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Operator: Good afternoon. My name is Jeannie, and I will be your conference operator today. At this time, I would like to welcome everyone to CleanSpark's Fiscal First Quarter 2026 Financial Results Call. [Operator Instructions]. Thank you. Harry, you may begin your conference. Harry Sudock: Thanks, Jeannie, and thank you for joining us today to review the first quarter to 2026 financial results for Queen Spark. We encourage you to review our earnings results press release, which was issued today and is available on our website. Our 10-Q will be filed shortly. A webcast replay and transcript of today's call will be added to our website once available. On the call today, I am joined by Matt Schultz, our Chairman and Chief Executive Officer; and Gary Vecchiarelli, our President and Chief Financial Officer. Some of the statements we make today will be forward looking based on our best view of the world and our business as we see them today. The statements and information provided remain subject to the risk factors disclosed in our 10-K. We will also discuss certain non-GAAP financial measures concerning our performance during today's call. You can find the reconciliation of non-GAAP financial measures in our press release, which is available on our website. And with that, it's my pleasure to turn it over to Matt. Matthew Schultz: Good afternoon, and thank you all for joining us. This quarter represents a meaningful step forward in CleanSpark's evolution into a digital infrastructure and data center development company. One that builds on the strengths of our mining operations while expanding the set of opportunities our assets can support. We continue to operate a large-scale fundamentally sound Bitcoin mining business that generates durable cash flows and balance sheet strength. What is different today is what those cash flows now enable? CleanSpark is no longer a single track business. We are building an infrastructure platform with multiple independently valuable earning streams, all anchored by scarce utility grade power. Bitcoin mining funds the platform. AI monetizes it and digital asset management optimizes it across all cycles. To frame how we think about AI development, we see 3 phases. First, securing scarce power and land; second, tenant-driven technical and commercial alignment; and third, structured long-term monetization. We are now firmly in the second phase across multiple assets. As a result, when we look forward, we increasingly see a company defined not just by hashrate. but by the quality, scale and flexibility of its infrastructure and by its ability to allocate capital into the highest return opportunities available at any point in the cycle. As we evaluate the opportunities for expansion into AI, we are seeing improving economics per megawatt, driven by scale, power quality and contracting structures even as capital intensity increases. Despite this evolution, Bitcoin mining remains foundational to our business. We are fully operational, passing every day and generating strong cash flows from a scaled mining footprint of more than 50 exahash per second. During the quarter, despite challenging Bitcoin price action and rising network difficulty, we generated more than $180 million in revenue at a gross margin exceeding 47%. Those cash flows allow us to fund growth deliberately. They give us the flexibility to hold assets in a fully monetized state while we complete diligence and commercial alignment rather than being pressured into a speculative development. We've built this strategy to perform across a range of market conditions, including lower Bitcoin prices, slower AI deployment or tighter capital markets without forcing reactive decisions. In November 2025, we completed a $1.15 billion convertible offering as part of our strategic evolution. Part of the use of proceeds was used to repurchase $460 million worth of shares, bringing total share repurchases to over $600 million since December 2024. We resulting in approximately 20% of our shares outstanding being repurchased because we believe dilution is not a strategy, discipline is. Turning to our power and land strategy. Historically, we built CleanSpark by acquiring and optimizing a large number of sub-100 megawatt sites. Those assets continue to perform well and have appreciated meaningfully as energized land has become increasingly scarce and valuable. As we evaluated the AI market, we recognized an opportunity to capitalize on the demand for larger sites. Until recently, Sandersville with approximately 250 megawatts of already live power was our only large-scale asset capable of supporting hyperscale workloads. That has changed. In October 2025, we acquired 271 acres in Austin County, Texas, along with 285 megawatts of contracted power fully approved by ERCOT with certainty on energization and the potential gas capacity for significant behind-the-meter optionality. In January, we followed with a second development initiative in Brazoria County, Texas, supported by a transmission facilities extension agreement enabling an initial 300-megawatt demand load expandable to 600 megawatts. Together, these assets establish a Houston area infrastructure hub with almost 900 megawatts of aggregate potential utility capacity, assembled intentionally to support multiphase AI campus deployments. As we look ahead, we expect to move from portfolio formation into commercialization milestones. Those milestones will take different forms, site-specific announcements, development partnerships and structured long-term offtake agreements, but they all reflect the same underlying reality. Our assets are being pulled into the AI market not pushed. We believe that over time, as those options convert into contracted visible cash flows, the market will increasingly recognize the embedded option value in our power and land portfolio. At Sandersville, we further strengthened our position with the acquisition of a 122-acre parcel in direct proximity to our substation and power infrastructure. These additions were made in close consultation with a select group of potential counterparties. Importantly, these discussions are no longer theoretical. We are operating from tenant-driven specifications, not internal assumptions. We are now past initial screening and into advanced diligence across multiple sites, including power studies, cooling validation and commercial structuring. The decisions we are making today around substation design, cooling architecture and campus layout are not reversible, and they reflect confidence in where demand is heading. What excites us about AI monetization is not just scale, but the duration, predictability and capital alignment of those cash flows relative to traditional compute. Throughout this process, we are expanding responsibly. That means being infrastructure-first aligned with customer requirements and disciplined in capital deployment. In this market, moving too fast is often riskier than moving deliberately, and we are intentionally optimizing for durability rather than velocity. As we plan this evolution, we have established an optimized operating model that allows us to continue running our mining infrastructure right up until load transition. When that transition occurs, we expect to redeploy miners elsewhere in our portfolio where they can continue to operate profitably. Earlier, I said that Bitcoin mining will always be core to our business. And that's because it continues to provide us with a strategic advantage and power acquisition. That advantage is now translating directly into differentiated positioning in AI infrastructure. We have seen this movie before. The discipline that allowed us to scale mining profitably across multiple cycles is the same discipline we are playing here. Only now with larger contracts, stronger counterparties and materially longer duration cash flows. Before turning to digital asset management, I want to briefly comment on the AI lease market. We believe there are meaningful second mover advantages in AI infrastructure, similar to what we experienced in Bitcoin mining. Lease economics have continued to improve across multiple dimensions. Rates have risen, risk-sharing terms have become more balanced and credit markets supporting these projects remain deep and constructive. When negotiating large-scale contracts, we are balancing lease rates delay provisions, capital structures and counterparty quality to optimize the holistic return profile. Our goal is not to win a single deal, but to build durable scalable relationships that monetize our growing portfolio over time. I also want to briefly touch on digital asset management. DAM is not a trading function. It is a capital allocation and liquidity management capability with defined mandates and risk limits. During the quarter, DAM generated over $13 million in premiums and cash. That represents about 24% of normalized adjusted EBITDA and improving capital efficiency across our business. These results are process driven and fully integrated into our broader financial framework. As we look forward, we see multiple paths to value creation unfolding in parallel, continued strength in our operations, increasing visibility into AI monetization and disciplined balance sheet management that preserves strategic flexibility. With that, I'll turn the call over to Gary. Gary Vecchiarelli: Thank you, Matt. The side right into the numbers for our fiscal first quarter 2026. For the quarter, our revenue grew year-over-year by approximately $19 million, an increase of almost 12%. Our Bitcoin production was relatively flat where we saw revenues of almost $100,000 per Bitcoin in the quarter compared to $84,000 in the same quarter last year. Our gross margins declined slightly from approximately 57% a year ago to 47% this quarter. This decline was mainly driven by the year-over-year increase in network difficulty. Power prices also increased marginally to. $0.056 per kilowatt hour, up from $0.049 a year ago. However, this reflects our decision to continue hashing to higher cost higher revenue periods may be curtailing based solely on an arbitrary power price threshold. This quarter, we recognized a net loss of approximately $379 million compared to net income of approximately $247 million a year ago. This change was driven primarily by mark-to-market adjustments to Bitcoin's fair value at the end of each respective period. Our adjusted EBITDA was negative $295 million compared to positive $322 million a year ago, also driven primarily by mark-to-market adjustments. Turning our attention to the performance of the first quarter versus the immediately preceding fourth quarter, revenues declined approximately $43 million or 19% to $181 million. This drop was primarily due to a combination of 2 external headwinds, rising network difficulty and softer Bitcoin prices. Because of these pressures, we experienced some of the lowest cash prices in history during the quarter, underscoring the importance of having a fleet with high uptime and efficiency. Quarter-over-quarter, our cost per kilowatt hour decreased marginally from $0.059 in Q4 to $0.056 in Q1, partially offsetting our 19% revenue decline. As a result, our gross margins remained healthy at 47%. With respect to our overhead expenses, it is important to note that the prior quarter includes approximately $25 million of expense related to separation from our prior CEO. As mentioned on last quarter's call, we do expect that our professional fees payroll and G&A line items will increase as we execute on our AI strategy. Additionally, I want to underscore that the AI data center business comes with stable cash flows and high margins. both of which will help CleanSpark through the peaks and valleys of Bitcoin mining economics. Our adjusted EBITDA was negative $295 million for this quarter compared to positive $182 million for the fourth quarter. It is important to note again that the difference relates to noncash mark-to-market adjustments, for which the current quarter includes approximately $350 million of these charges. On a normalized basis, taking the mark-to-market adjustments into account, our normalized EBITDA would be $55 million or approximately 30% normalized margin for this quarter. This represents cash generated from our operations. Bitcoin value as of our September 30 balance sheet date was approximately $1.5 billion. And as of December 31, it was $1.15 billion which the difference is the noncash mark-to-market adjustment of $350 million, which I mentioned earlier. Turning our attention to the balance sheet. You'll see our cash balance increased over $400 million compared to Q4. This is due to the $1.15 billion 0% convertible transaction we closed in November. As you know, we used a portion of the proceeds to pay off the outstanding balances on our Bitcoin back lines of credit and also repurchased $463 million of stock. This left approximately $420 million of net cash proceeds, the majority of which we will still have on our balance sheet. In addition to our cash balance, we had approximately $1.15 billion of Bitcoin value as of the end of Q1. Our total debt is approximately $1.8 billion, which on a net debt basis is approximately a 1.1 debt to liquidity ratio. Most importantly, the converts do not come due until 2030 and 2032, and numerous options remain available to us for capital. Also important to note is that our outstanding share count has decreased almost 20% in the last 15 months as we have not issued a single share of equity on the ATM or other offerings to Ecomat, dilution is not a strategy, discipline is. Turning our attention to our balance of over 13,000 Bitcoin. I want to point out that we are one of the first, if not the only company, which has scaled operations that is also using Bitcoin as a productive capital asset. On the last call, we discussed in detail our DAM strategy in its first full quarter. You may have also heard us previously talk about our crawl-walk-run approach, which I'm happy to say we're now fully in the walk phase. We're at full utilization of the portion of our Bitcoin balance we expect to use for yield generation, which is 40% or approximately 5,200 Bitcoin. Our DAM strategy generated $13 million in cash returns on the Bitcoin model during the quarter where bicorn price was down mark-to-market. I want to highlight several key members who speak to our core DAM strategies. We overlay a covered call derivative program on our monthly production and sales of Bitcoin, which resulted in an uptick of $7,700 or 8% per Bitcoin over the average sales price of approximately 97,200. Overall, the $13 million in total premiums also represents an annualized return of 4.2% on our average total balance, which surpasses our target of 4%. We accomplished this all within 6 months of our first trade. Importantly, this is all achieved by monetizing elevated volatility, especially in October, while keeping the average delta below 20. I also want to point out that we have added an additional tool to our treasury management to belt. The Basis Trade is a market-neutral strategy that captures the difference between the forward price of Bitcoin and the spot price. Importantly, this strategy takes no price risk and generates returns from the same types of market structure dynamics that we noted in our thesis in the first place. This basis trade allowed us to put our cash balances to work and exceed the risk-free rate by almost 200 basis points as we saw an annualized yield of over 5.5% on the cash allocated to the basis trade. While these opportunities are cyclical, we will continue to be opportunistic based on market dynamics, filling out the flywheel we initially envisioned when we launched our DAM team. On a final note, I'd like to take some time discussing our capital strategy going forward, especially in light of our expansion into AI data centers. From a capital perspective, I'm confident the capacity and appetite for financing an AI data center with a grade A tenant is strong. We saw a high-yield deal from our friends at Cipher, which priced at an attractive [ 6% and 8% ] which is indicative of the quality of recent leases being signed and the capital available in this market. The recent $2 billion bond had approximately $13 billion in demand an oversubscription of 6x while we have not committed to 1 specific means of financing our AI data center builds, we are focused on building a capital stack, which minimizes dilution. This continues with the sale of monthly Bitcoin production to cover our OpEx. Between our current cash balance and capacity on the Bitcoin backed lines of credit, we have over $800 million of liquidity available without selling any of our Bitcoin hurdle. This liquidity provides us optionality, and we will continue to use the lines of credit opportunistically in the marketplace for accretive purposes. Matt spoke about our current efforts and where we are going and we are excited to share on future calls to relationships and ecosystem we are building, one that is a more fulsome approach than exists in the market. While we are early in the innings of our AI data center journey, the market is moving quickly and CleanSpark is responding decisively. Our conversations with grade A credit quality tenants are ongoing, and it is not a matter of if, but when. With that, I will hand it back to Harry to lead us into Q&A. Harry Sudock: Thanks, Gary. We will now open the floor to questions from the analyst community. Operator, please provide instructions and manage the queue for the Q&A session.[Operator Instructions]. Your first question comes from the line of Mike Grondahl with Northland Securities. Mike Grondahl: I was wondering if you could talk a little bit about the demand environment you're seeing for HPC? And maybe how that's changed in the last 90 or 100 days? And kind of what attributes are you looking for most in a lease partner? Unknown Executive: Mike, thanks for the question, and thank you for the recent initiation. We're glad to see Northland covering us. I can tell you that 6 months ago, when I reassumed the role of CEO. We entered a market where there was a lot of enthusiasm around signing a deal. And what we're now seeing is some of the punitive components of the early leases such as losing a significant amount of revenue for a day late delay on an RFS date. And differing terms that are backstopped only at the site level rather than at the top co level. It has given us an opportunity to really sit back and evaluate what's out there. And I can tell you that We, Gary, Harry and myself and some of our team attended the Pacific Telecom Conference in Hawaii. And the feedback that we received by presenting an end-to-end solution was very overwhelmingly positive. We've been very pragmatic about the assets that we've accumulated, the location, the distance away from fiber networks, the access to behind-the-meter generation. And as a result, we've now been entertaining multiple trillion balance sheet companies that are interested in long-term leases on some of these assets. So we're seeing the demand continuing to escalate. And I might add, we saw Amazon earlier today talk about their commitment to invest $200 billion in AI infrastructure in 2026. exceeding the $140 billion estimated by the Street. So looking at the demand behind that, we feel very solid about it. And if the inbound inquiries and conversations we're having with hyperscalers or any indication, the fear of a bubble is highly overstated. Mike Grondahl: Got it. And then maybe just as a follow-up, your 3 sites, Sealy, Sandersville and Brazil, would you say it's equal demand for all 3? Or is there one that sticks out amongst those? How would you handicap that? Unknown Executive: I think probably the highest demand right now is Sandersville. Quite frankly, because it's 250 megawatts, we already built a substation. It's already energized. The Sealy site energization is Q1 '27 for the first 207 megawatts, so we're seeing strong demand there. And obviously, the next site has also been very appealing. But I would say that the data center environment in Georgia and the energized site are very compelling to the offtake clients. Operator: Your next question comes from the line of Brian Dobson with Clear Street. Brian Dobson: So just as a quick follow-up. You mentioned there have been some really positive CapEx comments from companies like Amazon. To me, that signals rising demand for AI data centers. Would you say that that's indicative of demand, call it, across the sector from various hyperscalers that you're speaking with? Or are people getting more cautious at all? Unknown Executive: Yes. I would say it's an emphatic yes. Just as a quick aside, Jeff Thomas, who leads our AI venture has been in the office with us this entire week, and more often than not, he's excusing himself to go into his office and close the door to field an inbound inquiry. So I would say demand is escalating rapidly. Brian Dobson: That's certainly good news. And I know you guys mentioned that you're looking for a mix of quality and scalability among clients, given construction commitments that you've already made, how confident are you that you'll be able to, call it, sign a contract in the relatively near future? Unknown Executive: We're very confident, Brian. I'll be honest with you the delay in -- I wouldn't even call it a delay. I mean when we did this 6 months ago and then we had our earnings call 7 or 8 weeks ago, we said that we would expect to sign a quality lease in less than a year. And I would say that, that's highly accelerated. But the discipline that we're taking, you look at some of the leases that other Bitcoin miners have put up and they're very highly redacted in the public filings. And that's a result of the punitive nature of some of the delay provisions. So as we contemplate this, we're actually working on a basis of design with the offtake customer. We're designing it in advance and then assuring that we can meet the delivery time lines to remove that potential overhang of failure to deliver risk. So being disciplined about this and building specific to the basis of design for the offtaker, including the implementation of the approved reference architecture from the chip manufacturers will allow us to have that certainty to secure the supply chain before we enter into these commitments to ensure that we don't have that fail to deliver. Brian Dobson: Excellent. Excellent. And then just one final one on Bitcoin mining, if I may. Given your efficiency you're better positioned than those heading into the next having, I guess, has your thought process changed at all as far as operating Bitcoin lines, call it, in tandem with your expansion into HPC. Unknown Executive: That's a great question, Brian. And what we found is that as new energy sources are energized, some of these communities, especially the smaller communities, are incentivized to monetize those metal lots very rapidly. The challenge is to build a data center for a hyperscaler with the approved basis of design and incorporating that reference architecture is a 12-month best case 18- to 24-month kind of average case delivery time line, we can use the infrastructure that we have for Bitcoin mining, like we did in Cheyenne, Wyoming, where we secured a 100-megawatt lease over a hyperscaler. We did that simply because we committed to start paying power bills inside of 6 months, not inside of 1.5 years, and that makes a difference to these communities. So we'll continue to use Bitcoin mining as that tool. You heard us talk about on the call, something that we haven't published it yet because it wasn't material, and that is we have 122-acre parcel adjacent to Sandersville. What does that mean? That means I can operate 11 exahash to a profitable Bitcoin mining up until the day we cut the power over to support the data center for our end-use clients. We also on the map of our projects, something that we haven't talked about is a 15-megawatt site in South Dakota. The utility there had introduced a blockchain specific tariff that with an interruptible load it gives us the lowest cost per kilowatt hour of almost any site in our portfolio. So that flexibility allows us to migrate that mining to a profitable location once we've spun up a data center behind us. So we see it kind of as a loss leader, but it makes money. Operator: Your next question comes from the line of Mike Colonnese with H.C. Wainwright. Michael Colonnese: Matt, first one maybe for you. I appreciate your comments on the HPC business with start being advanced discussions or diligence stages rather potential tenants here. And that you're currently looking on a basis of design. Curious what milestones should we be on the lookout for next and some of the expected time lines you see as we come across the next couple of quarters here? Matthew Schultz: So I think the process when you're dealing with a hyperscaler is we could rush in and sign a lease, so we could get a headline. And then we're facing potential losses for a failure to deliver. So as I mentioned in my prior comments, we're working towards that basis of design. And one of the things I think that is a key differentiator that's maybe gone a little bit under the radar. And that is we put out a press release announcing an MOU with Subaru. Mike, you've been around our company long enough that we don't ever make a material disclosure unless we've got a firm contract. And we felt that, that was important as we head into some of these discussions because summer has been very successful in building a modular MEP. So mechanical, electrical and plumbing, all the fiber runs everything according to the reference architecture required by the chipset manufacturers. So our solution will be to build the gray space to build a tilt up shell and then slot in the reference architecture. That also gives us flexibility. So if you have a hyperscaler that wants to modify from one particular type of chip to another, we have that modular approach. It also shortens the time line because we've all heard the horror stories about some of our peers that have a couple of thousand tradesmen all working at the same sites in West Texas, and they're struggling to provide housing and food and bathroom facilities. We look at this differently. We build instead of a one-off data center that's stick built. We build the shell according to the specifics required by the end customer. and then we build the MEP portion in a factory. So it's consistent and duplicatable and scalable, which is differentiated from anything else in the space. So it's important to us to establish all of those build parameters ahead of time. So when we put pen to paper, there's absolute certainty that we can deliver the product as expected on time. Michael Colonnese: Helpful color. Matt, I appreciate that. And Gary, maybe one for you. Does this recent downturn in Bitcoin prices change or huddled approach at all? I know from covering the name for a while here, you guys have historically had a very dynamic high approach, one that tended to adjust based on prevailing market conditions. So curious how you guys are thinking about the huddles back here? Gary Vecchiarelli: Thanks, Mike. Since you've been around a while, you know we've built this business on optionality. So that option is still on the table if we wanted to dip into the hotel and part with some of those Bitcoin, I'll tell you that's not something we're planning on doing even at these levels. We think that the strategy is still intact and part of the hedge is for us really selling nearly 100% of our monthly operating production. So as of right now, there's really been no change in that strategy. I'd also conversely say that we're not expecting to hold 100% of the operating Bitcoin production either because that would mean that we'd run through our cash a whole lot quicker and as we had mentioned, when we were raising the convert funds, we expect to use the majority of those funds to expand in AI data centers because we think that's the future of the company. Unknown Executive: Mike, maybe that just a little -- another layer to the Bitcoin mining side. At our last disclosure, we were at 16.07 jewels per terahash and Taylor and his team are actively deploying the 13.5 jewel per terahash machines in the immersion cooled containers in 5 different locations. So we expect our fleet efficiency to continue to improve. In the last cycles, I mean we've been through this a few times, we see the kind of wash out of the sorting process and the less efficient fleets tend to unplug. So we also believe that there is a very strong opportunity for us to organically grow a share of the network hash rate just by default as other less efficient miners or for unplug. Operator: Your next question comes from the line of Greg Lewis with BTIG. Gregory Lewis: Just thinking about the move forward in the HPC, I know Jeff joined the team a few months ago now. Gary, you alluded to potentially higher SG&A over time as we kind of build out the team and get ready to pivot into this new business. Like how should we think about costs and processes? And where are we in terms of -- we've seen other companies go out and build teams. What we're realizing we have a lot of capable talented people already inside the company. How should we think about growth at the employee level here? Gary Vecchiarelli: Greg. Thanks for the question. It's a great question. We get it quite often from investors. I'll tell you, it's hard to give guidance on that because while we have a plan to bring on a certain number of FTEs, the timing of when those hit is really what's going to drive what the numbers are going to be for the fiscal year. Additionally, we have optionality to where we can rent services. So if we need services from someone we could bring in outside consultant -- contractors to help fill that void while we're waiting to bring on full-time talent. And there's -- that could be different than what it would be to bring on a burden employee. So we're not prepared to give out numbers about right now. I don't think it's anything that's material that's putting us at risk or anything. I think we've been pretty measured about bringing on people right around the time we will need them. So I think you'll see that slowly uptick throughout the remainder of the year. Gregory Lewis: Okay. Great. And then I think it's been understood that we were going to acquire more land at Sanders ville for at least a few months. How does now owning that additional land at Sandersville. Does that go at all in changing the kind of conversation that it seems like we're focusing -- it seems like part of this call is you focusing on potential terms of some of these HPC contracts. Does -- I would think earning the land matters a lot. I guess my question is, was not earning some of the land and potentially leasing it kind of a nonstarter? Harry Sudock: Greg, it's Harry. I think you're exactly right. So we view the closing of the land expansion at Sandersville, a very orderly process in progressing the AI data center project there. It allows us to move into a very specific basis of design alignment exercise, which is underway. And it also brings a level of specificity to the compute and power ramp for the data center deployment as well because there's complexity to these projects that extend beyond standing up the data center for our state. There's a lengthy commissioning process that the tenants typically take on in the context of the overall project life cycle and being able to map out those time lines and those work streams in detail, is critical as we move through the full commercial scope of the discussions, they are, in many cases, governed by some of those technical pieces in the ramp process. Operator: Your next question comes from the line of Stephen Glagola with KBW. Stephen Glagola: Thanks for the question. Can you maybe provide some insight in how ERCOT's proposed large load bag study process may the energization time line for the Sealy side as well as the approval and development schedule associated with your Brazoria County, Texas project? Harry Sudock: Stephen, yes, Harry, again. Happy to do that. So I think the first piece of it is that the study process that ERCOT is proposing to roll out has not gone final yet. They're still in a comment period where they're taking member requests for how they want to influence that process and how it's going to be brought to market. So we're waiting to see kind of the final form of that. But given the early news there, we've had a lot of detailed discussions with a number of counterparties that we're working with there. That includes the substation developer. It includes the utility. It includes some of the political folks and obviously, some of the teams that are caught as well. And I think the assets that we have in the state are in very favorable position relative to this new piece of the process for a handful of reasons. The first is that the large load studies that have been done. Its Sealy, it's complete. And at the second location, it's in a deeply progressed state. And we've received the notice to proceed language at both of them. So that's kind of .1 and 2. The next is that the interconnect and the FDA pieces are executed. And the third at Brazoria is that the CAIC has been funded. And at the Sealy location substation is already under construction. So these are significantly progressed projects. And what we've seen is that the view of the batching and the study rollout is largely being informed by project maturity as well as location. And what we've gotten feedback from the utility of both of those locations of -- is that the location that we selected is that a point in the overall ERCOT transmission system that's going to be the least impacted by this type of reevaluation process. So we feel very, very positively about where these 2 assets sit within the system and how they're going to be treated. But until ERCOT comes out with final language, we can't have 100% visibility into that yet. Operator: Your next question comes from the line of John Todaro with Needham & Company. John Todaro: Two here, I guess, we'll start with the one that kind of comes off the ERCOT question. Are there -- as you think about just kind of longer-term pipeline, adding more power, are there other power markets that are now starting to look maybe a little bit more attractive relative to Texas and where could we see that? And then I have a follow-up on the HPC tenant side. Unknown Executive: Thanks, John. I think that we have always had a strong heritage of diverse portfolio construction. We see it in the way that we enter into power agreements today. We've got a significant footprint deployed and operating in Georgia. We've got significant presence in Tennessee. Wyoming and Mississippi as well are the smallest 2, but they're by no means small. So I think that what we're going to be able to accomplish is a continued expansion in those markets because of the relationship and community quality that we've engaged in to date. But additionally, I think that the other side of the question that you're asking is do large-scale data centers skew towards in front of the meter power or behind the meter power. And we're asking these questions internally along both vectors. So we think that there's a huge amount of opportunity inside of Texas and outside on the in front of the meter profile. We have a team that's become exceedingly expert in sourcing, negotiating and closing on that power. And then we are also strongly evaluating the capacity for behind-the-meter power as well in places where we're either able to get a smaller in front of the meter load or there's a particularly rich commodity environment by which we could power behind-the-meter generation and then the associated data center. So we're people for its business fundamentally, and our power and land teams are prepared to expand the portfolio very, very broadly in a diversified way, but also add that potential for behind the meter to the repertoire as well. John Todaro: Great. And then just on the HPC 10 discussion. I guess just trying to gauge kind of how far advanced we are in the positioning. Is it -- are we kind of down to 1 potential tenant that seems much further along? Or is there kind of 3 that are in final competition stages? Just a little bit more color there? Unknown Executive: Ask me a question that I can answer. What I would say, John, to be honest with you, is there are multiple potential offtake tenants for Sandersville to begin with. I would say there is a specific front runner by an order of magnitude to the extent that our team is collaborating with their team on the site placement. You may have seen a slide in our deck that had a mockup of the layout of the data center. So we've advanced it significantly with a particular offtake, but by no means is it committed elsewhere. I mean there -- the competition for megawatts and land right now is stronger than it was when we announced this strategy to expand into AI. So we're not closing any doors, but I would say there's a clear frontrunner there. Operator: Your next question comes from the line of Brent Noble with Cantor Fitzgerald. Unknown Analyst: This is Gareth on for Brett. I was just hoping you could go into detail on the 2 new sites in Texas. When are you guys expecting to have power available on those sites. And what do you think the time lines are kind of going forward there? Unknown Executive: Yes, absolutely. So let's tackle the Sealy project first. The land secured is 271 acres. The gross power is 285 megawatts. The first 207 to 209 is coming first half of '27. And then it's about 40 in '28 and 40 in '29. And that's driven by the transmission agreement by which we secure the power. The second project is in Brazoria County. Larger footprint with up to 477 acres at that location. And the way that it's structured is that we've signed for that agreement, but we're not closed yet, and there's some closing conditions associated with it, that we expect to wrap up here. The time line for the energization is a function of some of those closing conditions. And so we don't have the type of line in the sand clarity that we have at Sealy. But I think that Q4 '27, Q1 '28 is a range that is all reasonable and everybody internally is working to bring that energization date as close to the inside as possible. Operator: Your next question comes from the line of Paul Golding with Macquarie. Paul Golding: Congrats on all the progress. Gary, you referenced a peers recent capital raise. And I just wanted to ask, as we think about the liquidity you have, but also you have substantial capacity going forward that you'll hopefully be growing into with leases. Should we take that to be -- that comment to be indicative at all of how you hope to essentially face a counterparty in terms of counterparty type face-to-face with hyperscaler able to do high yield raises where the counterparty credit quality could yield that, I guess, how should we think about how you're selecting your counterparties given the context given around capital raising and cost of capital. Unknown Executive: Thanks, Paul. I'll tell you that it's very important to us to have that grade A credit quality tenants because we think that's the most financeable and the best cost of capital. So that's what we're focused on. In terms of the vehicle, I quote the recent Cipher deal because the high yield seems to be a playbook that a number of our peers have started to go down that path. We're open to that. We're happy to see that the terms are getting better both with that and the contracts and leases that are backed by that bond. There's some other options as well. obviously, a little higher cost of capital. But at the end of the day, what's great about this is, and you've heard this word from us for quarters or years now is optionality, right? We have a lot of options on the table. But I think it's safe to say we're going to follow a playbook right now that's probably proven in the capital markets, and it all starts with a grade A tenant. Paul Golding: And then maybe a follow-up. I believe, Matt, you mentioned when speaking about the Sandersville work and the 122 acres with tenant-driven specs in mind. How should we think about what that means for terms? You also noted that terms in discussion were seemingly more positive across the conversations you're having. Is there any kind of prepayment or deposit discussion involved in the conversations you're having, given that you are proactively using tenant-driven specs to set up the sites for HPC? Matthew Schultz: It's -- thanks for the question, Paul. It's a bit -- it's a little early in the discussions to comment on that. directly. But I can tell you that we're -- obviously, there are a number of different leases that have been put up. You've seen modified gross. You've seen triple net. You've seen posted agreements. You've seen miners that have committed to buy the chips themselves. So I can tell you that our focus initially, and I'm not -- I don't mean to downplay the quality of any other transaction. But as we look at the financing options, I think it's important to us to have a significantly better deal than I think the market would have otherwise expected. I think we're interested in putting a deal together directly with the hyperscaler, not necessarily with the Neo cloud backed by a hyperscaler. And we believe that we'll set the standard for the quality of the agreement and the, I guess, win-win is a term we use in the company a lot. There will certainly be expectations our feet will be held to the fire, so to speak, to deliver, but it's not at the risk of an existential threat on a fail to deliver. So we're negotiating all those terms. And I think what you'll see when we announced the first lease is a basis or a model for what you can expect going forward. Operator: Your next question comes from the line of Jim Milre with Chardan. Unknown Analyst: At the current Bitcoin prices, let's call it, $63,000 or so. How much of your minor fleet is economic to operate? Or another way to ask it is how much of the minor fleet is -- meets the hurdle rate in order to operate. Unknown Executive: Great question, Jim. Thank you for that. So our fleet efficiency improved and then it got a bit worse. And it got worse by design, because as mining economics improved, we actually started to scale up some less efficient equipment in our fleet. What I can tell you is that Taylor and his team are constantly running real-time analysis based on utility prices, network difficulty and the price of Bitcoin. And they brought me in to Gary and myself this morning as we were working on this presentation today. They brought us in a list. And I would say less than 10% of our fleet at the current half price is not profitable. So the vast majority of it is and the small portion that is at or below the breakeven threshold our machines that we brought on to take advantage of $125,000 Bitcoin 1.5 quarters ago. So it's not punitive to us to unplug those. Having said that, as we unplug those less efficient machines or scale them down or under clock them, it increases the overall efficiency of our fleet. Unknown Analyst: Got it. That's helpful. And can you discuss CapEx plans for this year and next, both in from a dollar basis as well as an allocation between Bitcoin and HPC. Gary Vecchiarelli: Jim, it's Gary. I'll tell you that our focus is going to be on deploying capital towards AI. That's in the range of $9 million to $11 million a megawatt which, as you probably know, has been reported by most of our peers in the space right now, and that's the range that we're seeing. So what is deployed is really going to depend on -- that amount is going to depend on the design to build and the customers and when we sign those respective leases. But I'll tell you that the overwhelming percentage majority percentage of that is related to HPC. With respect to Bitcoin mining, I think that the investment, particularly at these levels doesn't make a whole lot of sense from the sticker prices that we're seeing from the major manufacturers. If you look at our balance sheet as of 12/31, we had about $130 million of prepaid deposits on Bitcoin mining equipment and miners. And about $112 million of that was through September. So we're still deploying some infrastructure, mainly emerging cooling and miners that will help drive down that efficiency. But we don't plan on spending a significant portion of our cash on mining, unless economics change. We need to keep in mind that we are about 2 years off to the next having. And in any cycle, as you get closer to having that ROI window closes rapidly. And right now, it doesn't make sense. So we want to be redirecting every dollar possible towards CapEx. Operator: Your next question comes from the line of Matthew Capitalo with Maxim Group. Unknown Analyst: I'm filling for Mac right now. I was just wondering if you guys have any insight or I guess, predictions on how we should be thinking about network difficulty in response to the current Bitcoin prices. Unknown Executive: Yes, absolutely. So I think that what we've seen over the last weeks and the difficulty adjustment that's coming on Saturday is important to know is the largest difficulty adjustment to the downside since the China mining ban in 2020. And that's a combination of 2 factors. The first is that there have been significant weather events across the entire country during that period of time. where you're seeing either the demand response programs get engaged or you're seeing power prices move past the breakeven point of economics. And so that's certainly a contributor to this difficulty adjustment. The second piece is clearly Bitcoin price is off considerably. And so that next coming difficulty adjustment is going to be a significant one. And then I think given the price action that we've seen in the latter part of the difficulty adjustment period that we're in the middle of right now, we could see additional downward pressure on difficulty in addition to that. So I think that ultimately, this is the self-healing nature of the proof-of-work and Bitcoin mining system. And as you see these types of market forces, the network adjusts to be able to create that security model that's supposed to keep producing blocks and processing transactions. Unknown Executive: I just want to add one thing because if you look at this historically, when Bitcoin runs and hash price gets better, the global hash rate laps right? You'll have a period of time, usually weeks, maybe a month or whatever, for miners to find a way to get plugged in because miners just don't sit around waiting for hash price to sit typically, they're just not on racks just waiting for Bitcoin price at a certain price. It's the opposite on the way down because most miners, not all, but most miners know what their breakeven is because that's a real punitive cash penalty because they have to pay their power deals. And so as Bitcoin mining economics go down, what we've seen at least historically, is that cash rate comes off pretty quickly, pretty close to that. And that's because miners say, well, hey, why am I going to take a lot of X amount of dollars when I could just go buy Bitcoin, and I have more Bitcoin than if I actually mined it. So I think that given that routed in the fact that we have a decreasing a fleet with decreasing jewels per terahash, meaning our efficiency is going up. and we're more efficient and we're producing more Bitcoin for every watt that we're putting through these machines. We will be one of the last ones theoretically to turn off, and we'll mine more Bitcoin in terms of quantity as that global half decreases. Unknown Analyst: And I guess as a follow-up on the Texas opportunities. Do you guys have a time line on executing behind the meter opportunity into your portfolio? Unknown Executive: Yes, I appreciate the question. I think it's too early to have a view on the exact timing for that type of opportunity. What I can say is that we're evaluating a number of different behind-the-meter deployment types. Some of those energization schedules are longer. Some of them are much faster to market. And so ultimately, those types of decisions will be made in concert with the tenant community, and we're really looking to be able to meet their need and satisfy impute demand, whether that's through one form or behind the meter generation or another. Operator: There are no further questions currently. Harry, I turn the call back over to you. Harry Sudock: Thank you, and thank you, everyone, again, for joining today's earnings call. We look forward to staying in touch and sharing future results with you in the coming quarters. Stay tuned for more progress and exciting achievements ahead from us at CleanSpark. Operator: This concludes today's conference. You may now disconnect.
Claus Jensen: Good morning, everyone. Welcome to the conference call for Danske Bank's financial results for 2025. My name is Claus Jensen, and I'm Head of Danske Bank's Investor Relations. With me today, I have our CEO, Carsten Egeriis; and our CFO, Cecile Hillary. We aim to keep this presentation to around 20 minutes. And after the presentation, we will open up for a Q&A session as usual. Afterwards, feel free to contact the Investor Relations department if you have any more questions. I will now hand over to Carsten. Slide 1, please. Carsten Egeriis: Thanks, Claus, and I would also like to welcome you to our conference call, where I'm pleased to share the highlights of Danske Bank's financial results for 2025. Although the geopolitical situation overall continues to be challenging, the macroeconomic backdrop for our customers and thus our business in the Nordics continued to be stable and slightly improving during the year. This is clearly reflected in our financial results as 2025 has been a year of solid performance for Danske Bank. Measured in terms of profit before impairment charges, 2025 represented the best result ever. Net profit for the year came in at DKK 23 billion, equivalent to a robust return on equity of 13.3%. The result was based on improved income due to higher customer activity and furthermore evidenced by positive volume development. I'm pleased to see that despite the sale of our personal customer business in Norway and several rate cuts during the year, we were able to maintain net interest income at the same level as in 2024. The slightly lower net profit in 2025 was solely due to a more normalized but still a low level of loan impairment charges compared to net reversals in 2024. When comparing to the preceding quarter, core income came in better as a result of higher NII from an increase in lending and deposits and significantly higher fee income based on growth across all fee categories and in particular, from record high performance fees within Asset Management. Operating expenses came in line with expectations and credit quality remains strong. And as a result, net profit for Q4 amounted to DKK 6.3 billion, up 14% from the preceding quarter. And Cecile will comment on the details of the financial results later in this call. Let me talk about our strategy execution. It remained on track. And as we continue to see robust commercial momentum and invest in our business also as laid out in our strategy plan. During 2025, the scaling of our digital and our GenAI technological capabilities across the bank has been in focus, and we are now starting to see tangible results in our workflows, leading to improved productivity. And I'm really looking forward to presenting a more comprehensive update with our strategy update in connection with the presentation of our Q1 results on the 30th of April. And then I would like to comment on our capital distribution. Based on our strong earnings and our solid capital position, I'm pleased to announce the distribution of the full net profit for 2025. Ordinary dividend will account for 60% in accordance with our dividend policy. In addition, we propose an extraordinary dividend of 20%, taking total dividend per share to DKK 22.7 and a new share buyback program of DKK 4.5 billion in total, a payout ratio for 2025 of 100%. And then finally, on the financial outlook for 2026, which Cecile will elaborate on later, we expect a net profit of between DKK 22 billion to DKK 24 billion, driven by growing core banking income from continued efforts to drive commercial momentum. And then let me continue with the performance on the business units, and that's Slide 2, please. At personal customers, the financial performance has been solid with total income up 2% relative to the same quarter in 2024 and up 3% quarter-on-quarter. The performance was based on good customer activity that led to higher lending and deposit volumes, up 1% and 5%, respectively, relative to the level in 2024. The uplift in activity and volumes came from all our Nordic businesses, driven in particular by private banking and also home loans in Denmark and Sweden. In the Private Banking segment, 2025 was a year of strong momentum based on the continued execution of our strategic priorities. The investment business was supported by strong net sales, which helped lift assets under management to record high levels with Danske Invest retail funds reclaiming the market leader position in Denmark. In the housing market, activity improved in 2025. In Sweden, lending increased 1% in local currency with improving momentum towards the end of the year. The better traction in Sweden came from higher customer activity supported by a strengthened customer offering. In Denmark, housing market activity also improved in 2025, especially in the larger cities. Total lending was stable year-on-year, but our bank home loan product, Danske Bolig Fri grew another 12% compared to the preceding quarter and 44% year-on-year. The product now accounts for more than DKK 70 billion in lending, and the positive development is a testament to our flexible loan offering and ability to cater to the changing customer preferences. Furthermore, total income in Q4 was supported by a 14% increase in fee income, driven primarily by high refinancing activity for adjustable rate mortgages and by investment fee income. Costs came in higher in Q4 due to expected higher seasonal expenses, which explains the higher cost/income ratio. And then Slide 3, please. At business customers, 2025 was a year of solid financial performance based on strong customer activity that continued throughout the year. Total income was up 8% compared to the same quarter in 2024 and 5% quarter-on-quarter. And this was driven primarily by a positive development in net interest income based on a strong uplift in volume and activity-driven fee income. Lending as well as deposit volumes were up 5% based on growth in all countries. The increase in business momentum reflects the continued execution of our growth agenda as we welcomed new corporate customers. And as a result, we gained market share across all four Nordic countries. Return on allocated capital as well as cost/income ratio were in line with our targets. The increase in ROAC was supported by reversals of loan impairment charges on the back of continued strong credit quality. Business customers continues to be a key strategic focus for us. And in 2026, we will continue to strengthen our advisory capabilities, for instance, by investing in analytics to generate leads for advisers and improving the One Corporate Bank digital platform. And then Slide 4, please. Turning to our large corporate and institutions business. We are pleased that our continued focus on advisory solutions for our customers and our sustained efforts over the years to improve our business offering have shown positive results in 2025. Thanks to strong execution and customer focus, 2025 was a record year for LC&I. Firstly, we continue to see strong volume growth with corporate lending up 14% from the level in the fourth quarter of 2024, which supported a 15% increase in NII. Deposits, which by nature are more volatile, have seen a healthy overall trajectory, but also sizable fluctuations related to large corporate transactions. Secondly, in line with our strategy of growing our Nordic footprint, we are expanding our One Corporate Bank concept in the Nordic region. In 2025, we continue to win new house bank mandates within daily corporate banking. And in addition, 2025 has been an exceptionally strong year for our investment solutions. Assets under management grew 16% relative to last year and reached all-time high. Besides higher asset prices, we have successfully been able to grow net inflow and add new customer mandates within the institutional as well as the private banking segment. The impressive investment performance in asset management enables us to recognize performance fees of DKK 0.9 billion, up 27% from last year, which was already a year of strong performance. And then with respect to profitability and cost efficiency, the strong performance in 2025 has enabled LC&I to deliver significantly better compared to our targets. And then with that, let me hand over to Cecile for a walk-through for our financial results for the group, and that is Slide 5, please. Cecile Hillary: Thank you, Carsten. 2025 was a year of solid financial performance. Net profit for the group came in at DKK 23 billion compared to DKK 23.6 billion the year before. Total income improved mainly due to a 3% increase in fee income, reflecting increased customer activity and strong performance in asset management. NII was unchanged as the positive effects from increased volumes and a positive contribution from our structural hedge were able to mitigate lower rates. Operating expenses were in line with the level in 2024. Loan impairment charges came in at a more normalized but still low level, whereas we had net reversals in 2024. The results for Q4 came in at DKK 6.3 billion, up 14% from the level in the third quarter, mainly due to higher core income. NII benefited from positive volume effects. When excluding the tax-related contribution, NII was up 2%. Fee income was up 39% quarter-on-quarter as all fee income categories contributed positively with performance fees in asset management as the single most important source of fee income in the quarter. Trading income saw a decline in Q4, mainly due to seasonally lower customer activity in fixed income markets. Income from insurance activities was impacted by a model recalibration for the health and accident business that led to a net negative effect of DKK 200 million. The impact follows the annual update of model parameters as well as adjustments following an inspection by the Danish FSA. When looking at the net financial results in isolation, we saw a positive development from a better investment results. We continue to focus on repricing, preventive care and reactivation initiatives in the health and accident business to improve the financial outcome of insurance contracts and respond to current market trends related to long-term illnesses. Operating expenses came in higher in Q4 due to year-end seasonality related to performance compensation and severance costs. And finally, as credit quality continues to be strong, loan impairment charges were kept at a very low level. Slide 6, please. Let us take a closer look at the key income lines, starting with net interest income. NII for the full year remained stable as the headwind from deposit margins due to lower Central Bank rates was mitigated by an increase in lending and deposit volumes as well as improved lending margins and a positive contribution from the structural hedge, which grew to circa DKK 180 billion at the end of Q4. Relative to the preceding quarter, NII increased more than 4%, supported by a DKK 200 million tax-related effect. As interest rates were stable during the quarter, the impact from margins was insignificant; however, NII benefited from a continually positive development in volumes, particularly evident on the corporate side, whereas the impact from the structural hedge was similar to that in Q3. With respect to the deposit margin development, as I mentioned in Q3, the increase observed in Q3 relates to changes to our funds transfer pricing framework implemented in Q2 with the objective of allocating NII from the structural hedge to the business units. It is important to note, it is not driven by changes to customer pricing and does not impact group NII. Our NII sensitivity remains unchanged quarter-on-quarter. With respect to the outlook for 2026, we expect NII to grow, supported by stable rates and structural growth, particularly within lending. The outlook is, as always, subject to markets and balance sheet developments. Now let us turn to fee income. Slide 7, please. In 2025, fee income amounted to over DKK 15 billion, corresponding to a 3% increase compared to 2024. This represents a record high level for Danske Bank based on high customer activity and strong performance in asset management throughout the year. Relative to the third quarter, fee income was up 39% in Q4, mainly driven by sustained strong performance in asset management that led to record high performance fees, up 40% from the same quarter in 2024. In addition to higher performance fees, fee income was supported by continued growth in assets under management with positive net sales for all categories of clients. AUM ended the year at an all-time high of over DKK 1 trillion. Income from financing had a positive effect in Q4, driven by higher corporate activity and a seasonally solid refinancing activity at Realkredit Danmark. Within our Capital Markets business, fee income in Q4 benefited from a continuation of good DCM momentum and a rebound in activity in ECM. Next, let us look at net trading income. Slide 8, please. Overall, we have seen a stable development for trading income in 2025. With positive value adjustments in treasury, the headline number was up 8%. Stable customer activity, mainly within fixed income, further contributed to the results. In Q4, trading income came in lower due to seasonally lower customer activity at the end of the year. This concludes my comments on the income lines. Let's turn to expenses. Slide 9, please. Looking at the development for the full year, operating expenses are in line with our full year guidance of up to DKK 26 billion. We have managed our cost base as expected and mitigated the impact of inflation, which supported a slightly improved cost-to-income ratio of 45.5%. Relative to the level last year, costs were in line as the intended structural cost takeouts and the lower contribution to the resolution fund mitigated the impact of wage inflation and performance-based compensation. The relatively modest increase in digital investments in 2025 should be seen in the light of the significant ramp-up we made in 2024. Furthermore, we executed structural cost takeouts within our Financial Crime Prevention division. Going forward, ongoing efficiency in that division will mainly come from technology improvements with a limited reduction stemming for post-resolution rightsizing. Relative to the preceding quarter, Q4 costs were impacted by year-end seasonality, including performance-based compensation, severance costs and investments in our tech transformation. We intend to maintain the same focus on cost discipline in 2026 whilst continuing to invest in our digital and commercial agenda in line with our growth strategy. Accordingly, we expect expenses in the range of DKK 26 billion to DKK 26.5 billion in 2026. Slide 10, please. Turning to our asset quality and the trend in impairments. Throughout 2025, our well-diversified and low-risk credit portfolio benefited from a benign macroeconomic environment, particularly in Denmark, with sustained low unemployment, real wage growth, improving household finances as well as strong corporate balance sheets. In Q4, our strong credit quality underpinned another quarter of low impairment charges amounting to DKK 35 million, which took full year charges to DKK 294 million, equivalent to 2 basis points of our loan portfolio. Actual single name credit deterioration remains modest, and we continue to benefit from modest stage migration. Charges related to our macro models were negligible in the quarter, and we continue to apply both the downturn and a severe downturn scenario. With reduced external uncertainties in the commercial real estate sector, including lower and stable rates, our post-model adjustments review resulted in net releases of DKK 300 million in Q4. Although the PMA buffer has overall been reduced, we have bolstered the buffer related to global tensions further, and we continue to apply a prudent approach to cater for potential risks and uncertainties that are not captured through our macroeconomic models. We will continue to review the PMA buffer sector by sector going forward. I would also like to emphasize that our impairment guidance for 2026 of around DKK 1 billion remains below our normalized level but is not predicated upon significant PMA releases. Slide 11, please. Our capital position remains strong and has consistently been supported by a healthy capital generation throughout the year. At the end of Q4, the fully phased-in CET1 ratio was 17.6% when including the effects from the adoption of the new conglomerate directive that took effect on January 1. Furthermore, the ratio includes the full deduction of the additional 40% distribution of the net profit for 2025 announced this morning in addition to the already accrued dividend of 60%. The increase in risk exposure amount in Q4 relates to higher operational risk REA, which as per normal practice, is subject to an end-of-year calibration that reflects a higher top line and profitability as well as lending-related credit risk REA. We continue to operate with a healthy buffer to the regulatory requirements as we steadily execute towards our capital target of above 16%. We will provide more detail on our capital trajectory with our strategy update in connection with the presentation of our Q1 results. With that, let me turn to the final slide and outline our financial outlook for 2026. Slide 12, please. We expect total income to be around DKK 58 billion. This will be driven by growing core banking income and the continued commercial momentum and growth that we see in our markets. Income from trading and insurance activities remain subject to financial market conditions. We expect operating expenses in the range of DKK 26 billion to DKK 26.5 billion in 2026, reflecting our growth ambitions and continued investment spend alongside a sustained focus on cost management. Cost-to-income ratio is expected to be around 45%, in line with the target for 2026 announced at our strategy launch. We expect loan impairment charges to be around DKK 1 billion below our normalized loan loss ratio as a result of continued strong credit quality. We expect net profit to be in the range of DKK 22 billion to DKK 24 billion. Slide 13, please, and back to Claus. Claus Jensen: Thank you, Cecile. Those were our initial comments and messages. We are now ready for your questions. Please limit yourself to two questions. If you are listening to the conference call from our website, you are welcome to ask questions by e-mail. A transcript of this conference call will be added to our website within the next few days. Operator, we are ready for the Q&A session. Operator: [Operator Instructions] We will now take the first question from the line of Gulnara Saitkulova from Morgan Stanley. Gulnara Saitkulova: So my questions are on NII evolution. You saw a negative contribution from the structural hedge this quarter as well as the strong positive contribution from other income. Could you walk us through the key drivers behind the higher contribution in other income? And how should we think about it going forward? And looking ahead to 2026, how should we think about the main moving parts of NII, including the expected impact for structural hedge? And my second question also on NII. You mentioned that NII expected to grow in 2026. Based on current visibility, do you think the consensus estimates for this year NII are appropriately calibrated or the market may be over or underestimating the outlook? Carsten Egeriis: Thanks for that. Let me take the first more general question, and then I'll hand over to Cecile for the other income and the moving parts on NII evolution, including the structural hedge question. I think overall, we're guiding to higher core income. So we expect to see an increase both in NII and in fees and the higher -- the total income we've guided to around DKK 58 billion. So I think you can sort of roughly calibrate that against current consensus. Cecile, do you want to talk about the moving parts of other income and then the structural hedge? Cecile Hillary: Yes. No, absolutely. So obviously, beyond these effects that Carsten mentioned, I'll talk about the structural hedge and then I'll talk about the other income. On the structural hedge, look, the lift that you've seen year-on-year is obviously the one to focus on. I wouldn't focus too much on the quarterly effect in the sense that, look, we've got obviously a roll-off from our bond portfolio and those roll-offs happen in different quarters, right? So you might have slight ups and slight down in one quarter. But the overall effect for the year is the one to focus on, which leads me to talk about the structural hedge for 2026, and then I'll take the other income question. So the structural hedge for 2026. We will continue to provide lift. So year-on-year, you can expect a positive contribution from the structural hedge. I would note as well that you've seen that we've increased the structural hedge notional from DKK 170 billion as at end of Q3 to DKK 180 billion. So that's on the structural hedge. On the other income, and you can see indeed the other, including treasury of DKK 262 million from Q3 to Q4. Look, this is mainly the tax effect of DKK 200 million. And then the remainder -- so obviously, that tax effect is by definition a one-off, right, which you shouldn't assume going forward. And then the rest is a treasury effect. And obviously, we see ups and downs mainly down to the sort of market value impact of derivatives year-on-year. That's typically linked to the hedging we do on the cross-currency side. So that's on the other income. So obviously, again, 2026 in terms of your expectations, you should see an NII that is slightly up compared to the 2025 results overall. Operator: We will now take the next question from the line of Shrey Srivastava from Citi. Shrey Srivastava: Two for me, please. The first is, I believe you were at DKK 150 billion notional in Q2, and now you're at DKK 180 billion. So you've increased the size of the hedge quite significantly. Could I ask first for the rationale for this? And secondly, do you have a target notional for the structural hedge in terms of a percentage of stable and operational deposits? Or how do you think about it? And my second one is you've obviously done fairly well in large corporates. You've had double-digit loan growth for the year. And you previously remarked how you maintain -- you remain below your natural market share in certain segments. Can you talk a bit about what specific areas you expect to drive growth in the future? Carsten Egeriis: Yes. Thanks for that. Let me take the second question, and I'll hand over to Cecile for the for the question on the hedge increase and the target hedge and rationale. On the loan growth side of things, and now I talk across the sort of corporate banking business, so both our business customers and our large corporate institutions business. Our strategy is to continue to build a leading Nordic wholesale bank and a leading bank for business customers with more complex needs. That was the strategy we launched back in June '23. And we've seen solid growth and continued market share gains in those segments. And it's really all about how we bring to life our total One Corporate Bank and institutional platform, utilizing our strong product factories, utilizing our strong advisory capabilities and combined with our strong digital and technology platforms. And really, when you look at all the Nordic countries, we still believe that we have plenty of growth opportunities. Our market shares continue to be relatively small outside of Denmark. So we have much more opportunity to grow across Norway, Sweden and Finland. And then at the same time, we also believe that with a strong and growing economy in Denmark, we have opportunity to continue to grow there as well. And I think just again, in terms of like whether there are sectors, industries, et cetera, I mean, I would say it's pretty broad-based growth we've seen. There is no question that we believe that we're going into one of the larger investment cycles of our time, driven by energy transition, by defense, by the changes happening in technology. But at the same time, also, again, a pretty robust and healthy Nordic economy more generally. So broad-based growth, but clearly also some pockets of extra opportunity. Cecile? Cecile Hillary: Great. So I'll take the -- your structural hedge question, Shrey. So you've asked two questions. One about the rationale for increasing the hedge to DKK 180 billion in Q4? And then secondly, what is the target notional. So on the rationale, well, look, the structural hedge is well, exactly what it says, which is there to really hedge our stable deposits and liabilities. You've seen the increase on the deposit side, particularly in the retail sector, which is obviously part of our stable deposit base and the strong performance there, right, with 5% year-on-year on the deposit side in the PC sector. That increase in deposits and that stability allows us to continually look at the size of our structural hedge notional and that has led to the increase alongside our objective to be hedged for NII and provide the NII stability or NII uplift that you can expect in the current rate environment. So that hedging focus on the one hand and also the trajectory of our deposits explain where we are. On the target notional, look, I think at DKK 180 billion for the bond portfolio, we are well hedged. Having said that, I would also point out that we obviously have a loan hedge portfolio in addition to the bond hedge portfolio. The loan hedge portfolio is about DKK 200 billion. I would also point out that, that loan hedge portfolio has got some optionality. It's not as perfect a hedge as the bond hedge portfolio, which itself has a 3.5-year average life, but these are the details I can give you. So going forward in terms of the target notional, we're pleased with DKK 180 billion. Where will the trajectory go? Look, I'm not calling for any increase at this stage, although we may see some modest increases in 2026, but it will be either stable or potentially slightly increasing. We also have to see the trajectory on our deposits, of course. Operator: We will now take the next question from the line of Sofie Peterzens from Goldman Sachs. Sofie Caroline Peterzens: This is Sofie from Goldman Sachs. So my first question would be, we have elections in Denmark, if I'm not mistaken, in the second half of the year. There has been some noise in the local press about, I think one of your ministers is kind of suggesting that maybe the fees that the banks are charging are too high. Do you see any risk for any fee caps to potentially be introduced in Denmark? And what could that potentially mean for Danske Bank? And then my second question would be on price competition. We saw, I think, last week, both Nykredit and Danske cutting some of the pricing on the mortgage products. Could you just walk us through the competitive environment? What does these price cuts that you announced last week mean? And how should we think about the margin evolution in 2026? Carsten Egeriis: Sure. Thanks for that. I don't expect that there will be any intervention in terms of sort of price or usually caps. I mean the discussions in -- by the Business Minister has been around competition and increasing transparency and increasing ease of moving bank accounts. And those are all things that, in fact, we support in Danske Bank. So we continue to deliver very competitive products, continue to focus on how to make it even more transparent and easy to move banks. So we're not concerned about any intervention in terms of caps or the like. On the price competition in mortgages, we, in fact, continue to be very focused on competing in the segments where we believe that we can differentiate for our customers. And the mortgage market in Denmark is an important market in the sense that it's an important product for our customers, and we continue to be focused on delivering sort of a broad banking relation for our customers. And therefore, we have chosen to -- on a more sort of focused and targeted competitive approach to lower pricing on some of the fixed rate interest-only mortgage products. And we don't -- again, keep in mind, this is a relatively small pocket of the -- of our overall lending. And therefore, we don't see that this will impact margins. We -- looking into '26, I think at a very high level, we continue to believe that margins, and I'm talking overall now margins across deposits and lending will be fairly stable. Operator: We will now take the next question from the line of Tarik El Mejjad from Bank of America. Tarik El Mejjad: I just want to come back on your growth opportunities and with a focus on Sweden. In the past, you've been giving some snippets on -- hints on where you would grow. Can you tell us a bit where -- how do you see the corporate actually competitive environment in Sweden and how a franchise like yours can actually fit within this competition? And then second question on capital return. I know you will present all this with Q1. So it's more on the on the way you would think about distribution, not the quantum. A few banks now have moved into -- start to distribute the ongoing earnings earlier, like by executing buybacks earlier, which shows as well of confidence on earnings delivery. Is that something you would consider? Or it will be, let's say, '26 earnings with execution in '27? So just to understand whatever distribution you announced with Q1 results, how quickly this could be implemented? Carsten Egeriis: Thanks. Let me take the first one and then, Cecile, I hand over to you for the capital return dynamics and distribution dynamics. On Sweden, we have, over the last few years, increased our market share steadily across all of corporate banking and the institutional business for that matter as well. And we have seen since the launch of the new strategy, a larger inflow of new cash management customers than what we had targeted back when we launched the strategy. This is a very focused part of our strategy is to grow our customer base to get new cash management customers in and then again, to deliver our total One Corporate Bank for our clients in Sweden. The customer intake is really broad-based. There is some customers that are growing and therefore, need a second or third bank, and there are also some customers where we become their first bank. And also when I look at sector and industry, it's broad-based. We've continued to invest in advisory capabilities and talent in Sweden as well as continue to invest, of course, in our One Corporate Bank platform, which, of course, benefits all of our customers. So we see our strategy working. We see it in the market share. We see it in the activity. We see it in the customer satisfaction, where we're also strongly positioned on the Prospera customer satisfaction, not only by the way, in Sweden, but also across the Nordics. Cecile Hillary: So let me take your question, Tarik, on the capital return and the distribution. And let me outline how we view our regular capital distributions. Indeed, in terms of split, it's a 60-20-20. That's in line with last year, 60% ordinary dividend and 20% extraordinary dividend, 20% share buyback. As far as the rhythm of this regular capital distributions are concerned, they're annual. And really, this is not something that we've got any plan to change at this stage. Operator: We will now take the next question from the line of Mathias Nielsen from Nordea. Mathias Nielsen: Congratulations on the strong end to '25. So my first question goes a bit about cost and cost inflation. Like obviously, it seems a bit high in Q4, but I also understood the comments about compensation and seasonality. But you also guide for a bit higher cost inflation next year of between 0.5% and 2.5%. Is there anything that has changed there? And like how should we think about the point in time where we start to see productivity from AI investments and so on offsetting the investments, so to say, so like you get back on that? And then secondly, related to this and maybe a bit on private banking in general, it seems to lag a bit on the cost income target versus where you want to be. It also seems like the lending growth is a bit subdued compared to what we see in the other segments. Is there anything structurally that is not well working at personal customers yet? Or is it just a matter of time? Or how should we think about that before that is also on the same trajectory as we see in the other segments that you have? Carsten Egeriis: Thanks for that. Let me start by personal customers. In fact, since we launched our strategy, we see the following sort of really positive momentum, and that is we see customer inflow in private banking. We see customer inflow in the personal customers with more heavy advisory needs, and we typically segment those as customers with potential wealth above DKK 1 million that really require not just the product set, but also the advisory capabilities. So we see customer net flow in those areas inflow. And we also see market share gains on the investment side, and we overtook -- again, we took our first position as the largest investments market share in Denmark, which, of course, also has a very close link to the fact that both our private banking and the higher end of the personal customer segments are doing more business with us. We're also seeing increased insurance, Danica insurance penetration into those customer segments. And you see that really reflected, of course, in the solid fee income progress. Where we'd like to see more progress is on the mortgage side and is on the sort of mass retail flows. And there, you're right, it is something that takes a little bit longer. There's both sort of rebuilding reputation, continually being out there in the market from a marketing and positioning perspective. But we believe that our digital and technology platform, all the investments we've made, both on Panorama, which is our sort of comprehensive advisory platform to our mobile banking platform, including the housing portal in the mobile bank to our rollout of, for example, our AI chatbots, which provide a better customer experience. All those things, we believe, position us to be able to increase not only the growth in the focus segments, but also in the mass retail. Just a comment on cost, and then I'll also ask Cecile to comment on it. It is true that you see slightly higher costs into '26. '26 will be the largest investment year we've had. So we are investing heavily in our business, in technology, in advisory, in digital. At the same time, we are seeing beginning impact on productivity. I mean we've seen impact from productivity over the last few years, but we're seeing increasing impact of productivity as we roll out various different AI solutions. It is also something we'll talk a little bit more about when we get to our strategy update. So important to say we're investing heavily in the business. We are seeing productivity. We're also seeing continued benefits from lower costs on financial crime and other remediation. But perhaps, Cecile, you also want to comment on the costs. Cecile Hillary: Yes. Let me comment on the -- on the cost, Mathias, and I'll take your questions, which were about 2025 and Q4 specifically. And then, of course, the outlook into 2026, and I'll try and unpack a bit this guidance as well to give you more information there. So on the 2025 side, clearly, we're pleased to have ended the year on expenses in line with our guidance of under DKK 26 billion at DKK 25.85 billion as we guided all along. And as we guided as well in the last quarter, Q4 would be higher. You can see that we've had an increase of about DKK 350 million versus Q3 with respect to the staff costs, including severance and performance-based compensation, which obviously allow us to adapt our workforce to the new skills that we require and the new services that our clients also expect from us as well as beyond the staff costs, obviously, the investments, including digital investments, which you can see as well of above DKK 270 million, which we've done quarter-on-quarter. So as Carsten mentioned, our growth and our transformation strategy obviously require these investments, but also these staff costs, particularly when it comes to severance and performance-based compensation. So that's Q4. Now let me talk a little bit more about 2026 and our cost outlook. So you will see that we've provided effectively a dual guidance. One, we reiterate our circa 45% cost-to-income ratio. for 2026, which is the same as we guided at the launch of our strategy. So that hasn't changed. And then we gave a further range of DKK 26 billion to DKK 26.5 billion in terms of the cost outlook because we thought it would be helpful to effectively range bound the lower and upper bound of our costs for the year. So let me give you a little bit more insight into this cost range. So firstly, you can assume an inflation headwind around our cost from 2025 of about 3%. That inflation headwind will be fully mitigated by the efficiencies under the 428 strategy from our investments, which Carsten was mentioning. And as Carsten mentioned, we will go into these efficiencies and the tech and AI impacts, in particular, a little bit more during our Q1 update on the strategy side as well on 30th of April. Then beyond this inflation headwind of 3% mitigated by efficiencies, we, of course, have costs linked to our growth. So we assume growth in the business. But the rest is really investments, digital, including tech and AI as well as nondigital. And the approach that we have, which is why we wanted to show this range is a stage-gating approach. So effectively, depending on the momentum in the business, we will adjust our costs and our investments to be within this DKK 26 billion to DKK 26.5 billion and obviously meet our cost/income ratio target as well. Mathias Nielsen: Maybe just a follow-up on the Personal Banking. So when we look at the cost income like moving a bit above where you want to be, do you see that as an income issue or mainly a cost issue? How -- didn't really come across like Super clear, what is the delta to reach the target from your perspective? Cecile Hillary: Yes. No, absolutely. Look, a couple of things I would say. I mean, firstly, obviously, I would point you to the ROAC, which is extremely strong in that business. I mean you can see that it's actually above our target. And in terms of run rate in the fourth quarter ended up at 31%. So we're obviously very pleased with the profitability in that segment, which is led by all the initiatives and outcomes that we've seen, including in private banking that Carsten went through earlier. When it comes to the cost to income, look, we are investing, obviously, heavily in that area. These investments are clearly digital. We've upgraded our mobile app. For instance, we've provided some very significant tools that are already showing a very good amount of traction in terms of our relationship advisers and the tools that they have for their clients. And we will continue to invest. And that obviously is something that we're doing with an eye on the overall group costs, as I mentioned earlier, and again, on the ROAC of the area. Operator: We will now take the next question from the line of Martin Gregers Birk from SEB. Martin Birk: Just coming back to one of the last questions on volume growth and especially volume growth in this quarter and perhaps zooming in on large customers and also business customers, a quarter where you should have had quite decent benefit from FX. And it seems like Q-on-Q volume growth is fairly muted and it sort of breaks the trend from the previous three quarters. What's happening in this quarter specifically? And then also coming back to asset coming in -- talking about asset quality. Your impairment guidance is for lower than your normalized next year. I appreciate that you have reduced PMAs by roughly DKK 1.3 billion over the recent two years, but the DKK 5.4 billion still seems relatively high, both in Nordic and in a European banking context. Where would you see this go? Or what is it normalized level for this given your positive outlook on impairment charges? Carsten Egeriis: Thanks for that. I think on the volume growth Q4, on BC, in fact, we continue to see growth quarter-on-quarter. So pretty solid continued momentum. It's true that in LC&I, Q4 was more flattish, but it's not something that concerns us. I mean we -- when we look into 2026, we believe that pipeline and activity looks good. And again, of course, the stable Q4 is on the back of a growth rate of 14% year-on-year. On the asset quality, we see very solid asset quality. And as you also see in the staging, very solid sort of trends in Stage 2 and 3. So it is true that although we do have a little bit of release on the post-model adjustment side, it is still a high level of post-model adjustments that we have. If I sort of look at it through the cycle, that is very much driven, of course, by continued macro and geopolitical uncertainty. But as I've also said before, you should expect those PMAs to come down gradually as we get more certainty and visibility. That's, in fact, also what you've seen, particularly in commercial real estate as inflation and rates have come down and that, that has normalized more. So again, yes, continued view that it is on the higher end and that with the current economic environment, our base case, you should expect that to continue to come down somewhat. But again, also being very clear that there is an exceptional amount of geopolitical uncertainty. And therefore, we're also being cognizant of that, which is reflected in the PMAs. Martin Birk: And you wouldn't say that the volumes development that you see in Q4 is a function of particularly one player increasing its appetite on Swedish SME and corporate markets. I didn't hear that, sorry. Carsten Egeriis: No, no, I wouldn't say that. Claus Jensen: Operator, can we have the last question, please? Operator: We will now take the last question from the line of Riccardo Rovere from Mediobanca. Riccardo Rovere: Two, if I may. The first one is on the capital target. You technically have more than 16%. That is unchanged, but your common equity Tier 1 ratio stays more or less in line with the rest of the Nordic bank anywhere between -- in the range of 17.5%. So I was wondering how should we read the more than 16% because I would guess that this is interpreted at maybe 16.5%, but your common equity is way ahead of that. The second question I have is not clear to me if you have -- if your guidance on losses includes the use of PMAs or some of the use of PMAs in '26. And then if I may, a final one, the new conglomerate direction gives you some more headroom or some regulatory advantage in -- for bolt-on acquisitions in the asset management or insurance space eventually? Carsten Egeriis: Yes. I mean just a short comment on the last one. It's not something that we are looking at actively. Of course, we have a life insurance company in Denmark. But otherwise, it's not something that we're actively looking at, but there could be benefits in the future from accounting, but it's not something we're focused on. On the loss guidance, the loss guidance excludes any changes for post-model adjustments and the loss guidance of DKK 1 billion, much in line with last year is our best view given kind of the benign macro environment that we're looking into and the benign asset quality that we're seeing. And then Cecile, maybe you can comment on the capital targets. Cecile Hillary: Yes, absolutely. So on the capital targets, obviously, Riccardo, it hasn't changed, right? So it's still above 16%, and we're not going to -- we're not planning to change it at this stage. You are right that at a CET1 of 17.6%, we obviously have excess capital, which is something that we've obviously discussed and it's a regular topic of discussion with analysts and investors alike. We are planning to address this topic and the glide path when it comes to our capital in the context of our Q1 results. So that will be on the 30th of April. So I will ask you to bear with us until then. But look, I mean, I think in terms of capital, obviously, we benefit from a very strong capital generation year-on-year. That's been the case certainly since we launched our strategy, and we've been constantly quarter-on-quarter hovering between the sort of 250 and 300 basis points annualized capital generation, which is obviously a positive thing. So the 17.6%, just to confirm, obviously includes fully loaded, so the impact of the conglomerate directive as well. And I will also -- just one last thing. Obviously, you know that our capital requirement is 14.8%, right, on the risk side. So above 16% is obviously the target. Carsten Egeriis: Okay. Well, thank you very much, everyone, for your interest in Danske Bank and your questions. Much appreciated. And as always, please reach out to Claus and our IR department if you have any other questions. Thanks very much.
Operator: Good day, and welcome to QuinStreet's fiscal second quarter 2026 Financial Results Conference Call. Today's conference is being recorded. Following prepared remarks, there will be a Q&A session. Please press 0 for the operator. At this time, I would like to turn the conference over to Vice President of Investor Relations and Finance, Robert Amparo. Mr. Amparo, you may begin. Robert Amparo: Thank you, operator. And thank you, everyone, for joining us as we report QuinStreet's fiscal second quarter 2026 financial results. Joining me on the call today are Chief Executive Officer, Doug Valenti, and Chief Financial Officer, Greg Wong. Before we begin, I would like to remind you that the following discussion will contain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from those projected by such statements and are not guarantees of future performance. Factors that may cause results to differ from our forward-looking statements are discussed in our recent SEC filings, including our most recent 8-K filing made today and our most recent 10-Q filing. Forward-looking statements are based on assumptions as of today, and the company undertakes no obligation to update these statements. Today, we will be discussing both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures is included in today's earnings press release, which is available on our Investor Relations website at investor.quinstreet.com. With that, I will turn the call over to Doug Valenti. Please go ahead, sir. Doug Valenti: Thank you, Rob. Welcome, everyone. Fiscal Q2 was another productive and successful quarter. We exceeded our outlook for both revenue and adjusted EBITDA. And even more importantly, we continue to make good progress on needle-moving initiatives across the business. We see the setup for continued long-term revenue growth and margin performance as better than ever. Auto insurance demand remained strong again in fiscal Q2, with sequential performance besting historical seasonality trends. We continue to expect further significant growth in auto insurance revenue and margin in coming quarters and years due to strong client and marketplace fundamentals, and to our rapidly expanding product market and media footprints. Home services continue to grow at double-digit rates and is now running at close to $300 million per year in revenue, between $400 million and $500 million per year with the addition of Homebody. Our outlook for that business, what we believe to be our largest addressable market, remains strongly positive short and long term. I just mentioned Homebody. Subsequent to quarter end, and as previously announced, we completed the acquisition of Homebody, adding unique new product media and clients to home services. Homebody has mastered the technology and execution of auction-driven exclusive leads, a product in high demand by large segments of the home services client market and one that we did not yet have. Also, their focus and success building big scale campaigns in social and native channels brings vast new sources of media helping us meet fast-growing client demand. We expect Homebody to extend our long history of successful M&A. Most recently, that history includes Modernize Home Services and Aquavita Media. Modernize is now the core business of our home services client vertical, where our revenue has grown about 150% since the acquisition in 2020. Aquavita Media is now our core social native and display media platform. Those channels have grown about 300% in revenue just since the acquisition in 2024. We were even more excited about the potential for Homebody than we were about these highly successful transactions. Our total addressable market opportunity is enormous and growing. And we continue to deliberately, contiguously, and successfully expand our footprint. We still estimate that we are less than 10% penetrated in our current addressable market footprint. We are also focused on continuing to adapt aggressively and successfully to changes in our markets and ecosystem. Most prominently, our progress applying AI across the business and thriving in a more AI-driven ecosystem has already been strong, and we are continuing to increase those efforts. We expect AI to lead to increased opportunities in our already big and fast-growing markets. And we expect to disproportionately benefit from AI due to our structured proprietary integrations and data and to our long history of successfully applying AI as a competitive advantage. Overall, we expect total company revenue growth and margin expansion in coming quarters and years. We continue to expect full fiscal year revenue, excluding Homebody, to grow at least 10% and full fiscal year adjusted EBITDA, excluding Homebody, to grow at least 20%. Both consistent with our previous outlook. We also expect to achieve our next milestone margin goal to reach 10% quarterly adjusted EBITDA margin in this fiscal year, even excluding Homebody. Said another way, our core business remains strong, and Homebody is purely additive and accretive to our previous outlook. Turning now to our new outlook, which, of course, includes Homebody. We expect total revenue in fiscal Q3 between $330 million and $340 million and total adjusted EBITDA to be between $26.5 million and $30.5 million. We expect total revenue in full fiscal year 2026, which, as a reminder, ends in June, should be between $1.25 and $1.3 billion. The total full fiscal year adjusted EBITDA to be between $110 and $115 million. With that, the call will be Greg. Gregory Wong: Thank you, Doug. Hello, and thanks to everyone for joining us today. Fiscal Q2 was another productive and successful quarter, as Doug noted. It was the second consecutive quarter of record revenue for QuinStreet and what is typically our seasonally lowest revenue quarter. The strong performance was driven by impressive execution across our verticals. For the December, total revenue was $287.8 million. Adjusted net income was $14 million or $0.24 per share, and adjusted EBITDA was $21 million. Looking at revenue by client vertical, our financial services client vertical represented 75% of Q2 revenue and declined 1% year over year to $216.8 million. Auto insurance momentum continued in the quarter, growing 6% sequentially versus the September, significantly outpacing typical seasonality. From a year-over-year standpoint, we were down 2% as we were comping against an unprecedented surge of insurance carrier spending in the year-ago period. Noninsurance financial services, which includes personal loans, credit cards, and banking, grew 10% year over year. Our home services client vertical represented 25% of Q2 revenue and grew 13% year over year to $71 million. Turning to the balance sheet, we closed the quarter with $107 million of cash and equivalents and no bank debt. Moving to the tax front, our provision this quarter includes a one-time benefit of $48 million related to the reversal of our valuation allowance against our deferred tax assets that we established in fiscal year 2023. We expect to return to a three-year cumulative position by the end of this fiscal year. So this entry was required by GAAP. To be clear, this one-time benefit is a non-cash item and is excluded from non-GAAP results. Moving on from our Q2 results, I'd like to spend some time discussing our recent acquisition of Homebody and our capital allocation priorities. Starting with Homebody, Homebody expands our product, media, and client footprints for growth at scale. And what we believe is our largest addressable market, home services. While our home services vertical has been growing at a compound annual growth rate of over 15%, even combined with Homebody, we serve less than 1% of a massive market that we estimate spends more than $70 billion on marketing. We closed the acquisition of Homebody about a month ago in early January. As a reminder, the terms of the acquisition include $115 million of closing. We funded this amount with $45 million of cash from our balance sheet and $70 million drawn from our new $150 million revolver credit facility. In terms of the acquisition, also include $75 million in post-close payments payable equally over four years. As previously communicated, when we announced the acquisition, we expect Homebody to generate $30 million or more of adjusted EBITDA in the first twelve months after closing. And although early in our integration of Homebody, we are working on capturing synergies to drive that number even higher. Overall, QuinStreet remains in a strong financial position. And we expect to generate strong cash flows in the coming quarters. We continue to have a rigorously disciplined approach to capital allocation and will continue to prioritize one, investing in new products and initiatives for future growth and margin expansion, two, accretive acquisitions, and three, share repurchases at attractive levels. We will continue to be measured in our approach and remain focused on maximizing shareholder value. Overall, our long-term outlook has never been better. We expect strong revenue growth and margin expansion to continue in coming quarters and years. With our near-term next milestone goal, still to reach 10% quarterly adjusted EBITDA margin, in this fiscal year. Even excluding the expected accretive impact of Homebody. As a reminder, we have three key levers to expand EBITDA margin. One, growing and optimizing new higher margin media capacity to meet auto insurance market demand. Two, growing higher margin products and businesses in insurance and in non-insurance client verticals to represent a higher percentage of our overall business mix, and three, capturing operating leverage from top-line growth through scale and from efficiency and productivity initiatives. In other words, growing revenue and media margin dollars significantly faster than operating expenses. Turning to our outlook, which includes Homebody, we expect total revenue in fiscal Q3 to be between $330 and $340 million and total adjusted EBITDA to be between $26.5 million and $30.5 million. We expect total full fiscal year 2026 revenue to be between $1.25 billion and $1.3 billion in total full fiscal year adjusted EBITDA to be between $110 million and $115 million. With that, I'll turn it over to the operator for Q&A. Operator: Thank you. Ladies and gentlemen, we will now open for questions. Should you wish to decline from the polling process, please press the star key followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Zach Cummins of B. Riley. Please go ahead. Zach Cummins: Yes. Congrats on a strong quarter, Doug and Greg. Doug, I just wanted to start off asking about just AI in particular. I know that's been a big worry in the market here in recent weeks. But first, can you talk about the traffic trends you've been seeing with your platform in recent months? Have you seen any meaningful changes in terms of channel or overall traffic volumes? And then second, I know you touched on this a little bit in your script, but can you just speak to how QuinStreet can position itself to navigate the changes in the landscape as AI becomes more prevalent? Doug Valenti: Yes, Zach. Thank you for the question. In terms of traffic trends, only positive. We have seen no negative trends or let me say this. We have seen only net positive trends in the traffic, and we expect that that would continue to be the case. I think we have a record amount of volume with, say, Google on that platform. On and mostly the most of the searches now, as you know, involve AI-based answers and searches. It's only created more opportunity for us to get deeper and have more places to run our campaigns. So short answer, net positive and it's strongly net positive. You can see it in our performance trends. You can see it in our forecast. And we're seeing it in the data. So fears there would be unfounded. In terms of the overall AI landscape, which is obviously and apparently, on everybody's mind right now, that, you know, there seem to be if step back, there are kinda two big concerns. One is the AI bubble. And the other is the AI disruption or disintermediation. I think we can all agree that the bubble concerns don't really apply to us given, you know, where we're now trading relative to our strong performance and scale. And so we've traded down with the sector. Broadly defined. With respect to fears of disruption and disintermediation of existing business models, that's pretty clearly overblown across and it's been pretty indiscriminate. Of course, as it's kinda pulled in software, SaaS, information services, performance marketing, and all of those things. And it's not surprising it's been overblown and indiscriminate. It's kinda what happens early in these big risk cycles, you know, interpreted as risk cycles. But pretty clearly overblown. And don't take my word for it, obviously. I mean, Jensen Wong, who knows more about AI than any of us will ever know, is quoted, as you know, in the past couple of days talking about it and saying it's just illogical. It doesn't make sense. AI is much more likely to enhance or utilize the value-add business models and tools, software, and otherwise out there than it is to replace them. And the CEO of Google just said basically the same thing yesterday, certainly, that would be our view from the trenches as we actually do this stuff day to day. And I would add, historically, most of the value of these big technology disruptions eventually accrues to the incumbents after the big platform and infrastructure companies are built, which is a phase, of course, we're going through now. So that's exactly what we're also seeing. On the ground in the trenches applying and competing and working these businesses day to day. And as I think I've indicated before, we have a lot. We've always had a lot of AI going on in our core marketplace algorithm function. Since 2008, that's been our core technology. And we've only added to that, of course, and we have activities across the business and applications of AI. So we certainly see ourselves as that's gonna be an example of that. Now the fears of people being disintermediated, disruptive aren't completely unfounded. And if they're to accept their businesses, that rely on commodity data or commerce and commodity products, or that are doing simple aggregation, simple manipulation, or simple intermediation of those areas. Commodity data, commodity products, then they are certainly at risk from AI. But that is not what most successful software companies broadly define or certainly not what QuinStreet is or does. We at QuinStreet have literally billions of dollars of proprietary data. We have spent billions of dollars generating that data through media campaigns that are extraordinarily complex with permutations into the billions. When you combine all the variables. We have proprietary integrations and access to data and that to that data that allows to continuously generate more of it, refresh it, and build on it. And we have proprietary technologies, including AI since 2008, as I mentioned. That we utilize to optimize that data for the benefits of our consumers, and of our marketing clients. And we also do that in a regulatory compliant and brand compliant way. Which are highly, highly complex. So clearly, what we do is uniquely complex. It's not commodity. It is value-add. It's proprietary. And, clearly, we've been successful. We're good at it because if you look at our age and our size and our profitability, by definition, we're quite successful at it. So we see as AI comes. We see rather than the negatives and the disruption, what we see is a field of, you know, more, better, higher capabilities that is net additive in a very, very meaningful way. To our business and to our company. We do not view it as a big threat. And in terms of disintermediation, by the way, if our business model could have been disintermediated, there are some big players that already exist with massive capabilities that have done that a long time ago. Question we always ask, we have always asked because we take our moats quite seriously. Is if someone were to try to disintermediate with tech AI or otherwise, how would they do it? Who would be able to do it? And how would they make money? And we just don't we can't and, again, we do this to our so we, as an executive team and with a product engineering team, ask this question all the time. And the answers are you know, nigh on impossible. Extraordinarily difficult. First of all, who would have the incentive because they gotta be able to make money? How would they get access to or replicate the data which again, would take enormous amounts of time and money? It's not something you could just turn AI on, expect that the data's gonna come. How would they access the data? Because, again, they can't get access to the proprietary integrations because the clients among others, don't won't give it to them. And how would they make money? The money comes from the marketers. This remediation would include not just a district meeting, say, at QuinStreet, it would really mean disintermediating the client brands. Which represent hundreds of billions of dollars of value and tens of billions of dollars of annual spend. So the money is in the marketing. Which means the money is not in the disintermediation. So we see again, we don't see the risk that others see. We take it seriously. We look for it. We test against it. We ask ourselves. We question others in the industry. No. Nobody, by way, has been able to counter any of what I just said. But we see more opportunity not less going forward. And it clearly and hopefully that's reflected in our performance you know, recently. And in the past and in our you know, in the forecast that we've given. So probably a longer you signed up for, but I think in this environment, something that is worthy of that. Zach Cummins: Absolutely. Thank you so much for the color, Doug. I'll keep it to just one more follow-up question. In terms of auto insurance trends, nice to see the sequential increase here in what is seasonally a slower quarter on the auto insurance side. As we lap into calendar year '26, I mean, can you give us a sense of just the appetite and spending trends you've been hearing from your clients? I know premiums are likely to moderate, but it seems like profitability is in a great spot for many of these carriers. So just curious to hear conversations and trends you've been seeing across your auto insurance carrier base. Doug Valenti: Sure. Very strong engagement, very strong interest, a lot of focus on the channel, a lot of focus on how to do better and eventually bigger in the channel. On the other side, you know, there's been an unprecedented surge in their spend overall and certainly in the channel over the past year or so, and they're still digesting that. And they're kind of reaching, you know, kind of on this new plateau. They're scoring incrementally, but not growing at high rates from here. While they sort out how that worked for them and what they wanna do to optimize further and what risks lie ahead, including, you know, having enough and by the way, you're right. Their economics are in great shape. Their financials are in great shape. So they have great capacity. But I you know, based on what we observe, it appears that they're weighing that against you know, are there places where they should now be reducing rates? What are gonna be the eventual full effects of tariffs? And many other factors. So I would say that strong engagement, very stable, incremental growth, I'd say that returning to a more normalized growth rate, which we would consider to be between 10-20% year over year, is probably on the not too distant horizon as long as there's not some big externality impact from something that nobody expects. But you know, these guys these the carriers are extraordinarily sophisticated. They're balancing a lot of different things. They're adapting as they go. I know there's been some concern out there about rates and what happened in New York, people fearing that there'd be impact on rates. That's just normal course for the auto insurance industry. This is the stuff that goes on all the time. You know, different states having different points of view about the rates and where they are. And these companies, our clients, these sophisticated auto insurance carriers are extraordinarily adept at adapting and adjusting and navigating and moving forward. So we don't see any of that as being a material risk to what we're likely to see from them going forward. Zach Cummins: Understood. Well, thanks again, Doug, for taking my questions, and best of luck with the rest of the quarter. Operator: Thank you, Scott. Your next question comes from Jason Kreyer of Craig Hallum. Please go ahead. Jason Kreyer: Great. Thank you. So just wanted to touch on Homebuzz and kind of the cross-sell opportunity there. Specifically on the media side of things, I think Homebody opens up a lot more reach in terms of media. Maybe if you can just talk a little bit about what that cross-sell can look like. Doug Valenti: You bet, Jason. It's a great question. And that's probably the most exciting part of the Homebody combination. We are really despite the great success of Acovidia, which kind of our toe in the water, and what is the place where there's the most tumor traffic on the Internet, which is the combination of social display and native. We are kinda nowhere. In that overall ecosystem because the traffic is quite different in terms of its intent than the search ecosystem that we have grown up in and that we are so good at. And so what Homebody does is it brings demonstrated ability to build these campaigns at scale in that biggest media footprint on the Internet. They already do a $140-ish million in revenue. They're all in that media. And they do it very successfully in terms of client results and very successfully in terms of economic. And so they figured that out. And so we could have continued to spend a lot of money figuring it out and climbing that learning curve ourselves. But, you know, we were able to acquire Homebody on very attractive terms and in a way that gives us that access and that capability immediately so we can now scale it rather than continue to work our way up that scale learning curve. And the cross-sell there is enormously important because if you look at our home services business today, our GM there just recently said to every client wants more. Every client. And so that's the demand side of the market if you will. The supply side is media. And so having now the ability to scale dramatically in a very predictable expert way that Homebody brings us. In that media ecosystem to continue to feed the growing demand for digital performance marketing from our growing footprint of home services clients is enormous. It's just I can't say enough about how exciting and what a big deal that is for us. So that and then the other side of it is I indicated in my prepared remarks, prepared remarks, is they also have a unique product that works great in their ecosystem, but also works in our ecosystem, which is this auction-based exclusively. A product that's fairly complex and in this technology and implementation and execution. It's their core it is their only product, basically. And so taking that product and selling that into our client footprint is also a big opportunity. So both are big, but if you made me pick one, I'd pick the media side like you appropriately pointed out. That's a big deal. Jason Kreyer: Wonderful. I'm gonna pivot on the follow-up here. So the last couple of quarters, Doug, you've highlighted some R&D initiatives that you think can drive accelerated growth, drive improved profitability. I think embedded in there are things like QRP, things like finance March. I know you have others in there. Curious, you know, how are these tracking, and when do you think these initiatives can get to the point of scale where they become more noticeable to fundamentals? Doug Valenti: That's a great question. You named a couple of them. Others include new media and auto insurance to meet demand at a higher margin and expanding our insurance footprint into places other than just auto insurance clicks, which would include leads, calls, and selling more into the agent-driven models. We historically were dominated in our insurance business for clicks to direct carriers. Great carriers like Progressive and Allstate, GEICO and pretty much all the major carriers. But that's only half the market in terms of marketing spend. The other half is on the agent-driven carriers. And that's a place that we're spending a lot of time and money and that comes to us because of our abilities, at very attractive margins. In a place that we're you know, we see hundreds and hundreds of millions of dollars of new revenue opportunity, and we're up to about a $100 million revenue run rate there now. So we're getting that one to pretty good scale, but there's a heck of a lot more to come. And then there's the whole commercial or small business side, which has enormous demand from our clients and represents if you look at overall demand from, you know, insurance to consumers and then insurance to or PNC, if you will, for consumers and insurance to small businesses. That kinda and half of the overall market. So, you know, we're currently concentrating about a quarter of the overall addressable market. Still a lot of opportunity in that quarter. But we're expanding our footprint into another one of the quarters, which is the agent-driven side of cons PNC, and then the other half, which is the SMB and consumer. So we're further along in the agent-driven PNC, but we are making good progress on the SMB and commercial side, and we have a lot of runway in front of us. So those are also components of that. So I would say that some already at good scale. Leads and calls into PNC consumer agent-driven is, you know, like I said, running $100 million a year or so. And very strong performance there. Others are getting to better scale three and QRP. Are both growing very rapidly. And together will represent north of $10 million. Well north of $10 million in revenue high margin high variable margin revenue. This fiscal year we're getting near the tail end of our heavy lift in R&D spending for those products. And really much more into the scale and profitability era for those products. And so and I could probably name five or six or seven other initiatives in the various businesses across the company, including owned and operated media auto insurance owned and operated media. For credit cards, which are two areas that we've spent a lot of money developing, and we're, yeah, we're much further up those learning curves both in terms of scale, but it's also in terms of profitability than we were, you know, a couple months ago, let alone six, twelve months ago. Yeah. So big initiatives across the business. I think in terms of the answer, in terms of when you're gonna see their effects, you're seeing the effects now. You know, we have forecast a pretty significant increase in our adjusted EBITDA margin this quarter and next quarter. And Greg alluded to the various components of what's driving that. You know, one being new capacity, better margin media and auto insurance, O&O media, auto insurance. And other media, higher margin media in auto insurance. Another one being growing these new niche new higher margin initiatives in businesses, some of which I just talked about. And the third leg being just leverage from greater scale on a slower growing semi-fixed cost base. So you are going you have seen it. Lately. As we've ramped adjusted EBITDA margin back up after the effects of the initial surge in auto insurance and you're going to see a discord, the existing current quarter, and you're gonna see it grow significantly and incrementally yet again in fiscal Q4. Because, again, we've said, listen. We fully expect that we're going to hit that 10% adjusted EBITDA margin number from the 7.3% we just did last quarter. In this fiscal year, on a quarterly basis, even without Homebody, and Homebody's accretive to that. So, you know, those are kinda some of the moving parts, and, hopefully, that gives you a good view of it. Jason Kreyer: Yeah. Really good color in that answer. Thank you, Doug. Appreciate it. Doug Valenti: Thank you, Jason. Operator: Your next question comes from Eric Martinuzzi of Lake Street. Please go ahead. Eric Martinuzzi: Yes. The growth rate on the home services business, kind of a legacy side here. The last couple of quarters has been about mid-teens. What is Homebody growing at a similar rate? Doug Valenti: Homebody's been growing at a little bit faster rate lately. So, you know, net net, Eric, we still as we've said before, we expect the average compound growth rate of our home services business going forward to be between 15-20%. Eric Martinuzzi: Okay. And then the as I looked at the kind of implied math for Q4 based on the Q3 guide, least in MIMO, I've got a little bit more of a hockey stick in Q4 than I had as I'm revising the model. Just wondering if there was any abnormal seasonality either in the legacy business or in the Homebody acquired business as you look out to Q3 and Q4. Doug Valenti: That's a good catch. And in fact, there is seasonality in the home service business, both our legacy business as well as in Homebody, and a pretty significant seasonality. The March, one of the weakest quarters not surprising. Right? There's snow and ice everywhere, so people aren't doing a lot of gutter replacements or things like that. But and then the activity grows pretty dramatically, and the two strongest quarters are the June and the September quarter. And so you're dominantly, what you're seeing there, Eric, is that effect. From a now combined, as I indicated earlier, home services business that represents between $400 and $500 million for total revenue. So pretty significant seasonality. Weak quarter, marked weakest quarter one of the two weakest quarters, December and March quarters. And then you're seeing the June quarter, which is our fiscal Q4 being one it's which is historically the strongest quarter in the home services industry. So that's the impact or effect you're seeing. Eric Martinuzzi: Got it. Thanks for taking my questions. Doug Valenti: You bet. Operator: Reminder, if you wish to ask a question please press 1. Your next question comes from Patrick Sholl of Barrington. Please go ahead. Patrick Sholl: On the other financial service verticals, I think you mentioned that those were up year over year. I think you had talked about kind of, like, just a difficult comp in credit cards and the last quarter. So can you maybe just sort of like just talk about environment for those services right now just in the current macro environment? Doug Valenti: Sure, Pat. I would say the environment is good, not great. We still have tons of growth opportunity even in a good or less than good environment because we're still pretty early in and relatively small in our footprint and all of those. Those businesses are what we generically call personal loans. Should probably more specifically internally, we refer to it as financial solutions. Because it includes not just personal loans, but HELOC, debt settlement, credit repair, and a lot of other services to consumers. So still early in our overall growth planning and strategy there. Those markets are in pretty good shape. Unfortunately, debt settlement and credit repair have been in pretty strong demand. Over the past number of quarters and are likely to and look like they're just getting stronger. As the consumer cohort faces more and more pressure. The personal loans business is solid. And doing better. Most of the lenders have been opening up their demand and their filters. And then we have the other newer components there, like I said, HELOC and others. That we are super early in but are showing very good signs. So I would say it's a good environment. It's not a great environment because there is some concern among clients that the consumer or at least the working consumer is under a lot of stress. Again, that's not bad for some of what we offer, like debt settlement. In terms of and just to get to a couple of the other pieces of credit cards, we serve premium consumers pretty much only. We're dominant in the high-end credit cards, the travel points credit cards. So that business is in great shape. There's a ton of competition among the banks as you probably know if you've been exposed to any media. We're trying to sign up customers for their premium travel credit cards. There's a lot of money in that. A lot of interest in that. There's been a little bit of concern lately about the notion of somebody trying to impose a 10% limit on credit card interest. What we've heard from the industry and from the clients is that that is extraordinarily unlikely. And the clients are not behaving as if that is going to happen. So they're not changing their appetite, their spending habits. We have the unique position of being one of only a couple of companies that can run third-party media networks for all the major credit card issuers. We're very good at that. That's a great competitive advantage and a great opportunity. We are aggressively building on top of that a lot of owned and operated media, which has been something we've been investing in and that we're super excited about continuing to scale in that market. And our clients only want more from us. It's another one of those verticals where the only complaint we typically get from a client is we need more from you. We want more. So we're aggressively working to build that out, into a good appetite. And then the banking side was kind of the smallest of the three of those pieces. Which is where we really deal with source of funds accounts. A CD savings, high yield savings, more and more brokerage accounts. We're just super early. The demand is strong. We're not seeing, you know, macro effect wise, we're not seeing anything that I think is notable given how early we are in our penetration a massive market opportunity. We're super early. It's a very, very good business for us. And I think we feel like we're, you know, we're gonna continue to do well. Though we've seen a little bit of there's been some clients that have kinda been in the CD market. You know, every time there's a big threat of interest rates coming down faster than anybody expected, you'll see them pull back a little bit because they don't wanna commit to CD consumers. The rates are gonna come down immediately. And so there's been a little bit of choppiness but I would say I wouldn't say enough that I would call any kind of big macro effect. I would say that it's just kind of part of the volatility we're seeing generally in the current economy some associated with what I might say is what I might call unpredictable government intervention. Patrick Sholl: Okay. And then maybe just, like, a couple questions related to AI. Just maybe with all the capital being committed to AI investments, are you seeing, like, any difficulty in attracting or retaining talent? And then you kinda talked about, like, just the sources of traffic. Are you seeing specifically you highlighted the Google search results and the incorporation of AI there. Can just maybe sort of talk about, like, if you're seeing, like, any change in if what you're seeing a little bit more detail on what you're seeing on the traffic patterns of whether coming from SEO versus your partners and your other sources there. Thank you. Doug Valenti: Yeah. Sure. We are not seeing a loss of or difficulty recruiting. I would point out, and this is an interesting fact, that the chief strategy officer at OpenAI is a former QuinStreet employee. For you know, if anybody wants to understand how QuinStreet is integrated into the overall market. But no, we're not seeing problems attracting or retaining talent. Anywhere in the company, let alone in our tech group and our AI group. There's a lot of good talent out there, and we have a lot of projects. So we're able to keep those folks and attract those folks. In terms of Google traffic, more and more traffic does come from SEM, which is paid traffic. Around GEO searches, you know, generative engine optimization searches. And we're very, very successful in the SCM component. We always have been, and we're only getting more opportunities to do that at greater scale. In the current Google format. And we are seeing pretty good progress in GEO. We don't have much by way of SEO. It's never you know, we deemphasized that years ago. And so, our SEO is actually fairly stable, not declining any of significant rates, but it's not material anyway. So it's again, it's not something that we made the decision a number of years ago not to focus on it because we needed Google did not want people to focus on it. They want to they wanna build partnerships with folks like us where we pay for media. They don't really they're not that interested in sending us free traffic. So, again, we made that strategic decision a long time ago. It's not a significant component of either our traffic nor really of our third-party media. And that transition has happened over a number of years. So yeah, the mix is yeah. The mix has shifted to more SEM around AI-based searches and that's good. You know, we again, we see that as providing us with even more opportunity to be even more targeted. And segmented in our spend, and we're very, very good. Patrick Sholl: Okay. Thank you. Doug Valenti: Thank you, Pat. Operator: There are no further questions at this time. Thank you everyone for taking the time to join QuinStreet's earnings call. Replay information is available on the earnings press release issued this afternoon. This concludes today's call. Thank you.
Keri A. August: Good afternoon, ladies and gentlemen, and welcome to Good Times Restaurants Inc. Fiscal 2025 Fourth Quarter and Year End Earnings Call. I am Keri A. August, the company's Senior Vice President of Finance and Accounting. By now, everyone should have access to the company's earnings release, which is available in the Investors section of the company's website. As a reminder, a part of today's discussion will include forward-looking statements within the meaning of federal securities laws. These forward-looking statements are not guarantees of future performance, and therefore, you should not put undue reliance on them. These statements involve known and unknown risks, which may cause the company's actual results to differ materially from results expressed or implied by the forward-looking statements. Such risks and uncertainties include, among other things, the market price of the company's stock prevailing from time to time, the nature of other investment opportunities presented to the company, the disruption to our business from pandemics and other public health emergencies, the impact of staffing constraints at our restaurants, the impact of supply chain constraints and inflation, the uncertain nature of current restaurant development plans, and the ability to implement those plans and integrate new restaurants, delays in developing and opening new restaurants because of weather, local permitting, or other reasons, increased competition, cost increases or ingredient shortages, general economic or operating conditions, risks associated with our share repurchase program, risks associated with the acquisition of additional restaurants, adequacy of cash flows, and the cost and availability of capital or credit facility borrowings to provide liquidity, changes in federal, state, or local laws and regulations affecting our restaurants, including wage and tip credit regulations, and other matters discussed under the risk factor section of Good Times annual report on Form 10-K for the fiscal year ended 09/24/2024, and other reports filed with the SEC, including Form 10-K for the fiscal year ended 09/30/2025. During today's call, we will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP, and reconciliation to comparable GAAP measures is available in our earnings release. And now I would like to turn the call over to our Chief Executive Officer, Ryan Zink. Ryan M. Zink: Thank you, Keri, and thank you all for joining us today. As has been reported by other company-operated quick-service burger companies, the fourth fiscal quarter was a challenging one for us, in particular, at our Good Times concept. The combination of soft sales and higher costs, most specifically the significantly elevated cost of ground beef, put a dent in profitability for the quarter. Keri will go into details surrounding the financial performance during the quarter, but it goes without saying that we are disappointed in the results and committed to immediate improvement. Of note, although the same-store sales at Good Times remained negative in the fourth quarter, the 6.6% decline represented a 240 basis point sequential improvement from the fiscal third quarter, and through the first eleven weeks of the first fiscal quarter, Good Times same-store sales are down approximately 3.6% compared to the same time period in the prior year. Craig So to, our director of operations for Good Times, continues to demonstrate strong leadership and has been holding a higher level of accountability among above-store leaders, which has cascaded down to our restaurant-level general managers. Craig has focused on realigning general manager schedules to better align the time GMs are in the restaurant with peak revenue periods, which is creating greater GM-level awareness and interaction with team members throughout the day, enabling them to address product and service opportunities that exist primarily in the dinner and late-night dayparts. Craig, along with our learning and development team, have made significant strides in improving restaurant-level training, paving the way for us to roll out true cook-to-order among all of our burger products with minimal impact on speed of service. We have several different price tiers within our system and remain sensitive to menu price increases, as the quick-service burger segment has earned a poor reputation recently for value as a result of the significant price increases major players have taken in the years since the pandemic. Our core menu pricing at Good Times remains near its lowest premium to our large competitors in fast food, as we have only taken approximately 1% of menu price since January 2024. With our upcoming cook-to-order process and continued improvements in ops execution, we believe we can re-earn a premium to those competitors over time. We continue to be averse to large-scale discounting due to its impacts on profitability. However, we will be addressing value concerns with highly targeted value promotions starting this spring and expect expanded offerings through our GT rewards loyalty program, a recently refreshed mobile app meant to simplify the mobile ordering experience. For Bad Daddy's, although our same-store sales weakened during the fourth quarter, they have improved sequentially to date in the first quarter, and we are down approximately 1.6% through the first eleven weeks of the quarter compared to the same time period in the prior year. Same-store sales improvement has been most evident in our Colorado restaurants, marking a change in trend from 2025 when our Colorado restaurants have been a drag on same-store sales for the Bad Daddy's system. Similar to Good Times, we've made some targeted pricing adjustments and have made some upward adjustments to our Badass Margarita pricing in the fall. We currently have a blended year-over-year price increase covering food and beverage of less than 1%, and expect an average year-over-year price increase for the first quarter of approximately 1.7%. Our fall product promotion, which among other items featured a giant shareable Bavarian pretzel served with a house-made sauce trio of jalapeno cheddar Sam Adams beer cheese, whole grain dijonnaise, was a hit with our guests. And we see an opportunity for the pretzel to be included in our core menu at some point in the future. Our holiday promotion includes a chocolate cookie cheesecake that is made in-house and has satisfied a long-term guest request for a chocolate dessert. Similar to the pretzel, we see the cheesecake as a potential future core menu addition. Following a winter promotion anchored by a Mediterranean Power Bowl and two regional burger features, we expect to move to a burger of the month platform, which will simplify messaging around the product feature, enable a sharper focus on product execution and salesmanship, but more importantly, will feature approachable and familiar items to our guests but still with Bad Daddy's quality and scratch-made ingredients. I'll now turn the call over to Keri for a review of our performance during the quarter. Keri A. August: Thank you, Ryan. Let's review this quarter's results. Total revenues decreased approximately 5.1% for the quarter to $34 million and decreased approximately 0.5% compared to our all-time record fiscal year 2024 sales to $141.6 million. We'll start by going through Bad Daddy's results. Total restaurant sales decreased $1.7 million to $24 million for the quarter and decreased $2.2 million to $101.4 million for the full year. The sales decrease for the quarter was primarily driven by reduced customer traffic as well as the closure of the Longmont, Colorado restaurant in 2024, partially offset by menu price increases. Our average menu price during the quarter was 0.4% higher than Q4 2024. Same-store sales decreased 4.6% for the quarter with 38 Bad Daddy's in the comp base at quarter-end. As Ryan mentioned, same-store sales have improved into the first quarter of the New Year, with the most significant improvement in our Colorado restaurants. We expect an average price increase of approximately 1.7% for the quarter 2026. With the exception of certain targeted adjustments due to menu engineering, we do not expect any significant price increases over the next six months. Food and beverage costs were 31.6%, a 40 basis point increase from last year's quarter. The increase is primarily attributable to record high ground beef prices in the fourth quarter of 2025, as well as significantly higher prices for other proteins over the prior year quarter, partially offset by the impact of the 0.4% average increase in menu pricing. Thus far into the first quarter of 2026, we have experienced lower input costs. And despite the large number of complimentary burgers for our military guests on Veterans Day, we expect food and beverage costs as a percent of sales to improve quarter over quarter. Labor costs increased by 140 basis points compared to the prior year quarter to 35.7% for the quarter. This increase as a percentage of sales is primarily attributable to lower team member productivity resulting from sales deleverage. Although we expect improvement in this metric in the current year, in January, Colorado's minimum wage increases to $15.16, a 2.4% increase, and the tipped minimum wage increases to $12.14, a 3% increase. Occupancy costs were 6.7%, an increase of 50 basis points from the prior year quarter. The increase is primarily due to a decrease in benefit from the GAAP-required noncash rent adjustments between the quarterly periods. Other operating costs were 16% for the quarter, an increase of 80 basis points, primarily due to increased repair and maintenance and utility expenses. Overall, restaurant-level operating profit, a non-GAAP for Bad Daddy's, was approximately $2.4 million for the quarter or 9.9% of sales, compared to $3.4 million or 13.2% last year, primarily due to increases in labor and food and beverage costs as well as the deleveraging impact of lower sales on various fixed costs. Moving over to Good Times. Total restaurant sales for company-owned restaurants decreased approximately $300,000 to $9.7 million for the quarter compared to the prior year fourth quarter, and increased $1.2 million to $39.2 million for the year compared to the 2024 fiscal year. Same-store sales decreased 6.6% for the quarter with 27 Good Times restaurants in the comp base at quarter-end. The average menu price for the quarter was approximately the same as the prior year quarter. We have taken a small menu price increase for 2026 and currently expect to take only modest price increases as we have assessed our relative pricing position in the market. We expect to monitor competitive pricing in January and continue to make very targeted adjustments to the pricing of specific menu items but believe it is unlikely we will take any significant across-the-board price increases. Food and packaging costs were 32.1% for the quarter, an increase of 120 basis points compared to last year's quarter. As with Bad Daddy's, we experienced record high beef prices during the quarter. We also saw significantly higher costs for bacon and eggs. As is the case with Bad Daddy's, input costs have decreased into the first quarter, and we expect food and beverage costs as a percent of sales to improve quarter over quarter. Total labor cost increased to 35.9%, a 200 basis point increase from the 33.9% we ran during last year's quarter, due to higher average wage rates resulting from market forces and the CPI index minimum wage in Denver and the state of Colorado, as well as decreased productivity due to sales deleverage. Occupancy costs were 9.1%, an increase of 10 basis points from the prior year quarter. Other operating costs were 15% for the quarter, an increase of 110 basis points primarily due to increased customer delivery, technology, and utility expenses. Good Times restaurant-level operating profit decreased by $400,000 for the quarter to $800,000. As a percent of sales, restaurant-level operating profit decreased by 420 basis points versus last year to 8% due to elevated costs throughout the P&L. Combined general and administrative expenses were $2.4 million during the quarter or 7% of total revenues, a decrease of 70 basis points from the prior year quarter, primarily related to decreased multiunit supervision costs, legal and professional services, and outsourced accounting fees, as well as health insurance underwriting costs, partially offset by an increase in recruiting and training-related costs. We anticipate 6% to 7% general and administrative costs in fiscal 2026. Our net loss to common shareholders for the quarter was $3,000 or $0 per share, versus net income of $200,000 or $0.02 per share in the fourth quarter last year. There was approximately $500,000 income tax benefit recorded during the current quarter versus $400,000 in the prior year quarter. Adjusted EBITDA for the quarter was negative $74,000 compared to $1.3 million for 2024. We finished the quarter with $2.6 million in cash and $2.3 million of long-term debt. And now I will turn the call back to Ryan. Ryan M. Zink: Thank you, Keri. Abby, we can open the call for questions at this time. Operator: Thank you. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press 1 a second time. If you are called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is 1 if you would like to join the queue. Again, it is 1 if you'd like to join the queue. And we have no questions at this time. I will turn the conference back over to Mr. Ryan Zink. Ryan M. Zink: Thank you, Abby. Although the fourth quarter was a difficult one for our concepts, 2026 is shaping up to mark improvement in same-store sales and in adjusted EBITDA. Our product and promotional roadmap at both concepts is robust and targeted towards broad guest appeal, and we continue to drive operating improvements translating into great guest experiences. I am proud of our leaders and team members in our restaurants who each day deliver memorable experiences for our guests and who are ultimately the ones who create value for our shareholders. Thank you all for joining us today. And in conclusion, I wish all of you, as well as all of the members of the Good Times and Bad Daddy's teams, happy holidays. Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, this is the operator. Today's conference is scheduled to begin momentarily. Until that time, your lines will remain on music hold. Thank you for your patience. Good afternoon, and welcome to the Boyd Gaming Corporation Fourth Quarter and Full Year 2025 Earnings Conference Call. My name is David Straub, Vice President of Corporate Communications for Boyd Gaming Corporation. I will be the moderator for today's call, which we are hosting on Thursday, February 5, 2026. At this time, all lines are in listen-only mode. Following our remarks, we will conduct a question and answer session. If at any time during this call, you require immediate assistance, please press star then 0 for the operator. Our speakers for today's call are Keith Smith, President and Chief Executive Officer, and Josh Hirsberg, Chief Financial Officer. Our comments today will include statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. All forward-looking statements in our comments are as of today's date, and we undertake no obligation to update or revise the forward-looking statements. Actual results may differ materially from those projected in any forward-looking statement. There are certain risks and uncertainties, including those disclosed in our filings with the SEC, that may impact our results. During our call today, we will make reference to non-GAAP financial measures. For a complete reconciliation of historical non-GAAP to GAAP financial measures, please refer to our earnings press release and our Form 8-Ks furnished to the SEC today, both of which are available at investors.boydgaming.com. We do not provide a reconciliation of forward-looking non-GAAP financial measures due to our inability to project special charges and certain expenses. Today's call is being webcast live at boydgaming.com and will be available for replay in the Investor Relations section of our website shortly after the completion of this call. With that, I would now like to turn the call over to Keith Smith. Keith? Keith Smith: Thank you, David. Good afternoon, everyone. 2025 was another successful year for our company as we continue to build upon our strong foundation, position our company for further growth, and deliver long-term value for our shareholders. For the full year, our operations continued their steady performance as we achieved record company-wide revenues. EBITDAR for the year was approximately $1.4 billion, while property-level margins were 40%, both consistent with last year's. These results were supported by our diversified operations, continued growth in play from our core customers, and our focus on operational discipline and efficiencies. Beyond our operating performance, our company had several significant achievements throughout the year. In July, we unlocked considerable value from our FanDuel ownership interest, generating cash proceeds of nearly $1.8 billion for our shareholders. We utilized these proceeds to reduce leverage below 2x, further fortifying our already strong balance sheet. Throughout the year, we continued to enhance the competitiveness and growth potential of our properties across the country through our ongoing capital investments. We further diversified our nationwide presence with the debut of our transitional casino in Norfolk, Virginia. Given the strength of our financial position and robust free cash flow, we returned more than $800 million to our shareholders in 2025, reducing our total share count by 11%. Following our successful performance in 2025, we are optimistic about 2026. In our Las Vegas local segment, we will benefit from two new investments: the opening of our new Cadence Crossing facility at the end of the first quarter and the completion of our Suncoast modernization project in the third quarter. In our Midwest and South segment, we will benefit from a full year of contributions from our meeting and convention center expansion at Ameristar St. Charles, and from incremental revenues and profits from our recent hotel room renovations and food and beverage improvements throughout the region. In both Nevada and the Midwest and South, we continue to see strong play from our core customers and improving trends among retail players in 2025. Building on these positive customer trends, we expect the implementation of last year's tax legislation will benefit consumer spending across the country in the coming months, particularly in Southern Nevada, given the unique demographics of this region. Our online segment will be supported by the continued growth of Boyd Interactive, and our managed and other business will benefit from the opening of a casino floor expansion at Sky River later this month. Now turning to the fourth quarter. On a company-wide basis, revenues were $1.1 billion, while EBITDAR was $337 million. These results reflect continued growth in gaming revenues, led by strong play from our core customers. Year-over-year, EBITDAR comparisons in the quarter were impacted by approximately $40 million, primarily due to changes in our online segment as well as severe winter weather in December. Adjusting for these items, company-wide EBITDAR was even with the prior year, reflecting our operational discipline and cost controls throughout our business. Now moving to segment results, in the Las Vegas Local segment, overall revenue trends were consistent with the third quarter, with growth in gaming revenues and declines in cash hotel revenues related to ongoing softness in destination business in the fourth quarter. Higher gaming revenues during the quarter were driven by continued growth in play from our core customers, with strong demand from Southern Nevada residents. This growth in gaming revenue would have been even stronger had it not been for the softness in destination business during the quarter. This weakness in destination business resulted in a decline of nearly $6 million in cash hotel revenues versus the prior year, with the majority of the decline coming at the Orleans, consistent with what we experienced in the third quarter. Operator: Excluding the Orleans, Keith Smith: our Las Vegas locals business achieved EBITDAR growth of nearly 2.5%, an improvement over the third quarter as margins once again exceeded 50%. Looking to 2026, we expect our Las Vegas locals business will benefit from the opening of Cadence Crossing Casino late in the first quarter, the completion of the Suncoast project, and benefits to consumer spending from last year's tax legislation. In all, we remain confident in the long-term prospects for our Las Vegas locals business. Next, in our Downtown Las Vegas segment, play from our Hawaiian guests and our core customers remained stable in the fourth quarter. These trends were offset by an approximately 10% decline in pedestrian traffic on the Fremont Street Experience during the quarter, as well as lower cash hotel revenues, both of these reflecting weaker destination business throughout the Las Vegas market. Next, our Midwest and South segment benefited from continued growth in play from both our core and retail customers during the quarter. However, year-over-year revenues and EBITDAR were impacted by severe winter weather in December as well as the permanent closure of Sam's Town Tunica in November. The combined EBITDAR impact of weather and the Tunica closure was approximately $4 million during the quarter. After adjusting for these items, segment EBITDA grew by roughly 2%, in line with our third quarter results. Looking ahead, we expect to benefit from our recent investments in non-gaming amenities throughout the Midwest and South, including the completion of hotel room renovations at the IP, Valley Forge, and Diamond Jo Worth. We also expect incremental growth in Ameristar St. Charles following the opening of its expanded meeting and convention center this past September. Since the opening of this expanded facility, we have experienced significant levels of interest and strong forward bookings for this new space. And similar to our Las Vegas segments, we expect our customers in our Midwest and South markets will continue to stay and spend closer to home, with consumer spending supported by the economic benefits of last year's tax legislation. Next, our online segment achieved EBITDAR of $63 million for the full year, driven by a solid performance from Boyd Interactive and contributions from third-party market access agreements across the country. Looking ahead, we project our online segment will generate EBITDAR of $30 million to $35 million in 2026, reflecting continued growth from Boyd Interactive and changes in our revenue share agreements related to the FanDuel transaction last year. Finally, in our managed and other business, management fees from Sky River Casino continued to grow. With the first stages of Sky River's expansion project nearing completion, we are confident this growth will continue into 2026. The first phase of this expansion is expected to come online in February, adding approximately 400 slots and a 1,600-space parking garage adjacent to the property. Following the opening of this first phase, we will begin construction on phase two. Scheduled for completion in late 2027, this next phase will add a 300-room hotel, three new food and beverage outlets, a full-service spa, and an entertainment and events center. With the opening of Sky River's casino floor expansion in late February, we project our managed and other business will generate EBITDAR of $110 million to $114 million in 2026. So in all, our successful performance in 2025 was supported by continued strength in play from our core customers and strong returns from the capital investments we have been making across our portfolio. Building on the success of our recent capital investments, we will continue reinvesting in our properties in 2026 to enhance the overall customer experience and drive growth from our existing portfolio. For example, in January, we completed our hotel room renovation at IP Biloxi, the largest hotel in our Midwest and South segment. Work is now underway on hotel room renovations at the Orleans, where we expect to complete work in the fourth quarter of this year. We will also soon begin a hotel room update at Suncoast, which we expect to be complete by the end of the year. With the completion of these projects, we will have updated approximately 60% of our nationwide hotel inventory over the last several years. Separately, the modernization of our Suncoast property is well underway, with nearly half of the casino floor now complete. Properties continue to perform well throughout the construction process, further increasing our confidence in the growth potential of this investment. We expect this project to be completed toward the end of the third quarter of this year. Once our Suncoast casino model is complete, we plan to start a similar project at the Orleans during 2027. In addition to these property enhancements, we are continuing our growth capital investments nationwide. We plan to open Cadence Crossing Casino in late March, enhancing our Las Vegas locals presence with a modern gaming entertainment facility. The adjacent community of Cadence is growing rapidly, with more than 1,200 new homes sold in 2025 alone. This is the third-best sales performance of any master-planned community in the country. With strong residential growth continuing throughout the neighborhood, we believe Cadence Crossing Casino will be well-positioned to deliver a strong return on our investment. With significant land still available at Cadence Crossing for future development, we will have the opportunity to expand this property to meet the growing demand. Our next growth project will be the development of a new $160 million gaming facility at Paradise, Peoria. We are continuing to work with state regulators to finalize our plans for the development of a single-level facility with a modern new casino floor and enhanced amenities for our guests. Once we receive final approval from the Illinois Gaming Board, site preparations will begin, and we anticipate starting construction in 2027. Once complete in 2028, this investment will significantly enhance the competitiveness and appeal of Paradise, positioning us for incremental long-term growth at this property. Finally, work is well underway on our $750 million resort development in Norfolk, Virginia. We reached a key milestone in November when we opened our transitional casino adjacent to our development site. This was an important step for our Virginia project, and our focus remains on the development of our permanent resort. Foundation work is now largely complete for the permanent building, and construction is now going vertical. Once complete in late 2027, this upscale resort will feature a 65,000-square-foot casino, a 200-room hotel, eight food and beverage outlets, live entertainment, and an outdoor amenity deck. In addition to offering market-leading amenities, our resort will be the most convenient gaming destination for much of the Hampton Roads region, as well as the 15 million tourists who visit nearby Virginia Beach each year. While we continue to invest in our existing portfolio and new growth opportunities across the country, our strong balance sheet and robust free cash flow allow us to successfully balance these investments with our ongoing capital return program. We repurchased $185 million in shares during the quarter, supplemented by $14 million in dividend payments. We plan to continue repurchasing $150 million in shares per quarter, supplemented by a quarterly dividend. So in all, 2025 was a year of notable achievements for our company. Our operations delivered another year of strong and consistent results. We positioned ourselves for future growth as we continue to invest in property improvements and growth projects. We also returned more than $800 million in capital to our shareholders in 2025, and we unlocked significant value for our shareholders through the FanDuel transaction, allowing us to further strengthen our financial position. Looking ahead, we are well-positioned to build upon the strong foundation we have created as we continue to invest in our nationwide portfolio. With positive customer trends across the country and strong results from our capital investments, we are confident in our ability to build on our success and continue delivering long-term value for our shareholders. I'd like to conclude my remarks by thanking our entire team for their contributions to our company. Thanks to their hard work and dedication, we delivered yet another successful performance for our shareholders. Thank you for your time today. And now I'd like to turn the call over to Josh. Thanks, Keith. 2025 was another successful year for our company. We generated EBITDAR of approximately $1.4 billion, consistent with each of the last five years. Josh Hirsberg: Revenues achieved record levels. Property operating margins remained at 40%. On a company-wide basis, play from our core customers continues to grow, accompanied by increased play from our retail customers. Our diversified portfolio consistently generates substantial free cash flow, which we are actively deploying to create long-term value for our shareholders. Our strategy for value creation is built upon investing in our properties, growing our portfolio, and returning significant capital to our shareholders while maintaining a strong balance. In terms of investing in our properties, during the fourth quarter, we spent $148 million, bringing total capital expenditures to $588 million for the full year. Our capital investments are focused on strengthening our overall customer experience as well as targeted growth projects. For the full year 2026, we expect capital expenditures to approximate $650 million to $700 million, including $250 million in recurring maintenance capital dollars, $75 million in growth capital related to Cadence Crossing and Paradise, $250 million to $300 million related to our Virginia project, and $75 million related to additional hotel room renovations. As an aside, this should be the last year of our incremental hotel capital spend. Our recurring maintenance capital budget will continue to include our recurring hotel spend. In addition to our property and growth capital investments, we are utilizing our free cash flow and strong balance sheet to return significant capital to shareholders. During 2025, we returned $836 million to shareholders in the form of dividends and share repurchases. $58 million in dividends and $778 million in share repurchases. For the full year, we repurchased 10.1 million shares at an average price of $76.91 per share, with our actual share count finishing the year at 76.4 million shares, a reduction of 11% from year-end 2024. Since October 2021, the month we began our capital return program, we returned more than $2.7 billion to our shareholders in the form of recurring dividends and share repurchases, reducing our share count by 32% over that time period. During the fourth quarter, we paid $14 million as a regular dividend of $0.18 per share and repurchased $185 million in stock, or 2.3 million shares, at an average price of $81.18 per share. Going forward, we expect to maintain repurchases of approximately $150 million per quarter, supplemented by a regular quarterly dividend. This equates to more than $650 million per year, Keith Smith: or more than $8.5 per share. Josh Hirsberg: Moving to the balance sheet. As a result of last year's FanDuel transaction, we finished the year with total leverage of 1.7 times and lease-adjusted leverage of 2.2x. During the first quarter, we will pay approximately $340 million for tax credits. That will satisfy our tax obligations related to the FanDuel transaction. We anticipate that leverage will approach approximately two and a half times in 2026, taking into account this tax credit payment as well as our capital investments and our ongoing capital return program. In terms of our 2026 outlook, across our portfolio, we expect customers to continue to spend closer to home, which was a key driver of our business in 2025 for both our Nevada and Midwest and South businesses. We also expect to benefit from the opening of Cadence Crossing in March, the completion of the Suncoast renovation in 2026, and a full year of new meeting and convention space at Ameristar St. Charles, as well as the economic benefits to consumers from last year's tax legislation. As Keith noted, we expect continued growth from both Boyd Interactive and management fees from Sky River. Also, keep in mind as you think about 2026, the significant weather events in January impacting our results in the Midwest and South. So as we begin 2026, we remain confident in the strength of play from our core customers, the investments we are making, and our ability to create long-term value for our shareholders. David, that concludes our remarks, and we are now ready to take any questions. Operator: Thank you, Josh. We will now begin our question and answer session. You will hear a prompt that your hand has been raised. Should you wish to withdraw your request, please press star then 2. If you are using a speakerphone, please use your handset when asking your question. We will pause for a moment while we compile our list of questioners. Our first question comes from Barry Jonas of Truist Securities. Barry, please go ahead. Hey, guys. It's Patrick Gill on for Barry. Nice quarter, and thank you for taking our questions. First, we would like to dig into Locals play a little bit more. Could you possibly bifurcate between real locals play and destination locals play? How have each trended in Q4 and into the New Year? Josh Hirsberg: Thank you. Keith Smith: Yes. So when we look at our Las Vegas locals market here, what we saw during the quarter, and we saw this in the third quarter also, was very strong play from Las Vegas local residents, people who live here and participate with us. The real weakness, and we saw that in Q3, we saw it again in Q4, was in true destination play, you know, regional play, people coming in from out of town staying with us. That's what resulted in a $6 million decline in hotel revenue primarily at the Orleans because it's the biggest hotel, which is slightly elevated from Q3 where it was $5 million. So, you know, the core Las Vegas locals market is strong. The destination part of that, which really for Boyd Gaming Corporation is focused at the Orleans, is where the weakness is. But the rest of the market is strong. Josh Hirsberg: And the only thing to reiterate is in our comments, I think we pointed out, you know, the destination business, you can kind of see the most obvious impact in hotel revenues. Right? That you saw it in Q3. You saw it in Q4. In terms of a $5 million to $6 million decline in cash revenues. But it also is more broadly impacting our business. It affects the amount of gaming revenue we are reporting, the amount of food and beverage. And while it is primarily Orleans and primarily a Las Vegas phenomenon, to some degree, it's affecting, you know, larger hotel products even in the Midwest and South. Like at IP, for instance, where it is our largest hotel product outside of Las Vegas. It's also being impacted to some degree by weakness in destination or people's willingness to travel. Patrick Gill: That's very helpful. Thank you for the color. As our follow-up, your balance sheet is in a great spot. Could you share any updated thoughts on the M&A pipeline or overall environment on whole assets or opcos? Thanks again. Keith Smith: Yeah. Look, we obviously, over the years, have been very active in the M&A area, not in the last five or six years. But historically, we have been, and we remain interested. We remain open to it. We do look at things. We have the same very disciplined approach today that we have had over the years. In terms of making sure it's kind of the right asset and the right market at the right price, you know, and a lot of things go through the top of the funnel, and it's just that, at the end of the day, thus far in recent years, nothing's kind of come out of the bottom of the funnel. But we remain interested, and we continue to look at things. And I'm not sure there's a lot more I can say. Josh Hirsberg: Yeah. The only thing I would add is I think that we have probably the most capability to make an acquisition that we've ever had in terms of the strength of our balance sheet. But I think just because we can doesn't mean we necessarily will. It has to be the right opportunity. And in the meantime, we'll continue to remain focused on operating our business efficiently, reinvesting in our portfolio, not only to improve the overall customer experience but kind of enhance the growth of that portfolio, things like Virginia, things like Cadence, things like the Ameristar meeting space. And then as long as our stock continues to create value for us, we'll continue to buy and continue to return capital to shareholders. Patrick Gill: Sure. Thank you. Operator: Our next question comes from David Katz of Jefferies. David, please go ahead. David Katz: Hi. Evening. And thanks for taking my question. I wanted to follow-up on that second topic. You know, Keith, you sort of characterized the right market, right price, the right characteristics. Can you just shed a bit more light into that? And I know we've always had conversations about, you know, structure being, you know, holdco versus opco and propco, etcetera. You know, what are your current views with respect to, you know, those frameworks as you look at stuff? Keith Smith: Yes. So with respect to, once again, M&A, the discipline hasn't changed over the years with kind of being right market and the right asset and the right price and the right terms. With the industry has evolved over the years, which is a lot more opco in existence than a decade ago. We acknowledge that in order to buy certain assets, we're going to have to accept an OpCo structure. That is fine with us. We prefer to buy Holdco. Prefer to have Holdco assets, but we are not letting structure deter us from acquiring the right asset. And so once again, while we prefer Holdco, we're willing to accept Opco. But at the end of the day, it goes back to the right asset, the right price, the right market, the right time. So structure is not really an issue for us. David Katz: Understood. And if I can just follow-up one more time on that. Should we assume that, you know, operating improvements or operating execution on your part would be, you know, one of the ways that you can add value, but you would also consider sort of putting capital into a target as appropriate, you know, that that's on the table as well. Keith Smith: Look, I think if you look at our past acquisitions, well, I'd have to go through and check the box. But to a large extent, you know, every one of them has improved EBITDA as a result of better execution. And many of them received additional capital. You know, we bought Ameristar St. Charles in 2018, and we just spent money to expand their meeting convention center and do a few other things. So we would absolutely invest in these properties to, you know, help them continue to grow or improve their competitive position as part of an acquisition. Absolutely. David Katz: Okeydoke. Thank you. Operator: Thank you. Next question comes from Ben Chaiken of Mizuho. Ben, please go ahead. Hey, thanks for taking my question. This is really a two-part. So a few calls ago, you know, you mentioned that 40% of your customer base was 65 and older. I guess, number one, can you remind us, was that the overall company? Or was that just kind of the Nevada segment? And then part two is, you know, obviously, there's some other changes related to the one big beautiful bill or the tax bill. You know, depending on tax bracket, or you've got SALT, SNAP, so obviously, some good, some not particularly helpful. Where do you think your Midwest and South customer nets out? Is this a positive, negative, neutral? And then how do you think about the variables for that customer? Thanks. Keith Smith: So roughly 40% of our customer base being 65 plus was a company-wide comment. With respect to the one big beautiful bill, look, I think whether it's the Nevada consumer or the Midwest consumer, you know, they're going to receive a benefit, you know, and we expect that they will receive a significant benefit, you know, in the early part of this year. Obviously, we think Southern Nevada will get an outsized benefit simply because of the unique demographics we have here with a number of tip workers and a number of retirees in this town. But, clearly, we expect, and based on work we've done, we expect our Midwest customers will also, you know, get a good benefit from the one big beautiful bill. Now what ultimately that is, what they do with it, how much of it shows up in our business, TBD, obviously. Too early to tell. Only, you know, February 1, so we'll be watching and following it closely. But we do expect there to be, you know, very positive impacts to consumer spending both in Nevada and across the country from the tax legislation. Operator: Got it. But it doesn't sound like you're concerned around anything, any of the SNAP changes impacting your customer cohorts. Is that a fair submission? Keith Smith: That is a fair comment. Operator: Okay. And then just one quick one. I think we were expecting Suncoast to be at kind of peak margin disruption in Q3, Q4. Josh Hirsberg: Of this year. Is there any way to quantify the Q4 impact, either the margins or EBITDA? Operator: From the Suncoast disruption? Thanks. Keith Smith: So as we think about this year, '26, we'd expect that project to be complete at the end of Q3. And therefore, Q4, we should be starting to see, you know, see the benefits of not having construction disruption. The impact of construction sitting here today, I have to look at Josh to see if he has any commentary on the put, you know, significant in Q2 and Q3, potential impact. I don't have it for you. Yeah. I think what we've been surprised at is that the Josh Hirsberg: know, just the ability to discern the disruption has been minimal. So the property has actually been doing pretty well. Maintaining year-over-year performance or actually growing in some quarters. Despite the disruption that's been going on at the property. So the property management teams and the operating teams have done a really good job of managing through it. I think the real question is how much better could it have done without the construction? That's just, you know, that's a difficult number to come up with. So I'd just say, at this point, we've managed through it without the disruption that we expected. The guys have done a great job with that. And we'll continue to kind of work through it. And not really expect much in the way of change of performance than what we've seen since we started the project. So but we'll kind of live through it Keith Smith: to Josh Hirsberg: and report on it as we see it if it occurs. But I'd say today, we don't expect to see much. Patrick Gill: Appreciate it. Thank you. Sure. Operator: Thank you. Our next question comes from John DeCree of CB. John, please go ahead. Max Marsh: Hi. This is Max Marsh on for John DeCree. Thanks for taking my question. Was wondering if you could give us some updated expectations out of the temp in Virginia from an operational perspective. Previously, Operator: forecasted breakeven there, but revenue has looked pretty good so far. Josh Hirsberg: Can you guys make some money there before the permanent opens? Keith Smith: I think the guidance we've given on that and the guidance, I think, you'll continue to hear from us is we expected to breakeven kind of the level it's running at today. You know? Whether it's slightly positive or slightly negative is not big enough to move the dial for us. So you should just continue to think of it as a breakeven proposition through the opening of the permanent facility in late 2027. Max Marsh: Great. Thanks for that. And just as a follow-up here, there's been some Josh Hirsberg: some chatter about iGaming expanding to a couple new states. Now that you guys have a more defined iGaming product and strategy, how do you think about your approach to new state launches? Do you have an Max Marsh: opportunity to maybe gain a little bit more market share in a new state launch? Keith Smith: Yeah. Look, we're obviously supportive of iGaming, you know, around the country. And so, you know, as it looks to expand, they're looking at bills in a number of states, including Virginia right now, to pass iGaming legislation. So we're supportive of it as long as the bill has, you know, all the right elements and is a fair bill. We're supportive, and we look to be able to expand. So we're paying attention to all the states that are talking about iGaming and looking for a way to participate. Boyd Interactive has been, you know, a good source of growth over the last year or two. And we expect it to continue to grow. And we'll grow, frankly, quicker as other states, you know, adopt or legalize iGaming. Josh Hirsberg: Thank you very much. Keith Smith: Yep. Operator: Thank you. Our next question comes from Steve Wieczynski of Stifel. Steve, please go ahead. Steve Wieczynski: Hey, Keith. Hey, Josh. Good afternoon. So, Josh, I'm going to try to ask a guidance question without asking a guidance question. Keith gave us some help in terms of how to think about the online, how to think about managed. In the past, Josh, I think from a high-level perspective, you've kind of given some thoughts Josh Hirsberg: around the locals market downtown, Midwest and South, maybe just how you're thinking about the year, headwinds, tailwinds, you know, can you grow those markets? Is there margin opportunity? I guess, any kind of high color or, you know, high-level remarks would be, you know, would be helpful. Thanks. Josh Hirsberg: Yeah. So I'll try to help, Steve. And then Keith jump in if you think I missed anything. I think in Las Vegas, I think the real uncertainty is when does the destination business turn around. We don't really have any visibility at this point given destination softness was consistent between Q3 and Q4 in our view. So I think as we look at the Las Vegas locals, we are pleased with all of the property, you know, destinations largely affecting the Orleans. So outside of the Orleans, our properties are growing in revenue. We're maintaining our margins above 50%. We expect that to continue, you know, going forward. I think as we get into the second half of the year, there's a possibility that we can do better just relative to comping to destination business. And by that, I mean, I don't know if that means growth or if that means just less bad. I think the comparison will get a little bit easier in the second half of the year, and that's pretty obvious. I think we'll obviously be benefited by Cadence coming online, call it, at the end of March. And I think that as Keith mentioned in his remarks, we should see good consumer kind of health or fortification from the benefits here in Las Vegas in particular. Because of limited tax on tips and standard deductions and things of that nature. Look. I think in the Midwest and South for us, just moving there, and excluding weather where we've seen, you know, already seen pretty significant weather in January. And we were hopeful that we were past really bad weather that we saw in the first quarter of last year. But it seems like we're living through it again this year. I think we're encouraged by what we're seeing, and really this is true of Las Vegas as well as the Midwest and South. Core customer continues to be good. We continue to see good trends in the retail customer piece of our business. And that may sound counterintuitive because then at the same time, you know, we're having trouble in some areas because of destination business. That's a subset of those customer bases. But away from that, those customers are doing, those customer segments are actually going quite well. So I think we really need destination to turn around to really have a business that is well-positioned given our margin and discipline around operating. I think in the Midwest and South, we'll continue to benefit. As I stated in my remarks, people staying close to home, Ameristar St. Charles meeting space, and so I think there's growth potential in both of our Las Vegas segments and our downtown segment. Steve Wieczynski: But Josh Hirsberg: could be stronger if destination kind of came back to the table, and we just don't have visibility to that. Steve Wieczynski: So Josh Hirsberg: Steve, I hope that gives you some comfort or some answer to your question. I don't know if there's anything else you would want to ask about that, but happy to try to address. Steve Wieczynski: Yeah. Yeah. No. That's great. Thanks, Josh. And then real quick, second question. You know, you obviously called out weather so far in the first quarter. I don't think you quantified it yet. Or I don't think you quantified it. But just as we kind of think about, you know, modeling out the first quarter, how material was, you know, was January in terms of an impact on the Midwest and South just so we can kind of reset our models. Josh Hirsberg: Yeah. So I would say at this point, it's very similar to last year. Keith Smith: So Josh Hirsberg: you know, last year, I think we quantified about a $5 million impact. And I would say that's what we've seen approximately so far this Keith Smith: Yeah. It's very curious. We sat here a year ago on the same call and had $5 million worth of weather in January, and that's what it looks like this year. Steve Wieczynski: Yeah. Keith Smith: Okay. So Josh Hirsberg: Q1 this year right now is feeling a little bit like Q1 last year for the Midwest and South. Steve Wieczynski: Okay. Got it. That's great color. Thanks, guys. Really appreciate it. Keith Smith: Sure. Operator: Thank you. Our next question comes from Jordan Bender of Citizens Bank. Jordan, please go ahead. Jordan Bender: Hi, everyone. Good afternoon. Thanks for the question. I want to circle back on the comments around the weaker destination play some of the larger properties in the regions. It was something maybe newer that we've heard. Is this something that started when we started to see some of the weakness in Las Vegas last summer? Is this more of a newer trend that you're starting to notice? Keith Smith: Yeah. I think you probably need to narrow Josh's, you know, comment depending on how you heard it. The largest hotel we have outside of Las Vegas is the IP in Biloxi at a thousand rooms. And that's really what Josh was referring to. The other rooms are in the 200 to 400 category. And they're not being impacted by destination business. They generally run pretty good occupancies and pretty good rates. And so it really is about the IP, and the IP's been, you know, impacted for probably the last six months just like Las Vegas. So you should think about it as the IP, not a broader issue. Jordan Bender: Understood. Thanks. Josh, this might be splitting hairs a little bit, but you said 2.5x lease-adjusted leverage in '26. Is that you'll get to there at some point of the year? Is that a year-end target we should be thinking about? Josh Hirsberg: Yeah. So that was meant, I'm glad, thank you for clarifying. Not only am I thankful that Keith's here to interpret my comments for you guys, but thank you for asking this question to help me clarify. The two and a half times was traditional leverage, Jordan. So, you know, we're at, I think I said, 2.2 times lease-adjusted right now. So the lease-adjusted would be north of the two and a half times, probably just under three if I was estimating. I think that the two and a half times actually depends on people's expectations for the business and CapEx programs and spend and the timing of all that. But, like, kind of based on how we're thinking about it, that would have been a year-end type of estimate for 2026. Jordan Bender: Great. Glad I asked, and thank you very much. Keith Smith: Thanks. Thank you. Operator: Our last question today comes from Daniel Politzer of JPMorgan. Daniel, please go ahead. Hey, good afternoon, everyone. Thanks for squeezing me in. I wanted to follow-up on the comments on Virginia. It sounded like you guys were pretty supportive, which I think would be surprising just given, you know, you're building this big property there. Can you maybe help us better think through why that might be the case? And kind of how you're thinking about the chances that this actually goes through and, you know, passes legislation. Keith Smith: So, look, I'm not going to provide any commentary on its chances of passage. But I think with respect to being generally supportive of it, once again, making, you know, depending on exactly what's included in the bill. Right? We're supportive of iGaming as a concept in states around the country. But the devil's always in the detail and what's included in the bills and what's the tax rate and how many skins and a variety of other factors. Set the details aside for a second. Look. We've always been supportive of Josh Hirsberg: you know, Keith Smith: iGaming or iCasino. We think it is complementary to the business. I know some in the industry feel like it is detrimental. We think it's complementary. We've been involved and around the fringes of this for years. We see it as a new customer base. We've lived through this, whether it be in Pennsylvania, it be in New Jersey in the very early days when they launched iGaming and we were part of that. We've seen it evolve. We understand the customer. We understand who it is and who it is and how it can benefit the land-based properties. And so it just broadens the overall appeal of our product. It broadens the customer base. We don't think it is detrimental to the overall business. That's just our own philosophy. We know that many agree, and we certainly understand that some don't. Daniel Politzer: Right. That's helpful. And then just following up on the Locals business, right? There's obviously a good degree of concern out there on the demand for the strip. And, you know, if that could bleed into the locals business, given it's a much more diversified economy, how are you thinking about that risk? Is this something that you're concerned about? Have you seen any kind of signs of a little bit of fatigue or softening from that customer base? Keith Smith: No. We haven't, whether it be, you know, kind of the current situation or in years past when the business on the strip has ebbed and flowed, haven't really seen an impact to the overall locals market. As we commented a couple of times through the course of this call, in our Las Vegas locals business, the real strength is from people who live and play with us here. They're true local residents, Southern Nevada residents. And so we're not seeing anything bleed over. Those are not customers who are generally going to go and play on the strip. And once again, as we get into 2026, we expect consumers across Southern Nevada to, you know, have more discretionary income as a result of the tax legislation from last year. So nothing concerning, nothing we're seeing, nothing I'm worried about sitting here today. Josh Hirsberg: Yeah. And, Daniel, the one thing I would add is, or a couple things I would add is, you know, when you look at the performance of the portfolio and kind of narrow down the destination impact to just the Orleans, you see our business continues to perform pretty much as it has over the last several years in terms of the locals business. You know, we continue to see revenue growth. Continue to see our ability to drive margin efficiencies. And EBITDAR growth and really kind of the focus of the weakness in our business has been destination, and that's a focus on the Orleans. And so I think that, you know, if we were starting to see impacts beyond kind of Keith Smith: some Josh Hirsberg: kind of bleeding over from the challenges the strip are facing into our business, I think we see it in other parts of our business as well. We're just not seeing it in our Keith Smith: our everything we see in terms of Josh Hirsberg: kind of a near-term outlook don't suggest that either. Daniel Politzer: Got it. Thank you so much. Operator: Thank you. This concludes our question and answer session. I'd now like to turn the call back over to Josh for concluding remarks. Josh Hirsberg: Thanks, David, and thank you to each one of you for joining our call today. We know what time you can have competing demands on your time, so we appreciate you allocating some of that to us. If you have any follow-up questions, feel free to reach out to the company, and we'll be happy to assist. Thank you.
Operator: Good day, and thank you for standing by. Welcome to Paylocity Holding Corporation's Second Quarter 2026 Financial Fiscal Year Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Glenn, Chief Financial Officer. Please go ahead. Ryan Glenn: Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of fiscal 2026, which ended on December 31, 2025. I'm Ryan Glenn, Chief Financial Officer. Joining me on the call today are Steve Beauchamp, Executive Chairman, and Toby Williams, President and CEO of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next forty-five days on our website under the Investor Relations tab. During the call today, we will use non-GAAP financial measures as defined in Regulation G. You can find the related reconciliations to GAAP in our press release, which is located on our website at paylocity.com under the Investor Relations tab. We will also make forward-looking statements. Actual events or results could differ materially from those projected in our forward-looking statements. Please refer to our press release and SEC filings, including our most recent 10-K, which contain important factors that could cause actual results to differ materially from the forward-looking statements. We do not undertake any duty to update any forward-looking statements. In regard to our upcoming conference schedule, we will be attending the Raymond James Annual Institutional Investors Conference and the Citizens Technology Conference. Let me know if you'd like to schedule time with us at either of these events. With that, let me turn the call over to Steve. Steven Beauchamp: Thank you, Ryan, and thanks to all of you for joining us on our second quarter fiscal 2026 earnings call. Our strong results continued in Q2, with recurring and other revenue growth of 11% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace. Total revenue was $416.1 million, or 10% growth over Q2 of last year. Our multiyear investment in R&D and commitment to driving innovation continues to fuel our growth as the combination of HCM, finance, and IT in one single platform, all underpinned by our core employee record data, represents the broadest and deepest comprehensive offering in the marketplace. This dynamic continues to be highlighted by the growing adoption and utilization of products across our suite, including new HCM offerings such as reward and recognition. As the only provider with a native reward system that automates the taxation of rewards payments and allows for the cash redemption of rewards, reward and recognition continues to serve as a point of competitive differentiation in the market and a driver of improved employee engagement and efficiency for our clients. For example, during the calendar year-end, which is a popular time for companies to recognize employees, an existing client fully transitioned and automated their manual holiday reward program within our platform, successfully distributing gift cards to more than 750 employees located across multiple locations. Our expanded AI capabilities, which we have continued to embed across the platform, also contributed to our strong financial results and increased guidance, including the recent release of our policy and procedures agent, which enables clients to leverage their own internal documentation, such as employee handbooks and standard operating procedures, to provide employees with instant and accurate answers to questions around topics such as travel expense and sick leave policies. Additionally, we recently extended our AI assistant into HR rules and regulations, tapping into more than 200 IRS and Department of Labor knowledge sources to provide administrators with guidance on tax and labor regulations. Collectively, these new capabilities will help our clients simplify and automate employee support while also reducing risk and improving compliance outcomes. And we continue to see growing utilization of our AI capabilities, with the average monthly usage of our AI assistant increasing over 100% quarter over quarter. Our ongoing commitment to product innovation continues to be recognized by third parties as Paylocity was recently awarded the 2026 Buyer's Choice Award from Trust Radius, named a leader in 19 categories within the winter 2026 G2 Grid reports, and listed on Capterra's payroll shortlist. I would now like to pass the call to Toby to provide further color on the quarter. Toby Williams: Thanks, Steve. As Steve mentioned, the momentum seen in Q1 continued into the second quarter, contributing to a strong selling season performance and increased revenue and profitability guidance for fiscal 2026. Our results continue to be driven by the combination of strong sales, operational execution, and product differentiation, including the addition of new functionality to core products such as video candidate screening, self-service scheduling, and prescreening forms within our recruiting module. As a result of these new capabilities, we are helping our clients improve their hiring process, drive a higher degree of automation and efficiency within their business, and better stand out in an otherwise competitive hiring environment, as evidenced by an existing client with over 1,200 employees who has seen a roughly 50% reduction in their time to hire since adopting our new recruiting functionality. We also continue to be pleased with the consistency of our referral channel, which once again delivered more than 25% of our new business in Q2. The sustained success of our broker channel continues to be driven by our modern platform, third-party integration, and API capabilities, and because we do not compete against our broker partners by selling insurance products. We remain committed to investing in and supporting the broker channel, with the goal of continuing to deliver real value and true partnership and support to our referring brokers and their clients through enhanced capabilities such as our benefits guided setup. Through self-service and intuitive tooling, benefits guided setup allows brokers to directly build plans and rate structures and update rates on behalf of their clients directly within the Paylocity platform, enabling our partners to deliver a higher level of service to our mutual clients. We also saw another strong quarter of client retention, which helped contribute to our strong financial performance through fiscal 2026. As highlighted last quarter, in addition to embedding AI capabilities within our product suite, we are also investing in AI and broader automation efforts internally to help drive greater efficiency and productivity across our business. Specifically within the operations team, we continue to leverage AI to drive down client case volumes, automate client interactions and case routings, and perform sentiment analysis to flag urgent cases for faster response, and we remain committed to continuing to evaluate new opportunities to help deliver world-class service and partnership. Overall, we are pleased with our Q2 results and believe we are well-positioned heading into the back half of the year, as reflected in our increased guidance for fiscal 2026. Finally, this time of year is a very busy time for all of our teams as they work closely with clients on year-end processing of payrolls, W-2s, 1095s, and annual tax form filings to federal, state, and local agencies and on the implementation of new clients. I want to thank all of our employees for their hard work and dedication to our clients during this very busy time of year. In addition to our market-leading financial performance, our strong culture at Paylocity continues to be recognized externally as we were recently recognized by Newsweek on America's Greatest Workplaces for Culture, Belonging, and Community 2026. I would now like to pass the call to Ryan to review the financial results in detail and provide our increased fiscal 2026 guidance. Ryan Glenn: Thanks, Toby. Q2 recurring and other revenue was $387 million, an increase of 11%, with total revenue of $416.1 million, up 10% from the same period last year. Our strong Q2 results were primarily driven by another solid quarter for our sales and operations team, allowing us to come in $8.1 million above the midpoint of our revenue guidance and allowing us to again raise our fiscal year guidance by more than our quarterly beat. Our adjusted gross profit was 74.4% for Q2, versus 73.8% in Q2 of last fiscal year, representing 60 basis points of leverage. Over the first six months of fiscal 2026, adjusted gross profit is up 80 basis points over the same period last year as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. We continue to make significant investments in research and development, and to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 10% compared to 2025, and we remain focused on making investments in R&D throughout fiscal 2026 as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regard to our go-to-market activities, on a non-GAAP basis, sales and marketing expenses were 21.1% of revenue in the second quarter, and we remain focused on making investments in this area of the business in fiscal 2026 to drive continued growth. On a non-GAAP basis, G&A costs were 9% of revenue in the second quarter versus 9.8% in the same period last year, representing 80 basis points of leverage. Briefly covering our GAAP results for Q2, gross profit was $282.1 million, operating income was $70.4 million, and net income was $50.2 million. Our adjusted EBITDA for the second quarter was $142.7 million, or a 34.3% margin, and exceeded the top end of our guidance by $7.2 million, resulting in increased margin guidance for fiscal 2026. Excluding the impact of interest income on funds held for clients, adjusted EBITDA margin for Q2 was up 140 basis points over Q2 of last year, and we continue to be pleased with our ability to drive both durable recurring revenue growth and expanded profitability. We remain focused on driving leverage by improved operational scale and through improved efficiencies resulting from our ongoing investments in automation and AI across our business, which are helping us scale our team and providing the ability to focus on more strategic work. We're also pleased by our ability to drive expanded free cash flow through increased profitability and the benefits of recent tax legislation changes, including a 40% increase in cash provided by operating activities in the first six months of fiscal 2026, 26% growth in free cash flow over the last twelve months versus the comparative period, and a free cash flow margin of nearly 24% over the last twelve months as we execute against our recently increased financial targets. Additionally, given the confidence we have in our business and our strong cash flows, in Q2, we repurchased roughly 690,000 shares of our common stock at an average price of $144.86 per share, approximately $100 million in aggregate repurchases in the quarter. Fiscal year to date, we have repurchased over 1.8 million shares of common stock at an average price of $162.66 per share, approximately $300 million in aggregate repurchases, helping to drive our diluted shares outstanding down more than 2% as of the end of Q2. As a reminder, we have approximately $400 million remaining under our share repurchase program, which we anticipate continuing to opportunistically execute against going forward. In addition to our expectations for continued growth in adjusted EBITDA and free cash flow, the scale we are demonstrating in stock-based comp expense and the reduction in diluted shares outstanding will help drive continued expansion of earnings per share on an annual basis. Looking at the balance sheet, we ended the quarter with cash and cash equivalents of $162.5 million and $81.3 million in debt outstanding related to the funding of the Airbase acquisition. In regard to client-held funds and interest income, our average daily balance of client funds was approximately $3.2 billion in Q2. We're estimating the average daily balance will be approximately $3.7 billion in Q3, with an average annual yield of approximately 320 basis points, representing approximately $29.5 million of interest income in Q3. On a full-year basis, we are estimating the average daily balance will be approximately $3.3 billion with an average yield of approximately 340 basis points, representing approximately $112 million of interest income. In regard to interest rates, our guidance reflects all Fed cuts to date, with an additional 25 basis point rate cut assumed in each of March and April of this fiscal year. Finally, I'd like to provide our financial guidance for Q3 and full fiscal 2026. Note that as a result of continued momentum across both our sales and operations teams, we are increasing our fiscal 2026 recurring and other revenue guidance by $12.5 million and total revenue guidance by $14.5 million, which includes the full impact of our guidance being Q2 and a further increase in back half fiscal 2026 revenue guidance. Additionally, we continue to realize success driving increased profitability across our business, resulting in increased adjusted EBITDA guidance for fiscal 2026. With that said, for the third quarter of 2026, recurring and other revenue is expected to be in the range of $457.5 million to $462.5 million, or approximately 9% to 10% growth over Q3 2025 recurring and other revenue. Total revenue is expected to be in the range of $487 million to $492 million, or approximately 7% to 8% growth over third quarter fiscal 2025 total revenue. Adjusted EBITDA is expected to be in the range of $200 million to $204 million, and adjusted EBITDA excluding interest income on funds held for clients is expected to be in the range of $170.5 million to $174.5 million. For fiscal 2026, we are increasing all aspects of our guidance as follows: Recurring and other revenue guidance is now expected to be in the range of $1.62 billion to $1.63 billion, or approximately 10% to 11% growth over fiscal 2025 recurring and other revenue. Total revenue guidance is now expected to be in the range of $1.732 billion to $1.742 billion, or approximately 9% growth over fiscal 2025. Adjusted EBITDA is expected to be in the range of $622.5 million to $630.5 million, and adjusted EBITDA excluding interest income on funds held for clients is expected to be in the range of $510.5 million to $518.5 million. In conclusion, we are pleased with our Q2 results and the momentum we have across our sales and operations teams as we execute the busiest time of the year. The strong results we are seeing across HCM, finance, and IT solutions, combined with continuing to drive competitive differentiation and our AI strategy, give us confidence in our ability to drive sustainable, durable revenue growth and improve leverage across the business to achieve our updated long-term financial targets over the coming years. Operator, we're now ready for questions. Operator: If your question has been answered and you wish to remove yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Daniel Jester with BMO Capital Markets. Your line is open. Daniel Jester: I guess we'll start with the selling environment. I think the commentary was that it was pretty strong. I guess maybe double-click on that if you could, please. Maybe compare and contrast how you exited this year compared to last. And any pockets of strength or weaknesses you'd call out? Thanks. Toby Williams: Hey, Dan. Yeah. I'll start off. I mean, I think overall, I would characterize the selling season as strong this year. I think the go-to-market team performed really well, excuse me, across sales and marketing in our channel teams. And I think we saw a very stable demand environment. So I think similar commentary on the demand environment from last quarter carried through to this quarter. And I think our performance from a sales perspective through selling season was strong, and I think that's a good part of what allowed us to turn in the really strong results we did from a revenue growth and profitability perspective. And I think that's a lot of what carried into the raise of guidance for the rest of the year. I think on a relative basis to last year, to the other part of your question, I would characterize it as consistent and stable. And I think the performance of the team was really strong. So I think we were overall pretty happy with it. Daniel Jester: Great. Thanks. And then maybe just a follow-up on maybe sort of a bit of an obligatory AI question. You know, I think you've commented a lot about how Paylocity is building tools and integrating AI into the platform. I guess, how are you seeing your customers engage with AI, and are you seeing any trends about maybe building some of this functionality business themselves? Appreciate the context, guys. Thank you much. Steven Beauchamp: Yeah. I think I'll grab that one, Steve, here. What I would say is we have really been focused on embedding AI across the suite. You know, our value proposition is being the most modern platform. As we embed AI, the two use cases that we called out in the script, you know, policies and procedures, and allowing clients to be able to upload their own docs and answer employees' questions is certainly one of the big use cases that we've seen. We've seen a lot of interactions with our AI assistant with how do I do something? How do I accomplish this? Asking for data in the application. And so I think from our perspective, we will continue to build templated agents for our customers to be able to use. We'll give them some flexibility so that they can customize those for their use cases. And what we're seeing is really improved ease of use from our customer feedback. We're seeing more engagement in the platform, some more utilization. And then finally, it's really saving our customers time. Daniel Jester: Great. Thank you so much. Operator: One moment for our next question. Our next question comes from Brad Reback with Stifel. Your line is open. Brad Reback: Great. Steve, so on that last point, saving your customers' time, that's great. Can you talk about how you're translating that into revenue for Paylocity? Steven Beauchamp: Yeah. So I think, as you know, Brad, one of the things about being in payroll and HR is we have the data in terms of being the system of record. So we know in real time when anything happens, whether somebody's getting a new job, new supervisor, new hires, terms, and many times, our customers then want to use those triggering events via our APIs and marketplace to be able to connect to other systems. I think as the client experience becomes more developed, we will see more, and we've already started seeing significantly more usage of our APIs tying our data to other really key workflows within an organization. That's number one. Number two is we're seeing people put more data and drive more utilization of our platform. So from a monetization perspective, it has an opportunity for us to sell more of our modules back to our clients. We're seeing more value. And they're able to customize more of that experience so that it's purpose-built to really deliver on their individual use cases. So I think from a client perspective, it's less about us driving them away from the personal interaction that we have. As you also know, our clients call us very frequently. They're looking for advice. You know, that relationship is really part of our strong retention, so we don't want to walk away from that. But we really want to be able to drive an easier-to-use experience and drive more utilization. When we do that, we get larger upsell. On top of the opportunity in marketplace and APIs. That's really where we see the near-term opportunity. Brad Reback: And on that upsell and the retention, is it still too early to have good metrics around new customers with high AI engagement spending 10 or 15% more than peers or retaining two or three points better? Steven Beauchamp: I think it's a little early. I think you gotta go back to our average-sized customer, which is about 150 employees. And so this does happen on a gradual basis. And we have, though, seen in the past as we've really increased the number of modules that the customers who are using more of our modules typically have a stronger retention, typically are more satisfied, and we see AI as another tool to be able to drive that same outcome. Brad Reback: Awesome. Thank you very much. Operator: One moment for our next question. Our next question comes from Terry Tillman with Truist Securities. Your line is open. Terry Tillman: Yes. Hey, good afternoon. Nice job on the quarter. I've decided to abstain from asking an AI question. I was gonna ask two questions on kind of evolving products, which I'm very intrigued by. First, just an update on Airbase and just your play in the office of CFO and finance. And then secondly, I also wanted to ask what's developing and what you can share around your ability to help in the area of IT operations? Thank you. Toby Williams: Hey, Terry. It's Toby. I'll start and then, Steve, obviously, jump in. I mean, I think first on the Airbase update and all things in Paylocity for Finance, I think we continue to be pleased with the momentum we have there. We closed that acquisition last October, so we're just over a year or so into it. And I think we're really pleased with what we've seen so far. We delivered version one of the integrated product set in July, and I think that was an important factor from a differentiation standpoint as we came through selling season. So all across the spend management suite now is Paylocity for Finance. I think we are continuing to see lift there. We're continuing to get positive feedback from a client and prospect standpoint, and we're seeing, I think, a positive path as it relates to the attach and penetration and adoption and usage of those solutions. And then I would say we're in early days as it relates to all things IT-oriented, but I think we continue to see positive progress there from an attach standpoint and from a use case perspective there. And that's another one where, you know, I think you see Steve's comment in relation to the last question was very focused on our ability as the system of record to leverage the data that we have in our system to create automation against some really common use cases, whether that's onboarding or offboarding or system access or device management. I mean, I think all those things are triggered off of changes in the data that we see from a status perspective with respect to employees. And, you know, we continue to see a significant opportunity there to help create value for our clients from that product area. Terry Tillman: That's great. Maybe just a quick follow-up on the cash flow, which was well above what we were looking for. Was there, and this maybe this is for Ryan, but anything timing there that may not reoccur in the second half of the year? Just anything more you can share on just the strong outperformance and comparing it to the second half? Ryan Glenn: Yeah. Hey, Terry. This is Ryan. No. I think, yeah, obviously, you can see cash flow movement quarter to quarter. But when we look at it on an LTM basis, we're at nearly 24% free cash flow margin, up 26%. So we continue to execute against the same playbook that we've had for a number of years, which is driving leverage both in gross margin and G&A. And then continue to invest both in R&D and in sales and marketing to drive future growth. So nothing that I would call out timing-wise. Obviously, there is some benefit from the recent tax legislation changes, but we are seeing a strong majority of that leverage and free cash flow coming from natural scale across the business. Terry Tillman: Okay. Thanks. Operator: One moment for our next question. Our next question comes from Mark Marcon with Robert W. Baird. Your line is open. Mark Marcon: Good afternoon and thanks for taking my question. Wondering if you could talk just a little bit more about the selling environment. Obviously, the stocks have all gotten hit based on concerns around the impact of AI. Can you just talk a little bit about, like, from your client's perspective, the average client size is 150. I imagine they're not thinking anything close to about using, you know, any sort of new tools. But are you seeing any sort of hesitation in terms of slowing down either at the core part of the market or even at the enterprise side? And how would you judge your Salesforce productivity, you know, given some of the noise that's out there? Toby Williams: Yeah. So I think there's a few questions in that, Mark. I guess I would summarize it closer to where I started, which was selling season was strong. I think the team performed really well. I think we continue to be on a fairly consistent pace from a client growth perspective as we sit here halfway through the year, pretty consistent with last year. You know, and I think our ability to perform with the level of revenue growth that we showed in Q2 and our ability to raise the remainder of the year comes from the strong performance that we saw from new sales in the first half of the year. And I think the confidence that we have in our ability to perform across all segments throughout quarters three and four. And so I think, you know, you're right with an average client size around 150 employees, and Steve mentioned this a minute ago, I mean, I think we've seen just a relative level of stability in our client base, in the demand environment, in our team's ability to sell and bring on new units, and, you know, I think absent all of the concern around AI or any of that conversation, particularly in the last forty-eight hours. I mean, I think what we see is the continued really strong execution from both a sales and ops perspective as we've come through selling season performing really well. Driving, you know, 11 plus percent recurring revenue growth in the quarter. And I think performing really well from a retention perspective as well. I mean, our ops team performed very well in the context of getting through year-end and getting through January. So, I mean, overall, absent any other noise in the market, I think we sit here halfway through the year having put in a really strong performance in Q1 and Q2 with a lot of confidence around our ability to be successful in Q3 and Q4. Steven Beauchamp: I would just add one thing, Mark, just add one thing to that is, and I know you've been in this industry a long time, there's a lot more conversation from prospects around our service levels, our ability to meet those customer needs, and not necessarily replace all the interaction from an AI perspective. Certainly, when we automate things for them, they love that. When we make it easier for them, that's great. And they want to make sure that, you know, we're really pursuing the right modern technology. But our service organization, as Toby called out, is a big reason why it was a driver. So unlike other software spaces, we've got a pretty big moat around the service component of what we do, whether that's implementation or ongoing service or taxes. And that is actually a much bigger conversation still today with prospects than AI, which is a conversation and is a growing conversation, but still a smaller part of the overall value proposition. Mark Marcon: That's great. And then I was wondering if we could flip the AI in terms of advantages. And wondering if you can just talk a little bit about, like, how much more efficient I know it's early days, you know, Claude just came out a little while ago. But if we think about, like, when we think about your R&D efforts, are there any early thoughts there? And then in addition to that, with all the fears around AI, you know, are from a capital allocation perspective, are there some opportunities for M&A in terms of valuations becoming more reasonable that you're starting to explore to a greater degree? Thank you. Toby Williams: Yeah. On the first part, Mark, I mean, I guess I hear that from you as a question just around the efficiencies that we're able to drive in the business from the use of automation or AI. In areas like engineering. And we've talked about this a little bit before, but I guess I would start by saying, you know, going back to Ryan's comments with free cash flow up 26%, I mean, what you're seeing across the business is our ability to drive a level of continued productivity and efficiency increases across the business, and you see it show up in the free cash flow. And that comes from, you know, all kinds of different places. One of them is driving automation across the business, and part of that is utilizing AI in areas like engineering. But we're also using that from a broader operations perspective to help create a better, faster, more engaged client experience that is still driven by our service team. And so I think you know, that's part of the story that you're seeing play out. As it relates to our profitability increases in both adjusted EBITDA and free cash flow. So I think that's a significant part of the story. Mark Marcon: And M&A? Toby Williams: Yeah. From a capital allocation standpoint, I mean, I think we have always been focused on looking for areas in M&A that would be able to drive our product roadmap faster, further, speed time to market with critical solutions that we think are really strategic. And I think that, you know, that opportunity continues to exist. We continue to focus on it. But I think our threshold for what makes sense for us has not changed. I mean, I think you see valuations sort of ebb and flow in any given quarter from a target perspective. But I think our threshold for being able to find solutions that make sense for our platform that will add value to clients and that we tightly integrate, those are still the things that we're focused on. And if we can find things that will add value and that will speed our time to market, then those are the things that we'll continue to be interested in. Mark Marcon: Great. Thank you. Operator: One moment for our next question. Our next question comes from Sitikantha Panigrahi with Mizuho. Your line is open. Sitikantha Panigrahi: Great. Thanks for taking my question. I just wanted to ask about employment levels. First, what did you see this quarter, I mean, in the December quarter? Employment levels, and what's baked into your guidance? Ryan Glenn: Hey, Citi. It's Ryan. Good to hear from you. A lot of stability in employment levels, very similar to what we called out in the overall demand environment. So we continue to see year-over-year workforce levels up modestly in Q2. Spot on to what we saw in the first quarter. So continue to watch and see those numbers on a weekly basis, but have seen a lot of stability and no real change. And that extends into January as well. We continue to have an assumption in the back half of the year of flat employment levels year over year, which would be a slight degradation from what we've seen in the first half of the year. Sitikantha Panigrahi: Okay. That's great. And then, at a broader high-level question on employment, we keep hearing from, you know, people around saying that how AI is going to disrupt in terms of employment. More layoffs coming. How do you what what's your view on that? How exposed or not exposed is Paylocity? Toby Williams: Well, I think just to give you a couple of thoughts. I mean, I think, you know, we don't have any specific vertical concentration. And I don't think we have any particular exposure given any concern that anybody might have about a particular vertical being disrupted. And I then go back to, you know, Ryan's commentary that he just shared around us seeing things be relatively stable, you know, despite any of the commentary that's out in the market. I mean, we've seen stability, and I think if you go back to the commentary most recently from any of the large providers, you'll hear the same thing. So, I mean, I think what we see in real-time is stability across the employees in the platform in our business, and I think that's what you hear from others as well. Sitikantha Panigrahi: Great. Thanks for the color. Operator: One moment for our next question. Our next question comes from Scott Berg with Needham and Company. Your line is open. Scott Berg: Hi, everyone. Nice quarter, and thanks for taking my questions. I have two non-AI questions. I hope you're ready for them. The first one, I guess, is any commentary on win rates since you've had Paylocity for finance and asset management, IT asset management out in the market? I heard someone in the ecosystem tell me, you know, that they're seeing some at least chatter around it, that people have some interest in it and just don't know. And early, obviously, but didn't know if you're seeing any, you know, changes to your win rates based on having the availability of those modules. Toby Williams: Well, I think we've been going back to my prior comments. I mean, I think throughout the first half of the fiscal year, we've been really happy with how we performed overall from a go-to-market standpoint. I think we've seen a relative level of consistency in win rates. I do think, though, that there's a few things in the market, Scott, that are helping. It's just sometimes difficult to have perfect attribution as to, you know, what exactly those things are contributing and how much, but I think they're all positive. So, you know, I think the differentiation that we're able to create through things like Paylocity for finance, I think that is in the helpful column. And I also think it from an incremental ARPU standpoint. I would say the same thing with respect to our IT solutions. I think it's helpful from a differentiation perspective. Also helpful for ARPU. In pretty early days for each of those. And then I think the other thing that we've seen momentum on is our relationship with brokers, which has always been strong, but I think we continue to see momentum with the broker channel. And so I think all of those things are positive in addition to just the overall value prop of the platform. And the execution from our teams, I think, was really strong in the quarter. So there's a lot of positive there against a fairly stable demand environment. It's tough sometimes to create perfect attribution on those things. But I think that's the overall picture. Scott Berg: Fair enough. Thanks, Toby. I guess from a follow-up perspective, now that we've kind of seen what the impact of the tax law changes were on the business in the last quarter, which I assume had some maybe catch-up for the year a little bit, was there any debate or any conversation around maybe taking some of those cash flows and trying to invest that in other aspects of the business versus just, you know, harvesting them? I know it's accounting treatment and timing and etcetera, but you guys already generate plenty of cash, so my guess is, you know, probably there wasn't a lot of thought there. But I didn't know if there's anything that you thought of that you could maybe, you know, spend on that would be worthwhile in the short term. Toby Williams: Yeah. I mean, I think, you know, just echoing Ryan's commentary with free cash flow being up 26%. I mean, I think we're really happy with how we've been performing in driving that type of free cash flow leverage. I don't think, though, that that is coming at the expense of the things that we think we can and should invest in across the business to create better client experiences and to drive future growth. So, you know, I think we're really happy with what we've been able to both drive down into free cash flow, but while also investing in the things that we need to and want to and think that there's great opportunity around the course of the full year. And I think that includes, you know, a lot of things we talk about, new product development focus in our product and tech teams, a lot of things within the existing core of the solution. So I think overall, you know, pretty excited about the investments that we're making across the business not coming at the expense of also driving free cash flow. Scott Berg: Excellent. Thanks for taking my questions. Toby Williams: Yep. Operator: One moment for our next question. Our next question comes from Samad Samana with Jefferies. Your line is open. Samad Samana: Hi, good evening, and thanks for taking my questions. I guess one that I wanted to ask about is if you think about customers in a more muted hiring environment, presumably, they're hiring less and or there's less people to hire. What are they focused on? Like, where are they either redirecting within the HR tech budget and or are they redirecting that HR tech budget somewhere else? And then I have a follow-up question. Toby Williams: Yeah. I mean, I think we've seen going back to Ryan's commentary. I think we've seen a relative level of stability across the market from an employees on the platform perspective. And I think the clients that we're serving today and that we're talking to from a prospect perspective are focused on, again, going back to the fact that we have an average client size around 150 employees, they find significant value in a single vendor providing a broad swath of solutions on the platform. And echoing some of Steve's comments earlier, they derive a lot of value by the actual service that we're offering, particularly as we come through this time of year. So December is certainly a high point from a client service interaction perspective. And you have a huge amount of volume coming through the system in January with new business coming out of the platform. So I think I don't think there's a significant shift in terms of the value prop that clients in the core of our market are looking for. They're looking for a partner they can trust. They're looking for breadth of solution and a platform that will serve their needs and is purpose-built for their use cases. And I think we're continuing to deliver all of those things and focused on driving a level of automation and productivity and efficiency and usability to them that I think they value more and more by the day. So I think that's probably how I would characterize the overall state of engagement with clients. Samad Samana: Understood. And maybe just for follow-up in a different direction. Just as I think about the pricing environment, we've seen, you know, with different software vendors either raising prices, especially over the last couple of years. I know price increases are just a normal course of business, but how are you seeing customer reaction on renewal to either increases and or reduction of discounts? Any change in behavior versus prior renewal cycles, and anything that we can extrapolate from that? Toby Williams: No. I don't think we've seen any change there whatsoever. I mean, it's been very, very stable from that perspective. Although, we typically look at price in the springtime as we did last spring and as we will again this spring, and from the time that we would have looked at it last spring, I don't think we've seen any meaningful change. Samad Samana: Great. Appreciate the time as always. Toby Williams: Thank you. Operator: One moment for our next question. Our next question comes from Brian Peterson with Raymond James. Your line is open. John Messina: Hi. Thanks for taking the question. This is John Messina on for Brian. Maybe a follow-up to Terry Tillman's question earlier. As you look to deepen the penetration of finance and IT over time, what are the key execution milestones we should look for over the next eighteen to twenty-four months to measure success there? And how are sales cycles for those products either landing or expanding versus the traditional HCM modules? And then I have a quick follow-up. Toby Williams: Yeah. I think so taking that apart, I mean, I think when we're talking about the addition of those solutions to new clients that are coming out of the platform, the sales cycles are right in line with what we would have typically seen from our average client size. I mean, that could be in the, you know, thirty to forty-five day window for the heart of our market, and go-live times in the, you know, four to six-week time frame or something in that ZIP code. So there's no meaningful deviation from those products when they're included in new deals coming onto the platform. And then from a backspace perspective, it depends on what the specific product or company is. But those are usually fairly quick time to value in terms of the client buying those within the client base and being able to get them live on them. And there's, you know, depending on what it is, I mean, a lot of times, there's fairly limited implementation. So, man, I think that's what we've seen so far. Remind me if there's other parts of your question that you want me to hit. John Messina: It was just on measuring success from the outside there on the penetration rate of those products across the base. Toby Williams: Yeah. I mean, I think from a what we've always described as targets for new clients or new products being launched is if you can get into that 10 to 20% penetration rate over a, you know, three, four, five-year period of time, and I don't think it's any different from those. I think we're on track to get to those milestones with each one of those products or product areas. And so I think we're really pleased with the traction that we're seeing in the path that we're on. And I think what you see play out overall over time is our ability to continue to win new deals and continue to grow our client base in a fairly consistent fashion year to year while also continuing to drive ARPU. So I think those are overall the results that we've been really targeted on. John Messina: Okay. Thanks. That really helpful color there. And then with the announced consolidation in the industry, just can you share any impact the consolidation is having on pipeline, win rates, or go-to-market efficiency? The execution seems really good. Just trying to get at what extent you're maybe benefiting as competitors are navigating that M&A activity. Thanks. Toby Williams: Yeah. I mean, again, some of the attribution is challenging probably, but I think overall, the execution, you know, I appreciate your comment. Yeah. I think the execution has been very good across both our sales and ops teams in particular. And I think, you know, we see momentum in the business coming through selling season. And, you know, I think January, the same thing. I mean, we saw momentum with new deals coming out of the platform. So, you know, overall, I think the business has executed well. I think our go-to-market and ops teams have executed well. And, you know, I think overall, that's what we're really focused on to the extent that there's disruption in the market because of, you know, one company or another going through an M&A transaction. And yeah, I think we stand ready to perform for our clients and perform for the prospects that we're bringing on the platform. And I think if we can maintain that focus, if the case that others lose theirs, we'll be well-positioned to take advantage of that. So, you know, overall, just happy with the level of focus and the execution that we had in the quarter and year to date. John Messina: Thank you. Operator: One moment for our next question. Our next question comes from Jared Levine with TD Cowen. Your line is open. Jared Levine: Hello. Thanks. To start here, can you talk about Airbase upsell progress year to date versus expectations and your expectations for the second half of the year here? Toby Williams: Yeah. I think they're right on pace with our expectations. Both through the first half of the fiscal year and from what we can see for the back half. So, I mean, just commented on that a few minutes ago. I think overall, pretty happy with the progress that we've made. Yep. The one of the integrated solution was launched in July, so not all that long ago, but I think we're pretty pleased with what we've seen. And believe that overall, I mean, it's a story that helps with differentiation, believe that that's a meaningful area of differentiation for prospects that we're pitching. And I think it's been part of the reason that we've had such a successful first half of the fiscal year. Jared Levine: Got it. And then, Ryan, for follow-up here, in terms of the adjusted EBITDA guide, you didn't pass through all the 2Q beat here. Anything to call out in terms of timing? Because I think there was a similar dynamic with 1Q. There was some timing call out in terms of not passing through all the beat with the prior print, but just with this print, what would you call out here? Ryan Glenn: Yeah. I mean, I think, you know, as we set up the year on the August earnings call, I think the context we provided is if you look back to the last twenty-four months specific to adjusted EBITDA, we have driven several hundred basis points of leverage. Definitely ahead of where we would have expected to be and have been really happy with those results. And as we guided in August and have now updated in November, and here in February, we have increased margin each quarter. But the bias, I think, is to continue to drive some reinvestment back into the business. So you're seeing us reinvest some of those dollars back into R&D, back into sales and marketing because as you've heard on the call, we feel really good about the progress in each of those teams, and we want to reinvest in upside that will drive continued growth in the back half of this year and on to '27. So I think that's the context and that is how we're operating this year. Obviously, you are seeing outsized performance from a free cash flow standpoint as we've talked about. So that is not something that we have historically guided to, but when you think about free cash flow specifically in the updated target of 25% to 30% free cash flow margin against a TTM number of 24%. We are quickly moving to the high end of the prior range and not too far away from the updated range. So continue to believe, like, we have the ability to balance reinvestment but also continue to take margins up on a multiyear basis. Jared Levine: Great. Thank you. Operator: One moment for our next question. Our next question comes from Raimo Lenschow with Barclays. Your line is open. Sheldon McMeans: Hi. This is Sheldon McMeans on for Raimo. Thanks for taking the question, and I just have one here. The perceived AI risk in the market has been brought up times on the call, and as you mentioned, things are relatively stable for you. However, we're seeing announcements from AI companies that are moving software stock significantly. And to that point, can you speak a little bit more to some of the specific ideas on why AI advancements are not as big of a risk for your company compared to what, you know, maybe some of the recent price action may suggest? And you talked about the moat on your service org and, you know, are there a couple of other areas you could point out to? For example, the banking relationships and payment rails are not you can't vibe code something like that. Payroll companies need a certain scale on the from a balance sheet perspective on the float side or that simply, you know, just throwing a bunch of expensive GPUs at a payroll run just isn't efficient and doesn't make sense. And, yeah, as I mentioned, you touched upon this already, but I think we need some more handholding here. Thank you. Steven Beauchamp: Sure. So I think you hit some of the points. I think let me start with I think AI can certainly improve our client experience in a number of ways, make the software easier to navigate, make the data more accessible, provide additional use cases, where we have an opportunity to be able to expand our footprint and drive ARPU. All those things, I think, are opportunities in front of us. I think on the concept that some company is going to quickly kind of build a replacement product, there's challenges to that. And so you mentioned one. Is a lot of interaction with the customer. And so they call us. We email interaction. There's projects that we do on their behalf. Implementation is largely a handheld process where we lose money on implementation, right, to be able to bring the customer on board, which is well worth it when we think of how long we retain them for. So the service is absolutely an element. The other thing is there we interface with thousands of agencies on the back end. From a tax filing perspective. So local agencies, state, federal agencies, those formats change. The rules change. You're constantly changing your engine. Those are all deterministic calculations. They're not something that you can do and be probably right, and they require a fair amount of investment in testing. And so another example of where AI, at least today, is really not necessarily suited to be able to solve that problem most efficiently. And then you even got into a little bit of the capital structure behind it. To do that, you know, with an AI model and to be able to make the capital investments, it's much easier to be able to have deterministic algorithms to get you to that answer. And so as we think of this in a layered approach, the service capability that we have, the fact that, you know, we've got the data from a system of record perspective that allows us to continually expand our use cases, AI making those even better. And then the fact that we're moving, you know, billions of dollars through banks and to thousands of tax agencies across the country. We believe all are natural moats that, you know, we have and certainly many of our competitors have. And, again, I'll just end with, we see AI as a big opportunity. We certainly see an opportunity to be able to drive utilization, make our products easier to use, even integrate broader use cases into other applications. And so we're excited about that opportunity. And we certainly understand the nature of the question, but I think there's more complexity behind the scenes than in our business. Sheldon McMeans: Very clear. Thank you. Operator: One moment for our next question. Our next question comes from Patrick Walravens with Citizens. Your line is open. Austin Cole: This is Austin Cole on for Pat. A lot of questions here have been asked. I want to ask two on the new offerings in HCM, maybe, rewards and recognitions, and some of the other offerings there. What was kind of the upsell motion, how has that performed recently? And what's the opportunity around some of those new offerings? Steven Beauchamp: Yeah. I think Toby summarized it, I think, best. If you look at our historical formula and average revenue per customer growth versus unit growth, you know, those have moved a little bit year by year. But we've been fairly consistent on a year-over-year basis where unit growth is. And so you can see we're getting broader product adoption across the board that's really driving that incremental difference in terms of, you know, our unit growth versus our overall revenue growth. And I would not call out a singular product. I think to be able to move the needle at our size and scale, you know, our goal, you know, we want to get to 10 or 20% penetration for early products, things like reward and recognition. Then we want to move that to 30-40%. And then you've got products in our portfolio where we're seeing 70-80% adoption. And for those products, we think about what's the opportunity to be able to potentially add, you know, plus offerings or get more value from product enhancements that allow us to be able to continue to increase that average revenue per customer from those modules. So we see a ton of opportunity within the HCM category. Those continue to be probably because they're generally bigger and been around longer, the bigger driver today. And then you've got earlier in that product portfolio, things like IT and finance. Still being relatively small, but off to a really good start. And so I think we're really happy with seeing our product strategy resonate in the market and see the adoption across our client base. Austin Cole: Great. And then just as a quick follow-up, there was a comment made about the AI assistant monthly usage increasing 100% quarter over quarter. How should we think about that metric and maybe how it compares to your guys' expectations and that going forward and as a catalyst for some of that upsell as well? Steven Beauchamp: Yeah. So, you know, our strategy is to continue to embed AI across the suite, really adding additional use cases, increasing flexibility, and making the assistant, you know, more powerful over time. So, certainly, part of that utilization is the features that we've added. We talked about, you know, the policies and procedures. We talked about third-party content with the best department of labor, IRS, or state websites. And really helping our clients not only answer their questions but in many cases, save them time by answering a bunch of their employee questions. And so that's been really positive. We see an opportunity to continue investing in AI, adding additional use cases, and really driving agents' experiences that are going to really embed multistep processes into single clicks that's going to be able to drive insights and anticipate what their next steps are going to be. All of which is part of our goal, which is to be able to save our customers time so that they can, you know, really spend time with people, versus spend time on administrative tasks. And so, we're really, really happy with where we are, how that's really resonated with our customers, and we would anticipate that, you know, that single kind of text box interaction that you see in AI assistant is going to allow customers to do an increasing number of things over time. Austin Cole: Great. Thank you. Operator: One moment for our next question. Our next question comes from Jason Celino with KeyBanc Capital Markets. Your line is open. Zane Meehan: Great. Thanks for taking my questions. This is Zane Meehan on for Jason Celino. Just two quick ones for me. One of your peers noted that they had been seeing, you know, slightly smaller lands for just the initial lands for new customers, maybe due to, you know, macro or increased budget scrutiny. Is that anything you saw in the quarter? Anything new there? Toby Williams: No. We haven't seen that at all. I think we've seen a huge amount of consistency from a go-to-market standpoint. And new business being brought in during selling season and really happy with the performance that we've seen there. And I wouldn't call out any difference that we've seen from that standpoint. Zane Meehan: Okay. Great. Good to hear. And secondly, I believe last year, second quarter, you noted seeing a little bit of pull forward. Did that dynamic reoccur this quarter? Is there anything that might have pushed or pulled out of the quarter? Toby Williams: No. I don't think we saw anything this quarter. And what we mentioned last year was extraordinarily small, which we noted at the time. Zane Meehan: Great. Appreciate it. Thank you. Operator: One moment for our next question. Our next question comes from Steve Enders with Citi. Your line is open. Steve Enders: Alright. Great. Thanks for taking the questions here. I guess just to start, sounds like you had a good strong selling season. I guess, are you seeing kind of in the forward pipeline? And maybe how are kind of the new appointment requests or kind of the other forward-leading indicators kind of looking for pipeline development? Toby Williams: Yeah. I think they've been really stable. So, I mean, I think, you know, going back to prior comments, I mean, really, really happy with the team's execution from a go-to-market sales perspective in Q1, and through selling season. I think we've seen the demand environment maintain as stable. And, you know, there's nothing that I would really call out in terms of changes there. And I think that's also so I think that that is a big part of what allowed us to overperform relative to expectations for both Q2 and the first half. And I think that's also what gives us the confidence to carry that through from a raise perspective on the year. And, you know, I think to your question on activity and pipelining, I mean, I think that's that that is all our confidence in that carrying forward from selling season is also what gives us the ability to take the year up. So I think we feel pretty good in that respect. Steve Enders: Okay. Great. And then, just on the broker channel side of it, I guess, have you seen kind of any changes in terms of the, you know, the number of opportunities or maybe the share of opportunities that you've been able to capture within that channel? And then how do the new solutions and capabilities that you're releasing here to the broker side impact how you're thinking about that kind of go-forward opportunity and, I guess, how it could change the number of opportunities coming from the brokers? Toby Williams: Yeah. I mean, I think we've always had a great relationship from a broker standpoint with that channel. It's consistently been more than 25% of our new business referred from that channel, and that continued through the course of I think we've had the first half of the year and through selling season in Q2. Just, you know, directionally, I think we've had great momentum over the last year with the brokers in particular, and I think there's been some disruption from a market perspective with certain other competitors that have played in that space before. But I think we've taken we've gotten the benefit of some of that. I think we have great momentum. And, you know, I think part of that is our execution and focus and value-added delivery to that channel, and part of that is also focused there from a product perspective. So benefit guided setup is a product that we've launched, and I think that that is certainly one that accrues to the benefit of brokers being able to give more help and service to their clients. So I think we continue to focus on that channel in every respect, whether it's from a go-to-market standpoint, from a service standpoint, being able to partner with them and service their clients, and from a product perspective, launching new products that are not just useful to clients, but also helpful to the brokers. Steve Enders: Okay. Awesome. Thanks for taking the questions here. Toby Williams: Yep. Operator: One moment for our next question. Our next question comes from Matt Van Vliet with Cantor. Your line is open. Matt Van Vliet: Yes, good afternoon. Thanks for taking the question. Just looking towards the rest of the year and even into fiscal 2027, curious where you feel you are from a sales capacity and overall market coverage, especially with the addition of Paylocity for finance and IT there and kind of how you think you can continue to meet the demand in the market? Toby Williams: Yeah. I think overall, we feel pretty good about our coverage. I mean, I think as we've said for probably the last eighteen months or so, we've been really focused on making sure that we have that we have adequate coverage across the opportunity set, but also that we're continuing to focus on driving productivity across those teams. And I think we're really happy with what we've seen so far this fiscal year from a sales productivity standpoint. And I think that's, you know, also a big part of what helped us perform well in Q2 and through selling season, and that's also a big part of, I think, what gives us confidence to take the year up for, you know, quarters three and four as we're looking ahead. I feel pretty good with where we sit today in terms of go-to-market investment and the productivity that we're seeing from those teams. Matt Van Vliet: And then a quick follow-up on the broker channel. You've obviously seen better momentum there and you highlighted some disruption from competitors. But in terms of resource allocation, you know, is there still more to be done in terms of total broker coverage, or is it now just, you know, kind of leaning into those that have greater, I guess, success of selling through Paylocity and how you do that, you know, kind of how you leverage that relationship there. And within that, have win rates gone up at all given some of that disruption in the market? Toby Williams: Well, I think from an execution standpoint, it's all of the above. I mean, it's always been an important part of our selling motion. It's and it's an important part of the selling motion in the field with our reps. And building those relationships at the ground level, also managing them from a corporate perspective. But a lot of that work is in a lot of the partnership and a lot of that success is driven in the field with and through our reps. And I think it is just it is continuing to drive that focus from an execution standpoint. It's continuing to invest in the things that the brokers find the most value in. That's in part the relationship in the field. That is in part the service that we provide to our mutual clients, and the clients they refer to us. And it's in part being a good partner to them as clients go through implementation and service. And it's continuing to also drive the delivery of a platform and a solution set, including new product launches like benefit guided setup that add value to them and give them the ability to add more value to their clients. So it is it's all of the above. Matt Van Vliet: Alright. Great. Thank you. Operator: One moment for our next question. Our next question comes from Jacob Smith with Guggenheim Securities. Your line is open. Jacob Smith: Hey, thanks for taking my question. Retention has been consistently around 92% over the past couple of years. As you look at the elements from cross-selling Paylocity for finance, expanding IT offerings, getting greater AI adoption across the platform, how do you see that retention rate evolving over the next two years? Is there a structural reason it should move higher as customers become more embedded across HCM finance and IT, or are there any offsetting factors we should be mindful of? And maybe related to that too, are you seeing any early evidence that customers who adopt multiple modules have different churn characteristics than single product customers? Thanks. Toby Williams: Yeah. Our retention rate has been north of 92% for over a decade. And I think, you know, we are very, very happy with being able to maintain that level of client retention. You know, huge shout out to our operations and service teams that work really hard to maintain those relationships with our clients and partner with them. And particularly coming through this time of year when December, January is the biggest two months that we have for client engagement and client interaction. So I think overall, our belief has been and has played out that the more value that you can add to clients, whether that's through the adoption of a broader part of the platform, and coupled with our service model and our service teams, you know, that's the recipe for success. And I think that's a large part of the reason we've been able to maintain those retention rates for such a long period of time. And I think that's, you know, that is a reflection of the value that's added from an overall platform and service perspective. So, you know, really pleased with our ability to maintain those levels over a long period of time. Jacob Smith: Great. Thanks. Operator: And I'm not showing any further questions at this time. I turn the call back to management for any further remarks. Toby Williams: Well, thank you very much. I really appreciate everybody joining the call and your interest in Paylocity. And I want to send a special shout out to all of our teams and all of our employees helping our clients through year-end and onboarding in January. Great job. Very much appreciate all the effort, and I hope everybody has a great night. Thank you. Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.
Operator: Ladies and gentlemen, welcome to the Arrowhead Pharmaceuticals Conference Call. [Operator Instructions] I will now hand the conference over to Vince Anzalone, Vice President of Investor Relations for Arrowhead. Please go ahead, Vince. Vincent Anzalone: Thank you, Victor. Good afternoon, and thank you for joining us today to discuss Arrowhead's results for its fiscal 2026 first quarter ended December 31, 2025. With us today from management are President and CEO, Dr. Chris Anzalone, who will provide an overview; Andy Davis, Senior Vice President and Head of the Global Cardiometabolic Franchise, who will provide an update on commercialization activities; Dr. James Hamilton, Chief Medical Officer and Head of R&D, who will discuss our development programs; and Dan Apel, Chief Financial Officer, who will give a review of the financials. Following management's prepared remarks, we will open the call to questions. Before we begin, I would like to remind you that comments made during today's call contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are forward-looking statements and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those expressed in any forward-looking statements. For further details concerning these risks and uncertainties, please refer to our SEC filings, including our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q. I'd now like to turn the call over to Chris Anzalone, President and CEO of the company. Chris? Dr. Christopher Anzalone: Thanks, Vince. Good afternoon, everyone, and thank you for joining us today. We had another quarter of strong execution across all areas of our business, and we are well positioned to build on this progress throughout 2026 and beyond. In fact, the recent months have included some of the more significant achievements in Arrowhead's history. Let's talk about some of these. First, on November 18, 2025, Arrowhead received its first regulatory approval and began the next phase of growth as a commercial company marketing its own medicines. The FDA approved REDEMPLO as an adjunct to diet to reduce triglycerides in adults with familial chylomicronemia syndrome, or FCS. FCS is a severe rare disease with an estimated 6,500 people in the U.S. living with genetic or clinical FCS, characterized by TG levels that can be 10 to 100x higher than normal, leading to a substantially higher risk of developing acute recurrent and potentially fatal pancreatitis. This approval was supported by clinical data from the Phase III PALISADE study in adults with either clinically diagnosed or genetically confirmed FCS. The PALISADE study demonstrated deep and durable reductions in TGs with a median reduction of 80% from baseline and a lower numerical incidence of acute pancreatitis events compared to placebo. Arrowhead launched REDEMPLO independently in the U.S. with the One-REDEMPLO pricing model that creates one consistent price across current and potential future indications. This is important. We're committed to sustainable innovation, and this requires a rational drug pricing according to the value a medicine offers to patients and health care systems. REDEMPLO is a pancreatitis drug. And when we think about pricing, we look to those patient populations at greatest risk of acute TG-related pancreatitis. We've only had drug in channel for about 10 weeks, which included Thanksgiving, Christmas and New Year's holidays. So it is difficult to infer too much about launch. However, initial trends in prescription payer interactions and shipments have been encouraging. To date, over 100 prescriptions for REDEMPLO have been received from a diverse prescriber base with geographically balanced uptake across the U.S. Early patient starts fall into 3 categories: patients transitioning from our expanded access program, patients naive to the APOC3 class and patients switching from olezarsen. In addition, REDEMPLO shipments are being made for patients with clinically diagnosed and genetically confirmed FCS. In addition to FDA approval, we announced in January 2026 that REDEMPLO also received approval for the treatment of FCS from Health Canada and from the Chinese National Medical Products Administration. REDEMPLO will be available later this year in Canada, and we anticipate it will be marketed independently by Arrowhead. Pending regulatory review and approval, we expect to potentially launch REDEMPLO later this year in select EU countries and in the U.K. In Greater China, REDEMPLO will be marketed by Sanofi. Our cardiometabolic pipeline is off to a good start with REDEMPLO and the ongoing Phase III study of zodasiran in homozygous familial hypercholesterolemia, or HoFH. We are actively expanding this pipeline with a number of discovery programs and importantly, 3 clinical programs. ARO-INHBE and ARO-ALK7 being developed as potential treatments for obesity are in Phase I/II studies. We also recently initiated a Phase I/II study of ARO-DIMER-PA in patients with mixed hyperlipidemia. For our initial obesity candidates, we recently announced some early interim clinical data. ARO-INHBE enhanced weight loss and fat reduction versus tirzepatide alone in obese patients with type 2 diabetes. More specifically, 2 administrations of ARO-INHBE at the 400-milligram dose in combination with tirzepatide achieved approximately twofold better weight loss at week 16 than tirzepatide alone. This appears to be a high-quality weight loss as we saw an approximately threefold reduction in each of total fat, visceral fat and liver fat measures based on week 12 MRI versus tirzepatide alone in these patients. ARO-ALK7 Phase I/II study is approximately 2 quarters behind the ARO-INHBE study, but early data are encouraging. We believe this is the first RNAi therapeutic to show a adipocyte gene target silencing in the clinical trial, and we've seen dose-dependent reductions in adipose ALK7 mRNA with a mean reduction of minus 88% at the 200-milligram dose at week 8 and a maximum reduction of minus 94%. While these are very intriguing data, they are early and incomplete. So we have substantial work ahead of us before we get too excited about how these candidates could eventually be used. We will continue to run both Phase I/II studies. We are expanding existing cohorts to increase power, and we are adding new cohorts to better understand these candidates and underlying biology. We intend to report additional results later in 2026. ARO-DIMER-PA is being developed as a potential treatment for atherosclerotic cardiovascular disease, or ASCVD, due to mixed hyperlipidemia, where both LDL cholesterol and triglycerides are elevated. We believe there are approximately 20 million people in the U.S. with mixed hyperlipidemia, and this is a patient population without adequate treatment options. We recently announced that we dosed the first patients in the Phase I/II clinical trial of ARO-DIMER-PA, which is a dual functional RNAi therapeutic designed to silence expression of the PCSK9 and APOC3 genes, thus designed to reduce both LDL cholesterol and TGs. This represents an important step forward for the RNAi field as we believe it is the first clinical candidate to target 2 genes simultaneously in 1 molecule and an important step forward for preventative cardiology as both LDL and TGs have epidemiologic support as being important drivers for ASCVD risk. We expect to have interim data for ARO-DIMER-PA in the second half of 2026. If we see good LDL and TG reduction in a well-tolerated manner, we may have something truly special for a very large and currently underserved patient population. Outside of cardiometabolic, we made important advances in our CNS portfolio, specifically in programs that utilize a new proprietary delivery system designed to achieve blood-brain barrier, or BBB, penetration, utilizing subcutaneous administration. In nonclinical studies across multiple animal models, we saw deep target gene knockdown across the CNS, including deep brain regions. This underscores Arrowhead's leadership in the delivery of siRNA to multiple tissues and cell types throughout the body, utilizing the proprietary TRiM platform. Our first wholly owned program using the BBB platform is ARO-MAPT, being developed as a potential treatment for tauopathies, including Alzheimer's disease. During the last quarter, we announced that we dosed the first subjects in a Phase I/II clinical trial that will include healthy volunteers and Alzheimer's patients. ARO-MAPT targets the tau protein in the brain, which has good biological validation as a potential driver of pathology and has emerged as a promising target for Alzheimer's disease and additional tauopathies. We anticipate interim clinical data from the healthy volunteer portion of the study should be available in 2026, with data from the Alzheimer's patients to follow in 2027. This is a very exciting program for us. The second program to use our BBB delivery system is SRP-1005, formerly called ARO-HTT for the treatment of Huntington's disease. This program is partnered with Sarepta, which recently announced the submission of its CTA for study SRP-1005-101, also known as INSIGHTT, in approximately 24 participants. While our cardiometabolic and CNS work by no means encompasses everything we are doing, they are areas of substantial focus and potential value drivers in the near, mid and long term. Within these areas, we are addressing three of the greatest public health challenges of our time, obesity, cardiovascular disease and neurodegenerative conditions. Now I'd like to move on to some key events during the recent period that have dramatically strengthened our balance sheet and give us the necessary resources to push multiple programs toward commercialization. We anticipate being funded through multiple potential independent and partner launches. These meaningfully increase revenue opportunities for the company and push us toward becoming cash flow positive and self-sustaining from commercial sales. Since our last reporting period, we have completed transactions with gross proceeds of $1.33 billion. Let's break that down. First, we completed a global licensing and collaboration agreement with Novartis for ARO-SNCA, Arrowhead's preclinical stage siRNA therapy against alpha-synuclein for the treatment of synucleinopathies such as Parkinson's disease. The collaboration includes a limited number of additional targets outside our pipeline that will utilize Arrowhead's proprietary TRiM platform. Arrowhead received a $200 million upfront payment and is also eligible to receive development, regulatory and sales milestone payments of up to $2 billion. Arrowhead is further eligible to receive tiered royalties on commercial sales up to low double digits. Second, we earned $200 million milestone payment from Sarepta following a drug safety committee review and subsequent authorization to dose escalate and achievement of the second prespecified patient enrollment target for ARO-DM1. And third, we closed concurrent public offerings of $700 million aggregate principal amount of 0% coupon convertible senior notes and $230 million of common stock. Both offerings were several times oversubscribed and priced at company-friendly terms. As I mentioned at the beginning of the call, we demonstrated strong execution across all areas of our business. We received regulatory approval in 3 different countries. We launched our first commercial product. We continue to grow our cardiometabolic portfolio. We had encouraging early results from our obesity programs. We advanced our TRiM platform and CNS pipeline, and we meaningfully improved our financial position to push these and other programs forward. It has been a productive last few months at Arrowhead with so much potential to continue the strong progress in 2026 and beyond. With that overview, I'd now like to turn the call over to Andy Davis. Andy? Andy Davis: Thank you, Chris, and good afternoon, everyone. It has been just over 2 months since the approval of REDEMPLO on November 18, 2025, and we are very pleased with the progress we are seeing. I'd like to share some early insights across health care provider engagement, patient dynamics and payer developments. I'll start with health care provider engagement. As a reminder, we are targeting approximately 5,000 health care professionals through personal promotions, complemented by a much broader omnichannel effort. Early prescribing has been led by preventive cardiologists and endocrinologists, who together account for approximately 70% of total prescriptions, with the remainder coming from internal medicine physicians focused on lipid disorders. In addition, advanced practice providers, including nurse practitioners and physician associates working within multidisciplinary care teams; are playing a meaningful role in patient identification and treatment decisions. Turning to patient dynamics. As Chris mentioned, over 100 prescriptions for REDEMPLO have been received to date. We see this as a very strong start that exceeded our expectations for the early months of the launch. We are also seeing geographically balanced uptake across the United States. Early patient starts fall into 3 categories: patients transitioning from our expanded access program, patients naive to the APOC3 class and patients switching from olezarsen. Class-naive patients represent the overwhelming majority of starts with expanded access and switch patients contributing evenly to the remainder. Patients receiving REDEMPLO include both clinically diagnosed and genetically confirmed FCS, with the majority not required to submit genetic testing to gain access. Importantly, a high proportion of patients are enrolling in the rely on REDEMPLO patient support program. And in the fiscal first quarter, patients eligible for co-pay assistance paid $0 out of pocket. Next, I'll touch on payer developments. While it is still early, we remain encouraged by positive payer feedback on both the clinical profile of REDEMPLO and our unified One-REDEMPLO pricing approach. We are actively engaged with the largest payers and discussions to date reflect a willingness to cover REDEMPLO to label, including access based on either genetic or clinical diagnosis of FCS. I'd like to conclude with a brief comment on execution. Within days of FDA approval, we had product available in the channel for FCS patients. Our REDEMPLO care coordinators, rare disease specialists and field reimbursement navigators were deployed on day 1 to support prescribers and patients, and our payer account team continues to work closely with customers to minimize access barriers. The teams are off to a great start. And our teams are highly encouraged by early stakeholder feedback. This feedback further reinforces the key differentiating attributes of REDEMPLO. As a reminder, in the PALISADE study, REDEMPLO reduced triglycerides by 80% from baseline as early as month 1 and maintained this reduction with minimal variability through 12 months of treatment. In addition, the numerical incidence of acute pancreatitis was lower in REDEMPLO-treated patients than in placebo. And the U.S. approved prescribing information includes no contraindications, no warnings and no precautions. And REDEMPLO can be self-administered at home once every 3 months, just 4 injections per year. With that, I'll turn the call over to James Hamilton to discuss the R&D portfolio. James Hamilton: Thank you, Andy. I'd like to start with a review of the REDEMPLO FDA approval and information in the label and contained in the package insert. REDEMPLO is approved as an adjunct to diet to reduce triglycerides in adults with FCS. The recommended dose of REDEMPLO is 25 milligrams, and it can be self-administered at home by subcutaneous injection once every 3 months. REDEMPLO has no contraindications, warnings or precautions in the U.S. FDA-approved label. The most common adverse reaction includes hyperglycemia, headache, nausea and injection site reactions. REDEMPLO was studied in patients with both genetic FCS and clinically diagnosed FCS in the Phase III PALISADE study. Patients achieved deep and durable reductions in median triglycerides of around 80% from baseline with reductions largely maintained below the guideline directed threshold of 500 milligrams per deciliter throughout the year of treatment. Importantly, patients with genetic FCS versus clinical FCS showed similar reductions from baseline. We see the clinical FCS population as having the same high unmet need as the genetic FCS group. And as such, we think it's crucial to have shown that both patient populations showed similar large reduction from baseline in triglycerides. In PALISADE, treated patients also had a reduced rate of adjudicated acute pancreatitis events, a very welcome finding for FCS patients and their caregivers and an important validation that reduction in triglycerides can, in fact, lead to reductions in pancreatitis. In addition to FCS, we are also investigating plozasiran in patients with severe hypertriglyceridemia or SHTG. We announced last quarter that the FDA granted breakthrough therapy designation to investigational plozasiran as an adjunct to diet to reduce triglycerides in adults with SHTG. Breakthrough therapy designation is a process designed to expedite the development and review of drugs that are intended to treat a serious condition and where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapies on clinically significant endpoints. This is another important step for the program. The global Phase III studies of plozasiran designed to support the supplemental NDA filing to expand the label beyond genetic and clinical FCS are the SHASTA-3 and SHASTA-4 studies, which enrolled approximately 750 patients; and MUIR-3, which enrolled 1,400 patients. We're also enrolling patients in SHASTA-5 to directly assess the ability of plozasiran to reduce the risk of acute pancreatitis as the primary endpoint. We remain on schedule to complete the blinded portion of the SHASTA-3, SHASTA-4 and MUIR-3 Phase III clinical studies in mid-2026. We expect top line data to be available in the third quarter of 2026 with planned sNDA submission for SHTG before the end of the year. We presented the study design and baseline characteristics of the SHASTA-3 and SHASTA-4 studies at the 23rd World Congress Insulin Resistance, Diabetes and Cardiovascular Disease in December 2025. I'd like to spend a moment to go over a few key parts of that poster. The primary endpoint of the SHASTA studies and the accepted regulatory endpoint is TG lowering versus placebo. Plozasiran has been highly active in all patient populations studied. So these studies are overpowered to show TG lowering. One of the additional objectives and key secondary endpoints of SHASTA-3 and SHASTA-4 studies includes the assessment of acute pancreatitis rates. To be clear, the study was not designed or prospectively powered to demonstrate AP rate reduction after just a near treatment. However, there are a meaningful number of SHTG patients enrolled that would be considered at high risk for AP. Specifically, among the 2 studies, which will be pooled for AP event assessment; 37% of enrolled patients reported TGs greater than 880 milligrams per deciliter, an accepted high-risk threshold for AP. In addition, 20% of enrolled patients had a prior medical history of pancreatitis. Lastly, we are seeing AP events in the studies. We are, of course, still blinded and have about another 4 months before the last patient reaches the end of the blinded period, but overall, the studies are progressing as planned. Chris mentioned the interim obesity results from our ARO-INHBE and ARO-ALK7 programs earlier, but I'd like to add some color and talk about what we are adding to these programs. First, these early results were very encouraging. The next steps would be to investigate whether and where there is a therapeutic benefit and in the patient segments and treatment settings where it may be applicable. To review, the interim clinical trial results represent the first demonstration in humans that the Activin E/ALK7 pathway, a genetically validated pathway that regulates adipose fat storage, may potentially be harnessed therapeutically to improve body composition and enhance weight loss versus tirzepatide treatment alone in obese patients with type 2 diabetes mellitus. This patient population typically experiences less weight loss with incretin therapy. They're less likely to reach weight loss targets and need more effective treatment options. Importantly, ARO-INHBE in combination with tirzepatide achieved approximately twofold weight loss and approximately threefold reduction in visceral fat, total fat and liver fat versus tirzepatide alone in obese diabetics. We saw signals that the pathway was active in the nondiabetics as well. But based on early data, the diabetic signal, particularly in combination with tirzepatide; appeared to be the clearest. We are planning -- we are already in the planning and execution stage of the following next steps. increasing numbers of patients in the Phase I diabetic cohorts, including longer follow-up and better -- to better understand drug durability and activity out to 1 year; and initiating monotherapy cohorts in obese diabetic patients. We expect to have more data later in 2026 from these programs as we see data from the new expanded scope of the Phase I/II studies. I will now turn the call over to Dan Apel. Daniel Apel: Thank you, James, and good afternoon, everyone. I'll provide a brief outline of our financial picture. As we reported today, net income for the quarter ended December 31, 2025, was $30.8 million or an income of $0.22 per share based on 140.7 million fully diluted weighted average shares outstanding. This compares to a net loss of $173.1 million or a loss of $1.39 per share for the quarter ended December 31, 2024, based on 124.8 million fully diluted weighted average shares outstanding at that time. Revenue for the quarter totaled $264 million, driven primarily by our license and collaboration agreements with Sarepta and Novartis. Of this amount, approximately $229 million related to the Sarepta collaboration, and this included $181 million from the achievement of the second DM1 milestone, $32 million from the ongoing recognition of the initial Sarepta consideration and $17 million related to reimbursement of incurred collaboration program costs. In addition, we recognized $34 million of the $200 million upfront payment we received from Novartis under our global licensing and collaboration agreement with them. The remainder of that $200 million will be deferred over time as we fulfill our preclinical collaboration obligations. Finally, on revenue, we also recorded our first commercial sale of plozasiran in FCS. As both Chris and Andy have mentioned, we are very encouraged with the feedback and uptake we are seeing with patients and providers. For now, we are not disclosing specific sales numbers until such time as they become a meaningful driver to our financials. Turning to expenses. Total operating expenses for the quarter were approximately $223 million compared to $164 million in the prior year quarter, representing an increase of $59 million year-over-year. This increase was driven by $40 million of higher R&D expenses and $19 million of higher SG&A expenses. To break that down, the increase in R&D expense was primarily attributable to, as planned, higher clinical costs associated with our Phase III registrational studies for plozasiran in SHTG as well as increased clinical supply chain costs. Nearly half of our clinical trial spend in the quarter was associated with our 3 registrational SHTG studies, namely SHASTA-3, SHASTA-4 and MUIR; which again should read out in the summer. SG&A expenses increased year-over-year compared to the prior year's fiscal first quarter, primarily driven by investments to support the commercialization of REDEMPLO. As previously discussed, in advance of the U.S. launch, we built robust commercial capabilities to fully support FCS and importantly, capabilities that were intentionally designed to be highly leverageable downstream should we obtain approval for plozasiran in SHTG and sulastiran in HoFH. Turning now to the balance sheet. Cash and investments totaled $917 million as of December 31, 2025. Common shares outstanding at quarter end were 137.4 million. To be clear, the reported cash balance does not include the $200 million that we earned for the DM1 second milestone, which was received in January; nor does it include the $50 million anniversary payment that we expect to receive from Sarepta on or before February 10. Finally, and importantly, the cash balance of $916 million also does not include the financing transactions announced in early January, consisting of a concurrent offering of convertible senior notes and common stock, along with associated capped call transactions. As Chris mentioned, these were on company-friendly terms in the sense that the convertible was 0% coupon and the initial conversion premium was 35%. Said another way, the 0% coupon means the notes will not bear regular interest and the principal amount of the notes will not accrete. The initial conversion price represents a significant premium of approximately 35% over the public offering price per share of common stock in the common stock offering. Moreover, the private cap calls will prevent any dilution to existing shareholders up to an 85% of the premium over the offering price or roughly $119. We estimate that the total cost of capital of that convertible at any share price below that $119 to be very attractively below 1.5%. All that is to say that we have very significantly and efficiently strengthened our balance sheet, which provides additional flexibility to support ongoing clinical development, current and future commercialization activities and other long-term strategic priorities. With that brief overview, I will now turn the call back to Chris. Dr. Christopher Anzalone: Thanks, Dan. This is indeed an exciting time to be at Arrowhead or an Arrowhead shareholder. We're coming off a historic period for the company where we executed extremely well and all the hard work of the last several years is starting to pay off. While 2025 is productive, we look to the remainder of 2026 and the years ahead to be even more transformational. Let's look at some key 2026 events that we anticipate could be important value-creating events for the company and our shareholders. Commercial sales progress for REDEMPLO, Q3 2026 readout of Phase III SHASTA-3 and SHASTA-4 studies of plozasiran in patients with SHTG, which we believe has the potential to be a $3 billion to $4 billion commercial opportunity; second half 2026 readout for ARO-DIMER-PA targeting PCSK9 and APOC3 for LDL and TG lowering, which may address mixed hyperlipidemia, a population of potentially 20 million patients in the U.S.; additional ARO-INHBE and ARO-ALK7 data presented in 2026 that may build on the already encouraging early data for this novel non-incretin strategy; and early ARO-MAPT data in 2026, potentially providing validation for this drug candidate and our emerging CNS pipeline with systemic delivery via subcutaneous administration. These are just a few potentially important events in 2026 alone. If you fast forward 1 to 3 years, we expect many more opportunities in our pipeline to build value and potential commercial launches, both independently and with partners. Thank you for joining us today. And I would now like to open the call to your questions. Operator? Operator: [Operator Instructions] Our first question will come from the line of Mike Ulz from Morgan Stanley. Michael Ulz: Maybe just one on REDEMPLO. Can you just give a little bit more color on the breakdown between the different categories of patients transitioning from expanded access, naive and switch? And then maybe on the latter in terms of switch, just any key reasons you're seeing a switch? And does it have anything to do with coverage and pricing? Andy Davis: Thanks, Mike. This is Andy. Yes, I can comment that the vast majority of patient origination is from APOC3-naive segment, with the remaining balance split roughly 50-50 between those that are coming from switch and those that are transitioning off of the expanded access program. As it relates to switch, we're seeing switch patients that are coming both from efficacy, but also from safety as the two principal drivers for why physicians might be considering REDEMPLO as an alternative. I hope that helps. Operator: Our next question comes from the line of Maury Raycroft from Jefferies. Maurice Raycroft: Congrats on the progress. I'll ask one on obesity. Just wondering if you've had discussions with FDA about the development path or when would it make sense to do this? And what could timelines for your Phase II start look like? And do you need to have all the data, including combo data in hand, before you can determine next steps for the development path? James Hamilton: Yes, sure, Maury. I can take that. This is James. Probably middle of the year, we would be having some of those discussions with FDA. I don't think we need all of the data from all of the cohorts. As I mentioned in the prepared remarks, we expanded some of these cohorts, so they'll be going on some of them for a longer period of time. So FDA conversations probably middle of -- around middle of the year, and then we'll be looking to file an IND shortly thereafter. Operator: Our next question will come from the line of Andrea Newkirk from Goldman Sachs. Andrea Tan: Maybe I can ask you one here on the ARO-DIMER-PA asset. Just as we think about the data set that are -- that's coming later this year, just curious if you might be willing to speculate or share what you are looking for or how you've defined a TPP, what level of reduction in LDL-C and you're hoping to see? And then how that might inform a go/no-go decision for advancing the asset forward? And what extent of reduction would give you confidence that you could then see that translation to a benefit on MACE? Dr. Christopher Anzalone: Yes, sure. We'll see. I think we probably don't have to reach the level of reduction in terms of APOC3 and triglycerides that we're seeing with plozasiran, for example. Something less than that with the combination of the LDL cholesterol reductions would probably be sufficient. So I think if you look at some of the monkey data that we presented in the dyslipidemic monkeys, we were seeing reductions in LDL and in triglycerides of around 40%, 50%. So I think something like that, if you could do both of those, that would be really encouraging. But we'll see what the data show later this year. Operator: Our next question comes from the line of Luca Issi from RBC Capital Markets. Unknown Analyst: This is Cathy on for Luca. Congrats on strong REDEMPLO launch and progresses. My question also on INHBE and ALK7 since we just talked about the regulatory path. Andy, I appreciate early days, but how are you thinking about potential pricing for INHBE and ALK7? I mean Lilly now offers Zepbound via LillyDirect at $300 a month and the compounders announced today that you can get oral Wegovy basically at the same monthly price as YouTube TV. So what is your latest thinking on pricing? And how should we think about COGS for INHBE and ALK7? Andy Davis: It is -- as you expected, it's way too early for us to think about that. We're inherently in the biology here to see how these drug candidates could potentially work in various patient populations. Until we have a better understanding of that, it's really too early to speculate on potential pricing. Operator: Our next question comes from the line of Prakhar Agrawal from Cantor. Prakhar Agrawal: Congrats on the quarter and the progress. So I think, James, you mentioned that about the Pancreatitis event rates in the ongoing Phase III SHASTA-3, 4 trials. Maybe if you can talk about the blinded AP events that you're seeing in those trials and whether it's in the same ballpark of what Ionis saw? And just a follow-up to that, would you expect the placebo event rate on AP reduction to perform similarly to olezarsen core trials, given the population looks similar? Or are there any nuances that we should be aware of? James Hamilton: Yes. So on the first one, we're not going to give any additional details on event rates or the number of events that we've seen other than to say that we are seeing events. On the second question, I mean, I think it's rational to look at the CORE and CORE2 placebo rate that the population was similar to ours. So they are obviously different studies, but the population was similar. Operator: Our next question comes from the line of Jason Gerberry from Bank of America. Jason Gerberry: You mentioned payer feedback for REDEMPLO. I believe that was in the context of FCS. But I'm curious if in those discussions, SHTG came up at all and whether that price point that you guys have for FCS is appropriate for a market the size of SHTG and the likely benefits that APOC3 would provide. It seemed pretty derisked at this point, but just kind of curious if those discussions came up and how the view was on the $60,000 price point. Andy Davis: Thanks, Jason. This is Andy. I appreciate the question. I won't get into the details of any specific payer discussions, only to say that our team is laser-focused on ensuring we can gain coverage and access for those patients that have FCS, either genetically confirmed or clinically diagnosed. I would just add that the payers with whom we're discussing represent over 90% of U.S. lives and both the clinical teams and the economic teams recognize the clinical value and the economic value of REDEMPLO at the One-REDEMPLO price that we've previously announced. Dr. Christopher Anzalone: And you mentioned the size of the SHTG market. We think there are somewhere around 3.5 million people with triglycerides above 500. But that market is not all created equal. When we look at our -- at least initial target market there and we look at how we price REDEMPLO, it is really focused on those very high-risk individuals, those maybe 750,000 to maybe 1 million people who are -- who have triglycerides above 880 or history of pancreatitis. That's -- at least initially, that is the real core market that those are the patients who really need this new medicine. So again, don't get lost in the 3 million to 4 million people with trigs above 500 really focus on that high risk group. That's what we're focusing on at least initially. Operator: Our next question will come from the line of Patrick Trucchio from H.C. Wainwright. Patrick Trucchio: My question is on ARO-MAPT. I'm just curious, with the interim data from the healthy volunteer portion and then with the patient data to follow, I'm wondering, what specific elements of the healthy volunteer data, safety, CSF tauopathies knockdown or downstream biomarkers would most likely increase your confidence in this program and as well the data we should look for in patients to follow? And if you could also just talk about just the confidence this would give in the CNS targeting and platform overall and how we should expect the CNS platform to develop from here? James Hamilton: Yes, I can take that, Patrick. This is James. So maybe I'll take the second question first. We don't have any data in the clinic yet, any data in humans, but we do have data using the platform with multiple different targets in multiple different monkey studies, and they're pretty consistent in terms of the drug concentration that we get in various CNS regions and the knockdown we're able to achieve in the deep brain. So that is helpful and certainly enhances our confidence. But of course, the large leap in confidence will come once we see the clinical data. And to your first question, I think the key data that we anticipate being confidence building, of course, safety and then the CSF knockdown will be key in the healthy volunteers. There's not a lot of other downstream biomarkers to measure in the healthy volunteers. But then going forward into the patient cohorts, we can measure some of the [ phospho ] tauopathies varieties in the blood, also in the CSF. And then, of course, we can look at tau PET, although those readouts will take a while to see the tau PET signals in the patients. I think seeing a reduction in tau PET signal will be really very encouraging. Operator: The next question will come from the line of Edward Tenthoff from Piper Sandler. Edward Tenthoff: So thanks for all the detail. Really exciting to see the pipeline advancing. I'm wondering when it comes to the recognition of revenues, at this point, are you guys anticipating breaking out a cost-of-goods-sold line? I'm sure a lot of the manufacturing expense has already been expensed to R&D. But I'm just trying to think about how you're planning on reporting COGS going forward? And will you break out REDEMPLO product sales in the future? Daniel Apel: Yes. Thanks, Ted. Thanks for the question. Yes. As you pointed out, the cost of goods sold prior to launch are going to be in the R&D, and that's the majority of what we're going to see in the short term. We said in the prepared remarks, we're not going to disclose this actively until such time as they are meaningful drivers. So we will, at some point, I'm not going to hazard a guess as to when that will be. But then you would -- at that point, you would normally see then sort of the traditional product revenue and product sales. Operator: Our next question comes from the line of Joseph Thome from TD Cowen. Joseph Thome: Maybe just based on the differential biology of Activin E/ALK7, can you talk a little bit about your expectation to see monotherapy weight loss in obese nondiabetic patients with the ALK7 program? And a point of clarification, when you talk about the expansions of the studies in terms of including that monotherapy diabetic population and expand the overall size, was that for the Activin E/ALK7 programs already, both of them? Dr. Christopher Anzalone: Yes. I think -- well, we don't really have expectations in terms of monotherapy weight loss. We'll see what happens. I think we've said a few times that we view these studies as hypothesis generating. So we'd like to see if there's an early signal and then potentially expand cohorts to confirm that signal. So I can't really predict ahead of time what we're going to see. Then on your second question, the addition of the monotherapy cohort, we did add that in the INHBE study. We will likely have that in the ALK7 study as well. Operator: Our next question comes from the line of Mani Foroohar from Leerink Partners. Mani Foroohar: I know earlier, so I'm not sure this was asked earlier, but could you give us a breakdown of the EAP versus non-EAP patients out of the 100-plus prescriptions? And how should we think about the total pool of EAP patients rolling on to commercial drug? Is that -- is there a tail of that remaining? And I have a follow-up question. Andy Davis: Thanks for your question, Mani. This is Andy. At this time, we're not going to provide any further details aside from the previous remarks, which the vast majority of patients are APOC3 naive. It gives us a lot of optimism about our ability to identify and diagnose both genetically confirmed and clinically diagnosed FCS patients. And again, with respect to the balance, we do see that fairly evenly split between those patients transitioning off of the expanded access program and those that are coming via switch. Mani Foroohar: Okay. That's helpful. And a separate question, what are the expectations we should have over the next 12 to 18 months around potential data sets admittedly perhaps early on novel tissue types and further expansion of the platform? Dr. Christopher Anzalone: That's a good question, Mani. We've not given any guidance to that at this point. I think we have enough exciting stuff with more ALK7 data, with initial MAPT data, with initial [ Zimer ] data, with SHASTA-3 and 4 reading out with sales that we feel pretty good about those things. But you know us, Mani. We are always developing the platform, and we are always expanding to the sites. And so I can't -- it's possible that you may hear something about where we're going with the platform as well as maybe new candidates within the existing platform. I just can't give you any guidance on when that might be, I apologize. Operator: Our next question will come from the line of Madison El-Saadi from B. Riley. Madison Wynne El-Saadi: On the 100 prescriptions you mentioned, I'm curious how many of those do you expect to be converted to paid drug? And how long does it take to get from prescription to drug [ and ] body? And then relatedly, how should we think about the pace of both patient onboarding and competitive switching? Is this kind of a leading indicator for SHTG dynamic? Andy Davis: Thanks, Madison. Happy to comment. What we're seeing are really high-quality prescriptions in the sense that we believe these prescriptions truly represent either genetically confirmed or clinically diagnosed FCS patients. So we do have high confidence that a significant proportion of those prescriptions will, in time, translate into drug shipments and drug in patients. As far as the time it takes from prescription to drug shipment, again, that does vary by patient, by insurance and by prior authorization. But I would say, in general, we're able to do that within just a couple of weeks from prescription to patient receiving drug. So I've been incredibly pleased with the patient identification including both genetic and clinically diagnosed and incredibly pleased with the operational execution from the team in converting prescriptions to shipped medicine. Dr. Christopher Anzalone: And also just broadly be careful about reading too much into where we are right now. We've only been actively in market for 10 weeks now. And so we're still working with payers. We're still working with physicians to get comfortable prescribing this. We're still informing and educating patients and prescribers about the medicine. So we have a long way to go. Let's see where we are more towards the end of the year. We have a pretty small sample set at this point. Operator: I'm not showing any further questions in the queue. I would now like to turn it back over to Chris for any closing remarks. Dr. Christopher Anzalone: Thanks, everyone, for joining us today, and we look forward to speaking with you next quarter. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Desiree: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bloom Energy Fourth Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press the star one. I would now like to turn the conference over to Michael Tierney, Vice President of Investor Relations. You may begin. Thank you, and good afternoon, everybody. Michael Tierney: Thank you for joining us for Bloom Energy's fourth quarter and full year 2025 earnings call. To supplement this conference call, we furnished our fourth quarter and full year 2025 earnings press release with the SEC on Form 8-Ks and have posted along with supplemental financial information that we will reference throughout this call to our investor relations website. During this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding future events, and our future financial performance. These include statements about the company's business results, products, new markets, strategy, financial position, liquidity, and full year outlook for 2026. These statements are predictions based upon our expectations, estimates, and assumptions. However, as these statements deal with future events, they are subject to numerous known and unknown risks and uncertainties. As discussed in detail in our documents filed with the SEC, including our most recently filed forms 10-K and 10-Q. We assume no obligation to revise any forward-looking statements made on today's call. During this call and in our fourth quarter and full year 2025 earnings press release, we refer to GAAP and non-GAAP financial measures. The non-GAAP financial measures are not prepared in accordance with US generally accepted accounting principles and are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between the GAAP and non-GAAP financial measures is included in our fourth quarter and full year 2025 earnings press release available on our Investor Relations website. Joining me on the call today are KR Sridhar, founder, chairman, and chief executive officer and Maciej Kurzymski, our acting principal financial officer and also our principal accounting officer. KR will begin with an overview of our progress, and then Maciej will review financial highlights for the quarter. After our prepared remarks, we will have time to take your questions. I now turn the call over to KR. Good afternoon, and thank you for joining us today. Bloom is rapidly becoming the standard for on-site power. As evidenced by our excellent fourth quarter capping our best year yet. KR Sridhar: We delivered record revenue, gross margin, and operating margin for the year. Our product backlog increased 140% year over year to about $6 billion. Our service business has been profitable for eight quarters in a row, and in the fourth quarter, we achieved 20% gross margin in service. With around $14 billion of service backlog and a growing product backlog that is 100% attached to service, Bloom is well positioned for durable growth in service revenue and profits in the years ahead. Our growth has been fueled by seismic changes in customer attitude towards power. Bring your own power has become the mantra for data centers and power-hungry factories. On-site power has moved from being a decision of last resort to a vital business necessity. This shift has led large power users to seek Bloom to fulfill their needs. Our demand from data center and commercial and industrial or C&I customers, is secular and growing. In 2026 we will further invest in our commercial team to capitalize on growing sales opportunity. AI is a huge tailwind for the power industry and a big catalyst for Bloom's growth. The backlog we reported today includes half a dozen hyperscale and neo cloud end customers, compared to just one a year ago. Bloom has a master contract structure to enable these customers to keep returning to us for repeat orders, much as we have expanded with our C&I customers. And we're also experiencing surging demand in our C&I business. C&I backlog grew over 135% year over year. And it consists of several verticals: telecom, manufacturing, logistics, retail, healthcare, and education. Digitization, automation, electrification, and reshoring are driving C&I customers to seek on-site power. And our C&I sales pipeline is stronger than ever. The geographic mix of our US backlog is noteworthy. Two years ago, over 80% of our US backlog was composed of installations in California and the Northeast, traditionally the high cost of power states. But this year, over 80% of our backlog comes from other states with lower power costs. This geographic shift highlights two important dynamics at play. First, companies are locating factories and data centers in states where they can quickly secure reliable and affordable power, either from the grid or on-site. The states where we are growing fastest have robust natural gas infrastructure and favorable regulatory and policy frameworks for on-site power generation. Second, in these states with lower power costs, Bloom is cost competitive. Our value proposition—fast time to power, high reliability, and lower emissions—strongly resonates for our customers. In short, our customer base is diversified with numerous customers in every key sector including AI. We are rapidly becoming the standard for on-site power. Given our healthy backlog, and our robust funnel, I'm sure your questions will now shift from why we are expanding manufacturing capacity to when we will expand even more. Let me address that with some background. At the core, Bloom is a technology innovator that rapidly delivers cost-competitive platform products at meaningful scale to satisfy customers' current and future needs. We are building solid-state digital power for the digital age. We are not an industrial era energy company. Bloom's manufacturing IP and supply chain diversity enable us to scale without facing the multiyear delivery backlogs plaguing traditional suppliers. Our ability to scale also comes with a high ROI and low-risk profile. Capacity expansion requires a significantly lower upfront investment—a fraction of what legacy players need. Our return on invested capital for capacity expansion is a few months, not years. This gives us the freedom to expand without predicting market size many years into the future to justify our deployment of capital. The simplicity of our manufacturing process is anything but simple. It represents years of innovation, thought, and intellectual property. We have created a differentiated asset-light approach to manufacturing with the control and execution afforded only by in-house production and complemented with a diversified and global supply chain that flexes to meet market demand much like a tech supplier. So my answer to questions on capacity expansion is simple. The Bloom Energy team reiterates its clear and simple promise to potential customers that have large time-to-power needs. Bloom will not be the bottleneck to your growth. And you can count on us to deliver timely power. We will deliver our power platform faster than you can build your greenfield facilities, be it an AI factory or a C&I facility. We demonstrated this recently by delivering a hyperscale AI factory order in fifty-five days against a ninety-day commitment. And power for a large factory before they could complete construction and commence operation. That is quick time to power. The Bloom Way. In short, we will continue to expand deliberately and with discipline. At a fraction of the cost and time it'll take traditional legacy vendors. And we will offer our customers quickly deployable power that's reliable, clean, and price competitive to meet their present and future needs. Speaking of future needs, let me address 800 volt DC. First, what is 800 volts DC? And why does it matter? The electric grid turbines, and engines were designed for the electricity loads of the twentieth-century factories and process industries. Large amounts of alternating current or AC power delivered at high voltage, 35,000 to 69,000 volts. Contrast that to the needs of the digital age. Computer chips, devices, and other semiconductor equipment. Everything digital in our modern world runs on low voltage, direct current, or DC power. The upcoming AI computer racks will consume almost 100 times more power than traditional CPU computer racks of yesteryears. To reduce copper use, increase efficiency, and enhance compute density, AI racks will be architected to receive 800 volts DC. This switch to 800 volts DC is a necessity and not a choice. And will happen at the compute rack level irrespective of whether power is being supplied from an electric grid or on-site power. 800 volts DC will soon be the data center standard because physics requires it. Any AI data center using grid turbines, or engines will need to install numerous transformers, rectifiers, and power conditioning tools to convert high voltage AC to 800 volts DC. This adds significant cost, reduces reliability, and increases emissions. Bloom, and only Bloom, natively produces 800 volts DC today. No Band-Aids, or adapters needed. Starting now, every Bloom server we ship will be 800 volts DC ready. With a removable adapter that allows customers to deploy in legacy AC environments and migrate to DC on their own timeline. This is a compelling future-proofed offering. We also offer to convert any servers we have shipped in the past to 800 volts DC with simple modifications. Highlighting backward compatibility of this new future. 800 volts DC is one of our many innovative apps that integrates seamlessly on our energy platform much like an app installed to a smartphone. We'll continue to make healthy investments in technology advancements this year. And further strengthen our position as the innovative leader in the power sector. While we invest in the future, we'll continue to reduce costs of our core platform, keeping us on a path of anticipated margin accretion, and further increasing our advantage over traditional solutions. We look forward to a strong 2026 as we continue our journey to become the standard for on-site power. A benchmark for speed, reliability, and customer value in the digital age. Over to Maciej now for a financial overview. I'll join you in a few minutes to answer questions. Maciej Kurzymski: Thank you, KR, and good afternoon, everyone. On today's call, I will discuss results of both the fourth quarter and the full year and also provide our full year 2026 guidance. Let me start by recognizing all of our employees at Bloom. Incredible execution in 2025. By calling out three highlights that the team drove this year. First, we achieved record financial results with several key metrics. I would like to highlight $271.6 million in adjusted EBITDA proving just how much operating leverage there is in the business as we start to scale. Second, we were free cash flow positive for the second consecutive year. And third, our service business achieved approximately 20% non-GAAP gross margin for the first time. None of that would be possible without the fantastic performance and dedication of the entire Bloom team. As a reminder, I will focus my discussion on non-GAAP adjusted financial metrics. For a reconciliation of GAAP to non-GAAP, please see our press release and the supplemental deck on our website. Revenue for the quarter $777.7 million up 35.9% year over year. On-site power continues to accelerate relative to the grid. And Bloom's ability to deploy our energy servers and power upsides in record time continue to highlight Bloom's value proposition and drive revenue growth. Gross margin was 31.9%, lower than the 39.3% gross margin in 2024. Gross margin will continue to fluctuate given the mix of individual projects, in the quarter, but we will continue to manage this movement through product cost reduction efforts and operating expense efficiencies leading to a stronger EBITDA. Our operating income $133 million versus $133.4 million in Q4 last year. Adjusted EBITDA was $146.1 million versus $147.3 million in Q4 2024. Well, EPS was 45¢ versus 43¢ a year ago. Again, these are all non-GAAP results. Our product margins were 37% while our service margins were approximately 20%. This is the first straight quarter of double-digit margins in the service business, and while we will see some volatility in these results on a quarterly basis. We expect to continue to see annual improvement. Our balance sheet is much stronger than a year ago. As we added significant cash for convertible bonds. We ended the quarter with $2.5 billion in total cash on the balance sheet. Our inventory ended the year at $643 million slightly higher than what we expected at the 2025. As we prepare for a strong 2026. Our cash flow from operating activities was an inflow of $113.9 million while CapEx was $57 million. Turning to the full year, revenue was a record $2 billion. Up 37.3% from 2024. Non-GAAP gross margin of 30.3%, was up from 28.7% in 2024. Non-GAAP operating profit of $221 million up $113.4 million from the previous year, on a revenue increase of $550.1 million. Over 20.6% drop through to operating income. Non-GAAP gross profit in our service business was $29.7 million a significant improvement from 2024, as I mentioned earlier. Service was profitable on a non-GAAP basis during every quarter of 2025. For the second consecutive year. Looking forward, we continue to expect to drive improvements in service profitability as we expand our installed base and scale. Before we get to guidance, I wanna talk a bit about our backlog. We see tremendous momentum in commercial engagement across both the data center market as well as C&I. Our product backlog has more than doubled from a year ago, We also have approximately $14 billion in service backlog. We have grown our backlog while maintaining healthy customer mix and do not have oversized concentration to any one customer. This brings us to guidance for 2026. While 2025 was a great year for Bloom, we expect 2026 to accelerate. We expect 2026 revenue to be $3.1 billion to $3.3 billion. Non-GAAP gross margin of approximately 32% and non-GAAP operating income of approximately $125 million to $475 million. We expect capital spending to be $150 million to $200 million. And cash flow from operations to be close to $200 million. We do expect to invest in our R&D roadmap and commercial efforts. As you can see from our operating income projections, we expect to capitalize on the significant operating leverage of the business to drive profit expansion. To conclude, Bloom's disciplined execution is delivering accelerated growth while maintaining sustainable profitability as we scale. We believe that we are rapidly becoming the standard for the on-site power generation market. And I could not be more excited about the opportunity in front of us. Operator, we are now happy to take questions. Thank you. Desiree: We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press 1 again. If you are called upon to ask your question and are listening via speakerphone in your device, pick up your handset to ensure that your phone is not on mute when asking your question. We do request for today's session, but you please limit to one and one follow-up question only. Thank you. And our first question comes from the line of David Arcaro with Morgan Stanley. Your line is open. David Arcaro: Oh, hi. Thanks so much for taking my questions. I was wondering, could you speak to the follow-on opportunities at existing customers? I was curious how have the initial projects gone, and how seriously are some of those customers now considering follow-on orders with you? KR Sridhar: Hi, David. Nice to hear from you. Yes. Look. That's a very important question you're asking. You build a strong company on the basis of happy customers. We have seen that from the day we started. We can tell you even in our commercial and industrial business, that has been our traditional bread and butter. Over two-thirds of our business year over year comes from repeat customers bringing in multiple repeat orders to us. This is how it operates. Once people get used to Bloom, they love Bloom. Because we keep our promise and we deliver to them. So this is no different right now that the newer sectors and the customers that have lately engaged with us, be it our utility partners, be it a hyperscale end customer, is seeking us out once they've tried us out. And that's strong traction. Oracle would be a very good example. That is, you know, you know, that's happening on a daily basis. We have great conversations with them on so many projects, and we are working with them on many projects. Many prospective projects in the future. David Arcaro: Okay. Excellent. I appreciate that color. And also, some of your thoughts on further manufacturing capacity expansion. I was wondering as you consider the potential for the next one, the next capacity expansion, just curious, what are the milestones or triggers that you'd be watching for and when do you think a decision could potentially be made about that next tranche of additional production capacity? KR Sridhar: Look. For us, making a decision on expanding is like everyday business for us. It's not a major issue for a very simple reason. We are extremely capital light in order for us to expand. We have standing orders with our suppliers of equipment, with our supply chain, with everybody else to ramp up as quickly as we need to. And the return on investment for us is a few months. So, you know, when do we make a decision? It's fairly simple. If we see a large opportunity, on a time to power, and we need to be able to expand our capacity to be able to provide that additional power to a customer. We can ramp up and provide that additional power to that customer before they are ready. Typically, it takes more than a year to stand up a greenfield data center. It takes more than a year to stand up a factory. From permits all the way to full implementation. We can be ready for them before then. So this is a continuous decision we will make going forward. Quarter after quarter. The reason we signaled to you last year that we're going from one to two gigawatts was there was concern in the market. About do we have a pipeline? Do we have an order? We just wanted you to show how much confidence we had. So we signaled that, and now you all understand why we are expanding. But going forward, we'll just continuously keep expanding our capacity, and that's just normal business for us. David Arcaro: Thank you. KR Sridhar: Absolutely. David Arcaro: Okay. Great. Thanks so much. Desiree: Our next question comes from the line of Christopher Dendrinos with RBC Capital Markets. Your line is open. Christopher Dendrinos: Yes. Good evening, and congratulations on the strong quarter and year outlook. I guess to start here, wanted to follow-up on the HVDC architecture and know, I guess, when do you think we could start seeing that solution set deployed and you know, how are those conversations going with customers? It seems like you all will have quite a bit of an advantage here from a cost perspective about needing to deploy all that extra electrical equipment. So I'm just curious how that's shaping up in the pipeline and how you're thinking about that opportunity. Thanks. KR Sridhar: Look. I think thank you for that question. And, you know, thank you, Chris, for your sentiments about the quarter and the year over year. Super excited about the accelerating momentum that we are seeing in our business as we sit here today. And, we just, I think, add even more of a competitive advantage by bringing in the 800 DC. And I think you're all beginning to understand why that's important from whether it's a CapEx perspective, a reliability perspective, use of copper, and lack of availability of copper in transformers. With the alternative option. As well as the operating cost because of efficiency losses you get from switching from extremely high voltage DC or medium voltage DC to the 800 volt DC. All those reasons, you understand. Now we are betting like we bet twenty-five years ago, DC architecture is the right way to go. And you can see where we are today. And we are betting that very quickly this solution is gonna be sought after. And anybody who's not implementing that on day one their data centers now because they don't have the supply chain on their sites ready for implementing that architecture. We'll want to switch our equipment to that DC as soon as they are ready. That's the reason we're gonna ship everything going forward as 800 volt DC. Your question on when will the data centers be ready for it, that's better left to ask them as opposed to us. We are always going to future proof them and be a step ahead. The key to being a great supplier in the digital economy is you're anticipating what their needs are, and you're there ahead of when they need it. And that brings everyone forward with greater speed. We are moving at AI speed on this one. Thank you. Christopher Dendrinos: Thank you. And I guess maybe as a follow-up, just sticking on that point of anticipating customer needs. You know, I guess on the R&D side of things and the technology roadmap, you know, what are what's the next kind of step for Bloom here, and how are you thinking about the evolution of the product? Thanks. KR Sridhar: Look. We are working on a lot of apps right now. But I you know, I'll tell you one that I think we have talked about a little bit here and there in the past. And what I'm super excited about and makes our customers and potential customers who come out to take a look at our operating systems in the lab. Is this rapid load following of the AI load being handled by our systems without requiring batteries. That is huge. And the ability to, you know, islanded mode, operate our systems without needing any backup in terms of backup generators because of our high reliability. But add to that, not needing batteries. To keep up with the wild swings. That the AI load have in terms of power. Is a super important application and every day, we are making that better and more robust. And anytime a potential customer throws an AI load profile at us, our team is able to just seamlessly integrate that into our product and show them why it'll work really well. That's a huge advantage not just in terms of cost savings, in terms of safety of avoiding all those batteries inside a data center and, you know, you know, a complex and the, you know, like, five assets that may know, like, that may create the maintenance issues that may create. On top of that, think about this. As the AI data centers grow, that battery supply chain also becomes a constraint and we are completely eliminating that constraint, not even mitigating it. So super excited about applications like that. There'll be many more to come as time goes by. Stay tuned, and all that I can tell you is we have a lot more ideas of a lot more apps that are gonna reside on the smart platform. Christopher Dendrinos: Okay. Thank you. Desiree: Next question comes from the line of Manav Gupta with UBS. Your line is open. Manav Gupta: Congrats on a very strong quarter. KR, I wanted to ask you about the progress you are making on combined heat and power solutions. Most data centers are using vapor compression chillers powered by electricity. I think your absorption chillers would be using thermal process that is powered from waste heat. At this point, vapor compression chillers are the primary source of cooling, and then absorption chillers are being deployed for some supplemental cooling. I'm trying to understand in a world where electricity is very expensive, and grid power is not available, can absorption chillers actually go at a faster pace than vapor chillers? And if it does, happen, then how does the benefit? Your product already has an 800 volt advantage. Do absorption chillers make it even more competitive? KR Sridhar: Manav, I wouldn't have expected anything other than a strong technical question from you. You know, like, kudos to you on your very good research report on the 800 volts DC. I think it's a must-read for people to understand that. Well done on that. On the absorption chillers, here's the answer. Right? Thus far, vapor compression was being used simply because the energy coming into a data center came in the form of electricity from a wire. The generation facility that made that electricity was made hundreds of miles away somewhere, and therefore, you couldn't fight the heat. The excess heat all the way from that faraway generation capacity to where the data center is. Now with on-site power generation being the go-to option, in a necessity option for data center customers. If we are generating power for them, on-site, in addition to our extremely high electrical efficiency, we have high-quality heat and that heat is allowed to drive a very well-established technology called absorption chilling. To provide cooling. We think we can reduce electricity usage in the data center by at least 20%. Two zero. That's a big number for this huge power-hungry gigawatt class data centers. And what do we do with that? It's chilled water. At somewhere around five degrees Celsius or 40 degrees Fahrenheit. Coming in. We have systems now that we are operating in this mode chilling and cooling our factory. Just to demonstrate to customers. Customers are super interested in this solution right now. A, because it is more efficient, less expensive, and there's an additional environmental benefit coming out of those absorption chillers in that they don't use hydrofluorocarbons. And that is a big issue for global warming. And lastly, by using absorption chillers, where they do on-site power generation, they are not competing with the same supply chain constraints that they have to on the vapor for all those reasons, this is extremely important. So think of this as another app on our platform. And you know, you asked the question of, does it make us more competitive? A smartphone that has more apps and can solve more problems for a customer, is always a more competitive solution. That is what we are quickly becoming out here as you can see. Manav Gupta: Thank you for a very detailed response, and congrats on all the positive developments that are happening in your company, sir. Congratulations. I'll turn it over. KR Sridhar: Thank you. Desiree: Next question comes from the line of David Sandler with Baird. Your line is open. David Sandler: Guys. Thank you very much for the time, and please let me echo the ones me and say congratulations on a great quarter and a great year. I wanted to ask, your guys' technology is increasingly being comped to legacy incumbents such as combined cycle gas turbines. Could you maybe talk about if you guys are seeing project wins against these or other types of technologies? KR Sridhar: So our answer to you I want I won't discuss about the competitive landscape. That is something you should ask the end user in terms of what did they compare before they choose us. But you can clearly see from the stamp sizes, of the projects we operate. We are operating in that class. Very clearly. And you know, we are no longer the ten and twenty megawatt systems. We have hundreds of megawatts going into the gigawatts. Very soon. Kind of you know, single site location that is the that is the stem size you're looking at. So very clearly, it's in the same category, of a combined cycle gas server. Right? If you consider the entire value proposition, not just in any one narrow aspect. From a customer's point of view. If it is on-site power that is islanded, can a combined cycle gas turbine operate and provide power at partial loads? Can it swing up and down with the needs of the load? Can it what happens to that system in high altitude? What happens to their efficiency? Can you modularly grow pay as you grow and operate that system? Or is it monolithic? Okay? None of the features of a very large stamp size, anything, really matches with how a digital world of a data center operates. Okay? When you when you've taken the cost associated with all that stuff. And then very large mechanical equipment with its inertia cannot swing up and down in milliseconds and seconds like our solid-state digital platform does. So it cannot follow a load that way. So you need Band-Aids for that. And then a huge combined cycle gas turbine because of the large amount of power it puts out monolithically can only do that with reasonable amount of copper at very high voltage. And you you need bandage to now be able to bring that to 800 volts. You put all that together. Can we compete? Yes. Yes. We can. And the fact that we are winning these kind of stamp sizes should show you that we are able to do that not just in high cost value places, but in states where cost of electricity is traditionally low. So even in a place where irrespective of gas prices, irrespective of utility prices, we are able to compete. We're soon becoming the standard. And, you know, the customers who evaluate the entire value proposition will choose us. Customers would just look at first cost. Surely, you know, if you can find it, and if you can install it in a short amount of time, you'll be able to use a combined cycle customer. David Sandler: Thank you, KR. And as a follow-up, could you talk just a bit about how the life of fuel cell stacks has improved maybe how it relates to service margins and how you guys think about risk in the services business? Thank you very much. KR Sridhar: Yeah. So, you know, thank you for asking me to highlight that. That should no longer be a question on any one of your minds. We fully understand when we were losing money every single quarter on service. And we told you that we have a roadmap to get to gross margin neutral and then gross margin positive and keep accreting. You had a reason to wonder about Telus' specifics. Show us that you're making progress. What you're looking from the last eight quarters is eight continuous quarters, contiguous and continuous quarters of profits in the service business. And on top of that, Q4 of 2025, we had a 20% gross margin. And as our fleet sizes increase, as our technology keeps getting better, and if you look at our $14 billion backlog in service, and then you understand that every order that we are booking has a 100% attach rate to service and will add to that backlog. You'll clearly see that service is going to be a growing profit-generating revenue-generating business for Bloom. For years to come. Which is gonna be a huge advantage. This is the reason why we have worked so hard on it, and we'll continue to work on it. Hard on it. Improving life, lots reducing cost, operating the system with AI-driven digital platform. Let me highlight that for a second. Here is what you need to know. We have a few trillion cell hours of field operation. Is what Bloom has. Few trillion cell hours. More than 6 billion data points come from our field. To us every single day. We are using AI. We are not only benefiting from AI on our revenue side. We are using AI to our benefit. For all this. To improve our performance every single day. Because we have a digital twin associated to every single fuel cell stack and data from the real field is coming and feeding the digital twin and making our models better and better. So this is how we're gonna build that business. It's a strong business for us. You shouldn't have to worry going forward about what are we gonna do with service business. The more important question is, are you placing enough enterprise value to this service business? Thank you. Desiree: Next question comes from the line of Michael Blum with Wells Fargo. Your line is open. Michael Blum: Thank you. Congrats on the quarter and good evening, everyone. So I'm wondering if you can speak to one of your suppliers, MTAR Technologies, had extremely bullish comments on their earnings call. Projecting 30% growth CAGR to 2030 for Bloom Energy. So I'm wondering if you could just speak to that and maybe help us square that with the updated backlog number. KR Sridhar: You know, we are appreciative of the enthusiasm that our strong supply chain partners have and how bullish they are about what we do. But, Michael, either to all of you or to our board or to our vendors, we have not provided any long-term guidance. And, you know, you can't attribute any of that to us. You would have to ask them where their confidence is coming from and square that with your own models. But we don't you know, we have not provided any guidance that far out. And, there's not a flipping comment. Let me tell you what's just happening. Right? Just take the last three days last two days, of what you're all seeing in the market. Amazon came out today along with us after the market. And said, they're upping their capital expense almost 100% to $200 billion for the year. 2026. Right? Google did the same thing yesterday. Or yeah. Yeah. Yesterday after the bell. And, upping their CapEx heavily to a 175 to a 185 billion. This is all for the digital infrastructure. You know what? What you're seeing happening is the horizon at best is six months. Long-term horizon. Nobody has visibility past that because this entire field is accelerating at that pace. For us to sit here and talk about 2030, you know, that's the old industrial age resource planning that the utility companies used to do. That's not where the digital age is going. We don't have any predictions for 2030s right now other than to say we're extremely bullish and it's gonna accelerate. Michael Blum: Thank you. Thanks, sir. Appreciate the clarity there, so thank you. Other question I had was on the backlog. I wonder if you could tell us what the mix is, US, international, and really, the broader question is, if you could speak to your conversations you're having with prospective customers should we expect most of your business is gonna be in the US going forward, or is there a meaningful international market opportunity also that we should be thinking about? Thanks. KR Sridhar: Thank you. That's a good question. You know, we don't break down the mixes between US and international. But look, to answer your broader question, Bloom's gonna be a global company. We are going to expand and really play a major role in other countries. That is going to actually, if you think about what is the kind of infrastructure we need to be able to play in those areas. It's gonna lag behind the US. Simply because LNG terminals, the amount of LNG available for new projects given what's happened in the world. With, like, Russian gas being cut off to Europe, things like that. Is necessarily going to take a few more years to take off in a big way. If that is good, if there is gas going to these countries now, it is to support existing infrastructure. It's barely available to support new growing infrastructure, and you're not seeing very large projects in Europe for that reason. You know, you're not hearing about the half a gigawatt and gigawatt data centers being built out there. Right? Other than their power is already available. So it's gonna lag behind a little bit. But we are gonna stay on top of it. The predominance of the opportunities right now for everybody in the world is here in the US. The growth rate is unbelievable. So do we see at least for the foreseeable future this being the key area US being the key area of focus? The answer is yes. In terms of the diversity of the mix, I wanna remind you all, as much as we talk about AI, commercial and industrial business is very strong for us. We have had a 135% growth year over year in our commercial and industrial backlog. Companies, factories, campuses, retail businesses, they're all digitizing. They're all automating. They're, you know, they're all using robots. They're all seeking AI. Their power needs, their power draw is going up. So that electricity demand is very high. And when a factory is getting built, they can't wait for the power company to give them the power at their own pace. So we see them coming more and more to us. And it's all happening in the middle of the country. Where there is gas availability, and where there's proper policy for you know, on-site power being encouraged. Michael Blum: Thank you. Desiree: Next question comes from the line of Colin Rusch with Oppenheimer. Your line is open. Colin Rusch: Thanks so much. You know, guys, as you look at the depth of the market and the breadth of customers that you're dealing with and the value-added elements that you have to your system, and with the future proofing and cooling dynamics, can you just talk about your pricing strategy? You get a little bit deeper into this, how much pricing leverage do you have, and how much do you wanna take you know, here over the next twelve to twenty-four months? KR Sridhar: That's alright. Perfect. Look. Pricing really is very much a market phenomenon be you know, you know, like, based on where people are. People are now going to places where they can get affordable power. But affordable power, remember, is value-based. Okay? Most of our customers place value on time to power. Place value on ease of permitting because we don't create air pollution. And they don't wanna get caught in a backlash or either a nonpermit or a backlash from their local community. And we feel very, very good that our customers truly value the proposition we bring to them. And so if you just looked at where we are, we don't see us having to choose between growth and profitability. Okay? Between our continuous cost reductions and efficiencies, and given their electricity prices are going elsewhere, and, you know, if you just listen to the legacy suppliers of turbines and engines, they're all talking about pricing leverage. What does that mean? They're in they're actually increasing their price. So electricity for customers is going in only one direction. What we offer is really a competitive price but at the value stack, that they're extremely happy with. And are willing to pay. So I don't think in the foreseeable future, we have to be looking at worrying about you know, like, you know, like, Colin Rusch: Thanks so much. And then, you know, the follow-up here is really around any interest in potential M&A. Obviously, you've got a lot of wood to chop with the core product here. But with an augmented balance sheet, and, you know, a very robust currency right now, with the stock, is there any reason or opportunities for you guys to start looking at incremental acquisitions to scale the platform at all? KR Sridhar: Look. We can be selective about things that matter to us and things that matter to our customers. And if we had some acquisitions, will that make it easier for us to bring that entire smart platform to our customers in a better way. Other than that, our potential addressable market and our ability to light up the planet is just, you know, it's just unthinkably big. That we don't need to be looking at what else should we be doing. You know, if we just, you know, like, lighting up the planet is a good day job. I don't need another day job. Colin Rusch: Thank you. Great. Thanks so much, guys. Desiree: Next question comes from the line of Mark Strouse with JPMorgan. Your line is open. Mark Strouse: Yes. Good afternoon. Thank you for taking our questions. KR, I thought it was really interesting when you said that over 80% of the backlog today is in some of those lower-cost states. Outside of California in the Northeast. Appreciating maybe some of that's driven by data centers. I was curious if you could maybe give that for your non-AI business. Kinda what that mix might look like? KR Sridhar: No. Sorry. We, you know, we just don't do that. Know, give me another question. I can answer you. Mark Strouse: Okay. Alright. I'll follow-up offline. Thank you. Can I ask on the book and ship business? You know, this time last year, I think you said 2024 was the first year the majority of your revenue came from book and ship. Can you talk about what that looked like in 'twenty-five and how you're thinking about that going forward? KR Sridhar: Thank you. Yeah. Yeah. Sure. You know, and that's an important thing. Right? In, like, '25, we know, we had a significant double-digit percentage. Let's just put it that way of book and ship that we were able to do booking, shipping, turning power on for our customer. And you heard one example of that where we powered a data center. In, like, fifty-five days. Right? So and so that was a significant part of the business. And we would expect there are plenty of our valued customers who are going to come to us and want that power very urgently for whatever reason they have. And most often, I can tell you, Mark, it is some other vendor who did not keep their promise? And they come to us. We see this as a competitive advantage. And we want to be able to support a customer under those circumstances. So we have the capacity to do that. We would love to do that, and I would think it will still be in, like, double digits. In terms of percentages. Thank you. Desiree: Next question comes from the line of Sherif Elmaghrabi with BTIG. Your line is open. Sherif Elmaghrabi: Hi. Thanks for taking my questions. So last month, AEP their option for fuel cells under that gigawatt agreement with Bloom. But the offtake won't be finalized until the second quarter of this year. So my question is, would you expect them to take delivery of the fuel cells regardless given the existing power demand environment? And the infrastructure they put in the ground as well. KR Sridhar: Yes. AEP very clearly said that in their press release, and we reiterated that. That our sale of that product is unconditional. And they will take possession. And, obviously, they wouldn't have accepted that if they didn't believe very strongly that they could get this going. Number one, in terms of that project. But, additionally, here is what you need to know. Right? AEP and us are working on several projects together. And they're great partners of ours. And we expect that our combined business is only gonna grow. So they didn't have any concerns about signing a definitive order with us. Even though they had to go through some formalities on their side. You know, because Bloom's energy servers are not perishable. They can, you know, they can easily put that to use. In multiple other locations that they are potentially considering us for. Sherif Elmaghrabi: Thank you. Second, I do wanna ask about the warrant transaction with Oracle. That deal helps align your interest, of course. And I'm wondering, how do you think about doing similar transactions with other hyperscalers if that's something they're interested in? KR Sridhar: Again, you know, we still haven't executed that agreement. As you know, we are working through that strategic partnership agreement that we have. And because of that, I can't speak to the details of it because it's not out there. But you'll see that soon. Everything is on a case-by-case basis. You know? In this particular case, I'll tell you what the criteria was. Is a great strategic partnership. Where both enterprises had a lot to gain. And by doing that and remember, these are not penny warrants. These were done at market pricing on the day we agreed to, you know, like, what we do. So it is not in lieu of something other than both parties enhancing enterprise value. So if so I'm not gonna say yes or no to this. It'll all be evaluated on a case-by-case basis. If there's enterprise value. So the answer is, you know, neither a yes or a no. It depends. Thank you. Sherif Elmaghrabi: Great color. Thank you, KR. Desiree: And our last question comes from the line of Noel Parks with Tuohy. Noel Parks: Hi. Good afternoon. I wanted to ask about the product margins and the supply chain. I was just wondering what your thoughts are on your visibility into your input cost for components. And I'm just wondering if you were there is any trend you're considering towards longer-term contracting or forward purchasing from vendors? To serve exercise your leverage with cost? KR Sridhar: No. Thank you so much. And I'm going to ask for your indulgence and say, let me not do a follow-up question because we are, you know, like, running on the hour. But let me answer this very good question you asked. Look. We are constantly working both internally in the company and with our supply chain partners. To figure out efficiencies how to bring scale-related efficiencies, how to bring about technology and process-related efficiencies. And continuously keep bringing down the cost. We are also extremely judicious of watching what is going on in the world and securing, you know, a crisp bias if we need to if we see, you know, certain things happen. You can see we, you know, we are not pinching the last penny on the amount of inventory we hold. You know, there are very good reasons for those things. Because we're very strategic about all those decisions. And in terms of cost reduction, overall, double-digit cost reduction is in our DNA every single year. You know? And we make that happen. Sometimes all of that translates out, sometimes because suddenly a tariff regime came along, instead of saying our cost went up. They're able to neutralize a lot of that. Or, you know, during COVID, then the cost of logistics went up. We didn't have to increase that. Our price because we could make up for that cost increase using our cost reductions. But we have always delivered that and we'll continue to deliver that. And that's in our DNA. So that's how we are gonna bring about margin accretion over a long period of time in this company and keep growing our margins. Okay? With that, let me conclude to say in closing. Look. You all see Bloom's really executing from a position of strength but we are also scaling with discipline. And we are on a very firm path to make sure that we become the standard for on-site power. The benchmark for speed, reliability, flexibility, everything. As you heard in the last couple days, from the large digital companies. They're all increasing their CapEx by amounts that would have seemed unbelievable even two years ago. These numbers are staggering. And this is all for CapEx infrastructure. Everything is digital. This is digital infrastructure. Digital runs on electricity. Electricity at that pace cannot be delivered by anyone in the free world. Today using poles and wires. On-site power is a necessity. Bloom brings very clear competitive advantages that legacy providers that built their technology for the industrial age cannot adapt to. So we are very confident in the path we have chartered for ourselves and are excited for the future. We look forward to another very good year. Thank you so much. Desiree: Ladies and gentlemen, that concludes today's call. Thank you all for joining in. You may now disconnect.
Operator: Thank you for standing by. My name is Jaylen, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Doximity Third Quarter 2026 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, simply press 1 again. I would now like to turn the conference over to Perry Gold, VP of Investor Relations. Go ahead. Perry Gold: Thank you, operator. Hello, and welcome to Doximity's fiscal 2026 third quarter earnings call. With me on the call today are Jeffrey Tangney, Co-Founder and CEO of Doximity, and audit committee chair and board member, Tim Cabral, who is stepping in to help out with our CFO, Anna Bryson, currently on medical leave. A complete disclosure of our results can be found in our press release issued earlier today as well as in our related Form 8-K. Along with a copy of our prepared remarks, all available on our website at investors.doximity.com. As a reminder, today's call is being recorded and a replay will be available on our website. As part of our comments today, we will be making forward-looking statements. These statements are based on management's current views, expectations, and assumptions and are subject to various risks and uncertainties. Actual results may differ materially, and we disclaim any obligation to update any forward-looking statements or outlook. Please refer to the risk factors in our annual report on Form 10-K, any subsequent Form 10-Qs, and our other reports and filings with the SEC that may be filed from time to time, including our upcoming filing on Form 10-Q. Our forward-looking statements are based on assumptions that we believe to be reasonable as of today's date, February 5, 2026. Of note, it is Doximity's policy to neither reiterate nor adjust the financial guidance provided on today's call unless it is also done through a public disclosure such as a press release or through the filing of a Form 8-K. Today, we will discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A historical reconciliation to comparable GAAP metrics can be found in today's earnings release. Finally, during the call, we may offer incremental metrics to provide greater insights into the dynamics of our business. These details may be one-time in nature, and we may or may not provide updates on those metrics in the future. I would now like to turn the call over to our co-founder and CEO, Jeffrey Tangney. Jeff? Jeffrey Tangney: Thanks, Perry, and thank you, everyone, for joining our third quarter earnings call. We have four updates today: our CFO, financials, network stats, and AI results. First, some unfortunate news. Our CFO, Anna Bryson, is out sick on medical leave. We miss her here at the office and wish her the best. I know she wishes she could be here too. We've been fortunate to have Tim Cabral, the former ten-year veteran CFO from Viva Systems, as our audit committee chair for the past five years. Tim has graciously agreed to speak to our financials on this call and help guide our finance team. Okay. In happier news, our Q3 financials were solid. We delivered $185 million in revenue, which was 10% year-on-year growth, and a 2% beat from the high end of our guidance. Meanwhile, our Q3 adjusted EBITDA margin was 60% or $111 million, which was 7% above the high end of our guidance. All in, we had a better-than-expected third quarter and another record upfront annual buying season. Okay. Time now for our network stats. We're excited to announce that we just surpassed 3 million registered members and now have more than 85% of all US physicians and two-thirds of all NPs and PAs on our platform. Engagement in Q3 was strong. Our unique active users on a quarterly, monthly, weekly, and daily basis all hit fresh highs, with record usage of our news feed, workflow, and AI products. Our workflow users saw the largest sequential gain we've ever had. As a reminder, workflow includes our telehealth, scheduling, digital fax, and AI tools. And for the fifth year in a row, Doximity Dialer was ranked the number one best-in-class telehealth platform by health system CIOs and their teams, outperforming Microsoft Teams, Zoom, and many others. With an AI glow-up, our fax service also hit new highs. Doctors can now query or summarize long faxes as part of our AI platform. You'd be surprised how long patient record transfer faxes can be. We had one last month that was 2,600 pages. So with our AI summary inquiry tool, we're proud to help doctors save both time and toner. Okay. On that note, I'd like to share our results so far in entering the noisy, crowded, and rapidly expanding market for medical AI. First, we're proud to announce that over 300,000 unique prescribers used our AI products in Q3, and they're using us a lot. In January, Docs GPT active prescribers queried us on average four times a week. So in our first full quarter since acquiring Pathway.ai in August, we've already become one of the most used AI tools by physicians. We've done so by delivering doctors a faster, higher quality clinical answer. Indeed, in a head-to-head trial of over 1,300 high-prescribing physicians we published today, doctors preferred Docs GPT at over twice the rate of our nearest competitor. We win most often on drug-related questions, as ours is the only medical AI with a built-in deterministic drug reference. We also do well with complex cases and niche evidence as we have a licensing agreement with ASCO that gives our users access to their guidelines. And we're the only medical AI to provide full PDF access to over 2,000 medical journals. We're also doing great with hospitals. We're delighted that over 100 of the top health systems in the country have now reviewed, cleared privacy and AI committees, and ultimately bought our AI suite, which includes both our clinical reference Docs GPT and our Doximity Scribe note-taking tool. In total, these hospitals have purchased access for over 180,000 prescribers, granting them permission to put patient data into our secure tools. We've won over hospital leaders by being honest and transparent about both AI's strengths and shortcomings. To be clear, no AI has eliminated mistakes or achieved anything near superintelligence. Claims to the contrary are misleading and dangerous. A recent Stanford Harvard study found that AI can cause clinical harm in up to 22% of real patient cases. And with overconfident models, those errors can become harder to spot. So we believe physician oversight is essential. To that end, we now have over 10,000 US physician experts who have reviewed our clinical answers and that number grows every day. Medical publishers call this peer review. AI researchers call it RLHF or reinforcement learning from human feedback. We call it peer check. Before a doctor puts their license and their patient's life on the line, they'll want to see a peer check answer first. Now these aren't just any doctors doing our peer check. But rather the actual experts and authors cited by the AI for each question. For fifteen years now, we've painstakingly mapped each doctor to each paper and trial so we know the right expert right away. Our peer check editorial board is co-edited by Noted Research doctor Eric Topol and former surgeon general Regina Benjamin. In their words, quote, together, we can build AI systems worthy of our profession and our patients' trust. End quote. We're gathering with 150 other physician leaders in San Francisco next month to further build this out. Our focus today is on building AI tools doctors can trust. Outside of hospitals, we have not yet commercialized our AI tools. So we have not included any revenue upside for AI in our current guidance. At a high level, our strategy is simple. We're strengthening our AI-powered digital platform for doctors the same way we always have. By putting physicians first. Okay. As always, I'd like to end by thanking my Doximity teammates who continue to work incredibly hard. To care for those who care for us. And with that, I'll hand it over to our audit committee chair and board member, Tim Cabral, to discuss our financials and guidance. Tim? Tim Cabral: Thanks, Jeff, and thanks to everyone on the call today. Third quarter revenue grew to $185.1 million, up 10% year over year and exceeding the high end of our guidance range. Similar to prior quarters, our existing customers continue to lead our growth. We finished the quarter with a net revenue retention rate of 112% on a trailing twelve-month basis. For our top 20 customers, net revenue retention was higher at 117%, so our biggest most sophisticated customers once again represented our fastest growing. We ended the quarter with 126 customers, contributing at least $500,000 each in subscription-based revenue on a trailing twelve-month basis. This is a roughly 10% increase from the 115 customers we had in this cohort a year ago. And these customers accounted for 84% of our total revenue. Turning to our profitability, Non-GAAP gross margin in the third quarter was 91%, versus 93% in the prior year period, driven by a step up in our AI infrastructure investments from increased usage. Adjusted EBITDA for the third quarter was $111.4 million and adjusted EBITDA margin was 60%, compared to $102 million and a 61% margin in the prior year period. Now turning to our balance sheet, cash flow, and an update on our share repurchase program. We generated free cash flow in the third quarter of $58.5 million. We ended the quarter with $735 million of cash, cash equivalents, and marketable securities. During the third quarter, we repurchased $196.8 million worth of shares. We believe repurchasing our shares is a valuable use of the incremental cash we generate above what's needed to reinvest in the business. As of December 31, we had $83 million remaining in our existing repurchase program. In addition, our board just approved a new $500 million open-ended repurchase authorization. Now moving on to our outlook. For the 2026, we expect revenue in the range of $143 million to $144 million representing 4% growth at the midpoint, and we expect adjusted EBITDA in the range of $63.5 to $64.5 million representing a 45% adjusted EBITDA margin. For the full fiscal year, we now expect revenue in the range of $642.5 to $643.5 million representing 13% growth at the midpoint. And we now expect adjusted EBITDA in the range of $355.5 to $356.5 million representing a 55% adjusted EBITDA margin. Despite our Q3 outperformance, the midpoint of our annual outlook remains in line with our prior guidance. This is the result of lower Q4 revenue expectations and higher AI infrastructure investment driven by a strong increase in usage. During this year's upfront selling season, we saw significant client engagement, strong growth among many top 20 pharma customers, and high double-digit SMB growth. We also face short-term industry-wide policy headwinds. As we mentioned on our last call, we had observed client uncertainty over how recent policy changes may influence annual budgets. We saw this uncertainty continue through year-end, with 16 of the top 20 pharma companies signing most favored nation agreements with the White House. Focused on tariffs and pricing, between late December and early January. As a result, our annual selling season was impacted in two ways. First, we saw multiple customers deploy a lower percentage of their annual budgets upfront than usual, as 2026 planning wasn't fully complete. And some funds remained unreleased. Second, this uncertainty resulted in many deals we normally have signed by December 31, being delayed and pushed into our fiscal Q4. This is evident in our January pharma bookings growth rate, which is the best we've seen since going public. As a result of these Q3 bookings dynamics, calendar 2026 is off to a slower start than usual, evident in our Q4 revenue guided growth rate. With that said, we have a few reasons to be optimistic that we'll end our calendar year 2026 with significantly better growth than we started it. First, we believe the higher portion of our clients' budgets that wasn't deployed upfront will likely be available to be invested later this year during the upsell season. Second, with MFN deals now signed for six of the top 20 pharma manufacturers, we believe they should be able to more confidently complete and execute their 2026 media plans. Finally, we see strong inbound demand for our AI member engagement. Which we have not yet commercialized but expect to have a product in market this year, we believe this will allow us to meaningfully tap into our clients' 2026 innovation upsell and search budgets. Moving to our operating model, we will continue to invest in our doctor-trusted AI platform, including increases in infrastructure, development, and our peer check program. Even with these investments, we are in a position where we expect to maintain 50% or greater adjusted EBITDA margins on an annual basis. With that, I will turn it over to the operator for questions. Operator: Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, if you are called upon to ask a question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. And we do request for today's session that you please limit yourself to one question and one follow-up. Your first question comes from the line of Brian Tanquilut of Raymond James. Your line is open. Brian Tanquilut: Thanks for taking the question. And first, thoughts and prayers are with Anna. Hope you can get well soon. So just starting out on the budgets for calendar year '26, I think in prior calls, you referenced the growth rate around 5% to 8%. I know you mentioned a lot of swing factors that may have influenced that. But I'm curious, is that still the case for market growth and how much was MFN a factor? Or was that the largest factor in the calendar year '26 dynamics? Any color there? Perry Gold: Brian, it's Perry. Thanks for the question. So I'll take that one. So our operating assumption right now is that the market will grow roughly 5% in calendar 2026. EMarketer was out a few months ago with a report, and they're looking at about 5% growth for all of the healthcare and pharma digital advertising, which is down from last year. So that's kind of the gross assumption for the market. On the second part of the question on MFN, we think it certainly played a role. So coming into the very end of the year, when usually we will have signed a large portion of bookings for the next year, and you have many of these top 20 pharma companies that still haven't signed off on these big deals with the White House, these MFN deals, which are pretty broad-based, to do with pricing and tariffs. So it's a large, I think, bogey, a lot of uncertainty at the very end of the year. And so what we found were many of these customers weren't ready to fully sign off on their 2026 plans. They had some funds that were unreleased from the top down. So that timing really impacted us. So it was a large part of the impact, and I think it manifests in two ways as Tim called out. So one of them was just certain deals were pushed from usually, it'd be assigned by December 31 or pushed into next year. You could see our January bookings growth rate, as we mentioned, was one of the highest we've had since going public. It was the highest. And in addition, from what we heard from multiple customers, they deployed a lower percentage of their budget upfront. And so both of those, we think, were largely impacted by MFNs. MFN played a big part. There's some other policy things going on in the background. And as you know, the year's been very noisy, but we think MFN happening as late in the year as it did was kind of one of the primary factors in that slow start to the year for us. Brian Tanquilut: Got it. Thanks, sir. Appreciate that. And, Jeff, maybe just a follow-up on AI. Congrats on getting to the 100 plus health systems. I'm just curious, as we think about your customer conversations there, does that change the pace of where innovation budgets start? Like, do you expect that number to ramp up over time? Or I guess I'm just trying to think about the AI-oriented spend for your customers, what that ramp looks like and maybe your differentiation as you go attack that AI budget? Thanks, guys. Jeffrey Tangney: Yeah. Thanks, Brian. I think we really proved this last quarter that we are indeed a trusted digital platform for doctors. Right? With over 85% of US doctors, really look to us for the latest technology to help them take better care of their patients. We've done this in the past with identity and news and workflow and AI. I have to say I'm exceedingly proud that on our first full quarter after the Pathway acquisition, we've grown to over 300,000 quarterly active doctors, which is just a terrific pace. I don't think any other company could do that. And then to sign 100 hospitals, those 100 hospitals are major health systems. So those represent 20% of all US doctors. Those rollouts we're just doing now. So we signed those contracts to start at the beginning of this year, January, of course, takes a while to get the training planned and to get the rollout plan. That's really important, I think, for our continued AI growth. Because, of course, what doctors need to do with these systems is to put in protected health information, PHI patient information, to get the right answers out. And if you aren't in a signed agreement with that hospital covered under what they call BAA, their HIPAA agreement, well, that's not something the IT department will allow doctors to use just any tool for. So we're proud again, to be powering 100 health systems, 180,000 clinicians with our AI toolset. Operator: Next question comes from the line of Michael Cherny of Leerink Partners. Your line is open. Michael Cherny: Good afternoon. Thanks for taking the question. And yes, I will probably all say the same thing, but really best wishes to Anna as she goes through her medical leave. Maybe diving back in, I'm just gonna ask one question. I know sure plenty of people are behind me, but diving back in on the demand curve and the booking side, clearly, the narrative on your stock as well as virtually anything else that touches tech and software in the market is on this dynamic AI disruption, whether that's similar look-alike peers, broader GenAI oriented players. Just the general thought process of a new paradigm going forward. As you think through moving pieces tied to your start of your bookings, the January dynamic, how do you think about where the competitive dynamic lies and your ability to continue to capture the same hearts and minds of pharma companies deliver the same ROI, relative to what other peers may be promising them, whether they're hitting them or not. Jeffrey Tangney: Thanks, Michael. This is Jeff. I'll take that. So yes, step back, big picture. Our core business is very healthy. Right? We had over a million quarterly active users of our newsfeed, record high. We had 720,000 quarterly active users of our workflow tools, which is the biggest sequential step up we've ever had. Our telehealth product does very well. I will say last week during the snowstorms, we served more telehealth visits than we really ever have. It was over 700,000, which is a big chunk of all the care that was delivered in the US that day. People were snowed in. We're really proud to have won that telehealth market back in 2020. We believe we'll win the AI market here in 2026. And we do that by just having some very large moats around having, again, so many hospitals that have already worked with us and so many doctors. So the step that I'm actually most proud of on this whole call is the number of peer check experts that we have, these 10,000 cited authors and experts, doctors who wrote the evidence that made the clinical trials spent years of their lives studying and building this medical collective wisdom that we have. And I'm proud that at 10,000, we're bigger than the largest players in the industry. The biggest publisher in the space that's the leader and has been there for decades has about 7,000 experts that inform their clinical answers. And, again, we're now over 10,000. So I feel really good about the 20% of all US docs that we've gotten to use our Doc GPT, our AI already. And, again, for the first full quarter after the Pathway acquisition, I don't think there's really any other company that could have grown into this market that fast. To your question about what that means with pharma, you know, today, we do not have a pharma product that pharma can buy in this AI suite. We are just very thoughtful, I think, about how we work with doctors and make sure that things are win-win. We're not just gonna slap a full-page banner on top of a product. We know what that does to the experience for the end user. And, certainly, we want to be finding ways to have win-wins with industry around this, and we've done a great job of that in the past. And will continue to do here moving forward. So we're excited later this year to come to market with some product there. But, again, we have no revenue in our forecast for our AI products right now. Operator: Your next question comes from the line of Allen Lutz of Bank of America. Your line is open. Allen Lutz: Good afternoon and thanks for taking the questions. I wanted to ask on the policy uncertainty that pharma has. Can you talk a little bit about your recent conversations with top 20 pharma? Obviously, at the beginning of the year, there was the uncertainty around the things that you mentioned. Can you talk about the recent conversations and if the expectation is that some of that spend that was supposed to be maybe in the beginning of the year gets pushed out? Is there any opportunity for the midyear upsell season to be a little bit stronger? I'm just curious about your recent conversations and whether or not you think that could come into play. Thanks. Perry Gold: Hey, Allen. It's Perry. I'm happy to take that one. So, you know, I think what I want to get across is, you know, there were many of our top 20 customers. We actually had really good outcomes. So it was not the case with every single one of the top 20 had an issue. But there were a bunch where it was very clear that I think the brand managers wanted to be deploying more funds with us, but they hadn't got that approval of those funds released yet. And I think a lot of that had to do with the uncertainty very late in the year. And so just didn't have access to kind of that full amount of money to go deploy with us right away. We do believe that the intent is there that when they get funds released, we will get access to that a little later in the year. So that's, I think, one of the bigger things we've seen at play. Not really the brand manager, not wanting to deploy the funds, which is not having access to them from top down. It wasn't available yet. I think that was kind of the manifestation of it that we saw. But, again, there were multiple top 20 customers who were getting really good outcomes, and we're very proud of those accounts and kind of what we did there. But it was, you know, certainly the case that this unreleased funds issue was kind of more permeated more of the top 20 than, you know, we've ever seen anything like this before. Allen Lutz: Thank you. That's helpful. And then, you know, more of a strategy question, not asking for fiscal '27 guidance here. As we think about the increasing AI infrastructure or usage cost, I look at the gross margin year over year down about 180 bps. As we think about, you know, the way that you're scaling 300,000 physicians on the platform using AI. Really, really strong, impressive growth there. You mentioned the 50% adjusted EBITDA margin floor. As we think about you scaling AI and having costs there with no associated revenue, how should we think about the intermediate-term strategy there? Is revenue on the table for the next year or two? Or should we think about this really trying to build out the user base within fiscal '27 before turning on or even contemplating turning on that spigot? Thank you. Perry Gold: Hey, Allen. It's Perry once again. Great question. I think you hit the nail on the head. So the 50% that Tim referenced in the call, think of that as a floor, not a guide. We have an incredible opportunity in front of us with AI. We've already seen it one full quarter, you know, how much engagement this can drive and, you know, it's something that we want to lean into. We want to invest in. We're in a really fortunate position. We already have best-in-class margins, so we have room to go invest. To your point, I think it's late this year when we plan to be in market with commercial AI products. So we'll eventually start to put some revenue against this. Next year, you know, 2027 will pick up even more calendar '27. And so it's probably another few quarters in which there's cost without associated revenue, but that's an investment we're willing to make all day. And if there's upside in usage, a little bit more infrastructure cost, I think it's well worth it. As you see with a lot of these technologies over time, the unit economics start to get better. They go down. So I think the unit costs start to go down. We saw something similar happen with the early days of telehealth. And, you know, over time, you know, economics got better for us. We got bigger. We negotiate better rates. So that won't be a big burden for too long. We're also investing in PeerCheck, and I think PeerCheck is something that will really differentiate the offering. That trust component is huge for doctors. We have an opportunity, like Jeff said, we can go tap into this network with 3 million members. And in, you know, a month or two, get 10,000 expert reviewers to kind of come along and review a lot of these answers. And so we've got something that nobody else can do. And I think that investment, again, well worth it, differentiated offering, and I think that this will pay dividends over time. Yeah, think of that 50% as a floor. Operator: Your next question comes from the line of Glenn Santangelo of Barclays. Your line is open. Glenn Santangelo: Yes. Thanks for taking my question. Jeff, just two quick ones for me. The prepared remarks, I think you guys were commenting a little bit on fiscal '27, where I think you said you expect to end calendar year '26 with significantly better growth than where you started. So looking at your fiscal 4Q growth, you're assuming 4% revenue growth. And so is the assumption that you'll end the year much better than that 4% for the full year? I just want to clarify what you're saying. And then I just had one other follow-up. You know, Jeff, at this point, it's pretty clear that the public markets, they've been very punishing to companies with this perceived AI disruption and whether it's reality or not, you know, we'll ultimately see. But when you look at the public markets, they may not be appropriately valuing your business. And so I'm just kind of curious to get your take on this whole sort of dynamic that we're seeing. I mean, you're a big shareholder in Doximity. I mean, does Doximity need to be a public company just given the strength of your balance sheet? Perry Gold: Hey, Glenn. It's Perry. I'm happy to take the first one, and then I'll pass the terminal multiple question to Jeff. So great question, Glenn. Yeah. I think the way to think about it is, slower start to the year, you know, the 4%, but we actually feel really good about our ability to exit the calendar year as a double-digit grower once again. And, you know, the reason for that, there's a few. I think this year, a little bit more of a ramp. But one of the reasons is we think that those funds that hadn't been released earlier in the year will be released as we go through the year. And, as they get released, we've got one of the highest ROIs in the market, and we think folks will come to us because of that with those funds. In addition, we plan to be in market later in the year with a commercial AI product. And I think by having that, we will be able to very quickly tap into kind of innovation upsell budgets and search budgets. And so, yeah, I just want to be very clear. I think we will end the year or exit the year as a double-digit grower. I think, you know, I will reemphasize we believe for the entire year, without giving guidance, but for the calendar year, we'll be able to outgrow the market. As we have every year before. But that's probably the most we're prepared to give at this point, Glenn. Jeffrey Tangney: Great. Glenn, yeah, this is Jeff. I'll just say, I think overall AI is a tailwind for us. I think the opportunity in front of us to change healthcare, wow. It's never been better. And, again, to see 300,000 doctors come use our product here in the first full quarter after acquiring something and growing with it, I mean, we're just really excited. I think the opportunity to make being a doctor a better job is really fundamentally changing, I think, the way we're gonna look at the world here in a few years. And I'll just say the only problem from the doctor's point of view when you look at AI today, you really can't trust it. And the truth is they're putting their license on the line with every patient. And, you know, these are life or death decisions that are, I mean, very, very important. And so there's still this need to go check different sources or to go back to the textbooks which are trusted. So AI is fast, but they want textbook trusted and AI fast. And, again, that's where I think PeerCheck is just an incredible opportunity for us because these 10,000 noted authors, they're putting their name at the top of that. And that name up there, that's trust. That's showing that an expert in the field reviewed this answer and that it is correct, and I can get to it quickly. With the speed of AI, but, again, with the trust of the traditional textbook and expert approach. Your last question about our public market trading, I don't know. I try not to pay too much attention to it. I'll just say that there are certainly investors asking some of the same questions that you just asked there, us. And, again, from our point of view, we're just proud to be able to continue to be a company that is both serving doctors every day and able to generate cash flows that are attractive. Operator: Your next question comes from the line of Elizabeth Anderson of Evercore ISI. Your line is open. Elizabeth Anderson: Hi. Hey, guys. Sorry. Thank you very much for the question. I guess my question is, how do you guys see the monetization evolving over the course? I know you talked about it potentially. Over the course coming later in the year, but I'm curious how you kind of what your early thoughts are at this point on that opportunity. Both in terms of sort of model and then how that might sort of play into your broader advertising portfolio? Thank you. Jeffrey Tangney: Hey, Liz. This is Jeff. I'll take that. I'll just say at a broad level, there's a whole new TAM here that we traditionally haven't played in, and it's called paid search. And if you look at that same eMarketer report that Perry referenced, from a few months ago, you'll see that 55% of digital marketing spend in healthcare is for search. And so I think this is a large market and a big opportunity for us. We're not gonna talk much about our plans there. I think we are very good at doing this, and we don't want to tip-off others too much. But suffice it to say, we think there's a really large opportunity here. And, again, there's a lot of client excitement about it as well. Operator: Your next question comes from the line of Craig Hettenbach of Morgan Stanley. Your line is open. Craig Hettenbach: Just a point on 20% of health systems using AI. What do you think that could go in the coming years and how do you think about just kind of reference cases of those health systems that have adopted in terms of bringing others kind of into the fold? Jeffrey Tangney: Hey, Craig. Yeah. This is Jeff. Thanks for the question. So, you know, we publicly said in prior quarters that we have 45% of all US physicians through their health systems that use our telehealth tools. I think that gives you a sense of some of the opportunity here. But I'll just say getting to 20% in one quarter when every major health system has not only a privacy review committee, but also an AI review committee and they only work with trusted partners. And I think over time, the tech here is increasingly, you know, a commodity. I think we're seeing this across a lot of different areas of AI. It's the trust and the relationships and the platforms that really matter. We hear it from our clients all the time, the CIOs of these hospitals, they don't want to buy point solutions. They don't want to buy features. They want to buy platforms. And, again, between our scheduling and our fax and our telehealth, and our other tools, we really are one of those platforms that they turn to. Craig Hettenbach: Got it. And then just as a follow-up, nice strong start in terms of momentum. Post the Pathway Medical acquisition. But anything surprise you at this point now that you're kind of operating the business and things that, you know, whether it's when you went in, what you saw the opportunity set versus how it's evolving. I know it's only a few months, but just what's been kind of the feedback in terms of pathway? Jeffrey Tangney: Thanks, Craig. We've been really happy with the Pathway acquisition, and its speed of adoption and growth has probably been the best surprise here. The team, we're also getting along very well with, and they continue to really lean in, which is terrific. So we're really pleased with the acquisition and the growth. I would say, if anything, the semantic datasets that they brought us, the understanding of how to read through the 2,000 journals that we provide, uniquely provide full free PDF access to for our doctors and that drug dataset that built in because a lot of questions are drug-related questions, and those are the ones you really don't want to get wrong. And the reality is LLMs do struggle with this a bit. I will say the largest player in this space who's been around for decades, they've added an LLM to their product, but they haven't added a drug reference to their LLM. And they do that on purpose because they're careful, and they see that LLMs really struggle with drug information, with dosages, with things that are easy to move a decimal plate point one way or the other and make a really serious error. So we think we've got some great IP in the past acquisition, but we also got a great team and great growth this past quarter. Operator: Your next question comes from the line of Ryan MacDonald of Needham and Company. Your line is open. Ryan MacDonald: Thanks for taking my question. Maybe to ask on the budget question a little bit of a different way. Obviously, understand the headwinds with MFN. But obviously, of the other regulatory sort of talk and chatter around has been around sort of closing some of these direct patient marketing loopholes on TV and other platforms. Are you seeing in any of your conversations pharma customers starting to react to that in terms of how they're shifting the allocations of their budgets where maybe this potentially creates a tailwind and having more spend to the HCP budget over time? Thanks. Perry Gold: Hey, Ryan. It's Perry. I'll take that question. I mean, we've been having that conversation internally and externally for a little while now about DTC, and is it gonna benefit us? I could say at least this upfront season, we didn't see it happen yet. I think part of the issue was, you know, all of these cease and desist and warning letters went out in September. I think people forget already that right after we had the longest government shutdown we've ever had. So I don't think there was much on the enforcement front for a few months. The beginning of this year, I think there's some examples of that picking up again. And I think if the FDA kind of really pushes that enforcement, you will find probably more and more of these brands having to add a lot more small print, fine print to some of their TV ads. It'll, you know, make the ROI not look so attractive. And I think over time, the smart marketers will start to move that money to HCP where and when they can. But in terms of has that impacted us positively yet, we just haven't really seen it. And so, you know, that's just kind of, like, where we are today. Ryan MacDonald: Very helpful. Maybe as a follow-up on the AI side of things, great to see all the success in sort of these hospital and health system-wide evaluations. As you're having conversations with your health system partners right now, how much of what's called the AI strategy is a sort of top-down, you know, facility or system-wide strategy versus more sort of, let's call it, one-off physician usage of individual tools. And are health systems trying to grapple with maybe changing it to the former versus the latter? Jeffrey Tangney: Yeah. This is Jeff. I'd say it's been a mix. Honestly, both bottom-up and top-down. That said, I'd say the early discussions we had in, you know, September, October with our clients about this, of course, it was with, you know, the CIOs CMIO suite. And then they try out the product, and then they show a few friends. And then it becomes more bottom-up. I will say that I think you'll see much more vigorous AI enforcement. It's been a little bit wild west, to be totally honest. You know, in the AI world with hospitals, this past year. But there are a lot of real concerns that they have about leaking patient data, and, you know, liability and the accuracy of information. So I think you'll see more of an enforcement regime this year. And, again, I think we're on the right side of that in working with them. So, you know, we've been doing this for fifteen years. We are the trusted platform for physicians. We have a process to work with our hospital partners and our doctors to do this. I think, again, we're just very well positioned to capture this AI opportunity. Operator: Your next question comes from the line of David Roman of Goldman Sachs. Your line is open. David Roman: Thank you. Good afternoon, everyone. Wanted to just start with maybe some of the signposts that you're using to project the acceleration in both your business and in the market through the balance of the year? And why, as pharma companies look at their budgets, like, how you think they're balancing figuring out how to do more with less, versus deploying resources in an accelerated manner throughout the year. Jeffrey Tangney: Yeah, David. This is Jeff. I'll take this first at least. I'll say this. In an efficiency environment, digital marketing does pretty well. Why? Because it's the highest ROI. And I'm really proud that our portal usage has doubled over the past year. This is the number of clients we have using our portal. And the great thing about our client portal is it lets them see their ROI. We have IQVIA data in there. They can actually look at their what they call, script lift or NRx lift on a monthly or quarterly basis. And so this past year, we had a record number, 965 ROI studies that were done by our clients. And we're still at that same number we were at our IPO, about 10 to one median return on investment for our clients. So I do think in efficiency-driven environments, I think digital marketing will do well, especially when every $1 you put into it, you get 10 back. David Roman: And then maybe just one of the things you talked about earlier this year was on the recruiting front, and we did see kind of a step up in stock comp associated with bringing on AI talent. And it seems like the talent race is on in that segment. I mean, you operate in a very, very talent competitive environment. With anthropic opening offices and others. Right around you. So how are you thinking about talent retention and recruiting and making sure you keep the right people on board here, especially as the stock price has drifted lower. Jeffrey Tangney: This is Jeff again. Yeah. The talent wars definitely are heating up, and yes, we are, you know, retaining our best people, offering them stock grants, and, you know, the reality is I think we've done very well at keeping, I think, a very mission-driven team here who really, you know, do love humans, do love doctors, do love working with doctors who take care of humans. So, you know, it's, I think, an advantage in this market to be a company with such a long-held purpose and such deep roots in the medical industry. I find that the folks that we have on our team who are sons, daughters, or married to physicians really are the ones that really, I think, are the cultural torch carriers for us because they come in every day, every week with examples of how doctors have used our products to, again, save them time or lead to better care. So every week, we share what we call Doc Law, which is an email or a message that's come into our inbox unprompted from a physician talking about how, you know, we've helped them that week take better care of a patient. So there's no doubt you'll see that we will have to fight the talent wars, and we will have people who, I think, get bigger stock packages. But that's all part of leading into this AI opportunity, which we think is pretty fantastic. And is playing out in our margins as well. Operator: Your next question comes from the line of Scott Schoenhaus of KeyBanc. Your line is open. Scott Schoenhaus: Questions, and best wishes for Anna here. I guess, Perry, as a follow-up here, you know, you talked about the demand getting pushed out from December into January from a select group of large pharma. You mentioned January pharma bookings having the best growth rate ever. Do you mind providing more color on what exactly this growth rate looks like? And then know it's still only the first handful days of February, but are you seeing the same kind of similar healthy growth rate in bookings in February? Perry Gold: Hey, Scott. How are you? Yeah. So January bookings growth rate was the best we've seen since going public. I can say it by a wide amount. It's a clear indication of the delayed decision-making that we referenced. It was part of the impact, but less budget deployed upfront also played a major role. I aren't gonna quantify beyond that. We never provided absolute bookings figures. And it's just really early in February. So, you know, not much to add on that front. Scott Schoenhaus: Understand. And then back to the market growth rate, 5%. And your ability to get to double digits exiting the end of the year, I mean, what how should we think you had you think we took you took some market here in the midyear selling season this past year. How do we think about your ability to take market share as you scale and ramp throughout the year? Is it you know, historically said we can take double the market share, if the industry grows up? Perry Gold: Yeah, Scott. So I know we've talked about that in the past. I don't think the two x is always a hard and fast rule. But, you know, we've continually outgrown the market since we've been public. I think part of it has to do with the fact that we continue to innovate. We continue to grow our engagement. We continue to have best-in-class ROI. And I think as soon as you come to market with something really new, like an AI commercial product, you have our customers always have these innovation budgets. And those are the types of things that kind of are generally always available for interesting new offerings. And so AI will allow us to tap into those budgets, possibly search, as Jeff referred to. And so I think these are a lot of factors that will put us in a good position to, you know, get to that double-digit exit growth rate for the year. But that's probably the most we can say on that without giving official guidance. Operator: Your next question comes from the line of Jeff Garro of Stephens. Your line is open. Jeff Garro: Yes, good afternoon. Thanks for taking the question. Was hoping you could give us some kind of update on your strategy and progress integrating your workflow tools with the broader healthcare technology ecosystem. Most specifically, curious about integrating Medical AI and Scribe with electronic health records. Thanks. Jeffrey Tangney: Thanks, Jeff. Yeah. This is Jeff. I'll respond. So, again, we're really proud to work with hundreds of health systems, and we do integrations with many of them. The integrations to date have been mostly around our telehealth service offering, but we're working on other integrations as well. I don't have anything specific to say on that front today, but suffice it to say, our Scribe product does do very well among individual doctors. It saves them a lot of time. They like that it's personal to them, and that it's something that they can carry with them in their pocket anywhere at any time. And, really, the integration isn't that heavyweight when you think about it. It's mostly a cut and paste. The other thing is our dialer tool, which is our most popular work tool for telehealth, you know, we have that button right there in the dialer call that allows you to go inscribe the visit, again, which is a great point of integration for us to be in. And, again, it's not hard to have a receptionist or staff member go cut and paste that in at the end of the day. But we're also working on integrations with folks. And I just end by saying, you know, particularly with our product, I think we have many moats. And we've seen, you know, new competitors come and go here. We've had probably five direct competitors over the years that have tried to build a physician-focused dialer. I will say it is very hard. It's painstakingly difficult to go and do all the things you need to do with all the telcos. We have unique relationships with the telcos to make sure that the caller ID and the attestation all works correctly. And in the end, that manifests itself into pickup rates that we have that are three times what others have. So in short, when you call a patient using Doximity Dialer, you will not be marked as spam. You will not be flagged as spam risk. You will get through to that patient with a number that they recognize. And that's a pretty big moat for us. And, again, we've seen a number of companies try to come at us here. Our dialer usage has actually gone up more in the last quarter, nice and steady, than we've had in the past. Operator: Your next question comes from the line of Stan Berenshteyn of Wells Fargo Securities. Your line is open. Stan Berenshteyn: Hi, and thanks for taking my questions. On the medical AI, the 300,000 unique prescribers that you talked about, if we think about the workflow, I'm curious, how are the providers using these features? Are they opening up the app and going directly into the medical AI, or are they interacting somewhere else in the app and aren't, you know, organically getting redirected? I'm curious if you can talk about the workflow that's getting them to use this feature. Jeffrey Tangney: Thanks. This is Jeff. Yeah. The full platform flow, which we're happy to demo for folks if they'd like to see, is you start with the telehealth visit. You're talking to, seeing a patient, inscribes the visit. At the end of the visit, it writes what's called a SOAP note for you. The A and the P in the SOAP note is called the assessment and plan. And a lot of times, doctors will want to double-check their assessment and plan. And, again, that's just a one-click into our DocGPT AI to do an evidence-based search and double-check your assessment and plan. So there's a lot of on-ramps, honestly, into the AI. The other one is, you know, from our news feed, which has more than a million quarterly active users. Last quarter, after reading an article about something new in medicine, maybe I have a follow-up question or two, again, that leads you directly into our AI, which can do more research and help you understand the full article or new news a bit more. So, again, we're not a feature, and that's a huge advantage here. In the end, being a trusted platform for physicians for fifteen years. It's a place that they go. They're spending, again, most of their time doing workflow, newsfeed, identity, all of that comes together into also having a question and answer tool. Stan Berenshteyn: Thanks. And maybe a quick one on bookings. Just when you're having these budget discussions, I'm curious. Are customers sharing concrete budget expectations, or is it still kind of like a framework and maybe there's some squishiness and that'll get worked out in a couple, you know, months or quarters? Thanks. Perry Gold: Hey, Stan. I think it varies. I think there are, you know, like I said before, brand managers who intend or want to spend a certain amount with us, but it really depends on kind of what gets deployed, sorry, what gets released to them and when. Yeah. Obviously, others, you know, that signed on, you know, at a large scale by December 31, you know, we've got a good sense, you know, obviously, it's, you know, a sign of what they're gonna do with us. A lot of times, they'll make that decision if they can, if they're in a position to do that, the funds will be released. Because by doing that, you know, you kind of unlock the best possible economics. But like I said, it varies from customer to customer. And, you know, I think there are folks who would like to spend more with us and, you know, just hadn't gotten access to those funds yet. And, hopefully, if and when those funds become available, they'll kind of spend kind of where they've indicated they may be able to. Operator: Your next question comes from the line of Ryan Halstead of RBC Capital Markets. Your line is open. Ryan Halstead: Maybe just a follow-up on the pharma marketing budgetary decisions. Just curious if you are seeing any change in or anticipating any change in the cadence of budgetary decisions by your large pharma customers. Is sort of the traditional seasonality of the upfront and upsell seasons kind of still the norm, or has there been any shift to a more periodic review and decision-making process? Perry Gold: Hey, Ryan. Great to see you on your first call with us. You a great question. I think the answer is this is an anomaly. This what would happen at the end of this year was very odd. I think even for our customers, it was odd. And so this isn't what you would typically see. There wouldn't typically be this much uncertainty very late in the year. And I can tell you that I think, like I said in my last response, it is to your advantage to buy, you know, at scale for the full year December 31 because you unlock the best possible economics and top benefits with us. So I think this is truly an anomaly for this year. And we're working through that. I can say if you look back two years, it's a little bit, but we had kind of a similar dynamic where 4Q was, you know, a mid-single-digit revenue growth rate. It had to do with the fact that we'd sold a lot of point of care. And content wasn't ready. But, you know, things I think a lot of the programs, the launches were delayed. When you went to the first quarter, there's a nice step up in revenue growth as those things kind of normalize a bit. Not a perfect compare, but this isn't the first time we've seen something like this. But in terms of is this a new norm for the upfront season, we think this is really an anomaly. This is not something that we expect to continue. Ryan Halstead: Got it. That's helpful. And then for my just any color around demand for the multimodule integrated offerings. Perry Gold: Yeah. So I can take that. So, DocDynamic, this quarter was about 45% of our bookings, compared with 18% a year ago. It was still a significant part of the selling season. You know? Again, you know, there's only so many people that can buy it because the minimum is high to get access to it. So it's still an interesting product for many. It's still really good tech. Folks are interested. But, yeah, the update is about 45% of the program were DocDynamic in terms of what we sold in the third quarter. Operator: Your next question comes from the line of Richard Close of Canaccord Genuity. Your line is open. Richard Close: Yes. Thanks for the question. Obviously, a lot of them questions already answered. I was just wondering, Jeff, if you could go into a little bit more detail on the background of the study you referenced with the docs using the AI and how much impact that maybe has made in terms of gaining additional utilization with other providers. Jeffrey Tangney: Yeah, Richard. I'm glad you asked. So, yeah, we did do a study as we do our own research with Tau all the time. And, again, we're about to have 150 doctors here in a few weeks to go really deep on this for a few days. But, yeah, we had 1,300 high-prescribing physicians. So these are very busy physicians who took the time to go and actually ask a clinical question that they faced in their practice that day and do a side-by-side comparison, you know, our AI versus other AI in the marketplace. And the net of it was we feel really great that we performed at twice the rate our competition did in this space. And with good reason, I think around the better drug reference, the full 2,000 journals access, and even some smaller things. They like our formatting of tables. They like the speed of the product. We're faster than any other product on the market. So, yeah, we're proud to do that research, and we just put it out today. So more can see it. I do think they probably, you know, used the product and maybe told others about it. That's how we got to from that 1,300 trial list to 300,000 to give you a sense of how quickly word spreads in medicine. But to be fair, most of that study was done in January, so pretty recently. So I don't think that that, you know, was a meaningful part of our 300,000 number. Operator: Thank you. We've run out of time for any further questions. I will now turn the conference back over to Jeff for closing remarks. Jeffrey Tangney: Thank you. I want to thank you all for joining our third quarter 2026 earnings call. We appreciate the feedback, and I just want to say thank you to the entire team here who continued to work incredibly hard to serve our physicians every day. Thank you. Operator: This concludes today's conference call. You may now disconnect.
Colby: My name is Colby, and I will be your conference operator today. At this time, I would like to welcome you to the SS&C Technologies Holdings, Inc. Q4 and Full Year 2025 Earnings. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question and answer session. If you'd like to ask a question at that time, please press star, then the number one on your telephone keypad to raise your hand and enter the queue. If you'd like to withdraw your question, simply press star one again. We please ask that you limit yourself to one question and one follow-up. Thank you. I'll now turn the call over to Justine Stone, Head of Investor Relations. You may begin. Justine Stone: Hi, everyone. Welcome, and thank you for joining us for our Q4 and full year 2025 earnings call. I'm Justine Stone, Investor Relations for SS&C Technologies Holdings, Inc. With me today is Bill Stone, Chairman and Chief Executive Officer, Rahul Kanwar, President and Chief Operating Officer, and Brian Schell, our Chief Financial Officer. Before we get started, we need to review the safe harbor statement. Please note the various remarks we make today about future expectations, plans, and prospects, including the financial outlook we provide, constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent annual report on Form 10-Ks, which is on file with the SEC and can be accessed on our website. These forward-looking statements represent our expectations only as of today, February 5, 2026. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. During today's call, we'll be referring to certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to comparable GAAP financial measures is included in today's earnings release, which is located in the Investor Relations section of our website at www.ssctech.com. I will now turn the call over to Bill. Bill Stone: Thanks, Justine, and welcome, everyone. We are all well aware of the sell-off of software company shares following the recent release of the AI-driven automation tools across legal, sales, marketing, and accounting functions. We take all competitors seriously, but we strongly believe we have a deep moat not easily navigated. For decades, we've built deep expertise across sophisticated assets and strategies. And that capability remains a trademark and a key driver of our long-term success. We are functional experts, and our software is mission-critical. We believe the AI boom will be a tailwind. We are deploying rapidly and with conviction. As we accelerate adoption of these solutions, we see a clear advantage. We're uniquely positioned and structurally protected through the ownership of our software and code, enabling us to leverage AI in ways that only we can for our customers. Fourth quarter results demonstrate SS&C Technologies Holdings, Inc.'s strength with record adjusted revenue of $1.655 billion, up 8%, and adjusted diluted earnings per share of $1.69, an 18% increase. We delivered record adjusted consolidated EBITDA of $651 million, up 9%, and adjusted consolidated EBITDA margin of 39.3%. Fourth quarter adjusted organic revenue growth was 5.3%, with performance driven by continued strength in GIDS with 13.2% revenue growth, and GlobeOp was 9.6% revenue growth. We continue to focus on international growth opportunities and on execution for our clients. GlobeOp is seeing new opportunities in Australia, leveraging our recent superannuation mandates. Prospects include local Australian firms and global firms. Interlinks display signs of improvement with modest growth in Q4, and we are seeing momentum in 2026. For the twelve months ended 12/31/2025, cash from operating activities was $1.745 billion, up 26% year over year. On a weighted average diluted per share basis, it was $6.89, up $1.42 from 2024. In Q4, we returned $384 million to shareholders, which included 3.7 million shares repurchased for $319 million at an average price of $85.81, and $66 million in common stock dividend. We allocated over $1 billion in share repurchase in 2025, purchasing 12.3 million shares at an average price of $84.12. Our strong cash flow characteristics allow us to return capital to our shareholders in multiple ways. At current levels, our conviction around share repurchase has strengthened, and we will prioritize repurchases absent high-quality accretive acquisitions. We are pleased with the early progress of the Callisto acquisition. Since closing, we partnered with key leadership and operational talent and deepened client relationships. We are seeing strong engagement and collaboration opportunities with our clients and are able to go live with projects strategically meaningful to them. We expect momentum to continue as we move through the year. I'll now turn the call over to Rahul to discuss the quarter in more detail. Rahul Kanwar: Thanks, Bill. We delivered a strong quarter with solid organic growth and continued margin expansion. We are optimistic about the future as we look at the durability of what's driving that growth. Across the business, we're seeing a consistent trend: clients making long-term decisions to outsource, simplify, and scale their accounting models on our platform, are multiyear partnerships that create recurring revenue, expand over time, and provide clear visibility into future growth. Lift outs are a good example of this dynamic. Mandates such as Insignia and Humana reflect a repeatable process where clients entrust us with complex mission-critical operations at scale. These engagements ramp in a disciplined way and often lead to broader adoption of additional services across our platform. The fact that we continue to see similar opportunities emerge across regions and business lines, whether in GlobeOp, GIDS, or health, reinforces our confidence that this is a sustainable growth engine. We see the continued advancement of AI as a positive for our business. We're well-positioned given our large datasets, deep processing technology, long-standing client relationships, and our ability to deploy solutions at scale in regulated environments. The work we do is highly expertise-driven, requires a deep understanding of complex instruments, global regulation, and how information is used by tax authorities, institutional investors, and other sophisticated counterparties. AI working alongside with the teams we've built enhances efficiency, accuracy, and scalability over time, strengthening our competitive position and supporting sustainable organic growth. With that, I'll turn it over to Brian to walk through the financials. Brian Schell: Thanks, Rahul, and good day, everyone. Unless noted otherwise, the quarterly comparisons are Q4 2025 to Q4 2024. As disclosed in our press release, our Q4 2025 GAAP results reflect revenues of $1.654 billion, net income of $193 million, and diluted earnings per share of $0.77. Our adjusted non-GAAP results include revenues of $1.655 billion, an increase of 8%, and adjusted diluted EPS of $1.69, an 18% increase. The adjusted revenue increase of $124 million was primarily driven by incremental revenue contributions from GIDS of $49 million, GlobeOp of $40 million, and acquisitions of $27 million, offset by a favorable impact from foreign exchange of $16 million. As a result, adjusted organic revenue growth on a constant currency basis was 5.3%. And our core expenses increased 4.6% or $44 million, which also excludes acquisitions and is on a constant currency basis. Adjusted consolidated EBITDA was a record $651 million, reflecting an increase of $52 million or 8.7% and a margin of 39.3%, a 20 basis point expansion. Net interest expense for 2025 was $111 million, a decrease of $2 million, primarily reflecting lower short-term rates. Adjusted net income was a record $425 million, up 16.8%, and adjusted diluted EPS was $1.69, an increase of 18.2%. Our effective non-GAAP tax rate was 19.2% for 2025. Our resulting 2025 full-year effective non-GAAP tax rate is 22%. Note for comparison purposes, we have recast the 2024 adjusted net income to reflect the full-year effective tax rate of 23.1%. The diluted share count is down to 251.5 million from 254.5 million year over year, primarily as a result of share repurchases. Cash flow from operating activities grew 26%, and our operating cash flow per share was $6.89, driven by growth in earnings, improved working capital utilization, and lower cash taxes paid. Our full-year cash flow conversion has been above 100% for the past three years. SS&C Technologies Holdings, Inc. ended the fourth quarter with $462 million in cash and cash equivalents and $7.5 billion in gross debt. Our net debt was $7 billion, and our last twelve months consolidated EBITDA was $2.5 billion, resulting in a net leverage ratio of 2.8 times. As we look forward to the first quarter and full year of 2026 with respect to guidance, we will continue to focus on client service and assume that retention rates will be in the range of our most recent results. We will continue to manage our business to support our long-term growth and manage our expenses by controlling and aligning variable expenses, increasing productivity, and leveraging technology to improve our operating margins. And effectively investing in the business through marketing, sales, R&D. Specifically, we have assumed short-term interest rates to remain at current levels, an effective tax rate of approximately 22.5% on an adjusted basis, capital expenditures to be 4.4% to 4.8% of revenues, and share buybacks and debt reduction levels remain similar to 2025, but subject to changes based on market conditions as Bill noted in his earlier comments. For 2026, we expect revenue to be in the range of $1.608 billion to $1.648 billion and 5% organic growth at the midpoint. Adjusted net income in the range of $404 million to $420 million, interest expense, excluding amortization to deferred financing costs, original issue discount in the range of $102 million to $104 million, diluted shares in the range of 249.2 million to 250.2 million, and adjusted diluted EPS in the range of $1.62 to $1.68. For the full year 2026, we expect revenue to be in the range of $6.654 billion to $6.14 billion, and 5.1% organic revenue growth at the midpoint. Targeted annual EBITDA expansion of 50 basis points with the goal of a 40% margin in Q4. Adjusted net income in the range of $1.662 billion to $1.762 billion, adjusted diluted EPS in the range of $6.7 to $7.02, reflecting approximately 12% growth at the midpoint. And cash from operating activities to be in the range of $1.713 billion to $1.813 billion, again, translating to over 100% cash conversion. And now back to Bill. Bill Stone: Brian, I'd like to summarize our key takeaways from today's call. Record fourth quarter revenues, earnings, cash flows, and over a billion dollars worth of share repurchases in 2025. We're excited about the early execution with the Callisto acquisition and other lift-out wins. And the opportunities they present for growth and geographic expansions. Our investments in artificial intelligence and automation are paying off, and we're confident in our ability to drive margin expansion. As we look to 2026, we believe we are set up for success and will drive long-term growth and profitability for our shareholders. With that, I would now open it up to questions. Colby: Thank you. We will now begin the question and answer session. Again, we please ask that you limit yourself to one question and one follow-up. Thank you. If you would like to ask a question, please press star then the number one on your telephone keypad. To withdraw your question at any time, simply press star 1 again. We'll pause just for a moment to compile the roster. Your first question comes from Jeff Schmitt with William Blair. Your line is open. Jeff Schmitt: Hi, good afternoon. Question on the healthcare business, it had a tough quarter from an organic perspective and what is its seasonally strongest quarter. So could you maybe talk about what drove that weakness and why do you think that business hasn't seen maybe better momentum yet just given how much effort you've put into it? Bill Stone: I think that healthcare is a long-term play, and, you know, trying to go quarter to quarter or even year to year is a tough comp. I think last fourth quarter, we had large license sales. We had some large license sales in the fourth quarter this year, but a notable multimillion-dollar license closed in the first ten days of January of 2026. So, yeah, you know, it's lumpy. You know, they're highly regulated. Even when you've been in highly regulated businesses like financial services. And so although there are headwinds in healthcare, it's still an enormous market. There we have new technology. We're bringing out Amesys, which has been, you know, rewritten to a very large degree, and we're gonna have, you know, a One Health with Amesys and Domain. And we're excited about offering that for both medical as well as pharmacy. And so we have some optimism. But, certainly, you know, we would prefer to have more growth than what we're having. But we're still running at pretty healthy EBITDA margins, and we're managing the business in a way where it's adding to our cash flow. It's not really detracting from our earnings. And obviously, not. It's not accelerating our growth rate. But at the same time, it's a $26.07 billion business, and we like its opportunities for the long haul. Jeff Schmitt: Okay. And then could you provide an update on the Elevance relationship? Where does that stand? Is there still, you know, a chance they could onboard some of their business on the Dominion Rx? Bill Stone: Dominion Rx is certainly ready and waiting. You know, at the same time, Elevance is a very large healthcare organization, and their relationships with other very large healthcare organizations are long-standing, and they're difficult to break. And, you know, the original sponsor at Elevance has moved on several years ago. And so, you know, often when you lose the sponsor, it's hard to find another one. So, you know, it's not unexpected, but we think we have a lot of things that entice Elevance. And they've made a big investment. So we think they're still, you know, still, you know, rays of sunshine at the end of the summer. Jeff Schmitt: Okay. That makes sense. Thank you. Your next question comes from the line of Kevin McVeigh with UBS. Your line is open. Your next question comes from the line of Peter Heckmann with D. A. Davidson. Your line is open. Peter Heckmann: Good afternoon, everyone. Great to see the encouraging 2026 guidance. I wanted to ask a question on within alternative administration. It looked like the fourth quarter had exceptional growth in assets under administration. Can you talk a little bit about that? And does that maybe indicate that the alternative fund administration business can grow maybe faster in 2026 than it did in 2025? Bill Stone: Peter, there's a couple of things going on there. One, it did have very good organic growth both quarter and year. And similarly, we've got high expectations for 2026. Included in the fourth quarter change in particular is our acquisition of Kurofun Services, so I think the breakdown is about $92 billion of that change is organic. And the rest is the acquisition. Peter Heckmann: Okay. That's helpful. Okay. That makes sense. And then just in terms of the intelligent automation business, which includes the Blue Prism business, just remind us that that business seemed to be struggling a little bit from just delays in decision-making. I guess, how are you feeling about that business going into 2026? Do you think that can, you know, approximate the overall corporate organic growth rate? Bill Stone: You know, we do. We actually feel really good about that business going into 2026. Similar to kind of the comment we just made about healthcare, that business in particular had a really large license in Q4 the year before. So, you know, part of when you look kind of look at this quarter over quarter, those are some of the changes that, you know, that kind of have an impact. But in general, many of our comments around AI are, you know, centered at least in part on that business. So that's where we're doing the bulk of our innovation relating to whether that's AI agents, use of large language models, use of our orchestration platforms, you know, governance around AI, really a lot of the things that we're rolling out across the business come out of there. We perfect them in different others of our businesses and then sell them out. So we're really pretty optimistic about the growth prospects for that in '26. Peter Heckmann: That's good to hear. I'll get back in the queue. Colby: Your next question comes from the line of Alexei Gogolev with JPMorgan. Your line is open. Ella Smith: Good evening. This is Ella Smith on for Alexei. Thanks so much for taking our questions. So first, I was hoping to ask about the organic growth guide. Your 1Q and full year '26 guide is basically the same. Do you have anything to call out regarding the cadence of organic growth throughout the rest of the year? Bill Stone: Look, I think what it really reflects is that our business is getting stronger, right? And as our business gets stronger, we have more predictability and the recurring revenue is stronger. Right? So we're able to, in effect, forecast and maintain the, you know, whereas traditionally, you might have some more in the back end of the back half of the year, you know, we've got an opportunity to get even better than this. We're basically all year gonna be pretty strong. And, hopefully, by the time we get to Q3 and Q4. Ella Smith: Got it. Very clear. Thank you. And as a follow-up, given the breadth of your business, I'm sure you've seen AI, fintechs, emerging in the landscape. How are you maintaining your competitive advantage? Bill Stone: Well, I think that you know, we see fintechs. It's not very difficult to start a fintech. Right? Have an idea. Get a programmer. Build a little app. You know, now talk in a little AI, and you've got an entree with some spice in it. But to build an organization that has 29,000 people, 23,000 products, or 23,000 customers, several hundred products and services, you know, I think it's a little more daunting. And what we see with AI and people sometimes forget that, you know, our clients are SEC regulated organizations or CMS regulated organizations. You know, large language models sometimes have hallucinations. You know, those regulators, they don't really quite understand us telling us. A hallucination. You know, it's like a bad dream. We'll get over it. No, that I don't think that flies. So, you know, we're very control conscious. Our clients are conservative by nature. Right? And, you know, they're managing other people's money or the health of other people. So we think that we're positioned in how we conduct ourselves is the right way to do it. And I think that we have the financial wherewithal to invest very, very wisely. You know, we've spent hundreds of millions of dollars on our development that we've done and we're still maintaining in excess of 39% margins, and we think, you know, we'll close out 2026 at 40% margin. So, you know, we're optimistic, and we think we have good reasons for being. Ella Smith: Great. Thanks very much. Colby: Again, if you like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from Dan Perlin with RBC Capital Markets. Your line is open. Matt Roswell: Good afternoon. It's Matt Roswell on for Dan. I guess two questions if I could. Firstly, wealth and investment management, I mean, it seems like organic growth ticked up a little bit this quarter. As we think about kind of that business over the next, say, medium term, where do you think the organic growth could be and should be? Bill Stone: You know, we're very optimistic about our wealth management business. Our Black Diamond platform is, we think, the best in the industry. We have other platforms like our trust accounting that we have integrated with Black Diamond. Black Diamond has, you know, approaching $3.5 trillion that it's administrating for its various RIAs. I think we have something close to 4,000 RIAs that are using that platform. You know, we have integrated a bunch of the Morningstar that we had those we bought their wealth management platform, and we've already moved over five, 600 Morningstar clients onto Black Diamond. So we're very optimistic about that business, and I think that we have a lot of expertise and a lot of capability. And I think that that's gonna be one of is and will continue to be one of our crown jewels. Matt Roswell: Thanks. And can you talk a little bit about the M&A environment? I mean, you all have done some smaller pieces this year. I guess, what are you seeing out there in terms of asking prices, availability, etcetera? Bill Stone: You know, when you've been doing this for four decades and they start calling a billion-dollar acquisition like Callistone, things small pieces. You know what? We're constantly looking. We think we have the leverage down to a point where we could do a large acquisition, and if we could find the right one, we would, and we might find some of our competitors under different pressures than we're under. You know, we run our own data centers. Right? We have our own private cloud. We have our clients really secured. You know? Plus, we have a large-scale services business that we get to really test out our software before we, you know, send it into our client base. So we think that we're well-positioned. We think as far as all the fintechs out there that we're very well-positioned. And that our earnings, our cash flow, it really gives us a lot of flexibility. Matt Roswell: Excellent. Congratulations on the nice numbers. Colby: Thank you. And with no further questions in queue, I'd like to turn the conference back over to Bill for closing remarks. Bill Stone: There's always a lot of things that happen in the market. You know, when I first started this business, we were selling to broker-dealers. That was in 1986 and early '87. And then October '87 happened, and the market went down 25% in one day. That was the end of that. So, you know, you learn to be a little bit nimble. Right? And that's what SS&C Technologies Holdings, Inc. has been for forty years. And I think we have the talent and capability to continue. And that's what we're gonna do. So we appreciate you listening in. And we look forward to talking to you next quarter. Colby: This concludes today's conference call. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the 2025 Fourth Quarter Genpact Limited Earnings Conference Call. My name is Carmen, and I will be your conference moderator for today. We will conduct a question and answer session towards the end of this conference call. As a reminder, this call is being recorded for replay purposes. The replay of the call will be archived and made available on the IR section of Genpact's website. I would now like to turn the call over to Krista Bessinger, Head of Investor Relations at Genpact. Please proceed. Krista Bessinger: Thank you, operator. Good afternoon, everyone, and welcome to Genpact's Q4 2025 Earnings Conference Call. We hope you have had a chance to read our earnings press release posted on the Investor Relations section of our website genpact.com. Today, we have with us Balkrishan Kalra, President and CEO, and Michael Weiner, Chief Financial Officer. BK will start with an overview of our results, and then Mike will cover our financial performance in greater detail before we take your questions. Please note that during this call, we will make forward-looking statements, including statements about our business outlook, strategies, and long-term goals. These comments are based on our plans, predictions, and expectations as of today, which may change over time. Actual results could differ materially due to a number of important risks and uncertainties, including the risk factors in our 10-Ks and 10-Q filings with the SEC. During this call, we will discuss certain non-GAAP financial measures. We have reconciled those to the most directly comparable GAAP financial measures in our earnings press release. These non-GAAP measures are not intended to be a substitute for our GAAP results. More details on our constant currency growth rates can also be found in our earnings press release and fact sheet, which are posted to our investor relations website. And finally, this call in its entirety is being webcast from our Investor Relations website, and an audio replay and transcript will be available on our website in a few hours. And with that, I would like to turn it over to BK. Balkrishan Kalra: Hello, everyone. And thank you for joining us today. We delivered a strong close to a record year for Genpact. Focused execution, accelerating innovation, and broad-based demand drove $5.08 billion in revenue, up 6.6% for 2025. Advanced Technology Solutions revenue grew 17% to $1.2 billion, now accounting for 24% of our total revenue. We also delivered another year of healthy margin expansion. Gross margin expanded 60 basis points, and adjusted operating income margin improved 40 basis points, even with our significant investments for long-term growth. Adjusted diluted EPS increased 11% faster than revenue for the fifth year in a row. In 2025, we built a strong foundation to drive sustainable, long-term growth, with a deliberate focus on rapidly scaling data AI and domain-driven identity solutions to reimagine how clients operate. The shape of our business is meaningfully changing as a result. Our performance, pipeline, and prospects are increasingly higher quality and strategically aligned with our prioritization of advanced technology solutions and agentic-led work. We delivered over $5.5 billion in new bookings, with healthy growth in advanced technology solutions, which now account for more than a third of total bookings. We won 16 large deals and continue to make progress with the next generation of market disruptors. We are in a very strong position as we enter 2026. Demand is healthy and growing. Our inflows and pipelines are robust, and our backlog has never been higher as more clients see Genpact as a long-term strategic partner to transform their mission-critical operations. 2025 was a year of intentional disruption and tremendous achievement. As I look back, I am most proud of what we have built, launched, and scaled with our agentic solutions. We are fundamentally reshaping how businesses operate, and we are doing so at speed. Last February, we launched AP Capture, the first module in our accounts payable agentic suite, with AP Advance and Assist made available in June. While it is still early days, we have closed over $200 million in total contract value just for our AP agentic solutions. Within that, over 40% of awarded contract value came from new clients. And for existing accounts that have rotated from FTE-led to AgenTik, both revenue and gross margin expansion are notably above what we reported at Investor Day last June. With AP Suite, we have built the playbook for delivering sustainable, expanding value for clients and for Genpact. And we are just getting started. Our strong product roadmap of multiple domain-specific solutions, like AP, are clearly aligned to our areas of operational expertise. The insurance policy and record-to-report agentic suite that we announced late last year are just a couple of examples. We believe the most successful companies will be those that leverage AI to achieve higher levels of autonomy and redefine how they run their businesses. Genpact is shifting the paradigm of how knowledge work gets done. We are pioneering a new operating model. We call it agentic operations. Agentic operations move beyond automation to a collaborative model between agents and human experts through three main pillars. One, domain-specific agents that autonomously execute tasks in reimagined processes. Two, last-mile experts that validate exceptions, train and advance models, and reinforce learnings. And three, clear roles, skills, and governance underpinned by responsible AI. Agentech operations move from human process, human validated, machine processed, human validated. As we enter 2026, a new Genpact is taking shape. We are setting the standard for AI-led transformation. We are uniquely positioned to help clients reimagine the most critical components of their journey. From fundamentally redesigning end-to-end processes to building data and AI capabilities to operating at scale through agentic collaboration. The opportunity ahead is significant. AI is rapidly evolving from generating insights to executing actions, and CXOs face a clear business imperative. Translate AI and agentic investments into measurable financial outcomes. In the US alone, the work of more than 70 million knowledge workers will be transformed by seamless collaboration between AI agents and human expertise. And research indicates that enterprise app integration with domain-specialized agents that are built on last-mile expertise will increasingly become the norm. It is clear. Enterprise transformation demands a parallel focus on process reengineering, data modernization, agile tech architecture, with AI embedded at its core, and the discipline to unlearn legacy ways of working. This is exactly where Genpact shines. And where we continue to differentiate. Through our Genpact Next strategy, we are expanding our capabilities, clients, and catalysts to capitalize on this meaningful opportunity. And moving from meeting clients where they are to getting clients where they want to be. Let me walk you through key highlights for each. First, our capabilities. Advanced technology solutions grew to $1.2 billion, contributing more than half of total revenue growth in 2025. Demand for our data and AI expertise is increasing rapidly, with our investments accelerating our ability to deliver. Our AI Gigafactory continues to scale. We now have more than 400 GenAI solutions in the market, either deployed or going live. Up nearly three times from last year. And recently, we introduced AI Maestro, a software platform that helps AI builders and AI practitioners embed AI into last-mile processes at a much faster pace. Innovations like these are significantly increasing our set, with our data and AI pipeline up 50% year over year. AgenTeq has grown more rapidly than any other offering in Genpact's history. Our agentic solutions are clearly resonating, demonstrated by traction with new clients, as well as higher volumes and increased scope with our existing accounts. Core business services continued to grow, increasing 3.7% in 2025. Clients look to us to run their mission-critical operations at scale and do the foundational work necessary for AI transformation later. Because they know there is no artificial intelligence without process intelligence. Our deep domain and industry experience reinforce our competitive position and amplify demand for our advanced technology solutions, especially with large strategic engagements. Coming into 2026, we have been awarded more large deals than at the beginning of any prior fiscal year, further demonstrating how clients trust Genpact to drive real business outcomes. Next, clients. Clients choose Genpact because of our ability to combine data, AI, and AgenTeq with nearly three decades of experience running core operations. Let me walk you through a couple of examples to illustrate. The first demonstrates how our core business services position us to guide clients through their broader AI-led transformation. Humana is a leading American health and well-being company primarily focused on offering a wide range of healthcare services and insurance products. They are a long-standing digital operation client in finance and accounting. Recently, we expanded our partnership to support Humana's AI-enabled transformation across revenue cycle management, procurement, and, of course, finance and accounting. We are leveraging our deep process intelligence and last-mile knowledge to drive efficiency and consistency through process redesign and operating model improvement. Over time, we see the opportunity to support more advanced AI-enabled operating models, including agentic operations. This aligns directly with Humana's enterprise transformation and AI strategies and creates a pathway for Genpact to become a key partner to Humana's future workforce. The next example is Vesco, which shows just how quickly agentic operations can scale and generate meaningful outcomes. Vesco, another Fortune 500 company, and leading provider of business-to-business distribution, logistics, services, and supply chain solutions, has partnered with Genpact to reimagine their finance function, including an overhaul of their AP process. At our Investor Day in June, Vesco's CFO spoke about their comprehensive process and technology transformation. We transitioned their entire AP and procurement organization onto a unified platform and automated their end-to-end process with pre-trained outcome-oriented agents. Since June, we have made even more progress to drive better accuracy, faster cycle time, and an elevated supplier experience. Vesco has improved touchless processing of their 3 million invoices from 40% to 65%. They have also now implemented AP Advance, with plans to implement AP Assist soon. HFS research highlighted our work with Vesco as evidence that accounts payable is no longer just a back-office function. Instead, it is becoming a frontline for enterprise AI, providing a foundation for real-time visibility and agility across the finance enterprise. These are just a few of the success stories we have seen this past year. And finally, Catalyst. In 2025, partner-related revenue grew nearly 50% year over year. Partnering with companies like AWS, Microsoft, GCP, and Databricks is accelerating our ability to drive AI-led transformation. We are embedding domain-led solutions into their tech stacks with joint go-to-market efforts and roadmaps, setting us up to rapidly scale our execution. We also continue to invest aggressively in AI talent, through both hiring technology experts and intentionally training and upskilling our teams. Now with over 7,000 AI builders and nearly 20,000 AI practitioners, we are quickly building a future-ready workforce that can innovate, collaborate, and drive impact at scale. Looking ahead, 2026 will be a pivotal year for Genpact. Building on the momentum of Genpact Next, we expect to deliver another year of strong, high-quality results. Revenue growth of at least 7% year over year will be powered by advanced technology solutions growth, in at least the high teens. We will continue to aggressively invest in our technology solutions, expanding product development across AgenTic, data, and AI, and strengthening our sales and partnership ecosystem. Even with these significant investments, we are committed to again deliver healthy margin expansion. Finally, we expect to drive another year of double-digit adjusted EPS growth while continuing to return a significant portion of operating cash flows to our shareholders. In closing, let me leave you with a quote from one of our recent tech hires that perfectly captures why we are so excited about this new era. Genpact offers an incredibly unique opportunity to help customers move past the era of AI novelties and into the era of last-mile agent AI. Customers are realizing we can do what others cannot. We bring technology and process into the same room, connecting deep functional and industry understanding, proprietary data, AI, and agentic systems to truly integrate AI and transform their businesses. With that, let me turn the call over to Mike. Michael Weiner: Good afternoon, everyone, and thank you for joining us today. We delivered a strong fourth quarter that exceeded our expectations, underscoring the progress we have made throughout the fiscal year. As we consistently execute across our businesses, momentum from Genpact Next Strategy continues to build, demonstrating our strategic investments are paying off. In the fourth quarter, total revenue increased 5.6% to $1.319 billion. Advanced technology solutions revenue, which includes data and AI, digital technologies, advisory, and agentic, increased 15% to $323 million, with particular strength in data and AI. Our advanced technology solutions continue to create incremental value for our clients and generate higher value revenue for Genpact, delivering more than two times the revenue per headcount compared to the company average. This revenue is also growing more than two times faster than Genpact's overall revenue, with roughly 70% annuitized revenue and 70% from non-FTE models. Advanced Technology Solutions is high quality, sticky, and most importantly, strategically aligned to our future direction. Our rapid acceleration in AgenTeq reflects the strong foundation and client trust we have built over the years, as well as our leadership in advancing AI-led transformation. As BK mentioned, we closed over $200 million in AgenTeq contracts across new and existing clients in 2025, with more than 40% of awarded contract value coming from new clients. Within existing AP clients rotating to AgenTeq-led, we continue to see revenue and margin improvement driven by higher volumes, increased scope, or both, demonstrating the expansive opportunity of our AgenTeq investment. Core business services, which includes digital operations, decision support services, and technology services, grew 2.9% to $996 million in the fourth quarter, reflecting continued client trust and demand for our domain and industry expertise. Growth in core was offset by softness in decision support services as we continue to work through our go-to-market approach. In the fourth quarter, data tech and AI revenue increased 7.4% to $639 million, and digital operations increased 4% to $681 million. Non-FTE revenue, which captures our strategic shift to fixed fee, consumption, and outcome-based deals, represented 48% of fourth-quarter revenue. At a segment level, high-tech and manufacturing grew 9.9%, followed by financial services growth of 5% and consumer and healthcare revenue growth of 1.5%. Sales execution and demand remained strong, as we continue to make progress with new and existing clients. Existing client relationships continue to grow, demonstrated by our improvements in our net revenue retention rate. Our large deal momentum also continues. As noted earlier, in addition to the deals closed in the fourth quarter, we have a number of large deals awarded that we expect to close in the coming months, including some net new to Genpact. As a reminder, large deals are $50 million or more in total contract value. And across clients and cohorts, we are seeing a growing mix of advanced technology solutions pipeline and bookings. Turning to profitability, gross margin in the fourth quarter expanded by approximately 90 basis points to 36.6%. Over the past two years, our consistent track record of margin expansion reflects our disciplined approach to driving operational efficiencies, as well as an increasing contribution from our high-value advanced technology solutions. SG&A expense as a percentage of revenue was 20.3%. Adjusted operating income was $232 million, with adjusted operating income margin of 17.6%, as we continue to self-fund our strategic investments. Our effective tax rate in the fourth quarter was 24.2%, an increase from our prior year rate that was favorably impacted by a nonrecurring discrete item. Our full-year effective tax rate was 24.3%. Net income for the fourth quarter was $143 million, and diluted EPS was $0.81. Adjusted diluted EPS increased 6.6% to $0.97, faster than revenue growth for yet another quarter. We ended the fourth quarter with $854 million in cash and cash equivalents, up $207 million from a year ago. This quarter, we returned $129 million to shareholders through $100 million in share repurchases and $29 million in dividends. Turning to the full year, we delivered $5.08 billion in revenue, up 6.6% year over year. Advanced technology solutions increased 17% to $1.204 billion, and core business services revenue grew 3.7% to $3.876 billion. Data tech and AI increased 9.3% to $2.442 billion, and digital operations increased 4.1% to $2.638 billion. In 2025, we drove another 60 basis points of gross margin expansion to 36%, through rigorous operational discipline and our strategic focus on driving higher-value revenue streams. SG&A expenses as a percentage of total revenue were 20.3%, consistent with last year. We remain disciplined in managing costs by prioritizing strategic investments. Adjusted operating income grew 9.1% to $888 million, with adjusted operating income margin expanding 40 basis points year over year to 17.5%. Net income grew to $552 million. Adjusted diluted EPS increased 11.3% to $3.65, reaching a record high, growing faster than revenue for the fifth consecutive year. For 2025, we generated operating cash flow of $813 million, including $170 million from a client prepayment in the third and fourth quarters. Excluding this impact, cash flow from operations increased 5% year over year. Finally, we returned $401 million to shareholders through $283 million in share repurchases and $118 million in dividends. Turning to our outlook, which assumes the operating environment will remain relatively consistent, our strong execution, significant backlog, and rapidly accelerating demand for advanced technology solutions put us in a very strong position entering the year. As a result, we expect to deliver at least 7% growth for 2026 on an as-reported basis. This guide reflects committed revenue in line with historical ranges. In advanced technology solutions, we expect revenue to grow at least high teens for the full year, driven by ongoing demand for data and AI, as well as strengthening partnerships and continued momentum in AgenTeq. In core business services, we expect growth to continue, even as we help clients accelerate their AI-led transformations through agentic operations, and we increase our focus on driving sustainable growth through advanced technology innovations. Full-year gross margin is expected to further expand by 50 basis points to 36.5%. Adjusted operating income margin is expected to increase 25 basis points to 17.7%, reflecting our continued commitment to self-fund investments for growth. As a result, we expect adjusted diluted EPS to grow approximately 10%, again, faster than revenue. Regarding our capital allocation strategy, we continue to take a balanced and disciplined approach. We aim to return approximately 50% to shareholders through share repurchases and dividends, while maintaining flexibility for strategic investments. As a result, our Board of Directors has approved a 10% increase in our regular quarterly dividend to $18.75 per quarter and 75¢ on an annual basis. Turning to the first quarter on an as-reported basis, we expect to deliver total revenue between $1.282 billion and $1.294 billion, or 6% growth at the midpoint. We expect advanced technology solutions to accelerate from the fourth quarter to high teens growth year over year. And we expect continued growth in core business services. We expect gross margin to expand to 36.3% and adjusted operating income margin to increase to 17.3%. Finally, we expect adjusted diluted EPS of $0.92 to $0.93 for the first quarter. In closing, the unique combination of our last-mile expertise with advanced technology capabilities allows us to define how enterprises will operate in the future. With our Genpact Next strategy, we are innovating at scale to accelerate high-quality revenue growth and consistently expanding margins, all while further amplifying our differentiated position in the market. We remain committed to investing aggressively against the most strategic areas of our business to drive sustainable growth and improvements in our margin profile, with long-term partnerships that support improved economics for both Genpact and our clients. All this allows us to continue to grow adjusted diluted EPS double digits while driving long-term value creation. With that said, let me turn the call back over to BK. Balkrishan Kalra: Before turning to Q&A, I want to extend my thanks to an incredible leader. Krista Bessinger is transitioning to a new role at Genpact in 2026. Krista, you have made a significant impact here at Genpact. Thank you. Thank you for your partnership. And I look forward to working with you in your new advisory role. With that, I also want to welcome Kyle Wickstrom as our head of investor relations and the newest member of our Genpact leadership council. Kyle joined us from Microsoft last spring with over twenty years of experience in various finance roles in technology. We are very excited to have her on board. And now let me hand it over for Q&A. Operator: Thank you so much. And as a reminder, to ask a question, simply press 11 on your telephone and wait for your name to be announced. To remove yourself, press 11 again. One moment while we compile the Q&A roster. Our first question comes from the line of Bryan Bergin with TD Cowen. Please proceed. Bryan Bergin: Hi, guys. Good afternoon. Thank you. Maybe just given the material pressure on the from announcements from Anthropic and others, maybe we just start off with whether anything has changed for you on the ground in contracting conversations, whether you see any instances of clients seeking to try to do more themselves. You know? I guess I am curious. Where do you see type in the market being just that versus where there may be some validity to the risks that some of the traditional models face? Balkrishan Kalra: Sure, Bryan. Thanks. Let me take that. Look. I would say that we are incredibly excited with what is happening in Silicon Valley because it is accelerating our pivot. It is helping us drive outcomes for our clients faster. And whenever any of these tech shifts happen, it is always nuanced as to how it will apply to various different companies, and we clearly see this as a tailwind for us. We see that in our pipeline. We see that in our conversations. And if I just step back and maybe this is oversimplifying, Bryan, I see this as two main AI focus areas. One is, let us say, research AI, and the other one is task-oriented AI. You are probably referring to is more, you know, what is getting more attention these days in research AI, which is helping us accelerate our work. Where BCommon is more in task-oriented AI, and that is where we are building this agentic operations. We execute specific tasks within a process and making sure we are bringing in AI into the entire system of work, looking at the data, looking at the context, in these complex end-to-end business processes, which are unique to every industry. So fundamentally, if I see it from the operator lens as we speak to many Fortune 500 companies, not just the Frontier AI companies, we see our relevance increase. And we are seeing that, again, how our agentic operations are taken up, how data and AI are taken up. And what I would say is we are only seeing our pivot accelerate and only excited with this. Bryan Bergin: Okay. Understood. And my follow-up will be on ATS. You had nice solid growth here again in the fourth quarter, 15%. Now you are calling for an acceleration off of that level. So I want to test just the fact driving that confidence. I heard plenty of activity in your prepared script. Just give us a sense of maybe ATS bookings growth and is there an acceleration of work that is coming out of CBS? And into ATS? Anything that is kind of mechanically migrating between the two? Thanks. Balkrishan Kalra: I will answer it in two parts. And, Mike, feel free to give you a color. Point number one, I think we are beginning to see getting into a lot more conversations where we were originally not invited to, and I often have said that we are meeting where clients are, and, increasingly, we see that we can take them to where they want to be in a much faster manner. So we are, be it in large deals or mega deals, we are beginning to see into the conversation where we were earlier not invited, and that we see in our pipeline. Second, I think just from a core business services standpoint, we continue to see a very, very healthy demand because that is where we see last-mile advantage. That is where we have run mission-critical operations at scale. And that is where, you know, we understand the complexities and bring the process and technology conversation in one go. And fundamentally, what we have seen just agentic contracts grow, including with new clients, you know, 40% of the booking coming in from new clients or this contract value. You know, we are really excited. And even for the rotation, we see incremental revenue growth and gross margin growth. Michael Weiner: Yeah. So if you may just double click on that for a quick second. So just if you really want to just think about it from that perspective in the sense of how do we view ourselves in terms of ATS growth at the rate that we are projecting in the high teens for 2026. It is really driven by the two things BK alluded to. First, momentum we have seen in the AgenTeq ramp-up has been notable. Right? We put forth we had a TCV of approximately $200 million in bookings. Where we ended the year, and that is going to accelerate more as you roll out additional AgenTeq related solutions. That will help pivot some of the revenue from the core business services. And a few comments on that, as we talked about in our prepared remarks, the quality and sustainability of that revenue is incredibly important to us. It is highly sticky and continues to grow at a measured pace. It is recurring annual revenue if you want to think about it from that perspective. Balkrishan Kalra: I think maybe you know, what I am really excited about is how the shape of our business is changing. The pace at which it is changing. And more than a third of the booking is advanced technology solutions. And the majority of deals that in AgenTeq are obviously non-FTE, but driving consistent rec. Annual revenue streams. So the new commercial model is taking hold in a significant way. Michael Weiner: Okay. Understood. Thank you. Operator: Alright. Thank you. One moment for our next question. Comes from the line of Maggie Nolan with William Blair. Please proceed. Maggie Nolan: You mentioned, I think, 40% of your TCV for the AP suite was new clients. I think that number was maybe closer to 30% last quarter. Are there patterns in who is adopting this? You know, are they different than the typical clients that would have engaged with Genpact or BPO in general in the past? And then can you give us some data on how you are thinking about addressable market growth as you roll out these solutions? Michael Weiner: Thanks, Maggie. Balkrishan Kalra: Look, I think it clearly points to significantly expanding our total addressable market. And as I have said that we have not seen takeoff of any solution in Genpact history at the pace that we are seeing this. And many of these new clients are obviously net new to Genpact. But a number of them are also our existing clients who are not using finance, but they have now begun to use our finance stack. So, fundamentally, it is the enterprise client. It is mid-market client. It is our existing clients who are not using finance using us for finance. So a combination of all of that is really enhancing. And this is also in many ways getting us into the core foundational work that we need to do for many of these clients. Maggie Nolan: Okay. Thank you. And then have you noticed any improvements in the sales cycle or ramp times in the last ninety days or so, particularly in large deals, and I am curious what is contemplated in the full-year guidance with respect to those variables. And you sort of alluded to large deals in January being quite strong or those baked into the guide. Balkrishan Kalra: Look. I think large deals have their correct. Some move at a very accelerated pace. And some take much longer. And especially as we bring more technology and process and data and all of these skills together, especially for larger awards. It does not move in neat ninety-day increments. But, really, thrilled with the number of these conversations, the pipeline, across cohorts, including large deals is at record levels. Michael Weiner: Sure. May I have anything to add on to that, BK? So, Maggie, thanks for the question. Alright. You know, let me just bring this up a little. We are really confident in our guide at 7% on a full-year basis. So we look at everything that look at all deals. We probably weight them as we move forward and in our business. But a few things I want to just quickly talk. We think about the 7% number for us. We look at it in an absolute dollar perspective. Right? So we grew last year a little over six and a half percent and roughly the same number a year ago. So it is not a Herculean effort for us to grow at that rate for next year. But I would also like to just point out that our committed revenue is in line with historical averages. Which is about 75-ish percent. And again, this is all built off of a significant backlog which is at record levels, which takes into account 2025. Bookings as well as an exceptionally strong 2023 and 2024. So we feel really good about that on a go-forward basis. And specifically regarding your question, all deals are probability-weighted into how we look at the guide on a prospective basis. Maggie Nolan: Thank you. Congrats. Operator: Thank you. Thank you. Our next question comes from the line of Surinder Thind with Jefferies. Please proceed. Surinder Thind: Thank you. I would like to touch base on the margins starting with the gross margins and the expectations of 50 basis points of expansion. Can you walk me through the levers that you are using there, and then what is the potential to kind of continue that trajectory as we look further out into '27 and '28? Balkrishan Kalra: Maybe I will start, and Mike, feel free to comment on it. Look, fundamentally, it is a shift to advanced technology solutions, which is giving a higher value to our clients. And it is a higher value revenue for Genpact. And we have been talking about it for a bit, and now I think it is picking up the momentum. We see that come through apart from the disciplined operational capabilities that we are driving. But it is more from advanced technology solutions. And, you know, I will not like to opine on what will happen in 2027-2028, but fundamentally, our trajectory is clear as we have demonstrated over the last couple of years and increased the margin by 90 bps or 100 bps over the last two years. And we are very clear that it will certainly grow further in this year as we have guided the street. Michael Weiner: Yeah. Two just quick add-ons to that, Surinder. So when you know, as BK alluded to, right, at the increased mix from ATS, right, particularly that, you know, we see these non-FTE commercial models really support our margin in that business. In addition to it, if you think of our margin in totality or the AOI margin we lay out, remember that grew 40 basis points year over year. That is net of significant investments made in our organization. So we feel very good about our margin trajectory on a go-forward basis. Surinder Thind: That is helpful. And I guess as a point of clarification, what I was trying to tease out here is this idea that is this predominantly a mix shift benefit that you are receiving or are there other benefits that you can get from just from the delivery footprint and you know, the AI advances that we are seeing. I was just trying to understand that component here. Michael Weiner: Yeah. So correct. So the mix shift component, the nature of the work we do in ATS, we just alluded to is one component of it. But if you are thinking about it from a client zero perspective, which is how we think about our organization, and using AI and everything and how we are training our internal organization. Yeah, that has helped perpetuate the growth and the efficiencies that we are seeing in our own business. Remember, we come to the term client zero because we are embedding technologies in everything that we do. Right? I disproportionately focus on functional areas, and I have seen that technology pay off. Right? And we are using that we are using some of that benefit to invest in the future of our organization. So I think it is both things. I think you are correct. Surinder Thind: That is helpful. Michael Weiner: And then following up on the comment about this is all net of the you are making a lot of investments, and so, obviously, you are still seeing some good adjusted operating income margin expansion. You kind of use the terminology that you are investing aggressively in strategic areas. Can you elaborate on that in the sense of can you do more, and is it how do you balance the level that you want here? Because when we look at you know, other I will use the extreme example is just you know, the hyperscalers. You know, their CapEx spend this year is coming in much, much higher than anybody is anticipating. So it always seems like there is the ability to invest more. How are you drawing that line? Michael Weiner: So I will kick it off on here, Ravi. So remember, what we are doing, there is not a tremendous amount of CapEx associated when we talk about investments. In totality. Right? We do run a very disciplined process in the organization. Right? We look at the ROIs and the strategic implications of every one of the investments that we do. Right? Is there always a greater ask that we are willing to do? We evaluate that on a quarterly basis. We do it in a very disciplined fashion. Right? But what I will say is from an investment perspective and things partnerships, which was called out in quarters past to training, we are not pulling back from that by any stretch. You know? We are investing quite a bit of the operating leverage of the business in the future strategic investments and a whole core whole course of things. Balkrishan Kalra: And I think there are clear areas of our investments, Surinder, that we have laid out. Partnerships we have laid out, we continue to invest more and more in that. We have laid out in building the talent. We are increasing that more and more. You know, I talked about agentic ops and so on and so forth. This is all the product investments and the engineering investments that we have done. Sales investments, and the front-end investments we are doing. So we are changing the business. That is what I mentioned. The shape of the business is changing very fast. And may I say we are no longer the company that we were two years ago. And really proud as to the speed and the pace at which we are moving. Surinder Thind: Thank you. Operator: Thank you. One moment for our next question, please. And it comes from David Conning with Baird. Please proceed. Michael Weiner: Yeah. Hey, guys. Great job. I guess my first question is really on pricing. And our clients, it seems like coming to you at an increasing pace. That is great. Are they coming with greater expectations of the ability to drive more efficiencies? Are you having to change dynamics, like, faster kind of efficiency gains in their contracts or anything changing in the dynamic of the backdrop? Balkrishan Kalra: Maybe I will take first and feel free to opine you know, overall might look fundamentally how I will think about it is yes, aspirations are high. Overall aspiration of whatever everybody is reading, and therefore, what can happen in their businesses is high. And so is true in pricing as well. But what we are able to so I will say it in two parts. First thing is think of it as simple as p times q. And in p times q, yes, we are giving in more productivity to our clients. But our costs are offsetting at a much faster pace, and that is what you see in gross margin. And as far as our top line is concerned, we are getting you know, a bigger share or, you know, more scope that for the same body of work, we are able to that is what we reported that in AgenTeq you know, our revenue growth is much higher than what we reported in June. So I think there is that is why we are saying that we are creating higher value solutions for our clients. And we are gaining in the process. The second piece I will also say is how we are working with our partners and leveraging partner ecosystem as well as embedding solutions at the last mile and they are repeatable in nature. And therefore, I think we are gaining as a leverage point there as well. Mike? Michael Weiner: Yeah. I you know, the way I think about it is it just I look at our gross margins. Right? And I look at the gross margin expansion that we have and the gross margin expansion that we are guiding for. Right? I think that is really the best measure on how we are doing this. Right? So, yes, as BK alluded to in the beginning of his comments, there is always productivity asks. Right? We have seen nothing dramatically change from the past. But it is always been there and it is not going to go away. And I think our ability to navigate through that thus far and what we are projecting has been quite impressive. Balkrishan Kalra: Yeah. Construction-based structures are taking hold, so that is giving us more leverage. David Conning: Yeah. Okay. And that is great. I guess and a follow-up question. When a company, let us say, they are brand new to outsourcing. They have not thought of AI too much yet. They are in the forefront of thinking about it. Who do they first turn to? Is it you guys? Is it, you know, the you know, one of the bigger tech companies? Like, are you at the kind of the tip of the spear like Genpact's our first call to, like, start this all out, or who do they go to? Balkrishan Kalra: Look. I think, this is what I was referring in one of my earlier comments that over last year or so, we have begun to see and sit on the table where we were usually not invited. Because we are bringing the process technology, data, you know, and how to run mission-critical operations at scale, all in one dialogue, all in one conversation. And that is really accelerating our pipeline, and, you know, you see the progress thereof. And you know, we are talking about advanced technology solutions growing 17%. And we are saying for next year, our view is it will grow on top of 17% this year, another 17% at least. So we see that in our pipeline. We see that in our momentum. And, yes, I think we are getting invited. Where we were not earlier invited, so feel really thrilled about that. David Conning: Yeah. Alright. Thanks. Nice job. Operator: Thank you. Our next question comes from the line of Puneet Jain with JPMorgan. Please proceed. Michael Weiner: Hey, thanks for taking my question. I wanted to follow-up on agentic solutions when you offer, like, AgenTeq operations or AP solutions. Who is the decision maker within client organizations? Is it like, the business managers? Or the CIO office? Who is driving the charge towards embracing the Genetic AI within your clients? Balkrishan Kalra: Yeah. Look. I think it is always a combination of both. When we were just talking about running mission-critical operation, obviously, the business wise is much bigger. Fundamentally, now as you need to intersect and need to weave in all of these agents into their complex system roadmap. Clearly, their CIO or CDIO, they are an integral part of the equation. And therefore, you know, that is the other piece where we are getting invited when a CIO, CDIOs looks at how we are thinking about agentic operations, how agents combined with human expertise how overall underpinned with responsible AI governance, our all of the framework we are getting invited in more and more dialogue. Puneet Jain: And then on the last deals, that you have closed this year, what is driving that increase of the trend? Like, are these like deals typically rebadging comp? Like, do these deals have rebadging components? Meaning that they are coming from clients in-house operations? Are these AI-led deals? What type of work are you typically seeing in those deals? Balkrishan Kalra: Look, operations and maybe you are referring to talent transfer and others. Been an integral part of our model. And there is nothing special about that. Clearly, what is special is that you know, a lot more of our clients have begun to see that bringing you know, we have been running these mission-critical operations. Sometimes they are running themselves. But how we are bringing agentic operations in those mission-critical operations. Therefore, some of those demands, spigots are opening up more. And, you know, we are getting invited into even GCC conversations. That, hey. Why do not you take up the center? And run it for us? Because that is not what their expertise is in there. That expertise has begun to shine more and more. Puneet Jain: Got it. Thank you. Operator: Thank you. And our last question will come from the line of Bradley Clark with BMO Capital Markets. Balkrishan Kalra: Hey. Thanks. Just one for me. Just so I think it is clear that, you know, trend with your business are strong right now and in the BPO industry with really strong pipeline, expected acceleration in ATS. And I guess I want to shift focus to, like, long, like, long-term durability, like, the demand of customers needing help, you know, implementing a lot of different solutions, your own solutions like your IP solution into these processes that had previously done mostly manual labor. And I guess we want to understand, like, what is the tail of these types of projects or services for clients? Are you, like, once you help them implement the solution, whether it be, you know, your AP agent, the solution or a third-party agentic solution. You know, how did growth come after that? Balkrishan Kalra: Look, I think these are, you know, I am talking is more from an operator lens you know, what we see every single day. And fundamentally, it is, you know, when I am talking about API centric solution or for that matter, record to report or insurance, these are just very initial solutions that are taking hold. And please understand each of these solutions are building recurring annual revenues for Genpact. And that is what the commercial model is. And these are clearly as we see it, shaping the business in a very significantly different ways. And like I mentioned in my previous comment, more and more of our clients especially mega deals, they have begun to see that the benefit of agentic operations, especially running finance, supply chain, some mid-offices, claims operation, underwriting operations, banking operations. It is how we bring in agents with human expertise in a responsible AI framework so that they get enabled at the front end. They can gain market share, and they can focus where they need to focus. So we really see this as a long-term change. That is building a long-term business for us in a meaningful way. Thank you. Operator: Thank you so much. And this will end our Q&A session. I will pass it back to management for final comments. Balkrishan Kalra: Thank you. Thank you, Carmen. Look. I just want to take the opportunity and thank all of the employees, you know, across the globe, you know, who make, you know, what Genpact is becoming possible. So my deepest thanks to all of them, and, most importantly, to our clients who are choosing Genpact. And also to our shareholders for their ongoing support. 2025 was an incredible year. Set us up for even better credible year in '26 and beyond. And I look forward to showing you more and more of that, and I really do want to thank you all. Thank you. Operator: Concludes our conference. Thank you for participating. You may now disconnect.
Operator: And thank you for joining Atlassian Corporation's earnings conference call for this 2026. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian Corporation's website following this call. I will now hand the call over to Martin Lam, Atlassian Corporation's Head of Investor Relations. Welcome to Atlassian Corporation's Second Quarter Fiscal Year 2026 Earnings Call. Martin Lam: Thank you for joining us today. On the call with me today, we have Atlassian Corporation's CEO and co-founder, Michael Cannon-Brookes, and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for 2026. The shareholder letter is available on the Investor Relations section of our website, where you will also find our other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. During the call today, we will have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements are made, and we undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled "Risk Factors" in our most recent filed annual and quarterly reports. During today's call, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release, and investor data sheet on the Investor Relations section of our website. We would like to allow as many of you to participate in Q&A as possible, so out of respect for others on the call, please take one question at a time. With that, I will turn the call over to Michael Cannon-Brookes for opening remarks. Thank you all for joining us today. As you have already read in our shareholder letter, we closed out Q2 with very strong enterprise sales execution, Michael Cannon-Brookes: and incredible momentum across our business. We surpassed $6 billion in annual run rate revenue, delivered our first-ever $1 billion cloud revenue quarter, up 26% year over year, and grew our RPO 44% year over year to $3.8 billion. We have strong momentum across our enterprise, AI, and system of work transformations, and you can see this in our numbers. Customers are choosing us for their future, in bigger ways and bigger numbers than ever before. Enterprises like Cisco, Expedia, Reddit, and Synchrony Financial rely on Atlassian Corporation to power their most critical business processes and workflows. Robo surged past 5 million monthly active users of our AI capabilities. We are seeing firsthand every day how AI is transforming the way that work gets done, and we are directly benefiting as a business. When we look at the thousands of customers in our software team using AI code generation tools, we found that they create 5% more tasks in Jira, have 5% higher monthly active users, and expanded Jira seats 5% faster than those who do not use these AI coding tools. As I have said before, AI is the best thing to happen to Atlassian Corporation, and the results we are seeing today are no accident. As a long-term focused company, we are now benefiting from years of thoughtful investment across product, R&D, and GTM, which have positioned us to capture this moment. These investments are creating what we believe is a truly differentiated customer experience. First, the data and domain expertise living inside our Teamwork graph, which is now well more than 100 billion objects and connections across first and third-party tools, enables Robo to deliver real business value that is context-aware and actionable for customers across their search, chat, and agentic experiences. Second, our decade-long investments in enterprise-grade security, data governance, permissioning capabilities, and compliance enable every organization to securely move work forward at scale while deploying these fantastic new AI capabilities with the trust that they need. We provide a system of work built on deep integration into customer workflows, with that compliance, security, and support that enterprises trust built in. Lastly, our unique distribution engine enables us to seamlessly deliver incredible experiences to over 350,000 customers, including more than 80% of the Fortune 500 and 60% of the Forbes AI 50. Customers are realizing the value of our unified system of work and want to continue to partner more closely with us than ever before. And all of this is driving our results. We closed a record number of deals greater than $1 million ACV in Q2, nearly doubling year over year again, as enterprises are choosing to standardize on the Atlassian Corporation system of work. In less than three quarters, more than a thousand customers have upgraded to our main AI monetization driver, the Teamwork Collection, purchasing more than 1 million seats to get the best AI platform and many more AI credits for their agents. As I look across our business, two things are clear. We have never been more of a strategic partner to the biggest businesses in the world, empowering their AI and future work transformations. And our momentum is continuing to grow. This gives us confidence in our road ahead and our long-term opportunity. We are truly transforming how work gets done and solving the toughest human-AI collaboration challenges for our customers, and we are doing it every day. We are pushing ahead with strong conviction, and I could not be more bullish about the massive opportunities in front of us as we advance our mission to unleash the potential of every team. With that, I will pass over to the operator for Q&A. Operator: We will now begin the question and answer session. If you have a question, please press star, followed by the one on your phone. If you would like to withdraw from the queue, please press star followed by the two. First question comes from Rob Oliver from Baird. Please go ahead. Rob Oliver: Great. Thank you. Good afternoon. Thanks, Mike. Appreciate the clarity and conviction in the letter. Obviously, a ton of fear in the market right now on software, so I thought I would address it by asking you about some of the conversations you are having with your buyers right now. Clearly, the numbers show whether it be cloud NRR, you know, million-dollar deals, Robo adoption that existing customers are expanding with you. And in the letter, you called out some of those reasons, just Cisco around data, Michael Cannon-Brookes: Expedia around, you know, customer familiarity. But, you know, can you talk about how those conversations have changed, if at all? Recently with your customers, and what is driving this motion towards Atlassian Corporation right now, and if AI is all changing those conversations, thanks. Michael Cannon-Brookes: Thanks, Rob. Appreciate the kind words in there. The well, customer conversations have changed a lot over the last year. There is no doubt about that, Rob. And I would say all of those changes have been incredibly positive for us. The customer conversations we are having are at a higher level than we have ever been having them before. And those customers are looking for strategic partners to help them through AI. They continue to appreciate our delivery of that AI value to them, inside their processes and workflows. They will call this out directly. We get called out directly that AI capabilities are the reasons people move into the Teamwork Collection. They are the reasons that people are upgrading to the cloud. They are the reasons they see R&D investments. They use our chat capabilities, our agents, in millions of workflows now per month. They are able to deploy them, get them up and running, and get value from them quicker. We have so many customer quotes and examples where they see this. Right? We have long put software in our customers' hands for them to use and deliver on. That, in return, makes those customer conversations about longer-term commitments. Right? As you pointed out, you see that in our numbers. Right? Our RPO at 44% growing for accelerating for the third quarter in a row, is a really fantastic vote of confidence, I believe, from those customers. Right? Those are tens of thousands of seats signing multiyear deals, that are voting on not the platform for 2026 for them in but the platform in 2027, 2028, and 2029. And those customers are seeing what we are doing, seeing our progress, and voting with their feet. There is a lot, obviously, of noise out there in the market. Right? As I said in my shareholder, there is no doubt about that. But when I talk to customers, they believe that we are helping them through a lot of that noise. Delivering for their software teams, their business teams, and their business process, and they are able to get efficiencies and improvements today. And I would say they want all the same things they have wanted in the past. Sometimes, these types of times when there is a lot of noise, Right? We can forget the fundamentals. Right? Enterprise customers want a platform they can trust. They need it to be compliant and secure and all the things they have always needed. They want great ROI. They want efficiency in their business. AI enables us to do that better than we ever had before in our domain, helping their teams to collaborate and be better. I think we are seeing it in all of our numbers across the board. So, again, that is where you hear us feeling incredibly bullish, right, about what we are doing each quarter and seeing that real acceleration. Operator: Your next question comes from Keith Weiss from Morgan Stanley. Please go ahead. Sanjit Singh: Yeah. This is Sanjit Singh for Keith Weiss. Congrats on the $1 billion quarter cloud and the progress with Teamwork Collections, really nice to see. I wanted to follow-up on Rob's question. In terms of kind of the reality on the ground in terms of what the market is, you know, sort of asking and calling for versus customers want, and this is specifically around pricing. And like, I would love to hear your take on where does pricing go to and evolve over the next, one to three years? Market seems concerned on seat-based model, seat-based pricing. Customers probably like seat-based pricing. And so what do you think this all shakes out in terms of where we are headed in terms of the pricing monetization story for Atlassian Corporation? Michael Cannon-Brookes: Sure. Thanks, Sanjit. Look. A totally valid and important question. Let me start with the numbers that you can see it, and then I will talk to our philosophy. You can see in everything from the RPO to NRR number, again, 120% ticking up for the third quarter and are 120% plus, north of 120% and ticking up for the third quarter in a row. The pricing we currently have is delivering. Right, for the customers. They are opting for more of what we are doing. And price is not a huge part of any of these that we are having with our customers. It always is. They want to get good value. They want to understand, but we are a very good value option. We always have been, and we continue to be so. The conversations around consumption-based pricing and pricing models changing, again, our philosophy has always been to deliver the best value we can in the overall ROI sense to our customers. It is our job, I believe, as an application vendor, not an infrastructure vendor, but an application vendor a platform vendor, to manage the costs of everything that we have in the envelope of what the customers pay. We have done that in storage. Done that in network costs. We are now doing it in AI costs. And the customer's preferred method of payment is still an understandable predictable pricing pattern which tends to be a seat-based model in our category of software in terms of delivering collaboration tools for teams of people how many people are collaborating is a best proxy at the moment for value, and I believe continues to be so. You could worry about our AI costs. Again, you can see in our gross margin improvements, for a probably the third or fourth quarter, do not quote me on that, continue to improve our gross margin that we are able to deliver those 5 million Robo seats and continue to improve gross. That is a huge achievement on behalf of our engineering teams. But it shows that we can manage those AI costs inside for the vast majority of customers. Now, we do have consumption-based offerings, as you can see. Everything from Forge to extra AI credits, if you go over the limits, to Bitbucket pipelines. Like, there are consumption-based offerings. So we are very clearly in a hybrid model of that, but we do try to make our pricing philosophy what is best for those customers. Right? They want to buy their applications. Not on a consumption basis. But on a familiar predictable basis. Goes into the total cost of ownership that they look at for that equation. So we feel really good about where we are seeing it. And lastly, you would see the you know, the million seats we have passed in Teamwork Collection in under nine months is a huge achievement on behalf of a lot of teams at Atlassian Corporation. That has a predictable pricing pattern that is there. That has gone from zero to a million seats in under nine months. On this pricing pattern. And those are customers who are upgrading. Why? Because of the pricing philosophy, but also because of what the Teamwork Collection gives them as an AI platform. It gives them significantly more AI credits. Right? So when they look at that upgrade, AI's list is one of the reasons, but it is baked into the pricing plan that we have on 1 million seats, we would argue it is working really well. Still early in that business. Operator: Your next question comes from Gregg Moskowitz from Mizuho. Please go ahead, Gregg. Gregg Moskowitz: Thank you for taking the question. Well, we are in a software twilight zone of sorts. So when a company whose stock is down almost 40% and five weeks on no company-specific news just reports a strong quarter, raises guidance and makes a significant commitment to accelerate the buyback. And yet the shares are right now indicated down a lower or an 10%. So I really do sympathize with how frustrated you all must be. Now as to my question, it is for you, Mike. And what are your thoughts on the medium to longer-term prospects of Anthropic's CoWork as a competitive alternative to Jira? Also, I think it is important to get your perspective on CoWork's new plug-ins. And so you know, if we were to compare this to the most common Jira use cases, what could something like a CoWork plug-in automate for Jira, but also know, where would it fall short? Michael Cannon-Brookes: Thanks, Gregg again. Appreciate the sound the kind words you seem as frustrated as we are. So that is great. Look. Firstly, I would say Anthropic is a great partner of ours. Use a lot of their models. We use a lot of their coding tools and working tools. We have just both become partners of Atlassian Williams Racing. It is wonderful. We are both helping that team to get to the front of the grid. With a combination of all of our software and tools. And I think that is a great example. Right? There are going to be new tools that arrive with AI and those new tools are going to deliver new capabilities. We are seeing that every week. Every month. And that is great for our customers. Those tools continue to require data. They continue to require places to exchange. One of the greatest users of our MCP server as an example, is a way to get to Atlassian Corporation's offering and the Teamwork Graph and the context we have in those other tools is through things like, you know, CoWork's use of Atlassian Corporation's MCP server. That is really good for us. Right? Because it enables you to see how you can utilize and contribute back to the Teamwork graph from lots of different tools using lots of different contexts. There is no doubt some of these tools are going to exist in different places, with some overlaps. There is significant value, I think, between our offerings and those offerings. So we do not see that as being perhaps the challenge that others do out there. There is a great partnership opportunity there, and we continue to explore that. We continue to use their offerings really strongly internally. There are always going to be a lot of differentiations out there. Our Teamwork graph is very differentiated. The context we have across our applications and other applications is very useful for any of those agentic type tools. At the same time, you are still going to need human beings in the process in lots of different places. Approval workflows, business processes, they can be accelerated in lots of spots. That is exactly what we see customers doing with Robo agents and with all of the other agents that can now operate inside of Jira. Those agents are accelerating business processes in lots of different ways. They are not eliminating the human impact. Right? The human-AI collaboration is incredibly important, and I think it continues to be so. Lastly, I would just say that that is not new for us. Our philosophy of integration goes to listening to customers. The history of enterprise technology is about integrating with various different offerings. Right? Work with lots of different products. To make sure that our data and our workflows are integrated with what the customers are using. We will continue to do that. That is a very strong part of our philosophy, and I believe what customers really resonate with that we are integrated with deeply enmeshed in their processes and workflows, and we will continue to help those workflows get more efficient. Operator: Your next question comes from Karl Keirstead from UBS. Please go ahead. Karl Keirstead: Maybe I will direct this one to Joe. I noticed in the shareholder letter, you talked about next year, just, warning The Street that the DC segment, obviously, on the back of a tough comp would be down meaningfully. I guess the spirit of my question is if we go back to the medium-term guide that you offered a year and a half or so ago, I think we would get to sort of an implied total revenue growth, if my math is right, of 19, 20% next year, If DC is meaningfully down, I guess I just wanted to test your confidence that the cloud revenue can be up enough such that you still feel comfortable with hitting that previous guide. Through fiscal 2027. Thank you. Joe Binz: Yeah. Thanks, Karl. We do continue to have confidence in the long-term cloud guide. If you think about the short-term guidance, we have taken the same approach in Q3. FY 2026 that we followed last year. The growth drivers for the cloud business going forward continue to be very consistent. What we shared at the last Investor Day. We expect to tap into large market opportunities to drive healthy revenue growth. Through our strategies around enterprise AI and system of work. All of that drives a great number of users, a higher ARPU, and more opportunity for cross-sell and upsell to higher value additions. And with AI, we believe we have a unique and differentiated position at this critical pivot point in the market with our Teamwork graph around high-value mission-critical workloads combined with our cloud platform. And there is a lot of long-term opportunity in that space as well. So overall, those are the big drivers. And we continue to expect to drive healthy revenue growth over the next two years in cloud. Operator: Your next question comes from Aleksandr Zukin from Wolfe Research. Please go ahead. Aleksandr Zukin: I guess in the spirit of the first two questions, Mike, it feels like you guys are continuing to see really solid growth and really solid progress on all the initiatives you have laid out. I guess my question would be, given the fact that you are probably already both benefiting from within Teamwork's collection a number of AI consumptive drivers. You are seeing Robo, and you are starting presumably to see your customers use agentic interactions even from other systems to enhance the value that both Jira and Confluence provide to Teams. At what point do you would you expect to see monetization increase, improve, and that greater value proposition to result in acceleration, in stability, of the cloud numbers, specifically? And when do you think that will actually happen? Michael Cannon-Brookes: Hi, Alex. I can definitely talk to that. Look. I want to reiterate, firstly, what Joe just said in the last answer, we have our long-term guide. We firmly believe in reiterating our confidence in that guide. And, hopefully, you can see in things like our RPO numbers and our NRR numbers, so our retention and our remaining performance obligations. That there is a confidence in that long-term future that comes across. And both of those RPO and NRR numbers are across both cloud and DC. Combinatorial. So that is important. I think you are seeing it today. So we run into this tricky bond. You are seeing that acceleration today. Our RPO number has ticked up for the third quarter in a row and is growing significantly faster than our cloud revenue growth. And the cloud revenue growth also accelerated this quarter. So I believe you are actually seeing that today. And it will flow through. These customers are signing multi-year, you know, three-year large-scale deals. So in terms of at what point do we expect to see monetization? We are already seeing it and will continue to see it. Right? It is one of the number one reasons to move to the cloud and to upgrade to our cloud platform. AI is one of the number one reasons to choose the Teamwork Collection as a higher offering, and that is a great economic equation for our customers and for us. You are seeing more than 5 million AI now, as you pointed out, and millions of agentic workflows now running every single month. All of that is leading to our customers continuing to expand their commitment to the Atlassian Corporation platform. AI is a huge part of that platform. Like, we should not mistake that. It is one of our three big transformations. We are heavily invested in delivering that AI to our customers. That monetization is coming through in the Teamwork Collection numbers we are seeing. In those long-term customer treatments. They understand what we are building today. They see the road map of what we are building tomorrow. Customers have faith in our delivery. Again, the things we announce at our conferences we ship. We ship those very, very quickly now, increasingly quickly after those conferences. That does is build this long-term customer trust. Operator: Your next question comes from Ryan McWilliams from Wells Fargo. Please go ahead. Ryan McWilliams: Hey. Thanks. Second question. For Mike, as new models get released, we are hearing examples of developers switching between different models and different coding agents. As they see better model improvements. How do you view your position outside of the large AI labs working to Atlassian Corporation's advantage as customers can use Jira across their organization for the long term and then while still enabling their developers to use their favorite coding tool. Michael Cannon-Brookes: Cool. Thanks, Ryan. Look. There is a lot of answers to that question. Firstly, we are big fans of model delivery. Every time new models come out, we take those capabilities. We have long set our strength is in adapting and delivering those models to our customers through the value. Again, our customers do not use models. They use applications. Right? We do not sell chips. We sell apps. And those apps have to deliver value, and those models let us deliver better value. We have a very good AI team world-class in adopting new models, working out where they are stronger, where they are cheaper, where they are faster, where they deliver better quality results, and getting those into our products really quickly. That is our job to do. The customers may not even notice that. They probably do not. They may notice the check got a little better today than yesterday. We continue to do that. We have continued to improve check quality, agentic answer quality, etcetera. And we are able to use all the models again. We use models from multiple foundation labs within the customer's preferences. And choices our ability to do that, if we can pick the best model for the best purpose across multiple labs, that is a good thing. And that is a good thing for our customers, like, fundamentally, right, in terms of their ability. We take the same position when it comes to agents. Again, we are shipping a whole set of capabilities for Jira directly. That includes Jira Service Manager, Jira Product Discovery, and Jira itself. To assign work to agents inside of any existing workflow or business process. Now you can assign work to a Robo agent out of the box. You can build your own agents. But you are also able to assign work to agents from all of the other big agentic platforms. And I think that is a real strength of ours, because you can model your business process in Jira, You can model your workflow in Jira, and you can involve other agents from your agent platform of choice or as most enterprises will probably end up with, multiple agent platforms, and we have an out-of-the-box offering that works for you for simple quick cases. This is a real strength for our customers because it means that they have one workflow, and they can take the best of the best that makes sense. Maybe that one set of agents in finance and a different set in sales. Fine. We are able to help them across the board again to our view of helping integrate with the tools they have. Now lastly, you mentioned some of the software capabilities of those agents. Just wanted to stress as we have said for twenty years, we solve human problems. We do not solve technology problems. We have never solved technology problems. And when we solve human problems, Jira is about the human reference to work. It is a piece of work that is going through a workflow, a set of changes, We use our own Robo dev tool. Sure. We use old school coding where you just type the characters in, and we use many of the new AI code generation tools. In our engineering team, which is very large and very world-class. We use all of these things. We still use a lot of Jira. Again, the statistics we are showing is that the more people use those tools, they create more issues. They have more workflows. They actually have more MAU in Jira. 55% more MAU, at least. And they expand their seats at a faster rate. Because those are the most cutting-edge companies. Those are growing the fastest. Right? And I think that shows that the world of collaboration and human challenge of teams getting together to decide what to do is still really important even among all of those technologies. So I think we have a unique position to take all those models into our customer as they need the value from them. Operator: Your next question comes from Jason Celino from KeyBanc Capital Markets. Please go ahead. Jason Celino: Great. Thank you. Maybe switching topics a little bit more of a simpleton kind of question, but curious to hear how the migration activity is going, you know, DC to cloud, if you are able to quantify how much that benefit was for the quarter. Joe Binz: Thank you. Yeah. Thanks for the question. We saw very healthy cloud migrations in Q2. It contributed a mid- to high single-digit impact to cloud revenue growth rates. So given this, we continue to expect migrations to drive a mid- to high single-digit contribution to cloud revenue growth for the full year. So happy with the progress, and it continues to go very well. Operator: Your next question comes from Ittai Kidron from Oppenheimer. Please go ahead. Ittai Kidron: Thanks, and thanks Joe, for resetting their own 2027 data center. I wanted to dig into the seat expansion. It clearly was an upside driver. It came exceeded your expectations in the order. But, Joe, I was wondering if you could break down the seat expansion, if there is a way, that internally you look at this in context of new customer additions, expansion with existing customers, whether it is developers or other corporate functions. I mean, every day, we are hearing about companies laying off more and more and more people, yet you are getting more and more seats. I would love to get any insights as to the flavors. Where is it that you are gaining seats? Where are you still seeing kind of good momentum over there in your confidence level about your ability to sustain the seat growth? Joe Binz: Yeah. Thanks for the question, Ittai. In terms of where we see the expansion, I would say it is broad-based. It is across both tech and non-tech users. We are making a lot of progress on what we call non-tech or business users, particularly with the Teamwork Collection product. Those seat expansion rates both across the enterprise and SMB remain stable. That has been the case for, you know, four to six quarters now, so we feel really good about the continued progress on that. And that is the way I would describe from a prepaid seat expansion perspective. Sort of the color in terms of what we are seeing on that front. Michael Cannon-Brookes: Hi. Sorry. If I can just chime in at a sort of a non-financial high level. Look. We are very clear that the system of work is about a continued growth of Atlassian Corporation into the knowledge worker population. Right? When we talk about unleashing the potential of every team, our mission for over two decades, I would stress the every team part. We have got the software collection, which does very, very well. The DX and a lot of other things encompass in a Bitbucket pipelines. Like, there is a lot of great areas of that software collection. We have also got the service collection. So we are seeing great growth in service collection across HR teams, finance teams, other areas outside of its traditional market in IT and operations teams. But that is certainly an area of growth for us. So there is HR and finance teams seeing a lot in the service collections, for example, and you have seen us ship a lot of features. Also launched customer service this quarter. As an application within that, to go after a new set of teams. We have not been able to get to as well, you would say. In the core Teamwork Collection, look, as we said in our letter, we were seeing double-digit seat expansion. More than double-digit seat expansion compared to people who buy the standalone applications. And that is baked into the Teamwork Collection packaging, but it is also because of the AI offering and how it works. Right, in terms of getting you get you equate your Loom confluence and Jira seats along with your additions which often gains expansion. But given the nature of our applications, and our continued growth in business teams across an enterprise, sales, marketing, HR, finance, etcetera, what that licensing structure allows those teams to do is to collaborate more. And collaboration is a very sticky and kind of viral activity that is where you are seeing that expansion coming through in our MAU and in our AI MAU. And also ultimately ending up in our you know, NRR and RPO numbers in terms of long-term commitments from customers. That is and where they are seeing expansion across business teams of all fronts. Operator: Your next question comes from Koji Ikeda from Bank of America. Please go ahead. Koji Ikeda: Yes. Hey, guys. Thanks so much for taking the question. I wanted to follow-up on the point about customers that are using AI cogen tools are increasing Jira uses by 5%. You know, 5% on the tasks, on the MAU, and expanding faster. And so what I am trying to get at is understanding how the squares with the productivity gains that we are hearing from the cogen tools. Like, 30% more developer efficiency, driven by cogen. Does that equate to 5% more Jira usage? Maybe I have that completely wrong, but what I am trying to understand is how one helps catalyze use of the other. And how we can maybe use that plus 5% increase of that Atlassian Corporation usage when Gen I AI is being used as a good read for other parts of the Atlassian Corporation growth opportunity. Thank you. Michael Cannon-Brookes: Koji, great question. Into some specifics here. Firstly, that is obviously within sort of the software team and software collection. So the first thing I would say is, to if I spoke to him previously, that is a subset of our user base, right, in terms of software teams. And those are generally broad technology teams as well. Right? So not just developers, but you know, security folk and network analysts and operations teams and product managers and designers. There is a lot of different roles involved in a software team well beyond just the coding itself. But it is a subset of our total audience. And, again, service collection had an amazing quarter. In a totally non-software sense. I think what we are saying there is it is 5% higher or at least 5% higher than non-AI code generation based companies. It does not mean it is a 5% expansion rate. It means they are expanding 5% higher than the rate of expansion of the other groups. So that is where you see that it is not necessarily a 5% total expand rate. You can see in that NRR and other stats, it is higher than that. Right? Secondly, there is a lot of reasons for that, I believe. Firstly, these are the cutting-edge companies. These are the companies that are pushing the boundaries the most. They tend to be growth-oriented companies, so they tend to be companies that are growing, which is great. But guess who those largest companies are going to be? The future is those ones that are pushing the boundaries and driving forward in a generalized economic sense. So that is really good. Those are the leading companies for us. Secondly, yes, they are getting more efficiency. If you look at the actual delivery efficiency, loading speed is, again, 20 to 30% of the developer's job. And so you may be getting 10, 15, 20% improvement in the overall productivity of your organization if you have thousand people in R&D, something like that. But that innovation moving quicker does not mean you are finishing your road map. You are coming up with more things to do. So you are adding more tasks, you are also creating a lot more technology, a lot more software and services which makes your architecture more complicated, it gives you more things to manage with something like Compass in terms of the different software code bases and models and pipelines and all the different data structures that you have to deliver your technology products and services as an organization as a customer of ours. And lastly, you create more complexity. Right? The security and compliance of a bank. The governance functions that have to happen, the structuring and the downtime, the operating of that software. All of these things create Jira issues at large volumes. Right? So if you create more software, you are going to have more management, more overhead, more collaboration, some version of that is what we believe is happening underneath. Right? You have more collaboration to do because you end up with more technology, and that is a good thing. More software in the world is a good thing for Atlassian Corporation. If we have said that for a couple of years now, that is a belief that we are on AI is unlocking sort of human creativity at the highest level. Right? It is allowing them to create more. That means those humans have to interact and collaborate more, and those created objects need to be managed, operated, maintained, and that is generalized, a good thing for Atlassian Corporation across software and non-software teams. Operator: Your next question comes from Keith Bachman from BMO. Please go ahead. Keith Bachman: Hi. Thank you very much. Mike, I wanted to direct this to you if I could. And I wanted to get your perspective and update on JSM specifically. And I will break that into a few parts. If any kind of metrics you could give us on growth, and what the trajectory is. There is a lot of consternation about workflow, broadly speaking, mentioned your stock going on. It is not the only one. ServiceNow goes down almost every day given concerns around the underlying fundamentals of JSM. The second part is, just anything on the competitive dynamics. And then the third is really I wanted to focus on seats for a second within the context of JSM. And is there any update you can give us on like for like? What I mean by that is you have a JSM workload a customer has, is there seat degradation within the confines of a given workload understand you are still grabbing customers, so seats are probably going. But, really, on a like for like basis, just want to understand some context on seats. Many thanks. Michael Cannon-Brookes: Sure. Thanks, Keith. Great question. Love questions about the service collections. Doing fantastically. Look. We gave some stats in our shareholder letter. Right? We passed 65,000 customers, which is a big milestone. 50% of the Fortune 500 as a business in and of itself, and the enterprise side of that world growing over 60% year on year. So hopefully, from those sort of high-level statistics, service collection is doing very, very well. It is definitely our fastest-growing product at significant scale. And that is a really important milestone for that business. As I said earlier, yes, that growth is happening on a like for like customer base. I like your sort same store sale analogy. I get what you are asking there. You are certainly seeing efficiencies coming in some of those customers. At the same time, as a challenger brand, we are seeing great growth in HR. We shipped twelve months ago, a whole series of HR service management, blueprints, and other areas. We are going really well in that sort of part of helping operate a business. Same in finance, same in other areas of operations, often, like, management, these types of things. Service collection is doing very, very well in and we feel very confident that we have a lot more growth to go get there. Secondly, on the asset management side, you have seen us take assets out of the service collection and put them into the core platform. That continues to be a big growth driver for us as we have a far more modern CMDB like system as a graph compared to a lot of the legacy competitors. And as we connect the assets graph that you have of physical objects often to the Teamwork graph, but we are seeing our agents and our AI capabilities get significantly more powerful, and we are seeing great growth there. As such, you know, in the last six months, more than 40% of the agentic workflows that have been built are actually in service collection customers and service workflows. It is a very natural area to deploy agents AI agents into your service workflows to help improve the human agentic experience or the human agent experience of delivering value to the customer, or customer just getting the value directly themselves. So that is going very, very well. More than two-thirds of our service question customers are using it for non-IT use cases at the moment, which is a great sign that that is happening. Two other things, maybe one, you see we are a leader in our enterprise service management wave. The analyst community continues to recognize us as a leader and a visionary, but also a significant challenger and growth brand. And we continue to see a lot of migration from legacy service management platforms onto service collection for much higher ROI much better cost equation with a much more modern stack and user experience, and that is really great for us. Lastly, and it should not be last. It is definitely not the most minor. We only GA'd our customer service management app inside the last quarter. So that is delivering great efficiency results for us in running parts of our customer service, as we have said. And very early in that journey, but really excited about how that can continue to grow the service collection as it continues to power a large part of the license growth. Operator: Your next question comes from Raimo Lenschow from Barclays. Please go ahead. Perfect. Thank you. Thanks for squeezing me in. Raimo Lenschow: I have a question on the DC price increases and the gap we have to Jira cloud now. Like, how do you think about that in terms of as an incentive to move? Do you think there is further action in the this can help you there to kind of accelerate that journey? And then I had one quick follow-up. Joe Binz: Yeah. Thanks, Raimo. You know, from a pricing perspective, on the cloud, you know, we invest quite a bit in R&D. And we are consistently delivering a lot of innovation and value to our customers. And that fundamentally allows us the opportunity to increase prices over time, commensurate with that value delivery. We may do that through pricing packaging of premium SKUs or through list prices. In either case, our prices today remain significantly below many of our software peers and competitors across our portfolio. And because of that and the pace of innovation and value delivery, on mission-critical workflows, we still feel we have plenty of headroom for further pricing. In terms of data center, we will ensure that any price changes on data center going forward fit into the deliberate and planful approach we are taking in providing the right incentives at the right time to help customers upgrade to the cloud. Overall, however, we believe we remain competitively priced just relative to the value we deliver and competitive alternatives in that space as well. So that is how we think about the pricing perspectives, in terms of the interplay between cloud and data center. Raimo Lenschow: Yes. Okay. Perfect. Thank you. And then I have one question. I might have missed it, but did you talk to the 20% revenue growth CAGR? Or did you could you clarify that? Because I had a couple of questions from the from the other audience if you kind of reiterated it or not. Joe Binz: Yeah. Sure, Raimo. There is no change to our midterm outlook calling for 20% plus compounded annual revenue growth through FY 2027. I would say the same thing for our 25% plus non-GAAP operating margin commitment in FY 2027. We remain confident in our ability to deliver healthy and accelerating cloud revenue growth. As we expand operating margin over time. And I would also highlight that with respect to our short-term guidance for FY 2026, we do continue to take a conservative and risk-adjusted approach. So that is the way to think about that. Raimo Lenschow: Thank you. Operator: That is all the questions we have time for today. I will now turn the call over to Mike for closing remarks. Michael Cannon-Brookes: Thank you, everyone, for joining our call today. Thanks to all of the Atlassian Corporation teams for delivering a truly fantastic quarter. And as always, we appreciate all your thoughtful questions and continued support. From the investor and shareholder community. Have a kick-ass weekend, everybody.
Operator: Thank you for standing by. Good day, everyone, and welcome to the Amazon.com Fourth Quarter 2025 Financial Results Teleconference. At this time, all participants are in a listen-only mode. After the presentation, we will conduct a question and answer session. Today's call is being recorded. And for opening remarks, I will be turning the call over to the Vice President of Investor Relations, Mr. Dave Fildes. Thank you, sir. Please go ahead. Dave Fildes: Hello, and welcome to our Q4 2025 financial results conference call. Joining us today to answer your questions is Andrew Jassy, our CEO, and Brian T. Olsavsky, our CFO. As you listen to today's conference call, we encourage you to have our press release in front of you, which includes our financial results as well as metrics and commentary on the quarter. Please note, unless otherwise stated, all comparisons in this call will be against our results for the comparable period of 2024. Our comments and responses to your questions reflect management's views as of today, February 5, 2026, only and will include forward-looking statements. Actual results may differ materially. Additional information about factors that could potentially impact our financial results is included in today's press release and our filings with the SEC, including our most recent annual report on Form 10-K and subsequent filings. During this call, we may discuss certain non-GAAP financial measures. In our press release, slides accompanying this webcast, and our filings with the SEC, each of which is posted on our IR website, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with comparable GAAP measures. Our guidance incorporates the order trends that we have seen today and what we believe today to be appropriate assumptions. Our results are inherently unpredictable and may be materially affected by many factors, including fluctuations in foreign exchange rates and energy prices, changes in global economic and geopolitical conditions, tariff and trade policies, resource and supply volatility, including for memory chips, and customer demand and spending, including the impact of recessionary fears, inflation, interest rates, regional labor market constraints, world events, the rate of growth of the Internet, online commerce, cloud services, and new and emerging technologies, and the various factors detailed in our filings with the SEC. Our guidance assumes, among other things, that we do not conclude any additional business acquisitions, restructurings, or legal settlements. It's not possible to accurately predict demand for our goods and services, and therefore, our actual results could differ materially from our guidance. And now I'll turn the call over to Andrew Jassy. Andrew Jassy: Thanks, Dave. We are reporting $213.4 billion in revenue, up 12% year over year excluding the impact from foreign exchange rates. Operating income was $25 billion, and trailing twelve-month free cash flow was $11.2 billion. We are seeing strong growth, and with the incremental opportunities available to us in areas like AI, chips, low earth orbit satellites, quick commerce, and serving more consumers' everyday essentials needs, we have a chance to build an even more meaningful business in Amazon.com, Inc. in the coming years. With strong return on invested capital, and we are investing to do so. We are already seeing strong demand in these areas even in these early innings. I'll start with AWS. AWS growth continued to accelerate to 24%, the fastest we've seen in thirteen quarters. Up $2.6 billion quarter over quarter and nearly $7 billion year over year. AWS is now a $142 billion annualized run rate business. And our chips business, inclusive of Graviton and Tranium, is now over $10 billion in annual revenue run rate growing triple-digit percentages year over year. As a reminder, it's very different having 24% year-over-year growth on a $142 billion annualized run rate than to have a higher percentage growth on a meaningfully smaller base which is the case with our competitors. We continue to add more incremental revenue and capacity than others, and extend our leadership position. We are continuing to see strong growth in core non-AI workloads as enterprises return to focusing on moving infrastructure from on-premises to the cloud, along with AWS having the broadest functionality, strongest security and operations performance, and most vibrant partner ecosystem. AWS continues to earn most of the big enterprise and government transitions to cloud. Since our last call, we announced new agreements with OpenAI, Visa, MBA, BlackRock, Perplexity, Lyft, United Airlines, DoorDash, Salesforce, US Air Force, Adobe, Thomson Reuters, AT&T, S&P Global, National Bank of Canada, the London Stock Exchange, Choice Hotels, Accenture, Indeed, HSBC, CrowdStrike, and many more. More of the top 500 US startups use AWS as their primary cloud provider than the next two providers combined. We are adding significant EC2 core computing capacity each day, the majority of that new compute is using our custom CPU silicon Graviton. Graviton is up to 40% more price per than leading x86 processors and is used expansively by over 90% of AWS's top thousand customers. Graviton itself is a multibillion-dollar annualized run rate business growing more than 50% year over year. We consistently see customers wanting to run their AI workloads where the rest of their applications and data are. We are also seeing that as customers run large AI workloads on AWS, they are adding to their core AWS footprint as well. But the biggest reason that AWS continues to gain AI share is our uniquely broad top-to-bottom AI stack functionality. In AI, we are doing what we've always done in AWS, solving customer challenges. Let me give you some examples. The first challenge is having a strong foundation model to generate inferences or predictions. Customers are realizing as they get further into AI that they need choice. As different models are better on different dimensions. In fact, most sophisticated AI applications leverage multiple models. Whether customers want frontier models like Anthropix Cloud, or open models like Miesztrall or Lama, Frontier Intelligence will lower cost and latency like Amazon Nova. Or video and audio models like twelve Labs or NovaSonic. Amazon Bedrock makes it easy to use these models to run inference scalably, and performantly. Bedrock is now a multibillion-dollar annualized run rate business, and customer spend grew 60% quarter over quarter. The second challenge is how to hone the model for your application. Customers sometimes think if they have a good model, they will have a good AI application. It's not really true. It takes a lot of work to post-train and fine-tune a model for your application. Our SageMaker AI service along with fine-tuning tools in Bedrock make this much easier for customers. A third challenge is how to have a custom version of a foundation that best leverages the company's secret sauce, their own data. To date, companies have tried to shape models with their own data late in the process, usually with fine-tuning or post-training. There's debate in the industry about this, but we believe that enterprises will want models trained on their own data at an early stage, at pre-training if possible, so their models have the best possible foundation for what matters most to each enterprise on which to learn and evolve. It's a little like teaching a child a foreign language early in their life. That becomes part of their learning foundation moving forward and it makes it easier to pick up other languages later in their life. To solve for this need, we just launched NovaForge. Which gives customers early checkpoints on our Amazon Nova models allows them to securely mix their own proprietary data with the model's data in the pre-training stage, and enables their own uniquely customized versions of Novo. What we call novellas, trained with their data early in the process. This will be very useful for companies as they build their own agents on top of the model. There is nothing else out there like this today and a potential game changer for companies. Another challenge is cost. I've said this many times, but if we want AI to be used as expansively as companies want, we have to make the cost of inference lower. A significant impediment today is the cost of AI chips. Customers are starving for better price performance and typically and understandably, the dominant early leaders aren't in a hurry to make that happen. They have other priorities. It's why we built our own custom silicon in training. And it's really taken off. We've landed over 1.4 million Tranium two chips our fastest ramping chip launch ever. Tranium two is 30 to 40% more price performance than comparable GPUs. It is a multibillion-dollar annualized revenue run rate business with a 100,000 plus companies using it is trading as the majority underpinning of Bedrock usage today. We recently launched Tranium three, which is up to 40% more price performance than Trainium two. We are seeing very strong demand for Tranium three and expect nearly all of our Tranium three supply of chips to be committed by mid-2026. And though we are still building Tranium four, we are seeing very strong interest already. Looking ahead, the primary way companies will get value from AI is with agents. Some their own, some from others, and there are several customer challenges that we are well positioned to solve. It's harder to build agents than it should be. For that, we've built strands of service enabling agents to be created from any model. Once agents are built, enterprises are apprehensive about deploying to production because these agents need to securely and scalably connect to compute, data tools, memory, identity, policy governance, performance monitoring, and other elements. This is a new and hard problem where a solution has not existed until we launched Bedrock Agent Corp. Customers are quite excited about Agent Core, and it's unlocking deployments. Customers also want to leverage others' useful agents, and we've built several. Including Curo for coding, Amazon Quick for knowledge workers to leverage their own data and analytics, AWS Transform for software migration, and Amazon Connect for call center operations. We continue adding new capabilities, and usage continues to grow quickly. For example, the number of developers using Curo grew more than 150% quarter over quarter. In addition to agents that customers direct, customers are also becoming excited about agents that require less human interaction. They can be fully autonomous, run persistently for hours or days, scale out quickly, and remember context. At this past AWS re:Invent, we launched Frontier Agents to do that. Kiro autonomous agents for coding tasks, AWS DevOps agents for detecting and resolving operational issues, and AWS security agents for proactively securing applications throughout the development life cycle, and they're already making a big difference for customers. We expect to invest about $200 billion in capital expenditures across Amazon.com, Inc., but predominantly in AWS, because we have very high demand. Customers really want AWS for core and AI workloads. And we are monetizing capacity as fast as we can install it. We have deep experience understanding demand signals in the AWS business and then turning that capacity into strong return on invested capital. We are confident this will be the case here as well. I'll now turn to stores. We continue to expand selection, including more 400 new beauty brands in The US in 2025, like Bobbi Brown Cosmetics, Charlotte Tilbury, and Laura Mercier, and new fashion brands like Away Luggage, Converse, Diesel, Michael Kors, Nike, and The North Face. Our ultra-low priced offering, Amazon Hall, grew selection to over a million items under $10 in expanded to serve customers in more than 25 countries and regions. We continue to see strong customer response to everyday essentials and grocery. In 2025, everyday essentials grew nearly twice as fast as all other categories in The US, representing one out of three units sold in our store. And we've become a go-to grocery destination for over 150 million Americans. Mostly through online shopping and Whole Foods. With over $150 billion in gross sales, Amazon.com, Inc. is clearly a large grocer at this point. Customers in thousands of US cities and towns can now get perishables delivered same day alongside millions of other items. And customers who use that service shop more than twice as often as customers who don't. We plan to expand in many more communities in 2026, and we also plan to open more than 100 new Whole Foods Market stores over the next few years as we work to make grocery shopping easier, and more affordable for customers. We remain committed to staying sharp on price. And continue to meet or beat other retailers' prices. A recent study from Profitero showed that Amazon.com, Inc. is America's lowest priced retailer for the ninth straight year. 14% lower on average than other major online retailers. We again achieved our fastest ever delivery speeds for Prime members around the world in 2025. In The US, we delivered nearly 70% more items same day than the year before. We also continue increasing speed for rural customers with nearly two times more average monthly customers in rural areas receiving same day delivery year over year. Same day is our fastest growing delivery offering and nearly 100 million customers used it last year in The US. And the team is continuing to innovate, We've launched Amazon now in India, Mexico, and The UAE. Ultrafast delivery on thousands of items in about thirty minutes or less. And we are testing it in several communities in The US and UK. It's early, but customers are loving it. For example, in India, customer response exceeded our most optimistic expectations, and we are seeing Prime members triple their shopping frequency once they start using it. Expanding our same day delivery coverage also leads to meaningfully later cutoff times for orders. Which is a big deal for customers. For example, on Christmas Eve, customers in about 4,000 US cities could order items up until midday and get them that same day. Another example is our recently launched feature add to delivery. Which enables Prime members in The US to add items to their upcoming Amazon.com, Inc. deliveries with just one tap without going through checkout again or paying additional shipping fees. Just six months after launch, add to delivery already makes up about 10% of all Prime volume fulfilled through the Amazon.com, Inc. network each week. While this seems simple on the surface, this feature is supported by a lot of invention where we need to figure out in real time with incredibly low latency what items among Amazon.com, Inc.'s hundreds of millions of products are available to add to a customer's upcoming deliveries? Surface them, find a way to include in their packages, and deliver within the same customer promise. The stores team is also continuing to innovate and deliver for customers with AI. Our AgenTik AI shopping assistant, Rufus, is rapidly expanded. Rufus can research products, track prices, and auto buy. Purchasing a product in our store when it reaches your set price. It can also now shop tens of millions of items in other online stores and make purchases for customers using our agentic buy for me feature. Last year, more than 300 million customers used Rufus. In addition, customers used Lens our AI powered visual search tool to find products with a phone's camera, a screenshot, or a barcode. And they did it 45% more year over year. Moving on to Amazon Ads. We are pleased with the continued strong growth across our full funnel offerings generating $21.3 billion of revenue in the quarter and growing 22% year over year. Sponsored products advertising in our store continues to be our largest ads offering, and the combination of trillions of shopping, browsing, and streaming signals with advanced AI and machine learning led us deliver highly relevant useful ads for customers. We saw continued growth in Prime Video ads. Which is now available in 16 countries and is contributing meaningfully to our revenue growth. Prime Video has an average ad supported audience of 315 million viewers globally, up from 200 million in early 2024. Our ads team is also innovating with AI. We recently announced our ads agent, which lets brands use AI to create non optimize campaigns at scale. Implement effective campaign targeting, and quickly create actionable insights. And our creative agent lets advertisers research brainstorm, and generate full funnel ad campaigns from concept to completion using conversational guidance in Amazon.com, Inc.'s retail data transforming what was a weeks long process into just hours. We are also continuing to invent and see momentum several other areas, and I'll mention just a few. Starting with live sports on Prime. The fourth season of Thursday night football broke more records. It was our most watched season ever, averaging more than 15 million viewers, a 16% year over year increase, and a third consecutive year of double digit growth. And the packers versus bears wild card game was the most streamed NFL game in history with 31.6 million viewers clearing the prior mark by more than 4 million. We just made Alexa Plus available to all customers in The US, free for prime members and $19.99 a month for non prime members. Alexa Plus continues to get even better and more capable and we've added new ways to interact with Alexa, including a new chat experience at alexa.com, a redesigned mobile app, and new integrations with third party devices like Samsung TVs and BMW cars. We've also added new features like the ability to answer a ring doorbell on a customer's behalf, and more ways to shop or manage a home. And finally, the team is making rapid progress on Amazon LEO. Which will bring connectivity to consumers, enterprises, and governments in places where they don't have broadband connectivity. Our enterprise grade customer terminal, LEO Ultra, is the fastest satellite Internet antenna ever built. Delivering simultaneous download speeds of up to one gigabit per second upload speeds of up to 400 megabits per second. LEO will offer enterprise grade performance and advanced encryption with secure private networking that bypasses public Internet. Connecting directly to AWS. We've launched 180 satellites have more than 20 launches planned in 2026, more than 30 in 2027, and expect to launch commercially in 2026. We have dozens of commercial agreements already signed, including with AT&T, DIRECTV Latin America, JetBlue, and Australia's national broadband network. I have many more on the way. It's been an action-packed year of innovation and progress and we've hit the ground running in 2026. With that, I'll turn it over to Brian for a financial update. Brian T. Olsavsky: Thanks, Andy. Starting with our top line financial results. Worldwide revenue was $213.4 billion, a 12% increase year over year excluding the 150 basis points favorable impact of foreign exchange. In Q4, we reported worldwide operating income of $25 billion. This operating income includes three special charges, which reduced operating income by $2.4 billion. The first charge of $1.1 billion is for the resolution of tax disputes associated with our stores business in Italy, and the settlement of a lawsuit. This charge primarily impacts our international segment and is largely recorded in the fulfillment and other operating expense line items. The second charge is $730 million for the estimated severance costs. This charge impacts all three of our segments and is recorded primarily in the fulfillment sales and marketing and technology and infrastructure expense line items. The third charge of $610 million is for asset impairments primarily related to physical stores. This charge primarily impacts the North America segment as reported in other operating expense line. Moving on to our segment results. In the North America segment, fourth quarter revenue was $127.1 billion, an increase of 10% year over year. International segment revenue was $50.7 billion, an increase of 11% year over year excluding the impact of foreign exchange. Worldwide paid units grew 12% year over year, because our highest quarterly growth rate in 2025. The fourth quarter marked a strong finish to the year as we delivered for customers during the peak holiday season. Our sharp pricing, vast selection, and record vast delivery speeds resonated with customers. They appreciate the convenience of receiving their items quickly. Bring gifts for family and friends, to everyday essentials and perishable groceries. Our millions of global third-party sellers continue to be an important contributor to our broad selection. In Q4, worldwide third-party seller unit next was 61%. We continue to invest in tools and services including a comprehensive suite of AI tools that help our selling partners manage and grow their businesses. Shifting to profitability, North America segment operating income was $11.5 billion with an operating margin of 9%. Up from an 8% margin in 2024. International segment operating income was $1 billion with an operating margin of 2.1%. Excluding the impact of special charges mentioned earlier, International segment operating margins also expanded year over year. We are pleased with the fulfillment network performance throughout the peak season. We made strong progress improving the cost structure of our network over the past few years. In The US, a regionalized network is operating at scale and we continue to make refinements. This regionalization has improved local inventory placement, leading to faster delivery and lower costs. Last year, US Prime members received over 8 billion items the same or next day. Up more than 30% year over year. With groceries and everyday essentials making up half of the total items. For the third year in a row, globally in 2025, we achieved both our fastest ever delivery speeds for Prime members while also reducing our cost to serve. By leveraging our existing US network, we can now deliver perishable groceries to customers in more than 2,300 cities and towns, all with same day delivery. We saw significant adoption of this service throughout the year. When customers engage with our perishable offering, they demonstrate notably higher monthly spend compared to those who did not shop the category. We also see the customer shopping perishable gross add three times more items to their same day delivery orders. Looking ahead, we see further opportunity to enhance productivity our global fulfillment network while delivering at faster speeds for customers. We'll continue optimizing inventory placement to drive down distance traveled, reduce touches per package, and improve package consolidation. As well as launch robotics and automation to increase efficiency and elevate the customer experience. Shifting to advertising. Advertising revenue grew 22% in the fourth quarter and we added over $12 billion of incremental revenue in 2025 alone. As our full funnel advertising approach of connecting brands with customers is resonating. Simplifying the advertiser experience to enable brands to better reach customers wherever they are. Moving next to our AWS segment. Revenue was $35.6 billion, and growth accelerated to 24% year over year. We added $2.6 billion in quarter over quarter revenue and AWS now has an annualized revenue run rate of $142 billion. This acceleration was driven by both core and AI services as customers continue to modernize their infrastructure and migrate workloads to the cloud. Our AI offerings continue to resonate with customers. Including our argenic capabilities. This growth was helped in part by the more than one gigawatt of capacity we added in Q4. In 2025, AWS added more data center capacity than any other company in the world. AWS operating income was $12.5 billion. We are seeing strong top line growth while remaining focused on driving efficiencies across the business. This includes investing in software and process improvements to optimize server capacity. Developing a more efficient network using our lower cost custom networking gear, advancing custom silicon. At the same time, we continue to rapidly develop products and services on behalf of customers. As we've long said, we expect AWS operating margins to fluctuate over time, driven in part by the level of investments we are making at any point in time. Turning to cash flows. Our full year operating cash flow increased to $139.5 billion in 2025. Up 20% year over year due primarily to improved operating income and changes in working capital. Now turning to our Q1 financial guidance. Q1 net sales are expected to be between $173.5 billion and $178.5 billion. This guidance anticipates a favorable impact of approximately 180 basis points from foreign exchange rates. As a reminder, currencies can fluctuate during the quarter. Q1 operating income is expected to be between $616.5 billion and $21.5 billion. A few things to mention on the operating income guidance. Within the North America segment, we do expect a year over year cost increase of approximately $1 billion related to Amazon LEO. We have more than 20 launches planned in 2026, and more than 30 in 2027 which means we are spending more on launching satellites each year. Select enterprise customers are testing Amazon LEO services now. And we expect a wider commercial rollout later this year. As a reminder, today, we do expense most of these LEO costs as incurred. We expect that later in the year, many of these costs, such as satellite manufacturing and launch services, will be capitalized. Within the international segment, we are continuing to invest more in our stores business to enhance the customer experience and to encourage retail demand to move online more quickly. This includes bringing faster delivery options including Amazon Now or service which delivers to customers in thirty minutes or less. We are also working hard to stay sharp on pricing and seller fees. In our countries where we've had to be more aggressive to meet or beat competitors' prices. We like these investments because they will delay customers, grow our business, and we believe they will generate long-term positive return on invested capital. As we enter 2026, I'm energized by our team's strong execution. I want to thank everyone across the company for their hard work on behalf of our customers. We remain focused on driving an even better customer experience which is the only reliable way to create lasting value for our shareholders. With that, let's move on to your questions. Operator: At this time, we will now open the call up for questions. We ask each caller to please limit yourself to one question. If you would like to ask a question, please press star 1 on your telephone keypad. We ask that when you pose your question, you pick up your handset to provide optimum sound quality. Once again, to initiate a question, please press star then 1 on your touch tone telephone at this time. Please hold while we poll for questions. Andrew Jassy: Thank you. Operator: Our first question comes from the line of Mark Mahaney with Evercore ISI. Please proceed with your question. Mark Mahaney: Okay. Thanks. I think, Brian, let me throw this to you or maybe to Andy. On the strong long-term return on invested capital, I think that's the debate in the market today. So could you give us a little bit more insight into how you think investors will be able to see that? Either, talk about the duration of the CapEx cycle that you're going through now or, what we should see in terms of profitability levels? And maybe also talk about, like, other de minimis or minimum free cash flow generation levels that you don't want to go below as you go through this CapEx cycle? Just help us get to that get to your level of confidence in having a strong long-term return on that invested capital. Thank you. Brian T. Olsavsky: Yeah. Sure, Mark. Thank you. I'll start from a financial side. So on the investments we are making, as Andy said earlier, you know, we are putting into service with customers all capacity that we are getting, and it's immediately useful. And we are also seeing a long arc of additional revenue that we see from other customers and backlog and commitments of people are anxious to make with us, especially for AI services. So you can see that it's working out its way into our P&L both through CapEx and also through our operating margin in AWS. AWS is 35% operating margin through Q4, up 40 basis points year over year. Just talked about before that is going to fluctuate over time. It certainly has a headwind from the investments in AI and the depreciation on that CapEx. But we also work very hard to offset that with efficiencies. And cost reduction. So we will see how that develops over time. So but, yeah, we see long strong return on invested capital. We see strong demand for these services, and we continue to like the investments in this area. I would add to that. You know what? If you look at the capital, we are spending and intend to spend this year, it's predominantly in AWS. And some of it is for our core workloads which are our non-AI workloads because they are growing at a faster rate than we anticipated. But most of it is in AI and we just have a lot of growth and a lot of demand. When you are growing 24% year over year with an annualized revenue run rate of $142 billion, you are growing a lot. And what we are continuing to see is as fast as we install this capacity, this AI capacity, we are monetizing it. So it's just a very unusual opportunity. You know, as I've shared a lot of times I passionately believe that every customer experience that we know of today is going to be reinvented. With AI, there are gonna be a whole bunch of customer experience none of us ever imagined that are gonna become the norms of how we all operate every day and what we use. I think the other thing is that if you really want to use AI, in an expansive way, you need your data in the cloud and you need your application in the cloud. Those are all big tailwinds pushing people towards the cloud. So we are gonna invest aggressively here, and we are gonna invest to be the leader in this space as we have been for the last number of years. We have, I think, a fair bit of experience over the years in AWS of forecasting demand signals and doing it in such a way that we don't have a lot of wasted capacity and that we also have enough capacity to serve the demand that's there. And I think we've also proven with AWS over the years how we build data centers, how we run them, and how we invent in there. If you think about our chips and our hardware and networking gear and how we've invented and power that this isn't some sort of quixotic top line grab. You know, we have confidence that these investments will yield strong strong returns on invested capital. We've done that with our core AWS business. I think that will very much be true here as well and I think some of the things that you will see over time in the AI space is you're gonna keep seeing all the inference services, which is gonna be the majority of the long-term AI workloads is gonna be inference. You're gonna see the inference keep getting optimized. You're going to see higher utilization on those services. You'll see prices normalize over a period of time. And then I think the companies that have not just the excellence and infrastructure but also the component that give them it'll give customers better price performance and give those companies themselves better economics are going to have advantaged financials. And I think if you look we're already off to a really good start having Traneum underneath some majority of our bedrock service and that's not just giving customers better prices but it also gives us better economics. So we see that following the same sorts of patterns we saw in the early days of our core AWS investment. I'm very confident we're gonna have strong return on invested capital here. Operator: And the next question comes from the line of Douglas Anmuth with JPMorgan. Please proceed with your question. Douglas Anmuth: Thanks so much for taking the questions. Can you just talk about how Project Ranir is running with Anthropic after first full quarter? And I think in the release, it talks about 500,000 ships, but a few months ago, you talked about getting to 1,000,000 as well. So if you could clarify that. And then maybe just a follow-up on Mark's question, are there any financial guardrails or governors in place that we should think about around the spend just in terms of operating income growth? Or positive free cash flow? Thanks. Andrew Jassy: Yeah. I'll start with the training piece. We are very excited about the growth that we see in Traneum the future that we have there. I think if you look at what's happened in the early innings of AI over the first few years, you see a lot of usage but customers are really thirsty for better price performance. And Tranium has 30% to 40% better price performance than comparable GPUs, so it's very compelling to customers. You mentioned Project Rainier Anthropic is building their next they're training the next Claude model on top of Tranium two. And that's what Project Rainier is. We talked about 500,000 chips there. You will see that continuing to increase. They're also using a fair bit of Tranium-two for other workloads and their own APIs beyond just Project Rainier but Trainium is a multibillion-dollar annualized run rate business at this point and it's fully subscribed. And what you're also seeing is Trainium three, which is the next version of Tranium, which we just started shipping. That's 40% more price performance than Tranium two. And we have there is very substantial amount of interest there. We expect that nearly all of that supply will be committed by somewhere around the middle of this year. And we're just in the process of building training four. There's very substantial interest in training four which is coming in 2027 and we're already having conversations about training five so there is a lot of interest in training at this point and I think when you you know, I think people know about our chips capability, our chips business, but I'm not sure folks realize how strong a chips company we've become over the last ten years. You know, if you look at what we've done with Tranium, if you look at what we've done with Graviton which is our CPU chip, which is about 40% better price performance than comparable x86 processors, 90% of the top 1,000 AWS customers are using Graviton very expansively. If you combine Traneum and Graviton, it's well over a $10 billion annualized run rate business it's still very early there so I'm very optimistic about what we're seeing, know, the Project Rainier has gone very well. I think Anthropic is quite pleased with it. We've learned a lot in the process as well but it's early days with what's possible here. This is big business that's getting bigger and has a lot of potential. And I just briefly comment on your second question that you know, we are as I mentioned, this is what know, I think this is an extraordinarily unusual opportunity to forever change the size of AWS and Amazon.com, Inc. as a whole. I think it also is an extraordinary opportunity for companies to change all their customer experiences and for startups to be able to build brand new experiences of businesses that would have taken much longer try to accomplish before that they can do right now. And so we see this as an unusual opportunity we are going to invest aggressively here to be the leaders because like we've been the last number of years and like I think we will be moving forward. Operator: Thank you. The next question comes from the line of Ross Sandler with Barclays. Please proceed with your question. Ross Sandler: Great. Andy, you mentioned if you called back how the AI market was currently a bit top heavy with a lot of the spend kinda clustering around a few of the AI native labs. So how is that changing as you look out into '26? And, specifically, how do you think you might extend your relationship with a company like OpenAI to maybe help Amazon.com's AI efforts both on the retail side and the AWS side. Thanks a lot. Andrew Jassy: Yeah. The way I would describe what we see right now in the AI space is it's really kind of a barbelled market demand where on one end you have the AI labs who are spending gobs and gobs of compute right now along with and what I was consider a couple runaway applications. And then at the other side of the barbell, you've got a lot of enterprise who are getting value out of AI in doing productivity and cost avoidance types of workloads. These are things like customer service or business process automation or some of the fraud pieces. And then in that middle of the barbell are all the enterprise production workloads. And I would say that the enterprises are in various stages at this point of evaluating how to move those, working on moving those, putting them into production. But I think that middle part of the barbell very well may end up being the largest and the most durable and I would put in the middle of that barbell too by the way I would put just the altogether brand new businesses and applications that companies build that right from the get go run-in production on top of AI. And so I think that to me when I look at this and what's happening it's kind of unbelievable if you look at the demand of what you're seeing already with AI but the lion's share of that demand is still yet to come in the middle of that barbell and that will come over time, it will come as you have more and more companies with AI talent, as more and more people get educated with that AI background, as inference continues to get less expensive and that's a big piece what we're trying to do with Tranium and hardware strategy and as companies start to have success in moving those workloads to further and further success in moving those workloads run on top of AI. So I think there's it's just a huge opportunity. It's still in the relative early stages even though it's growing at very unprecedented clip as we've talked about. You know, and then I think how do we see our relationships extending with other companies like OpenAI. You know, would tell you that this movement and what's happening in AI is it's very broad. It's gonna be a lot of companies. It is a lot of companies already. There's a number of AI labs but almost every company you talk to, almost every conversation we have on the AWS side starts with AI. And so we have very significant with a lot of different companies. You know, I think we announced an agreement with OpenAI in November. We're excited about that agreement. It's a big one and we have a lot of respect for the company and we hope to continue to extend our partnership over time but this AI movement is not going to be a couple of companies. It's gonna be thousands of companies over time. Operator: Thank you. The next question comes from the line of Michael Morton with MoffettNathanson. Please proceed with your question. Michael Morton: Hi, good evening. Thank you for the question. This one's on the retail business. Andy, you've talked about how you're passionate. This is going to change experiences across the board. And you've shared some encouraging data points on Rufus. And we're seeing all the other Internet platforms roll out. Agentic protocols. I would love to see how you think this plays out for the retail business. And the on-site ads portion of the retail businesses. What seems like it could be a compression in the funnel as consumers get better answers over time. Anything there would be great. Thank you. Andrew Jassy: I'm very optimistic about the customer experience that will ultimately be what customers use for agented shopping. And I think it's good for customers. I think it's going to make it easier for them. It's a big piece of why we've invested as significantly as we have in our own shopping assistant in Rufus. And if you haven't checked out Rufus recently, I really encourage you to do so. It's gotten much, much better and keeps getting better every month. And, you know, we have about three we have 300 million customers who use Rufus in 2025. Customers who used Rufus are about 60% more likely to complete a purchase and so you just you know, you're seeing a lot of usage of it and a lot of growth and I think it's very useful. And, you know, I think at the same time, we will have relationships with third-party horizontal agents that can enable shopping as well. We have to collectively figure out a better customer experience. You know, it's still, you know, these horizontal agents don't have any of your shopping history, they get a lot of the product details wrong. They get a lot of the pricing wrong. And so yeah, we have to try to find a customer experience together that better and, you know, a value exchange that makes sense for both parties. But I'm very hopeful that we'll get there over time. We continue to have a number of conversations then I think you're gonna have to look at as time goes on you know, which types of you know, which shopping agents are consumers gonna use and it kinda reminds me in some ways of the early days of of kinda all the search engines that were that that were referring traffic to retailers and, you know, it's still a relatively small portion of the overall traffic and sales but of that fraction you have to ask how many consumers are going to prefer using a horizontal agent where it's kind of a middle person between the retailer and the consumer versus wanting to use a great agent from that retailer that has all its shopping history history and that has all the data right there and makes it easy if you're just you know, spearfishing for something to shop for it right there or if you wanna do discovery, you can do it there and it's got the best data on shopping. I think a lot of customers are ultimately gonna choose to use a great shopping agent from that retailer because if you think about what consumers really want in retail and retailer they want really broad selection, They want low prices. They want really fast delivery. And then they want they want a retailer that they can trust and that takes care of them. And I think horizontal agents are pretty good at aggregating selection but retailers are much better at doing all four of those items. And so I'm very optimistic that people will use our shopping agent it's off to a great start I also expect that we'll work with other third-party agents over time as we work on the issues I mentioned earlier. Operator: Thank you. The next question comes from the line of Brian Thomas Nowak with Morgan Stanley. Please proceed with your question. Brian Thomas Nowak: Thanks for taking my question. Andy, I want to ask you one about the global retail business. This year. I know there's a lot of areas of investment in it that you're talking about. To sort of make improve the service, make it more durable over the long term, etcetera. But I'm assuming there are also sources of efficiency you expect to see this year. So can you sort of help us understand both sides of the ledger on retail this year? Where are some of the areas where you see the potential for sources of efficiency and cost to serve savings? And then where should we be thinking about the areas of investment to drive more durable growth, robotics, etcetera? How does that sort of break down? Andrew Jassy: Yeah. So I would say on the side of continuing to invest, to keep growing the retail business, you know, the kind of core drivers of demand continue to be the same. You know, we are gonna work really hard to expand selection and you you've seen what we've done over the last several years, you know, the expansion of selection has been broad. And you'll see it on both ends of the spectrum. You know, we have a lot more of those luxury brands that have built presences in Amazon.com, Inc. had success found that we could we could manage their brand presentation the right way and they've been very happy. Mean you only have to look at L'Oreal as an example too of just how fast that business is growing and how happy our partners have been and at the same time we are working really hard to continue to expand the amount of everyday essentials that we offer our customers. And the growth in everyday essentials in our business is really remarkable as I mentioned in my opening comments. And one out of three units now that we that we move are everyday essentials and what we find there is that the more the customers can rely on us for everyday essentials and the lower ASP items, they just choose to do more their downstream shopping with us in every way. We're just more front of mind. And so, yeah, I think a big piece of why we have captured more and more of those everyday essentials and you see it also in our grocery business with perishables too. It's just our speed of delivery improvements over the last three years has been really market mean, it's customers it's the one thing I get stopped on the street most often about which is I just can't believe how quickly from when I order something I get it my door and how reliable you are. I think along that speed of delivery piece it's also quite interesting what's happening with QuickCommerce, you know, and we have this offering called Amazon that we've largely started outside The US and India and The UAE and that gets thousands of items to customers within thirty minutes and it really is it's quite interesting how quickly that is growing. And I think that it's just another one of those things like everyday essentials that when you're when you're able to order more and more from Amazon.com, Inc., you just think of Amazon.com, Inc. first if it's a great experience that we're offering for whatever you're looking for. But in our if you look in India, which is the place we've rolled out QuickCommerce the fastest, customers who try QuickCommerce are shopping with triple the frequency than they did before they tried us in Quick. So those are all areas I think are pretty exciting that we're expanding. You'll see us continue to expand what we're doing in the perishable side too which we're quite excited about and we are able to deliver perishables same day in thousands of cities around the world now. In the cities in which we have those perishables available, nine out of 10 top items that are ordered in that geography are perishables. So we're just having a lot of success with that too and people buy perishables from us. After they buy perishables, they're shopping with us twice as frequently. So lot of good things to like there. And then, you know, on the efficiencies, we are I mean, we always have a very long list of these. That we're working on, Brian. And, you know, it's true today as well. If you look even you know, I mentioned I talked a lot about regionalization. In our fulfillment network, particularly in The US. You know, over the last couple of years. And I said we weren't done honing that and that's true. It's just we, you know, we don't talk about it every time but if you look at what we've done there we've extended the number of regions. You know, it was eight. It's now 10. We've extended regionalization to what we do with our inbound delivery to be much more efficient, being able to get more items closer to customers more quickly. We have made a lot of we're doing a lot of work and we've made a huge amount of progress in being able to get more units into each box. And as we're able to get more units into each box it obviously saves shipments and we drive better operating income when we do that and we've made very significant progress there but have a lot more planned. It's part of by the way that improvement is part of what helps us do things like I was talking about earlier in adding to a delivery in near real time. And then, you know, robotics, as you mentioned, is another big one for us. You know, we have over a million robots today in our fulfillment network. They take care of all sorts of functions, but still a fraction of what I think we are going to be able to enable over time which will allow our you know, we'll always have a lot of people that we employ in our fulfillment network, but they'll you know, they'll leave to the robotics things that, you know, that are more repetitive so it's better productivity for the business, more safe for teammates and there's real cost efficiencies in that as well. So, a lot on both sides of the ledger as always. Operator: Thank you. And our final question comes from the line of Eric Sheridan with Goldman Sachs. Please proceed with your question. Eric Sheridan: Thanks so much for taking the question. Maybe a few parts just on AWS. Can you speak to the current state of your revenue backlog as of Q4? And also discuss a little bit about what you see both for internal use cases and external client needs with respect to any imbalance between supply and demand around AI efforts? And how you think about closing the gap on those as more capacity comes online through 2026? Thank you. Andrew Jassy: Yeah. That's a lot of parts. I'll start with the first one. Which is on backlog, our backlog is $244 billion. That's up 40% year over year. I think it's up 22% quarter over quarter. You know, we have and we have a lot of deals that are in the pipeline. There's just a as I mentioned earlier, there is a lot of demand for AWS right now. In the AI space and also in the core AWS space. Your second question was internal and external use cases. I would and then the impact around supply and demand. You know, the vast majority of our the capital that we spend and the capacity that we have consumed by external customers. We have all Amazon.com, Inc. has always been a very large AWS customer, very helpful AWS customer because they're very demanding and they use the services very expansively and stretch the limits as we launch things. So they've always been a very important big customer but always a very small fraction of the total and that's true today in AI as well as the overall AWS business. You know, on internally, we have all sorts of ways that we are using AI. We have over a thousand AI applications that we've either deployed or in the process of building, and they range from our shopping assistant in Rufus that we were just talking about to Alexa Plus, which is a really large scale generative AI application. To applications in our fulfillment network that allow us to have more forecasting predictions to how we do customer in our customer service chatbot to how we are making it much easier for brands to create advertisements and to optimize all their campaigns or across the full funnel of advertising options we have. To, you know, in live sports, you watch Thursday night football, can see you know, defense of alerts which predict which player is gonna blitz or, you know, pocket health. I mean, we in every one of our businesses, you see a very broad use of AI to improve the customer experience. And in many cases, just to completely reinvent was possible before. I mean, it's pretty neat to use something like Lens where you may see something you want to buy, you can just take a picture of it in the app and it finds the item on the detail page and buy it one click. Kinda magic. You know, externally, I would say it's kind of what I said earlier. You have AI labs, you know, consuming lots and lots of capacity. Both for training as well as for the inference and the research across what they're doing with their different applications and models. We see enterprises, all sorts of workloads, you know, customer service automation, business process automation, fraud, completely reinventing their application you know, agentic coding applications, legal applications, Suno is a really cool example. An AWS customer that's kind of reinvented how you can write music and build music. So really across the board and, you know, and I just think on the supply and demand, what I would tell you is you know, we're growing 24% year over year a $142 billion annualized run rate business. So we're growing at really an unprecedented rate. Yeah. I think every provider would tell you, including us, that we could actually grow faster if we had all the supply that we could take. And so we are being incredibly scrappy around that. If you look know, in the last twelve months, we added 3.99 gigawatts of power. Just for perspective, that's twice what we had in 2022 when we were in $80 billion annual run rate business. We expect to double it again by the '27. We added 1.2 gigawatts of power in Q4 just quarter over quarter. So it's so we are our team is being aggressive scrappy and inventive and adding capacity as fast as we can. I you know, we'll add a lot more in '26 and '27 and in '28 for that matter. And we're very optimistic we can continue to grow in the ballpark of what we have. Dave Fildes: Thanks for joining us on the call today and for your questions. A replay will be available on our Investor Relations website for at least three months. We appreciate your interest in Amazon.com, Inc., and we look forward to talking with you again next quarter.
Operator: Good day, and thank you for standing by. Welcome to the Q3 2026 StepStone Group Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Seth Weiss, Head of Investor Relations. Please go ahead. Seth Weiss: Thank you. Joining me on today's call are Scott Hart, Chief Executive Officer, Jason Ment, President and Co-Chief Operating Officer, Mike McCabe, Head of Strategy, and David Park, Chief Financial Officer. During our prepared remarks, we will be referring to a presentation available on our Investor Relations website at shareholders.stepstonegroup.com. Before we begin, I'd like to remind everyone that this conference call, as well as the presentation, contains certain forward-looking statements regarding the company's expected operating financial performance for future periods. Forward-looking statements reflect management's current plans, estimates, and expectations, are inherently uncertain, and are subject to various risks, uncertainties, and assumptions. Actual results for future periods may differ materially from those expressed or implied by these forward-looking statements due to changes in circumstances or a number of risks or other factors that are described in the Risk Factors section of StepStone's periodic filings. These forward-looking statements are made only as of today, and except as required, we undertake no obligation to update or revise any of them. Today's presentation contains references to non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings release, our presentation, and our filings with the SEC. Turning to our financial results for 2026. Beginning with Slide three, we reported a GAAP net loss attributable to StepStone Group Incorporated of $123 million or $1.55 per share. As a reminder, GAAP accounting requires us to factor the change in fair value of the buy-in of the StepStone Private Wealth profit to interest through our income statement, which drove the negative GAAP earnings result this quarter. Moving to slide five, we generated fee-related earnings of $89 million, up 20% from the prior year quarter, and we generated an FRE margin of 37%. The quarter reflected retroactive fees from our infrastructure secondaries fund and our multi-strategy global venture capital fund. Retroactive fees contributed $1.1 million to revenues, which compares to retroactive fees of $9.7 million in the third quarter of the prior fiscal year. When excluding the impact of retroactive fees, core fee-related earnings were $88 million, up 35% relative to the prior year quarter, and core FRE margin remains at 37%. We earned $80 million in adjusted net income for the quarter, or $0.65 per share. This is up from $53 million or $0.44 per share in the third quarter of the last fiscal year, driven by higher fee-related earnings and higher performance-related earnings. I'll now hand the call over to Scott. Scott Hart: Thank you, and good evening. As Seth just highlighted, we generated strong results to cap off a very successful calendar year in 2025. Beginning with our financial performance, we delivered our best quarter ever in core fee-related earnings. We are confident of our earnings trajectory as core FRE continues to grow and as an improving capital market environment may potentially yield stronger realizations in the coming year. While realizations as a percentage of our accrued carry are still below long-term trends, the last two quarters have seen a pickup in activity. When viewing performance fees inclusive of incentive fees, total performance fees were very strong, driven by over $200 million of gross incentive fees related to our 39% over the year. Notably, less than three percentage points of this performance came from the markup of secondary discounts, with the remaining 36 points of performance coming from returns post the initial markup. Shifting to fundraising, we generated growth AUM additions of over $8 billion in the quarter, and over $34 billion for the calendar year. Our best twelve-month period of fundraising ever. The fundraising is balanced across commercial structure, geography, and strategy. We believe our diversified mix bodes well for continued growth through market cycles. Our managed account fundraising has essentially matched our best twelve-month period with balance across re-ups, expansions, and new accounts. Re-ups have historically been our largest driver of managed account gross additions, but expansions and new accounts are critical for building the foundation for future re-ups. This past year has been our best year ever for the combination of expansions and new business. In private wealth, we grew the platform to $15 billion and generated over $2.2 billion in new subscriptions for the quarter. Our private equity evergreen funds continue to be standouts, originating nearly $1 billion of subscriptions across the combination of S Prime, our all-private markets model portfolio fund, and STEPEX, our PE fund. Also generated approximately $1 billion of subscriptions in Spring, our Venturi growth equity fund. As we've mentioned in prior calls, Spring is a one-of-a-kind product that is in high demand within the private wealth community. Momentum also continues to grow in Structs and Credex, where we continue to build our syndicated partners. The value proposition of income, yield, and diversification is resonating with our investors. We are comfortably generating more than $2 billion in private wealth subscriptions each quarter. With five fund families in market, and with an increasing effort internationally, we believe we have the balance, brand recognition, and track record to continue to grow off this base. Stepping back to the broader firm, we are thrilled with the success of the past year. As we look at our full pipeline of commingled funds, the setup for the coming year may be even more exciting. We are currently in market with our private equity co-investment fund, our private equity secondaries funds, and we just had an initial close on the second vintage of our infrastructure co-investment fund. We expect these funds to execute most of their fundraising over the coming calendar year as well as activate to fee-earning capital. Additionally, we are now in market with our venture capital secondaries fund, and we anticipate that we will be back in market with our special situation real estate secondaries fund and our multi-strategy growth equity fund in the coming quarters. Collectively, the prior vintages of these funds represent over $16 billion of capital, and we are targeting modest growth across each of the funds. Before I conclude, I want to highlight how StepStone is positioned for the continued evolution of artificial intelligence and the significant value creation we expect to drive for our clients and for our firm. As a leading investor in the innovation economy, we are backing category-defining companies across the AI ecosystem. From native AI platforms to the hardware companies building the compute and storage that power these tools, to software companies with proprietary data that enable differentiated high-value outputs. Furthermore, as a diversified private market solutions provider, we can invest across asset classes and capital structures, putting capital to work in essential components of the AI build-out like data centers and power generation, through our infrastructure, real estate, and private debt strategies. While we anticipate AI will be a huge creator of value, it will undoubtedly be disruptive, creating winners and losers, presenting risks and opportunities. We, like all managers, will not be immune to the risks, but given our highly diversified approach to private markets investing, our track record of partnering with top managers, and our data-driven insights, we expect to be well-positioned on both a relative and absolute basis. As we look forward to the coming year, we have built a solid foundation for private market solutions and will continue to offer and evolve our client-centric offerings. Our results this year are a function of executing this plan, and we believe StepStone is primed to accelerate on this momentum in 2026. I'll now turn the call over to Mike to speak through fundraising in more detail. Mike McCabe: Thanks, Scott. Turning to slide eight. We generated over $34 billion of gross AUM additions over the last twelve months. We had a healthy mix across commercial structure, geography, and asset class, as well as a balance of new versus existing clients. More than $21 billion of these inflows came from separately managed accounts and over $13 billion came from our commingled funds, including private wealth. Looking by region, roughly two-thirds of our inflows were from outside of North America. Our international fundraising is particularly strong among institutions, where we continue to benefit from an extended runway as these LPs continue to grow their allocations to private markets. Of the managed account additions over the last year, approximately $10 billion or nearly 50% came from a combination of new accounts or the expansion of existing accounts into new asset classes or strategies. As Scott mentioned, this was our strongest twelve-month period ever for overall gross inflows, as well as our best period ever for new and expanded business. Our retention rate on managed accounts continues to be over 90% with re-ups growing on average by nearly 30%. So these expansions in new accounts fuel sustainable growth. During the quarter, we generated over $8 billion in gross additions, including more than $4 billion of managed account inflows, and more than $4 billion of commingled fund inflows. Notable commingled fund additions included a $300 million close for our private equity co-investment fund, a $100 million close for our infrastructure secondaries fund. We were thrilled to execute a greater than $600 million close on our infrastructure co-investment fund, which is now raising its second vintage. We anticipate our infrastructure co-investment fund and our private equity co-investment fund, which has raised approximately $900 million to date, will activate by the end of 2027. And we expect our flagship private equity secondaries fund and the first vintage of our GP-led private equity secondaries fund to have first closes in the coming two quarters with activation shortly thereafter. Turning to our Evergreen Fund platform, we generated over $2.2 billion of subscriptions in our private wealth suite of offerings, growing the platform to $15 billion as of the end of the quarter. Additionally, we have grown our evergreen non-traded BDC, S Credex, to nearly $2 billion in net assets. Slide nine shows our fee-earning AUM by structure and asset class. For the quarter, we increased fee-earning assets by nearly $6 billion, and we increased our undeployed fee-earning capital or UFEC by approximately $3 billion to nearly $33 billion. The combination of fee-earning assets plus UFEC grew to over $171 billion, which is up more than $8 billion sequentially and is up over $35 billion from a year ago. Our strongest one-year growth in our history. This translates to a healthy 20% annual organic growth rate since fiscal 2021. Slide 10 shows our evolution in fee revenues. We generated a blended management fee rate of 63 basis points over the last twelve months, down slightly from the 65 basis points in fiscal year 2025, driven by the moderation in retroactive fees, but partially offset by a favorable mix shift driven by growth in our evergreen funds. With that, I'll hand it over to David for our financial results. David Park: Thanks, Mike. Turning to Slide 12. We earned fee revenues of $241 million, up 26% from the prior year quarter. Excluding retroactive fees, which were only $1 million this quarter, fee revenues grew by 32% year over year. This increase was driven by strong growth in fee-earning AUM across commercial structures, particularly private wealth, which carries a higher average fee rate. Fee-related earnings were $89 million, up 20% from a year ago, while core FRE was up 35% driven by strong growth in fee revenues. FRE margin was 37% for the quarter, both on a reported and core basis, up roughly a percentage point from last quarter. Shifting to expenses, adjusted cash-based compensation was $107 million, representing a cash compensation ratio of 44%, slightly lower as compared to the last two quarters. General and administrative expenses were $40 million, up $6 million from last quarter. The increase was primarily driven by our StepStone 360 conference held in October. G&A will remain seasonally high in our fiscal fourth quarter driven by a venture capital conference in February. Gross realized performance fees were $253 million for the quarter, comprising $47 million of realized carried interest and $207 million of incentive fees. Incentive fees are seasonally strong in our fiscal third quarter driven by the annual crystallization of our Spring incentive fees. These fees were particularly strong this year, driven by both exceptional growth and net asset value and performance in Spring. Total NAVs for Spring of $5.5 billion more than tripled over the course of the year, while performance of 39% was more than double the prior year. Spring's investment performance was particularly strong in the back half of the year, which further benefited this year's incentive fees, as those fees were calculated on a higher average asset base. Looking forward, if we assume Spring's investment performance achieves a mid-teens return, we would expect next year's incentive fees to moderate slightly as compared to this year, as growth in asset balances would be offset by more normalized investment returns. However, results will depend on actual performance. As a reminder, much of these incentive fees do not drop to the bottom line today, as the gross revenue is shared with the investment team through compensation, and with the private wealth team through the profits interest. However, shareholders should still see a meaningful benefit as about $25 million of this quarter's Spring incentive fees flows to pretax ANI. Consistent with past practice, we plan to pay out a supplemental dividend at the end of each fiscal year, subject to Board approval, based on performance-related revenues, net of compensation, non-controlling interest, and profits interest. Through the first three quarters of this fiscal year, the net PRE has already exceeded the total from all of fiscal year 2025. Furthermore, this year's strong level of performance bodes well for the longer-term earnings power of the franchise, particularly after the profit's interest is bought in, at which time over 50% of the Spring incentive fees will flow to pretax ANI. Adjusted net income per share of $0.65 was up from $0.44 a year ago and $0.54 last quarter, driven by growth across fee-related and performance-related earnings. Moving to key items on the balance sheet on Slide 13. Net accrued carry finished the quarter at $875 million, up 4% from last quarter. Our net accrued carry is relatively mature, with approximately 65% tied to programs that are older than five years, which means that these programs are ready to harvest. Our own investment portfolio ended the quarter at $338 million. This concludes our prepared remarks. I'll now turn it back over to the operator to open the line for any questions. Operator: Certainly. To withdraw your question, please press 11 again. And our first question will be coming from Alex Blostein of Goldman Sachs. Your line is open, Alex. Alex Blostein: So maybe starting with topic du jour. Scott, you mentioned software, obviously been important over the last couple of days. So maybe just frame the exposures you guys have to software companies across the portfolio and specifically just double-clicking into Spring and any other retail vehicles where you might have exposures, and that that might be a good place to start. Scott Hart: Yeah. Thanks, Alex, for the question. A couple of things. And I think you've obviously heard from others on this topic throughout the last several days as well, you know, highlighting the fact that, you know, not all software companies are traded equally, highlighting the fact that, you know, where there are risks, there are also opportunities. I think we, you know, would agree with all of that. I think the point I really wanted to spend some time on here in response to your question is really just building upon what I mentioned in the prepared remarks around our diversified approach to private markets investing. And really two key points I would highlight. One, one of the things you hear us talk about here at StepStone frequently is that as investors there's a lot that's outside of our control. There's a lot of uncertainty. You know, the one thing that is always completely within our control is portfolio construction and diversification. So we really look to that, you know, as something that's really the first line of defense when we encounter disruptions, like this one. Second, you know, just wanted to highlight the fact that our multi-manager, multi-asset class approach is by definition very well diversified. So if I just think, for example, about the value chain within the private markets from individual company or asset, to general partner or fund that's investing those assets through to the allocators or private or solutions players like ourselves, give just a couple of comments. I mean, one, if you're an individual SaaS company, you know, today that maybe lacks some of the characteristics that we're all looking for, whether it's, you know, vertical specialization, system of rec proprietary data streams, you know, a strong AI strategy in place. That's probably an uncomfortable place to be at the moment. But like we said, not all software companies are created equal. If you're a software-focused GP, well, at least in this case, you don't have all of your eggs in one basket. You probably have some challenges in the portfolio, but at the same time, probably have some potential winners. And there's no doubt you're working very closely with your portfolio companies in a very active way to develop your AI strategy and AI product roadmap. You know, generalist GP, similar situation, although now you're talking about only a percentage of your portfolio invested in software. But with that, by the time you get to, you know, a group like StepStone, again, multi-manager, multi-asset class approach, we're just very well diversified. Right? Obviously, our real estate and infrastructure businesses have no software exposure. And if anything, AI has presented a bit of an opportunity and a tailwind for certain investments. Our private credit business, where we tend to focus on small and mid-market loans, which has been less heavily invested in software, and where we tend to shy away from ARR loans, has resulted in a situation where we've got very modest exposure to software. So for example, on a couple of the evergreen funds, think sort of mid to high single-digit software exposure in private credit. And so it really leaves us with within private equity and venture as the main driver of our software exposure. And as a result, if you look across the entire business, we estimate about 11% of our total AUM that is in software investments. And if we exclude, you know, venture, that drops down to about 7% of our total AUM. So let's then just, you know, spend another minute on venture because as you said, you know, certainly topic of the day, but this is not a new trend in terms of the potential threat to software companies from AI. And I think our venture team has been operating accordingly over really the last several years here. And so if you look at a fund like Spring, you know, have probably leaned more heavily into, you know, some pure play AI opportunities, AI infrastructure, specialized vertical software players, cybersecurity, defense tech, and physical AI, all of which have had, you know, the benefit of an AI tailwind. And frankly, that's what has driven the 39% performance that we mentioned in the prepared remarks in a year where you saw, you know, public software indices down, you know, close to 30% in some cases. So I think, you know, sort of highlights the fact that just because we are investing in venture and technology more broadly, it does not mean you're making, you know, a bet on software in particular. So maybe with that, I'll stop. I hope that gives you a bit of a sense, one, for the exposure across the business, but also the way that we think about this type of disruption risk. Alex Blostein: Yeah. I know. It's really helpful context. And, again, I agree with everything you were saying. And, you know, thanks for the color there. My second question, just pivoting to growth. Obviously, really impressive trends in the private wealth business. I think I heard you guys talk about $2 billion in subscriptions each quarter. Awesome momentum, and it sounds like you're seeing line of sight to build on that. So I was hoping you could maybe expand on how you're thinking about the build from here in terms of scaling the existing products? Any kind of near-term opportunities you see to expand distribution, and any other new products you're thinking about launching over the next call of twelve months? Jason Ment: Thanks, Alex. Jason here. In terms of expanded distribution, we're still in the very early innings from a syndicate build on STEPEX. Of course, that's the newest private equity fund. And still also in very early innings with Credex and Structs. Lots of positive momentum there, but through the syndicate build, we'll see flows on those funds increase over time and would expect to see growth in distribution of those funds over the course of the coming year. No announced roadmap for new product offerings in the coming twelve months. Other than, I would say, you know, feeder funds, different geographies, specialized funds, and the like all feeding into the same portfolio. But not a new product per se as we continue to expand the international footprint and expand the fund families in that way. Alex Blostein: Thank you, guys. Operator: Will come from Kenneth Worthington of JPMorgan. Your line is open, Kenneth. Kenneth Worthington: Let's start on Spring. So Spring had monster performance this year. Maybe first, given the size and the performance, how are you managing the inflows? Are you in a position where you feel like you need to kind of protect the existing investors by in any way sort of limiting the amount of net new assets that are coming in there and maybe chasing that good performance? Or is that not an issue? Scott Hart: It hasn't been an issue to date, Ken. The amount of opportunities that our venture and growth team continues to see across the innovation economy is strong. And that's driven by us having the market-leading venture and growth platform. And having multiple avenues for deployment across primary fund investments, co-investments and directs, as well as secondaries, which in venture specifically leans heavily into direct secondaries. The team is very proactive in identifying those companies that we want exposure to in our portfolios, and sourcing that exposure through all those different avenues so that we can take advantage of the power law in venture. To date, we continue to see a lot of opportunities as companies stay private for longer, if not some forever. And that provides us an avenue for strong deployment. Kenneth Worthington: Okay. I feel like you were prepared for that question. Thank you. Operator: Okay. Kenneth Worthington: You mentioned a number of funds in market or coming into market in the coming quarters. I think $16 billion of AUM is what you said the prior vintages were at in terms of commitments. Yet you sort of expect maybe these next vintages to have modest growth. And I guess the question is, why expectations are tempered a bit? And so from there, you mentioned that 50% of sales are coming from sort of new clients and expansion clients. You think that can kind of continue as you raise this next round of funds? And it would seem like if it can or can come anywhere close, that unless you're really trying to throttle the size of these funds, that there might be the opportunity to do better than just modest growth as these new funds come to market. Help me sort of connect the dots in terms of how you're thinking about the next vintages and coming to market? Scott Hart: Yeah. So I think a few comments there, Ken. And I think the expectation around modest growth in fund size is one that we have often pointed to throughout our history. And I think particularly on the back of, in some cases, having significantly increased prior fund sizes, you know, doubling of the last secondary's fund, a significant increase in the last real estate secondary spot. I think we wanted to just make sure to set expectations that the goal with certain of these vehicles is not necessarily to go out and double in fund size, but to grow and make sure that we are a little bit to the question you just asked Jason, we're matching the fundraising to the opportunity. Now we do think there is a sizable opportunity, particularly given sort of the strategies we will be in market with, including secondaries across multiple asset classes here, but again, want to just moderate expectations there. Look. I think overall, we feel good about the line of funds that we have coming to market. You asked about the mix of re-ups and new, etcetera. Look. We do expect to have strong re-up activity given the performance of these vehicles historically, but also trying to create a bit of room for either net new clients to the platform, many of which find our commingled funds to be an attractive entry point and set, you know, some investors that have looked at these vehicles last time around, but missed out as we wrapped up, you know, at or close to hard caps. But also, you know, open to clients that are expanding, you know, across the areas within StepStone. I think we're gonna see growth from each of those areas. But also recognize, look, while the fundraising has been strong and like we said, we've had a record last twelve months, it continues to be a competitive fundraising environment, and we'll have a lot on plate in the year ahead here. Kenneth Worthington: Great. Thank you very much. Operator: And our next question will be coming from Brennan Hawken of BMO. Your line is open, Brennan. Brennan Hawken: Thanks for taking my question. Love to drill into the discussion performance at Spring. It's pretty remarkable that only three percentage points of it are coming from the markup. So and that definitely doesn't, like, it's not totally intuitive how that would be the case given how well it's flowed and my sense of the discounts on those VC funds. So could you maybe help me understand that a little bit better? How we could see such a small portion of the attribution from that? Scott Hart: Yeah. So it's really, I think, a continuation, Brennan, of the comment that Jason made when talking about the opportunity and the fact that in venture in particular, it's really more of a direct secondaries opportunity as opposed to a pure LP secondary at significant discount. I think even if you were to look at some of the market statistics about the size of the secondaries market overall and look at what supposedly coming from venture, I mean, I think it vastly understates the size of the venture secondaries market because it does focus less on the direct secondaries and more on just the LP. So that's gonna be the biggest driver of the performance not being driven purely by discounts. Brennan Hawken: Got it. So I'm guessing that that's just another way of saying the continuation vehicles. Assuming that I'm on the right track there, like, what does the volume breakdown been in the continuation vehicles versus LP led for Spring here in the past year? Scott Hart: Yeah. So in this case, not even just referring to GP led, although it may take the form of GP led, but may also be direct secondaries buying out, you know, interest in individual portfolio companies whether from prior owners, management teams, etcetera. But I think it really just speaks to Jason's point earlier that we have a sense for which companies are gonna be the major value drivers in the venture space. And then we go out and use our full toolbox of ways to acquire those interests again, whether through direct secondaries, whether through GP leds, which can take a variety of different forms, as well as LP leds. I don't have an exact breakdown. Maybe Jason can jump in here. Jason Ment: But yeah. I would add to 34% of Spring this is in the card. You can see it right there. The 34% of Spring are primary directs, meaning not secondary at all, but going in on a direct basis. So think akin to co-invest alongside our venture partners. Right? And then 64% of the portfolio is coming through secondaries. The vast majority of which is direct secondaries. So not really CVs, although some could be CVs. Really acquiring interest directly the interest of the underlying companies. Brennan Hawken: That's interesting. I did not appreciate all the different options you had. Great. Thanks for taking my questions. Operator: And our next question will be coming from Michael Cyprys of Morgan Stanley. Your line is open, Michael. Michael Cyprys: Maybe just coming back to your helpful commentary on software exposure and AI disruption risk. Just curious, as a large allocator to the private market space, sounds like AI disruption risk, and it's been something you've been focused on, but there's a risk but also an opportunity that you've been thinking about for some time. So as you look at managers and funds across the space, curious what you're seeing in terms of assessing and sizing the potential risks for the industry. Maybe talk a little bit more about your portfolio construction, how you've been navigating this. And curious what insights you've gleaned from the datasets that you have. Scott Hart: Yeah. So maybe a few different comments there. I mean, if I look back at some of the transaction activity from, say, the 2020 to 2025 time period, and it's gonna be private equity specific. So not venture, but private equity specific. You know, our data would suggest that something like 27% of all private equity investments were in IT broadly speaking, just over 20%. More specifically in software. So just to give you a sense over the last five years, which would generally be vintage years that are less realized at this point in time. Interesting. If you break that down by size, and one of the reasons I made the comment about our small market and mid-market exposure in our credit business. If you look at small and mid-market, the software exposure, you know, based on our database, more like 13% over those last five years, whereas the large and global part of the market closer to 24%. So that's maybe just some helpful context around, you know, market-wide, what we're seeing, how active the GPs have been in these software space broadly speaking. I think some of that driven by where, you know, where you have your true sort of software specialist versus just generalists that are operating. Look, it's been a diligence question that we've been asking both our GPs, but also we've been focused on through our co-investment in secondary business over a number of years. Frankly, not just in but across the board in terms of understanding where are their AI-driven opportunities and where are their AI disruption risks. And, obviously, it's a continually moving picture here. But that is something that we and I think many others have probably been focused on for a period of several years here. And I think we learn a lot from speaking with our GPs, understanding a few things. One, what they are doing internally in terms of how they operate within their own four walls to, you know, what are they doing with their portfolio companies. And that's part of the reason I made the comment earlier about some of the software GPs that are very actively involved and have sort of a playbook they've developed and task force that are working very closely with their companies to develop their AI strategy and product roadmap. And so those are some of the things that we are seeing and looking for in our business today. Michael Cyprys: And then to the point just to the learnings, the data, the insights, I guess when you speak with the GPs and you're underwriting, doing diligence, I guess, what sort of steps can the GPs take to minimize this sort of risk? Not all software created the same clearly to your point. When you think through how much of that exposure could be at risk from AI as you're constructing your portfolios and trying to mitigate it yourselves there. Just any thoughts around that? Scott Hart: Yeah. Look. I think some of it probably comes down to how they have managed their existing recognizing that some of these portfolios would have been built starting pre-COVID and the years post-COVID and who's been more active in managing the risk and strategy with their portfolio companies and or who's been more active in looking to divest some of those companies over the last few years and really look to hold those that are best positioned to continue to grow in the current time period. And then I think it comes down to investment selection going forward. What are some of the key things that they are looking for in diligence to make sure that they are avoiding those companies that are likely to be disrupted on a go-forward basis. I mean, those are the kind of two broad categories I'd point to is managing the existing portfolio, and then it's really about new investment selection. Michael Cyprys: Great. Thank you. Operator: Our next question will come from John Dunn of Evercore ISI. Your line is open. John Dunn: Thank you. Maybe a little more on the sourcing of subscriptions. You said two-thirds of fundraising was non-US. I think in the past, you've given us a kind of flavor of what regions are seeing the most demand and for what particular strategies. Scott Hart: Yeah. John, thanks for the question. So it depends on the exact time period we look at. If I look at the last quarter, it has probably been Asia and Europe, and broadly across whether Singapore, Japan, Korea, and then within Europe, Germany, and some of the Nordics that have been some of the bigger drivers. If I look over the last twelve-month period, I would also include those same geographies. I would also include The Middle East as well. Look. It varies a bit by asset class. I would say, of late, our infrastructure business has had tremendous success in the European market. Private credit has been having great success and interest in Asia and The Middle East and has had some recent wins in The US market. I think, interestingly, as we travel around with the private credit team, despite some of the headlines that we see related to private debt, private wealth redemptions, or otherwise, that is not a major topic of conversation when we're sitting with institutions, some of which are just setting aside allocations for private credit and continue to be very interested and active in the space. Then if I think about private equity, look, I'd say the regions that we probably had the most momentum of late, probably Asia, and The Middle East. So, hopefully, that provides a little bit of color for you. John Dunn: Yeah. It does. And then on private credit, in the wealth channel, maybe outside of software, has there been any changes in discussions or interest or concerns about other exposures? Scott Hart: Well, look. I mean, there's obviously the headlines that we need to contend with. I guess, in our case, we are, obviously, as Jason mentioned earlier, a bit earlier in building out the syndicate for funds like Credex, and so we have not seen maybe the pickup in redemptions that have been talked about across the industry. But, you know, clearly, you need to contend with some of those headlines as it relates to new fundraising that you're doing. But look, I think part of what also has driven some of the interest in our private credit strategies of late is again, our multi-manager approach and just the highly diversified portfolios we are building as a result with getting private credit, your largest position tends to be sub 1% positions across our evergreen vehicles. John Dunn: Thanks very much. Scott Hart: Well, I don't know if we lost the operator there or any additional Q&A. I'll just give it one more moment here. Okay. Well, if no other questions, we appreciate everyone's interest this quarter and look forward to connecting with you and continuing the dialogue about StepStone. Thank you for participating. You may now disconnect.
Operator: Good afternoon. Thank you for attending today's Alpha and Omega Semiconductor Fiscal Second Quarter 2026 Earnings Call. My name is Victoria, and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to Steven Pelayo. Thank you. You may proceed, Steven. Steven Pelayo: Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2026 second quarter financial results. I'm Steven Pelayo, Investor Relations representative for AOS. With me today are Stephen Chang, our CEO, and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for seven days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows today. Stephen will begin with business updates, including strategic highlights and a detailed segment report. After that, Yifan will review the financial results and provide guidance for March. Finally, we will have a Q&A session. The earnings release was distributed over the wire today, 02/05/2026, after the market closed. The release is also posted on the company's website. Our earnings release and this presentation include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially. For a more detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided in today's call. Now I'll turn the call over to our CEO, Stephen Chang. Stephen? Stephen Chang: Thank you, Steven. Welcome to Alpha and Omega fiscal 2026 Q2 earnings call. I will begin with a high-level overview of our results and then jump into segment details. We delivered fiscal Q2 revenue results slightly higher than the midpoint of our guidance, primarily reflecting seasonality across several end markets, including PCs, wearables, tablets, and gaming. Inventory digestion in AI further impacted by shifts in GPU allocation to prioritize data centers over graphic card markets. Strength from our tier-one US smartphone customer and sequential growth in e-mobility power tools, and home appliances. Overall, total December revenue was $162,300,000, down 6.3% year over year and down 11.1% sequentially. Non-GAAP gross margin was 22.2%. Non-GAAP EPS was a loss of 16¢ per share. In addition, we repurchased approximately $13,900,000 of AOS shares during December, representing 728,000 shares as part of our recently announced $30,000,000 share repurchase program approved by the board. Following these purchases, approximately $16,000,000 remains available. This balanced approach to capital allocation reflects the board and management's confidence in our strategy and execution while maintaining the financial strength needed to invest for long-term growth and deliver shareholder value. Several years ago, we launched a deliberate strategy to transform AOS from a component supplier into a provider of application-specific total solutions. From the start, our focus has been on higher performance markets where system-level differentiation matters. Barriers to entry are higher, and we can meaningfully expand BOM content. We believe this strategy is working. We have seen tangible results in AI and graphics in smartphones through a mix shift towards premium platforms and higher charging terms. And more recently, this momentum has extended into our high-performance medium voltage MOSFETs used in applications such as hot swap and intermediate bus converters for AI data centers. Just as important, this focus helps offset competitive pressure at the lower end of the market and reinforces our confidence in the direction we are taking. We have remained disciplined in how we execute this strategy, making targeted long-term investments rather than reacting to short-term noise. As applications continue to evolve towards higher performance and greater system complexity, we believe the right response is to accelerate investment in the technologies, products, and engineering resources required to win. Consequently, we are increasing critical R&D investments. These are not broad-based investments. They are highly focused where we hold clear differentiation, strong customer engagement, and a clear roadmap to higher BOM content and sustainable margins. To support this strategy, we strategically optimized our balance sheet. As part of a planned capital allocation approach, we monetized a portion of our equity interest in the Chongqing joint venture, retaining a meaningful ongoing stake. As previously announced, we sold approximately 20% of our equity interest in the joint venture for an aggregate purchase price of $150,000,000 payable in installments, and we continue to hold an 18.9% equity interest in the joint venture. We received $94,000,000 in September followed by an additional $11,000,000 in December and subsequent to the quarter end, received $30,000,000. There is an additional $15,000,000 remaining that will be received later this calendar year. This financial strength allows us to invest decisively and strategically in technology development, manufacturing capability, and engineering talent as we continue to shift the business towards higher value, higher margin opportunities. We are already realizing the impact of our strategy on revenue. For example, while overall PC unit demand in calendar 2026 is expected to be constrained by tightening memory supply, our total solution strategy is gaining traction and we are seeing increased BOM content on new platforms such as Intel's Camberlake. In communication, we are witnessing the fruits of our earlier investment in silicon and packaging technology, in smartphone battery protection. Our technology differentiation coupled with the industry move towards higher charging currents enabled us to secure increased BOM content and deepen our relationship with top-tier customers. Factors that are expected to contribute to our growth in 2026. In advanced computing, including AI data centers, server, and graphics, we are encouraged by an expansion in demand across a broader array of AI data center applications and a broader set of customers. We are seeing near-term demand for high-performance medium voltage solutions used in applications such as hot swap and intermediate bus converters for leading ODMs for major hyperscale customers. Advanced computing is becoming a core growing element within the computing segment. The key takeaway is that we are continuing to see the benefits of our structural transformation. We will see tangible results this calendar year, and we expect more meaningful acceleration in 2027 and beyond as new platforms and programs ramp. With that, let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with computing. December revenue was up 5.9% year over year, and down 17.1% sequentially and represented 49.6% of total revenue. The sequential revenue decline was in line with our expectations. Within computing, we saw softness following an unusually strong September that benefited from tariff-related PC pull-ins as well as earlier AI and graph shipments. Seasonality also affected sales of tablets. As we mentioned before, during September, AI and graphics customers entered a digestion phase that extended into December, which was further influenced by increasing prioritization of production by our customers towards GPUs for AI data center over traditional graphics card platforms. Looking ahead to calendar 2026, visibility into the PC market remains limited driven primarily by uncertainty around memory shortages. While memory availability may impact end PC demand, center investment continues to provide an important offset. As mentioned before, we are shipping our high-performance medium voltage MOSFET products into infrastructure programs, including hot swap power solutions and are now moving into the build phase asset leading ODM, for major hyperscale customers. We are also expanding our presence in AI platforms through medium voltage solution supporting 48 volts to 12 volts intermediate bus conversion. Looking ahead to March, we expect computing segment revenue to decline in the low single digits sequentially. This reflects softness in the PC market mostly offset by strength in AI data center applications as well as growth in graphics cards and tablets. Importantly, we have clear visibility into demand for our new VDN voltage MOSFET across an expanding list of applications and customer base that includes power supply providers, module makers, cloud service providers, and major hyperscalers. Turning to the consumer segment. December revenue was down 14.9% year over year and down 18.3% sequentially and represented 11.8% of total revenue. The results were in line with our original expectations for a high teen sequential decline. While wearables experienced a normal seasonal decline, the overall year-over-year revenue decrease in consumer was primarily driven by gaming. With a smaller impact also from home appliances. In wearables, we continue to see underlying momentum supported by share gains, new customer engagement, higher BOM content, and a broader mix of end applications. In gaming, we remain closely aligned with our key customer as they progress through their next product cycle for our existing relationship and strength in high-performance power solutions positions us to participate in the next generation platform. Home appliance demand was modestly lower year over year though new design activity in 2025 supports longer-term opportunities. Particularly in emerging markets. For March, we forecast mid-single-digit sequential growth in the consumer segment, primarily driven by a recovery in gaming after a sharp inventory correction in December. Next, let's discuss the communication segment. December revenue increased 1.1% sequentially and was flat year over year, represented 20.4% of total revenue. The results were supported by strong year-over-year growth from our tier-one US smartphone customer, driven by continued expansion of BOM content. While demand from China smartphone customers remains uneven as we prioritize US customers, we are sustaining high market share in the premium phone segment. We see additional growth coming in calendar 2026. As new models launch with higher charging currents, and our investments in differentiated silicon and packaging technologies for battery protection further enable BOM content expansion. Looking ahead to March, the communication segment will likely decline mid-single digits sequentially. This is due to typical seasonality from our tier-one US smartphone customer, partially offset by sequential growth from China smartphone. Korea is expected to remain relatively flat. Now let's talk about our last segment, power supply and industrial. Which accounted for 16.7% of total revenue and was down 22.5% year over year and down 3% sequentially. Overall, the results were below our expectations for mid to high single-digit sequential growth as quick charger demand came in weaker than expected. But were partially offset by a rebound in power tools and e-mobility. Looking ahead to March, we expect power supply revenue to increase mid-single digits sequentially driven primarily by quick chargers and DC fans. Offset by softer power tools and e-mobility. In closing, we are guiding March to be down slightly sequentially. We expect March to mark a near-term low point for revenue and margin. With the business returning to growth beginning in June and into the peak season. Supported by improving mix and a more favorable contribution from higher value applications. Consistent with the strategy we have outlined, we are accelerating targeted investments in performance-driven applications where we have strong positions. Clear differentiation, and expanding customer engagement. While calendar 2026 may reflect modest growth, as markets work through near-term constraints, our application-specific total solution strategy is yielding results. And we are already seeing a positive impact. Today. As we continue to move higher value programs towards production, we expect these benefits to become increasingly visible through the course of calendar 2026 which we expect to support stronger growth as we move into 2027 and beyond. With that, I will now turn the call over to Yifan for a discussion of our fiscal second quarter financial results and our outlook for the next quarter. Yifan? Yifan Liang: Thank you, Steven. Afternoon, everyone, and thank you for joining us. Revenue for December was $162,300,000 down 11.1% sequentially and down 6.3% year over year. In terms of product mix, DMOS revenue was $101,000,000, down 6.9% sequentially and down 10.6% over last year. ROIC revenue was $58,800,000, down 19.1% from the prior quarter and up 9.5% from a year ago. Assembly service and other revenue was $2,500,000, as compared to $1,300,000 last quarter and $1,100,000 for the same quarter last year. Non-GAAP gross margin was 22.2%, compared to 24.1% last quarter and 24.2% a year ago. The quarter-over-quarter decrease was mainly impacted by higher input and operation costs. Non-GAAP operating expenses were $41,300,000, compared to $41,400,000 for the prior quarter. And $39,000,000 last year. Non-GAAP quarterly EPS was a 16¢ loss compared to $0.13 earnings per share last quarter, and $0.09 per share a year ago. Moving on to cash flow. Operating cash flow was negative $8,100,000 including $4,000,000 of repayment of customer deposits, and $8,700,000 income tax paid by one of our entities on the gain from the sale of CQ JV equity interest. By comparison, operating cash flow was positive with $10,200,000 in the prior quarter, and positive $14,100,000 last year. We expect to refund $1,000,000 of customer deposits in the quarter. EBITDAS excluding equity method investment loss was $9,700,000 for the quarter. Compared to $19,400,000 last quarter and $16,800,000 for the same quarter a year ago. Now let me turn to our balance sheet. We completed December with a cash balance of $196,300,000 compared to $223,500,000 at the end of last quarter. Net trade receivables decreased by $8,100,000 sequentially. Day sales outstanding were twenty-five days for the quarter. Compared to twenty-one days for the prior quarter. Net inventory increased by $3,900,000 quarter over quarter. Average days in inventory were one hundred and forty days for the quarter. Compared to one hundred and twenty-four days for the prior quarter. CapEx for the quarter was $15,000,000 compared to $9,800,000 for the prior quarter. We expect CapEx for March to range from $15,000,000 to $18,000,000. With that, now I would like to discuss March guidance. We expect that revenue to be approximately $160,000,000 plus or minus $10,000,000. Yep. Gross margin to be 20.2% plus or minus 1%. We anticipate the non-GAAP gross margin to be 21% plus or minus 1%. GAAP operating expenses to be $52,000,000 plus or minus $1,000,000. Non-GAAP operating expenses are expected to be $45,000,000 plus or minus $1,000,000. The sequential growth in the operating expenses is mostly the result of increased spending for R&D. Interest income to be $1,000,000 higher than interest expense, and income tax expense to be in the range of $1,100,000 to $1,300,000. With that, we will now open the call for questions. Operator? Please start the Q&A session. Operator: Of course. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. Our first question comes from the line of David Williams with Benchmark. David, your line is now open. David Williams: Hey, good afternoon, everyone, and thanks for taking my question. I guess maybe first, Stephen, you talked a lot about the strategy and that's really starting to show here. But I wanted to first maybe about the AI opportunities and on the GPU track. In those design wins. Can you maybe talk about how that tracking? Is it to your expectations? I know there's been some push and pull between the segments there, but just kind of curious how you're seeing your how that AI opportunity is tracking and what your expectations are. Stephen Chang: Hi, David. Yes. Good to hear from you. Yes. The AI opportunity that we've been pushing for it is less than what our original expectations were for regarding creating selling solutions for going into the VRM powering the GPUs directly. However, actually, we've been talking about, in this earnings as well as in the previous season is that our AI opportunity is actually expanding. The breadth of our offerings into this AI opportunity is going beyond even just the, you know, the total solutions that we're offering for the VRM solutions. We are excited to see that we can already start to address the medium voltage MOSFETs that are being used in the power conversion that happened even before that stage. And that's and then we can see that already in our results for this this quarter already, which is encouraging for us. David Williams: Thanks. Certainly appreciate that. And then maybe from the OpEx perspective, when should we think that kind of normalizes? Is this a good base rate to kind of consider going forward? Or are there some expenses maybe in this next quarter that won't flow into the following quarters? Yifan Liang: Well, sure, Dave. Yes. For the March quarter, we guided about $4,000,000 up in, you know, in operating expenses compared to December. Three out of that $4,000,000 increase for the R&D. So, yes, and, like, Steven said that that we are increasing, you know, our investment in R&D. Some critical areas. This year. So those those new products are focused on where we we have strong foothold in that and strong customer engagement and then and where we have a big potential. So so so we're going to double down and step up the R&D investment. So you know, our divestiture of the the CQ JV equity share, then you know, that provides the some means for us. So So we'll we plan to spend around, like, $20,000,000 or so in you know, from this proceeds on some new R&D projects this calendar year. So so not translate to about 25% R&D expense. Increase. This calendar year. So so March reflect in the a little bit lower. So gradually, you know, in the June, September, it will interrupt. So on an annual basis, we expect them about 25%. Increase compared to prior calendar year. David Williams: Okay. Great. Thank you. And then just one last bit, if I can sneak it in here. Just on the capacity side, just kind of given the balance sheet, are there areas within maybe your existing footprint that you could add capacity? Or areas that that you might be able to to do something there in terms of helping maybe on the gross margin front or, any other just maybe uses of that cash as we look forward? Thank you. Yifan Liang: Yes. And, I mean, that if you noticed that our CapEx investment in December was about $5,000,000 higher than the prior quarter, and Stephen Chang: March also Yifan Liang: inched up compared to December. So the so we are investing in CapEx to prepare for the for the calendar year 2026 and, you know, growth, you know, some new new products and new products and started rolling out. So we are building up some capacity right now. Operator: Thank you for your questions, David. Thank you. Oh, apologies, David. Give me one moment. Let me open your line back up. Stephen Chang: There you go, David. Sorry about that. That's all for me. Yeah. No no problem. That that was all for Sorry. Operator: Alright. Our next question comes from the line of Tore Svanberg with Stifel. Your line is now open. Stephen Chang: Hey. This is Solomon Wang on for Tore Svanberg. Thanks for taking my question. Looking ahead to the March revenue guide implies a pretty healthy top line momentum, gross margin comes in a little bit lower than than than what we're expecting. Could you share a little additional color regarding what's causing that, and where do you kinda see gross margin longer term as you try to reach that 30% target? Yifan Liang: Sure. Yes. March guidance is about 10.2% lower than the December margin. It's mainly reflecting the you know, the the lower Stephen Chang: UTI. Yifan Liang: Utilization in March, especially during the you know, lunar New Year time frame. So, typically, you know, each year, those still that's the time know, some operators, and they will go back to their hometowns we also reduce our production. So money impacted by the utilization. So I would expect that, you know, for June, we we expect to see the margins rebound and, you know, would expect to probably back up to the December 2025 or September 2025 in the quarter. The margin level. So somewhere that neighborhood. So and then going forward, yes, you know, our midterm target model is a still $1,000,000,000 in revenue and 30% non-GAAP gross margin and then 20% all packs. And so that's still our midterm target model. So from where we are now, then, know, back up to to the 30% gross margin level, yes, We we expect, you know, those new products and to contribute to this. To the margin growth and then better product mix and and that's and then some normal pricing environment, and that would also help. So that's the the way we see we can get back to the 30% gross margin level. Stephen Chang: Great. Very helpful. Thank you. And and kinda following up, on on R&D. And so as you're utilizing the proceeds from twenty team's JV stake monetization to help accelerate and fund the R&D. Could you share a little bit more regarding your what specific programs the increased R&D is going to? And and what revenue scale does this increased R&D really begin to offer some operating leverage? And yeah. Yeah. Let me let me take a stab at that first. So as we described in in in our in our our prepared remarks, yes, you know, our investments is not gonna be in, you know, in all different Steven Pelayo: directions. It's in very focused areas. Stephen Chang: We want to invest in the areas that that we have strength, that we have competitive leverage, and we want those areas to be even stronger. And we chose those areas because we've already seen success in those areas, whether it's in PCs with, total solutions for that, and then expanding that, to AI applications going into graphics and AI. And now and expanding the breadth of that to go not only covering the ICs, but also the high-performance MOSFETs. So we're you know, in the AI space, this is pretty exciting for us because it's the expansion of the product breadth. But on top of that, it's also the expansion of the customer base. So not only are we going out after the top AI guy, but we're also going that whole ecosystem. And our solutions can also be used and are actually already being sold into servers, other data center servers going to cloud service providers. It increases that that customer base for us, to, you know, go after a bigger TAM. With the expansion of our products. Of course, you know, we still we are still seeing the expansion of our smartphone battery business this is because the underlying trend there is moving towards higher charging currents And with that, they basically, the solutions have to physically be bigger. They have to handle quite a bit more current, and and this requires a lot of technology both in silicon as well as in packaging to to in order to meet the space constraints as well as the the performance constraints. Business for us means and the impact on our business is that the BOM content will increase as well as the margins for those areas. So all three of those areas, you know, we are already seeing results now. We'll see more results even on later in this calendar year. But the bigger bigger impact from the additional R&D investment will come in 2027. Thank you so much. That's very helpful. Operator: Thank you for your questions. There are currently no questions registered So as a reminder, it is star one to ask a question. Our next question comes from the line of Craig Ellis with B. Riley Securities. Your line is now open. Stephen Chang: Thanks for taking the question, guys. I wanted to Steven Pelayo: go further on what's been topical on the call, which is the Stephen Chang: investment in advanced compute product. The first one guys, I appreciate the the clarification Craig Ellis: that 25% year on year in calendar '26. I I was hoping to ask kind of a higher level theoretical question or maybe a business strategy question Steven. As you as you look at investing in new opportunities, what are the gating factors that determine where you will invest and and what would be too far away from your low voltage and mid voltage core competencies so that we have a better understanding of where the targets set on a range of things you might be looking at. Stephen Chang: Hello? Yifan Liang: Kim, are you still on boarding? Stephen Chang: I'm sorry. I didn't hear my question. So let me let me ask that question. You know, I I heard the question. I just thought I was on mute. I was talking about it. I'm sorry. So regarding the the the the our investment into AI, is it started with our total solutions for PCs. And with those total solution controller, paired together with the driver MOS, that's what helped us to get into the graphics space as well as going into now the various AI platforms. Our investments there will continue, and we are going you know, when we would mention both total solutions for PCs as well as going after AI applications, that's still you know, that is still a core target of ours. And it fits in very well with our technology strengths. You know? With our ability to create these drivers, controllers, well as the best that are used inside these power stages. But that said, you know, we're also expanding. We're going after that that medium voltage power conversion, in that 48 volt to 12 volt space. Where, you know, we can use our solutions now. We don't have to wait for future platforms And this is because, you know, we are going after not only, our onboard solutions, but also going after the ecosystem partners, even going after solutions that go into into, into a cloud service provider too. This is, has, you know, broader reach beyond, just the specific AI application. This is why it's exciting for us to see the impact even now in a little bit in the December, but more so in the March. Even you know, we don't have to wait till for 2027 to see some of those results. This will be one of the key growth growth drivers that see in this calendar year. But, you know, regarding kinda the bigger direction, yes, we're gonna go after e and then tackle more of the sockets in going into the AI applications. We look forward, to the 800 volt solutions, we are preparing solutions for wide band gap to go the the high voltage aspect of that. There's other off also other solutions other products that that we're developing to cover that space, including medium voltage. And we're also looking at various IC sockets as well too. Craig Ellis: Thanks, Steven. If I could ask a follow-up that relates to that. Understand what you're seeing in terms of revenue return on the investment, how big is advanced compute as a percent of the compute segment now? What do you think it would be a year from now as you start to get more benefit from all of the investment since you said it'd be pretty quick if we look down the road eight quarters, to '28, '28 how big would the business be by then? How much return are we gonna see you know, two years from now on this 25% R&D increase for we're we're making. Stephen Chang: Sure. And at least for the portion of know, R&D will be invested in three core areas. One, of course, is this AI opportunity. The second is is the PC total solutions, which is a close cousin for AI. And then also for our smartphones, going after the high-performance battery protection, there's also a lot of opportunity there. But with regards specifically to the proportion of AI graphics related, that port that portion of computing in the past you know, has has been has hit somewhere, like, 20 to 25% of computing in some of the quarters of this of the calendar 2025. So going forward, actually, we see much more potential So we see opportunity not only for the CRM solutions, directly powering the the GPUs, But, also, again, the SAM going into the medium voltage is a new area that we didn't start to really have meaningful revenue until recently, and this is an area that we believe can have some quicker returns even in this calendar year. So, you know, I I can't give a hard number, but, you know, I I I certainly can see it going to 50%. In fact, it could be higher than that. Depending of depending on how successful, how quickly we can penetrate all all the opportunities here. Craig Ellis: Got it. Thanks for that color. And and then one over to you, Yifan. We've Been Hearing From Companies In The Equipment Space That Their Readings On Southeast Asia China foundry utilization are now in the 80 to 90% range, which should be a range that starts to support less severe pricing. I know pricing's been at normalized level, the last quarter or so, but you see an environment where pricing starts to help your ability to move gross margins up from I think, that 21% guidance level in the current quarter where is pricing and how much of a headwind or tailwind to what you see going through this year? Thank you. Yifan Liang: Okay. Sure. December pricing was was I would say, was in line with historical trend. And a little bit better than the September. So put in that way, March, was factored in normal historical trends in the price erosion and at this point. So, yeah, we we are closely monitored in the market, see what Stephen Chang: market it is. Yifan Liang: Going to go, and then and then I will adjust the ourselves accordingly. So the based on the business, customers, the products, like, you know, all those factors. So see. Yeah. Definitely. But company, you know, better pricing. Environment. Craig Ellis: That's real helpful. And if I could just ask one more, bouncing it back to Steven. Steven, the commentary in the press release, and I think within the script, on expectations for PC growth and smartphone growth this year. Helped my content gain. So good for you guys for getting even more of that because that's been part of the story for a long time. The question is, lead time stretched out enough that you've really got long term visibility or what gives you the confidence to make a comment that goes all the way through the end of calendar year '26. Thanks, guys. Stephen Chang: Yeah. For us, you know, we we do see that the impact of the memory shortage and memory supply that will be a headwind for those markets. But we also believe that, you know, we are increasing bot content and in PC side, again, you know, our our total solutions still have a lot of room to grow in terms of penetrating, the market. You know, we've been selling, our discrete, MOSFET, discrete, separate individual driver mosses. But, you know, we are looking forward to having a bigger adoption of our total solutions include including our controller solutions onto more platforms. So that that can help there. Of course, yeah, we have to deal with the our customers have to contend with the memory supply. But that, you know, I I feel confident at least in our ability to to to penetrate further with our total solution strategy. And on the smartphone side, you know, we we do see that especially on in in the big US customer that the move towards higher charging currents is is is going going to be more widely adopted. And this is helping to to support the quick charging features on these big smart batteries. And, you know, we are in a good position there with a leading technology as well as a strong share. Craig Ellis: That's great. Good luck with that. Thanks, Steven. Stephen Chang: Thank you. Thank you for your questions. Operator: There are currently no questions registered, so I'd like to pass the call back over to Steven for any closing remarks. Steven Pelayo: Okay. It's Steven Pelayo here. Before, we conclude, I wanna highlight a few upcoming investor events. Management team is gonna be participating in. So first of we have the fifteenth Annual Technology Conference on February 26 in New York City. And we have the Loop Capital Seventh Annual Investor Conference on March 9. This is virtual. And with the Jefferies Semi's IT hardware and Comtech Summit, on August 26 in Chicago. If you wish to request a meeting, please contact the institutional sales representatives at sponsoring banks. This concludes our earnings call today. Thank you for your interest in AOS. And we look forward to speaking with you again next quarter. Yifan Liang: Thank you. Operator: That concludes today's call. Thank you for your participation. Have a wonderful rest of your day.
Operator: Welcome to News Corporation's Second Quarter Fiscal 2026 Earnings Conference Call. Today's conference is being recorded. Media will be allowed on a listen-only basis. At this time, I'd like to turn the conference over to Michael Florin, Senior Vice President and Head of Investor Relations. Please go ahead. Michael Florin: Thank you very much, operator. Hello, everyone, and welcome to News Corporation's fiscal second quarter 2026 earnings call. We issued our earnings press release about thirty minutes ago, and it's now posted on our website at newscorp.com. On the call today are Robert Thomson, Chief Executive, and Lavanya Chandrashekar, Chief Financial Officer. We will open with some prepared remarks, and I'll be happy to take questions from the investment community. This call may include certain forward-looking information with respect to News Corporation's business and strategy. Actual results could differ materially from what is said. News Corporation's Form 10-K and Form 10-Q filings identify risks and uncertainties that could cause actual results to differ and contain cautionary statements regarding forward-looking information. Additionally, this call will include certain non-GAAP financial measurements such as total segment EBITDA, adjusted segment EBITDA, and adjusted EPS. The definitions and GAAP to non-GAAP reconciliations of such measures can be found in the earnings releases for the applicable periods posted on our website. With that, I'll pass over to Robert Thomson for some opening comments. Robert Thomson: Thank you, Mike. We are delighted to report excellent second quarter results with both revenue and profitability growth accelerating from the prior quarter, and we see favorable signs for the second half of our fiscal year. Revenues increased 6% to $2.4 billion for the quarter, and total segment EBITDA of $521 million expanded 9% despite a one-time inventory-related charge at HarperCollins. Net income from continuing operations was $242 million, a 21% decrease from the prior year, but that was due to the absence of a rather favorable $87 million gain on REA Group's sale of Property Guru last year. Our adjusted EPS for the quarter was 40¢, compared to 33¢ in the prior quarter, and our profitability margin rose from 21.4% to 22.1%. These results were driven by sustained growth at Dow Jones and Digital Real Estate Services, which both reported double-digit profit growth. And both have started the calendar year strongly. Given the current trajectory of our core drivers, we believe prospects for the third quarter are auspicious. The results are indicative of our ongoing transformation, both digitally and commercially, as we continue to increase recurring revenues and reduce our dependence on advertising, which has a certain cyclicality. Our consistently strong cash position has allowed us to enhance our buyback program, which has been running at four times the prior year pace, whilst preserving our financial flexibility and allowing us to focus on maximizing shareholder value. We also note that Moody's, which only recently upgraded our rating, has put our outlook on positive, reflecting the sturdiness of our balance sheet and our strong operating performance. Speaking of the future, it is clear that expectations of AI's impact are evolving, and that the more perceptive players have come to realize that provenance is paramount, and that our proprietary content is valuable. Let us be clear: Anthropic has already agreed to pay $1.5 billion for using pirated books. We and our authors at HarperCollins naturally expect to receive our fair share of that payout starting later this calendar year. What is the point of acquiring cutting-edge semiconductors if they are being deployed to repurpose gormless, fatless, feckless content sets? What is the point of spending billions on energy generation when that energy is powering the prosaic, not the profound? We do believe an increasing number of insightful AI creators understand this content contradiction and will indeed pay a premium for our premium content. AI companies must provide meaningful services with reliable, relevant, contemporary information, not biased bilge or retrospective rubbish. Ignoring the obvious need to fund fecundity will mean that AI stands for artificial intransigence. Turning to our segments, Dow Jones delivered robust results for the quarter, with revenue rising 8% and segment EBITDA increasing 10% compared to the prior year. It was a record quarter for the business on multiple fronts, including a 29.5% profit margin, an improvement of almost 50 basis points versus the prior year. It also marked the fourth consecutive quarter of double-digit EBITDA growth for the segment. Digital advertising reached a record level of $87 million for the quarter, rising 12%, supported by the strength of demand, in particular from the financial services sector. The Dow Jones professional information business continued to provide crucial intelligence for customers this quarter, with revenues increasing 12% overall, thanks to a 20% surge at risk and compliance. All of our B2B verticals made positive contributions, with Dow Jones Energy posting double-digit growth and Factiva and Newswires both growing modestly during the period. Intelligence, insight, meaningful metrics, and astute analysis remain non-negotiables for global corporations and their executives, especially against a backdrop replete with uncertainty and volatility. On the consumer side, digital volumes increased 12% to over 6 million subscriptions, led by our continued push into enterprise partnerships embedding our content in corporate work streams, while the Dow Jones team is intensely focused on increasing yield and conscious of the responsibility to deliver reliable news at a moment when much journalism is mere activism. We recently announced a partnership with Polymarket, that will selectively bring data to users across The Wall Street Journal, Barron's, MarketWatch, and Investors Business Daily. Fresh investment in The Wall Street Journal's influential opinion pages saw the launch of Free Expression, an expansion of the vertical that introduced fresh writers to the editorial board's august audience. We are establishing new AI partnerships, which we expect to generate additional revenues, including an expanded deal with Bloomberg for AI rights for our peerless Dow Jones content. We also bolstered Factiva's Gen AI capabilities with expanded licensing rights for more than 8,000 premium news and business information sources. To highlight the vast potential of Dow Jones, we will be holding an investor briefing next month in New York. I have no doubt that you will find the Dow Jones proposition to be commercially compelling in the age of AI. In digital real estate services, we have seen signs of strong growth in our US business even though the housing market remains far from normal. Despite the lingering challenges, realtor.com's revenues grew by 10% in the quarter, building upon its performance in the first quarter led by premium products and notable improvement in lead volume, which posted double-digit gains. The quarter also benefited from gains in audience share and continued expansion across realtor.com's adjacencies. We firmly established our position as the leading publisher of residential real estate news and are striving to expand unique features that support sellers, buyers, and realtors. Realtor.com's share of visits among the real estate portals continued to grow in the second quarter based on Comscore, while unique visits per user for the same period continue to surpass the industry at 4.8 times, almost double that of homes.com and far superior to Zillow. In Australia, revenue growth at REA of 7% benefited from continued double-digit yield growth and an improvement in listing volumes in Sydney and Melbourne, coupled with strong growth in financial services. Competition is bringing out the best in REA, which posted record audience numbers in November with unique users of over 13 million, an increase of 9% versus the prior year. The team in Australia is savvily adopting AI applications that enhance the service for our customers and prove that AI is certainly more friend than foe. No one wants housing hallucinations. HarperCollins revenues grew a healthy 6%, a significant recovery after a sluggish first quarter, and we have mounting optimism for the second half of the year. We benefited from a strong front list in general books, as well as particularly strong growth in our faith segment as readers searched for meaning amidst the contemporary chaos. The core creative value of our books was highlighted by the continuing success of our Wicked collection and the stunning sales of Heated Rivalry, which inspired the steamy streaming series. Ice hockey stereotypes are melting away as players pursue each other and a puck. Other notable releases included Mitch Albom's Twice, Senator John Kennedy's How to Test Negative for Stupid, and Jasmine Masses' Bonds of Hercules. And the third quarter is off to a strong start, with Peter Schweitzer's The Invisible Coup and Pennsylvania Governor Josh Shapiro's memoir Where We Keep the Light. In the months ahead, we anticipate a Bridgerton boost with the recent premiere of season four on Netflix and are honored to publish the first book by Pope Leo the Fourteenth, Peace Be With You. As the pope has sagely observed, we cannot let the algorithms write our stories, and we remain passionately committed to protecting the IP of our authors in the age of AI. Across the news media segment, revenues for the quarter were flat despite a challenging print advertising market, and EBITDA fell 5% compared to the prior year. In the UK, The Times and The Sunday Times continued to build on Q1 performance, with digital subscribers rising 7% to total 659,000. While advertising trends were mixed overall, The Times achieved a record second quarter with digital advertising revenue up mid-teens. News Corp Australia reached nearly 1.2 million total subscribers, surpassing the prior year by 4%, and there was an improvement in ad trends compared to the first quarter and a modest increase in circulation revenue. Last week, we celebrated the launch of the California Post, which is bringing editorial enlightenment to the West Coast and is built on the renewed profitability of the New York Post. The early audience numbers are impressive, and we will update you on our progress in the next earnings call. The launch itself highlighted the potency of and comparative advantage of our network effect, as the WSJ, realtor, and Bible Gateway, our HarperCollins faith site, all contributed to generating traffic for the new website and app. In conclusion, we are pleased with the strength displayed across the business throughout the second quarter, and the signs so far are patently positive for the second half of the year. We have a robust balance sheet, particularly strong free cash flow, and have continued to execute on our expanded buyback program with a keen focus on maximizing shareholder value. As AI angst afflicts some sectors, we believe the company is well-positioned to profit over the coming quarters and years. We are poised with poise. Remain grateful for the thoughtful leadership of our chair, Lachlan Murdoch, the enduring support of our Board, and the sterling efforts of our teams around the world. And now for deeper insight, I cede to our Chief Financial Officer, Lavanya Chandrashekar. Lavanya Chandrashekar: Thank you, Robert, and good afternoon, everyone. Our second quarter results demonstrate the continued strength and resilience of our portfolio and the benefits of disciplined strategic diversification. Despite the continued uneven economic backdrop, we posted accelerated top and bottom-line growth led by our core pillars. Now that I have been in this role for over a year, I will start off by saying that I'm even more confident in News Corporation's growth opportunities and our ability to maximize shareholder value. The second quarter marks our eleventh consecutive quarter of year-over-year total segment EBITDA growth on a continuing operations basis. These consistent results are the outcome of strong operational discipline and reflect the repositioning of our portfolio. Our focus on operational efficiency has successfully driven margin expansion and increased free cash flow, and I believe there is significant opportunity for this to continue. We remain disciplined in our focus on the three core growth pillars: Dow Jones, digital real estate, and book publishing, which collectively accounted for 95% of our profitability in the second quarter. News Corporation has evolved well beyond the scope of a traditional media company. We are now a digital-first company with a strong and growing recurring revenue base, complemented by high-margin content licensing revenues. Disciplined investment and value-accretive M&A have increased our exposure to the large and fast-growing data and information services market. We believe the B2B business of Dow Jones has a significant runway for growth and it is highly profitable. And as Robert mentioned, we are very excited to be able to showcase Dow Jones on March 16 in New York at the Nasdaq market site. We continue to make strong progress in returning value to our shareholders and have accelerated our share buyback program. In the second quarter, we repurchased $172 million in shares, up $132 million from the previous year period. We believe our stock remains materially undervalued relative to its net asset value. And as a reminder, share repurchases in fiscal 2026 are expected to benefit from the approximately $380 million repayment of Foxtel shareholder loans. Turning to the results, News Corporation's reported fiscal second quarter revenue of almost $2.4 billion, up 6% from the prior year, and total segment EBITDA of $521 million, up 9% year-over-year. Margins improved from the prior year by 70 basis points to 22.1%. Second quarter adjusted revenue rose 3% while adjusted total segment EBITDA increased 7% versus the prior year. For the quarter, we reported earnings from continuing operations per share of $0.34 compared to $0.40 in the prior year as last year included a gain related to REA's sale of Property Group. Adjusted earnings from continuing operations per share were $0.40 in the quarter, compared to $0.33 in the prior year. Moving to the individual segments starting with Dow Jones. Dow Jones delivered another very strong quarter with reported revenues of $648 million, increasing 8% versus the prior year period, and the highest quarterly revenue growth in nearly three years. Digital revenues accounted for 82% of Dow Jones segment revenues this quarter, improving by one percentage point from last year. Professional Information Business revenues, which reflect our B2B products and services, rose 12% year-over-year, a rate 200 basis points faster than quarter one. Within that, risk and compliance revenues grew 20% to $96 million driven by new customers, new products, and higher yields. We saw continued momentum from risk feeds and API solutions and increased penetration of advanced screening and monitoring products. We also benefited from the integration of Dragonfly and Oxford Analytica as we extend our breadth of products to include geopolitical monitoring and surveillance. At Dow Jones Energy, revenue grew 10% to $75 million with customer retention remaining very strong at approximately 90% in addition to improving yields. Results include a modest benefit from the recent acquisition of EcoMovement. Factiva again posted revenue improvement benefiting from new customer acquisition, with a focus on GenAI. Within the Dow Jones consumer business, circulation revenues increased 3% versus the prior year with digital circulation revenues rising 7%. As I mentioned last quarter, we raised the full price rate for the Wall Street Journal digital subscription for new customers and continue to increase prices for a portion of tenured customers. We're also implementing changes to our promotional offerings including shorter duration offers and higher introductory pricing which we expect will have a positive impact on ARPU. I should reiterate that overall digital ARPU has been impacted by the expansion of enterprise and corporate partnerships. Those deals extend our B2B footprint and are margin accretive with low subscriber acquisition costs and very high retention rates. Direct subscription ARPU, which excludes the impact from enterprise, has been improving at a healthy rate. Digital circulation revenues accounted for 76% of circulation revenues for the quarter, improving from 73% in the year. Digital-only subscription improved 12% year-over-year and by 133,000 sequentially driven by enterprise customers. Advertising revenue rose 10% to $133 million, a very strong improvement from quarter one, including record digital performance of $87 million, up 12% led by financial services. Print advertising revenue rose 7% also benefiting from higher financial services spend. Digital represented 65% of advertising revenues, up one point from the prior year. Dow Jones segment EBITDA for the quarter grew a robust 10% to $191 million with margins increasing to a record high of almost 30%, an increase of nearly 50 basis points year-over-year despite a higher rate of cost growth as we had flagged on last quarter's earnings call. Moving on to digital real estate. Digital real estate had another solid quarter despite lower national listing volumes in Australia due to a tough prior year and still uncertain macro conditions. Segment revenues of $511 million rose 8% versus the prior year, an improvement to the growth rate in the prior quarter, and were up 7% on an adjusted basis. Segment EBITDA was $206 million, up 11% and up 12% on an adjusted basis. REA revenues grew 7% year-over-year to $368 million. Growth was driven by a combination of residential yield increases, favorable customer contract upgrades, and geographical mix. National new buy listings in the quarter declined 3% overall but improved in Sydney, up 7%, and Melbourne, up 4%. Results also benefited from strong growth in financial services driven by mid-teens growth in settlements. Overall, Australian revenues improved by a strong 10%. A partial offset was at REA India with revenues declining mainly due to the sale of PropTiger and the closure of the housing edge business with overall performance broadly consistent with REA's outlook as they communicated last quarter. Please refer to REA's earnings release and their conference call for more details. Realtor.com continued to make strong progress this quarter, with revenues rising 10% to $143 million and improved results contributing to segment EBITDA growth. We are also accelerating the pace of innovation including the announcement of realtor.com plus last month. The new platform, which leverages our partnership with the National Association of Realtors, and the MLSs enhances the home search experience by driving agent-client collaboration, transparency, and insights. This quarter revenue growth was driven by strength in core real estate products, with leads improving by 13%, improving yields, and higher annual contract values given the improved penetration of 21% of revenues in the quarter, improving 100 basis points versus the prior year. Average monthly unique users for the quarter also improved, rising 1% to 62 million. Comscore data for the second quarter highlighted that Realtor once again had the highest engagement among real estate portals at almost five visits per unique user. Realtor continued to gain audience share with visits to its properties reaching 29% of total visits to all real estate portals in quarter two, more than triple that of homes.com and double that of Redfin, while narrowing the gap versus Zillow. These strong outcomes are a result of the improvements in SEO as well as continued product enhancements and a successful brand campaign. At Book Publishing, business conditions improved markedly this quarter with revenues growing a robust 6% to $633 million despite lapping a tough comparator of 8% growth in the prior year. Segment EBITDA of $99 million declined 2% versus the prior year with margins of 15.6% down 140 basis points. However, the results this quarter included a $16 million one-time write-off primarily related to inventory at HarperCollins International operations, which impacted margins by 260 basis points. Results were driven by recent acquisitions, strong sales at Christian Publishing, as well as an improvement in general books due to higher front list sales. We also benefited from the timing of ordering. Digital revenues at HarperCollins grew 2% led by higher e-book sales up 7%. In total, digital sales represented 20% of consumer revenues compared to 21% in the prior year. This quarter the backlist contributed 59% of consumer revenues down from 61% in the prior year, driven by a strong frontlist. News media revenues were flat at $570 million benefiting from higher cover and subscription prices in The UK and Australia, offset by weak print advertising trends. Segment EBITDA declined 5% to $70 million driven by challenging advertising conditions and some investment related to the launch of the California Post in January. Turning to the outlook, some of the themes across each of our segments. At Dow Jones, overall trends remain healthy, and we expect continued strong revenue growth in B2B. As a reminder, last year's digital circulation revenue growth included approximately 300 basis points related to a non-recurring benefit. At Digital Real Estate, Australian residential new buy listings for January were down 8%. Please refer to REA for more detailed outlook commentary. At Realtor, we hope to see improving market conditions leading to strong lead volumes which should translate to continued healthy revenue growth supported by ongoing reinvestment. At Book Publishing, as Robert noted, trends remain encouraging and we expect to benefit from HarperCollins' backlist and more favorable year-on-year comparisons. At News Media, we expect to incur modest investments related to the launch of the California Post. While difficult advertising trends are likely to continue, we remain focused on driving cost efficiencies. With that, let me hand it over to the operator for Q&A. Thank you. We'll now start the Q&A session. Operator: Please limit your questions to one per participant. If you've joined via the Zoom application, please use the raise hand functionality to ask a question. If you've joined via the audio line, please press 9. Questions will be answered in the order they are received. We will now pause for a moment to assemble the queue. Okay. Our first question will come from David Karnovsky with JPMorgan. Please unmute your line and ask your question. David Karnovsky: Hey. Thank you. Robert, I think we've seen this week the market react to AI or the perception of AI, and what that is gonna mean for companies that operate in the business services or data spaces. And it'd be great to kinda get your expanded thoughts on this reaction and you know, what you view as reasonable to worry about versus maybe what the market is potentially overweighing or maybe missing here? Thank you. Robert Thomson: Yeah. David, a very salient question. There is a fundamental misconception about the impact of AI on News Corporation. AI is retrospective and synthesizes generic content sometimes imperfectly. But it is past tense, often past imperfect. We have contemporary creative proprietary content, which is only accessed if AI companies pay us. Our woo or soo strategy, we've been consciously building a moat, and it is a moat with saltwater crocodiles, with sharks, and an even more dangerous species, lawyers. More importantly, the moat separates commodity content from our premium prescient IP. Now let's be clear. Anthropic is already set to pay out $1.5 billion for inappropriate use of pirated books, and we and our authors will get a large chunk of that money later this year. And we have a partnership with OpenAI whose expertise will enhance our editorial business and real estate products, while our editorial will enhance OpenAI products. Now we're not complacent, we're certainly not naive or digital dilettantes. But we are absolutely confident about our ability to create compelling premium content and experiences in an age in which many AI companies will be recycling rubbish. I mean, it is worth remembering that AI models need data. Otherwise, they are just lines of inert code. They need real-time, real-world data, and that's what we produce every single minute of every single day. Without compelling content, these AI operators are not omnipotent. They are not unique, they are eunuchs. Michael Florin: Thank you, Dave. Luke, we will take our next question, please. Operator: Our next question will come from Entcho Raykovski with Evans Partners. Please unmute your line and ask your question. Entcho Raykovski: Hi, Robert. Hi, Lavanya. My question is a follow-up to David's question, actually. I mean, given this is such a topical issue in the market at the moment, I'm just curious as to whether you're comfortable around the investment into Dow Jones which is required including to deal with any AI threat? I think you mentioned last quarter that some of the CapEx is linked to continued investment in technology. I suppose are you able to quantify this? And again, just curious whether, you know, the launch of tools like Claude Legal for example, given it's worried the markets, whether you see it as having a negative impact on your operations? Thank you. Robert Thomson: Encho, to the last point, absolutely not. We are fully confident in the Dow Jones professional information business for the reasons that I outlined in the previous answer. And we're also very confident about the trajectory this quarter and next quarter. And we don't normally give forward guidance, but that's as much forward guidance you're gonna get. And it's particularly positive at this stage. And it's positive because we do have unique information, and it's a high-margin business, but it's not a retrospective content set. It's a contemporary content set. And I disconnect between the reality of the threat of AI and the reality of the needs of AI. And we are a company that fulfills the needs and face a very limited threat. We're not a collection of legal case studies. We're a collection of contemporary content, much of it journalistic. And in the book business, we are a collection of unique works written by authors that cannot in any way be used without our permission and their permission. And we certainly look forward to making the most of that. And the fact is that we already have AI deals, and negotiations are advanced for other AI deals. Lavanya Chandrashekar: Yeah. And Encho, maybe I can take your question on CapEx. Looking forward to seeing you next week in person. Yes. We do expect total CapEx to be up moderately this year. And that was the case in the first half as well. Having said that, Dow Jones CapEx specifically within that is going to be modestly down this year. Overall, we will generate very strong free cash flow growth for the year, despite the slightly higher increased investment in CapEx. Then I'd just conclude by saying we do invite you to join us for the Dow Jones Investor Day to really see the strength and opportunity of this business. Thank you, Encho. Michael Florin: Thanks, Encho. Luke, we'll take our next question, please. Operator: Our next question will come from the line of David Joyce with Seaport Research. Please unmute your line and ask your question. David Joyce: Thank you. I'm kind of following on the capital expenditures question, where else would you be allocating to drive returns? How would you prioritize? Are there things that you can do to accelerate your strategies given the one big new bill act in case that helps with overall free cash flow allocation plans? Robert Thomson: David, I think we've made very clear that we see three core drivers of the business. And that is Dow Jones, Digital Real Estate, and HarperCollins. And those businesses are traveling very well at the moment, and we will allocate cash accordingly. Thank you, Dave. Luke, we will take our next question, please. Operator: Our next question will come from David Arvest with Macquarie. Please unmute your line and ask your question. David Arvest: Yes. Thanks for taking my question. Look. I mean, kind of in the same vein as the prior question a little bit. But, you know, with the broad valuation de-ratings across your operating segments and your balance sheet, your cash generation, can you just remind us of your M&A strategy and maybe talk to areas of interest to what could be complementary to News Corporation? Or would the preference right now be kind of just to monitor AI developments and execute the buyback? Robert Thomson: David, we have the option of optionality. We are constantly looking for investments externally that make sense for the business, but not at unreasonable prices. And you can see from our recent acquisitions, that's been precisely the case. We obviously invest organically where we see growth opportunities within the company, and then there's the buyback. And I'll pass to Lavanya for a little articulation of that. Lavanya Chandrashekar: Yeah. Thank you, David, for that question. On the buybacks, we definitely evaluate this on a continuing basis. And we are focused on maximizing and driving shareholder value. As you would have seen from our announcement, we bought back $172 million worth of shares in the second quarter. At the current stock price, we expect the rate of purchases will be higher in the second half and the total dollars repurchased will be meaningfully more in the second half than in the first half. Michael Florin: Thank you, David. Luke, we'll take our next question, please. Operator: Our next question will come from Craig Huber with Huber Research. Please unmute your line and ask your question. Craig Huber: Great. Thank you. Robert, this is a two-part question for you. I always like to ask you, has anything changed in your mind about investors' thoughts and wishes that you guys would help, you know, simplify your company here? It seems like you're doing a lot better fundamentally across the businesses here, but anything changed in your mind to help simplify the company any further here? And my added question I wanted to ask you was on homes.com out there in the marketplace, you know, versus realtor.com, you're doing quite well here recently with the revenue growth at realtor.com, roughly 10% type growth in revenues there. Is homes.com in the marketplace concerning you all given all the amount of money that they're putting in place to run that operation? Or is it having any negative effect on you? Worried about it? Are you doing anything significant to change your operation to combat that? Thank you both. Robert Thomson: Craig, look, we're consciously constantly examining structure, and our focus is on generating value, long-term value for our shareholders. We have a robust balance sheet, strong free cash flow, positive growth trajectory, and as I said earlier, the option of optionality. As for homes.com, look, we're absolutely delighted with the progress at realtor, which is going from strength to strength. Look. And, obviously, homes.com is complicated. It's at least a fixer-upper. And while some people suggest that it's more of a knockdown, I think that comparison is a little unkind. For us, the focus is absolutely on realtor whose revival is real. And whose trajectory is particularly positive. Lavanya Chandrashekar: Yeah. If I could just add to that, maybe some details on that. I mean, as Robert said in his remarks, I mean, we're really pleased with the engagement that we have seen on realtor.com. We have the highest engagement across all of the portals with five visits per unique user. We have gained audience share up to 29%, and when you look at our visits, we have three times the number of visits as homes.com, two times the number of visits as Redfin. And we've had the fastest revenue growth here in this last couple of quarters that we've seen in the last four years. And that's without the property market being meaningfully better, and we do know that the property market will recover, and so there's a very long successful runway here for realtor. Michael Florin: Thank you, Craig. Thanks, Craig. Luke, we'll take our next question, please. Operator: Yes. As a reminder, if you would like to ask a question, please use the raise hand functionality to put them in the queue. Our next question will come from Elsa Lee with UBS. Please unmute your line and ask your question. Elsa Lee: Hi, Robert. Hi, Lavanya. Thank you for the question. My question is on circular revenue at Dow Jones. You've called out consumers and now rolling off promotional pricing which will be supportive of ARPU. Can you share any colors on how you're thinking about pricing growth going forward and maybe the balance between acquiring new subs versus ARPU? Robert Thomson: Oh, look. Thank you for the question. The Dow Jones team has successfully secured a significant increase in enterprise customers, where we are incorporating WSJ content into the work streams of companies. Now those tend to be large deals with lower churn and significantly lower marketing costs, but obviously, in the shorter term, they will have a modest impact on ARPU. But the innovative subscription team at Dow Jones believes that we have genuine elasticity on price given our unique editorial experience. Our ability to track potentially vulnerable subscribers is improving each passing month, as is our ability to identify high usage subscribers who can be targeted with dynamic pricing that reflects the importance of their reading relationship with the journal. Now, obviously, our focus is on recurring revenues, but it should also be noted that digital advertising revenue rose 12% during the quarter compared to a year earlier and to a record high. So not only does Dow Jones have a growing audience, it has a very desirable digital demographic. Lavanya Chandrashekar: Yeah. And maybe I'd add to that, Elsa. We did take price on digital new customers and on certain tenured customers here in the recent past. We're also working on optimizing a number of our promotions, and I do want to point out that excluding our enterprise customers, our ARPU has been improving at a healthy rate. Michael Florin: Thanks, Elsa. Luke, we will take our next question, please. Operator: At this time, we have no further questions. I will hand the call to Michael Florin for closing remarks. Michael Florin: Well, great. Thank you all for participating today. Have a wonderful day, and we'll talk to you soon. Take care.
Operator: Good day, and thank you for standing by. Welcome to the first quarter 2026 ESCO Technologies earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. On the call today, we have Bryan Sayler, President and CEO, and Christopher L. Tucker, Senior Vice President and CFO. And now I'd like to turn the conference over to the first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, now you have the floor. Thank you. Kate Lowrey: It was made during this call, which are not strictly historical, are forward-looking statements within the meaning of the safe harbor provisions of the Federal Securities Law. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the company's operations and business environment, including but not limited to, the risk factors referenced in the company's press release issued today, which will be filed as an exhibit in the company's Form 8-Ks to be filed. We undertake no duty to update or revise any forward-looking statements except as may be required by applicable laws or regulations. In addition, during this call, the company may discuss some non-GAAP financial describing the company's operating results. Reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company website at www.escotechnologies.com under the link Investor Relations. Now I'll turn the call over to Bryan. Thanks, Kate, and thanks, everyone, for joining today's call. Bryan Sayler: We are pleased to meet with you this afternoon to discuss ESCO's strong first quarter results, which have our fiscal 2026 off to a great start. We booked over $550 million in orders in the first quarter, which is an increase of 143% over the prior year. All three of our segments saw double-digit orders growth, led by strong aerospace demand and large Navy orders at Maritime and Globe. We believe in the long-term growth drivers across our end markets, and it was great to see the positive momentum across our businesses to start the year. Top-line sales growth of 35% combined with 380 points of adjusted EBIT margin expansion drove a 73% year-over-year increase in adjusted earnings per share from continuing operations to a Q1 record of $1.64 per share. Our exceptional financial results for the quarter are a testament to our strategic positioning across our served markets combined with disciplined execution by our global team. Chris will take us through all of the financial details in the quarter, but before we get to that, I want to give you a few comments on each of the segments. Let's start with aerospace and defense. As I mentioned, we're seeing tremendous order strength on both US and UK Navy programs from the maritime business and from our organic Navy business. In addition, sales were up 76% in the quarter, driven by the addition of Maritime, and double-digit organic growth across our Navy and aerospace programs. The growth story here remains intact, driven by increasing build rates for commercial aerospace OEMs, and sizable investments from our defense customers as they refresh and expand their capabilities. Overall, we're seeing the benefits of our A&D segment's sharper focus on the aerospace and Navy markets where the long-term outlook remains quite positive. Switching over to our utility solutions group, the results here were a little bit more mixed in the quarter. Orders were up double digits with very strong order flow for services, condition monitoring, and offline test equipment at Doble. But this was partially offset by lower demand in our renewables business. Sales were up modestly over the prior year, as renewables headwinds largely offset the 6% revenue growth at Doble. Overall, we remain quite excited about the outlook for our utilities business. The majority of the activity here is driven by utility capital spending focused on grid reliability and capacity increases, and we continue to see those forecasts grow. ESCO's capabilities have a clear role to play in assisting utilities to meet growing electricity demand, and we remain bullish on the long-term prospects for growth here. As we have discussed previously, the renewables market is recalibrating right now as US developers focus on completing current projects in order to satisfy the safe harbor provisions related to tax credits which expire in July. This has slowed domestic renewables investments in the near term, but we continue to believe that longer-term, renewables will play a vital role as a cost-competitive source of generation as utilities work to meet the increasing demand for electric power. Finally, I'll touch on the test business, which had a robust start to the year. With orders up 17% over the prior year and revenue up 27%. This business had a nice year of recovery in 2025, and it's great to see that momentum continue with significant growth during the first quarter. This is a technology-driven business with broad capabilities to serve customers across the RF test and measurement and industrial shielding markets. The team here is executing very well, and we're excited the outlook for test continues to improve. Overall, our Q1 results got us off to a great start for the year. With record backlog and continuing strength across our businesses, we are raising our full-year sales and earnings guidance. With that, I'll turn it over to Chris who will run you through the financial details for the quarter. Thanks, Bryan. Everyone can follow along on the chart presentation. We will start on page three, which shows financial highlights for the first quarter. Christopher L. Tucker: Bar charts across the top of this page clearly show that ESCO had a tremendous first quarter. The key theme with ESCO's financial performance right now is that core company performance on an organic basis is quite strong, and the ESCO Maritime acquisition is adding significantly to that base company performance. It's a powerful combination. Getting the numbers, we start with orders, which increased 143%. Organic order growth was double-digit for all three business platforms, with aerospace and defense being particularly strong. Maritime added $238 million of orders as the business received large contract awards in the UK. On the sales side, reported growth was 35%, which was comprised of 11% organic growth and $51 million of sales from Maritime. On the profitability side, we saw adjusted EBIT margins improve by 380 basis points to 19.4%, and adjusted earnings per share increased by nearly 73% to $1.64 per share. Next, we'll go through the segment highlights, starting with aerospace and defense on page four. A great quarter here, starting with orders, which came in at over $380 million compared to $75 million in the prior year quarter. Order activity was quite strong from the commercial and military aircraft customers. Additionally, Navy order activity was also very strong with organic growth driven by Virginia class block six orders. Sales in the quarter were $144 million with organic growth of 14%. This robust organic growth was driven by strength in commercial and defense aerospace, as well as the Navy business. So really nice performance from all parts of the core aerospace defense platform. On the profitability side, we had tremendous increases with adjusted EBIT margins up to 26.5%, which is more than 500 basis points of improvement. Adjusted EBIT and adjusted EBITDA dollars both more than doubled from last year's first quarter. Again, this demonstrates the strength of our base company performance and the additive impact of the ESCO Maritime acquisition. Margin increases were due to positive impacts from leveraging sales growth and increased price while Q1 also had favorable mix due to aftermarket sales. Next, we will go to chart five in the Utility Solutions Group. Orders here were up 10% in the first quarter driven by strong performance at Doble, where orders grew by 15%. Backlog finished at nearly $155 million, up 8% since September 30. Sales in the quarter were up a modest 1%, with Doble sales growth of 6% mostly offset by declines at NRG. Doble continues to see good end market activity across a number of product lines serving the regulated utility customer base, while NRG continues to see near-term market weakness as the renewable activity resets. Adjusted EBIT dollars were down just over 4% with price increases and sales volume leverage at Doble unable to offset margin drops at NRG. We have the test business on page six. This business had a terrific start to fiscal 2026 with orders up over 17% and sales up nearly 27%. This business is seeing robust market activity centered around US test and measurement, industrial shielding, medical shielding, and power filters. Adjusted EBIT margins improved nicely, increasing to 13.8%, which represents an increase of 320 basis points from last year's first quarter. The business is leveraging the sales growth nicely, also increasing margins via price increases and cost containment. Going to chart seven, we have cash flow highlights for the first quarter. Operating cash flow in the first quarter was very strong, more than doubling to $68.9 million on a continuing operations basis. This was led by an increase in contract liabilities at the Navy businesses. Capital spending increased slightly in the quarter, and there was also a payment of just over $5 million during the quarter for the final working capital settlement related to the ESCO Maritime acquisition last year. Our last chart is number eight where we have the updated 2026 guidance. With a great start to the year, we are able to substantially increase the 2026 outlook. The sales guidance is increasing by $20 million at the midpoint to a range of $1.29 billion to $1.33 billion. The increase is coming primarily from the test business, where we had Q1 outperformance in sales and orders driving up the full-year forecast. The original sales guidance for Test was for growth in the range of 3% to 5%, and the updated guide is for revenue growth in the range of 9% to 11%. Additionally, we had a slight increase in the A&D sales outlook. Overall, the sales increase is driving increased adjusted EBIT performance expectations for 2026. Additionally, the first quarter tax rate was favorable, and that impact will flow to the full-year forecast. This means that full-year tax rate projections are now in a range of 23% to 23.5% compared to 23.7% to 24.1% in the original guidance. All of this drives the full-year adjusted earnings per share to a range of $7.90 to $8.15 per share. Compared to the prior guidance range, this is an increase of $0.38 per share at the midpoint and represents growth of 31% to 35% compared to 2025 adjusted earnings per share. The original outlook represented a strong growth plan for ESCO, and we are pleased to share this increased forecast representing an even stronger growth trajectory. That completes the financial summary. Now I'll turn it back over to Bryan. Thanks, Chris. Bryan Sayler: So as you've heard from our commentary, Q1 was a great start to the year. Robust orders and strong execution have put us in a position to raise our outlook for the full year. So with that, we're finished with our prepared remarks and can turn it over to the Q&A. We also ask that you wait for your name and company to be announced before proceeding with your question. Operator: The first question today will come from the line of Tommy Moll of Stephens. Your line is open. Tommy Moll: Good afternoon, and thanks for taking my question. Bryan Sayler: Hey, Tommy. Tommy Moll: Bryan, my first question is on the A&D orders. To the extent you can comment on ships that content on either side of the Atlantic, if there's any updates there, we'd appreciate it. And maybe bigger picture on orders, you know, last quarter's 0.83 book to bill was clearly not the right level. This quarter's 2.66 is probably not a sustainable level. But how would you give us some kind of enduring takeaway here on the state of affairs there? Bryan Sayler: Well, I'll take the last piece first, and that is I think the enduring takeaway is that the long-term demand in all of these markets is really, really good. I think we've signaled a number of times that Navy in particular is going to be very lumpy. I think we mentioned in November's conference call that we had a large, you know, couple $100 million order in the UK. That came through. Unfortunately, the way that the MOD thinks about those things, we're not really in a position to be able to give you specifics on platforms or our content there. So I would not be able to give you a lot of detail there. I'd say over on the US side, we also received in the quarter about $30 million in orders for Virginia class block six. And we would expect that to kind of be continuing. But again, that's going to come in big chunks, and so that's gonna be kind of lumpy. And it's not always gonna be in the same quarter every year. So the year-over-year quarter-to-quarter comparisons aren't really great. I think the other big story here is that we really did see a pretty robust return to orders from our aerospace OEMs. You know, 2025 was kind of a year that was a little soft on the order side as you know, build rates were kind of stable, and there seemed to be a lot of management of inventory going on in the supply chain. But we think that they're kind of through that. We're really encouraged to see Boeing and the other OEMs kind of getting their bill rates up. And we're starting to see that come through on our order book. I'd also say there was a pretty good amount of military aircraft activity in the quarter as well. That's something that is more stable, will be lumpy through a, you know, four-quarter cycle. But generally speaking, it will be pretty repetitive on a year-to-year basis with a little bit of growth. Tommy Moll: Bryan, if I could stay on A&D for another question. Just looking at the results in the first quarter, and the guide for the year, I'm talking revenue now. It looks conservative at first glance. I mean, you raised it from a seven to an eight at the midpoint. But you started the year in the teens on a pretty tough comp. So maybe walk me back from that assumption if there's something I'm missing here. Christopher L. Tucker: Yeah, Tommy, this is Chris. You know, I would say that we do expect that the first quarter is going to be the strongest growth, and we would expect to still see solid growth through the year, but kind of tapering down a little bit. And then when we get to Q4, we have, you know, kind of lower growth overall. Again, I think that's a function of the comps a little bit. So, you know, we still see a nice high single-digit outlook there in the core business, but you know, understanding it's a little bit front-end loaded. Tommy Moll: Thank you both. I'll turn it back. Operator: Thank you. One moment for the next question. And the next question will be coming from the line of Jonathan E. Tanwanteng of CJS. Your line is open. Jonathan E. Tanwanteng: Hi. Thank you for taking my questions and a really great quarter and outlook, guys. Bryan Sayler: Thanks, Jon. Jonathan E. Tanwanteng: If you could start, what's driving the strength in test, and how did that change so quickly in the span of ninety days? Bryan Sayler: Listen. A lot of our traditional core markets, particularly electromagnetic compatibility, you know, medical shielding, those really came back very, very strong this year. Or this quarter, I would say. We won a couple of pretty good-sized orders, and that's really, you know, because it happened earlier in the year, we're gonna see a lot of that come through as revenue within the year. I would also say that we're starting we've seen kind of a return to, you know, regular orders from our kind of our EMP filter product line that supports, you know, some of the data centers and that sort of thing. So, listen. Just a pretty broad-based I would tell you that the one area that we're still not, you know, feeling love on is the wireless business. I mean, it's we did see a little bit of growth there, but it's coming off a very low base. So that's the one area where we're probably still looking for some recovery. But I would say overall, like, a little bit A&D in there, some microwave stuff, so really good good and I would say Europe and the US were the two big leaders there. Jonathan E. Tanwanteng: Got it. Thank you. And then are you within sight of the trough of the energy business, or do you think that's gonna extend a little further out? Bryan Sayler: Yeah. Listen. I think that what we believe about that is that the focus for all of the developers in the US is really they're hyper-focused on kind of getting as much done on their existing projects by July. So that they can qualify as much of that as possible for those cash credits. And so, you know, a lot of our content's already been delivered on those projects. And so that's leading them to make lower investments right now on new projects. We expect that that's gonna kind of revert in 2026. So it might be in our fourth quarter. It might be in the first quarter of next year. That's when we think that things are gonna kind of return to what we would call normal growth. Which would be kind of high single digits, kind of like our regulated utility business operates. So please remember, Jon, that after the Inflation Reduction Act was put in place, you know, that whole market kind of got turbocharged for two or three years. And now they're kind of, you know, getting off that sugar high from all those tax incentives. And it's gonna take them, you know, a couple more months to kind of get back in the pocket. And really making good decisions. The renewables business, you know, will have a big role to play because it is very cost-effective. Relatively easy to deploy, and the assets are available. And those are all characteristics that utilities are looking for. Jonathan E. Tanwanteng: Got it. Thank you. Then last one, if I could. Just the large orders of the maritime business, can you just talk about how they'll layer in over the next couple of years and if that's an acceleration of the growth rate or if that's in line with what your expectations were? Christopher L. Tucker: Yeah. I would say it's in line, you know, kind of since we've owned the company. You know, we closed the deal in April, and so these were kind of the expectations were that this order would come in. As far as how that layers in, I would say we would get a little revenue starting in the fourth quarter. And then you'll start to see it kind of kick in more in '27 and '28. So these are, you know, these are long-term contracts and programs. That really kind of help solidify the outlook for '27 and beyond, I would say. So that's kind of how we're thinking about them. And really not much of a revenue impact this year, although there will be a little bit towards the end of the year. Jonathan E. Tanwanteng: Got it. Thank you. Operator: Thank you. One moment. We do have a follow-up question. And that question is coming from the line of Tommy Moll of Stephens. Your line is open. Tommy Moll: Thanks for a follow-up question here. I had to ask on capital allocation. You'll look not too long for now and potentially have a net cash balance sheet. So I'm just curious what comments you can make on M&A funnel or capital allocation more broadly. Thank you. Bryan Sayler: Yeah. Well, listen, I think with the sale of the tobacco business, and the completion of the maritime business, and that integration kind of going pretty well. Our cash flow really has been outstanding, and our leverage is pretty low. We are actively rebuilding a pipeline of M&A opportunities. The market looks pretty healthy. And we do see a number of different prospects on the horizon. Nothing we can announce, you know, at this point in time, but, you know, we do have a couple of good things that we could get something done this year. That's really our primary focus for deployment of capital, would be to continue to add good fit strategic acquisitions. I think that we're going to continue to be a little bit picky focused primarily on our utility segment, our aircraft components segment, and our Navy segment, where we think we understand those markets pretty well, and they are all markets that have really good long-term secular growth characteristics. So that's kind of where our focus is right now. Tommy Moll: Thank you, Bryan. That's all for me. Operator: Thank you. And we have a follow-up question from the line of Jonathan E. Tanwanteng of CJS. Your line is open. Jonathan E. Tanwanteng: Thanks for the follow-up. I was wondering if you could talk a little bit more about the military business in the A&D segment that is not Navy. You mentioned strength in military aircraft. Just wondering where that's coming from, number one. And if there's anything outside of that, maybe drones or munitions that's driving some strength there. Bryan Sayler: Yeah. I think it's pretty broad-based. But a couple of highlights there. You know, you would have seen in the 2025 reconciliation bill that they put a lot of money out there. They've provided 21 of the 15 EX fighters. That's a platform that we have a lot of content on. You know, there's a lot going on with regard to the sixth-generation fighter platform, the F-47. And, you know, that's been a positive story for us. So, yeah, there's a lot of good things going on. But I would say, yeah, the traditional kind of F-35, missile programs, all those things are all kind of coming through for us. Jonathan E. Tanwanteng: Got it. Thank you. And then just for the broader airplane business, the commercial side, how closely does your guidance, I guess, mirror the targeted production rates at the OEMs? Or are you still giving them a little cushion in your outlook? Bryan Sayler: No. We stopped cushion. I think that, you know, yeah, I've we follow, you know, our OEM partners very, very closely. But I think that we have our own opinion which is probably modestly skeptical of their ability to get to reach their targets. And so when we are communicating, you know, to you, you know, I think you should assume there's a little bit of discount on there, which, yeah, listen. If they're successful, then that's gonna be all upside for us. Jonathan E. Tanwanteng: Got it. Thank you, guys. Bryan Sayler: Thanks, Jon. Operator: Thank you. And this concludes today's Q&A session. I would like to turn the call back over to Bryan for closing remarks. Please go ahead. Bryan Sayler: Well, listen, thanks for taking a little bit of time to hear about our first quarter. We're pretty excited about the results and probably more excited about our growth prospects going forward. So we'll look forward to talking to you again next quarter. Operator: Thank you for joining today's program. You may all disconnect.
Operator: Welcome to Impinj, Inc.'s Fourth Quarter and Full Year 2025 Financial Results Conference Call and Webcast. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Andy Cobb, Vice President, Corporate Finance and IR. Please go ahead, sir. Andy Cobb: Thank you, Nick. Good afternoon, and thank you all for joining us to discuss Impinj, Inc.'s fourth quarter and full year 2025 results. On today's call, Chris Diorio, Impinj, Inc.'s founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj, Inc.'s CFO, will follow with a detailed review of our fourth quarter and full year 2025 financial results and first quarter 2026 outlook. We will then open the call for questions. You can find management's prepared remarks, plus trended financial data on the Investor Relations section of the company's website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995. Whereas we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. We describe these risks and uncertainties in the annual and quarterly reports we file with the SEC. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements except as required by law. On today's call, all financial metrics, except for revenue, or where we explicitly state otherwise, are non-GAAP. All balance sheet and cash metrics, except for free cash flow, are GAAP. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics. Before turning to our results and outlook, note that we will participate in the Barclays 43rd Annual Industrial Select Conference on February 17 in Miami, Susquehanna's 15th Annual Technology Conference on February 26 in New York, and the 2026 Tanner Global Technology and Industrial Growth Conference on March 11, in New York. We look forward to connecting with many of you at those events. I will now turn the call over to Chris. Chris Diorio: Thank you, Andy. And thank you all for joining the call. 2025 was a tough year for our industry. Tariffs, and tariff-related supply chain whipsaws, inventory reductions at every layer of our retail markets, a downward trend in apparel imports, and protracted general merchandise adoption all weighed heavily on the RAIN market. It was also a transition year for us. We grew year-over-year endpoint IC volumes by 9%, believe we gained endpoint IC market share, made M800 our volume runner, launched Gen2X, and proved it to be a must-have for solution success. We drove Gen2X-enabled solutions at multiple Lighthouse accounts, helped plant the seeds for accelerating food adoption, and exited the year with record adjusted EBITDA and cash. I am very pleased with how our team rose to meet the challenge. Looking into 2026, we see in the first quarter, a confluence of order timing, ongoing retailer inventory burn-down, product transitions, and a super seasonal systems decline due to project timing, driving revenue lower. Looking just a bit further out, we see conditions improving as endpoint IC volumes rebound, and growth returning as our investments in seeding new opportunities and our solutions focus pay off. Starting with first quarter endpoint ICs, like last year, our second large North American supply chain and logistics end user significantly shifted their label supplier allocations. Partners that anticipated share gains ordered ahead in the fourth quarter, whereas those with share losses are reducing inventory in the first. Additionally, we are quickly pivoting to a custom-built endpoint IC for that end user which I'll describe shortly, causing a further temporary dip in endpoint IC orders as partners reduce prior product inventory while we ramp volumes of the new IC. Second, we see apparel retailers reducing stock and under-buying demand, impacting our first quarter outlook. And finally, food volumes remain modest in the first quarter. Turning to our expectations as we exit the first quarter, I'll start with that custom endpoint IC. Think of it as an ASIC, developed with the end user tightly linked to their and our platforms, with added features like label authentication, that solve key business needs, while also eliminating unneeded features. They plan to fully switch to it this year. The EIC also opens new opportunities for them to unlock and for us to participate in new outward-facing customer accounts. Second, we see endpoint IC demand for apparel normalizing as soon as the second quarter. Third, we see general merchandise growing as existing categories add SKUs, and new categories get added. Fourth, we see food rollouts expanding to more stores. And finally, we see our solutions efforts opening major new accounts. To speed our pivot to solutions, we recently added Chris Hundley as an executive vice president for enterprise solutions. Chris adds significant software and solutions talent to our team. We are also doubling down on Gen2X as a solutions enabler. Added EM Microelectronic as a Gen2X licensee, and are forging close Gen2X partnerships with leading ecosystem players. We not only see Gen2X increasing the performance and feature gap between M800 and its competition, but also see it as an essential toolkit for enterprise solutions. And we have a growing pipeline of solutions opportunities. We expect our solutions efforts to drive endpoint IC volumes and share, reader and reader IC revenue growth, and in time, meaningful software revenue. And perhaps most importantly, a selling model that focuses on solution value rather than individual components. Of course, even as we pursue solutions, we remain keenly focused on our current products. In retail apparel, multiple new end users are talking openly about RAIN adoption. We are pursuing wins with them as well as further share shifts with existing retailers. In general merchandise, we see 2026 as the year that unlocks key new logos and current use cases, add significant new ones, and drive the IC volume goals. On the competitive front, we see Gen2X driving additional opportunities to us. In food, we see a ramp through 2026 led by bakery with proteins to follow. And although food volumes remain modest, the opportunity is staggeringly large and we intend to lead and win it. Overall, we see industry endpoint IC volumes rebounding from an uninspiring 2025 as these growth factors layer on with our leading market share driving an outsized portion of those volumes to us. We see our solutions revenue expanding, notably as our Lighthouse end users outperform their peers, and pull us into opportunities. And in all, we expect our focus on hitting solution price points where the ROI pencils out for the end user to pay off handsomely. Before I turn the call over to Cary for our financial review and first quarter outlook, I'd like to again thank every member of the Impinj, Inc. team for your constant effort driving our bold vision. As always, I feel honored by my incredible good fortune to work with you. Cary? Cary Baker: Thank you, Chris, and good afternoon, everyone. Fourth quarter revenue was $92.8 million, down 3% sequentially compared with $96.1 million in third quarter 2025, and up 1% year-over-year from $91.6 million in fourth quarter 2024. 2025 revenue was $361.1 million, down 1% year-over-year compared with $366.1 million in 2024. Fourth quarter endpoint IC revenue was $75.2 million, down 5% sequentially compared with $78.8 million in third quarter 2025 and up 2% year-over-year from $74.1 million in fourth quarter 2024. Endpoint IC revenue slightly exceeded our expectations driven by Pern's orders. M800 was the volume runner with unit volumes increasing sequentially. 2025 endpoint IC revenue declined 2% year-over-year driven by the factors Chris already noted. Looking to first quarter, we expect endpoint IC revenue to decline sequentially at a high teens percentage rate driven primarily by supply chain and logistics channel inventory reductions, retail weakness, and to a lesser extent by annual endpoint IC price reductions. Fourth quarter systems revenue was $17.7 million, up 2% sequentially compared with $17.3 million in third quarter 2025, and up 1% year-over-year from $17.5 million in fourth quarter 2024. Systems revenue exceeded our expectations driven by NRE revenue, while reader and gateway revenue and reader IC revenue declined as anticipated. 2025 systems revenue grew 2% year-over-year with reader and gateway growth more than offsetting declines in both reader ICs and test and measurement solutions. Looking to first quarter, we expect systems revenue to decline more than seasonally, primarily due to project timing at our enterprise customers. Fourth quarter gross margin was 54.5%, compared with 53% in third quarter 2025 and 53.1% in fourth quarter 2024. The year-over-year increase was driven by higher endpoint IC direct margins, specifically from a richer mix of M800. The quarter-over-quarter increase was driven primarily by higher systems direct margins, specifically higher NRE revenue, and to a lesser extent, higher endpoint IC direct margins. 2025 gross margin was 55.3%, compared with 54% in 2024 with the increase due primarily to a richer mix of M800 endpoint ICs. Looking to first quarter, we expect gross margin to decline sequentially driven primarily by lower revenue on fixed cost and annual endpoint IC price reductions. Total fourth quarter operating expense was $34.2 million compared with $31.8 million in third quarter 2025, and $33.6 million in fourth quarter 2024. Research and development expense was $18.6 million. Sales and marketing expense was $8.2 million. General and administrative expense was $7.4 million. 2025 operating expense totaled $130.1 million compared with $131.9 million in 2024. We expect total first quarter 2025 operating expense to increase sequentially, driven primarily by normal seasonal factors. Fourth quarter adjusted EBITDA was $16.4 million compared with $19.1 million in third quarter 2025 and $15 million in fourth quarter 2024. Fourth quarter adjusted EBITDA margin was 17.7%. 2025 adjusted EBITDA was a record $69.6 million compared with $65.9 million in 2024. 2025 adjusted EBITDA margin was a record 19.3% in line with the long-term model we shared at our 2023 Investor Day. Fourth quarter GAAP net loss was $1.1 million. Fourth quarter non-GAAP net income was $15.6 million or $0.50 per share on a fully diluted basis. 2025 GAAP net loss was $10.8 million. 2025 non-GAAP net income was $64.2 million or $2.11 per share on a fully diluted basis. Turning to the balance sheet. We ended the fourth quarter with record cash, cash equivalents, and investments of $279.1 million compared with $265.1 million in third quarter 2025 and $239.6 million in fourth quarter 2024. Inventory totaled $85 million, down $7.7 million from the prior quarter. Fourth quarter capital expenditures totaled $1.5 million. Free cash flow was $13.6 million. 2025 capital expenditures totaled $12.9 million. Free cash flow was $45.9 million. Turning to our outlook. We expect first quarter revenue between $71 million and $74 million compared with $74.3 million in first quarter 2025, a year-over-year decrease of 2% at the midpoint. We expect adjusted EBITDA between $1.2 million and $2.7 million. On the bottom line, we expect non-GAAP net income between $2.5 million and $4 million reflecting non-GAAP fully diluted earnings per share between $0.08 and $0.13. In closing, I want to thank the Impinj, Inc. team, our customers, our suppliers, and you, our investors, for your ongoing support. I will now turn the call to the operator to open the question and answer session. Nick? Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, a courtesy to others, we ask that you limit yourself to one question and one follow-up. You have additional questions, please requeue, and we will take as many questions as time allows. At this time, we will pause momentarily to assemble our roster. And the first question will come from Harsh Kumar with Piper Sandler. Please go ahead. Harsh Kumar: I wanted to hit upon the first quarter guidance a little bit. I think you're off something like $17 million to $18 million relative to the expectation on the street. I know you've got a shift at EPA. I'm sorry. A shift at your second customer in logistics. And you've also got some sort of a custom chip that you're developing and also seems like some excess inventory. So I was hoping that you could break down for us this miss between the impact from orders from the custom ship and the timing associated with it. Versus how much excess you have. And I'll ask my second question at the same time. It seems like there's a lot of stuff moving around. You talked about food, sort of moving around, apparel moving around. But then you seem pretty confident that all of this will fix itself fairly fast, like in the second quarter. These are large end markets, and I'm curious what gives you the confidence that this will swing around in a better situation as quickly as the second quarter. Chris Diorio: Okay. Thank you, Harsh. This is Chris. There's a lot to unpack in this question. I think Cary and I will tag team it here. So I'm going to start by saying that despite the starting points looking the same, we see 2026 very differently from 2025. 2025, we took a competitive lead and held our own, in what was an otherwise pretty tough year. In 2026, we're gonna press that lead in what we believe is shaping up to be a growth year for the reasons that we cited in our prepared remarks. Relative to those prepared remarks, Cary and I will both go through some of the details on why we see things turning around and actually why I talked about exiting the quarter on an upward swing. Just before I hand over to Cary to add a few points, I will say that that custom chip for our second large American supply chain and logistics end user is not just in design. We are currently shipping it. And so it is in production now. Cary, why don't I turn over to you for a bit, and then we can go back and forth? Cary Baker: Thanks, Chris. First, let me break down the Q1 revenue guide and how we built it. So as I noted, we're expecting endpoint IC revenue to decline sequentially at a high teens percentage. That's primarily on lower volume as our inlay partners supporting our logistics customers burned down a few weeks of inventory. Think of each week of burn-down approximating about $5 million of impact. To a much lesser degree, yearly price reductions and product mix are also impacting our first quarter. We're modeling pricing at a couple million bucks, and the mix impact is smaller than that. There's also some retail weakness that we're factoring through our guide. Now as we built our guide we wanted to be prudent in doing so. So there's a couple of things to consider in our guidance. First, the January turn orders have been strong. They're already double what Q4 was at the same point in the quarter and they're up more than 50% than they were last January. The second piece I would highlight is that the elevated rescheduling behavior that we saw all of last year has significantly moderated and is approaching a return to normal levels right now. And then finally, I would add, our endpoint IC business is nearly 100% booked to the midpoint of the guide, despite there being a few weeks left to turn business in the quarter. So Harsh, we'll pause there. Why don't you follow on and we answer your question adequately, or did we leave parts of it open? Harsh Kumar: No. No. Super helpful. I just wanted to follow-up on the second question that I asked, which was you've got a lot of end markets moving around food, apparel, all of which is getting hit seems like in 1Q, you mentioned. But then you're pretty confident that all of this will turn around. I was curious. Are you just looking at your orders and saying this will turn around for you, or is there something happening within the end markets that is causing the orders to have come in into the 1Q and you're expecting something to happen in the end market to drive that business up? Chris Diorio: Yeah. So there's no easy answer to your question because the answer depends on the particular aspects of the end markets. In food, as I said in my prepared remarks, we see modest volumes but inexorable growth. And we remain incredibly excited about that food opportunity. We see the number of stores expanding, especially in bakery. And we see opportunities in the food space. In retail apparel, as we said, we see ongoing retailer inventory burn-down. We saw some of it in the latter part of the fourth quarter now that we finally have the data. And we see it continuing in the first quarter. We expect that inventory burn-down to normalize based on input from the retailers themselves as well as from our partners. And we've seen new accounts coming online. For example, Abercrombie and Fitch, Aritzia, Old Navy, Academy Sports, and others. We see new accounts coming online. And then in the supply chain and logistics space, of course, as Cary noted, we see the inventory burn-down correcting as well as the new IC added volumes to us. So overall, we think we've got good visibility into the end opportunities that you've been you just raised here. And the reasons we feel positive about the situation exiting the quarter is that we see positive news there. Harsh Kumar: Thank you, you guys. Chris Diorio: Thank you. Operator: The next question will come from Blayne Curtis with Jefferies. Please go ahead. Ezra Weener: Guys. Ezra Weener on for Blayne. Thanks for taking my questions. Just first, wanna make sure I understand this correctly. You said apparel is gonna normalize in Q2. Do you also expect the logistics to normalize in Q2, or do you think that's take a little bit longer? Chris Diorio: We said that we see apparel overall normalizing as early as the second quarter. We're not going to actually project the actual date. In the supply chain and logistics space, as Cary said just a minute ago and Cary, I'll have you ahead again. We see the inventory correction happening in the first quarter. Cary, anything you'd add there? Cary Baker: Yeah. Ezra, I would say, you know, we're entering the quarter with a few extra weeks of channel inventory related to supply chain and logistics. We're gonna work very hard to burn that down in Q1. But we know from history that it's difficult to contain a correction to a single quarter, and it may spill over into the second quarter. You'll have to wait for us to give an update as we exit Q1 on how successful we are at burning that inventory down. Ezra Weener: Got it. And then my follow-up would be in terms of ASIC, talked a little bit about pricing and solutions. Can you talk a little bit about how you view that and that solution for the customer and how you think about kind of pricing and value? Going forward with that? Chris Diorio: Yes. I'm this is Chris. I'm happy to. You know, we've been focused for a while on understanding end-user problems designing customizations through our platform, that address the customer needs. We did Protected Mode for a visionary European retailer and brought that broadly to market, and it's being used by them and many others. If you think overall of Gen2X, it's the same idea. Custom features that we're broadly to market, and both of them see market success. In this case, you can think of the custom IC as being tailored to the specific needs of that end user. And it is an IC customized for them. And we see it as not only meeting their critical needs and helping their business go forward, but also giving them the opportunity to drive operational efficiencies across their organization, and for them to expand their prowess in RAIN RFID to win new customer business, including with that IC. So we, as a company, are focused on working directly with those end users and truly enabling them to drive forward with their business and to expand it. And then for us to basically partner with them along the way. So expect us to do more of those kinds of opportunities. And as we build more and more whole solutions to tie that customized endpoint IC and a radio link that supports it features in our reader ICs into an overall solutions offering more and more and less just an IC offering. So we're early in that stage where we focus on a solution sale rather than an individual IC sale. But expect us to drive in that direction. Cary Baker: Ezra, this is Cary. The only other thing I would add is we'll price that IC to market. Ezra Weener: Awesome. Thank you. Operator: The next question will come from Jim Ricchiuti with Needham and Company. Please go ahead. Jim Ricchiuti: I just want to follow-up on this. This new chip. Is this for a subset of applications with this customer? Chris Diorio: No, Jim. It's for all applications with the It's they're gonna switch to that chip. They plan to fully switch to that chip in 2026. Okay. Customized for them, for their needs. Jim Ricchiuti: Got it. Chris, will this, I don't recall you guys ever going down this path with a customer. What kind of concerns could this customer have about back-end sourcing being able to source the chip from someone other than you just to protect themselves. Wondering, does this have anything to do with the relationship perhaps with EM Microelectronics? Chris Diorio: Good question and good connecting the dots, Jim. Not far enough along to speak to any possibilities along the about the relationship with EM, but you're thinking in the right direction. Right now, we're focused on delivering to the customer's needs, ensuring they have adequate supply and giving them commitments of supply so they have confidence in this chip and their ability to rely on it. As the future evolves and we do more of these things, and I wanna do more custom shifts because we've got other enterprise customers with key needs that aren't addressed without customizations. We will be looking to ensure for them that they have added support adequate supply of chips. Labels, reader ICs, and everything else so they can feel confident moving down this path. Jim Ricchiuti: Got it. One final question. I'll jump back in the queue. You suggested that Integu gain market share in endpoint ICUs. The major competitor has introduced a new chip. And I'm wondering how you're thinking about market share particularly with this new chip that you're introducing, and in a related question, it sounds like this competitor is still talking about a license payment in the June. So, Cary, maybe you could help me out. With is that something we should be thinking about as well for Q2? Cary Baker: The way some Demotation you should expect the license payment in Q2, Jim. You should expect it. Chris Diorio: We do. So, yes, we'll get the license payment. To the other part of your question, Jim. You know, we're focused on enabling solutions for enterprise end users. Those solutions are just not a are not just a chip. It's not just a chip and an antenna. It's a chip and an antenna and the AirLink supporting it and the reader IC supporting that and the firmware on the reader IC supporting it, the readers and gateway supporting it and the partnership supporting it and then and then solution software. We're focused on driving the entirety of those pieces to create an enterprise solution. And we firm and you see Gen2X as a key key key part of that initiative. And we firmly believe that by delivering whole solutions, and optimizing so that the solution for the end user we can outperform mix and match efforts using competitor products. And that's our focus. Jim Ricchiuti: Thank you. Chris Diorio: Thank you. Operator: The next question will come from Scott Searle with ROTH Capital. Please go ahead. Scott Searle: Maybe to start, I just wanted to get a couple of clarifications on some of your comments and some of the initial questions. For starters, on the logistics softness, I want to clarify, is the customer that you're designing a custom chip for, are they in then working down inventory to zero from legacy M700, M800 chips and that's part of the pressure as well. And then as it relates specifically to the custom ASIC, I think you got asked the market share question, but I'll ask it maybe a different way. Know, I would imagine if they're moving in this direction, it should deliver higher share as opposed to splitting the business historically with NXP. Should we be assuming though that you're going to be gaining 100% share with these types of customers? And it sounds like there's more custom opportunities in the pipeline. So how is this going to transition then over the course of 2026 and 2027? And then I had a follow-up. Chris Diorio: Yeah, Scott. I'll do my best to those questions. First, we're not just designing the chip. It's in production now. Second, it's dedicated to a single customer, which is our second large North American supply chain and logistics customer. It is targeted at addressing their specific needs, and it is a chip specific to them. We already have high share at that account. It will maintain that share. And we are exploring customizations for other enterprises, that aren't as far down the path as we are this particular instance where we actually have the IC or the chip in production. But more importantly, I view this chip as us engaging closely enough with the enterprise where they can share their needs we can share what we can do, and we can together build a chip. It's not just Impinj, Inc. chip, build a chip for them. It's we work together on it. They came forward with what they needed, and we built it for them. And they're gonna be using it and we intend to keep doing so. You know, I have a mantra in the company. And I push it at every meeting we have, which is we support our end customers. We never let an end customer down. And you should expect that us to do that here. Cary, what did NSC Scott, let me unpack the oh, Scott Searle: well, just one clarification. Inventory bill is just oh, sorry. Before the inventory bill, just, Chris, to clarify then, do you retain the IP and the ability then to license it to additional customers within that same sub-vertical or no? Chris Diorio: Yes. We do in this particular instance retain the IP. I can imagine other scenarios where there might be some shared IP in this instance, we retain the IP. But our focus first and foremost, is supporting that customer. They're a lighthouse customer to us. I consider them a close partner. You should expect us to focus first on them, with this particular chip, and we built it for them specific to them. Cary Baker: And, Scott, I'll just unpack the inventory build a little bit. Today, parcel tracking deployment uses the M800 exclusively. The M800 is our general-purpose SKU, meaning it can also support virtually any retail, apparel, or general merchandise application. And that application fungibility gave some of our partners the confidence to lean in build supply ahead of actually winning the award knowing that they can move those ICs through other applications if necessary. So when we were looking at our fourth quarter and we were building our fourth quarter, it came together as we expected. But when we unpacked it unpacked the quarter in mid-January we matched that with our channel inventory reports from our inlay partners, we realized that the logistics-related build had masked the weakness in retail. Now this will get better. With our logistics customer now ramping to the new custom IC that Chris just described, we will have better visibility into logistics-related inventory. We'll be able to match our shipments of that custom IC directly to that end customer's monthly consumption reports. We have to prove it to you, certainly, but we think this gets better going forward. Scott Searle: Okay. Very helpful. And if I could just as a follow-up, another market share question. Chris, you've referenced it a lot of times in your opening remarks. But Gen2X provides significant benefits and advantages. It only works with your endpoint IC. So I'm wondering as you look out over the next couple of quarters in '26 and '27, is this the primary driver, of incremental share out there? And will you start to run the table a little bit more in terms of meaningful market share within your existing accounts? Thanks. Chris Diorio: I'm gonna yes. I'm gonna answer the question yes. I believe that Gen2X will be the significant driver of our market share gains. But you should think of Gen2X as a toolbox that we can bring to bear, for enterprise customers who have an unmet need and allow us to solve their problem. So to the extent that we have significant enterprise accounts, which we do, we need a way to solve them. Consider Gen2X to be the way we're gonna be driving the solution and going forward, even adding more features and capabilities to Gen2X as we learn and do more. So, essentially, you should think of Gen2X as a way to improve the readability overall performance, and protection capabilities provided by RAIN RFID. To reduce labor cost to speed inventory, to provide readability work, you wouldn't have it otherwise, to localize where items are, to identify exits and theft. And many we have protect consumer privacy in many other areas where we put that whole toolbox together it's the driver of our differentiation in the market. It's kind of manifestation it, but it's also a manifestation of our overall solution strategy. For the two together, they're gonna be the drivers of our success. Scott Searle: Hey. Great. Thanks so much. I'll get back in the queue. Operator: The next question will come from Natalia Winkler with UBS. Please go ahead. Natalia Winkler: Hi. Thank you so much for taking my question. I just wanted to ask one more on the fourth quarter kind of outlook for you guys. So if I understood Cary correctly, Cary, you mentioned several weeks of inventory burn for retail. Right? And it sounds like each week is $5 million. So if I'm thinking, you know, even of a sequential, you know, reduction of $20 million, it sounds like you know, more than half of that is probably related to the retail inventory burn-down. Is that kind of a fair way to think about it? Or is it more nuanced? Cary Baker: I think that's a fair way to think about it. It's a few weeks of inventory, not several. It's primarily related to supply chain logistics for the reasons I just described. You're correct in that the impact is about $5 million per week of burn-down. And then the other factors, are far less impactful, are pricing and mix, a sized pricing at a couple million dollars, and mix of less than that. Natalia Winkler: Awesome. Thank you so much. And then I guess a follow-up. Can you guys help us understand, you know, clearly, it's a highly complex supply chain for retail, right, with kind of multiple different steps and stages in it. Can you walk us through your, you know, forecasting process and maybe part of the reason, like, why we're seeing such a strong kind of corrections and burnout that may be a little bit less predictable than for some of the other end markets you guys cover? Cary Baker: Yeah. So the inventory build was related to logistics. We had a similar logistics build last year at the same time, but for different reasons. It's nonetheless frustrating. This year's build is a result of our partners leaning in ahead of winning the supply rep supply or supply awards or label awards following the label reallocation process. They were comfortable leaning in because up until the custom IC ships, the M800 goes into the package the tracking deployment. The M800 is a fungible SKU across the industry in that its general purpose. It can support retail apparel. It can support general merchandise. It can support logistics. That fungibility gave our partners the confidence to lean in build extra inventory in hopes of winning an award. Because if they didn't win the award or didn't win as much of an award as they thought, they would be able to burn that inventory down through the rest of their market opportunities. We didn't realize that in the fourth quarter as it was happening. Because our fourth quarter from a unit volume perspective was coming in right as we expected. When we began unpacking the fourth quarter volumes in mid-January, and we matched that with the channel inventory reports we received around that same time, we realized that the logistics build had masked some weakness in retail apparel that we didn't anticipate and wasn't obvious to us until that point. Now I think next year, this gets better. And I know we have to prove that first given the last two years of channel inventory builds. But I think it gets better because we will only ship one SKU to that customer. It's only usable by that customer, and we will be able to match our shipments with their monthly consumption reports and the difference between the two is the inventory that will be in the channel. So again, we have to prove it to you. But I think we get better next year at that. Operator: The next question will come from Troy Jensen with Cantor Fitzgerald. Please go ahead. Troy Jensen: Hey, gentlemen. Thanks for taking my questions. Maybe for Chris, I guess either one of you guys, you know, these customers that were leaning in, right, in the hopes for the awards, sounds like they went to a competitor. So I'm just curious why do you think we had this share loss the quarter? Was running No. They didn't go to our competitors. Right. No. No. That that wasn't part of it. There was no none none of that moving to a competitor. So just a awards awarded They they there's a new IC coming? They, anticipated some wins. They started building to the new IC, At the same time, they know their existing inventory is gonna it needs to get burned down. So they they they started buying ahead. The ones who as we said in our prepared remarks, the ones who didn't win as much now need to burn down their inventory in the first quarter. Cary Baker: So, Troy, the only thing I'd add to Chris is is that our logistics customer rebids their label suppliers each year. It's still the M800, for all labels, but the mix of inlay partners that support them each year can change. Based on that rebidding process. And that rebidding process here this year coupled with the fungibility of the M800 that I just described, gave them the confidence to lean in and buy more supplies so they could be more responsive if they won the award or to win a greater share of the award. Troy Jensen: Gotcha. And they knew that if they didn't win as much, they would be able to take that inventory out through virtually any other retail apparel or general merchandise application. Chris Diorio: Yep. Okay. Understood. So several partners probably thought they're gonna win the award and and went to one. Exactly. It was oversubscribed. The award was oversubscribed. Exactly. And the we compound it with a new chip entering the market, and there still needs to be a further burn down of the existing M800 product. Troy Jensen: Yep. Okay. Understood. And then, maybe just to follow-up with the, you talked about retail SKU growth you're seeing. I'm curious if that's broad-based or is that just limited to a couple of your bigger customers? Chris Diorio: It was a SKU growth in general merchandise. You mean retail apparel? Growth? Troy Jensen: I think it means SKU growth in general. On SKU Just the common SKU growth, was that just based on a few large customers, or is it more broad-based? Chris Diorio: The comment on SKU growth in existing categories as well as the potential for new categories was related to a small number a pretty small number of customers in the general merchandise space. Troy Jensen: Gotcha. Okay. Good luck this year, guys. Operator: The next question will come from Guy Hardwick with Barclays. Please go ahead. Guy Hardwick: Hi, good evening. Hi, guys. Hi, guys. Just a couple of questions. So I think a year ago, when you had an inventory overhang in the T&L space, you said some similar comments that it could take more than a quarter to clear the inventory, but I think you actually cleared the inventory in just one quarter. What's different this time? And then as a follow-up, it looks like you have pretty good visibility on the endpoint IC business that you're pretty much already booked for Q1 within the midpoint of your guidance, looking at your comments. So what does that tell you or tell us in terms of what's the underlying growth in the endpoint IC market of 2025 levels? Cary Baker: Guy, this is Cary. I'll try to take both of those questions. So, yes, it is the same in that it's the supply chain logistics space. There are a variety of different reasons, which I've already covered. We last year, we were successful in burning all that channel inventory out in the first quarter. We are attempting to do the exact same thing this year. However, we know that inventory corrections are seldom contained to one quarter and we just wanna be cautious with our guidance so that if it does spill into the second quarter, we have room to do that. As it relates to our guidance, we are seeing strong signals from our bookings and our turns order in quarter to date. So think of January through February. That is turns at a higher rate than it was at the same time in fourth quarter more than double, and 50% up from last year January. That has put us in a position where we are 100% booked to the midpoint of our guide for our endpoint IC business or nearly 100% booked. We're giving ourselves a little bit of room because we aren't done with the annual price negotiations. We still have a couple that are outstanding there. And also, the Chinese New Year occurs later this year than it did last year, and we typically see a low in bookings during those three weeks. Guy Hardwick: Thank you. Good day. Operator: The next question will come from Christopher Rolland with Susquehanna. Please go ahead. Dylan Olivier: Hi there. This is Dylan Olivier on for Chris. Thanks for taking my question. Maybe pivoting away a bit from this inventory situation and sort of bigger picture question. I wanted to ask about sort of the competitive landscape, particularly against non-RFID components. We've heard some news flow of some end users kind of pivoting away to some more BLE and, you know, other protocols. Is that something that you consider a risk? Or do you remain confident in RFID as a long-term solution? Chris Diorio: Dylan, this is Chris. The simple answer is we remain confident to bring our RFID as a long-term solution. The just two different technologies. And active BLE with batteries has a particular use case. For tracking things like temperature and other kind of stuff against continuous data logging. That's complementary. Passive BLE for beaconing operates in a narrow window of use cases. And again, with some different features and capabilities that I also view as mostly complementary. The volume differences between the two are gigantic. I mean, you know, our industry delivered 52.8 billion ICs last in 2024. And volume differences are gigantic. The infrastructure is different. I view them as mostly complementary. Of course, with every complementary thing, there's a bit of overlap. But I don't really look at the competitiveness. I look at complementary things. And trying to enable the end customer with a solution that meets their needs. Dylan Olivier: Thanks. Appreciate the color here. And then maybe more of a housekeeping question for my second for my follow-up. But, yeah, you had that EM Microelectronics license announcement in the quarter. Just wondering if Yeah. How we think about that impacting the model, if there's gonna be a recurring revenue and if that's gonna be consistent through the year. Chris Diorio: Yeah. There's an immaterial impact to revenue in 2026. We're still working on what that first chip might be, likely a dual-frequency IC. Likely not available this year. It just view it as a strategic partnership. And then just think that it so the answers that we gave to Ed Jim's question, you know, view the strategic partnership as a way for us to deliver confidence to our end users. Dylan Olivier: Great. Thank you. Operator: The next question is a follow-up from Harsh Kumar of Piper Sandler. Please go ahead. Harsh Kumar: Yeah. Hey, guys. So I was curious how long do you think it would take for you to be fully penetrated at your second largest logistics customer with the custom chip. And am I correct in assuming that custom chips typically mean better pricing than a normal chip? Chris Diorio: So I'll take the first answer. So the customer plans to fully switch over to that ship this year. That's what I said in my prepared remarks. And as Cary said, are pricing the chip to market. Cary, anything you wanna add? Cary Baker: Nope. Harsh Kumar: Did I answer your question, Harsh? Harsh Kumar: Well, I guess there is no market for a custom chip. Right? The standard in RFID, and you've got a custom product. I would suspect So are you saying that your pricing is similar to M800? Or more than that? Chris Diorio: I'm gonna say that we're pricing it to as I also said in some of the prepared remarks, a little bit further down. To drive an ROI for the end customer and for us. Harsh Kumar: Okay. Fair enough. Fair enough. Thank you. Chris Diorio: Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Chris Diorio, Co-Founder and CEO, for any closing remarks. Chris Diorio: Thank you, Nick. I'd like to thank you all for joining the call today. And thank you for your ongoing support. Bye-bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Hello, everyone. Thank you for joining us, and welcome to the Insight Enterprises Q4 2025 Earnings Conference Call. [Operator Instructions]. I will now hand the call over to Ryan Miyasato, Director of Investor Relations. Ryan, please go ahead. Ryan Miyasato: Welcome, everyone, and thank you for joining the Insight Enterprises earnings conference call. Today, we will be discussing the company's operating results for the quarter and full year ended December 31, 2025. I'm Ryan Miyasato, Investor Relations Director of Insight, and joining me is Joyce Mullen, President and Chief Executive Officer; and James Morgado, Chief Financial Officer. If you do not have a copy of the earnings release or the accompanying slide presentation that was posted this morning and filed with the Securities and Exchange Commission on Form 8-K, you will find it on our website at insight.com under the Investor Relations section. Today's call, including the question-and-answer period, is being webcast live and can also be accessed via the Investor Relations page of our website at insight.com. An archived copy of the conference call will be available approximately 2 hours after completion of the call and will remain on our website for a limited time. This conference call and the associated webcast contain time-sensitive information that is accurate only as of today, February 5, 2026. This call is the property of Insight Enterprises. Any redistribution, retransmission or rebroadcast of this call in any form without the expressed written consent of Insight Enterprises is strictly prohibited. In today's conference call, we will be referring to non-GAAP financial measures as we discuss the fourth quarter and full year 2025 financial results. When discussing non-GAAP measures, we will refer to them as adjusted. You will find a reconciliation of these adjusted measures to our actual GAAP results included in both the press release and the accompanying slide presentation issued earlier today. Please note that all growth comparisons we make on the call today relate to the corresponding period of last year, unless otherwise noted. Also, unless highlighted as constant currency, all amounts and growth rates discussed are in U.S. dollar terms. As a reminder, all forward-looking statements that are made during this conference call are subject to risks and uncertainties that could cause our actual results to differ materially. These risks are discussed in today's press release and in greater detail in our most recently filed periodic reports and subsequent filings with the SEC. All forward-looking statements are made as of the date of this call, and except as required by law, we undertake no obligation to update any forward-looking statements made on this call, whether as a result of new information, future events or otherwise. With that, I will now turn the call over to Joyce. Joyce? Joyce Mullen: Thank you very much, Ryan. Good morning, everyone, and thank you for joining us today. We are pleased with our fourth quarter results and the momentum in our business after a challenging year. Strong execution in our Cloud business and strong growth in our Core services business, driven by our acquisitions enabled us to deliver record gross profit, record gross margin and record adjusted earnings from operations margin. We delivered strong growth in adjusted earnings from operations across every geography and achieved double-digit growth in adjusted diluted earnings per share. Specifically in the quarter, overall revenue was down 1% due to the netting impact of on-prem software migrating to cloud. We are pleased that our influence of partners and clients continues to expand, which you can see on our balance sheet. Total gross profit grew 9%. EMEA had strong growth, driven in part by UAE and Saudi Arabia demand. Cloud gross profit increased 11%, ahead of our expectations, led by double-digit growth in SaaS and Infrastructure as a Service. This performance was partially offset by the impact of the partner program changes we've previously discussed, which are now largely behind us as we begin 2026. Core services gross profit grew 16%, driven by acquisitions as well as organic growth. These factors, along with incremental netting, contributed to expanded gross margin again this quarter to 23.4%. And by prudently managing our adjusted expenses, we delivered adjusted earnings from operations growth of 13% and adjusted earnings per share growth of 11%. We are encouraged by the progress in our services business. We've streamlined our services offerings, implemented disciplined processes and augmented our leadership team. Best practices from acquisitions have been adopted across the business, resulting in improved pipeline. We are also pleased with the cross-selling momentum. Core Services results were strong and delivered a second consecutive quarter of organic bookings growth. Growth of core services is central to our strategy. Clients expect a comprehensive approach to realizing value of their technology investments. To support those requirements, we have expanded our technology consulting capabilities, which is improving our overall performance, especially in EMEA. The Inspire11 acquisition expands our advisory capabilities in North America and supplements our strength in infrastructure, cloud, edge, data and security services. We expect these advisory capabilities will also increase demand for our core solutions. I'd like to share an example of how an initial advisory engagement pulled through solutions in EMEA. Our client, a European green IT provider, is building sustainable data centers, engineered and optimized for AI workloads. They engaged us to support both the build-out of these data centers and the development of a SaaS Gen AI platform, enabling them to design, develop and visualize AI models and their interactions. Our senior technical advisers drove the conceptual discussions and are now delivering end-to-end program leadership for this large-scale program, which includes network and data center, security and software development work streams. The team implemented a structured governance framework, strengthened delivery performance and ensure the client's business outcomes were met. Since project inception, the client has signed an additional multimillion euro agreement to extend both the scope and duration of the program. This is an example of how our teams can drive value, beginning with advisory discussions and expanding to include modern platform investments. Our deep expertise in platforms is also demonstrated through our engagement with Sedgwick, a global leader in claims management and risk solutions. The Inspire11 team designed and implemented a modern unified claims management platform that streamlined operations, enhanced employee productivity and elevated customer experience. This transformation has since become a model for success within Sedgwick, sparking new innovation across other areas of the business. Recognized as one of the most successful projects, the organization has delivered, it demonstrates how the value we create extends beyond a single program and continues to scale as organizations identify new opportunities for impact. As our clients look to modernize, many are hitting the same wall, legacy systems that have become so customized so heavily over the years that they've become too rigid to move at the speed of business. To stay competitive, these organizations have to get back to basics, stripping away that complexity so they can innovate again. Our teams are effective in assisting clients with this challenge. Never has innovation been more exciting than with the current AI tools and capabilities. Client interest remains strong and focused on tangible business outcomes. We are very well positioned to help clients move from hype to how. We are proving this by advancing our own internal AI transformation, developing and operationalizing use cases within Insight that we showcase and replicate with clients. In the fourth quarter, as part of our Insight AI launch, we introduced Prism, our AI platform for clients, which has received very positive feedback. Prism is a business transformation platform designed to help our clients simplify AI adoption by identifying and prioritizing high-impact use cases through a proprietary data-driven transformation index. The platform evaluates potential AI initiatives across key elements such as value, feasibility, access to data and risk to provide a clear, actionable road map. Prism enables our clients to manage the entire life cycle of an AI project from initial assessment to measurable outcomes. Our partner ecosystem is central to our success and a critical accelerator of our strategy. These partnerships strengthen our capabilities across technologies, platforms and services, helping us to stay agile and responsive to the rapidly evolving technology landscape. In 2025, we received numerous awards and recognitions from our partners. There are too many to list here, but notable Partner of the Year awards include those from Google, Cisco, HP, HP Enterprise, Intel, Databricks and others. We were also the first partner to build out, demonstrate and launch the Cisco Secure AI factory with NVIDIA. You can find more details in the earnings presentation. Additionally, our portfolio of offerings and technical expertise have been recognized by leading industry analysts, including Gartner, IDC and Forrester. These recognitions span software, AI and cloud capabilities and workspace solutions, reflecting the breadth of our end-to-end solutions integrator capabilities. Insight's more than 6,600 technical professionals bring deep specialized expertise across the major platforms that are most critical to our clients' success. To safeguard and formalize our proprietary IP developed by our technical talent, Insight has filed more than 200 patent applications globally, resulting in more than 70 patents issued to date, covering innovations in AI, machine learning, among other things. Our teammates are the source of the value we deliver to clients. We cultivate a culture of collaboration, knowledge sharing and continuous improvement. And Insight is consistently recognized as an employer of choice by Forbes Fortune and Great Place to Work. Despite the challenging backdrop in 2025, we made meaningful progress in transforming Insight into the leading AI-first solutions integrator. We pivoted our Google and Microsoft resale business towards the corporate and mid-market space. We use this transition to sharpen our focus on efficiency and improve our operating leverage, leading to record cloud gross profit of $495 million. We improved profitability in Core services and increased bookings performance with our aligned structure in North America and advisory pull-through in EMEA, leading to record core services gross profit of $320 million and margin of over 32%. The increase in mix of services resulted in record total gross margin of 21.4%. We successfully integrated acquisitions and drove cross-sell and best practices across all businesses. We added Inspire11 and Sekuro, strengthening our technical expertise in data, AI and cybersecurity and expanded cross-sell and pull-through opportunities across our global client base. We applied our own client zero approach, deploying AI agents internally to improve our own productivity and building compelling reference cases for our clients. To help clients move from AI experimentation to production, we've completed hundreds of AI assessments, developed road map recommendations and begun implementations. All this resulted in record adjusted earnings from operations of $504 million and margin of 6.1% in addition to adjusted diluted EPS of $9.87. As we look towards 2026, our outlook reflects cautious optimism as we anticipate subdued spending across the industry. The macro environment has largely remained unchanged and our corporate and large enterprise clients remain cautious. PC and infrastructure investments will continue at a moderate level in the near term, and we're closely monitoring industry supply chain dynamics and memory pricing. Clients are making infrastructure investments as they prepare for AI implementation. At the same time, we see opportunity in cloud modernization, security and AI adoption, and we will continue to invest in these areas to position Insight as the leading AI-first solutions integrator. Our strategy remains clear: Simplify complexity for clients, deliver measurable outcomes and accelerate time to value through integrated solutions. With that, I'll turn the call over to James. James? James Morgado: Thank you, Joyce, and good morning, everyone. Our Q4 results met our expectations for the quarter. Net revenue was $2 billion, a decrease of 1%. The decrease was driven by a 4% decline in product, primarily due to on-prem software, which declined 18% and was a result of netting as clients shift to cloud-delivered software. Hardware revenue increased 2%, the fourth consecutive quarter of growth with growth in both devices and infrastructure. Core services revenue was up 7%, primarily driven by the acquisitions completed in the quarter. Gross profit increased 9%. EMEA gross profit increased 30%, driven by ongoing transactions in UAE and Saudi Arabia, where we act as the agent. Growth in core services across EMEA also contributed to this increase. Cloud gross profit was $138 million, an increase of 11% with growth in both SaaS and Infrastructure as a Service, partially offset by the partner program changes we previously discussed. Insight Core Services gross profit was $90 million, an increase of 16% due to contribution from acquisitions as well as growth in our organic business. Hardware gross profit was up 1%. Hardware gross margin improved sequentially and was down year-over-year due to mix. As a result, total gross margin was 23.4%, an increase of 220 basis points. Adjusted SG&A increased 7%, driven by acquisitions and variable costs primarily in EMEA. This resulted in adjusted EBITDA of $156 million, up 11%, while margin expanded 80 basis points to 7.6%. And adjusted diluted earnings per share were $2.96, up 11%. Overall, 2025 was a challenging year that fell short of our gross profit growth expectations entering the year. Spending from our corporate and large enterprise clients remain subdued, weighing on growth in both core services and hardware. However, there were bright spots that are consistent with many of our long-term goals. Gross margin expanded for the fourth consecutive year. Cloud remains a key element of our strategy, and we are successfully navigating the impact from the partner program changes. We further strengthened our technical expertise through the Inspire11 and Sekuro acquisitions. And through disciplined expense management, we met our profit expectations. I'll now get into greater detail for full year 2025 results. Net revenue was $8.2 billion, a decrease of 5% as netted transactions continue to mute revenue growth. Despite this decline, gross profit was flat, and we expanded gross margin by 110 basis points to 21.4%. Our gross profit and gross margin results were driven by cloud and services as well as a mix of higher netted agency transactions. Cloud gross profit was $495 million, an increase of 2%. SaaS and Infrastructure as a Service growth offset partner program changes. Adjusted SG&A expenses were flat due to disciplined expense management, partially offset by recent acquisitions. Adjusted EBITDA margin expanded 40 basis points to 6.6% and adjusted diluted earnings per share were $9.87, up 2%. For the year, we generated approximately $300 million in cash flow from operations. In Q4, we increased our share repurchase authorization by $150 million, bringing the total amount to $299 million at year-end. In 2025, we settled $333 million of convertible notes and all associated warrants. For the year, the combined effect of share repurchases and settlement of the warrants associated with the convert, reduced our adjusted diluted share count by approximately 3 million shares. We exited Q4 with total debt of approximately $1.4 billion compared to approximately $900 million a year ago. The increase in debt was primarily related to acquisitions, the settlement of warrants and share repurchases. In Q4, we raised the limit of our ABL facility to $2 billion and extended the term for another 5 years. As of the end of Q4, we had access to the full $2 billion capacity under our ABL facility, of which approximately $1.1 billion was available. We have ample liquidity to meet our needs. Our adjusted return on invested capital for the trailing 12 months at the end of Q4 was 15.2% compared to 15.3% a year ago. As we look towards 2026, we have considered the following factors in our guidance. Adjusted diluted earnings per share growth will be more heavily weighted toward the first half. For the year, we expect our corporate and large enterprise client spending to remain subdued. Hardware gross profit will be approximately flat as component costs may impact demand. We expect hardware revenue to grow faster than gross profit, primarily due to customer mix. We expect Core services gross profit will grow in the high single digits as our organic business returns to growth, coupled with contribution from our recent acquisitions. We anticipate cloud gross profit to grow in the low double digits as we move past the majority of the partner program changes we have previously discussed. And we will continue to prudently manage SG&A and expect growth slightly slower than gross profit. Finally, we intend to start repurchasing $75 million in shares beginning in Q1. Considering these factors, for the full year of 2026, our guidance is as follows: We expect to deliver gross profit growth in the low single digits and that our gross margin will be approximately 21%. Including stock-based compensation, adjusted diluted earnings per share is expected to be $10.10 to $10.60. Beginning in 2026, our adjusted guidance excludes stock-based compensation. We, therefore, anticipate our adjusted diluted earnings per share will be between $11 to $11.50. This represents approximately 5% growth at the midpoint compared to 2025 adjusted diluted EPS of $10.75, excluding stock-based compensation. Please refer to the investor presentation for a historical view of our results, excluding stock-based compensation. Finally, we expect cash flow from operations in the $300 million to $400 million range. On a go-forward basis, guidance excludes stock-based compensation and includes interest and other expense to be approximately $85 million, an effective tax rate of 25.5% to 26.5% for the full year and capital expenditures of $20 million to $30 million and an average share count for the full year of approximately 31 million shares. This outlook excludes stock-based compensation, excludes acquisition-related intangible amortization expense of approximately $83 million, assumes no acquisition-related costs, severance and restructuring or transformation expenses and assumes no change in our debt instruments and no meaningful change in the macroeconomic outlook. I will now turn the call back over to Joyce. Joyce? Joyce Mullen: Thanks, James. 2025 was a year of resilience and transformation. We navigated macro headwinds, evolving client priorities and significant partner program changes. Through it all, we strengthened our capabilities and sharpened our focus on the areas that matter most to our clients, cloud, data, AI, cyber and edge. As we enter 2026, we are confident in our ability to execute and capture emerging opportunities. Our strong portfolio of offerings and expertise, disciplined approach and commitment to innovation position us well to capture future growth opportunities. Finally, regarding the search for my successor, the Board's orderly transition process is well underway. Our public external search is progressing as planned, and I remain committed to ensuring a smooth handoff as we identify the right leader to guide Insight through its next phase of AI-driven transformation. We expect to name a successor in the next few months. I want to thank our teammates for their unwavering commitment to our clients, partners and each other, our clients for trusting Insight to help them with their transformational journeys and our partners for their continued collaboration and support in delivering innovative solutions to our clients. This concludes my comments, and we will now open the line for your questions. Operator: [Operator Instructions]. Our first question comes from Adam Tindle from Raymond James. Adam Tindle: James, I wanted to start with 2026 guidance. I just was curious, I saw the low single-digit growth expectation. It seems like you may be a little bit more conservative this year than in prior years. So maybe just talk about your process to annual guidance this year, how it might be similar or different than prior years. And Joyce, if you could add maybe a little bit of color outside of this guidance, just kind of boots on the ground, your conversations with customers as they think about or thought about their budgets in 2026. I'm sure you've been having those conversations with your sales force as well into year-end. What does IT budgets for your customer base look like in 2026? And any early indications on how the year is starting? James Morgado: I'll start. Thanks for the question, Adam. So here's the approach that we took this year for guidance. First, when we set guidance, we always look at many factors, what we hear from our customers, what we hear from our partners. We obviously take into consideration any disruptive events like what we're experiencing now with the memory costs, the partner program changes from last year, et cetera. This year, what I would say that the difference in the guidance is, I place greater emphasis on 2 particular areas. The first is exactly that last point that we said with the potential disruptions. The environment is still complex and fluid. There's a continuation of many of the factors we saw last year, which creates a degree of a bit of uncertainty that we have to account for in our outlook. The second point, which is different than previous years is I more heavily weighted our past performance in terms of the guidance that we set at the beginning of the year. Look, the last couple of years have had twists and turns, and I think FY '26 has them as well. And so I think we're trying to balance the internal ambitions that we have as a company with a bit of the market realities that we see. And so our approach to guidance is similar in many ways, but what I would say is I place greater emphasis in those 2 particular areas. Joyce Mullen: And then in terms of IT budgets, Adam, and kind of how we're thinking about the various market segments, I think in general, it's just a bit more of the same. Uncertainty persists, especially with large enterprise and large corporations. So we've been -- I think one thing that's different is we aren't assuming any kind of massive improvement in spend in the large enterprise, that's different. But they continue -- they're really worried very -- I mean, they're very excited about and worried about making sure they preserve some of their IT budgets to support the transition to AI. That means a lot of different things to a lot of different people. That includes things like infrastructure, which is aging and likely to be a more important factor. It includes security, of course, networking to get the data moving around so you can actually leverage AI. They're continuing to spend significant money on existing infrastructure requirements, for example, VMware and Broadcom. So that's continuing. But I think they are thinking carefully about how to preserve some of their IT budgets to make sure that they can invest in making sure their company is ready for AI. That also could mean some data projects and making sure that they have the right kind of connections. So I feel like that is really very much more of the same on the large enterprise space. Commercial has been really robust, and we expect that to moderate just a tad over the next year. They've done -- we've had really good success in the commercial space, 7 quarters of growth in a row. But we do think that those growth rates are likely to moderate just a bit. And then the public sector is very sort of spiky up and down. It has a lot to do with kind of what's going on in the government and where funds are coming from, et cetera. And then we also see a whole lot of netting there. So we spend a lot of time thinking about what's going on with GP there. But overall, we expect this to be a whole lot like the 2025 in terms of IT spend with a bit more emphasis on security and preparation for AI. In terms of how the year is starting, we're pleased with the momentum coming out of Q4. We continue to see that momentum into the early parts of Q1 in terms of bookings. So that's a great sign. And we expect to continue to build a bit of backlog, especially as there's supply chain constraints start to hit due to memory pricing. I guess that's the other sort of thing that is a bit different this year. Everybody is very much expecting memory prices to increase, supply chains to probably slow down a bit because of availability. And that is a factor that's kind of weighing on our customers' minds, making sure they preserve some of their IT spend to support some of the memory increases. We also expect a level of elasticity, especially around devices to kick in given those increased prices. Adam Tindle: Very helpful. Maybe just as a follow-up, James, I hope we don't have to talk about partner program changes anymore going forward. I'm sure you feel similarly about that. But now that we're done with 2025, I think you were helpful in being explicit about quantifying those. If you could just maybe like summarize the partner program change impact in 2025. And I think you were thinking there might be, maybe a little bit left in 2026, kind of how you're thinking about that. And I'm asking just in light of the EPS guidance, you talked about it being more heavy weight to the first half, but I thought there was a little bit more partner program changes still coming through. So if you could just lay that out and then put a little bit finer point on the -- how heavy in the first half and the rationale for that for EPS, that would be helpful. James Morgado: Yes. Thanks, Adam. Yes, we certainly would love to not have to talk about partner program changes. Joyce Mullen: Ever again. James Morgado: Yes. What I would say is the $70 million gross profit impact that we called out at the beginning of the year, it landed very, very close to that number in terms of the impact. The reason that we overperformed in cloud last year from our beginning of the year expectations was because of a more effective pivot. But the gross impact was still $70 million. So that was an area that we called correctly. In terms of the partner program changes in the pivot, what I would say is that we are done with the pivot internally, in terms of the engine that we have internally focusing on the mid-market space, I think the team has completed that pivot. But as we mentioned last year, there would be a tail of a financial impact into this year. We see that tail a little more in the second half, candidly, and that is because of the dynamics associated with Google and the Google solution line. And really from the acquisition, it dates back to the acquisition of SADA, which they had a very heavy presence in enterprise. And so to build that installed base in the corporate and mid-market space just takes longer than it would in, for example, compared to the Microsoft space, where we had a nice presence already a good growing presence in the mid-market space. And so it's a bit of a tail into building that installed base still on our Google solution line. And the reason that the impact is a little more heavily weighted in the second half is because of the seasonality associated with the SADA business. It is more acute in -- it's greater in the second half and in fact, in Q4. So when I think about cloud to the guidance that I gave, what we're likely to see is a first half that performs a bit better than the cloud guidance that I gave and a little more challenged into the second half. And by the time we exit the second half, I think the Google space, the Google solution line then has a good installed base and these dynamics completely -- we're expecting these dynamics that would go away completely in 2027. But still a bit of a tail impact into 2026, and you'll see it again, a little more in the second half than the first. Operator: Your next question comes from Luke Morison of Canaccord Genuity. Lucas Morison: So maybe just to start, you highlighted an AI optimized data center engagement that I thought was pretty interesting in your remarks. I'm curious, as we think about that engagement, how should we be thinking about the repeatability of that opportunity maybe as AI data center investment accelerates across the U.S. and Europe? And how do you see AI data center build-outs becoming a more meaningful recurring growth vector for your business over the next few years? And how does that play into your overall growth algo? Joyce Mullen: Thanks, Luke. Yes. I mean -- so that is a great example. I think there's a couple of things to take away. One is that it is a more complex data center solution than we've -- than historical data center solutions have been. There's just a lot more choices. There's a lot more complexity. There's a lot more considerations that probably gets exacerbated as you think about memory optimization coming over the next couple of years as well as power optimization, et cetera, et cetera. So we think we're at the very -- and I would say we're not alone in this. I would say a very -- all of sort of basically the industry is believed that we are primed for broader enterprise adoption as enterprises consider their opportunities and consider their cost structures and think about multi-cloud in a broader way because there's definitely cost constraints associated with running everything in a public cloud. So we have definitely seen more interest in on-prem enterprises. I would say that our partners are making that easier with sort of prepackaged, not exactly simplified yet, but prepackaged AI factories. We were the first partner, as I noted, to launch the Cisco Secure AI factory with NVIDIA into our labs. So there -- we believe we are ready to see enterprise adoption of AI infrastructure, specifically in data centers and specifically in a multi-cloud environment. So we've also been working really, really hard to make sure that there's portability between the solutions and the workloads that we are building out, for example, to start with in public cloud. And they can run in public cloud, they can run in a different public cloud and then they can also run on-prem. So all of those things are critical, I think, to giving our customers the right kind of options and the right kind of cost profile solutions that they're looking for. So we're very, very excited about this. We are absolutely at the very beginning stages, as I noted. This is a function of a couple of things. One is GPU availability. I would say also, there's increased knowledge and understanding of when we can use CPUs and GPUs and what the right combinations are, again, to manage the cost structure and also AI skills and understanding kind of what those workloads and use cases look like. So this should be a significant tailwind for the industry as we move beyond just funding the public clouds and the neo clouds in terms of building out data centers. Lucas Morison: That's great color. And maybe just a quick follow-up here. Maybe just putting a finer point on sort of the memory cost supply chain disruption that's going on right now. How should we be thinking about the potential for that to impact your customers and your business if trends there continue the way they look -- they're going right now? Joyce Mullen: Yes. Well, it's been moving pretty fast, and it's changed a lot, I would say, in the last 90 days, and it probably has changed again in the last 30 days. So the memory price expectations will result in something somewhere between 10% and probably 20%, 25% increases in PCs this year. We've seen those price increases documented from most of the OEMs. A few have decided not to do that. But anyway, but generally, I would say that's the right kind of range. And historically, and I hesitate to say this because every time I've said historically before, it doesn't actually continue now. But historically, as prices go above kind of 15%, elasticity kicks in and the volume is impacted. So generally, I would say, as an industry, we're expecting prices to increase 15% or so on average and volume to units to decline kind of just barely low single digits. And what happens to our business from a device point of view is that we pass along those price increases. But of course, we're always managing the elasticity as well. So that's kind of how -- that's what we saw during COVID. I think there's also an incredible -- there's an opportunity for us to help our customers navigate the supply chain impact, which is what we did pretty well during COVID and help them understand alternatives. So this is, I think, a place where partners can add a whole lot of value and Insight will add a whole lot of value to our customers as they navigate that. On the infrastructure side of this, we're basically rounding a refresh cycle on infrastructure. And those prices will also go up significantly given the memory constraints and the memory price hikes. We think there's a little bit less elasticity there. And -- because, again, the compares for on-prem infrastructure are really the public cloud compares in terms of cost for customers, and we still think that's going to be relatively favorable. But it will cause a bit more, I would say, caution as customers decide which investments to make in terms of infrastructure and how it will play out. As a general rule, we pass along those cost increases. As a general rule, those are helpful to us. But again, the wildcard there is the elasticity. Operator: Your next question comes from Joseph Cardoso from JPMorgan. Joseph Cardoso: Maybe just for the first one regarding the full year guidance. James, I appreciate the color on the weighting towards the first half of the year. But any additional color you can give relative to the magnitude that you're thinking of in terms of the full year guide first half versus second half? Just trying to understand the balance for the year given the commentary. And then if I take that question and then I add to it, how are you thinking about the concentration of the drivers of that dynamic relative to the underlying portfolio? Is it primarily hardware and PCs? Or is there -- or is it a broader dynamic that we should be considering in terms of the first half, second half weighting? James Morgado: Thanks, Joe. Great question. I'll jump in and then Joyce, if there's anything you'd like to add, please jump in. So Joe, in terms of how to think about the year, first half, second half. So in my prepared remarks, I talked about the first half growth rate being a little bit stronger from an EPS standpoint in the first half and second half. What I would say is the best way to think about that is the first half growth rates are likely to be closer to the upper end of our range and the second half a little bit below the midpoint to the lower end of that, at least based on what we currently see today. And the dynamics in there -- and by the way, I would remind within the first half, I still see Q2 as our seasonally stronger quarter. So if you think of the split between the first half, I would expect to see a slightly stronger Q2 than Q1. In terms of the reason behind the dynamics, one of them is the one that I called out earlier regarding the cloud situation, which I think cloud will grow more strongly in the first half than the second half. The other dynamic is hardware. I think that follows a similar profile with more strength in the first half than the second half. The Core services business is the one that is more of an equalizer through the year. I think that, that performs more steadily through the year. So I think when you add up all of those factors, you get to a slightly stronger first half than second half. Joyce Mullen: You mentioned cloud stronger than the first half. James Morgado: Yes. Joseph Cardoso: Great. Appreciate the color there. And then maybe just a quick clarification question on the cloud gross profit growth for the quarter. First part of it is just more wondering if we were to ex out the partner headwinds or the partner headwinds there, what -- where would have growth tracked for the quarter? I believe over the last couple of quarters, you've been mid-teens, high teens in kind of that ballpark. So just curious if momentum exited the year in that range. And then as we think about the guidance for double digits, is that -- does that imply an acceleration from those levels? Or are you kind of embedding something similar for the year? James Morgado: So what I would say is our performance in Q4 was similar to what it was all year, kind of in that mid-teens range. So the underlying performance was strong. When I think about this in terms of first half versus second half for cloud, I would actually expect the first half cloud number growth to be slightly above my guidance for the year and the second half to be slightly below that guidance. And then the full year ends up close to the double digits as the low double digits as we mentioned. And I think as we exit the year from a financial stand -- like I said, I think from an operating the business standpoint, the pivot is done. And then the financial -- any of the financial tail that was there impact is done as we exit FY '27 -- FY '26, sorry. Operator: Our next question comes from Vincent Colicchio from Barrington Research. Vincent Colicchio: Joyce, how did your share changes play out in your key focus areas in North America? Joyce Mullen: You mean market share or... Vincent Colicchio: Yes. Joyce Mullen: So well, we believe -- so we're generally -- we basically put together all of the IDC data and try to figure out this with OEMs. We feel like we are on par with the market in terms of devices. And we feel like we are basically on par with infrastructure and probably a little bit ahead in cloud, I would say. Vincent Colicchio: Okay. And do you think you currently have the resources on the AI side to meet current demand? Or is it hard to access the supply you need? Joyce Mullen: So we are doing our level best to build the skills and buy the skills as demand increases. And I think that's going to be kind of a constant theme for a very long time. We are -- we've really doubled down on the development effort, and we're seeing some really good success with our internal development and training programs. That's really important to us, but we've also begun specific recruiting programs to find the AI talent that we need. So far, we've been in pretty good shape. Operator: There are no further questions at this time. I will now hand the call over to Joyce Mullen, President and Chief Executive Officer, for closing remarks. Joyce, please go ahead. Joyce Mullen: Thank you very much to all of you for your questions and interest, and I think we're ready to close the call, operator. Thank you. Operator: That concludes today's call. Thank you very much for attending. You may now disconnect.
Operator: Hello, and welcome to the Hub Group Preliminary Fourth Quarter and Full Year 2025 Results Conference Call. It is now my pleasure to turn the call over to the company. You may now begin. Hello. And welcome to the Hub Group preliminary fourth quarter and full year 2025 results conference call. Phillip D. Yeager: Joining on the call are Phillip Yeager, Hub Group's President, Chief Executive Officer, and Vice Chairman, and Kevin Beth, Chief Financial Officer and Treasurer. Statements made on this call that are not historical facts are forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, uncertainties, and other factors that might cause the actual performance of Hub Group to differ materially from those expressed or implied by those statements. Further information on these risks and uncertainties is included at the end of our press release and in our most recent Form 10 and other periodic reports filed with the SEC, which are posted on our website. The financial results that we will be discussing today are preliminary and may change, including as a result of adjustments that may arise in connection with the ongoing audit of our consolidated financial statements for the year ended 12/31/2025. There can be no assurance that the company's final results will not differ from the preliminary results and any changes could be material. Finally, the preliminary financial results should not be viewed as a substitute for full financial statements prepared in accordance with GAAP and are not necessarily indicative of results that may be achieved in future periods. I now turn the call over to CEO, Phillip Yeager. Good afternoon. Welcome to Hub Group's conference call to discuss our preliminary fourth quarter 2025 financial results. Joining me today is Kevin Beth, Hub Group's Chief Financial Officer, and Garrett Holland, our Senior Vice President of Investor Relations. Before we dive into our preliminary results, as you saw in the press release we issued this afternoon, in the course of our quarter and year-end closing process, we identified a calculation error that resulted in the understatement of purchase transportation costs and accounts payable. As a result, we are delayed in finalizing our financial results for the fourth quarter and full year 2025. We will restate results for earlier quarters in 2020 when we file our 10-K. Accuracy and transparency in reporting on our performance is of the utmost importance at Hub Group, and we have taken steps to strengthen and enhance our controls. Kevin will discuss this in greater detail. But as noted in our press release, there is no expected impact on total cash and cash equivalents or operating cash flow for any periods, and we have provided an estimated impact of purchased transportation and warehousing costs for the nine months ended 09/30/2025 based on our team's initial review. Now I'd like to turn to our preliminary financial results that we are able to review today, along with details on the execution of our strategy and trends we are seeing in the market. The last year was a continuation of a challenging market cycle, with stable demand and an oversupply of capacity. Kevin W. Beth: We performed well and focused on controlling what we can control, delivering record service levels across our platform and, in particular, our intermodal segment. While managing our costs, adding new business wins, and investing in our business, including equipment, technology, and acquisitions. We executed on our strategy while maintaining our strong balance sheet and cash flow profile. 2025 preliminary operating cash flow approximately $194 million. I will now discuss our segment performance beginning with ITS. Fourth quarter ITS revenue declined slightly year over year. We experienced a lighter peak season than last year in this segment, while continuing to focus on cost management and operational discipline, in both intermodal and dedicated. Intermodal performance remained strong, and we delivered another year of record service and market share gains. For the fourth quarter, volumes increased 1% year over year, while revenue per load was flat, but up 3% sequentially. Transcon volume was up 1%, Local East was down 4%, and Local West was down 1%, while refrigerated volumes increased 150% and Mexico volumes increased 33%. Intermodal volume finished October up 2% year over year, down 3% year over year in November, and up 3% year over year in December. In January, intermodal volume decreased 4% year over year with significant impact from the winter storm against a challenging growth comparison from a year ago, as shippers pulled forward orders ahead of tariffs. We worked extremely well with our rail partners during peak, delivering a 90 basis point improvement in year over year on-time performance, positioning us well for intermodal volume growth in the 2026 bid season. Throughout the year, our excellent service performance and the consolidation with our rail partners drove enhanced engagement with our customers who are excited about the opportunity for improved transit and costs in a single rail network. Which along with our consistent focus on cost reduction and efficiency gains, we believe will position us well in intermodal in 2026 and beyond. Given the strong value proposition across our business lines driven by quality service and savings, especially for the intermodal offering, we remain optimistic regarding the 2026 bid cycle. Incumbency and strong service on awards in recent years is expected to provide a strong foundation to grow from, and new logos have engaged with us to establish service. We remain focused on supporting growth with customers, building on the momentum from business awarded last year, and further improving network balance to reduce backhaul costs. With respect to demand, shippers are cautiously optimistic with potential benefits from stimulus measures countering lingering inflationary pressure. In Dedicated, revenue declined in the fourth quarter due to lost sites from earlier in the year, but we were able to partially offset this impact through operational and service improvements. We have significantly improved service levels, which is leading to a strong pipeline of growth opportunities, with existing clients, and we are excited about the recent trends in the business. Fourth quarter Logistics segment revenue reflects softer demand across business lines, partially offset by new business wins. In CFX, we have performed well through our warehouse consolidation leading to a 630 basis point improvement year over year in space utilization. We see additional opportunities for further efficiency improvements, and we expect to be better positioned for further growth. In Final Mile, we are in the process of completing the onboarding of significant new business wins, which has helped to offset negative mix and lost sites. In order to successfully onboard the business, we have made investments in the relationships that are continuing into the first quarter to ensure a seamless transition in start-up. The volume underperformed in the fourth quarter, due to onboarding delays and minor scope changes, we are confident that the steps we are taking now will help drive volume growth well into the future. For the fourth quarter, brokerage volumes declined 10% year over year, revenue per load down 4% as LTL volumes slowed while truckload and refrigerated volume benefited from project freight and market tightness in the latter portion of the quarter. Market conditions have remained tighter due to weather as we enter 2026, and we are seeing opportunities to support customers with spot opportunities. Our fourth quarter productivity improved 41% year over year due to our investments in technology and our restructuring, and we expect this to position us well for the current market backdrop and as conditions evolve. Finally, managed transportation performed well throughout 2025, and is expected to continue to perform well in 2026. As we brought on new business in the fourth quarter and have a strong pipeline of additional growth opportunities. Our strong value proposition of continuous improvement, savings, and technology continues to resonate with our clients. Our fourth quarter productivity improved 12% compared to the prior year, which is enabling our ability to invest in the business and position for growth. Phillip D. Yeager: We are pleased with our operational performance in 2025 in challenging market conditions. As we look ahead to 2026, we believe we are well positioned to support our customers in this evolving environment and excited about our opportunities for growth. We continue to see signs of tightening capacity due to regulatory enforcement along with challenging market conditions and cost inflation forcing out undercapitalized carriers. However, demand and inventory levels remain balanced and the consumer has stayed resilient. With the increased tax refund disbursements, we are hopeful that supply and demand will move to equilibrium, leading to opportunities for intermodal conversion and growth across all our services. It is too early to determine whether a sustained market inflection is imminent, but we believe we are well positioned regardless of market conditions due to our best-in-class service and team, efficient cost structure, financial flexibility, and ongoing strategic investments. With stabilizing market conditions, and excellent service as well as rail consolidation expected in 2027, we have the ability to convert business from over the road to rail. We believe our logistics services are well positioned due to our focus on productivity, service, and continuous improvement. Lastly, we maintain a strong balance sheet and capital flexibility to invest in our business for the long term. We expect to remain disciplined with capital deployment, continuing a balanced approach. Returning capital to shareholders through our dividend and share repurchases. While evaluating potential M&A opportunities that meet appropriate return thresholds. As of today, we have approximately $142 million remaining under our share repurchase program. To sum up, although there is some uncertainty near term in the industry, we see all these drivers creating an exciting backdrop for Hub Group in 2026 and beyond. With that, I will hand the call over to Kevin to discuss our preliminary financial results. Kevin W. Beth: Thank you, Phil. Before walking through our preliminary fourth quarter and full year 2025 financial results, and our 2026 outlook, I want to touch on the accounting item outlined in our release that Phil mentioned at the start of the call. The company identified an error that resulted in an understatement of purchase transportation cost and accounts payable in the first nine months of 2025. The total amount of the reduction to accounts payable and purchase transportation costs related to this issue that was recorded during these periods is $77 million. Based on our analysis to date, we estimate the correction of the error will increase purchase transportation and warehousing costs for the nine months ended 09/30/2025 but cannot yet estimate what the resulting increase to purchase transportation and warehousing costs and accounts payable will be. There is no expected impact on Hub Group's total cash and cash equivalents or operating cash flows for any periods. We are working to report our full and final financial results for 2025 as soon as possible. We plan to include the restated quarterly financial information for Q1, Q2, and Q3 2025 in our 2025 Form 10-K. The team is committed to transparency and resolution of the accounting matter. Now turning to our preliminary results. For the full year, we expect consolidated operating revenue of $3.7 billion, a 7% decrease over the prior year. Full year 2025 ITS segment operating revenue is expected to be approximately $2.2 billion, which includes a low single-digit year-over-year decrease during the fourth quarter. Fourth quarter intermodal volume growth of 1% and stable revenue per load despite lower surcharge revenue was offset by lower dedicated revenue during the quarter. We realized peak surcharges of approximately $900,000 in Q4, representing a year-over-year difference of $4 million. Full year Logistics segment operating revenue is expected to be approximately $1.6 billion, inclusive of a high single-digit year-over-year decrease during the fourth quarter. Fourth quarter performance reflects lower brokerage revenue, select customer attrition at CSS, and softer underlying final mile demand, partially offset by new customer onboarding. Building on Phil's earlier remarks, peak season activity was largely in line with expectations, but muted overall relative to prior years. We saw select customers reaching out with project freight activity, we saw pockets of tightness particularly off the West Coast, to start the quarter. However, many shippers pulled forward inventory over the course of the year and had less urgency to move product. Tightening capacity conditions later in the quarter reflected a combination of lower driver supply from policy actions and weather disruptions. Freight market dynamics clearly remain fluid and closer to balance than any time in recent years. Now turning to our cash flow. Preliminary cash flow from operations for the full year was $194 million. Our full year CapEx was approximately $45 million, in line with our estimate of less than $50 million. Integrations related to the acquisitions of Marin Intermodal Assets and West Coast Final Mile provider Sith LLC are complete and the businesses are performing well. Importantly, our balance sheet and financial position remain strong. Debt, at 12/31/2025 totaled approximately $229 million, which after giving effect to cash of approximately $113 million resulted in net debt of approximately $116 million, a decrease of approximately $50 million compared to 12/31/2024. In 2025, we returned $44 million to shareholders through dividends and stock repurchases. Turning to our preliminary 2026 guidance. Revenue is projected to be between $3.65 billion to $3.95 billion for the full year. For our ICS segment, we have revenue will largely be driven by intermodal volume growth through the year. We expect dedicated performance will be slightly lower compared to 2025, due to lost customer sites, which will continue to offset new awards in the near term. For logistics, excluding our brokerage business, expect recovering revenue through the year due to new business wins and improving profitability led by final mile and managed transportation. For brokerage, we expect volume pressure continues in the near term and weighs on Logistics segment profitability. For the year, we expect capital expenditures of $35 million to $45 million as we continue to focus on technology projects and opportunistic replacements for tractors, given favorable purchase terms and recent changes for bonus depreciation. We do not plan to purchase containers in 2026. As Phil noted, our capital allocation plan continues to guide us and starts with investing in the business that supports long-term growth and improves efficiency across tractors, technology, and container capacity. As you know, we consider M&A opportunistically to complement organic growth. The bar for M&A is high, given our disciplined due diligence process and return focus. And finally, we remain focused on returning capital directly to shareholders through our quarterly dividend and share repurchases. Our current dividend also returns approximately $7.5 million to shareholders quarterly. And as Phil noted, we have approximately $142 million remaining under our current share repurchase authorization. We expect to continue to balance capital deployment priorities and repurchase shares as market conditions and opportunities evolve. Our balance sheet is in great shape and has been fortified by the cash flow resiliency of our operating model through this industry downturn. We remain focused on ways to maximize shareholder value. We will share additional details on the 2026 outlook when we release our full fourth quarter and full year 2025 financial results. And now I'll turn it back over to Phil for his closing remarks. Phillip D. Yeager: Thanks, Kevin. To sum up for today, freight market conditions remained challenging through 2025. But the Hub Group team adapted and remained focused on serving our customers and controlling expenses. To start 2026, we are seeing positive trends in the marketplace, as reflected in improving ISM new orders, and spot market activity. Our balance sheet and cash generation remain strong, and should provide significant capital flexibility as we remain disciplined with capital deployment. Operating momentum and a strong focus on execution has carried us into 2026, and we will continue to lead with service as the freight market backdrop evolves. Phil and Joyce Yeager founded this company fifty-five years ago based on the principles of service, integrity, and innovation. And the success of this business has been and continues to be based on living those values every day. We are excited about the growth prospects for Hub Group, and extending that legacy of performance. Operator: Ladies and gentlemen, this concludes today's call with Hub Group. Thank you for joining. You may now disconnect.