio and Vega installed base. While we are encouraged by the recent NIH budget updates, academic customers remain cautious given ongoing uncertainty around funding visibility and grant timing. Our outlook assumes a continuation of the muted academic spending environment we have experienced over the last several quarters, particularly in the Americas. We are not expecting a broad recovery in capital spending for these academic customers. Moving down the P&L, we expect to see a 100 to 400 basis point improvement in non-GAAP gross margin in 2026. Factors that will positively impact gross margin will include higher consumables mix, and the introduction of SparkNex in the second half of the year. In spite of continued Revio and Vega cost reduction initiatives, there may be potential headwinds with the compute associated with these instruments, as we are currently seeing significant volatility with components such as memory costs. We expect non-GAAP operating expenses to slightly improve compared to 2025 levels as we continue to tightly manage operating expenses and invest in our next-generation sequencing. With improving revenue mix, expanding gross margins, and disciplined cost management, we believe the company remains on a clear path towards cash flow breakeven. I will now hand the call back to Christian for closing remarks. Christian Henry: Thanks, James. 2026 is shaping up to be an exciting year for PacBio. We are focused on enabling HiFi to become the sequencing standard of care through five key initiatives. First, we plan to dramatically improve the economics of HiFi and increase penetration across our key markets through the successful launch of our SparkNex chemistry and multi-use SMRT Cells. Second, we plan to accelerate clinical adoption across rare disease, oncology, and carrier screening, supporting new as well as our existing customers as they ramp up utilization of HiFi. Third, we plan to continue to enable population-scale sequencing studies. We have hundreds of thousands of samples in various stages of negotiation and approval, and while these studies have long sales cycles, we expect these studies to drive our growth in the longer term. Fourth, we are enabling the next-generation informatics by scaling multi-omic HiFi data and applying AI to unlock unique biological insights. For example, several of our customers have been awarded funding through Google's AI for Science initiative, where researchers are leveraging HiFi data alongside AI to address some of the most complex challenges in biology. We believe the depth, accuracy, and completeness of HiFi data amplified by AI positions us to unlock new biological insights. And finally, we continue to drive innovation, which is part of our core mission. We look forward to updating you on our progress across each of these initiatives as we progress through the year. Additionally, we are excited to participate in the upcoming AGBT conference in the coming weeks and hope to connect with many of you there. With that, we will now open it up for questions. Operator? Operator: Thank you. We will now begin the question and answer session. And today's first question comes from Tycho Peterson at Jefferies. Please go ahead. Madeline Mollman: Hey team, this is Lauren on for Tycho. A few from me. Starting with Revio pull through, it was pretty stable year over year. Maybe how should we think about pull-through progression as Spark chemistry lowers per-sample cost? Will that lower cost drive higher utilization, or does it risk pulling revenue forward? On consumables, another record quarter for you guys. What gives you confidence that this growth is structurally sustainable versus being driven by a smaller cohort of power users? And then lastly, going forward, how do we think about steady-state mix between Vega and Revio? And what does that imply for average system ASPs? Thanks. Christian Henry: Wow, Lauren, you gave us a lot to start off with. Thank you for the questions. We will start with Revio pull through. So pull through was, you are right, it was pretty stable from year to year. And my expectation is that the opportunity provided with SparkNex will lower the price per sample but is likely to increase utilization on the systems and certainly expand our market share. And so when you think about it, what we are trying to accomplish is, through a more attractive price, the ability to win larger, larger scaled studies would drive both instrument sales as well as expanded utilization within those fleets of instruments and drive broader adoption across the entire base. So at the end of the day, the focus is on driving the revenue up, which would effectively have pull through kind of in a similar range, anywhere from $225,000 to $250,000 is what we have been talking about. I do not think it will change that much. You may see some short-term dislocations depending on the timing of when samples come in and which customers are adopting. So we will be watching out for that over the course of the year. But on balance, this is a fundamentally enabling technology that allows us to increase our footprint and drive consumable revenue up at the same time, and of course expand our gross margin because this is one of those rare occasions where the product actually is very beneficial to customers but it is also expanding our gross margin on consumables. So really important. When you start to think about your second question about kind of structural growth, we certainly see that the market is going to be expanding because of the nature of HiFi first and foremost, and then now we are at a point where we have the economics in place where we can be highly competitive with short-read technologies and other long-read technologies. And this will enable us to expand both the Revio and the Vega sales because we will be introducing SparkNex to Vega later in the year. We are going to first focus on Revio and then move to SparkNex. And then finally, with respect to the mix, Vega and Revio reach different parts of the market. So Vega is the focus and the strategy with respect to Vega is land and expand, so to speak, introducing new customers to HiFi technology. The application set with Vega is in microbiology and metagenomics and different shorter, smaller genomes. And so we are seeing actually really strong traction there, and it is highly competitive against other long-read competitors. And so we are seeing some opportunities with that. And then of course, Revio is focused on kind of the discovery market as well as our clinical opportunity, particularly with respect to whole genome sequencing and then larger targeted sequencing panels like the PureTarget panel. And so I would expect us to continue scaling Vega and Revio in 2026, both growing in terms of number of units shipped year over year, both of them moving towards different parts of the market. And then ultimately, we will launch a third system that will be even higher throughput for the highest scale labs. So hopefully, I captured most of your question there. Madeline Mollman: No. That was super great. Thanks. Operator: Thank you. And our next question comes from Subhalaxmi T. Nambi with Guggenheim. Please go ahead. Subhalaxmi T. Nambi: Hey guys, thank you for taking my question. What should we expect OUS to do this year from a clinical growth perspective? And did you see any budget flush, particularly from Europe in Q4 2025? Christian Henry: Subbu, can you start with the first part of your question again? It came in a little bit garbled. I kind of got the budget flush part, but not the first part. Subhalaxmi T. Nambi: What do you expect, like, outside of the United States to do this year from a clinical growth perspective? Christian Henry: Okay. So clinical growth and then budget flush. I will start with the easy one. Budget flush, we really did not see a lot of budget flush at the end of the fourth quarter. I mean there is always a little bit of opportunistic purchasing. I can think of one order where we were able to capture a large consumable PO from a competitor actually, and in that process got a new customer. So that was actually a really exciting win for us. But we did not see a lot of actual budget flush. And then with respect to clinical growth, you saw that we had really strong growth in 2025. The base was a little bit smaller, so the 55% is exciting; it is off of a smaller base, so we have to be mindful of that. But when we look into 2026, we see very strong growth in the clinical side of our business, particularly in rare disease and whole genome sequencing, and largely in EMEA. We have really seen them start to move from the pilot phases to actual production. And you have seen press releases from folks like Radboud who are expanding from 5,000 to tens of thousands of samples. And there are lots of examples of that where we are seeing data in the market, and I think that will be a driver of clinical growth. Of course, some of that is enabled through the Spark. So we have to balance out the more favorable pricing with respect to accounts like that, for example. So it is going to be a bit of a balancing act there. We are also seeing strength in our targeted portfolio as the PureTarget platform and assay continues to gain more traction, and we are seeing some of the higher throughput targeted customers expand their fleet. We saw that in the fourth quarter, and I think that will help us scale clinical consumables in 2026. Subhalaxmi T. Nambi: Okay, helpful. And a quick follow-up, not really follow-up, a separate question altogether. When thinking about international expansion for multi-use SMRT Cells, how are you considering rollout in tandem with the U.S. if your aim is to keep elasticity contained this year? Christian Henry: Yeah, it is a good question, Subbu. So we started the beta program just with accounts in the United States, really so that we could keep tabs on the users and understand how their workflow was working and all of that. And now we are very pleased with how it has gone. I mean, we are seeing 25% increase in yield, which is amazing for customers. And then, you know, the workflow, you can see the consistency of yield from run to run, from the first use to the second use. So we are expanding our program over the next couple weeks into EMEA and ultimately APAC. And then over the course of the year, we will just continue to roll out the product as customers have the samples that are ready to go. So we are going to try to monitor and meter out this rollout so that we can get as many samples onto the systems as possible at the favorable pricing so that we can see continued consumable growth. And so we are going to be in this beta early access program until the late spring, early summer, and then ultimately it will be rolled out to everyone. So we have a good plan. The innovation is working really well, and we are going to start heading into the second phase of beta and the scale-up phase over the rest of the first quarter and into the second quarter. Operator: Thank you. And ladies and gentlemen, we ask that you do please limit yourself to one question. And our next question today comes from Douglas Anthony Schenkel at Wolfe Research. Please go ahead. Christian Henry: Good afternoon. Thank you for taking my questions. So, you are continuing to successfully reduce OpEx spending. Where is the biggest opportunity to do that this year without hindering the pace of recovery? And just one follow-up and I will get back in the queue. I think in your prepared remarks, you called out, I think you said industrial weakness. If so, is that new, and if so, what is it? Is that ag or synbio, both, something else? Could you just tell us what is going on there? Thank you. Christian Henry: Yes. Hey, Doug. So just to clarify, I do not think we called out any specific industrial weakness per se. What we are trying to say is that that part of the business, consistent with the academic world, has not been very strong. And what that really is is kind of the agricultural business. And so is that what you were referring to in your question? Yeah. That makes a lot of— Douglas Anthony Schenkel: Alright. Sorry about that, Christian. Yeah. Thank you for clarifying. No. It is fine. Christian Henry: No. I just wanted to make sure I got the question right. And then with respect to OpEx, we have worked really hard to take a lot of cost out of the business. And I think in 2026, we will continue. First, we will get the full-year benefit of the reductions in force that we saw in 2025, and so that will naturally give us a bit of a tailwind to start the year off. But the next places to focus are we are going to be focusing on managing G&A expense, managing R&D, staying focused in R&D. So we have a few very critical programs going on, and we are going to make sure that they are very well funded and we have all the people we need to be successful. But we are going to be very thoughtful and mindful about adding new priorities to the equation, and that will help us save money because we will be able to save on non-headcount related spend and things like that. Of course, the counterbalance is we are in the meat of developing the next-generation platforms, and that comes with a lot of expense—costs for prototypes and alphas and betas, things like that—which we will see some of this year. So we will be focused on overcoming that. And then finally, a dollar is a dollar. So we are really focused also on the gross margin line and reducing production costs. And so we are insourcing more, which allows us to leverage our overhead more effectively and therefore reduce costs overall, which will help expand our gross margin. So it is really a concerted effort across the organization. And I also think there is some opportunity in our marketing organization to be mindful about investing in the right events to make sure that we have the presence we need, but also make sure we get ROI on the events. We will be expanding the commercial, the sales organization a little bit this year because I do think that there is opportunity for us. And so that gives you a bit of a broad tour of operating expenses. We also have some ongoing litigation that we will be spending on this year that will be incremental to last year, and this is from litigation that has been going on since 2019, long before I even got to the company. But that gives you a sense of expenses. I do think we are going to be able to do better than we did in 2025. And the focus is, of course, getting to breakeven. Operator: Thank you. And our next question today comes from Kyle Alexander Mikson at Cantor. Please go ahead. Christian Henry: Hey, Kyle from Cantor. Thanks guys for the questions. Kyle Alexander Mikson: I want to follow—I was trying to follow the cost. So first, on the short-read divestment last week, was there any costs taken out of the P&L from that move? Based on the 8-Ks with the pro forma results, seems like there is a tailwind to gross margin, for example. So if you could just dive into that, it would be helpful. And then secondly, there was a slide in the earnings deck, I think it is slide nine, comparing long-read to the standard of care at a beta site, a clinical customer. You got performance better with respect to diagnostic yield and turnaround time. I am just curious if cost improves when you go to long-read from standard of care. Thanks. Christian Henry: Yeah, Kyle, great questions. It is great to catch up here. So I will start with the short-read business. There will not be substantially more costs taken out. We covered in our reduction in force last year, we eliminated a lot of those costs. We are still supporting the Onso system through the year, and so we will have costs associated with that as we support that, and then as that hits end of life, we will have savings there, but that will likely be more in 2027. You are right that there is a tailwind to gross margin in the sense that the Onso platform was not a very high gross margin instrument relative to the rest of our portfolio. But we did not really sell many, if any, Onsos in 2025. So on a year-over-year basis you are not going to see any incremental tailwind from that. And then the long-read business with respect to diagnostic yield—that slide is really meant to show how not only is diagnostic yield improving with long-read sequencing, and that is what we have been, all of us, working on for the last several years, to show the power of HiFi because it is such a unique data type and you get so much information—but on top of that, customers like Radboud now are taking six or seven other tests and combining them into one genome and using one HiFi genome to answer all those questions. And so, as a result, you are seeing faster turnaround time, better diagnostic yield, and lower cost. And this is going to become a much broader message that you are going to hear a lot this year, especially as we launch SparkNex. Not only are you getting better answers, you are actually getting better answers faster and cheaper, and it is a real opportunity for us to go to these hospitals, clinics, labs, and demonstrate that not only is it the direct comparison of short-read versus long-read sequencing or other long-read sequencing players, but it is really the holistic approach to how much does it cost to get an answer and how much we can benefit. And so that is really exciting. And we are in the early days of that. But now we have examples of customers that are doing that, and so we are going to amplify that and help other customers kind of achieve the same result. Very exciting for us. Operator: Thank you. And our next question today comes from David Westenberg at Piper Sandler. Please go ahead. Christian Henry: Hi, thank you for taking the question. So— David Michael Westenberg: I just—it is a kind of a recurring theme about the elasticity of demand, but you noted cumulative current customer gigabases growing at 60% year over year. It is a great number. With the promise of a sub-$300 genome with SparkNex, I want to look at the changes in dynamics. I am of the people that does believe in elasticity of demand. It always has been in the past, but that is not always linear. So how should we think about SparkNex balancing the elasticity of demand with the price headwind over the cadence of kind of the next few years? Thank you very much. Christian Henry: Yeah. That is an excellent question, and it is something that we are very focused on. You know, first thing I will say before we get into some of the nuance, is that the reality is that the samples exist already in the market. So when you think about elasticity of demand, what you are really thinking about is substitution of HiFi in place of other technologies that are already existing. And that really is a bit different because the samples are generally available on day one. Now, each customer will have a ramp phase and a conversion time horizon, so there will be some variability. But it is different in the context of other elasticity curves that we have all seen in this space for a very long time. That said, I think you phrased it exactly right. It is not always going to be linear, and in the short term, you may have periods where the samples are not available yet at scale relative to the price. But over the course of a year, two years, like you have mentioned, you certainly will see substantial elasticity of demand, and you will see not only more gigabases being generated, but this will help drive more instrumentation sales, and as we get to higher throughput instrumentation, very much higher levels of consumable pull through, which will be at substantially higher gross margin. And so on balance, it really adds to the whole portfolio of what PacBio can deliver, starting with a better genome and enabling the customers to scale up both in discovery mode and in clinical mode with the whole genome, as I talked about in the last question. And you see all of that coming together with the ability to substitute long-read sequencing in a whole-genome context for the exome and for other short-read approaches. And all of that on balance gives us an opportunity to really generate dramatically more demand. But it will be lumpy over the course of the first part of the launch of SparkNex. And one of the ways we are trying to manage that is by having a very controlled early access phase to make sure customers have the samples ready to go so that they can better utilize their systems and then help us drive our consumable revenue in the right way. It is tricky, but it is a very exciting time for us because since we announced SparkNex at ASHG, the nature of the conversations has just fundamentally changed. Part of the reason why we had such a nice fourth quarter, I think the year 2026 is set up to have a strong result. Operator: And our next question today comes from Jack Meehan at Nephron Research. Please go ahead. Jack Meehan: Thanks. Good afternoon, guys. I had two modeling questions for you. The first is, is there any color you can share on the first quarter, just expectations for pacing in the year? And then, James, on gross margins, it is good to see the traction. Wanted to see if you could give a little bit more color on the component volatility you flagged, just what is driving that and what is reflected in the guide? Thank you. Christian Henry: Yeah. So maybe, Jack, good to hear from you. I will start with the Q1, and then, James, why do you not take the gross margin part of the response. With respect to Q1, we do think Q1, consistent with seasonal patterns, will likely be a little bit lower than Q4, but certainly above Q1 2025. And so we expect to be growing and we expect to be expanding. We think we will have continued strength in Revio, and Vega should get off to a good start. And I do think we are being cautious about how we are thinking about the academic and government spending. And I think although the budget has kind of improved the outlook a little bit perhaps, it is a long way from the budget to the actual dollars getting spent, especially with respect to acquiring new capital equipment. And so we are going to be pretty cautious in that. We do think that Europe is going to continue to be strong. I think on this call a year ago, I said Europe was going to be our strongest region, and quite frankly, they exceeded my expectations. I would not be surprised to see Europe continue to be strong in 2026 and perhaps our strongest region again. We will see. I was just at the Europe and APAC sales meeting, so there is a little bit of competition, which is really good to see as a CEO. But I do think you will see Q1 probably be a little bit lighter than Q4 due to seasonality, and then we will grow from there. And we set guidance in a place assuming that the academic and government funding does not come back in any meaningful way. We figured that is the best place to start. We do think our growth will be driven by the expansion of the existing clinical accounts that we have won over the course of 2024 and 2025 and new accounts coming into the fold. So that will be opportunities for more Revio placements and certainly some Vega placements. We do think we are going to have a strong year with respect to Revio. We are seeing a lot of interest and the funnel growing because, quite frankly, SparkNex is enabling a new level of scale that I think Revio will fit really well. So hopefully that gives you a little bit of color on the outlook, and we are pretty excited to get going here. I think the quarter is off to a reasonable start. And, you know, James, you want to talk about gross margin? James Gibson: Sure. So, Jack, as you pointed out, one of the things that we—when we gave our guide of 100 to 400 basis points for 2026—one of the things we highlighted is the impact of some of the memory shortages that we and a number of companies are seeing right now as we look to lock in agreements with our suppliers. As you probably know, since we provide such robust data, we do have compute as a significant component of our cost of our Revios and, to a lesser extent, Vegas. So as you think about our guide, we did bake that impact into our guide. I think as we think about the lower end of the guide, that would be a consistent and continuous impact on compute. We are hoping that is not the case. We are hoping that, with a lot of things, it will stabilize as we get into the middle of the year, and that is baked into the 100 to 400 basis point increase. Christian Henry: Okay. Yes. Thank you. And our next question comes from Dan Brennan of TD Cowen. Please go ahead. Dan Brennan: Great. Thank you. Thanks for the questions. Maybe just a couple. On placements and pull through, did you guys give color on how to think about that? That would be helpful. I know you talked about Revio pull through being consistent, but just wondering if there is any more color across Vega and Revio. The burn, like, we could probably back into the burn ourselves; is there a burn that you guys are targeting in 2026? And then the final one would just be, you know, with EMEA clinical surging and Christian, you sound like it is going to continue to be strong. What will it take to see U.S. clinical growth really accelerate? Thank you. Christian Henry: Yes. Thanks. Thank you for the question, Dan. So I think with respect to placement and pull through, I do think we believe that the $225,000 to $250,000 range for Revio for pull through continues to be a pretty realistic place for us to be. We will see how SparkNex obviously impacts that in the short term. We do think placements for Revios will be consistent, if not a little bit better than 2025. And then, if you look at Vega, we have not really talked a lot about Vega pull through, but we now have 147 systems out there. And based on what we are seeing, it is likely that pull through sits in the $25,000 to $40,000 range over time. And right now, it is about $25,000, give or take, so it is a little bit at the lower end of that range, but I do think it has a bit of upward potential. But I think it is going to be kind of that $25,000 to $40,000. You are going to see lots of instrument placements. We do expect instrument placements to grow in the Vega product line this year over 2025 levels, and the sales funnel supports that. The other thing that is great about Vega is we have actually had much faster sales cycles and many more intra-quarter leads turning into orders than, certainly, Revio, but actually, in general, at a nice clip. So we are pretty excited about that. With respect to the burn for 2026, we are going to be working to try to keep the burn relatively consistent, but the challenges we are going to face are really around alpha and beta builds of the next-generation system driving some more spend than we otherwise would. Some of those units will ultimately be capitalized in inventory and sold, but cash would likely go out the door this year for some of that. So I would expect burn to perhaps be just a touch higher than this year because of that. But it will depend on how many end up getting capitalized in inventory and sold, which will then generate revenue, of course, but the timing—you will have to manage that. And then how disciplined we can be around managing operating expense so that we can balance those costs so that we keep our burn under control as we try to push towards being cash flow positive. And then finally, with respect to EMEA and the U.S., the U.S. market is much more focused on the targeted sequencing panel. That is where our clinical growth has been so far, at least in the U.S. markets, particularly with the bigger laboratories. And they have been mostly in research and validate mode. And so as those products start to get to market, we should see real growth there with some of the bigger players. And then the children's hospitals continue to be the vanguard, so to speak—like Children's, for example—with respect to whole genome approaches. And I do think the recent demonstrations of favorable economics, in addition to faster turnaround time and higher diagnostic yield, are driving interest in the United States. And those accounts—there is definitely better funding and ability there. So it is up to us to go capitalize on that this year, and we will see how we do. Operator: Thank you. And our final question today comes from Mason Owen Carrico with Stephens. Please go ahead. Mason Owen Carrico: Hey, guys. Thanks for fitting me in here. So are you guys expecting multi-system placement orders to become more common in 2026? And if so, should we expect that to have an impact on ASP via discounts? Are you able to generally maintain pricing for those orders? Christian Henry: Yeah. It is a good question, Mason. And the truth is that those are difficult and unpredictable. So I cannot really give you that they are going to be consistent every quarter or how many we are going to get. But what we do see is that clinical customers—customers that want to do whole genomes in a clinical context—are generally going to buy multiple Revios because they want to have redundancy at a minimum, and then they want to scale up. One thing we did see in 2025, and I think we will continue to see, is customers adding to their capacity and scaling on the Revio system. And so we saw that in a number of different accounts in 2025, and I think that will certainly continue in 2026. Both of those have an impact on ASP. And so we are thinking holistically about driving the lifetime value of revenue for those accounts. And the faster we can get them running consumables, the more valuable those accounts are. And so oftentimes we will make a bit of an ASP trade-off for accelerating consumables. And also on top of that, for customers that are adding to their fleets and expanding, obviously our cost structure to serve those accounts goes down, which is certainly useful, and volume goes up, which gives us more of that higher gross margin consumable revenue. So it is a long-winded answer to basically say the timing of multi-system orders will continue to be variable, and we will see how that goes over time. But I do believe we are seeing customers add to their fleet, and those fleet additions are very, very positive for the company, both from a revenue perspective, overall lifetime value to customer, and then improving and driving that gross margin up, and also really the operating margin associated with that particular account. We do not talk about that a lot, but if I can have one sales rep managing $15 million of revenue out of an account versus $5 million, that obviously pays dividends for us. And so that is how we think about it, Mason. Hopefully that helps. Operator: Thank you. And that concludes our question and answer session. I would like to turn the conference back over to Christian Henry for closing remarks. Christian Henry: Alright. Well, we thank everyone for their time today, and we hope to see some of you at AGBT in a couple of weeks here, and then we have other conferences in March that we will be attending. And as usual, you can always reach out to us if you have questions offline. Thank you everyone for your attention, and have a great evening. Sam: Cheers. Operator: Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.
Operator: Hello, and thank you for standing by. Welcome to Roku Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Conrad Grodd, Vice President of Investor Relations. Sir, you may begin. Conrad Grodd: Good afternoon. Welcome to Roku's Fourth Quarter and Year-End 2025 Earnings Call. Joining us on today's call are Anthony Wood, Roku's Founder and CEO; Dan Jedda, our CFO and COO; Charlie Collier, President Roku Media; and Mustafa Ozgen, President Devices. On this call, we'll make forward-looking statements, which are subject to risks and uncertainties. Please refer to our shareholder letter and periodic SEC filings for risk factors that could cause our actual results to differ materially from these forward-looking statements. We'll also present GAAP and non-GAAP financial measures. Reconciliations of non-GAAP measures to the most comparable GAAP financial measures are provided in our shareholder letter. Unless otherwise stated, all comparisons will be against our results for the comparable 2024 period. With that, operator, our first question, please. Operator: [Operator Instructions] Our first question comes from the line of Shyam Patil with Susquehanna. Shyam Patil: Congrats on the strong 2025 and 2026 outlook. I have a couple of questions. The first one, can you help us bridge the 1Q revenue outlook of over 21% growth to the full year outlook of about 18% growth? And then I have a follow-up question. Anthony Wood: Shyam, this is Anthony. I'll kick this off and then turn it over to Dan, who can talk more about the outlook. So let me just start by taking a minute to reflect on our execution over the past several years. In 2023, our priority was to rightsize our cost structure and reach adjusted EBITDA breakeven in 2024, and we achieved that goal a full year ahead of schedule. And this early progress positions us to invest further in our platform monetization initiatives. As a result, in advertising, we deepened integration with leading demand-side platforms and scaled our measurement and performance capabilities. In subscriptions, Q4 was our biggest quarter ever for premium subscription net adds. We expect to add more Tier 1 partners and roll out bundles this year, and we plan to expand how to beyond Roku and take it to additional platforms. So these initiatives are paying off for us. We grew platform revenue 18% in 2025, and we accomplished all of this while growing our streaming households, both in the U.S. and globally. Looking ahead to 2026 and beyond, we're confident in our ability to sustain double-digit platform revenue growth while continuing to grow profitability. So with that introduction, let me turn it over to Dan. Dan Jedda: Thanks, Anthony, and thanks for the question. Let me just add a little bit to what Anthony said. Exactly 2 years ago, when we were entering 2024, we said that now that we rightsized our cost structure, we would relentlessly focus on growing our platform revenue, improving our monetization and driving profitability, including free cash flow. In Q4, we grew platform revenue over 18%, surpassing $1.2 billion. We achieved adjusted EBITDA of $169 million and net income of $80 million, all were records for us. For full year, we also grew our platform revenue 18%, achieved adjusted EBITDA of $421 million, which represents a margin expansion of 255 basis points, and we generated free cash flow of $484 million. also a record for us and over 100% year-over-year growth. With our strong free cash flow, we purchased $150 million of Roku stock through our share buyback program and achieved near 0% dilution for Q4. The lowest dilution we have ever reported. This year, our outlook for platform revenue growth is more than 21% in Q1 and 18% for full year as we continue to execute on our monetization initiatives. Our full year adjusted EBITDA guidance of $635 million represents over 50% year-over-year growth and margin expansion of 267 basis points to 11.6%. I expect that free cash flow will again be above adjusted EBITDA as we remain CapEx light. And it's also worth noting that we have over $1 billion of a deferred tax asset which will keep our cash taxes low for many years. I see our free cash flow continuing to be strong and outpacing EBITDA beyond this year. In fact, I see a path to over $1 billion in free cash flow by the end of 2028, if not sooner, which will be a significant milestone for us. We have incredibly strong momentum going into 2026, and our focus is on sustaining growth. So to get to your question specifically on Q1 versus full year. A few factors are shaping our Q1 outlook. First, Q1 last year was our easiest comp at just under 17% year-over-year. Second, Q1 of this year includes the full benefit of Frndly. As you recall, we closed that acquisition in Q2 of last year. And I guess, finally, we have stronger visibility into Q1 versus the second half of the year. So as we gain better visibility into political and into H2, we'll provide updated guidance. Shyam Patil: It was really helpful. I did have a quick follow-up. Can you comment on your retail distribution strategy for 2026 given that Walmart is switching its House TV to VIZIO's operating system. Anthony Wood: Shyam, this is Anthony again. Yes, let me take that. So as Walmart focuses more on VIZIO OS for their House brand, we're focused on broadening and diversifying our retail distribution. We remain extremely well positioned in the market with hundreds of millions of dollars a year of investment in distribution, we have flexibility in how we invest this budget and we'll continue to optimize this investment across both our retail and our OEM partners. We're already widely distributed, obviously, including at Walmart, and I'll share a few examples of how we're expanding our distribution. At Best Buy, we expanded with the addition of Pioneer Roku-made TVs, which we recently launched. At Target, we expanded with Hiro Roku TVs, and they're going -- they're doing extremely well. At regional and national retailers like Amazon, we have expanded our presence. And in addition to retailers, TV OEMs are key strategic partners for us. And we have expanded our licensing and distribution agreements with 2 of our largest and longest term Roku TV partners, TCL and Hisense, as well as several others. We also have first-party TVs. And for our first-party TVs, we expect sales to increase after shifting our TV production to Mexico, which will help us lower our cost. And then, of course, we expect streaming players to continue to be a meaningful contributor to overall Roku OS distribution. So those are some of the things we're doing in 2026. This work has started but we expect to see the impact predominantly in the second half of the year as these cycles take time to scale. So in addition to this work that I just outlined, I want to take a second and just talk about some of the strategic assets that we have to create a strong foundational competitive advantage for Roku that are really important. One is, of course, the Roku brand. It's a brand that consumers love and ask for by name and has resulted in Roku being used in over half of U.S. broadband households. Nearly half of all TV streaming in the U.S. happens on the Roku platform. And importantly, we're best-in-class at monetization, which gives us a lot of flexibility to invest in building scale and distribution. We're also globally scaled, and we have a success -- we have successful Roku TV partnerships with dozens of TV partners, factories and retailers. And then one of the main ways we've achieved our success is with the Roku OS, which is a purpose-built operating system designed specifically for TV. It's the only purpose-built OS for TV. It has a lot of intrinsic advantages. One of those is the lowest BOM cost in the industry. And one of the reasons for that is we have the lowest memory footprint in the industry. And as everyone knows, memory prices are going up right now. And so as memory prices continue to go up, that's a cost advantage that accrues to us and keeps growing as memory prices increase. So the number of Roku TV units sold, it may go up or down from quarter-to-quarter, but overall, we expect to continue to grow our scale of streaming households in the U.S. and globally, and we're on track to surpass 100 million streaming households this year. Operator: Our next question comes from the line of Cory Carpenter with JPMorgan. Cory Carpenter: So generative video, the advancements have really caught investors' attention of late. We saw Cadence yesterday, Google Genie, both recent examples. I think one interpretation from this we're rehearing is that it's likely to significantly increase the amount of content available, perhaps shift time spent more to short-form videos. So Anthony, the question for you really is I thought it would be helpful to hear how do you think AI could impact the streaming landscape? And what do you think it means for Roku? Anthony Wood: Sure. Yes. I mean, personally, I'm super excited about AI and how it's going to impact content specifically. I think to answer your -- let me -- I'll answer your question directly and then let me talk about some of the kind of bigger picture ways that we think about AI generally. So just in terms of content, it's very clear to me that AI is going to reduce the cost of content significantly over time. And as content -- and including long-form content. And as long-form content costs come down, that's going to grow engagement on our platform, and we monetize engagement. That's basically our business model is monetizing engagement. So I view it as all very positive for our business. But if I just take it at a level up and think about how do we think about AI generally and its impacts on our business, let me start by saying that I think AI is a significant opportunity for Roku. We view it as a powerful tailwind to our business. It's not a disruptor for us, and we're integrating it across our entire technology stack. We're applying AI across our platform to improve discovery, increase engagement and unlock major new monetization opportunities. So let me just talk about a few of those. On the viewer experience, AI helps personalize and simplify how people find what to watch, which increases engagement. For example, on our content row, we're improving recommendations and introducing new features that surface trending content. On our content details page, we're using AI to generate why to-watch summaries that go beyond just plot overviews. We've updated Roku Voice recently. Now viewers can ask more conversational entertainment-based questions and get contextual answers directly on their TV screen. So that's just some examples in the viewer experience. But I would say also equally important for us is on the advertising side, if not more important. AI is a major driver of opportunity in the advertising side of our business. AI helps us build the most performant connected TV ad platform. AI is opening the entire new market of small- and medium-sized businesses, which we're addressing with Ads Manager. I mean that's an entire new segment in the ad business that was not accessible to TV platforms before, but is now because of AI. AI allows products like Ads Manager to exist. And AI tools make it easier for advertisers to create high-quality video ads. And the easier it is to create video ads, the more -- the larger the number of advertisers that can advertise on a TV platform. And then AI is automating workflows that were previously manual, such as reviewing and adapting ad formats. And then finally, we're using AI internally across the company to drive operational efficiency and productivity. So overall, AI strengthens our platform. It improves monetization and it enhances the performance of our business overall. Operator: Our next question comes from the line of Michael Morris with Guggenheim Securities. Michael Morris: I wanted to ask about how the third-party ad demand partnership that you have with Amazon is impacting the business so far and how you expect it to progress throughout the year? Is it additive to growth yet? Or has it cannibalized revenue in any way as it has come online? And then if I could just briefly on the platform gross margin, you provided the 51% to 52% range for '26, which is very helpful. What are you expecting for the first quarter? And how much variability do you expect in this quarter-to-quarter throughout the year? Anthony Wood: Michael, Charlie will take your first question on third-party ad demand partnerships. Charlie Collier: Great. Thanks, Anthony. Michael, look, just stepping back for a second. Our strategy has been to be open and interoperable and be deeply integrated with all the DSPs so really that we can meet clients anywhere they want to transact. So the Amazon partnership was natural in that context. And really, overall, we strive to be the most performant CTV ad platform in the industry. So I'd say to your question of impact this year, it's early innings. Amazon is working hard to bring new clients over to its DSP. And the combination of our TV OS footprints make for an impressive offering. To put it in context, over the last year, we've added dozens of ad tech partners, Michael, from the Yahoo! DSP to AppLovin and Wurl to Magnite. And then once they're onboarded, just like with Amazon, we begin deepening our relationships with each of them, and they start to ramp, and that will continue, and that's the case for all of them. So our goal with all these partnerships is to drive greater outcomes and greater performance for our marketing partners. And we're bullish about our position, not just as the open interoperable partner in a marketplace with so many walled gardens, but the ability of this to grow as we deepen the integrations. Dan, do you want to? Dan Jedda: Yes. Let me just add that in terms of how it will affect the business this year. I'll add to that, and then I'll answer your gross margin question. As Charlie said, like the ramp of Amazon DSP will take time. Obviously, we're fully integrated. We are ramping. We are on. It's going as expected. And I think like across all the DSPs, we feel very good about how we're performing on that specific to Amazon. As the Amazon DSP grows and becomes -- and is successful, which we think it will be, we'll be successful along with it. It does take time for these to ramp though. And we don't obviously break it out. But again, it's tracking as we'd expect, and we expect it to be more of a contribution over time. With respect to platform gross margins, the guide was 51% to 52%. For the full year of 2025, we did end at 52%. I'll say that I don't expect a lot of variability from quarter-to-quarter. It does depend to some extent on the mix of our different activities in the platform business. We saw some stabilization in M&E in Q4, which was great, which helped margins. We're tracking -- that stability is happening in Q1 as well. We'll see how M&E goes forward, we're liking what we see there. But specifically, I don't expect a lot of variability. I will say, again, we have a lot of mix -- different activities growing at different rates, and it's not lost on me and us that we don't give -- we don't break out a lot of detail. One thing we are working on is some more detail on our different activities and giving you a bit more color into the margin profile and the different activities in platform. And I hope to share some more data on that next quarter. It's something we're working on. Operator: Our next question comes from the line of Jason Helfstein with Oppenheimer. Jason Helfstein: So in the prepared remarks, you kind of alluded to the success you're seeing with the international viewership and how it's early days of monetization. I guess is there a way to -- as we think about like what the opportunity is relative to like the platform business today back in the early days of Netflix, we would be like, oh, international, x times potentially bigger than the U.S. opportunity. And then I guess just if you want to take a step back, I guess, like where does that fit in with where you think the kind of biggest opportunity is in the business? So comparing, let's say, the international revenue opportunity, advertising to other opportunities that you're looking at right now. Anthony Wood: Jason, Dan will take that question. Dan Jedda: Yes. So we've talked about international in our focus countries, and we're at different stages depending on the country. So let me just give you some examples of this. So for example, in Canada and in Mexico, we actually have scale and we're starting to monetize that more. In Mexico, we have incredible scale, and we're really starting to focus on the monetization side of that -- of our strategy. In Brazil, where the ad market isn't quite there yet, we're still building scale. That's a little bit further off in terms of focus on the monetization. So we're very focused on building scale and making great progress into Brazil and the rest of Latin America. We're making progress on the U.K. But the monetization is really starting to take hold in Mexico and in Canada for slightly different reasons. In Canada, the market is very good from a digital perspective. Our ARPU is actually quite strong in Canada. We're growing our streaming households and our ARPU along with it. And so we like what we see there. In Mexico, the ad market hasn't shifted to digital like it has in the U.S., although we expect that to happen over time. So we have incredible scale in Mexico. It actually rivals the U.S. in terms of scale in Mexico, which is great. We're really starting to focus on monetization of subscriptions and advertising across all our international locations. So for example, we launched premium subscriptions in Mexico recently, and we'll likely launch more countries over time. So we're very focused not just on advertising, but on leveraging our amazing subscription business in our international countries, and we like what we see there. That is also an opportunity. And over time, I do believe that international will become a larger percent of our overall platform revenue, but it's still pretty early on. So there's a lot of room to grow in these international locations. Jason Helfstein: And how would you rank that relative to like the opportunities you're looking at now that -- for growth? Like is there single one... Dan Jedda: You mean relative to the U.S.? Jason Helfstein: Relative to U.S. or just other things you're looking at from here? Dan Jedda: The international is an incredible opportunity for us to grow. I mean, like I said, subscriptions alone is a big opportunity. The Roku Channel is doing very well in our international locations. We're doing more -- we're having -- engagement is growing very well. In Brazil, where we have scale, we recently launched a FAST, which is doing very well. So I think it's a big opportunity. The question is how do the digital ad markets migrate over and that is a country-by-country specific situation, but subscriptions, including, for example, Howdy can grow really well in these locations, and that's a really big opportunity for us. Operator: Our next question comes from the line of Steven Cahall with Wells Fargo. Steven Cahall: Dan, just following up on the platform guide in the first quarter. I don't know how much kind of political or Frndly is in both the current Q1 and the prior Q1, but it seems like there is a little bit of a deceleration in kind of same-store sales in platform from Q4 to Q1 and the comp is slightly easier. Just wanted to know if that's conservatism. Is there some natural deceleration because you've gotten to such big scale or am I doing the math wrong there? And then also, if we just think about your revenue and platform outlook for 2026, just curious how you're thinking about the contribution of political dollars in there? I think you did about $90 million in '24. That kind of came out of nowhere. So wondering what you're thinking for '26. Dan Jedda: Yes. Yes. Thanks for the question, Steven. To the point -- first of all, Q1 doesn't have a lot of political in it in general. So I wouldn't say that's an impact for Q1, although it will be impactful in H2. Yes, Frndly is impactful for Q1, and that does add a couple of points. With respect to Q1 versus H2 or Q1 versus the full year, to the answer I gave in my first question, we just have a lot more visibility into Q1. And so we're waiting to see how political shapes up, how the spending shapes up. I do believe that if the market is similar in the midterms versus the general, like we will do well in that market. Charlie and team have built out a very good, strong political sales funnel. We're very good at targeting. We're a great platform of which to advertise on. So again, like it's just a question of having more visibility right now in Q1 versus H2 and how political will transpire. And we'll update you as we go forward. So yes, I would agree with the comment that the back half is a little bit more conservative, just given how much visibility we have into Q1. Operator: Our next question comes from the line of Laura Martin with Needham. Laura Martin: Congratulations on really great numbers. I want to follow up on one of the GenAI questions asked earlier. So Netflix is telling us that they are going to put short-form video and user-generated content on their platform because they think engagement is what they are solving for. Anthony, you just said something similar in an earlier question, that engagement is your like North Star. However, I think one of the reasons you get so many really high-quality brand advertisers is that your top of funnel premium-only video. So how do you think from a judgment point of view of balancing and driving engagement, which would mean vertical video and adding user-generated content even short form compared with protecting your ad environment so that you continue to get high-quality advertisers. That's my first question. Anthony Wood: Yes, let me -- I'll give you my opinion, and then I'll turn to see if Charlie has anything to add. We do have short-form content on our platform. We're always experimenting with different kinds of short form and how to place in our UI. There's lots of ways we drive engagement on our platform, mostly around our user interface and the personalization of the experience, but also around the content that's on the platform. I think that -- I mean as a platform, we're a big screen TV platform primarily, and that does mean generally long-form content. That's generally what gets consumed. So although we do have some shorter form video, and I'm sure that will grow. Our focus really is on long-form video. That's what people generally look for when they turn on their TV. And I mean, I strongly believe that as content costs come down, that's going to -- anything -- when you lower the cost of something, people consume more of it. And so we'll see more engagement of long-form video, and that's a big opportunity for us as a platform. In terms of advertisers, let me -- I'll ask Charlie to take that question. Charlie Collier: Sure. Laura, it's a good question. One thing I think we have a few real advantages. One is our FAST channel environment has been really powerful. And so for example, Mr. Beast launched his own FAST channel and it premiered on Roku. And because of our scale, of course, that did really well, and we got to see the type of viewers who consume that content. And that last point is really one of our advantages. We really do understand the cohorts of viewers and one of the things we've been able to do is curate content around different interests. And I think as we get more into short term, when we do, as Anthony said, we do it against specific cohorts and really try to super serve audiences that we understand. We are known for premium content. And in the foreseeable future, it's going to be the majority of what we do and do well. But I very much like the ability of our platform to sort of figure out what the viewer wants to watch and how. Some of the examples of that beyond just the content creators you might be thinking about or even in places like our sports zone, where we'll do shoulder content. They'll go into watch the game. They'll get short-form clips, they'll get short-form commentary and other information. And we do that with the league. So there's all sorts of ways you can do it, and Roku is really good at putting it in context. Laura Martin: Super helpful. My second question is on upfront versus SMB. Just a similar judgment question, which is a lot of the letter is talking about your investments in Ads Manager and your focus on SMBs because it is a large market. But what we hear from MOUNTAIN, which is 100% performance CTV, is that those types of advertisers are really 100% focused on performance like within 3 days, like super short-term performance. And my recollection is you guys do more than $1 billion in upfront guarantees, which is like 1/4 of your total revenue. So as you think about investing in this bottom of funnel, making yourself a full-funnel CTV option for advertising, over time, do you think you're going to pivot from like towards the more performance-oriented, which I would think would have lower margins than top of funnel? But correct me if you think I'm wrong on that thinking. Charlie Collier: Sure. Laura, this is Charlie again. I think it's sort of different horses for different courses. So let me tell you what I mean by that. Yes, we do a lot of guaranteed business at the top of the funnel with enterprise clients. And they -- by the way, and I believe they're performant, too. They measure perhaps different things and, as you said, conversion in a few days. But the shift to performance marketing and the opening of our platform to small- and medium-sized businesses is absolutely a tailwind, but we can manage it in a very different way. We've talked a lot in past calls about how unique our situation is as a platform, which is that we can price up and down the pricing curve and the demand curve. And I think in that context, you'll see us manage very well the opportunity to both perform and to serve the high-end clients. One way to break this out for you is the way we price our inventory. You'll have specific units and opportunities at the high end of the pricing curve, our sponsorships, our Roku Originals, our sports, our home screen units or any time we do a deep digital integration, that comes with a price tag because of exactly what those are. And then on the other end of the business, and this might be some of the business that you're picturing when you asked the question, you've got some advertisers who have different needs who are priced at a much lower price point but they certainly don't get inventory with the same quality signal. They don't get certainly any of the unique units or sponsorships that I was talking about on the other end. So look, we are the largest CTV footprint, and we have really ways to expand our inventory thoughtfully as we grow. And so I think our ability to price up and down the demand curve allows us to not just do well in the current CTV landscape, but as we push to be the most performant CTV platform and welcome in small- and medium-sized businesses. They will spend $600 billion on advertising this year in small- and medium-sized businesses. And if the enterprise trend is any indication, you combine the visual impact of television with the performance of digital and Roku Ads Manager, I think, is uniquely positioned to lead in that transition, and we'll price it properly at both ends of the curve. Anthony Wood: This is Anthony. Let me just add. Yes, I'll just add a few comments. I think just generally, we're hearing from all of our advertisers, both traditional high top-of-the-funnel brand advertisers all the way to lower-funnel advertisers, which we have a whole range that they're all focused on performance. And it's a key strategy for us to be the most performant connected TV platform in the industry. And we're putting a lot of effort into that, and we're integrating a lot of generative AI technology to help us achieve that and it's going well. And you can see -- I mean, in early days, but Roku Ads Manager is doing extremely well, and we're seeing strong growth. And so that strategy is working for us. So there the whole advertising business is moving to performance. Different advertisers have different definitions of how they're measuring performance and what they're looking for. It's not all the same. It's like a traditional social media advertiser type performance, but it is moving more and more into performance. Results are being measured. And we're seeing it, it's working. Like we're seeing those advertisers start to move over. Dan Jedda: Yes. I think I'll just add on one more thing, Laura, to your point. I do think it's important to understand that -- I agree with everything Charlie and Anthony said, but your comment on the pivot towards lower margin and more performant ads they're not lower margin for us. We are very -- so it's not where like a performance-based ad that is focused on a site visit that's focused on a ROAS that's focused on a click they're not lower margin for us in this area. So you should not think that as we focus on the SMBs that it drags down margins, it does not. Operator: Our next question comes from the line of Rob Sanderson with Loop Capital. Robert Sanderson: I wanted to ask a little bit about just expanding your advertising opportunity on the home screen outside of M&E and into the much larger advertising landscape. I'm sure there's lots of interesting things you can do here. But any color on the types of ad formats you might be thinking about? Is it something that we're likely to learn more about through 2026? And then just thoughts on go-to-market. These would be completely unique and probably require some education of advertisers, maybe not something your third-party demand partners could help you with. Is that something that you think you'd have to take on a direct basis? Or anything you can sort of share on go-to-market? Anthony Wood: Rob, Charlie will take that question. Charlie Collier: Yes, sure. Well, it's happening already, Rob. It's a great question, and we've expanded well beyond M&E over the last couple of years. Actually, I think if you saw the home screen or you're looking at the home screen right now, Roku City, which is our beloved interactive world that is living inside your television. Right now, if you look at it, it's got the Olympics on it and some of our sponsors -- actually, I think, most of which are not M&E at all. We also added video to the home screen inside of our marquee unit, which is a big unit on the right-hand side of the screen. And that is really performing well for all sorts of categories beyond M&E. So we are testing several variations of home screen design and we're obviously proving that it drives more engagement and viewer satisfaction, which is -- but you're going to see us do a lot of it. And as to your question about whether it's programmatic, to date, it is not. There are lots of reasons we got a question earlier about upfront versus SMB. Obviously, with our enterprise clients and our -- or advertising agencies, they are very focused on these unique units and these performant units and you'll see more of it moving forward. Anthony Wood: And Rob, this is Anthony again. I'll just -- in terms of new ad units, we've mentioned before that we have a new home screen design that we're working on. It's one of our major initiatives. It's in testing right now, and we're testing several different variations of the home screen, it's going well. We're driving more engagement and viewer satisfaction. We believe it will increase monetization over time, whether that's getting viewers to sign up for subscriptions or watch more ad supported content and we hope to roll it out sometime this year. But the new -- I'll just say that the new home screen, one, it's got a lot of improvements. One of the changes is we're testing new types of ad units. And we're also looking hard at how we can and we're testing different ways to increase impressions of current ad units and also increase click-through of the current ad units as well. Operator: Our next question comes from the line of Vikram with Baird. Vikram Kesavabhotla: I wanted to ask about the Howdy launch as well as the Frndly acquisition. Could you talk more about how each of those integrations is going so far? And what are your plans for those businesses in 2026? Anthony Wood: Vikram, this is Anthony. Both of those are going well. We haven't broken out numbers, but the -- like I'm extremely happy with how the Howdy launch is going, subscribers are continuing to grow nicely. And I'll just say that for those who don't know, Howdy and Frndly, they're part of Roku's portfolio of owned and operated services, which started with the Roku Channel and adding Howdy and Frndly is a strategic expansion into subscription that's going to add incremental revenue. We're using the power of our platform, the -- our user experience to drive engagement in both of those. We're seeing increased engagement on both of them. I mean, we're definitely increasing engagement and the sign-ups for Frndly since we took over that service. And of course, that platform is how we're launching and growing the Howdy business. We have plans -- Frndly is already available on platforms outside of Roku and we have plans to launch Howdy on platforms off of Roku as well. So I mean, I'm very excited about both of them. And this Howdy in particular, I think, has the opportunity -- the potential over time to become a very large service for us. Operator: Our next question comes from the line of Matt Condon with Citizens Bank. Matthew Condon: I just wanted to ask, as Netflix is pending the acquisition of Warner Bros., and this is changing potentially the broader streaming landscape can you just talk about if they become more guarded about how to distribute their content, how this could potentially impact Roku both on the advertising side and the subscription side? And then maybe just a quick follow-up, Dan, just mid-single-digit OpEx growth going forward. Is that the right way to continue to think about this? And if revenue growth comes in above expectations, how do you just think about reinvesting some of that growth back into the business. Anthony Wood: Matt, this is Anthony. I'll just say in the U.S., as we've said before, we're in more than half of broadband households and half of all TV streaming happens on the Roku platform. I mean that's a lot of scale. This makes us an essential partner to every content owner and streaming service, and we don't anticipate that changing regardless of how the industry consolidates or how that consolidation plays out. In any scenario, the streaming sector remains extremely robust, it's continuing to grow quite nicely, and we remain well positioned to help our streaming and content partners drive engagement, find viewers and sign up customers. And I'll let Dan take the question on... Dan Jedda: Yes. Thanks for the question, Matt. With respect to OpEx, we remain focused on execution and operational discipline ensuring we invest where we see the highest returns. We grew our OpEx 3% in 2025, a little bit lower than I expected, which is fine because we're investing well in these -- all these initiatives that we've laid out here, both in the shareholder letter and what we've talked about on this Q&A. I do expect our OpEx to grow in that mid-single digits. As we've said many times, we expect our platform revenue to grow double digits I think I gave some pretty concise guidance on gross margin, where we don't expect any major decel in gross margin. In fact, we expect it to stay in this 51% to 52%, and that will translate into improved EBITDA margins over time. It's also one of the reasons why I feel like we're on a good path to achieving $1 billion in free cash flow by 2028. So -- and all of this is to say we are absolutely investing. We're adding headcount, mostly on the engineering side to invest in these incredible initiatives that we have in front of us. So a lot of good things happening. I think it's also -- one thing I will say that that's helping our OpEx growth is our SBC continues to come down. We've done a lot of work in SBC and that is actually trending -- going backwards. From 2025 into 2026, our guide contemplates that. And that's one of the things that's helping our OpEx stay in that mid-single-digit range. Operator: Our next question comes from the line of Tom Champion with Piper Sandler. Thomas Champion: We can see from your discussion around '26 expectations, a pretty solid top line revenue guidance. But I think you've been sort of indicating that you see a path for a very solid multiyear CAGR in revenue growth and you've talked about some of the near-term drivers. But I'm just wondering if you could talk a little bit about maybe more intermediate or longer-term dynamics in the business that would give you confidence in sort of a solid growth trajectory beyond this year in '26? Any thoughts would be welcome. And then maybe for Dan, just a clarification, is it $250 million that remains on the buyback? Anthony Wood: This is Anthony, I'll start and then turn it over to Dan. In terms of what's driving our growth, our 2 big businesses are advertising and subscriptions, and they're both doing nicely. So on the advertising side, we've talked about deepening our relationship with third-party DSPs and partners. There's still room to continue to do that. There's still a lot of ad dollars that is in the traditional linear ecosystem that's still moving the streaming. We're taking, I would say, more than our fair share of those dollars so we're continuing to see growth there. We have initiatives in place like our new home screen that we're launching, which I think will grow -- which I believe will grow monetization over time based on the testing results I'm seeing. So -- and then on subscriptions, one of the big trends in the industry that we're seeing is aggregation of streaming services. I think increasingly over time, it's only going to be a small number of services that can maintain a profitable app and that a much more profitable way to distribute their streaming service will be through something like Roku's premium subscriptions, and that's one of the reasons we're seeing every major streaming service other than the top few sign up to be a participant in premium subscriptions because it's just good economics. It drives more subscribers on a more economical basis. And I think that -- so I think premium subscriptions are going to be a big growth driver and a big secular trend in the industry for quite some time. Things like Ads Manager are opening up huge new ad markets for us that just were not available to TVs before. And those new markets are now accessible because of AI, essentially AI that can create video very quickly or instantaneously at very low cost and then provide the targeting and then provide the granular self-serve capabilities that open up to a large number of advertisers. So those are some of the areas we're working on. And there's other activities and research projects that we have in place that we haven't disclosed yet. So there's just a lot of opportunity in the streaming space. And there's a lot of ways to continue to grow monetization on our platform as well as, obviously, we're going to continue to grow the scale of our platform, both outside the U.S. and inside the U.S. I don't know, Dan, did you have anything? Dan Jedda: Yes. I'll answer the second part of your question. We purchased $50 million in Q3 and $100 million in Q4. So yes, there's $250 million remaining on the buyback. I will say like as we noted in the shareholder letter, we see a clear path to offsetting dilution for FY '26, and we have very strong free cash flow as our guide contemplates of the $635 million of adjusted EBITDA. And my comments with respect to, we believe free cash flow will be above adjusted EBITDA for the year. Operator: Our next question comes from the line of Robert Coolbrith with Evercore ISI. Robert Coolbrith: Just wanted to go back to Ads Manager maybe for another follow-up. Can you talk about maybe the performance orientation or some of the ways that the product is different from OneView? Or do you use OneView as a base and try to sort of make more performance into the platform? Just anything you could tell us about the starting point for Ads Manager and how you're attempting to serve the needs of performance-based advertisers? And then secondly there, if you could talk a little bit more about maybe the go-to-market for how you identify maybe your high-value SMB prospects, how you reach out to them, how you onboard them or get them into the funnel and then onboard them into the platform? Anything more you could tell us about that would be really helpful. Anthony Wood: Robert, this is Anthony. I'll take the first part and then turn it over to Charlie for the second part. I'll just say -- well, first of all, OneView was a technology platform, but it was also a business strategy. And I would say the business strategy is what's changed. So the OneView technology is still integrated throughout our platform and pieces of it are in Roku Ads Manager for example, as well as a lot of homegrown technology as well. Our ad stack wasn't just OneView, but that was a piece of it. But OneView was really a strategy around us making that essentially our exclusive DSP on our platform. And that changed a few years ago to like we're not going to have OneView DSP on our platform. We're going to work with all the large DSPs that are out there that customers are using and want to continue using. So that's when we completely switched our strategy to working with third-party partners. That's when we started deeper integration with Trade Desk with Amazon with all the other partners that are out there that we work at third-party platforms. So that was really a strategy change, I would say. And that strategy change has been extremely effective, like that's working well for us. And I don't know, Charlie, do you want to take the second part or add to that? Charlie Collier: Yes. Well, it's a very different sales funnel, obviously, than going to the agencies and clients the way we do with enterprise. I'll say for my career, it is such a joy to be able to serve top of the funnel, middle of the funnel and bottom of the funnel. And it is really the bottom of the funnel that we're working on with the Ads Manager product. Driving it all -- to your point about outcomes, driving it all is really just trying to improve performance. And Anthony said earlier in the call that's spot on, really people define performance in very different ways. And so we've announced a bunch of partnerships, for example, iSpot AppsFlyer, Incremental and each of them in one way or another is about measurement performance. And so I won't go deep into how we identify the high-value SMB prospects except to say we've created a very different sales force and sales approach. We do a lot of lead gen, we market into this group. And then the best advertising for this is actually the performance itself because unlike our enterprise clients who come in with budgets, when this works, people will leave it on and continue to come back to Ads Manager for more. So in the letter and actually in the recording right before the call, you heard about a client with specific objectives who came in, saw the return on ad spend. And then not only do they continue to come back, but we see a lot of performance lead to other advertisers in the category doing the same. So really, in many ways, it's the purest form of advertising because you invest, you -- we tweak and optimize results and outcomes and then we improve performance and then we become new partners. And so I'm very excited about the ramp of this, and I think we can move from going hundreds to thousands to tens of thousands of advertisers. Anthony Wood: This is Anthony again. I'll just say one other point, which is that although Ads Manager is doing well for us, it's not exclusive. Like we are working with other third-party partners that are targeting the same target customers, the same SMBs. tvScientific, for example, is just one. But I do think that there are some significant competitive advantages to building our own self-serve platform in terms of integrating it more deeply into our platform that will result in better performance. And so I think that -- one of the reasons we're doing it ourselves is we think we can build a better product by integrating it ourselves into our platform. Operator: Ladies and gentlemen, due to the interest of time, I would now like to turn the call back to CEO, Anthony Wood for closing remarks. Anthony Wood: I'd just like to thank our employees, customers and advertisers and content partners, and thank you for listening. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Bright Horizons Family Solutions Fourth Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Michael Flanagan, Vice President of Investor Relations. Please go ahead. Michael Flanagan: Thanks, Paul, and welcome to Bright Horizons Fourth Quarter Earnings Call. Before we begin, please note that today's call is being webcast and a recording will be available under the Investor Relations section of our website, investors.brighthorizons.com. As a reminder to participants, any forward-looking statements made on this call, including those regarding future business, financial performance and outlook are subject to the safe harbor statement included in our earnings release. Forward-looking statements inherently involve risks and uncertainties that may cause actual operating and financial results to differ materially and should be considered in conjunction with the cautionary statements that are described in detail in our earnings release, 2024, Form 10-K and other SEC filings. Any forward-looking statement speaks only as of the date on which is made, and we undertake no obligation to update any forward-looking statements. Today, we will also refer to non-GAAP financial measures, which are detailed and reconciled to the GAAP counterparts in our earnings release. which is available under the Investor Relations section of our website at investors.brighthorizons.com. Joining me on today's call are Chief Executive Officer, Stephen Kramer; and our Chief Financial Officer, Elizabeth Boland. Stephen will start by reviewing our results and will provide an update on the business. Elizabeth will follow with a more detailed review of the numbers before we open it up to your questions. With that, I let turn the call over to Stephen. Stephen Kramer: Thanks, Mike, and good evening to everyone on the call. I am pleased to report a strong finish to 2025, closing out a year of solid growth and continued progress across the business. In the fourth quarter, revenue increased 9% to $734 million and adjusted EPS increased 17% to $1.15 both ahead of our expectations. For the full year, we delivered revenue of $2.93 billion, up 9% over the prior year and adjusted EPS of $4.55 representing 31% growth year-over-year. These results exceeded the expectations shared at the beginning of the year and highlight the continued evolution of Bright Horizons into a diversified, integrated solutions provider of employer-sponsored education and care. The improvements in our business mix throughout 2025, combined with our growing impact on families and employers, reinforce our confidence in the durability of our model and long-term opportunity for growth. Let me now walk through the segments. First, back-up care again delivered strong growth and earnings contribution in Q4 as it is done over the course of 2025. In Q4, revenue increased 17% to $183 million. Driven by solid utilization across center-based, in-home and school age programs. Utilization during the quarter reflected a combination of unplanned CAGR when regular arrangements were disrupted along with more predictable care needs such as scheduled school breaks and holiday coverage. For the full year, back-up care revenue grew 19% to $728 million and sustained strong operating margins. Our service reach spans more than 1,100 employer clients and millions of eligible employees globally. Importantly, our existing clients had double-digit growth in backup users even as their eligible populations remain relatively flat, meaning growth was driven by deeper penetration into the eligible population, underscoring the value of the benefit to an increasing number of working families. Looking forward, our focus remains on scaling the backup business by expanding unique users within existing clients, increasing frequency of use among those utilizing care and continuing to retain and add new employer clients. This growth relies upon an unmatched delivery model that combines owned capacity across our full service centers and backup operations alongside a broad third-party provider network. We still well less than 10% penetration within existing clients we have a significant opportunity to further expand active user adoption and utilization through targeted marketing, expanded capacity across use types and our One Bright Horizons initiatives to increase awareness across our services. We remain confident that back-up care will continue to be a durable source of growth in earnings while also strengthening broader employer partnerships across Bright Horizon services. Turning to full service. Revenue increased 6% in the fourth quarter to $515 million, with growth driven by a combination of tuition increases and enrollment growth tempered by our continued portfolio rationalization. We added 6 new centers this quarter, including 4 client centers, 3 of which were transitioned of management for Stormont Vail Health and Cone Health. These additions extend our leadership in employer-sponsored child care and reaffirm the critical role on-site care plays in supporting working families and their employers. Enrollment in centers opened for more than 1 year increased approximately 1% in the fourth quarter, and occupancy averaged in the mid-60% range, broadly consistent with seasonal patterns we typically see in the back half of the year. Underlying enrollment dynamics remained similar to what we saw throughout 2025, with solid demand in many geographies, countered by more muted enrollment growth levels in some of our more challenged areas. We are pleased to see continued progress, particularly in our lower occupancy cohort, were centers operating below 40% occupancy declined from 16% to 12% of the portfolio in the fourth quarter year-on-year. Specifically in the U.K., our full-service business continued to make progress and delivered positive operating profit for the year, a significant milestone post pandemic and a meaningful turnaround from the $30 million of annual losses we absorbed just 2 years ago. This progress reflects higher occupancy, more consistent staffing and improved affordability for families aided by expanded government supports. Looking ahead, our focus remains on serving families where they work and live, continuing to invest in the quality of our services and strengthening the long-term economics of our portfolio. We will continue to operate in locations that are important to our client partners, are strategic in delivering back-up care and in areas with strong supply-demand dynamics. At the same time, we'll continue to rationalize locations where these characteristics are not present. Turning to ed advisory. Revenue increased 10% to $36 million in the quarter. and for the full year grew 9% to $125 million, both ahead of our initial expectations. College Coach led the growth in margin performance as more families engage with our college counseling services, while EdAssist also continued to expand its participant base. During the quarter, we added new employer clients to the portfolio, including launches with [indiscernible] Estee Lauders and Becton Dickinson, among others. Before I turn it over to Elizabeth, I want to take a moment to recognize an important milestone. 2026 marks the 40th anniversary of Bright Horizons. When our founders launched the company in 1986 they, believed employers could play a meaningful role in supporting working families. And then doing so, we benefit children, parents and employers alike. Over 4 decades, Bright Horizons has developed thoughtfully alongside changes in the workforce, employer priorities and the needs of working families. Central to that evolution has been the development of our back-up care business. and the expansion of our services to support families and employees across life and career stages, broadening our impact to a much wider population. That progression reflects our ability to listen to clients adapt to changing needs and invest in ways to maximize impact, all while remaining grounded in our mission to support children, families and employers. We are proud of what this organization has built over 4 decades. Deeply grateful to our employees whose dedication make it possible and appreciative of our client partners and customers who place their trust in us. In closing, 2025 was a year of solid financial performance and meaningful progress across many dimensions of our business. We grew revenue 9%, expanded adjusted operating margins 200 basis points and delivered 30% earnings growth. We strengthened our balance sheet, repurchased $225 million of shares and position the company for long-term success. As we look ahead to 2026 we are optimistic about the opportunities in front of us and look to build on the momentum we saw in 2025. Elizabeth will walk through the guidance in more detail, but at a high level, we expect revenue to be in the range of $3.075 billion to $3.125 billion and adjusted EPS to be in the range of $4.90 to $5.10 per share. With that, I will turn the call over to Elizabeth. Elizabeth Boland: Thanks, Stephen, and hello to everyone who's joined the call tonight. I'll start with our financial highlights. Revenue in the fourth quarter was $734 million, representing 9% growth year-over-year and modestly ahead of our expectations. The quarter reflected solid execution across the business with continued strength in back-up care and steady performance in full service and ed advisory. Adjusted operating income rose 14% to $91 million, with operating margins up roughly 60 basis points over the prior year to 12.3%. Adjusted EBITDA increased 12% to $123 million representing an adjusted EBITDA margin of 17%. And lastly, adjusted EPS of $1.15 per share, ahead of our expectations, grew 17% over the prior year. . Breaking this down into the segment results. back-up care revenue grew 17% in the fourth quarter to $183 million, driven by solid demand over the fall and holiday season. As Stephen mentioned, utilization continues to be driven by both predictable and planned needs as well as unexpected care disruptions. Operating margins remained strong in the quarter at 32% and in line with our expectations for the higher volume of care that we deliver in the second half of the year, while also reflecting our disciplined expense management and a favorable mix of utilization. Full service revenue of $515 million was up 6% in Q4, mainly on pricing increases, modest enrollment gains and an approximate 175 basis point tailwind from foreign exchange. Centers we have closed as part of our portfolio rationalization since Q4 of '24 partially offset these gains representing an approximate 200 basis point headwind. Enrollment in our centers opened for more than 1 year increased approximately 1% and occupancy levels across our portfolio averaged in the mid-60s for Q4. In the specific center cohorts we have discussed on prior calls, we continued to show improvement over the prior year period. Our top-performing cohort centers above 70% occupied, improved from 39% of those centers in Q4 of '24 to 40% of centers in Q4 of '25. And as Stephen commented, our bottom cohort of centers those sub-40% occupied, improved from 16% in the prior year period to 12% of the total population this past quarter. Adjusted operating income of $20 million in the full service segment increased roughly 45 basis points to 4%, up $3 million over the prior year higher enrollment and improved operating leverage, particularly in our U.S. and U.K. operations helped drive the growth in earnings, while higher benefits costs partially offset some of these advances. Lastly, our revenue in the educational advisory segment increased 10% over the prior year to $36 million with operating margins of 30%, consistent with Q4 '24. Net interest expense ticked up to $12 million in Q4 of '25, also consistent with the prior year quarter and totaled $45 million for the full year. Our non-GAAP effective tax rate was 26.4% in the quarter -- in the fourth quarter, bringing the effective rate for the full year to 27%. Turning to the balance sheet and cash flow. For the full year 2025, we generated $351 million in cash from operations compared to $337 million in 2024. Capital investments totaled $91 million in the current year 2025 as compared to $95 million in the prior year. And with the continued cash build specifically free cash flow generated in Q4, we repurchased $225 million of stock in 2025, including roughly $120 million in the fourth quarter. We ended the year with $140 million of cash and a leverage ratio of roughly 1.7x net debt to adjusted EBITDA. Moving on to our 2026 outlook. In terms of the top line, we currently expect 2026 revenue to be in the range of $3.075 billion to $3.125 billion or growth of 5% to 6.5%. Looking at this at a segment level, in full service, we expect reported revenue to grow in the range of 3.5% to 4.5% on enrollment gains and tuition increases offset by approximately 200 basis points in headwind from net center closings. In back-up care, we expect reported revenue to increase 11% to 13% and driven by the continued expansion of use. And in ed advisory, we expect to grow in the mid-single digits. In terms of earnings, we expect 2026 adjusted EBITDA, EPS, excuse me, to be in the range of $4.90 to $5.10 a share. As we look specifically in Q1 '26, our outlook is for total top line growth in the range of 6% to 7.5%. The segment breakdown would be full service reported revenue growth of 5.5% to 6.5% back-up of 11% to 13% and ed advisory in the low to mid-single digits. In terms of earnings, we expect Q1 adjusted EPS to be in the range of $0.75 to $0.80 a share. So with that, Paul, we are ready to go to Q&A. Operator: [Operator Instructions] Our first question is from Jeff Meuler with Baird. Jeffrey Meuler: Can you help us with how you're thinking about the full-service margin outlook, including as you close these centers that are a 200 basis point revenue headwind on average, are they at a loss? Or just how should we factor in the different drivers of full-service margin outlook? . Elizabeth Boland: Yes. Thanks, Jeff. So as we look at 2026, we had, obviously, good performance this year and are building off of where we ended 2025 into '26. We mentioned a couple of things on the prepared remarks, including about 100 basis points of enrollment gain in the year. That will contribute some continued performance in our U.K. business, which had a certainly a strong year in 2025, and that velocity will be -- continues to grow, but it will be expanding at a little bit lower pace than it was able to this year. So we're looking overall at about 25 to 50 basis points of margin improvement in the full service business in '26. That captures some effect of these closures as you're highlighting, most of them are in a loss-making position, yes, because that's the reason for underperformance leading to a closure decision. There is some tail to those costs even as the center ceases operations if we're running dark and/or we're not able to fully exit the lease are paying off multiple years of lease expense in advance. So we are having some ongoing effect of that, but it does add modestly to the operating leverage as we are exiting these underperforming centers. But overall, full service 25 to 50 bps. Jeffrey Meuler: Got it. And then just given the headlines and new stories, can you just comment on health and safety protocols, any changes that you're making or considering? And then just how you think about any sort of like local market or licensing risks or a private public partnership for UPK opportunities that could be impacted from those issues. . Stephen Kramer: Sure. Thank you for the question, Jeff. As you'll know, and those who interact with know, our #1 priority continues to always be delivering high-quality care and education for families and ultimately for the clients that we serve. When we have any incident at a center. We take it incredibly seriously. What I would say is that enrolled families at other centers tend to focus on the experience that they are having at their individual center. And the relationships that we enjoy with our clients. We focus on transparency and also strong communication so that we can express to them exactly what has occurred. And then ultimately, the actions that we are taking to make ourselves even stronger going forward. So overall, to be very direct with you, we continue to see strong retention of families in our centers. We continue to see stability in our client base. And so overall, while we take these incidentally seriously, from a business impact perspective, I would say, at this point, our view is that, that is not the case. You referenced the relationships that we may have with UPK, so for example, in New York City, in particular. And what I would say is that we enjoy contracts in the majority of our centers for UPK . We have received feedback from the regulator. Having visited almost all of our UPK centers in recent months that we continue to perform at a high level. There is never a guarantee that contracts will ultimately be renewed over time. On the other hand, we feel confident in our position at this point within the New York City market and our ability to continue to deliver for the large number of families that we do. Operator: Our next question is from Manav Patnaik with Barclays. Manav Patnaik: Elizabeth, maybe just firstly on the guide, if you could help us with the assumption on pricing and enrollment growth in the full center business? And then also just if you want to just knock out the margins for the other two businesses in 1Q and the full year. . Elizabeth Boland: Sure. So overall, we're looking at price increases, which would vary as I'm sure most on the call know we make individual localized decisions on this. But on average, the price increases for '26 are approximately 4% and we are looking at overall enrollment for the year plus 100 basis points give or take. So the two of those are the two primary components there. The price increase reflects what we see in the wage offsetting around 3% or so range against that 4% for wages. As it relates to the overall margin in the other businesses. So back up, we would be looking at our long-term average. Just to reiterate that, we would expect to be 25% to 30% operating margin over time. We certainly have been performing well against that, and we would look in '26, we would look to be seeing that in the upper half of that range. So call it, 27%, 28% to 30% for the year. So that's what we're seen in back-up care. And then in ed advisory business similar to this year overall in the low 20s . Manav Patnaik: Got it. And maybe just back to New York City, I guess, with the new mayor and the free child care proposal. I wanted to just get your take, if you've spoken to the administration, you're involved in there. Just some color on what your New York City exposure is? I know in the past with pre-K and those kinds of things, you benefit from wraparound care, but I'm not sure what these proposals look like. Stephen Kramer: Sure. So as I shared, we -- as the majority of the centers that we have in New York City proper, we participate in UPK and that is a good relationship with the city in terms of a good demonstration of the power of private public partnerships. It's an environment where the city funds at a level that supports quality and likewise, is an environment that is open to working with private providers like us. So New York City has been, in our opinion, a really good example of where UPK can work well both for the city, but also for Bright Horizons and the families that we serve. The expectation going forward is there have been conversations about moving to younger age groups, so the twos, so 2k and there is an indication that it would likely look similar to the UPK program that's in place only for younger age groups. The expectation also is that they are going to be starting with a pilot that is focused on the neediest areas of the city and then potentially expand in the way they did previously to a much broader aspects of the city. In terms of the relationship, yes, I mean, I think we as one of the largest providers in New York City or UPK, we certainly have a good and ongoing relationship with the folks that manage those programs and continue to feel like we have a good sense of how this may unfold over time. Operator: Our next question is from Andrew Steinerman with JPMorgan. Andrew Steinerman: So Bright Horizons continues to have strong backup cap growth as employees at the corporate clients engage and use their additional use cases of their backup benefits. I was wondering how do the corporate clients feel about that kind of the increased spend that comes as employees realize and use their backup benefits more and do you see any tightening of backup benefits in terms of like use cases that are allowed by corporate clients? . Stephen Kramer: Sure. I'm happy to answer that, Andrew. So first, it's fair to say that we're very pleased with the 19% growth that we experienced this year. And that is in addition to the last several years of very strong growth. And as you all know, the majority of the revenue that we derived is directly from the employer support of these programs because there's really a limited co-pay that goes along with it at the employee level. But I think that we have done a really good job of articulating to employers the value in terms of productivity. That backup provides to their employees and then ultimately accrues to them as employers. And so I think that strong ROI has really held us in good stead as it relates to the continued investments that they're making. I would also observe that within the benefits portfolio that HR manages, backup is still a pretty modest line item, especially as it compares to some of the more traditional and larger benefits that they manage. And so while the increases are significant for us and obviously for the progress that we have continued to make from any one employer's perspective, it's still a pretty modest line item despite the fact that on a percentage basis for them, it is growing more significantly. But again, I think our teams have done a really good job of ensuring that we are focused on -- and secondly, the feedback from employees around the backup benefit continues to be incredibly strong. Operator: Our next question is from George Tong with Goldman Sachs. Keen Fai Tong: You mentioned occupancy averaged mid-60s in 4Q. Based on your guide for this year, can you describe how you expect occupancy to unfold over the course of 2026 by quarter roughly? . Elizabeth Boland: Yes. So the seasonal pattern would be pretty consistent where we see a lift in enrollment in the first half of the year, particularly in Q2 is where it would be peaking in the -- it was in the high 60s in 2025, so being picked up -- it would tick up a bit above that. And then in the second half, it would be back down into the mid-60s for the second half of the year, Q3 and ending the year similar to Q4 as Q3. So it's a lift in Q1 and Q2 and then similar to the pattern you saw this year. Keen Fai Tong: Got it. So by 4Q this year, would you expect it to be better than mid-60s from 4Q last year? Or do you think you've reached the steady state and mid-60s as a reasonable year-end? . Elizabeth Boland: Yes. It would be still in the mid-60s exiting '26 because with a growth rate of just 100 basis points in a year. We're we're making headway against that gradually, but it wouldn't be getting beyond the mid-60s by the end of the year. Still growth to come though. We are heartened by the continued interest, and we have the overall number of enrollment in the 100 basis point range is masks the improvement in the middle and lower cohorts, which are growing low to mid-single digits because they're more under enrolled than the top cohort, which is very well enrolled. And in fact, can't really take any more enrollment and may see some cycling. So overall, we're pleased with the ongoing momentum, it's modest, and it's year-by-year, quarter-by-quarter, but we are seeing growth and think that, that will continue to allow us to move beyond the mid-60s over time. That won't happen, we wouldn't expect in '26, but certainly have the opportunity down the road. Operator: Our next question is from Toni Kaplan with Morgan Stanley. Toni Kaplan: I was hoping you could start maybe giving additional color on the closures. Just wondering if there are any sort of commonalities on why the centers got up to a higher level of utilization and I'm sure there were a number of things that you tried. And so just wanted to understand the reason for that. But were there a number of leases that came up this year? Just trying to understand also like how to think about closures for maybe '27 as well. Elizabeth Boland: Yes. Yes. So I think the common theme is probably the centers that have been circled up for closure. And in fact, we have closed already in '26 close to half of what we would expect to close for the year. we'd expect to be in the range of 45 to 50 or so closures this year overall, and we've closed more than 20 already in this quarter. And that the circling up of those has been a combination of the things that you mentioned, Toni, which is some were within a year or 2 or 3 of the end of their lease. And so the underperformance, the lagging enrollment and the overall economics of operating compared to covering the fixed cost was not sensible. And so we were able to in many cases, move the families and the staff to other nearby centers and to accommodate the needs of everyone in that way. And so that's obviously the best case scenario where we can rationalize portfolio and retain the enrollment and the staff as well. Also, there certainly were some cases where the underperformance is so significant and there is no particular lease action, the lease is not coming up for still several more years, but we have elected to stop operations and do this either combine or just stop operations because the demand is not sufficient. The operations are quite -- the operating performance is quite low, and therefore, we are shutting down operations and may have some tail of costs that carries on for a couple of years if we are not able to sublease the space, we will certainly work to do that, but it's not the most amenable market for that. But I think it's just a decision point of persisting looking at the client relationships, is there client interest in full-time care? Is there a client interest in back-up care? Is there a landlord negotiation that can get us a more tolerable occupancy cost? Are there other -- and of course, the main ones, which are can we enlist more enrollment by more parent awareness and more marketing conversion, but that's all of those things go into a decision, which is a tough one to make. Toni Kaplan: Great. And then for my follow-up on back-up care, I guess, anecdotally, we're aware of at least one employer who added days during COVID and now is cutting back on days going back to sort of pre-COVID levels. And so I wanted to understand if that is just a one-off situation or if they're is sort of a larger trend of cutting back on days? And what I'm trying to get at is if you're seeing any changes in the drivers of growth in back-up care like going forward versus like recent years, are you seeing sort of more growth from new employers signing on as opposed to those adding days or any difference in usage, et cetera. I just wanted to understand directionally the back-up care drivers and if that is something that is changing. Stephen Kramer: So Toni, what I would say is now the drivers in 2026. And moving forward, we expect actually will look very similar to the last several years. So the vast, vast majority of the growth comes from the existing client base. Of course, we continue to add clients, but that is not a large source of growth given the maturation that is required of a new client, and it takes time for the benefits to become known and then ultimately used in a more mature way. So when we think about the drivers, number one, is continuing to increase the number of unique users. And so as I shared, we grew that at sort of mid-double-digit rate and so getting more penetration within our existing base is a really critical component. I would say that to the question around program design and policy changes, it was not actually the norm for most of our employers to change their program parameters even during COVID. We had a select number that really had some outsized programs that have come back into more of our normalized program policy. But the reality is in the current operating environment, most of those who use do not use their full bank, whether it be an outsized bank or even a more traditional sized bank. So again, it's this combination of continuing to drive users continuing to drive their frequency of use, understanding that most do not use their full bank, and those become the two most important determinants of the continued growth algorithm. Operator: [Operator Instructions] Our next question is from Josh Chan with UBS. Joshua Chan: I guess, around your expectation to grow enrollment 100 basis points which is similar to kind of the exit rate in Q4. Have you seen kind of a solid or pretty stable fall enrollment season during Q4 to kind of inform you of that? Just I'm just wondering how the enrollment season kind of progressed. Elizabeth Boland: Yes. It was -- I would say that we had a bit of a slowdown in the second half of the year. We were a little faster growth in 1H of '25, and then it tapered in the second half. So it was -- the momentum coming through the fall was and into the rest of the year was similar to what we had expected and stable going into next year. I'd say that the maybe the notable element as we're looking ahead is a little bit of an uptick in younger age group enrollment. The mix is it's not dramatically different, but it's an uptick in younger age interest. And so that's always a positive, of course, for just growing the younger children into the older age groups as they stay with us. So that's one of the elements of positive outlook that we are seeing. And we talked last -- throughout 2025, it is last year, and we're talking about Q4, but some of the supports that we are seeing outside the U.S. has certainly helped to improve affordability to families in the countries that we operate, where government funding for child care is available to all families. It's means tested, but it's available to all families at some level, and that enables more families to afford care. So that has driven some good stability also in the enrollment outlook. Joshua Chan: Okay. That makes sense. And then in terms of your center count, I guess, how many centers are you aiming to open next year? And at what point do you feel like you can get to kind of net neutral center count in the future? . Elizabeth Boland: Yes. So in '26, we'd look to be opening plus/minus 20 or so. And I think I mentioned closing 45 to 50. So we would be in the net closure position as you say, in '26. It will go a long way, closing getting underperformers closed throughout the rest of this year. We'll go a long way toward addressing that bottom cohort. We mentioned there's 12% of centers in the bottom cohort about just under 90 of those or so are P&L centers that we control the bottom line. And even after the closures in the early part of this year, it's already ticked down meaningfully to -- in the neighborhood of 70. So we will be in a good position to have made progress through many of the centers, but I'd still say we would -- we'd probably be in another year beyond '26, '27 before we're meaningfully net positive. . Operator: Our next question is from Stephanie Moore with Jefferies. Stephanie Benjamin Moore: Hi, good afternoon. Thank you. I was hoping you could talk a little bit about what you're seeing from just an overall pricing standpoint, general appetite from parents and customers on tuition increases, how you view kind of pricing going forward now that inflation is kind of arguably a bit under control, labor is in a little bit better positioned. So I would just love to get your kind of updated view on general pricing trends. Elizabeth Boland: Yes. I mean it's obviously the economy has been in many families have been quite stressed with the whole of inflation in general over the last many years. Child Care has, for many years, been a higher than inflation cost service, mainly because of the labor intensity that goes into it and the pandemic really added some fuel to that with significant increases to the labor cost as some significant wage steps were made early on in the pandemic. And then we continue to do increases, but they're much more market level increases over the last couple of years. So I think the parents are understanding that the cost of care is very much driven by personnel costs. We mentioned benefits costs on this call, in particular, because it is one of the important cost wage and benefits is an important element of the total rewards package for our teachers. It's one of the things that's attractive to them about our employee value proposition and why they work here, but it is a cost that we need to be continuing to bake into the overall cost structure and the tuition recovery over time. So we feel like our algorithm will continue to hold. Parents understand where the increases are coming from and the I think that our measured approach to tuition increases that tries to balance the economics, covering costs in the center as well as attracting enrollment, retaining enrollment and bringing as economic value to families and to our client partners as we can will ultimately carry the day. So we're always looking for ways that we can be effective in making the cost of care affordable to families but transparent about the fact that it does increase with -- primarily with those personnel costs each year. Stephanie Benjamin Moore: Absolutely. No, I think that's fair. And just as a follow-up, and I do apologize if I missed this, but wondering if you guys could give an update on getting back to 70% enrollment or what you view as an optimal enrollment level, just kind of update and time line there? . Elizabeth Boland: Sure. So we're in the mid-60s right now across the portfolio and about half of our centers operate above 70%. And actually, they operate above 80% on average. And so I would say that our target would still be to aim for 70% many centers performed just fine below that, 60%, 70%, it doesn't -- it's not a magic number, but it is certainly one that we aspire to in terms of critical mass in the center of the right kind of mix of age groups that bring the operating efficiency that is natural in a childhood center where this labor intensity is as high as it is. And so our view at 100 basis points a year of enrollment gain, we will be making headway on that and getting closer to 70%. But the other factor there is as we continue to rationalize the portfolio, and we have fewer centers that are operating sub 40%. We will naturally be drifting up, if you will. But it's really having the enrollment that's the most important factor. And it's -- the top group is doing well. It's doing great. They're sustaining enrollment above 80% even as the natural age up and cycling happens. So that is the most heartening part of it. It's that middle cohort of, call it, 40% of our centers that have the real opportunity to be adding 5, 10, 15 basis points of children -- 5, 10, 15 percentage points of enrollment to really get us closer to that 70% average. Stephen Kramer: Great. Well, thanks again for joining us on the call and wishing you all a good night. . Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Thank you for standing by. Welcome to the Great-West Lifeco Fourth Quarter and Full Year 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would like to now turn the conference over to Mr. Shubha Khan, Senior Vice President and Head of Investor Relations at Great-West Lifeco. Please go ahead. Shubha Khan: Thank you, Morgan. Hello, everyone, and thank you for joining the call to discuss our fourth quarter and full year financial results. Before we start, please note that a link to our live webcast and materials for this call have been posted on our website at great-westlifeco.com under the Investor Relations tab. Turning to Slide 2. I'd like to draw your attention to the cautionary language regarding the use of forward-looking statements, which form part of today's remarks. And please refer to the appendix for a note on the use of non-IFRS financial measures and important notes on adjustments, terms and definitions used in this presentation. And turning to Slide 3, I'd like to introduce today's call participants. Joining us today are David Harney, our President and CEO; Jon Nielsen, our Group CFO; Ed Murphy, President and CEO, Empower; Fabrice Morin, President and CEO, Canada; Lindsey Rix-Broom, CEO, Europe; Jeff Poulin, CEO, Reinsurance; Linda Kerrigan, our appointed Actuary; and John Melvin, our Chief Investment Officer. We will begin with prepared remarks, followed by Q&A. With that, I'll turn the call over to David. David Harney: Thanks, Shubha. Please turn to Slide 5. 2025 was a great year for Great-West, marked by strong financial results, further advancement of customer propositions and leadership transitions that position us for continued growth. We delivered record base earnings, up 11% over the previous year and a 12% year-on-year increase in base earnings per share, well above our medium-term objective. The double-digit base earnings growth in Retirement, Wealth and Group Benefits has continued our shift to a more capital-efficient business mix. The strength of our balance sheet gives us substantial financial flexibility. This includes over $2 billion in deployable cash at year-end, virtually unchanged from a year ago despite $1.6 billion of share buybacks. This is a testament to the strong cash generation profile of our business. We also continue to bring an increased focus on shareholder value during the year. Our record performance, strong balance sheet and our continued commitment to driving shareholder value through disciplined capital deployment have contributed to strong total shareholder return we delivered in 2025. Please turn to Slide 6. As I already mentioned, we delivered record base earnings per share in 2025, up 12% from the prior year, primarily owing to strong growth in our capital-efficient businesses. This helped drive base ROE of 18.2% with our U.S. business crossing 20% for the first time. We continue to reinforce our position as a leading player in Retirement services and Wealth management, ending the year with total client assets of $3.3 trillion, of which more than $1 trillion represents higher-margin assets under management or advisement. In 2025, Empower crossed the $2 trillion mark for the first time, highlighting the incredible progress the business has made in attracting and retaining customers. Robust capital generation has supported significant return of capital to shareholders, maintained our LICAT ratio above target levels and reduced leverage. In addition to the $1.6 billion of share buybacks in 2025, we've repurchased $250 million in common shares so far this year and may repurchase up to 20 million shares this year under our renewed normal course issuer bid. Given our strong results and financial position, we are delighted to announce an increase to our quarterly dividend of 10% to $0.60 per common share. Please turn to Slide 7. As we reflect upon 2025, it's important to recall that less than a year ago at our Investor Day in Toronto, we unveiled our updated medium-term financial objectives. We reiterated our objectives for base EPS growth and dividend payout, raised our base ROE ambition and introduced a new objective for base capital generation. Recent growth in base earnings per share has consistently exceeded our objective, supported by strong global equity markets and favorable currency movements. The consistency of these results and the consistency of the delivery from each of our 4 segments makes us very confident of achieving our growth ambitions in 2026 and beyond. With higher growth in the capital-efficient Retirement and Wealth businesses, we are well on track to deliver ROE of over 19% in the medium term. We've maintained our disciplined and consistent approach to dividends all throughout, maintaining a payout ratio around the middle of our range. And finally, we are pleased that our base capital generation this year exceeded 80% of base earnings, while at the same time, deploying considerable capital in our Capital and Risk Solutions business this past year to take advantage of compelling opportunities in the market. Please turn to Slide 8. Each of our businesses performed in line with our growth ambitions in 2025. This performance is a credit to our clear strategies, focused execution and commitment to delivering for our customers. The U.S. and CRS comfortably met our medium-term growth ambitions on a constant currency basis. In Canada, our results were adversely impacted by lower earnings on surplus due to falling yields. Adjusted for this, base earnings increased by 6%, a very strong result on the back of 7% growth in 2024. In Europe, earnings on surplus decreased significantly as a result of the nearly $2 billion in dividends paid to Great-West over the past 24 months, which exceeded the earnings of the business by a significant margin. Adjusted primarily for earnings on surplus, base earnings growth for Europe was 7% in constant currency. Overall, I am pleased with the strong underlying momentum across all 4 business segments, which gives us confidence, as I said, on continued growth in 2026 and beyond. Please turn to Slide 9. As I shared last August, we're focused on 4 execution priorities in bringing our strategy to life. I am pleased with the significant progress we have made against each of these priorities in just the past year. Let me highlight a few examples. We have continued to strengthen our Wealth platforms, which are seeing the most promising growth opportunities. Empower Wealth exceeded USD 100 billion of client assets, driven by -- driven in large part by increasing rollover sales with net new assets alone driving net flow organic growth of 14%, which added to market growth during the year and increased operating margin drove an increase in base earnings of [ 26% ]. In Canada, we continue to bolster the platform with book acquisitions and greater integration of the dealer network. And in Europe, we achieved record retail net flows of $4.2 billion as Irish Life continues to expand its market presence. We are also deeply committed to delivering best-in-class service for our customers. There is no better example of this than the strides we have made in expanding Empower's workplace offering with the introduction of private market investments for 401(k) participants, expanded consumer-directed health options and a broadened suite of stock plan administration services. At the same time, we continue to invest in and accelerate the use of new digital technologies, including AI. In Canada, that includes the launch of CaLi, our first AI assistant that is helping to streamline workplace plan member inquiries. And Irish Life is seeing the continued development and utilization of CARA, which has revolutionized the claims process through advanced AI. And finally, we made tremendous progress in streamlining our operations. This included the ongoing optimization of our balance sheet in the U.K., which has yielded more than $2 billion in capital benefits since the start of the program in 2024. And in 2025, CRS ceased writing new mortality risk reinsurance in the U.S., thereby devoting more resources to Capital Solutions where risk-adjusted returns continue to be significantly more attractive. I'll pass now to Jon to provide more detail and insights into our performance. Jon Nielsen: Thank you, David, and good morning. Please turn to Slide 11. Lifeco delivered record base earnings for a third consecutive quarter. Results in the fourth quarter were supported by strong new business volumes, constructive global equity markets and approximately $0.04 per share of tax benefits. Base earnings grew 12% year-over-year with double-digit growth across the U.S., Canada and Capital and Risk Solutions. In addition, we repurchased nearly $1 billion of common shares during the quarter, contributing to the 13% growth in base earnings per share. As a result, Lifeco's base ROE increased to 18.2%, up 70 basis points from the prior year and well on track towards our medium-term objective of 19% plus. In the fourth quarter, net earnings were principally impacted by the previously announced restructuring plans and unfavorable market experience from interest rates. Please turn to Slide 12. We are pleased that total credit losses were marginally lower than our expected annual range of 4 to 6 basis points. This quarter's credit experience was primarily attributable to a single commercial property in the United States. As a reminder, total credit experience is the aggregate of credit experience shown in our drivers of earnings disclosure as well as our retirement and Wealth P&L statements, all of which are included in the supplemental information package. Going forward, we continue to expect annualized credit experience to be in the range of 4 to 6 basis points and under normal conditions to be at the low end of this range. Now turning to our results by segment, starting with Slide 13. Empower delivered double-digit growth with base earnings up 17% year-over-year in constant currency, reflecting continued organic growth momentum across both Retirement and Wealth. In retirement, strong equity markets drove double-digit growth in average client assets. Planned flows for the second half of 2025 were USD 29 billion, exceeding the USD 25 billion expectation we shared in the second quarter. Looking forward, we expect continued positive net planned flows in 2026, which should dampen the impact of ongoing participant outflows. The retirement results in the fourth quarter were impacted by increased share-based incentive compensation in line with the strong results delivered by Empower, which accounted for most of the increase in operating expenses. We do not expect this to recur in the next quarter. Empower Wealth continued to perform exceptionally well with base earnings up 43% year-over-year in constant currency. Rollover sales drove record net inflows of USD 3.4 billion. In fact, Empower Wealth drove an industry-leading growth in net new assets of 14%. The pretax operating margin was a record 39% this quarter, up 5 percentage points year-over-year. We continue to demonstrate the attractiveness and scalability of our wealth platform. While margins were strong in the fourth quarter, there is seasonality in marketing expenses, and we would expect the first quarter of 2026 to see increased investment in building our brand, consistent with our results in 2025. As such, the full year operating margin of 35% better reflects the near-term margin expectation for the Wealth business. Overall, the performance across the business drove a 200 basis point improvement in Empower's base ROE, which ended the year above 20% for the first time, and we remain confident in our double-digit base earnings growth outlook into 2026. Turning to Slide 14. Base earnings in our Canadian operations increased 10% year-over-year, primarily due to strong insurance experience gains, which more than offset the impact of lower yields from earnings on surplus. Group Benefits continued to deliver solid organic growth as well as favorable health, life and long-term disability experience. The profitability of this business in recent quarters reflects our continued pricing discipline. Retirement and Wealth results were supported by higher fee income due to stronger equity markets and IPC's acquisition of the Wealth business of De Thomas. Turning to Slide 15. In Europe, full year base earnings surpassed $1 billion for the first time, benefiting from favorable currency movements. In constant currency, Europe delivered growth of base earnings of 7%, adjusting principally for the reduced earnings on surplus resulting from increased dividends to Lifeco, thanks to the capital optimization initiatives that we announced at our recent Investor Day. These initiatives have resulted in higher aggregate remittances of dividends than aggregate base earnings over the last 2 years. This has driven an increase in ROE for Europe of over 250 basis points and also additional capital flexibility for Lifeco overall. We expect this trend to continue into 2026. In contrast to the full year result, fourth quarter base earnings declined 2% year-over-year due to unfavorable mortality experience and significantly lower trading gains, both of which can vary quarter-to-quarter. More notably, insurance experience remained favorable on a full year basis. The underlying sales momentum within each of the principal lines of business continued to be strong with growth in sales of over 25% across all products, if you exclude bulk annuities. The Wealth and Retirement businesses benefited from higher fee income driven by favorable equity markets and healthy net asset flows. The Group Benefits in-force book grew by 6% in constant currency, in part due to strong new business volume at Irish Life. We delivered a particularly strong sales quarter with a record $1.5 billion of bulk annuity sales, in the U.K., which reflected an industry-wide rebound in deal flow. Anticipated regulatory changes had temporarily dampened activity in the first half of 2025. Overall, for the year, our sales of bulk annuities declined in line with the overall market. With those regulatory changes now firmly in the rearview mirror, we expect bulk annuity volumes to return to growth in 2026. Turning now to Slide 16. Capital and Risk Solutions delivered a strong quarter with base earnings up 9% year-over-year in constant currency. This was once again driven by our Capital Solutions business, where continued strength in demand drove a 46% year-over-year increase in run rate insurance result in the fourth quarter and 29% for the full year. The pipeline remains robust, and we expect to remain active in the coming quarters. In Risk Solutions, we maintained a disciplined underwriting approach, prioritizing risk-adjusted returns and long-term value creation in the face of competitive market conditions. We continue to decrease our exposure to P&C catastrophe risk, which accounted for less than 8% of our run rate insurance results in the fourth quarter. Now turning to Slide 17. As we've highlighted before, organic capital generation of our businesses remained a significant source of strength. For the full year, base capital generation exceeded 80% of base earnings and free cash flow represented approximately 90% of base earnings as a result of our capital optimization efforts. This high degree of capital fungibility provides strong support for continued capital deployment while maintaining balance sheet strength. Turning to Slide 18. Lifeco's strong free cash flow continues to provide us with significant financial flexibility. In 2025, we repurchased 28 million shares for over $1.6 billion and renewed our NCIB, which allows us to repurchase up to 20 million shares in 2026. As always, we will continue to balance capital deployment through buybacks with other strategic opportunities that enhance long-term shareholder value. So far in 2026, we bought back shares for $250 million, and we would expect to return a similar amount of capital to shareholders in 2025 if compelling M&A opportunities do not emerge. Turning to Slide 19. Lifeco's capital position remains robust despite strong growth from capital deployment in our CRS business and the substantial share repurchases throughout 2025. Our LICAT ratio stood at 128% down from 131% at the end of the third quarter. As we mentioned on our third quarter call, we expected a 1- to 2-point decrease in LICAT due to seasonality in the reinsurance business. Market conditions also supported very strong new business volume in CRS at attractive risk-adjusted returns for the second consecutive quarter. New business in the second half of 2025 reduced LICAT by approximately 2 points. In 2026, we expect to maintain the LICAT ratio above 125% in normal operating conditions, even if new business volume in our reinsurance business remains elevated. Our leverage ratio increased by 1 percentage point quarter-over-quarter to 28%, reflecting nearly $1 billion in share buybacks. Lifeco's cash balance of $2.1 billion positions us for continued growth, financial flexibility and to pursue strategic opportunities, including any compelling M&A opportunities that emerge. Now before turning it back over to David for his comments on the business outlook, I'd like to make a few observations about our expectations for the year ahead. Our 2025 base earnings included approximately $0.10 per share of tax benefits, resulting in an effective tax rate of less than 16%. We expect this to be approximately 18% in 2028, primarily as a result of the growing share of earnings from Empower and recent or proposed tax changes in Canada. Earlier in my remarks, I noted that we expect credit experience to be in the range of 4 to 6 basis points as a share of fixed income assets and at the low end of this range in normal operating conditions. In 2026, this would translate to a range of $70 million to $100 million post tax, given the current size and composition of our portfolio. With that, I'll turn it back over to David for his concluding remarks. David Harney: Thank you, Jon. Please turn to Slide 21. As we close out 2025, I reflect on the impressive results we delivered over the past year. Our segments have a clear opportunity to continue their growth trajectories by delivering on their focused strategies. At a portfolio level, Great-West has substantial financial flexibility, thanks to a strong balance sheet and continued cash generation. With this strong foundation, we are well positioned to deliver base earnings in line with medium-term growth objectives. This includes our expectation that Empower will deliver double-digit earnings growth in 2026. Our confidence in the outlook for Empower is rooted in the scalability of the platform and strong rollover sales momentum. From a portfolio perspective, we remain on track to generate 70% plus of base earnings from capital-light businesses and drive base ROE of over 19% over the medium term. And we retain significant financial capacity for strategic opportunities to further strengthen the portfolio. If compelling opportunities are slow to emerge, we will continue to return capital to shareholders as we did in 2025. With the announcement of a 10% increase in our quarterly dividend and the option to repurchase up to 20 million common shares through our NCIB, we are well positioned to continue driving attractive shareholder returns. As I begin my first full year as CEO, I am energized by the strength of our businesses, the momentum we have in delivering against our strategy and the highly motivated teams we have in place to deliver for our customers. I'm confident that we can deliver on our ambitions and continue to drive exceptional value for our shareholders. And with that, I'll turn it over to Shubha to start the Q&A portion of the call. Shubha Khan: Thank you, David. [Operator Instructions] Morgan, we are ready to take your questions right. Operator: [Operator Instructions] Your first question comes from Alex Scott with Barclays. Taylor Scott: First one I had for you is on the potential for AI to offer up risks, but also opportunities. And just in light of some of the stock movement in the U.S. and concerns around disruption of wealth managers and things like that, would be interested in your take on it. And what are some of the things that you're going to look to do to take advantage of your scale and efficiency across Empower and Empower Wealth. David Harney: Yes. So on AI, like certainly top of mind and has been for a number of years now in the organization and I think the way you frame it is right. There are opportunities and risks. And like the big opportunity is around efficiency and AI industrialization of financial services and I think that's pretty well understood. We're going to see AI having a big impact on all of our customer touch points and on the operations behind those within the back end of the business. Last year, at our Investor Day, like we guided on improvement in our overall efficiency ratio from 57% down to 50% or below. That was in advance of, I think, full appreciation of the AI efficiency opportunity that's ahead of us. And at this point, we're very comfortable on exceeding and going below that 50% level, and we'll share more during the year on how we expect to deliver I think, further efficiency gains beyond that. I think the thing that's more top of mind for people now is around the risk and just how AI might change advice. I will say that sort of hybrid advice, AI-assisted advice is well up and running in financial services already. It's in use in all of our call centers. It's gathering information in the background to help agents and advisers. It's monitoring advisers, it's prompting advisers, and it's racking up calls. So that AI-assisted advice is already in existence. And I think there's a lot of parallels to that AI-assisted advice and say, the AI-assisted driving that we're all used to now. So -- but I think what people are wondering about is can we move to full AI advice and how that might impact on models. I think the jury is still out a little bit on that. Our view is still that people will look for human in the loop advice. But it is possible some people will be more comfortable with AI-only advice. And again, I think from our point of view, the most important thing is that people get good advice. People are saving for retirement. These are complex decisions and people get good advice. It is interesting if you go into ChatGPT and tell ChatGPT, I'm a 401(k) participant, I've saved 400,000 and I'm retiring in 6 months. What should I do? It will have a very good conversation with you on withdrawal rates that you should be thinking about from your fund. It will have a very good conversation with you on the asset allocation you should have. It will have a very good conversation with you as well around equity and market risk and explaining the most important thing is not necessarily a fall in the market, but when it happens, that's what we call sequencing risk, and it explains that very well. It will have a very good conversation then on strategies around that, whether it's bucketing, whether it's partial annuitization or whether it's just your overall asset portfolio. But at the end of the day, what it says then when it comes to picking is you need to pick a platform that has basically access to all of those product propositions. It will talk about the importance of price and it will talk about the importance of good service. And for that, increasing scale just becomes more and more important. And we have that in all of our markets, but particularly in the U.S., what we've built is a large open architecture efficient platform that has the best access to different product propositions, has the best service delivery and has the best price. So we will continue to believe that advice will be very important, and we're very comfortable on the different routes that people get to that advice. So I could pick any of these segments, but Ed, you might just want to share a little more on the work that's been done on AI within the U.S. Edmund Murphy: Yes. Thanks, David. I appreciate the question, Alex. I would just echo some of David's comments. I would say, in general, we're very constructive on AI in terms of the impact that we think it can have, particularly on our Wealth business. We've always subscribed to the hybrid model. If I think back to the acquisition of Personal Capital in 2020, that was at the time, the preeminent digital hybrid wealth management platform in the U.S. And if you look at our Personal Wealth business today, there's multiple use cases of AI that are currently being deployed across the personal Wealth business. We're using AI to improve sales and service supervision. We have over 1,000 advisers. So think about it from a regulatory standpoint, the requirements that we have to supervise every single call to catalog every single call and then to provide qualitative coaching back to those individual advisers and the training associated with that. So that -- it's being leveraged there from a sales coaching and training standpoint. We're also using it to -- for prospect targeting and identifying opportunities with existing customers. I mean, think about our business, we have 900,000 customers. So when you think about the deployment of advice, particularly in the mass market where you have clients that are less complex, their needs are less complex to be able to leverage AI as an advice delivery mechanism is powerful, teeing up that next best step for customers. So again, I'm encouraged by the early results that we're seeing. My expectation is that it should free up capacity and lead to deeper conversations between advisers and clients that build trust, loyalty and ultimately, over time, greater share of wallet, right? I mean the whole intent here is to earn their trust so that they will aggregate more of their assets with Empower versus somebody else. So that's sort of where we are on the journey. It's still early days, but I'm very optimistic about the impact AI can have on our business. David Harney: Yes. I just add that's 900,000 wealth customers with a pipeline of 19 million customers in our businesses. Taylor Scott: Yes, that's all really helpful. Second question and connected in ways to the last conversation is just the M&A interest you have. Could you help us frame anything around the amount of dry powder you have available and that sort of thing as well as what is of interest maybe geographically or the types of businesses, et cetera? David Harney: Yes. So maybe I'll just explain where our interest lies. Jon can follow up and just give some numbers on our dry powder, if you like. I think the first thing to say just standing back from an acquisition interest is, as we explained at Investor Day, we're very confident around our medium-term financial objectives. And to achieve those, we're not dependent in any way on acquisition, and that's totally the right place to be. So that means we can have a very high bar, which we do when it comes to looking at any potential acquisition. So there have to be a strategic fit to our existing 4 segments. So that means they have to add scale or capability to our existing strong market positions. They have to deliver on our internal return requirements and they have to add to future EPS growth and capital generation. And then we have to be very, very confident on execution, just our ability to execute on those. So we look at opportunities across all of the 4 segments. We look at many opportunities. We follow-through only on a minority of those because of the high bar that we put in place. But when we do follow-through then our track record on implementing and integrating acquisitions is like it's 100% over the last number of years. Like it won't be a surprise that our main interest is in the U.S. because, obviously, where we have most confidence given our recent track record is in workplace and our ability to integrate those businesses. But we do look in other segments as well. We've made recent 12 acquisitions in Europe and in Canada and across the different segments, we've done other types of acquisitions as well. So we look across all of the segments. We're patient on waiting for the right opportunities. And I would say maybe just on order, if we did move ahead with an acquisition outside of the U.S., we wouldn't see that as a barrier in any way to future acquisition opportunities in the U.S. So Jon, you might want to give some color just on our dry powder. Jon Nielsen: Yes. Thank you, David. Alex, we -- obviously, we have about $2 billion of excess cash at the holding company that's been fairly consistent. And if you look at our medium-term group objectives, what we've indicated is we're going to be highly cash and capital generative. So we're going to continue to see significant cash flowing to the holding company that gives us a lot of flexibility as you look forward. We've been generating free cash flow in excess of our capital generation as we've optimized -- gone through some of those optimization activities. We usually like to keep around $500 million of cash at the holding company. So that's about $1.5 billion. Then if you look at the excess capital that we have in our Canadian Life operation -- Canada Life operations, that's about $2 billion. Our U.S. business also has excess capital of about $1 billion. So before you look at any balance sheet capacity from a leverage, and we worked this down significantly, we're around $5 billion of excess capital. And then if you look at what we've kind of said in the past, a 30% leverage ratio wouldn't be unusual for us. That gets you to $6.5 billion. And in exceptional cases, for the right acquisition, we've been able to go above north of that 30% leverage. And then as you will recall, pay it down quite quickly. So that would add more capacity. So we're well positioned. We're pulling on all the -- as we shared our capital allocation framework, we're pulling all the levers, maintaining a strong balance sheet, investing in strong new business. We deployed about 2 points of capital, growing the dividend double digit and then obviously, continuing to look at M&A opportunities. So we're pulling all those capital allocation levers, and we have plenty of capacity if something comes up. Operator: Your next question comes from Mike Ward with UBS. Michael Ward: I was wondering if we could just touch on the potential pace of capital return. I just thought the $250 million year-to-date was pretty strong. Jon Nielsen: Yes. Thanks, Mike. As we indicated, we continue to buy back shares into the first quarter, it's $250 million. As I just shared, we're going to generate quite a bit of free cash flow this year. That free cash flow, we're not going to let -- let's say, we will park it temporarily. So you -- in the event that there aren't compelling M&A opportunities, there's no reason to believe we wouldn't return in order of what we did last year, which was about $1.6 billion in terms of buybacks. But that may not be a straight line. Obviously, we're always looking at market opportunities. Last year, it was back-end weighted. We did $1 billion in the fourth quarter. But in the event that we don't see anything compelling, and I think David laid out the thought process, the bar is high for M&A. If we don't see anything compelling, there's no reason to believe we wouldn't return as much as we did at least last year. Michael Ward: Okay. And then I was just wondering if you could sort of comment on the competitive environment for actual retirement blocks out there in the U.S.? I know we've kind of [indiscernible] touched on the competition and the developments on the Wealth side. Just kind of wondering about like actual retirement competition. David Harney: Yes. So maybe on the workplace first, and Ed can follow up maybe on just closer observations from the U.S., and like it's probably a little more competitive than when we made our recent bigger acquisitions, but not hugely so, I would say. So more our point of view is like, obviously, it has to be a right price, but it will be just the mix of business that's in any target and just how clean it is. So that's probably a bigger consideration than price. And then as you go down, further down the scale, then there's smaller opportunities. Again, it's really around cleanness and ease of integration. So prices are probably a little bit above, are more historic -- our recent historic transactions, but not substantially so. Ed, I don't know if there's anything you want to add to that? Edmund Murphy: No, I might just say that clearly, we're one of the few strategic acquirers in the market. These opportunities really don't lend themselves to financial sponsors typically. And we're obviously a very credible buyer and have delivered on expectations. So for someone that's looking to sell that wants to get their employees and their clients in the right place with the right provider, I think we represent a very attractive option. So -- and I think in some ways, we stand alone as a core strategic acquirer on the space. Operator: Your next question comes from Doug Young with Desjardins Capital Markets. Doug Young: Maybe just starting with CRS for Jeff. I mean there was a pullback, I guess, in the P&C retrocession market. Can you talk a bit about that, the financial impact that it had maybe this quarter or what you're expecting going forward? And then you're pulling back from this business, you pulled back from U.S. mortality. Any other changes or any other pressure points that you see kind of on the horizon across your businesses? And I know this Capital Solutions business is doing well. I'm more thinking about the areas of pullback. Jeff Poulin: Thanks, Doug. Yes, it's a good question. So on the P&C market, the last 3 years, like maybe explaining the market wherein we're doing retrocession business. So our customers are reinsurers and they're looking for cover in case of very big catastrophe. We tend to cover business in the U.S., Europe and Japan, the three big insured markets. So that's really what we're trying to focus on. Earthquake and windstorms are the main perils. And so in the last 3 years, there hasn't been very many catastrophe in the market. Our portfolio has not been touch much. We had a small loss on the California fires last year. But for the most part, it's been pretty quiet. So what we saw at renewals is the rate that the clients were offering were about 20% lower than the prior year. So those rates are less attractive to us. And I think it's cyclical, right? Like that market is cyclical. You get a few claims and all of a sudden, the premiums go up again. So this market has been good to us. We've been in it for over 20 years. It's diversifying. So I still like the market, but we -- this year, we lowered our exposure to it. We've got a certain limit internally that we're not disclosing, but that we didn't put all that limit to work this year, and we reduced our exposure. We like our core clients, so we back them up and then we use them, and then we use the rest of our capacity just when it made sense for us to use it. So we're going to see less earnings or less expected earnings from that business going forward. Having said that, we had a great capital solution year. Last year was fantastic, and we're seeing that continuing in the first quarter. So I think we should be making up the earnings missing on that line from that. Doug, that's -- the mortality business is a different decision. We've tried for many years and the returns were never good in that business, so we stopped writing the new business there. I'm not looking to stop writing any of the other lines of business that we're in. I think we like to be diversified and we remain opportunistic. If you look back 7 years, we wrote a lot of longevity, and we're very happy, and we have a book of maybe $35 billion of underlying liabilities that's producing good earnings for us. Now that Capital Solutions are hot and that this is where we see the opportunity, so we're focused on that. But as a group, I think we see our role as being very opportunistic in picking the right opportunities that are bringing good returns to this group. So we're not going to do business if the returns are less than 17% or 18%. We see our role as deploying capital in really good attractive opportunities. So that's the way we're looking at it. I'm expecting longevity to eventually come back and certainly that the catastrophe market should come back, too. So we're not talking about growing the catastrophe market, but I like the diversification it brings. Does that make sense? Doug Young: Yes. No, it all kind of fits with the way we've talked about it before. And I guess from the earnings giving up in the P&C retro, what I'm kind of getting is like don't worry about it, like you're doing well in other businesses. And so within that 5% base earnings growth target, like this does not impact any of your guidance? Jeff Poulin: No, I think we're still in the mid- to high single digit. And the way things are going, hoping it's going to be closer to the high single digit than the mid-single digit. Doug Young: Yes. Okay. And then second question, just on Europe. There's a drag from negative insurance experience and just hoping you can unpack what you're seeing there. And then, Jon, you talked about pulling $2 billion out of Europe. I mean that's a lot of money. What does that signal strategy-wise, if anything, for the European operation? David Harney: Maybe Linda, do you want to talk on insurance experience and give some broader color on insurance experience as well. And then, Jon, you can talk about the capital. Linda Kerrigan: Yes, sure. So on the insurance experience in Europe, we're really seeing volatility quarter-to-quarter, and it's really driven by the Group Benefits business and particularly this year on mortality experience. And we do expect overall at the Lifeco level when you look at all our mortality lines to continue to see volatility, mortality. But I think the key point in terms of Group Benefits business in Europe, which is the key driver of insurance experience in Europe. And I think the key point is that if you look at the full year, we were actually in insurance experience gain territory. Jon Nielsen: Yes. And Doug, on the second question, I don't think it means anything strategically. It's an operational and financial lever that we're pulling to -- as you would expect, to maximize the returns we get from all of our businesses. I think, in particular, Europe, we found those opportunities to raise capital returns. We've continued to grow the business. I think in my script, I mentioned a very strong quarter in the fourth quarter for both annuity sales, combined with a really strong year across all of -- if you look at all the other lines of business in Europe, 25% growth in all the other sales combined. So we've seen really strong growth there. So we're continuing to deploy capital to grow Europe. We're confident if you -- when you adjust for -- principally for that capital return that, that mid-single-digit objective over the medium term is a good target. And we should continue to see the returns or the ROE grow from that business both from the residual efforts that we still have to go on capital optimization and also from the -- over time, you see the growing more capital-light businesses, our Wealth and Retirement businesses in Europe combined with our other businesses. So really happy with that. And we've just made the business much more efficient from a financial perspective. David Harney: Yes. I think that's a good point on the top line growth. Lindsey, you might want to just add some color just to the top line performance we've seen recently and the outlook. Lindsey Rix-Broom: Yes. Thanks, David. Yes, I think we have -- as Jon said, I think we're really pleased with the strong sales performance that we've seen across the year, particularly in Wealth and Retirement. Obviously, we saw a bit more of a subdued first 3 quarters in bulk annuities due to some known potential regulatory changes. When that went away, we saw the pipeline come through in Q4 and saw a very strong quarter for bulk annuity. So I think we're optimistic about 2026 and continuing on the growth in all of the product lines that we've got across the businesses in Europe and continuing as well to push on with our bulk annuity business as the market returns to a bit more normality. Operator: Your next question comes from Gabriel Dechaine with National Bank Financial. Gabriel Dechaine: I just want to revisit this buyback and M&A dance, I suppose. You did reference that last year, your buyback was back-end loaded. Is that how we're going to find out if you find a deal or not that you'll have maybe modest activity until later in the year? And then just on M&A, it sounds you are being a bit explicit about it, which we appreciate and the criteria description was also appreciated. Let me ask you this about scale in existing businesses. Is there also an appetite for adding complementary businesses? So let's take the U.K., for instance, you're a group insurance provider and you have the payout annuities business. Would there be a fit for a business that's more in the group pensions like active employee group pensions market that sort of fits in with that would be sort of similar to what you'd -- not really, but kind of to what you do with Empower in that retirement accumulation and then rollover business? I know that was a lot of words, but I think you know where I'm going with that. David Harney: Yes, it's not hard to get to where you're going with that, all right. And like my overall comments on acquisition targets would be just very similar to what I said earlier, like we have a high bar. We're not under pressure to do any acquisitions. When we talk about strategic fit, though, we do talk about adding scale to existing market positions, and we have very strong market positions in all of our 4 segments. But strategic fit also covers adding capability, and that could be along the example that you gave and certainly adding workplace in the U.K. would add a capability that sits alongside the existing business segments. They can operate very well without that workplace capability, but it would add to it. But all of the other hurdles have to be met. And as I said, the most obvious place for us to execute well remains workplace in the U.S., but we would look at all of the segments, as I said earlier. Gabriel Dechaine: Got it. And on the buyback stuff. Jon, I suppose? Jon Nielsen: Yes. I mean, Dave, we don't necessarily have a set buyback target for each quarter in 2026 at this point. We've got off to a strong start and wanted to continue the momentum that we had at the end of the year. We renewed our NCIB program in January 2026. It gives us initial capacity of 20 million shares. Obviously, there's some flexibility if we would need to, to go back and increase that as well. But we just evaluate the environment. We evaluate the attractiveness of the share price and any opportunities in the market. And I would just stick back to what we said here in the event there aren't compelling M&A opportunities in 2026, you should expect us to return at least as much capital as we did in 2025 and timing being considerate of numerous factors, including the cash flow that we have from our companies and when we get it, the share price opportunities in the market and so forth. Operator: Your next question comes from Paul Holden with CIBC World Markets. Paul Holden: I want to go back to the discussion on Capital and Risk Solutions and the change in earnings mix. So I fully appreciate the opportunistic nature of the business and pursuing where margins are best at a point in time. I would have thought maybe that would translate to higher ROE, but ROE roughly flat year-over-year. So is that something that could change in '26 as you've shifted mix more through '25, maybe it becomes more obvious than the ROE number in '26? Or is there another way we can kind of see the margin improvement in the business? Jeff Poulin: That's a good question. I think that ROEs are already pretty high at 40%. So I think that -- and a lot of that comes from the Capital Solutions business. So we have deployed a fair bit of capital. This capital comes back relatively quickly when we deploy it. So that's the advantage of a 40% return. So if these transactions stay on the books long enough, it could improve the returns a little bit. But there's also some fluctuations from quarter-to-quarter. I think depending on the way we structured the deal, there might be some higher capital in the fourth quarter than there is in the -- fourth and the first than there is in the second and third quarter. So we see some of these fluctuations a little bit too and that might be what you're seeing there. But yes, I would expect that it would go up a bit because the mix is going towards Capital Solutions, which tends to have slightly higher capital -- higher return. Jon Nielsen: And maybe if I just add, I mean, deploying capital in new business, even if it isn't at the current ROE can be quite attractive from an overall Lifeco perspective. So we have high hurdles for new business, and we're getting great returns on that new business, but it may not be incremental to the 40% ROE, but still be very, very attractive, Paul. Paul Holden: Understand. In another perspective just to look at the benefits of the change in mix there, is maybe ROE doesn't change a lot, but the earnings volatility should be lower. Is that a fair conclusion? Jeff Poulin: Yes. I think that's right. There's less -- there's probably less experience change with the Capital Solutions business. There is sometimes reserve. We're depending on the experience we're getting, we could set up reserves. And then the volatility usually comes from renewal or termination, right? So you have these transactions that terminate, then you lose these earnings going forward. So that's where most of the volatility comes. But generally speaking, it's a more stable block. Paul Holden: Yes. Okay. My second question is for Jon. I think some of the numbers you gave us on how to look at excess capital across the business are new. I just want to be clear like on the -- I call it the fungibility of capital. So say, the $2 billion of excess capital in Canada Life, for example, like if you were to do a deal, in the U.S. Workplace Solutions, which is clearly where you've pointed to is the highest probability. Like could you actually extract that $2 billion from Canadian Life as an example, to use it for U.S. Workplace Solutions business? Or would that has to be used within the Canadian Life regulated entity? Jon Nielsen: I think we have a lot of financial flexibility, and we've done that. And we've shown the fungibility of our capital. Would we go down to 120% in a transaction, we could. Would we is a different discussion. We're just trying to articulate how much excess capital there is and how would we look at the framework. We have various funding sources, as you're aware. We have funding sources that are in the U.S. and within Canada Life. We have borrowing capacity. We feel very comfortable, Paul, that we have the capacity to fund most of any transactions with our current balance sheet. Paul Holden: Okay. I think I understand what you're saying is, given the type of opportunities you're looking at, you wouldn't need to issue equity. Okay. I'll leave it there. Operator: Your next question comes from Tom MacKinnon with BMO Capital Markets. Tom MacKinnon: Just a question on Empower Retirement. If I'm looking at average client assets both in quarter and for the whole year of 2025, they're up 12%, but the net fee and spread income, which is kind of a bit more of a revenue item, I guess, is only up 4% in 2025 and just up 5% in -- year-over-year in the first quarter or in the fourth quarter of '25. So -- and even if we look at the asset-based fee income, it's only up 5% last year despite the 12% growth in average client assets. So maybe you can talk a little bit about why -- what you're seeing in terms of marketplace? Why is this phenomenon that I'm pointing out happening? Is there higher competition with respect to this business going forward? And what should the outlook be with respect to net fee and spread income growth going forward? David Harney: Okay. Maybe I'll pass that over to you, Edmund, if you just want to talk about sort of mix of the revenue and just how that can change. Edmund Murphy: Yes, in terms of the mix, if you go back a few years ago, we were far more concentrated on asset-based fees. And I think over time, what we've seen is less dependency on asset-based fees as we broaden out the revenue stream. So you're seeing a good mix of spread income. You're seeing good contribution from non-asset-based fees. So the percentage of asset-based fees have come down. You're also seeing some compression in the business, which is to be expected, which is why we're very focused on continuing to lower unit cost. We had another strong year in 2025 and lowering our fully allocated unit cost, and we expect that to continue over time. So asset-based fees as a percentage of total revenue have come down as we've expanded the different sources of revenue, particularly as we've added additional product capabilities. And I think you're going to continue to see that play out going forward. Operator: Your next question comes from Mario Mendonca with TD Securities. Mario Mendonca: If I could just follow up on that line of questioning. In U.S. Retirement, there's been negative operating leverage in 2 of the last 4 quarters. And what I'm trying to wrap my mind around is if we continue to see this compression, doesn't it sort of argue for what other folks on this call are asking about, like you really do need to grow this business through M&A. And that sort of is in contrast to what you said, David, early on, where you said you don't really need M&A to reach your targets. I mean these numbers would suggest that you do because it really is hard to grow this business if you're generating negative operating leverage. Do you know where I'm going with this? David Harney: Yes, I do and I disagree. I think if you look at the full year of 2025, it's just -- it shows clearly how we can grow Empower absent acquisition at double-digit plus. And that comes from just high single-digit growth of the Retirement business and over 20% growth of the Wealth business. And the two things that makes me just very confident about the Retirement business in the U.S. are we're in positive net plan flow, which means we're winning market share every year, and that's adding to the scale of the business. And the other thing that you're seeing post the integration of all of the businesses and the building of that open architecture platform that I talked about is just the increasing scalability of the business. So operating margin has improved from, I think it's 29-point-something percent to over 30% this year. So we've had 110 basis point improvement in the operating margin of the Wealth business, and that scale advantage is just going to continue. So we expect to see very similar performance overall for Empower in '26 that we saw in 2025. So that's double-digit growth again, absent acquisition. Edmund Murphy: If I could just add, if you think about the acquisitions that we've made, particularly the option tracks back in late 2024, where we're providing equity plan administration. We have far more revenue levers on the workplace side than we've had historically, which I think speaks to what we talked about earlier in terms of broadening out the revenue base and the sources of revenue. I'm actually tremendously optimistic about our ability to drive stronger penetration with services like health savings accounts, flexible spending accounts, equity plan admin, actuarial consulting across our 90,000 corporate sponsors. Including in that would be executive services, where we're taking a lot of our personal wealth capabilities and we're bringing them to the workplace, offering advice and financial planning. And that's still very much in the early days. So I would concur with David. I mean, obviously, M&A would be additive and accretive when we do it well and we know how to extract the synergies. But we can continue to grow the workplace business very attractively provided we can execute on this multiproduct approach that we've been pursuing. So again, I'm pretty optimistic. Mario Mendonca: So let me pursue that just a little bit longer. You offered us an outlook that planned flows would be positive in 2026. That's good, but it's not a particularly ambitious outlook, though, considering that participant outflows over the last 4 quarters have been $39.4 billion. So you're going to need an awful lot of plan inflows to offset that if markets aren't giving you what they gave you in 2025. So I mean, how do you address the notion that calling plan outflows positive in 2026 isn't all that ambitious? David Harney: It's a market dynamic just with baby boomers that the overall workplace market has that 2% outflow, and that's going to persist for the next couple of years. So that's the starting point for all players. As I said, we win market share every year. So that means our net plan inflows are positive. For us, most years, that has that outflow of 2, so it brings it down to 1 or less than 1. And then you have market growth and just growth in our participant numbers that offset that. And then we have just the scale advantage that we have, which is adding that improvement in our operating margin. And then there's the revenue scale that Ed talked about. So that dynamic you talked about has been there in the last 2 years, and we've delivered on that growth in that market environment in 2025, and we expect to do the same again in 2026. Mario Mendonca: Okay. Can I just go to one other quick top... Edmund Murphy: I think, participant outflows, I agree with you on participant outflows. Frankly, it's not something we're preoccupied with. I mean if you just look at the facts, participant outflows are largely driven by higher balances, 75% of it is rate related. The people that are taking distributions typically have higher balances than the new participants that you're bringing on the platform. We added $37 billion in assets under administration in the fourth quarter. We added $230 billion for the year. And we also added net 500,000 participants to the platform in 2025. So despite the net participant outflows, the business remains strong. The pipeline is robust, and we continue to take share from the competition. And I would also note that we did roughly $7 billion in gross sales in our Wealth business in the fourth quarter of 2025, where that was predominantly coming from the workplace business. So some of it is certainly leaving the complex, but some of it's staying in the complex as well. And so I think the real issue is, are you able to continue to take share and grow the business organically at a rate faster than the market? And the answer to that is yes. Historically, we've done it, and we'll continue to do it going forward. Mario Mendonca: All right. A quick other topic. Earlier on in this call, David, in addressing a question around AI and let's call it, disintermediation or disruption, you gave us that interesting example where you go on ChatGPT and you ask a question. And you made points like and you can have a very good conversation with ChatGPT about asset allocation and everything else. And as you were going through that, just I can't think of myself, like is David making an argument for why AI, precisely the argument for why AI could disrupt this business. So help me understand what point were you trying to make there that AI is a problem? Or help me -- just help me understand what point you're making there? David Harney: The point I'm making is there's lots of different avenues for advice at the moment, like we have our own employed advisers, people can go and get independent advice. So both of those are human forms of advice, if you like. And I think they will be increasingly AI assisted and will become more efficient. But there will be an avenue of AI-only advice. And I suppose the point I'm making is the nature of that advice at the end of the day, even though it's AI-driven, is not any different to the best human advice that you get at the moment. And ultimately, that advice is going to point you to an open architecture platform that has good access to product propositions, has the best price in the market and has the best service in the market. And Power is going to do very well in that environment. Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Khan. Shubha Khan: Thanks, everyone, for joining us today. Following the call, a telephone replay will be available for 1 week, and the webcast will be archived on our website for 1 year. Our 2026 first quarter results are scheduled to be released after market close on Wednesday, May 6, with the earnings call starting at 9:30 a.m. Eastern Time the following day. Thank you again, and this concludes our call for today. Operator: This brings today's conference call to a close. You may disconnect your lines. Thank you for participating, and have a pleasant rest of your day.
Operator: Good day, and welcome to the Callaway Golf Company Fourth Quarter 202 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katina Metzidakis, Vice President of Investor Relations and Corporate Communications. Please go ahead. Katina Metzidakis: Good afternoon, and welcome to Callaway Golf Company's Fourth Quarter Earnings Conference Call. I'm Katina Metzidakis, Vice President of Investor Relations and Corporate Communications. Joining me on today's call are Chip Brewer, our President and Chief Executive Officer; and Brian Lynch, our Chief Financial Officer and Chief Legal Officer. Earlier today, the company issued a press release announcing its fourth quarter 2025 financial results. Our earnings presentation as well as our earnings press release are both available on our Investor Relations website under the Financial Results tab. Aside from revenue, the financial numbers reported and discussed on today's call are all non-GAAP measures. We identify these non-GAAP measures in the presentation and reconcile the measures to the corresponding GAAP measures in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. Please review the safe harbor statements that are contained in the presentation and the press release for a more complete description. With that, I'd like to turn the call over to Chip. Oliver Brewer: Thanks, Katina, and hello, everyone. Before jumping into our results, I'd like to take a moment to reflect on the significant changes we've made to our business over this past year. In May, we successfully completed the sale of the Jack Wolfskin Outdoor Apparel and Gear business to Anta Sports for $290 million, representing an important first step towards refocusing our strategic priorities on our core golf equipment and apparel businesses. Then just last month, we announced the successful completion of the sale of a 60% stake in the Topgolf business to Leonard Green & Partners in a deal valued at approximately $1.1 billion. We've received approximately $800 million in cash in this transaction and immediately repaid $1 billion of our Term Loan B debt. Following the deal close and the repayment of the debt, we are in a net cash positive position. And we anticipate generating positive cash flow this year, returning capital to shareholders and ending the year with a continued net cash to zero net leverage position. We also expect Topgolf to thrive going forward and that this transaction will provide our investors with the upside of Topgolf without any operational involvement from the Callaway management team and with no financial obligations. Importantly, all Topgolf lease and debt obligations stay with the new Topgolf entity with no recourse back to Callaway Golf. With these transactions behind us, we've returned to our roots as a leading pure-play golf company, including returning to our prior name Callaway Golf Company. I'd like to take a moment to thank the teams for all the hard work they put in to help us make this transition complete. The excitement in our headquarters in Carlsbad is now palpable as we turn our focus to bring the company vision to life, which is to make the game better for every golfer by being the global leader in innovation, performance and craftsmanship across premium golf equipment, apparel and accessories. Now turning to our results. In Q4, Topgolf performed roughly consistent with expectations, finishing the year with a strong second half. We're optimistic about the future of this business. As we are now a minority partner in a private business, we will no longer be reporting on this business during our earnings calls. We're back to being a pure play, and this is back to being a golf-focused call. To that end, I'm pleased to report the Callaway Golf Company's Q4 results were better than expected in both the top line and in EBITDA. This applies to all regions as well as both TravisMathew and Callaway Golf. Now stepping back to look at the big picture. There is no doubt that the last several years have proven that the game of golf is as healthy as it's ever been or certainly as I've ever seen in my career. And according to the National Golf Foundation, 2025 was no exception. The year ended with U.S. rounds played up 1.2%, marking another record year, the third consecutive year of growth and the sixth year of increases over the last seven years. Golf's U.S. reach, including those who play, watch, read about or follow golf, is now more than 136 million or approximately two out of every five Americans. Participation in off-course golf grew once again and is now estimated to be 38 million, an increase of 63% since 2019. And this growth in off-course golf is clearly supporting more interest in the game and creating a greater on-ramp for on-course golf. On-course golf participation is now estimated to be 29.1 million and is up 20% since 2019. Over the same period, on-course participation by women is up 46%. Young golfers aged 6 to 17 years of age is up 58% and participation by people of color is up 61%. These are terrific numbers and trends. The sport and business of golf is clearly in a good spot. At the same time, Callaway, Odyssey and TravisMathew remain impressively strong brands, a position they have enjoyed for some time. On the golf equipment side, Callaway maintains a top 2 market share position in both clubs and balls in the U.S. and a top 1 or 2 club position in every primary market we compete. This past year on global tours, the Callaway and Odyssey brands saw 61 driver, 92 putter and 35 ball wins. We are generally viewed as the leader in technology and innovation globally, and Odyssey remained the #1 putter across global tours. Turning to the Apparel and Gear segment. Our Callaway and OGIO gear and accessory business remains strong, and TravisMathew remains a premium scaled men's apparel and lifestyle brand with a growing presence in women's. Furthermore, on a net of new tariff basis, we drove meaningful improvements in our golf equipment gross margins last year. We also managed two strategic processes at corporate, delivered strong cash flow and transformed our balance sheet. Turning to the year ahead. We are very proud of our new product for 2026 across the company and initial feedback on our new golf equipment from both our green grass and retail partners has been strong. On the club side, we launched our Quantum family of woods and irons as well as our new Odyssey AI dual putters. These are engineered with groundbreaking technology across every category. The new Quantum driver, in particular, introduces a revolutionary Tri-Force Face, which we believe is the most advanced face technology in the world, consisting of three materials, titanium, poly mesh and carbon fiber, engineered for exceptional speed and spin consistency and thus delivering improved distance and dispersion. On the ball side, we're excited about the second iteration of our premium Chrome Tour family of balls, which are designed to deliver more speed along with unmatched consistency and overall performance. As we get ready for the peak spring and summer sales seasons, we are excited about our new product offerings across our business as well as healthy market fundamentals. At the same time, there are some external factors to consider. First, incremental tariff expense of approximately $40 million in 2026 on top of approximately $35 million last year is driving higher than historical price points in several categories. In addition, although the golf consumers remained healthy and engaged over the last year, both overall consumer confidence and job growth have been at lower than desired levels. Taken all together, these dynamics warrant close monitoring. Still, as we return our full focus to our core business, we're excited about the opportunities we see. And we're seizing this moment as a newly focused company to make three fundamental changes that we believe will maximize efficiency and drive long-term improvement in both our share and our margins. First, we are pulling back on sales of some of our lower-margin categories and channels across the business. Secondly, we're making incremental investments into our fitting program, an area that is important for us to maintain our leadership position in equipment. And thirdly, we will be making some changes to our launch cadences, taking a longer-term view on a product line that we would have normally launched this fall and extending product life cycles in another. These changes will have a negative impact on our revenues this year, particularly in the second half, but should improve our long-term profitability and market share going forward. In conclusion, we ended last year on a fantastic note, executing two transformational transactions and returning to our roots as a leader in golf with a strong balance sheet and the opportunity to drive further improvements in our business. However, we're not content. We see opportunity, and we believe that our renewed focus will drive an even stronger company going forward. We know our teams are fired up to take on this challenge. Our management team is entering 2026 clear-eyed, energized and optimistic about our opportunity as a pure-play golf company again. Thank you for taking the time to join our call today. And with that, I'll turn it over to Brian. Brian Lynch: Thank you, Chip, and good afternoon, everyone. As you will see, following the sale of the Jack Wolfskin business and the 60% interest in Topgolf, both businesses have been reflected as discontinued operations in our financial results. As required and to make prior periods comparable, the prior periods have also been restated to reflect the discontinued operations presentation. On today's call, I will be discussing our financial results for our continuing operations on a non-GAAP basis. Unless otherwise noted, all comparisons are on a year-over-year basis. Before jumping into results, I want to review some details surrounding the Topgolf transaction, which you can see on Slide 7 and 8. As Chip mentioned, we are very pleased with our recent Topgolf transaction, which reestablishes us as a pure-play golf business, while our 40% minority stake preserves our ability to participate in any future upside at Topgolf. In terms of the specifics of the transaction, we sold a 60% stake in Topgolf based on a $1.1 billion valuation. The sale proceeds and related financing transactions resulted in approximately $800 million in cash proceeds, net of working capital adjustments and transaction costs. We subsequently used this cash as well as a portion of the cash on our balance sheet to pay down $1 billion of the $1.2 billion term loan debt. In addition, immediately following the repayment of our loan, we had approximately $480 million in outstanding debt, which includes $258 million of convertible notes and $166 million in remaining term debt as well as unrestricted cash and cash equivalents of approximately $680 million. As a result, there is currently no net leverage on our business. We are in a net cash position. We intend to settle the $250 million of convertible notes due May 2026 in cash and expect to end the year in a net cash to 0 net leverage position. Looking ahead, Callaway Golf's capital allocation priorities are to: one, reinvest in our business; two, maintain a healthy balance sheet; and three, return capital to shareholders through the $200 million stock purchase program we announced last month. Before moving to our results, I want to reiterate one point that Chip made. Callaway Golf has no future cash obligation to Topgolf. All of Topgolf's debt, including its venue financing debt and operating leases as well as any new debt raised in the transaction went with Topgolf as part of the transaction. There is no recourse against us for any of Topgolf's debt, venue financing or operating leases. Now turning to our financial results. We are pleased to report a strong close to 2025 with fourth quarter and full year financials exceeding our expectations for revenue and adjusted EBITDA. Starting with full year results. Consolidated net sales were down slightly, primarily due to a 1.4% decrease in our soft goods segment, which was impacted by soft market conditions globally. Golf Equipment sales were approximately flat. With regard to tariffs, in 2025, the company incurred $34 million of incremental tariff costs, of which $25 million impacted our Golf Equipment segment, with the remainder impacting the soft goods segment. Our full year consolidated gross margin declined approximately 60 basis points to 42.2% due to the $34 million of incremental tariffs, which impacted gross margins by 166 basis points. Our Golf Equipment gross margin, however, actually increased 10 basis points and importantly, would have increased 189 basis points, excluding tariffs. These results are a testament to the hard work and good progress our teams have made on our gross margin initiatives. Our operating expenses increased 1% as our cost savings initiatives offset almost all normal inflationary pressures and the year-over-year increase in annual compensation expense. As a reminder, we paid very little annual incentive compensation in 2024. Adjusted EBITDA was $222 million, representing a $39 million decrease. This result was better than expected. FX had a minimal impact on our full year 2025 results. Moving to quarterly results. Fourth quarter consolidated sales of $368 million decreased 1% year-over-year. This decrease was due to an $11 million decline in golf equipment sales due to fewer second half product launches, partially offset by a $7 million increase in our soft goods segment. Q4 gross margin declined 220 basis points to 37.4% due to a 340 basis point impact from incremental tariffs. Q4 operating expenses increased $19 million due to a $19 million increase in annual incentive compensation expense. As a reminder, we are lapping a reversal of the amount of incentive compensation accrual in Q4 last year. Adjusted EBITDA of negative $25 million declined $30 million. This decrease was better than expected and was impacted by the $12 million of incremental new tariff expense and the higher annual incentive compensation expense. Moving to liquidity. As of January 2, 2026, we had approximately $480 million in outstanding debt and had unrestricted cash and cash equivalents of approximately $680 million, putting the company in a net cash positive position. And as I mentioned earlier, we expect to maintain this net cash to 0 net leverage position in 2026. Capital expenditures for 2025 were $32 million. Now moving to guidance, which you will see on Slides 13 and 14. Given our renewed pure-play focus, as Chip noted, we are making some fundamental shifts to our business to prioritize long-term margin expansion and free cash flow. For 2026 full year revenue, we anticipate a range of $1.98 billion to $2.05 billion, down slightly at the midpoint versus last year due to the fundamental changes Chip discussed earlier. As a reminder, these changes include rationalizing and reducing sales of some of our lower-margin categories and channels, and we are also planning to increase product life cycles in certain golf equipment areas, which will impact our financial results in the back half of the year. We believe both of these changes will positively impact gross margins over the long term. Moving to EBITDA. We expect full year adjusted EBITDA in the range of $170 million to $195 million. This outlook includes incremental tariffs of approximately $40 million compared to 2025 or a gross tariff impact of approximately $75 million versus 2024 and approximately $16 million in lower dividend income due to a significantly lower cash balance compared to 2025 due to the $1 billion of cash we used to pay down debt. This will, of course, also mean that we realized savings in interest expense in 2026 and is overall cash flow accretive. We anticipate 2026 CapEx to be in the range of $35 million to $40 million. Free cash flow will remain a top priority, and we expect to generate approximately $100 million of free cash flow in 2026. Now turning to Q1 guidance. For Q1, we are forecasting total revenue of $635 million to $665 million, representing an approximate 3% year-over-year increase at the midpoint and adjusted EBITDA of $110 million to $125 million. In Q1 2026, we expect an incremental $24 million of tariff expense compared to Q1 2025, and we are lapping a $12 million benefit from the early termination of our former Japan headquarters lease in Q1 last year. This is an exciting period of transformation for Callaway. As Chip mentioned, in the last seven months of 2025, we sold the Jack Wolfskin business and a 60% stake in Topgolf. These transactions and the subsequent use of transaction proceeds to reduce our debt profile, not only returned us to our core golf heritage, but also changed our capital structure such that we are now in a net cash position. We are now in the process of resetting our business by emphasizing our most profitable products and channels and reducing costs while continuing to invest in the areas that matter most for the health of the business. From this reset base, we believe we can grow sales more profitably, generate stronger free cash flow and be in a position to return significant capital to shareholders. We have strong brands and with our renewed focus on our core business, we are excited about the future. With that said, I will turn the call back over to the operator to begin Q&A. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] In the interest of time please limit yourself to one question and one follow-up. [Operator Instructions] And the first question will come from Simeon Gutman with Morgan Stanley. Simeon Gutman: I first have a question about sales and the way you approach the guidance with all the newness. Would you say you built it based on moderate product success with the newness, very successful with launch with the newness? And maybe if you think about like drivers, balls and irons, did you build in the simple price and inflation component? Or are you thinking that there's a lot more unit growth on top of that as well? And then I have one follow-up. Oliver Brewer: Simeon, I would guess that we're looking at it from a moderate perspective in direct answer to that question. We are cautiously optimistic based on what we know right now. The golf market, as you know, is healthy. We feel good about our product, our plans. We've got a proven track record where over the last 12 years, 9 of them, we were #1 in clubs. We've delivered steady growth in golf ball. We feel good about the brand, R&D delivering innovation edge, and we should benefit from greater focus being a pure play. But with all that said, it's too soon to be sure. We're not yet in peak season, and we have to see how our products and the price points perform at that time, how the weather is, et cetera. Our Q1 revenue is forecast to be up. And perhaps that's a cleaner look, but it's also a little preseason. And in the second half of the year will be impacted by the revised launch cadence. But we feel good about our position. We feel really good about the market, and we're making some fundamental improvements in the business. Specific to the second part of your question, we feel really good about all the products, but the driver in particular, we're getting very strong feedback and the technology in that product is simply outstanding. Simeon Gutman: And then the follow-up on margin. Are you in a position to say how much better the margin profile of the business could look like? And is this iterative process for you, Chip, where there are certain things you'll keep doing? And then do you reinvest what you get or you let it flow and let the business just look more profitable? Oliver Brewer: Well, we certainly are extremely focused on driving improvements in the margin and just overall strengthening the business over the long term. So we're taking a long-term perspective on this, which I think is clear. And the margin is a top priority. I also want to point out that net of tariffs, we increased our equipment gross margins nearly 200 basis points last year. And we're forecasting our total company gross margins to be approximately flat this year despite $40 million of incremental tariffs. So, on the margin front, we're on it. We're not providing specific long-term targets at this time, but we've got a good track record, and we feel good about the direction. Operator: The next question will come from Anna Glaessgen with B. Riley. Anna Glaessgen: I'd like to start with the discussion around exiting some lower-margin profile businesses across category and maybe channel. Could you expand a bit on what you're exiting and put a finer point on what the headwind is for the back half? Oliver Brewer: Sure. Sure, Anna. That really touches two of these improvement initiatives that we're making in our business this year. One is, as we mentioned, pulling back on sales of some lower-margin products and categories. And that's really a mix optimization. We're focusing on the higher octane products and categories that are most profitable and have the highest long-term potential. It will include less closeout off-price and second year product, some SKU rationalization, less low-margin products. Some examples here may be range balls, certain SMU product, things like that. And then in the second half of the year, we're making some changes on our launch timing and product cycles. Normally, Anna, we have more launches in the second half of the year in even years, if you would. And we're making a change this year, which will make that not the case. We're doing that because we believe that will provide long-term benefits, longer overall life cycles, greater focus, hopefully more impactful launches, again, less closeout, greater efficiency on our launch assets and tooling. So it will have a little bit of an impact in the second half of this year on that launch cadence item, but we believe it will help both profitability and margins going forward. Anna Glaessgen: And then thinking through the annual guide, could you maybe share some perspective on general expectations around the broader golf equipment market performance and what you're assuming as far as potential market share gains on top of that? Oliver Brewer: Sure. And we feel good, as I mentioned, about the golf market. It's been excellent over the last year. And as I mentioned in my prepared comments, the fundamentals of the golf business participation continue to be fantastic. So there's a lot of variables that will go into how this specific year plays out in our share. And I hope I answered that reasonably well in Simeon's question. We're cautiously optimistic from that perspective. But the golf market itself has been quite good, and we would expect it to remain there. Operator: The next question will come from Arpine Kocharyan with UBS. Arpine Kocharyan: I was hoping you could bridge a little bit more the growth guidance for revenue for 2026 and more importantly, EBITDA from what you did in 2025. I know you've talked about incremental tariff of $40 million. But you have taken, I think, 8% to 10% pricing in the core product line. First, does that sound right? Second, if you could maybe help us bridge then how much of that tariff impact you're able to offset through pricing and how that flows through to your revenue and EBITDA? And then I have a quick follow-up. Oliver Brewer: Sure. I'll start. On the pricing, we did take some select pricing. I do not believe it's 8% to 10% across the core product line. I think that would be more aggressive. And then Brian, why don't you talk about the delta between EBITDA between the years? Brian Lynch: Sure. At the midpoint, it's down about $40 million, and that represents the $40 million of incremental tariffs that we'll have in this year as well as $16 million less in dividend income in 2024. I mentioned during my script that we'll have -- our cash balance is a lot lower than last year because we paid down $1 billion of debt, and therefore, we'll just have less dividend income. Oliver Brewer: The net would have been up with... Brian Lynch: Without those two things, we'd be up. Oliver Brewer: Right. Arpine Kocharyan: Okay. And Chip, I did want to ask you about new product lineup this year, specifically about Tri-Force. What is the response you've seen from Pro shops and mainly in Sunbelt regions, although we are early in the season, obviously. But in terms of that initial feedback, it sounded like you were pretty positive and upbeat about Tri-Force. Oliver Brewer: I really am. I'm very excited about the technology. This is the type of thing that Callaway does so well and really fires us up, quite frankly. This is, we think, a breakthrough product. But just to give you an idea how early it is, the product hasn't launched yet. It launches tomorrow. So it's premature to know definitively, but we are cautiously optimistic, and we think we've got a terrific product. Operator: The next question will come from Casey Alexander with Compass Point Research & Trading. Casey Alexander: Looking at your guidance for 2026, and I understand tariffs, but you did also say that there have been some price increases to offset some of the tariffs. But it presumes about a 9% EBITDA margin. Your last year prior to purchasing Topgolf, you had about a 12% EBITDA margin. How do you refill that golf? What's different between now and then? Because that's a pretty substantial difference. And how do you eat into that golf and make up some of that ground? Oliver Brewer: Yes. Great question, Casey. And as we're back to being a pure play, we can't be more focused on that. We're excited about that opportunity. And -- to give us some color on that as well, over the last year, we would have grown our Golf Equipment margins by 200 basis points net of tariffs. So we've got more work to do. And some of that is baked into the things that you're hearing about with these three improvement initiatives, changing the mix, refocusing on the higher octane, higher-margin products and pieces of business, changing some launch cadence and the life cycles, reinvesting in fitting and driving even a higher percentage of our business there and creating some differentiated approaches. So those are the types of initiatives intended to move us back into the direction that you mentioned. Brian Lynch: And just a reminder, Casey, the tariff impact over the two years is $75 million, which has obviously impacted margins significantly. Operator: The next question will come from Noah Zatzkin with KeyBanc Capital Markets. Noah Zatzkin: I guess kind of adding on or continuing in that kind of train of thought, structurally, how are you thinking about kind of the change in mix and product launch cadence in terms of opportunity to margins? And then on the $75 million of tariffs, how are you feeling about ability to offset that, if at all, looking ahead? Oliver Brewer: Sure. Noah, those are fundamental questions. So structurally, we believe that these three improvement initiatives are what we're doing to invest in the long term and improving the long-term margin profile, but as well as improving share going forward. So these are structural investments in the further improvement of the business. And the $75 million of tariff impact, that's obviously significant. And we've been working through that over the last year plus. We've taken that very seriously. We talked about last time we spoke, restructuring efforts. We've talked about how we are working with our vendor partners. We are we're changing our mix. We're redesigning product where appropriate, and we're taking some pricing. All of these things are having the intended impact in the business. And although we're absorbing these, you can see that our projection for gross margin, which is a forecast at this stage in 2026 is for gross margins to be approximately flat. That plus the structural improvements and then further initiatives because we're building momentum on these is the plan going forward. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Chip Brewer for any closing remarks. Oliver Brewer: Well, thank you, everybody, for joining our call today. We're excited about the opportunity being back to Callaway Golf Company, a pure play with excellent balance sheet and opportunity going forward. We look forward to updating you our progress on our Q1 call, which will occur in May. Thank you, and have a great golfing season. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Morguard Real Estate Investment Trust 2025 Fourth Quarter Results Conference Call. [ Operator Instructions ] This call is being recorded on Thursday, February 12, 2026. I would now like to turn the conference over to Andrew Tamlin, Chief Financial Officer. Please go ahead. Andrew Tamlin: Thank you, and good afternoon, everyone. As mentioned, my name is Andrew Tamlin, Chief Financial Officer of Morguard REIT. Welcome to the Morguard REIT's Fourth Quarter 2025 Earnings Conference Call. I am joined this afternoon by John Ginis, Vice President of Retail Asset Management; Tom Johnston, Senior VP of Western Office Management; and Todd Febbo, Vice President of Office Asset Management, Eastern Canada. Thank you all for taking the time to join the call. Before we get into the call, I would like to point out that our comments will mostly refer to the fourth quarter 2025 MD&A and financial statements, which have been posted to our website. I refer you specifically to the cautionary language at the front of the MD&A, which would also apply to any comments that we make on this call. Our fourth quarter results were very much in line with expectations. We have continued to see softness in the office numbers with an expected decline in net operating income from Penn West Plaza transitioning to a multi-tenant building. Our retail results were stable with good rental growth on lease renewals for both our malls and retail strips. In the third quarter, we had highlighted that we had a large onetime prior year property tax refund received from one of the Trust's enclosed shopping malls. The final accounting for this represented a positive $3.8 million onetime impact on net operating income for the year. This primarily represents the portion of the refund that has been allocated to either vacant space or space where otherwise the landlord is entitled to keep the refund. We have known for some time that 2025 is going to be a tough year due to the market rent resets at Penn West Plaza in Calgary. The impact of this has continued throughout the year and finally into this quarter. The 11-month impact of this adjustment in 2025 was $16 million. This decline at Penn West Plaza is due to the expiration of the Obsidian head lease on February 1, 2025, which has resulted in a reset of rents for all tenants to current market rates. Effectively, this building has transitioned from a single-tenant building to a multi-tenant building. We are pleased with this transition, and it has resulted in an occupancy of Penn West Plaza at 81%, which is a strong rate for the Calgary marketplace. Significant inducements of opening free rent and free operating costs to secure various tenancies are also impacting the Penn West Plaza. [Technical Difficulty] Sorry about the interruption. Our net operating income for the fourth quarter declined from $33.5 million in 2024 to $29.1 million in 2025. As mentioned, this decline is primarily due to the results from the Penn West Plaza asset. Looking at 2026, we do expect our retail results to remain stable. While we have a partial year of the missing bay income to work through, we are still seeing positive retail fundamentals, and there are some retail developments we are working on, which I will touch on in a few minutes. We are expecting to see some continued softness in the office numbers in 2026 as we work through some vacancies in certain markets. Our leasing teams have noticed increasing interest in tours for office space in major urban areas as companies continue to push their employees to get back in the office. We are cautiously optimistic that this will translate into future office leasing deals into late 2026 and into 2027. Touching on The Bay. On Friday, March 7, 2025, The Bay filed for creditor protection under the Company's Creditors Arrangement Act. The Trust has two Bay locations comprising a total of 290,000 square feet of GLA, one at Cambridge Center in Cambridge and one at St. Laurent in Ottawa. The Trust's annualized gross rent earned from The Bay leases was approximately $1.5 million. In the second quarter, the Trust lease with The Bay at Cambridge was disclaimed. The remaining lease at St. Laurent was subject to a bid by Ruby Liu Commercial Investment Corp. On October 24, the Ontario Supreme Court rejected the proposal by Ruby Lui for the creation of a new Canadian department store chain. Subsequently, the St. Laurent lease was disclaimed on November 27, 2025. Management is now looking at future opportunities for these locations and are organizing short-term tenants to replace some of The Bay income. Notwithstanding the failure of The Bay, there are still lots of positives in the retail sector. We are seeing positive rental growth on lease renewals, and there remains lots of good conversations involving well-known national brands. It still remains quite expensive to construct new retail space and hence, a lot of retailers are looking at options in existing buildings rather than building new space. Further, with the exception of one location, our community strip centers are full at 99% occupancy. Sales and traffic numbers at our enclosed malls also continue to be strong. Turning to financing and liquidity. The Trust has $68 million in liquidity at the end of the year, which is down from $81 million in liquidity at the end of 2024. The Trust has $219 million in unencumbered assets along with some up-financing opportunities in 2026. The Trust believes that it has adequate liquidity to address current development initiatives. The Trust interest expense declined $1 million for the quarter primarily due to a decline in short-term variable interest rates on a year-over-year basis. Total interest expense is down almost $4 million for the full 12 months. During 2025, the Trust renewed 8 mortgages totaling $166 million, lowering the interest rate from an average of 5.4% on these mortgages to an average of 4.95% on renewal. The Trust has approximately 21% of its debt as variable at the end of the quarter, which has increased from 15% at the end of the year. We do expect to see selected opportunities for up financing in 2026 as we are currently in discussions with a number of lenders about these renewals. In general, we have seen this market open up more in the last year with lower spreads, especially on attractive assets, along with lenders being more open to look at lending opportunities for office product. The Trust continues to focus on paying down its debt, which has declined by more than $100 million over the last 4 years. As mentioned in past quarters, the Trust's operating capital reserve increased from $25 million annually to $35 million in 2025 to account for both fire repair costs as well as leasing costs. This represents $8.750 million per quarter. Actual spending for the year was $36.8 million, which was slightly down from last year's operating capital spend. A significant portion of the $15.3 million leasing capital was to secure office tenancies, which included new tenancies at Penn West Plaza, along with other office renewals in Vancouver and Montreal. Looking at our accounting for real estate properties. During the quarter, we had $20 million in fair value losses and $62 million in losses for the year. In both cases, these adjustments are primarily coming from the office asset class. Our overall occupancy level of 85.1% at December 31, 2025, has declined from 86.6% at the end of September due primarily to the extra vacancy from The Bay at St. Laurent. The decline from 91.2% at the end of 2024 is due to the increased vacancy at Penn West Plaza, along with the disclaimed Bay lease at Cambridge and St. Laurent. As mentioned in past quarters, we are now embarking on a strategic merchandising program for St. Laurent, which will see the addition of some new nationally recognized brand names being added to the tenant roster, along with expansion plans for other tenants on the existing tenant role. The current development spend in the amount of $6.4 million includes build-outs for tenants such as Sephora and H&M. These are all now open, and we've received very positive reviews about their impact. We ultimately expect to spend in the range of $25 million to $30 million as we look to add more discriminating tenants and also look to activate the former Sears space at St. Laurent. We are working on this future phasing as we look to ensure a stable, sustainable and traffic-generating mix of tenants to this asset, and we'll advise further details as they are available. The Trust has also had two No Frills grocery deals, which have been undertaken. During the fourth quarter of 2025, a new No Frills grocery store opened at Parkland Mall in Red Deer. This cost was $1.5 million and was activated -- and activated previously vacant space. There is also a new No Frills opening at the center in Saskatoon in early 2027 with a cost of approximately $5 million. The Trust believes that both of these new stores will be strong additions to these malls. Discussions have previously stalled with the provincial government tenant at Petroleum Plaza in Edmonton, which came up for renewal back on December 31, 2020, and is still in overhaul. At this point, there is still nothing to report in regards to discussions or when the space will be officially renewed. In looking at leasing renewals for 2026, the vast majority of the 1.6 million square feet of space coming up for renewal has already been contracted for renewal. Every retail tenant greater than 20,000 square feet is either renewed or expected to renew. This includes a Walmart and a Canadian Tire, which are both greater than 100,000 square feet. Further, there is only one office tenant greater than 10,000 square feet that we don't expect to renew. This includes 164,000 square feet in Montreal and 110,000 square feet in Vancouver. Wrapping up, we continue to believe that there are strong fundamentals in the retail leasing environment and that the office fundamentals have changed for the better. We are looking forward to continued positive leasing conversations for all of our assets. Most of our enclosed malls remain dominant in their geographical area and our strip malls, which are largely grocery-anchored, have performed steady. Beyond our retail assets, we have high-quality office buildings in Canada's largest markets with a high degree of government office tenants. We continue to be positive about our business and the objective of building value for our unitholders. We look forward to continuing to execute our strategy, and thank you for your continued support. We will now open the floor to questions. Operator: [Operator Instructions] Your first question comes from Jonathan Kelcher from TD Cowen, Canada. Jonathan Kelcher: First question, just on, I guess, the HBC backfill and I guess, larger more on the St. Laurent. I guess on the St. Laurent, the $25 million to $30 million that you talked about, like what should we sort of think about in terms of over how long a period that would be? Andrew Tamlin: Yes. John Ginis will expand on that, can you give me some more color? John Ginis: Okay. So as Andrew noted in his introductory remarks, we have exposure to two locations, Cambridge and St. Laurent. Cambridge, we're evaluating longer-term options as we speak, but we probably will look to invoke a short-term solution in the immediate term just to carry us through and we get some footfall through that box into the mall. With respect to St. Laurent, Andrew also noted that a sizable investment program on repurposing one of our anchor boxes, but his reference was to our former Sears location because this shopping center in St. Laurent had both the former Sears and an HBC. So the $25 million to $30 million refers to work that we look to conduct at some point over the next 2 years to repurpose a portion of the former Sears box. As it relates to HBC, again, we are evaluating longer-term objectives with respect to that box. It is 2 levels, almost 160,000 square feet. But in the short term, we're looking to activate both the upper and the lower levels, and we're currently working through some transactions whereby we would do that. Jonathan Kelcher: What sort of tenants would you put in there short term? What type? John Ginis: In the HBC? Jonathan Kelcher: Yes. John Ginis: Yes. So we're targeting fashion-focused retailers at this juncture because that's where the demand has been expressed to us. So -- and branded ones, not like ones that you will see across the country. So -- and again, it is a sizable footprint of both the upper and the lower levels. So -- but we're just following up on that and hoping to execute a short-term solution probably in the next few months for both levels. Jonathan Kelcher: Okay. So you think we can see some NOI from those spaces in 2027? John Ginis: Absolutely. With respect to HBC hoping in 2026. As it relates to the Sears situation, there's a lot of work to be done. And again, going back to the number that Andrew quoted, it's not an insignificant amount, the $25 million to $30 million. But we're currently finalizing hopefully some lease transactions on repurposing one level of that space, but the NOI contribution from those tenants won't occur until 2027. Jonathan Kelcher: Okay. And then secondly, just on the -- good to hear that most of your lease maturities are already spoken for this year. But on the retail side, just given the strength in the market right now, what sort of uplifts are you expecting to get on the renewals? John Ginis: It depends on what we're talking about here, right, Jonathan. We, as you know, our retail portfolio is split between two subsets, one being the enclosed malls and the other one being the open-air community or grocery-anchored strip centers. So as Andrew, again, going back to his comments, we have really solid occupancy in our community in our grocery-anchored strip centers. I think it's 99%, if memory serves me right. So there, where we are fully occupied, it's easier for us to get some good renewal spreads when tenants roll because of limited new supply. On the enclosed mall market, we've been very fortunate, again, because of the cost issues associated with building new retail and tenants looking to expand. We've been fortunate we've been able to cure our vacancy in some of the malls, albeit we took a hit clearly with the HBC situation here. So our data suggests that our occupancy is 86%. But if you strip those out, we're probably close to historical occupancy numbers in the mall. But when you -- to answer your question directly, better on the community anchored -- the community-based strip centers relative to the malls, but still, we're seeing some pretty good spreads on renewal and that's showing up in the results as part of our MD&A disclosure. Andrew Tamlin: I probably highlight, Jonathan, that within 2025, the malls were about a 5% uplift and then the strips were about a 9% uplift. Jonathan Kelcher: Okay. And would that be fair to think about going forward in '26, given like ballpark those numbers? Andrew Tamlin: In the retail space, it's always contingent on factors you can and can't control. All else equal, we feel pretty confident about our retail portfolio and our ability to grow our income. Operator: [Operator Instructions] There are no further questions at this time. I will now turn the call over to Andrew Tamlin, Chief Financial Officer. Please continue. Andrew Tamlin: Thank you, everybody, for joining us for the call this afternoon, and we look forward to seeing everybody next quarter. Thank you. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, everyone, and welcome to the Bridgeline Digital First Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to hand the floor over to your host, Thomas Windhausen. Sir, the floor is yours. Thomas Windhausen: Thank you. Thank you, everyone, for joining us this afternoon. My name is Thomas Windhausen. I'm the Chief Financial Officer of Bridgeline Digital, Inc. We're pleased to welcome you to our fiscal 2026 first quarter conference call. On the call with me today is our President and CEO, Ari Kahn, who will begin the call with a discussion of our business highlights. Then I'll update you on our financial results for the quarter, and we'll conclude with some questions. Before I begin, I'd like to remind listeners that during the conference call, comments we make regarding Bridgeline that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Security Act of 1934 and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. The statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and the internal projections and beliefs upon which we base our expectations today may change over time, and we expressly disclaim and assume no obligation to inform you if they do. The results we report today will not be considered an indication of future performance. Changes in our economic, business, competitive, technological, regulatory and other factors could cause our results to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more information, you can review our filings from time to time on the Securities and Exchange Commission website. On the call today, we'll also discuss some non-GAAP financial measures, and we have a reconciliation of those GAAP -- of our GAAP financials to those non-GAAP measures in our earnings release, which is on our website. I'd now like to turn the call over to Ari Kahn, Bridgeline's President and CEO. Ari? Roger Kahn: Thank you, Tom, and good afternoon, everyone. Bridgeline's core products led by HawkSearch Suite and our AI products continue to lead our growth and our customers are having an outstanding experience as they've proven with their pocketbooks when they repeatedly increase their investment into their HawkSearch subscription and purchase add-on products as well. Enhanced hosting, expanded usage packages and the AI suite are all upsells to our existing customer base. Search is the heart of the online shopping experience for both B2B and B2C sites with HawkSearch acting as our customers' online salesperson who intelligently interacts with their customers to increase traffic conversion and order size. Core products at Bridgeline are now 60% of our total revenue, growing 17% to $2.4 million this quarter from $2.0 million last quarter and was $9.2 million on the trailing 12-month basis versus $8.8 million for the prior 12 months. HawkSearch is an even larger percentage of our subscription revenue, now representing 63% of the subscription revenue at $2 million of revenue versus $1.9 million last quarter. Net revenue retention, which includes renewals and license expansion was 107% for our core product line. This demonstrates best-of-class customer satisfaction and how quickly our customers are adopting our new products. These new products include Smart Search, Visual Search, Smart Response and our latest AI agents such as the Search Assistant, Analytics Assistant and Merchandising Assistant. New customer acquisition continues to grow with an average ARR per customer increasing by 12% this quarter to $28,000 from $25,000 last quarter. After customers make their initial purchase, they tend to subscribe to additional HawkSearch products. We have more than 200 customers in HawkSearch with an average subscription per customer of $33,000, up from an average of $30,000 last quarter and up from $25,000 in Q1 of our fiscal 2025. This quarter, we sold 13 new licenses with $1.2 million in total contract value for over $350,000 in ARR and $700,000 in professional services. More than half of our new license sales include one of our AI products in their initial purchase with many customers adding AI capabilities to their license after they go live with HawkSearch. In our first quarter of fiscal '26, we won several new customers, including many B2B manufacturing and distribution customers, where we're growing so quickly and where HawkSearch was ranked #1 in Gartner's 2025 Critical Capabilities Report. Some recent new customers include a national closeout retailer with more than 170 locations and a rapidly expanding e-commerce presence who selected HawkSearch to power their online store. The retailer replaced their previous search software with HawkSearch to increase online revenue because of HawkSearch's AI-driven relevance and filtering capabilities. A leading U.S. distributor of specialty lighting products is leveraging HawkSearch's Smart Search, so their customers can search with images, concepts and questions that enhance their ability to find items quickly and accurately. A Midwest B2B distributor using to optimize the e-commerce platform launched HawkSearch to elevate its online product discovery and delivery with an exceptional digital experience to its customers in the construction, industrial, plumbing and HVAC industries. And a leading wholesale supplier serving both B2B and B2C selected HawkSearch to power product discovery across 5 e-commerce sites. This supplier chose HawkSearch for its B2B foundation, multisite support and AI-driven recommendations. Also, a national industrial B2B supplier selected HawkSearch to improve search relevancy, engage logged-in customers and enable stronger merchandising capabilities. This industrial B2B supplier used HawkSearch's AI relevance tuning and boost and Barry rules to enhance product discovery by providing precise control over how products are ranked and surfaced to customers. Because we made early investments in AI and have a clean product architecture, we're able to rapidly release new products that drive revenue for our more than 200 customers and to win more new customers against less nimble competitors. In Q1, we released Spark, our next-generation user experience platform for administrators. Spark natively integrates Hawk AI capabilities with advanced analytics, including merchandising and analytics assistance. Spark represents a significant step in modernizing the user experience, while enabling scalable AI innovation across the platforms. We've also introduced contextual fields for HawkSearch. Contextual fields enable franchises and chains to provide customer-specific pricing and availability per store. This quarter, a customer leveraged contextual fields to provide contextual information across 120,000 products and 7,000 stores with more than 1,000 real-time update per minute. HawkSearch advanced analytics API was released this quarter, and it allows AI agents to integrate with HawkSearch analytics for greater visibility into customer behavior for automating, merchandising. And HawkSearch launched AI content extractor to accelerate customer adoption by having an agent examine the customers' product catalog and marketing materials to automatically configure HawkSearch. With our pipeline of new products that drive value to existing customers and increase new customer wins, we expect HawkSearch and our core products to become over 70% of overall revenue this year, and that will drive faster, more profitable growth for Bridgeline as a whole. Because of outstanding customer satisfaction, our growth is expected to continue to be efficient, allowing us to invest more in new products that drive customer and shareholder value. Now with that, I'll turn the call over to our Chief Financial Officer, Tom Windhausen, who will share additional details. Tom? Thomas Windhausen: Great. Thanks, Ari. I'll provide an update on our financial results for the first quarter of fiscal 2026, which ended December 31, 2025. Our total revenue for the quarter ended December 31, 2025 was $3.9 million compared to $3.8 million in the prior year period. As we look at components of revenue, we'll start with subscription revenue, which is comprised of our SaaS licenses, maintenance and hosting. And for the quarter ended December 25 was $3.2 million compared to $3.0 million in the prior year period. As a percentage of revenue, that puts subscription revenue at 81% of total revenue for the quarter ended December '25. Moving to services. The services revenue was $758,000 for the quarter ended December '25 versus $743,000 in the prior year period, and that puts services revenue at 19% of total revenue for the quarter ended December '25. Our cost of revenue was $1.3 million for the quarter December '25 compared to $1.3 million in the prior year period, and that left our gross profit at $2.6 million, an increase from $2.5 million in the prior year comparable period. The overall gross profit percentage was 66% with subscription gross margin at 69% compared to 71% previously, and services gross margin this quarter was 55% versus only 51% in the prior year same period. That resulted in operating expenses of $2.8 million for the year ended quarter, December 31, '25, down from $3 million in the prior year comparable period. And that put our net loss at $100,000 negative loss compared to a loss of $600,000 in the prior year period. And we also ended up with positive EBITDA in the first quarter. Adjusted EBITDA was a positive $122,000 compared to negative adjusted EBITDA of $193,000 in the prior year period. As we move on to our balance sheet, at December 31, '25, we had cash of $1.5 million and accounts receivable of $1.6 million, and our total debt was down to EUR 200,000, which is about USD 236,000, 3.25% average interest rate, and those payments are due throughout 2028. Besides that, we have no other debt or contingent payments or earn-outs remaining from any previous transactions. Our total assets were $15.7 million at December 31, 2025, and liabilities were $6.2 million. Looking at our cap table, at December 31, 2025, we had 12.2 million shares outstanding, 860,000 warrants and just under 2 million stock options. Those 860,000 warrants have 2 primary tranches, 167,000, which expire on May 26 at $2.85 and $592,000 with an exercise price of $2.51, which expire in November 2026. Bridgeline looks forward to continued growth and success in '26 and beyond, and we continue to focus on revenue growth, product innovation, customer success and delivering shareholder value. Thank you for joining us on the call today. And at this time, we'll open up the call to questions and answers. Moderator? Operator: Certainly. [Operator Instructions] Your first question is coming from Casey Ryan from WestPark Capital. Casey Ryan: Well, so I just want to jump into these ARR figures and make sure that we're understanding them correctly because they're impressive, right? So, I think I have -- and you guys can correct me if I'm wrong, but for '24, we talked about $18.5 million as an ARR number. And then on the last call, we talked about this $25,000 figure, and now we're quoting a $33,000 figure. That trend-wise also tracks with the new customer ARR numbers that you're giving out. I think in Q4, September quarter, you talked about 18 customers doing about $1.25 million of ARR and now you're talking about 13 customers doing $1.2 million. So, kind of the point is it's clear that people are spending more money maybe on a per customer basis. But we're not quite seeing as big a jump yet in the revenue figures. And I just want to talk about the mechanics of how ARR blends into your future numbers and impacts future numbers, I guess. Roger Kahn: Yes. So yes, so here, let's -- I'm going to tease out just a couple of details here, starting with the per customer and per new customer sales. We've got -- for winning new customers, an average of $28,000 in ARR this year. It's 12% up -- or this quarter, which is 12% up from the $25,000 for winning a new customer in our Q4. And then after those customers buy things, most of our customers end up investing even more with us. So, if you take a look at our overall revenue divided by our number of customers, we're now at $33,000 per customer compared to $30,000 last quarter and $25,000 a year before. So, those are the numbers, which I think you just pointed out, and I just reiterated. Casey Ryan: Sure. Roger Kahn: So, net revenue retention is one of our core metrics that we evaluate every month, and our customer success team internally is focused on that and that's 107%. That represents customers renewing, customers buying additional products from us. And then also when customers renew, sometimes they have increased the usage of our product and we'll have to renew to a higher set of limits in their license. So, all of those contribute to our growth. And then, of course, churn, where a customer doesn't renew pulls away from the NRR. So, we feel pretty good about the 107%. It was down from last quarter. I think last quarter it was 116%, but 107% is still very good for the industry, but we had less growth this quarter than we did in our Q4 2025. Casey Ryan: I see. And maybe that response sort of leads us into the conversation. And I think the answer is there are lots of targets and customers to go after. But has anything changed? Like has the fact that your average package is going up, has that taken some people out of the market for your services just in that it's a more robust tool? Or do you still feel like there are these hundreds of thousands of people to win still? Roger Kahn: Yes. I think that the total addressable market for us has not changed. What we're seeing is that we've -- on the initial purchase last year, people were still not as inclined to buy the AI add-ons they needed to be proven. And that adoption is more ready now, more readily purchased than before. So, our customers that we won last year are now buying -- adding on to their base license Smart Search and Smart Response and the new customers are buying those more often right out of the gate. Casey Ryan: Okay. Okay. And so that's good. So, certainly, that can sort of be a tailwind for NRR sort of that like net purchase number as we move through '26. And then sort of the other question I was wondering about is, have things changed competitively? Has anybody seen your success and tried to sort of bring product into the sales channels that you are? Or have people fallen away and maybe said this isn't for us, we're not winning here and HawkSearch is gating us? Roger Kahn: Yes, yes. So, in our deals, we're still seeing the same top competitors as we did in 2025. So, that hasn't changed. And we think that one of the ways that we're differentiating now even better than we were last year is through our analytics. So, at the end of the day, you cannot have artificial intelligence without data. There's a saying of you got artificial intelligence and artificial stupidity. And if you don't have sufficient data behind these AI agents, you get dumb agents. So, what we did, which is different than what anyone else has done is we have created a data lake that allows all of our customers to have their data, their analytics, which person clicked on what link and bought what product and so forth, all provided inside of a private lake for them. And then we're creating a library of agents and they can create their own AI agents themselves that are able to monitor that lake and automatically tune HawkSearch for them based on current customer behavior. And this is really driving -- is raising a lot of eyebrows on our prospective customers and existing customers. Everyone is really excited and interested about that, and that is helping to differentiate and win more deals for us. Casey Ryan: Okay. Yes, that's terrific to hear. Sort of just -- sorry if I'm jumping around, I just want to go back to the ARR figure just for a minute. The growth in it has been impressive and very important and obviously paints a good sort of trend line to sort of future growth. Should we expect growth rates like we've seen over the last 18 months? Or has that sort of just been a spike as we've added the AI features and maybe that will start to level off and maybe not be as explosive as it's been or maybe it will continue? Roger Kahn: We're actually expecting it to continue. So, our HawkSearch had 17% growth rate this quarter, and our goal is to get that all the way up to 20% this year. So, we expect to see that continue to increase, and it will increase for 2 reasons. One is we've got a very solid pipeline of new customers that we're selling to. And two, as we continue to release products, our existing customers, which we've got more than 200 have a lot -- there's a lot of room inside of that customer base for add-on growth. So, both of those are going to contribute to that growth and allow us to grow even quicker. And kind of going back a little bit to your previous question, the -- our sweet spot market, so we sell to B2B and B2C, but we've really been very strong in B2B manufacturing and distributors. And that marketplace itself is relative to our size, infinitely big and is maturing very quickly with respect to technology adoption. So, we feel really good about that specific market in addition to selling elsewhere, but we want to be very targeted with our marketing dollars and most of them point towards that market because we have such a high win rate there. Casey Ryan: Right. Okay. And thank you for mentioning the marketing dollars. I know you didn't call that out specifically, but there were some, I think, indication that last quarter, you guys were saying, "Hey, we want to spend more -- a little bit more on sales and marketing and do it smartly. As we've gone through just this sort of October, December period, have you felt like the spend has matched what your plans were? Or have they been above or below? Or how qualitatively? Roger Kahn: Yes, yes. So, we did a pretty good consistency with our cost per lead. So, the marketing dollars are working well. We do want more marketing dollars, but not by injecting capital at bad dollar rates. So, there's a lot of room for growth for us. And the marketing is effective. We're seeing great success at industry conferences. An example of one that we do very well at is B2B online Chicago each spring. We also have our own customer conference that our partners are invited to and they actually do sponsorships. So, about 60% of the cost of that customer conference is actually covered by our partners. Our customers come to that, prospective customers do, and that has a great impact on revenue as well and is very efficient. So, we're feeling pretty good about the marketing dollars, and we need to continue to find ways to invest even more because we know which campaigns work, which conferences work and where to be. Casey Ryan: Right, right. Okay. Terrific. One last question. Just on the gross margin line. It's been pretty stable within a few points, I think, for quite a while. And is that something we should expect? I mean, is there any reason to think that maybe with the new products that we're burdening the GM line a little bit or maybe there's some expansion because of the pricing changes. But what are your thoughts about just kind of that mid-60s range, if that would be expected to change meaningfully? Roger Kahn: Yes. Yes. So, we do expect to -- the combined gross margin of our services and subscriptions to stay in the mid-60s, 65% to 67%. And we look at that on a line item basis in terms of our professional services gross margin and our subscription gross margin because there's different characteristics within those. This quarter, our services gross margin was unusually high. It was 55% plus another -- and then 69% for subscription. On the services line, the low 50s, I think, is where we're going to continue to be. So, maybe say, 53% running there, which is a little bit better than last year, but it's because the value that we're delivering, especially in the context of a lot of the AI initiatives is so much higher that we are able to bill a higher rate. And then on the subscription side, which is dominated by our hosting costs, should hover around 70% going forward. So for the rest of this year, that's what we should be looking for. And then you combine the 2 of those together and you can call that between 65% and 67%. Casey Ryan: Okay. Great. That's a terrific outlook and really very strong trend continuation from last year. So, congratulations on a good quarter and I'll jump back in the queue. Operator: Thank you. [Operator Instructions] Thank you. There are no further questions in the queue. Roger Kahn: Well, thank you, everybody, for joining us today. We appreciate your continued support, the support of all of our customers, partners and our shareholders. We're excited about our business and ongoing growth prospects. This is an exciting time indeed. AI is making huge changes to the industry, especially marketing, and we have made the investments to continue to innovate in this area, very exciting time. We look forward to speaking with you again on our second quarter fiscal 2026 conference call, which will be in May. Until then, be well. Operator: Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.