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Operator: [Operator Instructions] I'd now like to introduce CEO, Andre Rogaczewski; and CFO, Thomas Johansen. Speakers, you may now begin. André Rogaczewski: Thank you. Good day, and welcome to this presentation of Netcompany's results for Q4 and full year 2025. My name is Andre Rogaczewski, and I'm the CEO and Co-Founder of Netcompany; and I'm joined today by our CFO, Thomas Johansen. And before we get going, there are some important disclosures that I need you to read through. So could we have Slide #2, please. I will pause for 30 seconds here and let you all have a read-through of these important disclosures. And with that, can we go to Slide #3, please. The topic of today's presentation is our performance for Q4, full year '25 and financial guidance for '26. I'll start by walking you through the business highlights for Q4 and '25 in general. And once I'm done, Thomas will go through the financial performance, including our guidance for 2026 before we can open the call for questions. And can we have the next slide, please? Over the past year, we've navigated a landscape defined by geopolitical uncertainty. In times like these, the call for resilient, secure and digitally sovereign Europe has never been more urgent. At Netcompany, we are not just observing these changes. We are actively building the solutions that Europe needs to thrive. For both governments and private enterprises, the path forward is clear. We must move beyond legacy systems, streamline administration and responsibly embrace the power of AI. Why? Because technology that truly works and deliver tangible benefits is the single most important force that can bring Europe to a competitive edge. It's what will strengthen our position in the global race, a race where we, as a continent, stand for true democratic values. We have clearly differentiated our offerings from our peers, which is also why we continue to grow by using platforms and products and AI will become a force in the industry and someone other vendors strive to become. At the crucial and complex space where we operate developing regulated IT solutions that truly matter, we have a clear and ambitious goal to become a European tech giant. That is the future we are building. We will get there by accelerating growth and profitability by transitioning from a pure IT service model to a hybrid model, driving expansion through a portfolio of scalable products and platforms and related expertise. The future does not belong to traditional IT consultancy companies building solutions from scratch, but rather to European platform companies using components and products and AI to deliver in a fast, reliable and responsible way. And in 2023, we launched a product and platform strategy embracing this development, and we are strongly positioned to take market share from the more traditional players. Our talented employees embrace this development, and we continue to look at how we can become better in everything we do. To us, this is not a threat but an opportunity. And in 2025, we realized an eNPS of 32 compared to 22 in 2024, highlighting that the trajectory we are on is supported by our employees, too. With the combination of our products, platforms, AI and talented employees, I believe that Netcompany is the most modern and future-pointing company in our sector. That is why when I look to 2026 and see the uncertain global geopolitics that the world finds itself in, I'm comforted by knowing that Netcompany will raise the challenge and enable that we digitize Europe responsibly making us stronger, more competitive and resilient. To get there, first, we need to show velocity. Europe's legacy needs to be replaced and new systems designed to embrace and embed AI must be put in place. Our dedication and skills combined with our platforms and products will get us there. Secondly, we need to show determination by consistently delivering on time, at budget and within the required quality. This is how we'll continue to stay competitive by acting intelligently, by reusing as much as possible, adhering to our methodology, we will show the way. We are uniquely combining our own platforms and products with our abilities as a system integrator. This gives us the edge. This is how we will prevail. This is how we're different. We are confident in our direction and immensely proud to be at the forefront, building the digital foundation for a strong, independent and prosperous Europe. And we will continue the momentum we've built to push even further in '26. Europe needs us more than ever. And can we have the next slide, please? And 2025 was also the year we cemented our position in the financial services industry with the merger of SDC into Netcompany Banking Services. The integration has moved swiftly and since the beginning of this year, all employees of Netcompany Banking Services have been integrated at our headquarter office in Copenhagen, fostering closer collaboration with colleagues from across the group. We have launched the first new modules for our Netcompany Banking Services customers, and we will continue with ongoing new releases. During the second half of 2025, we have seen a significant improvement in margins, and we expect more to come as synergies will be realized. The integration is progressing faster than initially anticipated and the synergy targets announced in connection with the Capital Markets Day remain unchanged. And can I have the next slide, please? That our purpose and ambition for a prosperous and digital sovereign Europe have had merits with clients in both the private and public segments in our markets is supported by continued contract wins throughout the quarter. In the U.K. public sector, we have been selected by HMRC to implement and operate the next phase of the Trader Support Service, TSS. The solution will be built on a market-proven ERMIS customs product and our AMPLIO platform. Netcompany Banking Services was selected by OBOS-Banken in Norway for the delivery and maintenance of the new core banking system. The agreement is a testimony to Netcompany Banking Service approach to open architecture, flexible integration and a high degree of automation. In the Danish private sector, we've expanded our agreement with Forca bringing Festina alongside to deliver the pension solution for the future with OpenAdvisor. The implementation of OpenAdvisor platform from Festina will be a part of the complete pension solution delivered to Forca and its customers. And can we have Slide #7, please? In the Danish public sector, Netcompany has been selected as a vendor under a framework agreement with the Danish Agency for IT and Learning. The framework covers development and maintenance of a portfolio of critical education and grant administration systems. And in the private sector in Greece, we have secured a 3-year extension with Cosmote Payments. The extension includes development, maintenance and operational support across the full Cosmote Payment ecosystem. Furthermore, in the private sector in Greece, we have been awarded a contract by the National Bank of Greece covering several key strategic areas, including the development of the bank's AI framework. And with that, I will now pass on the word to Thomas, who will go through the numbers. Please, Thomas, go ahead. Thomas Johansen: Thank you for that, Andre. Like already mentioned, I am the CFO of Netcompany, and I will go through our financial performance for Q4 and for the full year 2025. So if we move past the breaking Slide #8 and straight into Slide #9, please. We ended 2025 with a strong quarter and grew organic revenue in constant currencies by 10% compared to Q4 2024. Currencies impacted revenue growth negatively by 0.5 percentage points in the quarter, resulting in reported organic revenue growth of 9.5%. Organic growth was driven by 20.7% growth in revenue from the private sector and 5.2% growth in revenue from the public sector. Revenue growth was driven by a mix of new wins related to our products and platforms and revenue generated from existing customers with contributions from all segments. Group revenue grew 35.5% in the quarter, of which 25.4 percentage points were nonorganic related to the inclusion of Netcompany Banking Services. Continued the strong performance in Q3, Netcompany Denmark revenue increased 10.2% compared to Q4 2024, mainly driven by 27.9% growth in the private sector with contribution from multiple verticals, most notably in the financial services industry with both new and existing customer engagements. Netcompany SEE & EUI grew revenue 6.9% compared to the same period last year. The growth was driven by both the public sector, including the EU and the private sector, which grew 4.9% and 12.7%, respectively. Netcompany U.K. also continued its strong growth from the previous quarters and grew revenue 28.1% compared to Q4 '24. The growth was driven by both the public and private sector with increased engagements within Tax and Customs and Defense and Resilience. In Netcompany Banking Services, revenue decreased 3.9% compared to pro forma revenue in SDC in Q4 2024. SDC results in Q4 last year were positively impacted by one-off revenues from customer "outconversions" and exit fees. In Netcompany Norway, revenue increased by 7.4% compared to the same quarter last year. And in Netcompany Netherlands, revenue was in line with the same quarter last year. And can we move to the next slide, please? During a year when most of our peers have seen little to no growth, Netcompany grew organic revenue by 7.9% in constant currencies compared to 2024, fully in line with our guidance given at the beginning of the year. Organic growth was driven by both public sector, including EU that grew 7.4% in '25 and the private sector that grew revenue 8.4%. Growth in both segments was supported by our go-to-market strategy, focusing on dedicated industry verticals, combined with our embedded AI product and platform solutions. Group revenue grew 20.8% in 2025, of which 13 percentage points were nonorganic related to Netcompany Banking Services. And can we move to the next slide, please? In Q4 2025, organic adjusted EBITDA, that means excluding NBS, before allocated headquarter cost increased 21.3% to DKK 346.4 million, yielding an organic adjusted EBITDA margin of 18.8%, an increase of 1.7 percentage points compared to the same quarter last year, all in constant currencies. Group adjusted EBITDA before allocated headquarter costs increased 41.2% to DKK 403 million in Q4, yielding an adjusted EBITDA margin for the group of 17.7% compared to 17% in Q4 2024, even with the inclusion of Netcompany Banking Services, which actually impacted margin negatively by 1 percentage point. In Netcompany Denmark, adjusted EBITDA margin increased 4.7 percentage points to 26.2% in Q4. The significant development was a result of improved utilization and our continued focus on scaling revenue without a one-to-one relation in FTE growth, underpinned by a 2.5% increase in client-facing FTEs compared to double-digit revenue growth in the quarter. In Netcompany SEE & EUI, adjusted EBITDA margin was 13.3% in Q4 2025 compared to 15.5% in the same quarter last year. The decrease in margin was a result of lower license revenue income recognized in this quarter compared to the same quarter last year. In Netcompany U.K., adjusted EBITDA margin increased by 4.4 percentage points to 14% in Q4, an improvement reflected by better project execution as well as continuing focus on converting freelancers into own employees and especially public deliveries. In Netcompany Norway, adjusted EBITDA margin was breakeven in Q4. And in Netcompany Netherlands, margin decreased to 18.8% based on timing events. In Netcompany Banking Services, the adjusted EBITDA margin was 13.3% in the quarter compared to pro forma adjusted EBITDA margin of 6.4% in SDC in the same quarter last year. On a sequential basis, margin in Netcompany Banking Services more than doubled compared to Q3 as the integration is progressing faster than anticipated, and we're starting to see the impact from synergies materializing. The performance in Q4 2025 fully supports and validates our expectations for synergies. And with the recent win of OBOS in Norway, we are confident that Netcompany Banking Services will be able to take market shares going forward. Can we have the next slide, please? For the full year 2025, organic adjusted EBITDA margin before allocated headquarter cost was 17.8% compared to 17.6% last year despite increased time spent on product and business development during the first half of the year as well as time spent on preparation for the SDC integration. Group adjusted EBITDA margin before allocated cost from headquarter was 16.9% compared to 17.6% in the same period last year. The lower margin was fully attributed to the inclusion of Netcompany Banking Services into the group. Can we have the next slide, please? In Q4 2025, we employed an average of 9,752 FTEs, equal to an increase of 1,500 FTEs or 18.2% compared to Q4 2024. Of this, 7.8 percentage points were organic and 10.4 percentage points were nonorganic as a result of including Netcompany Banking Services into the total number. Attrition rate for the last 12 months was 18.1% for the organic part of the group, which was in line with Q4 2024. Netcompany Banking Services is right now in the initial phase of a significant structural reorganization. Stand-alone attrition rate for Netcompany Banking Services was 27.5% for the last 6 months. And can we go to the next slide, please? Along with previous years, a continued focus within our group is that of working capital management. And while our cash conversion ratio was lower at 98% compared to 147% in 2024, we are still satisfied with our result. First of all, we are comparing against an extraordinarily high cash conversion ratio in 2024. Secondly, two of the most important metrics indicating whether we are on the right track in our focus on working capital management, both improved in 2025. The relative share of net work in progress and accounts receivables combined relative to revenue decreased compared to last year as did days of sales outstanding. We ended the year with DKK 287 million of cash at hand, up slightly from last year. Our leverage was 1.6x, naturally impacted by the acquisition of SDC, but still at a level giving us strong balance sheet momentum into 2026. During the year, we have executed share buybacks of DKK 500 million, bringing our accumulated share buyback to DKK 1.3 billion in the period 2024 to '25. We canceled 2.5 million shares in March 2025, and we plan to cancel another 1.5 million shares in connection with the upcoming AGM, reducing our outstanding capital by more than 8% over the last years. To complete our 3-year committed share buyback program of DKK 2 billion, we have today initiated another share buyback program of DKK 750 million, of which DKK 700 million are to be executed in the calendar year 2026. And can we have the next slide, please? Revenue visibility for the group, excluding Netcompany Banking Services for 2026 amounts to DKK 5.3 billion, an improvement of 8.1% compared to 2025. Revenue visibility for Netcompany Banking Services for 2026 amounts to DKK 1.4 billion and solely relates to the private sector. And can we go to the next slide. Taking the current macro and geopolitical uncertainty into perspective and observing pipeline and revenue stability at the beginning of the year, we expect our group revenue to grow between 15% and 20% measured in constant currencies in 2026, including Netcompany Banking Services. Excluding Netcompany Banking Services, we expect revenue to grow between 5% and 10%. From a margin perspective, we expect to deliver adjusted EBITDA margin between 15% and 18%, also in constant currencies and also including Netcompany Banking Services. Excluding Netcompany Banking Services, we expect adjusted EBITDA margin between 16% and 19%. Based on our market position, our superior product and platform offerings, we remain committed to our long-term targets, and we expect to keep winning market shares in existing and new markets in the years to come. And with that, we've concluded the presentation of Q4 and the annual report. And if we move to the Q&A slide and open the call for questions. Thank you. Operator: [Operator Instructions] The first question will be from the line of Daniel Djurberg from Handelsbanken. Daniel Djurberg: Congrats to a solid year-end. I have two questions, if I may. And I could start off with a little bit on how to think of the license revenue. I think it was roughly 1% of group's organic revenue in '25, in line with '24. But now we also have the banking services and the OBOS deal, et cetera. But should we still expect the license revenue to account for roughly 1% of the group also for '26, '27? That's my question. Thomas Johansen: Yes, I can start with that, Daniel, and thanks for the question. We don't give specific guidance on the different revenue lines in our group. But it's clear that with the focus we have on our products and platforms and with the maturing and commercialization of these, we would expect license revenue to be a larger and larger percentage of our total group. So without giving you any number, which you know what you asked for, but without giving you any specific number, we would expect that relative share to increase in the years to come. Daniel Djurberg: That's fair enough. And if I may ask you on -- you have increased the organic growth in client-facing FTEs, while you have had a reduction in non-client facing, partly due to internal work made in early '25. But my question is, is the mix now between the non-client and the client-facing FTEs now is at the optimal level or if you could ask for more improvements or have to think? Thomas Johansen: I'm quite sure that both Andre and I agree on this answer. So I'm going to give it because otherwise, Andre is going to give it for me. We would expect the level of non-client-facing FTEs that is the administrative part. We will expect that to continue to come down as it should. André Rogaczewski: Yes. Daniel Djurberg: Perfect. And may I also ask you a little bit on the geopolitical opportunity, if you call it. Recently, EU took a little bit more clear view on the need for the growing digital sovereignty and push towards tech funds and infrastructure funds, et cetera. But have you seen anything more taking place so far from this? André Rogaczewski: Yes. I think you can say that our dialogues with both governments and large enterprises are obviously affected by the whole movement towards more resilient and a much more strategically independent solutions in the EU space. That goes for both public and private solutions. Now all the new platforms we have been launching in the last 3 or 4 years, they've been launched in a way where they can be moved and they're very flexible and containerized. So in that sense, many of the customers are truly interested in using our technology. Operator: The next question will be from the line of Claus Almer from Nordea. Claus Almer: Also from my side, congratulations with a strong Q4. The first question goes to Denmark and the private sector. You had a very solid growth in Q4. To what degree does this come from, let's call it, AI-based projects? That would be the first one. André Rogaczewski: Yes. Thank you, Claus. That's a great question. Now what we see is that we don't sell AI like an independent offering. We sell AI as embedded offering. And that's something that's happened over the last 1 to 2 years. So customers are really interested in our experience and knowledge about specific industrial processes, for instance, in the financial industry. If you know something about life and pension or insurance or you know something about banking, that's the entrance ticket. But then at the same time, you have to show AI capabilities and treating that data with high levels of confidentiality and track where you use AI and why. If you're able to do that, you have a very compelling offering, and that's what we've been doing in Denmark. And that's what we see happening in the private sector. I hope that was answering your question. Yes. Claus Almer: Yes, it definitely did. Then coming to the MPS division. It seems like your synergies is coming in a bit faster than initially communicated at least. Should we also expect that compared to the split you did at the CMD that you might be a little more front-end loaded? And then secondly, what about the commercial opportunities? I think, Thomas, you said you expect to take market shares. Have you been more confirmed about your potential or it's more following the business plan? That will be the second question. Thomas Johansen: I'll start with the first part of the question, Claus, and Andre will take the second part of the question. When it comes to realization of synergies, what we can say at this point in time is that we reconfirm the plan that was laid out in connection with the Capital Markets Day, which is DKK 300 million to DKK 350 million, more or less evenly split over the years to come. And then with that said, we'll see how fast it goes. But as of now, there's nothing in our performance in Q4 that leads us to be worried about our ability to execute on that promise given earlier. So that's as far as I will go. And then I'll leave the other part to Andre. André Rogaczewski: Yes. I think that when it comes to commercial possibilities here, I mean, the market is definitely in Denmark is much more dynamic now than it was just 1, 2 years ago for certain. But what is maybe even more interesting is that you don't really need to be the core system vendor in order to be relevant, delivering all other types of modules. And if you measure on the frequency and the quality of the meetings we have with the overall sector in Denmark, but actually also in Scandinavia, that frequency is going up. We have a lot of meetings. We have some really qualified discussions of how to use separate modules, not necessarily engaging with the entire banking platform. And I see that as very promising. Claus Almer: Sounds great. And then just a small last question. VERA, is there any opportunity or possibility for you to share some thoughts about the progress you're doing with that solution? André Rogaczewski: VERA is -- well, there's a huge interest in VERA. And technologically, I think we have one of the best solutions in the market space. We have a lot of qualified dialogues, and we also have prototypes running with several customers. But unfortunately, I can't go into further details at this moment, but it looks promising. Operator: The next question will be from Balajee Tirupati from Citi. Balajee Tirupati: Two from my side, if I may. Firstly, you have cited focus on efficiency gains from AI to be supportive for the group's growth. Are you seeing clients also looking at Netcompany for cost-out projects expecting your ability to better leverage AI for productivity gains? And secondly, I appreciate Netcompany doesn't have time and material-based pricing. But even for fixed price contracts, do you believe the industry would be able to retain productivity gains and not required to pass that on to clients? André Rogaczewski: Yes, that's two very good questions. I mean your first question is, yes, we actually see that occurring now more and more. Not that it's a big part of what we do. Normally, we are hired to bring in an IT solution that will come up with the necessary effects. But yes, we also see some customers asking us to engage with them to realize the benefits. And when it comes to fixed price, I think the most important thing at the moment is to be relevant and price is important, absolutely. But the business case is even more important. So if you can show a time to deliver within, say, 1 year or even less, benefits that can be realized within 2 or 3 years and with a compelling business case, I don't find the fixed price and trying to bring that down somehow as an obstacle for our business model at all. So I think we are ahead of the curve. I mean, obviously, some services will become cheaper over time when AI inflects the businesses. But you have to be ahead of the curve and you have to be the one with the most compelling business model. And in that way, you can actually have a very, very good business. Balajee Tirupati: If I may have one follow-up question on margins. So Thomas, could you share building blocks within 2026 margin outlook? It would appear that most of the margin improvement is coming from the banking services business, while outlook for the organic business suggests margin being broadly stable over 2024 level. Are you still factoring sourcing of Danish talents across the group as well as our efforts in product and business development in your 2026 outlook? Thomas Johansen: So without giving you what you asked for, by the way, and that would also be the first time I'm doing that then, right? But without talking in details on the margin buildup, when you decompose the 16% to 19% on organic and 15% to 18% on group and then you can calculate backwards what that implied would be on Netcompany Bank Services. You're right in your math. Now we will do everything we can to continue to improve our efficiency within Netcompany call within Netcompany Banking Services and within the group. So at this point in time, early on in the year, we are comfortable with the guidance that we have laid out, both for the group and for the organic part and the implied part that has to do with Netcompany Banking Services. And then rest assured that we will do everything we can to be as effective and as good to deliver the services that will continue to make Netcompany the standout name in the industry. Operator: The next question will be from Yiwei Zhou from SEB. Yiwei Zhou: Yiwei Zhou from SEB. Also a couple of questions from my side. Firstly, I just want to follow up on the cost synergy. Thomas, if you can elaborate a bit here. So the cost synergy here materialized in Q4, is it a part of the 2026 target or it will be addition to it? Thomas Johansen: What we realized in 2025 has nothing to do with 2026. So what we're realizing now, you can say, will be on top of what we're realizing. So it's not that we have taken something that was planned for '26 and done it in '25 or anything. So we're following the plan for '26 to '28 of the DKK 300 million to DKK 350 million. And then we've just had the opportunity to accelerate certain things that we've done in Q4, but we'll continue with the same pledge in '26 and forward. Yiwei Zhou: Okay. And could you also comment a bit on the phasing of the materialization of those cost synergies during 2026. I previously got the impression that it will be back-end loaded. Is it still the expectation? Thomas Johansen: Yes. Without giving any specific guidance on the quarters of when the synergies are going to be realized because that would then imply that we would give input as to what the margins are going to be in the different quarters. But we don't necessarily expect all the synergies for '26 to be back-end loaded. Yiwei Zhou: I see. Okay. And then lastly, I also realized in the provision did increase quite a lot here in '25. And I can understand the provision for restructuring, but I can see you also booked a sizable project provision here. Could you elaborate a bit here? Thomas Johansen: It's related to the merger with SDC into Netcompany Banking services as part of the purchase price allocation. So that has to do with the period before we took over ownership of SDC. Yiwei Zhou: And is there -- is it fair to understand that you see the risk here that it will be a bad project? Thomas Johansen: No. Operator: The next question will be from the line of Aditya Buddhavarapu from Bank of America. Aditya Buddhavarapu: First, on Denmark. Could you comment on how you're thinking about the public sector development this year, given you saw probably slower tender activity last year, how are you thinking about that going into '26? Second, just a follow-up on the question on margins for the core business. Why do you think -- why is sort of the implied margins for the core business flat? Is that because of maybe some more investments or headcount growth? If you could just maybe offer some color on that? And then could you just comment on how to think about the tax rate for 2026, given you have elevated tax rate in H2? André Rogaczewski: Yes. Thank you for those questions, Aditya. Let me just take the first one and leave the other ones to you, Thomas. So the public sector, yes, I mean, we are looking into a very exciting year in Denmark at the moment. I mean we have some large public engagements to be had. We won a recent one that we mentioned in the presentation. But we're also looking into what's going to happen at some of the core major Danish institutions, both tax office and of course, also police force and defense. And at the same time, we see public sector running at a decent pace. However, we will also see an election coming somehow during the year. But we are very confident that many of the deals that we need to have in '26, we will be able to get signed and executed upon before elections, and that plan is running accordingly to what we've scheduled. And overall, I believe we will have a very decent year in '26 in public sector because there's so much digitization happening everywhere. And for the margins and tax things, I better leave that to you, Thomas. Thomas Johansen: Sure. Thanks, Andre. And for the margin, like I said on the previous question that also was on margin. We don't comment per se on the bridge or the buildup on the margin for 2026 for the group or for the organic part. We've given a guidance of 16% to 19% for the organic part, of which we are comfortable at this point in time. And then we will do our utmost to do as good as we can. For the tax rate, we expect that to come down during 2026 to a more normalized level. It is impacted for the first half negatively with the special items that are nontaxable -- nontax deductible, sorry. So that, of course, has a big impact on the tax rate in 2025, which will not have the same impact in 2026. We will see that we can deduct the taxable depreciation on the purchase price for SDC, which will then have a full year effect of 2026 and have a positive impact, meaning a lower tax rate for 2026. So it will normalize in 2026, Aditya. Aditya Buddhavarapu: Understood. Also just a follow-up on the free cash flow. You mentioned that what you're looking at in terms of the DSOs, work in progress, all of that is looking in the right direction. So how should we think about the cash conversion in '26? Thomas Johansen: If you look at 2024, that was really high, right, especially in Q4, more than 400%, underpinning that, that was an abnormal quarter, 147% in 2024 and 98% in 2025. So we're probably looking into a year which is more in line with what we've seen from a cash conversion perspective like 2025. Operator: [Operator Instructions] The next question will be from the line of from ABG Sundal Collier. Unknown Analyst: Just one question on my end here. So it's obviously very encouraging to see the integration of NBS is tracking well, and we all know that you have high ambitions in terms of growth. I'm okay with Denmark and the Nordics, which I also appreciate are sort of the starting point. But I'm just still curious regarding the expansion you're aiming for into the rest of Europe at some point. Can you confirm that you, at this point in time, have all the regulatory approvals you need, i.e., is it theoretically something you could do tomorrow? Or would it take some time to get these? And if so, how extensive would that be able to get? Would it be -- would it require? That would be my question. André Rogaczewski: That's a good question. So that depends definitely on the specific type of solution you want to build in a specific European country. Obviously, if you're in -- within EU, many of the regulatory things you need to build particular solutions are already in place. And when it comes to supporting European banks with particular modules or processes, we can do that without any problems at the moment. Now there are definitely some things that need to be regulated even further in EU. For instance, if you want to put things into the EU wallet and you want payment services in that, that still -- there's still some regulation to be had. But overall, I have to say 80%, 90% of what we can deliver to European banks, we can do without any problems at the moment. So that's not a big obstacle. Having that said, the most important thing right now is obviously Scandinavia. We have -- we see a big market there. And of course, the integration of NBS absolutely important. So we have a very, very strong focus on that. I think that alone can bring us to a very interesting place alone in '26 and '27. Operator: The next question will be from the line of Poul Jessen from Danske Bank. Poul Jessen: I have 3 questions. First question is coming to Yiwei's question about NBS and the guidance. With DKK 56 million in the fourth quarter and a guidance of DKK 180 million to DKK 230 million for full year '26, then you actually guide flat earnings described that you would see slight growth. And I assume also you will have further initiatives coming in '26. So how should we get to that you will have lower earnings on the full year run rate next year in '26 than you had in the fourth quarter? That's number one. Thomas Johansen: What we can say in terms of specific guidance for NBS is that we are comfortable with the guidance set out at this point in time. And clearly, Q4 was good and Q4 was based on realization of synergies. So that's also good. Integration is going fine, and we see some very, very strong interest into the business. So let's see where we end the year with both the group and with NBS. At this point in time, we are comfortable with the guidance. Poul Jessen: Second question, public sector Denmark. Andre, you said that you saw contracts coming up from police tax on defense. We're waiting with consensus moving for an election, do you actually believe that we will see those contracts awarded in before end of April? André Rogaczewski: I think you were falling out a bit there, but I hear your question is the public sector in Denmark and whether some of the contracts with the tax defense and police will fall into place before spring time. Now I'd say -- okay. I'd say that you will see some of it happening definitely before the summer. The good thing about taxes, a lot of these funds have already been allocated. I think so too, when it comes to Defense '26, even in you will see defense and resilience sector acquiring what they need to acquire in '26, that's not going to be influenced by the elections and the same thing goes. So I'm very confident that '26 will be a year with all those 3 government institutions will actually invest more into IT than we've seen for a long time. So I think it looks promising, yes. Poul Jessen: Okay. And then a final question is about Schleswig-Holstein. There has been some local German press writing that you are doing a tax solution, a very small one in Italy for the municipalities there. But they also state that it could be run out across all municipalities in Schleswig-Holstein and also more than just the tourist tax. Can you put a little or elaborate a little about what kind of opportunities you see for this isolated, but also how it can be used in Germany to further expand into tax in Germany in general? André Rogaczewski: Well, it is true that we are delivering minor -- smaller tax solution in Schleswig-Holstein. But we're also in dialogues with other German states about similar solutions based on our AMPLIO platforms. Now the ability to scale those solutions and whether they can be made into larger deals, I think we have to await that. But we are working continuously actually right now in 5 or 6 different areas in Germany, trying to -- trying to use our platforms as an entry point to do new modern case management systems. It's very difficult at this time because it's early days to discuss whether it can be scaled or not. But obviously, that's our intention. Operator: The next question will be from the line of William Richards from Morgan Stanley. William Christian Richards: Just a single one for myself. So for the quarter, we saw SEE & EUI segment growth slow a bit sequentially. I think we are now around 7% for the fourth quarter. I know for a while you've been talking about growth slowing in this region to more normalized levels. So I guess my question is, is 2026 the year where we can expect this normalization to take hold? Or was there something else on the growth front in the fourth quarter for that segment that drove this deceleration? Any more color there would be really helpful. Thomas Johansen: So the deceleration of Q4 stand-alone was driven by lower license revenue in Q4. So that's the main reason for that. We don't necessarily expect the growth to be had in SEE & EUI to come to an end in 2026 on the contrary. I think we lost William. Operator: Yes. As we have no further questions in the queue, I'll hand it back to the speakers for any closing remarks. André Rogaczewski: Well, thank you all for joining in, and have a wonderful day.
Operator: Hello, and welcome to the Q1 2026 TransDigm Group Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Director of Investor Relations, Jaimie Stemen. Jaimie Stemen: Thank you, and welcome to TransDigm's Fiscal 2026 First Quarter Earnings Conference Call. Presenting on the call this morning are TransDigm's Chief Executive Officer, Mike Lisman; Co-Chief Operating Officer, Patrick Murphy; and Chief Financial Officer, Sarah Wynne. Also present for the call today is our Co-Chief Operating Officer, Joel Reiss. Please visit our website at transdigm.com to obtain a supplemental slide deck and call replay information. Before we begin, the company would like to remind you that statements made during this call which are not historical in fact, are forward-looking statements. For further information about important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements, please refer to the company's latest filings with the SEC available through the Investors section of our website, or sec.gov. The company would also like to advise you that during the course of the call, we will be referring to EBITDA, specifically EBITDA as defined, adjusted net income and adjusted earnings per share, all of which are non-GAAP financial measures. Please see the tables and related footnotes in the earnings release for a presentation of the most directly comparable GAAP measures and applicable reconciliations. I will now turn the call over to Mike. Michael Lisman: Good morning, and thanks for calling in today. First, I'll start off with the usual quick overview of our strategy. Second, make a few comments about the quarter; and third, discuss our fiscal '26 outlook. Then Patrick and Sarah will give some additional color on the quarter. This will be the first time you're hearing from our new co-COO, Patrick Murphy, but he's hardly a new guy around TransDigm, having served as an Executive Vice President for the last 6 years, and as President at our HarcoSemco operating unit in Connecticut prior to that. To reiterate, we believe we are unique in the industry in both the consistency of our strategy, in both good times and bad, as well as our steady focus on intrinsic shareholder value creation through all phases of the aerospace cycle. To summarize, here are some of the reasons why we believe this. About 90% of our net sales are generated by unique proprietary products. Most of our EBITDA comes from aftermarket revenues, which generally has significantly higher margins and over any extended period have typically provided relative stability in the downturns. We follow a consistent long-term strategy. First, we own and operate proprietary aerospace businesses with significant aftermarket content. Second, we utilize a simple, well-proven, value-based operating methodology. Third, we have a decentralized organizational structure and unique compensation system closely aligned with our shareholders. Fourth, we acquire businesses that fit this strategy and where we see a clear path to private equity-like returns. And lastly, our capital structure and allocation are a key part of our value creation methodology. Our long-standing goal is to give our shareholders private equity-like returns with the liquidity of a public market. To do this, we stay focused on both the details of value creation, as well as careful allocation of our capital. As you saw from our earnings release, we had a good start to our fiscal year. Our Q1 results ran ahead of our expectations, and we raised our sales and EBITDA defined guidance for the year. During the quarter, we saw solid growth in the revenue for our commercial OEM channel, and healthy growth in both our commercial aftermarket and defense market channels. Bookings in the quarter were strong across all of these three market channels. Commercial aerospace trends remained favorable. Air traffic continues to steadily grow, and airline schedules remain fairly stable as well with takeoffs and landings growing in the 4% ballpark year-over-year. Within commercial aftermarket, a quick note on our growth in this market channel over the last 12 months. While our growth rates have hit and continue to hit our own expectations, there is a lag in TransDigm's growth versus the broader market of probably 5 to 6 percentage points. As we have said many times before, it's not odd for us to see this, and we have lived through brief periods like this before. With regard to what is driving it as we run the math, roughly half of the 5 or 6 percentage point growth gap is from our underexposure on engine content versus the rest of market, and the remaining half comes from lumpiness in our distribution channel and at airlines, with this latter piece owing to our earlier and higher recovery versus the broader market as we came out of COVID. The second piece, the lumpiness, can be hard to quantify exactly. Switching to the commercial OEM market, there's still much progress to be made for OEM rates. However, it is good to see both Boeing and Airbus steadily ramping up their production rates. They expect to continue doing so in coming months and quarters. Airline demand for new aircraft remains high and the OEMs have long backlogs. The OEM production rate recovery to date has been bumpy, and we're planning for it to remain so. We remain encouraged by the progress we're currently seeing and have seen over the last several quarters. Our EBITDA as defined margin was 52.4% in the quarter, which includes about 2 full percentage points of dilution from recent acquisitions. Contributing to this solid Q1 margin is the continued growth in our commercial aftermarket, along with diligent focus on our operating strategy, which is allowing margin performance to expand across all segments. Additionally, we had strong operating cash flow generation in Q1 of over $830 million, and we ended the quarter with a cash balance of over $2.5 billion. Next, an update on our capital allocation activities and priorities. In the past 5 weeks, we have signed up the acquisition of 3 new operating units and 2 separate M&A transactions. Stellant Systems, Jet Parts Engineering, and Victor Sierra Aviation. On December 31, we announced that we had agreed to acquire Stellant Systems from Arlington Capital Partners for approximately $960 million in cash. Stellant is a designer and manufacturer of high power electronic components and subsystems serving the aerospace and defense end market. The business generated approximately $300 million in revenue for the 2025 calendar year. And then on January 16, we announced that we had agreed to acquire two businesses, Jet Parts Engineering and Victor Sierra Aviation, from Vance Street Capital for approximately $2.2 billion in cash. Jet Parts Engineering is a designer and manufacturer of aerospace aftermarket solutions, primarily proprietary OEM alternative parts and repairs. Victor Sierra is a designer, manufacturer and distributor of proprietary PMA and other aftermarket parts serving the commercial aerospace end market, primarily the general aviation and business aviation sectors. Collectively, Jet Parts and Victor Sierra generated approximately $280 million in revenue for the 2025 calendar year. As you know, we've been a player in the PMA space for many years through our existing operating units, which often work directly with the airlines on their PMA efforts, most of which are focused on developing better technical solutions for the airline customers. We see PMA as a small but growing subsector within commercial aerospace that serves an important need for the airlines. Jet Parts and Victor Sierra will add to our existing PMA revenue and further enhance our partnership with these airlines. We look forward to owning all three businesses, Stellant, Jet Parts and Victor Sierra. These are good businesses with proprietary products that generate significant aftermarket revenue and align well with TransDigm. Regarding the current M&A activities and pipeline, we continue to actively look for opportunities that fit our model. As usual, the potential targets are mostly in the small and midsize range. And while we are very happy to be adding Jet Parts and Victor Sierra into the fold, the primary M&A focus at this time remains on acquiring proprietary OE component aerospace business. As always, we will remain focused and disciplined around our approach to M&A. Additionally, acquisitions are, by their nature, hard to predict. So consistent with past practice, I will not be saying too much on what is currently active in our funnel. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses. Second, do accretive, disciplined M&A. And third, return capital to our shareholders via buybacks or dividends. The fourth option paying down debt seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options. We exited the quarter with a sizable cash balance and our recent capital allocation actions still leave us with significant liquidity and financial flexibility to meet any likely range of capital requirements, or other opportunities, in the readily foreseeable future. Pro forma for the announced acquisitions, we have significant M&A firepower and capacity remaining, approaching $10 billion. Moving to our outlook for fiscal 2026. As noted in our earnings release, we are increasing our full year '26 sales and EBITDA as defined guidance to reflect our strong first quarter results, and our current expectations for the remainder of the year. At the midpoint, sales guidance was raised $90 million, and EBITDA defined guidance was raised $60 million. We are still early in our fiscal year, and considerable risk remains. But I am quite encouraged by and optimistic on how things appear to be shaping up these first 4 months. The guidance assumes no additional acquisitions or divestitures. Our current guidance for fiscal 2026 is as follows and can also be found on Slide 6 in today's presentation. Note the pending acquisitions of Stellant, Jet Parts Engineering and Victor Sierra are all excluded from this analysis until each acquisition closes. The midpoint of our fiscal 2026 revenue guidance is now $9.94 billion, or up approximately 13% over the prior year. In regard to the market channel growth rate assumptions that this revenue guidance is based on, we are not updating the full year market channel assumptions for our three primary end markets: commercial OEM, commercial aftermarket and defense. Underlying market fundamentals have not meaningfully changed for any of these markets. The revenue guidance is based on the following market channel growth rate assumptions. We expect commercial OEM revenue growth in the high single digit to mid-teens percentage range, which is highly dependent on the evolution of the production rates in the commercial OEM environment, commercial aftermarket revenue growth to be in the high single-digit percentage range, and defense revenue growth in the mid-single-digit to high single-digit percentage range. The midpoint of fiscal 2026 EBITDA defined guidance is now $5.21 billion, or up approximately 9%, with an expected margin of around 52.4%. We are very pleased with our margin performance in the year-to-date period, and we are running ahead of where we thought we'd be. Adjusting for the two dilutive factors we discussed last quarter, the margins in our base businesses improved nicely in our first fiscal quarter, more than we had expected. And as a reminder, the dilutive factors are approximately 200 basis points of margin dilution from our recent acquisitions, and about 0.5 percentage point to 1 full percentage point of dilution from commercial OEM and defense mix headwind. The midpoint of adjusted EPS is now expected to be $38.38. We believe we are well positioned for the remainder of fiscal 2026. We'll continue to closely watch how the aerospace and capital markets develop and react accordingly. We are pleased with the company's performance this quarter. It is a good start to the fiscal year. Our teams remain focused on our value drivers, cost structure and operational excellence. We look forward to the remainder of fiscal '26 and expect that our disciplined, consistent strategy will continue to deliver the value you have come to expect from us. Now let me hand it over to Patrick Murphy, our TransDigm Group Co-COO, to review our recent performance and a few other items. Patrick Murphy: Good morning, everyone. I'll start with our typical review of results by key market categories. For the remainder of the call, I'll provide commentary on a pro forma basis compared to the prior year period 2025. That is assuming we own the same mix of businesses in both periods. For reference, the market discussion includes the recent acquisition of Simmonds Precision Products, the pending acquisitions of Stellant, Jet Parts Engineering and Victor Sierra are excluded. In the commercial market, we will split our discussion into OEM and aftermarket. Our total commercial OEM revenue increased approximately 17% in Q1, compared with the prior year period. As we anticipated, commercial OEM revenue in the first quarter showed strong growth as we supported higher build rates. Commercial transport OEM revenues, which excludes the biz jet submarket were up 18% over the comparable prior year period. As you will recall, Boeing experienced production issues in late 2024 that resulted in a drop in OEM demand in our first fiscal quarter last year. Our Q1 FY '26 growth is driven by the increase in the Airbus and Boeing OEM build rates, and the bounce back from the Boeing production disruption in the prior year. Commercial OEM bookings in the quarter were up compared to the same prior year period, and ran ahead of our expectations, and significantly outpaced sales. Commercial transport bookings growth was up into the high teens percentage for the first quarter. The bookings levels for commercial transport OEM continued to show that the market is recovering from the various disruptions seen over the past 1.5 years. However, the OEM recovery to this point has been bumpy, and uneven on a quarterly basis, and we expect that to continue as OEMs in our Tier 1 and Tier 2 customers rightsized inventory levels. We remain encouraged by the continued progress of the 737 MAX production line as well as the overall progress we are seeing at both Boeing and Airbus as they ramp their production rates. Our operating units are well positioned to support the higher production rates as they occur. The commercial OEM guidance we are giving today contains what we believe is an appropriate level of risk around the production build rates for the 2026 fiscal year. Our fiscal 2026 commercial OEM revenue guidance range, which as Mike mentioned, is unchanged, is high single digit to mid-teens percentage growth, and contemplates reasonable risks around the Boeing and Airbus rates. Now moving on to our commercial aftermarket business discussion. Total commercial aftermarket revenue increased by approximately 7% compared with the prior year period. This quarter, all submarkets within commercial aftermarket experienced positive growth. Our commercial transport aftermarket revenue growth, which excludes our biz jet submarket, was up 8% driven by solid growth at all 4 of the transport submarkets, freight, interiors, engine and passenger. Overall, we saw strength in commercial aftermarket transport across a large majority of our operating units. Q2 bookings in commercial aftermarket were also strong, running ahead of our expectations, solidly outpacing sales and supporting the full year growth outlook. Additionally, POS at our distributors grew in the double digits on a percentage basis this quarter. As Mike already mentioned, our commercial aftermarket revenue growth guidance is unchanged, and with positive leading indicators in bookings, book-to-bill ratio, and distribution sales, we fully expect 2026 commercial aftermarket growth in the high single-digit percentage range. Additionally, as we have said before, our operating units continue to vigilantly monitor market share and competitive losses. We see no material loss in this space from either USM or PMAs. Now shifting to our defense market. Defense market revenue which includes both OEM and aftermarket revenues, grew by approximately 7% compared to the prior year period. Over the past year, we have seen strong growth in defense, driven by new business wins and strong performance by our teams in both domestic and international markets, driven by the growth in defense spending around the world. Q1 defense revenue growth was well distributed across our businesses and customer base. We saw similar rates of growth in both OEM and aftermarket components of our total defense market, with OEM running slightly ahead of aftermarket. Defense bookings for the quarter were robust, up year-over-year, higher than our expectations and significantly surpassing sales for the period. Bookings started the year strong and continue to support our unchanged 2026 defense guidance for mid-single digit to high single-digit revenue growth. As we have said many times before, defense sales and bookings can be lumpy. We are confident that the bookings and sales will meet our expectations, but forecasting them with accuracy and precision, especially on a quarterly basis, is difficult. Overall, we are encouraged by the backlog that is building in our defense market segment. Moving on to our value drivers. We continue to see strong success winning new business at our operating units, and I would like to highlight a few new business program wins from last quarter. Our Chelton business was awarded a multimillion dollar contract from Lockheed Martin to supply their latest generation very high-frequency, ultra-high frequency antenna system. These systems are used in line with the upgraded radios that are now standard fit for production on C-130J aircraft. In December, the IrvinGQ business was awarded a $24 million contract from the U.S. Department of Defense for provisioning of floating decoy systems to protect the U.S. Navy Arleigh Burke Destroyers. These systems are used as one of the last lines of defense for ships under missile attack. U.S. DOD have requested these deliveries to start in FY '26, the overall program period of performance over the next 4 years. Just a quick update on our acquisition integration activities. We continue to make good progress integrating our two most recent acquisitions. Servotronics and Simmonds Precision. Both integrations are being led by experienced EVPs, and we have augmented the existing teams with seasoned individuals from other TransDigm operators to accelerate their progress. It's still early, but our experience to date indicates that these are going to be 2 very good additions. I'd like to wrap up by recognizing the concerted efforts of our operating teams during the first quarter of fiscal '26. We are pleased with the solid operational performance our teams delivered for our shareholders this quarter. The teams continue to execute on our value drivers and it was a good start to our fiscal '26. As we progress further into the year, our management teams remain focused on our consistent operating strategy, delivering on new business opportunities, and meeting increased customer demand for our products. With that, I'd like to turn it over to our Chief Financial Officer, Sarah Wynne. Sarah Wynne: Thanks, Patrick. Good morning, everyone. I'll recap the financial highlights for the first quarter and then provide some more information on the guidance. First, on organic growth and liquidity. In the first quarter, our organic growth rate was 7.4% and all market channels contributed to this growth, as previously discussed by Mike and Patrick. On cash and liquidity, free cash flow, as we traditionally define as EBITDA less cash interest payments, CapEx and cash taxes was just under $900 million for the quarter. This is higher than our average free cash flow conversion due to the timing of our interest and tax payments in the quarter. This will normalize throughout the year as these payments pick up next quarter. We expect to steadily generate significant additional cash throughout the remainder of fiscal 2026. Our free cash flow guidance is unchanged, and we continue to expect free cash flow of approximately $2.4 billion for fiscal 2026. As a reminder, this guidance doesn't include the pending acquisitions or interest expense from any potential debt issuance to fund those acquisitions. Below that free cash flow line, an investment of net working capital consumed approximately $30 million for the quarter. For the full year, we expect working capital tool to end roughly in line with historical levels as a percentage of sales. We ended the quarter with approximately $2.5 billion of cash on the balance sheet after paying for the Simmonds acquisition at the beginning of the quarter. Our net debt-to-EBITDA ratio was 5.7x, down from the 5.8 at the end of last quarter. While we don't target a specific amount of cash that we like to have on hand, our current balance, and available debt capacity, provides ample liquidity to fund the recently announced pending acquisitions through a likely combination of cash on hand and new debt issuance, based on our strategy of operating in the 5 to 7x net debt-EBITDA ratio range. Our net debt-to-EBITDA target range also preserves plenty of capacity for additional acquisitions should opportunities arise along with other capital deployment options. Regarding our debt, our capital allocation strategy is to both grow actively, and prudently, manage our debt maturity stacks by keeping near-term maturities well extended. In addition, approximately 75% of our $30 billion gross debt balance is fixed through fiscal 2029. This is achieved through a combination of fixed rate notes, interest rate swaps, caps and collars. This provides us plenty of protection at least in the immediate term. Our EBITDA to interest expense coverage ratio ended the quarter at 3.1x, which provides us with comfortable cushion versus our target range of 2 to 3. Additionally, during Q1, we took advantage of a dip in the share price and opportunistically deployed a little over $100 million of capital for repurchases of our common stock. These share repurchases are anchored in the same targeted return criteria we have consistently applied over the years. We continue to seek the best opportunities for providing value to our shareholders through our capital allocation strategy. We think we remain in good position with adequate flexibility to continue to pursue M&A opportunities, or return cash to our shareholders via share buybacks, and/or additional dividends during the course of fiscal 2026. With that, I'll hand it back to Jaimie, our Director of Investor Relations. Jaimie Stemen: Before we open the line for Q&A, I'd ask everyone in the queue to consider your fellow analysts and ask one question only so we can get to as many people as possible today. Operator, can you please open the line? Operator: [Operator Instructions] And our first question comes from the line of Sheila Kahyaoglu with Jefferies. Ellen Page: It's actually Ellen on for Sheila this morning. Just looking at your profitability in the quarter, it was better than expected given fiscal Q1 is typically seasonally weaker, and it's in line with your guidance for the year. How are you thinking about the puts and takes through the year and the cadence of profitability? And what is -- kind of what's driving that strength in the quarter? Michael Lisman: Sure. We had a stronger start to the year on the margin front than we thought, the 52.4% that we came in at on EBITDA was a little bit better than we expected. In terms of what contributed to that, while commercial OEM did have a strong growth quarter, it was up 17% on a pro forma basis, as Patrick said, that was a little bit light of where we thought it would come in, a couple of points. So we got a bit of tailwind on the margin just from the mix that came with that. And then separate from that, the teams at our op units have done a really good job in terms of getting cost out, productivity projects, driving a higher margin for us in Q1. Hopefully, that continues for the balance of the year. There's probably a bit of conservatism embedded in the guidance, too, from here on out. I think as you guys know, we aim to be conservative on some of the projections. We'll see how the year evolves in terms of the growth rates as commercial OEM bounces back. As you know, that's expected to be the highest growth end market for us. So that could present a bit of a headwind, but overall, a solid start to the year. Operator: And our next question comes from the line of Myles Walton with Wolfe Research. Myles Walton: I was wondering maybe, Mike, could you comment a bit on the distributor POS and that's been running double digits now for the last several years, every quarter, but 3 of the last 5 times aftermarket has [ fallen short of ] that double-digit mark. I think it's more engine sensitive. So maybe you can confirm that, or how much of information value there is? Then within the aftermarket growth, if you can just tell us what is lagging in that plus 8%? Is interiors in the low single digits still? Michael Lisman: Sure. So a couple of things on the POS point. We do, through the POS channel weighed a bit more heavily towards engine there. So that has what has been a little bit of what's contributed, driven it up. In terms of where distributors are generally, as I think we mentioned on last quarter's call. During our fiscal '25 year, we probably saw 1 to 2 percentage points of drag on the overall CAM growth from distributor inventory changes. That was a headwind at the time. Some of that persisted into our Q1 here, probably a little bit more elevated than the 1 or 2 percentage points. That should turn the corner as we head into the year. Again, it's not rare to see these kind of movements in distributor inventory levels. So as that rebounds into the balance of fiscal '26 that continued headwinds should hopefully turn into a bit more of a tailwind. In terms of the end market color, Patrick, do you want to provide a little bit of commentary? Patrick Murphy: Yes. I mean one of the -- we see that's a really solid growth rate on our engine end market for CAM, as well as our airframe and airline being in line with what our expectations are. Biz jet is a little bit lighter here, and that's what's kind of holding us back. But overall, these are well within our expectations, and it was good growth in the first quarter. Michael Lisman: And all of the submarkets were -- when you strip out the business yet, which was obviously at 1% and dug us back a little bit. All the submarkets within commercial transport at 8% for commercial transport were above sort of the 7% overall CAM growth rate for all of them. So good to see uniformly distributed growth. Myles Walton: Just one clarification on the 7.4% overall company organic growth versus the subsectors, 17%, 7% and 7%? I know there's pro forma versus organic. But is the takeaway that Simmonds' significant growth underlying year-on-year, and that's what's driving most of that differential? Sarah Wynne: Yes. Myles, this is Sarah. I'll take that one. Yes, if you look at the market growth segments, which are obviously pro forma for Simmonds, we do see a little bit of upside in the market segments coming from Simmonds on that piece. The other bit that's playing into that delta difference, the 7.4% of organic, that includes our non-aero market segment. It's a smaller piece but it's lower than the average 7.4%. So that's the other bit of the delta that you see going on there. Operator: Our next question comes from the line of Gavin Parsons with UBS. Gavin Parsons: I just wanted to follow up on Myles' question on the lumpiness to make sure I'm just clear on the time frame we're talking about, and I appreciate that color. The 7% aftermarket growth rate in the quarter, so if half of 5% to 6% below peer growth was lumpiness, does that suggest that your core growth is more like 9% or 10% for aftermarket? Michael Lisman: I guess it depends how you define core growth. We've taken a bit of a headwind just because of the distributor lumpiness and some of the inventory in the channel, potentially the airlines. And it's -- as I tried to address in the prepared remarks, it's hard to quantify that exactly in what it might be because you don't get great inventory data from the airlines. You do from distributors, but not always from the airlines in terms of great detail on exactly what they have. As we rack up the math over the last 4, 5 quarters or so, if we're 5 or 6 percentage points [ light ] versus where the rest of the market is, about half of that is this kind of lumpiness, both at airlines and at the distributors. And that's what -- the point we were trying to raise in the prepared comments. Gavin Parsons: Was the destocking last year more specific to the first half or second half? Michael Lisman: No, I think it was pretty uniformly distributed throughout the year. It bounces around a little bit quarter-by-quarter as you would guess, with as many distributors and op units as we have, but generally fairly uniformly distributed. Operator: Our next question comes from the line of Noah Poponak with Goldman Sachs. Noah Poponak: You mentioned aftermarket -- aerospace aftermarket bookings grew faster than revenue. I was hoping maybe you could quantify how much faster the bookings growth was compared to revenue, or a book-to-bill? And I don't know if you also had that for full year '25 just so we can understand if things are accelerating, decelerating, staying the same? And then as we go through the rest of the year, how much should we be taking into consideration that compares from last year in aerospace aftermarket just because 2Q is a much different comp than 3Q? Or do you expect the remainder of the year's growth to be pretty even? Michael Lisman: Yes. No, it's Mike. I'll take that one. I think you know how we look at the quarterly CAM bookings trends. We don't focus on it too much. We look at a rolling 12-month average. So I don't want to go down the path of saying too much on the quarterly bookings targets that I think everybody expects to get it every single quarter. That said, as Patrick said in his comments, prepared comments, it ran nicely ahead of what the sales growth was this quarter into the double digits. But we're not going to go and give a specific number, but good growth that we think sets us up nicely for the rest of the year. When we look at CAM growth, we look at a rolling 12-month average stat. And as you look at the 2025 level, and where we sort of tracked out all the calendar last year, it was nice signals growth, was above 1.0. But again, we don't disclose the exact amount. That's what set us up well as we looked in and forecasted out FY '26 and what the growth could be, it made us somewhat confident that we'll have at least a little bit of backlog there to hit the shipments target. On the quarterly comps and where things go from here, we don't want to say too much. This sort of sounds like we're giving quarterly guidance. We'll see how the year progresses. As we give the guidance, we guide for a full year because we know how lumpy commercial aftermarket can be. We feel really good about the high single-digit guidance for the full year, but I'm hesitant to give anything that sounds like we know exactly what it's going to look like on a quarter-by-quarter basis as we get there. Noah Poponak: Okay. I appreciate that. And just one clarification, the lumpiness in distribution being a headwind, and then the statement of POS at distribution grew double digits. What's the difference between those two comments on one being a headwind, one being a tailwind from distribution? Michael Lisman: Well, I think the point is distributor inventory is contracted. So we're getting headwinds of selling into distributors and then their on sale rate into the market from the distributor is higher. So the net inventory position is contracting a bit. Noah Poponak: Do you have visibility into how much inventory of yours is left in the channel? Michael Lisman: We track it quite a bit at the op unit level of distributors, and we think as the rest of the year shapes up, this should be something that instead of a headwind should hopefully become more of a tailwind for us as we head out through Q2 through Q4. We did take a bit of a headwind in Q1, a couple of percentage points. Operator: And our next question comes from the line of Scott Mikus with Melius Research. Scott Mikus: Mike, quick question on the Jet Parts Engineering and Victor Sierra acquisition. That should accelerate your commercial aftermarket growth, but was part of the rationale also to deter other companies from PMA-ing your OEM parts, because you could then retaliate in PMA or DER their parts as well? Michael Lisman: No. No. We bought these businesses because we think they're fundamentally good businesses on which we can make a 20% IRR. The same TransDigm logic we've always applied to M&A, the businesses will run and operate themselves. And that's why we bought these two companies. Scott Mikus: Okay. And then thinking about the deal model, normally, you let your operating units run autonomously. But is there upside to your deal model if Jet Parts Engineering and Victor Sierra start distributing the PMAs from your other operating units? Michael Lisman: Potentially, but our business run themselves. So anything of that sort would have to be an arm's length agreement between the op units and those businesses. That certainly wasn't in our acquisition case and not what we banked on. I think, as you guys know, our 53 businesses and going on 56 will run themselves independently. Operator: And our next question comes from the line of Robert Stallard with Vertical Research. Robert Stallard: Just a couple for me. First of all, on the acquisitions. they looked a bit pricey. And I was wondering if that was reflective of broader M&A market trends in aerospace and defense at the moment. And then secondly, do you expect to see similar opportunities for value-based pricing readjustments going forward? Michael Lisman: I guess on the valuation multiples, you're always -- theoretically, you'd love to buy things for lower than you actually have to pay for them. But at a certain point, the market is what it is, and we have to pay up, especially in the current environment to own these businesses. What we did pay is not anything that we view as too high. Again, it foots to math that basically results in the same 20% sort of IRR we always targeted. So we're happy to own the businesses. We think we paid fair prices, but nothing that was too high given the valuation environment we're in today. Robert Stallard: And on the pricing? Michael Lisman: And on the pricing, I think it's going to be similar playbook as we've deployed our acquisitions over time at TransDigm. Basically, no change there. Operator: And our next question comes from the line of Scott Deuschle with Deutsche Bank. Scott Deuschle: Patrick, I think in your prepared remarks, you mentioned that you've seen no material share loss from PMAs. I guess within that, what would you define as material? Is it less than 1% share loss per year? Patrick Murphy: We just think that, that's something small and it's not something that we're seeing. Our operating units is where they're sort of fighting this, or looking for that potential risk to pop up. And those are the ones, those are the teams that are really considering what they should be doing. Right now, our teams are delivering very well to the market. They're satisfying the demand for our -- for all of our customer needs. Our on-time delivery has improved significantly over the last few quarters over the last year, and I think we're well positioned to defend ourselves there and it's just not something that we see as an issue. Scott Deuschle: Okay. And then just to clarify, does Jet Parts currently have many PMAs on existing TransDigm products? And is there any kind of conflict of interest that needs to be managed through there? Or can it all just be done by the typical TransDigm playbook of running them as their own entities? Michael Lisman: Yes. I think the playbook is they'll run themselves as their own entities. That's the game plan for all of our businesses. Consistent with how we do it here, and there's no significant or sizable overlap to your other question. Operator: Your next question comes from the line of Ronald Epstein with Bank of America. Jordan Lyonnais: This is Jordan Lyonnais on for Ron. On Jet and Victor, if we look out 3 years and you start to realize revenue synergies, do you guys have a target or an idea of how much you would like to see your PMA business grow? Or what percentage of the portfolio you'd be comfortable with? Michael Lisman: That's not necessarily how we looked at it in terms of overall TransDigm. Again, we footed as we bought these businesses, we modeled it up and we built a 5-year LBO model, same approach we've always taken and ask ourselves, can we hit 20% IRR at the price we have to pay. And we think that's the case with both of these businesses, but we're not footing necessarily to a total percentage growth target for TransDigm's overall CAM in year 5. We think these are great businesses. That's why we bought them. We think there's a good growth trend here in PMA. It's something that's not going to see explosive growth, but it's probably going to grow a little bit above the market. This gives us position in that space and a way to benefit from that growth. And again, we look forward to getting both deals closed and owning these businesses and then watching them continue to grow. Operator: And our next question comes from the line of Gautam. Khanna with TD Cowen. Gautam Khanna: Just to follow up on the PMA acquisitions. I'm curious if the margin structure in that type of business mirrors that of TransDigm's core business. Because when we look at companies like HEICO, their segment margins in the related business are like half that. Admittedly, that's -- I'm sure there's differences in accounting, or what have you, but I'm just curious, is there any structural limitation to moving the margins of the acquired businesses up towards the company average? Michael Lisman: We think these are great businesses. We're excited to own them both. In terms of margin targets, we did not model these as getting where -- anywhere close to the TransDigm margin level. There's good volume growth here. That's part of what drives and helps you get to the 20% IRR. But in terms of how we model these businesses up, we did not model the margins getting to the TransDigm level. Gautam Khanna: Okay. And do you know if the -- those businesses have an engine, if you will, internally to constantly develop new PMA parts? And if so, kind of at what rate they've been introducing new PMA parts per year? Michael Lisman: Yes. And they both do. They've got engines in both businesses that do this. That's what drives the growth, and they've got a solid track record of having done it. In terms of the exact numbers they've done, we know it, obviously through our diligence. It's good sizable growth they drive every year through those efforts. And we're not going to disclose the exact numbers, but it's pretty sizable introductions that drive good revenue growth. Gautam Khanna: Okay. And last one, just quickly on M&A beyond that what you've announced, how would you characterize the pipeline? Michael Lisman: Just as I said in the comments, active in the small to midsize range. We're working away at it. M&A is impossible to predict. We're working hard. Operator: And our next question comes from the line of Ken Herbert with RBC Capital Markets. Kenneth Herbert: Mike, and Patrick and Sarah, thanks for the time. Maybe Mike, just to maybe pivot over to the commercial OE side. Can you just talk about some of the puts and takes as we think about the range of high single to mid-teens on the guide? And just to clarify, you feel like you're basically through the destock you've seen on the MAX and some of the other major programs at Boeing? Patrick Murphy: Yes, Ken, I'll take this one. This is Patrick. Yes. We do think we're through that destocking. So as the both -- as Boeing had their strike issues last year, what we saw from our Tier 2 and Tier 3 customers that we're supplying, they continue to order at kind of mixed rates. And so what that meant was there was some bleed out over the past, let's say, quarter to 2 quarters as they're kind of getting back to the normal pattern. That, we think, is done at this point in time. So we're encouraged that we're all in lockstep supporting the Boeing and Airbus build rates. As far as what we expect to see going forward, right now, there are positive indicators from Boeing and Airbus about what they can do. And that should create some tailwind for us as we continue to support that. We're encouraged by what we see, but there's still risk, right. There's still -- there are still things that could go wrong in supply chain, as you heard about from some of the other companies that support this growth rate in this business segment. Kenneth Herbert: Thanks, Patrick. So as we just think about the range, I guess, I don't want to put words in your mouth, but if things go according to plan, that's probably mid-teens, but the high single just reflects maybe some conservatism rightly so just sort of based on recent track record? Or how would I interpret that? Patrick Murphy: I think that's fair to say as well as there are some. Other -- it's not all just commercial transport, Boeing and Airbus that factors into our number here. Michael Lisman: And I would add too, Ken. I mean this is a segment, as you know, the last 2 years, the ramp-up has been more challenged than we thought. So hopefully, our range and as broad as we made the brackets ends up being conservative at the low end, but time will tell. Past 2 years, you probably would have liked to have some of that cushion and we'll see whether or not this year we need it again. Operator: And our next question comes from the line of Seth Seifman with JPMorgan. Seth Seifman: I wanted to start off. I think you said a little bit earlier, you hope the margin forecast for the year would be conservative. I think it's probably around what you did in the first quarter and had Simmonds in there for more or less the entire quarter and margin usually moved up through the year. Is there -- other than conservatism? Is there anything to be aware of regarding why that margin wouldn't ascend through the year? Michael Lisman: I think it's a bit of conservatism and then also just we'll see where commercial OEM goes and how that ramp up and the growth comes from there. As you guys know, that's a lower margin segment for us. So as that outgrows other things presents a bit of a headwind. We're early in the acquisitions. So we're probably conservative in the margins we forecasted for both those businesses as well. So time will tell. But I think it's fair to say there's a healthy dose of conservatism here on the margins included too. And we'll aim to be there. Seth Seifman: Right. Okay. And then just following up. I know you're not guiding for the acquisitions, but in the past, I think maybe you've given -- you foreshadowed a little bit what impact acquisitions could have on margin. When we bring in these three pending deals, how do we think about where the margin resets to from where it is now? Michael Lisman: Yes. We don't want to give guidance until things actually close. So we'll cross that bridge when we come to it. I think you guys know the way past acquisitions go, usually dilute you down a little bit on the margin. And it'd be safe to assume that you can expect something like that with these 3 new op units as well. Operator: And our final question comes from the line of Kristine Liwag with Morgan Stanley. Kristine Liwag: Maybe pivoting away from commercial aerospace and PMAs. Your defense business is now more than 40% of the portfolio. And if you look at the ecosystem, a lot of the primes have called out some of the sole source providers in the supply chain as creating bottlenecks for the ability to convert the $540 billion record defense backlog into revenue. Your pricing model has gotten a lot of attention, but you're operating excellence also is a significant variable for the company. Is this an opportunity for you to roll up some of more of these mom-and-pops shortages. How do you see that opportunity set there? Because some of the companies we're seeing that are providing these solutions, you're seeing 20% plus growth in those kinds of ecosystems. It would be great to get your perspective here. Michael Lisman: Kristine, I think you know what we -- from an M&A standpoint, we go out and we look at commercial and defense businesses. We're looking for highly engineered aerospace and defense components, and that's how we size it up, regardless of whether they're doing commercial or defense work. We think we're a great supplier to Department of Defense directly, as well as to the primes in terms of on-time delivery and high-quality products. A lot of the businesses we acquire that do defense work, it's usually a bit of their revenue. We get the on-time delivery, the performance up, the quality up, and that's why I think folks generally like and enjoy working with TransDigm op units because they're fast, nimble and they do what they say they're going to do, and hit the delivery dates. We think that's definitely value add to the folks who are in the supply chain up to the prime level, because it gets them the parts they need to satisfy their end customer, which is the U.S. or international governments. In terms of mom and pop shops and M&A and supporting them is, we're not actively out targeting from an M&A standpoint, mom-and-pops in the defense world. It is more larger acquisition focused and again, not focused on any one end market. It's commercial and defense. And if we had our pick, we aim to buy more commercial rather than defense. We're primarily a commercial supplier. Kristine Liwag: Super helpful. And then on the growth question on the revenue side. When you look at the backlog, we've seen the backlog for big defense primes up double-digit CAGR in the past 3 years. How conservative is your defense outlook? And what are the variables that could potentially get you through a higher revenue growth for the year versus your guidance? Michael Lisman: Yes. I think that what you're saying is true. We're seeing some good demand. Our bookings are strong. They're ahead of expectations outpacing our sales. And so if that were to continue, we could see some upside here. But these lead times are a bit longer as well, Kristine. And it's hard to anticipate exactly how that will play out over the next, say, 6 to 9 months. But over the long term, we are seeing good positive indicators in this market segment, and we're well positioned to support that. Operator: I'll now hand the call back over to Director of Investor Relations, Jaimie Stemen, for any closing remarks. Jaimie Stemen: Thank you all for joining us today. This concludes the call for today. We appreciate your time, and have a good rest of your day. Operator: Ladies and gentlemen, thank you for participating. This does conclude today's program, and you may now disconnect.
Operator: [Operator Instructions] I'd now like to introduce CEO, Andre Rogaczewski; and CFO, Thomas Johansen. Speakers, you may now begin. André Rogaczewski: Thank you. Good day, and welcome to this presentation of Netcompany's results for Q4 and full year 2025. My name is Andre Rogaczewski, and I'm the CEO and Co-Founder of Netcompany; and I'm joined today by our CFO, Thomas Johansen. And before we get going, there are some important disclosures that I need you to read through. So could we have Slide #2, please. I will pause for 30 seconds here and let you all have a read-through of these important disclosures. And with that, can we go to Slide #3, please. The topic of today's presentation is our performance for Q4, full year '25 and financial guidance for '26. I'll start by walking you through the business highlights for Q4 and '25 in general. And once I'm done, Thomas will go through the financial performance, including our guidance for 2026 before we can open the call for questions. And can we have the next slide, please? Over the past year, we've navigated a landscape defined by geopolitical uncertainty. In times like these, the call for resilient, secure and digitally sovereign Europe has never been more urgent. At Netcompany, we are not just observing these changes. We are actively building the solutions that Europe needs to thrive. For both governments and private enterprises, the path forward is clear. We must move beyond legacy systems, streamline administration and responsibly embrace the power of AI. Why? Because technology that truly works and deliver tangible benefits is the single most important force that can bring Europe to a competitive edge. It's what will strengthen our position in the global race, a race where we, as a continent, stand for true democratic values. We have clearly differentiated our offerings from our peers, which is also why we continue to grow by using platforms and products and AI will become a force in the industry and someone other vendors strive to become. At the crucial and complex space where we operate developing regulated IT solutions that truly matter, we have a clear and ambitious goal to become a European tech giant. That is the future we are building. We will get there by accelerating growth and profitability by transitioning from a pure IT service model to a hybrid model, driving expansion through a portfolio of scalable products and platforms and related expertise. The future does not belong to traditional IT consultancy companies building solutions from scratch, but rather to European platform companies using components and products and AI to deliver in a fast, reliable and responsible way. And in 2023, we launched a product and platform strategy embracing this development, and we are strongly positioned to take market share from the more traditional players. Our talented employees embrace this development, and we continue to look at how we can become better in everything we do. To us, this is not a threat but an opportunity. And in 2025, we realized an eNPS of 32 compared to 22 in 2024, highlighting that the trajectory we are on is supported by our employees, too. With the combination of our products, platforms, AI and talented employees, I believe that Netcompany is the most modern and future-pointing company in our sector. That is why when I look to 2026 and see the uncertain global geopolitics that the world finds itself in, I'm comforted by knowing that Netcompany will raise the challenge and enable that we digitize Europe responsibly making us stronger, more competitive and resilient. To get there, first, we need to show velocity. Europe's legacy needs to be replaced and new systems designed to embrace and embed AI must be put in place. Our dedication and skills combined with our platforms and products will get us there. Secondly, we need to show determination by consistently delivering on time, at budget and within the required quality. This is how we'll continue to stay competitive by acting intelligently, by reusing as much as possible, adhering to our methodology, we will show the way. We are uniquely combining our own platforms and products with our abilities as a system integrator. This gives us the edge. This is how we will prevail. This is how we're different. We are confident in our direction and immensely proud to be at the forefront, building the digital foundation for a strong, independent and prosperous Europe. And we will continue the momentum we've built to push even further in '26. Europe needs us more than ever. And can we have the next slide, please? And 2025 was also the year we cemented our position in the financial services industry with the merger of SDC into Netcompany Banking Services. The integration has moved swiftly and since the beginning of this year, all employees of Netcompany Banking Services have been integrated at our headquarter office in Copenhagen, fostering closer collaboration with colleagues from across the group. We have launched the first new modules for our Netcompany Banking Services customers, and we will continue with ongoing new releases. During the second half of 2025, we have seen a significant improvement in margins, and we expect more to come as synergies will be realized. The integration is progressing faster than initially anticipated and the synergy targets announced in connection with the Capital Markets Day remain unchanged. And can I have the next slide, please? That our purpose and ambition for a prosperous and digital sovereign Europe have had merits with clients in both the private and public segments in our markets is supported by continued contract wins throughout the quarter. In the U.K. public sector, we have been selected by HMRC to implement and operate the next phase of the Trader Support Service, TSS. The solution will be built on a market-proven ERMIS customs product and our AMPLIO platform. Netcompany Banking Services was selected by OBOS-Banken in Norway for the delivery and maintenance of the new core banking system. The agreement is a testimony to Netcompany Banking Service approach to open architecture, flexible integration and a high degree of automation. In the Danish private sector, we've expanded our agreement with Forca bringing Festina alongside to deliver the pension solution for the future with OpenAdvisor. The implementation of OpenAdvisor platform from Festina will be a part of the complete pension solution delivered to Forca and its customers. And can we have Slide #7, please? In the Danish public sector, Netcompany has been selected as a vendor under a framework agreement with the Danish Agency for IT and Learning. The framework covers development and maintenance of a portfolio of critical education and grant administration systems. And in the private sector in Greece, we have secured a 3-year extension with Cosmote Payments. The extension includes development, maintenance and operational support across the full Cosmote Payment ecosystem. Furthermore, in the private sector in Greece, we have been awarded a contract by the National Bank of Greece covering several key strategic areas, including the development of the bank's AI framework. And with that, I will now pass on the word to Thomas, who will go through the numbers. Please, Thomas, go ahead. Thomas Johansen: Thank you for that, Andre. Like already mentioned, I am the CFO of Netcompany, and I will go through our financial performance for Q4 and for the full year 2025. So if we move past the breaking Slide #8 and straight into Slide #9, please. We ended 2025 with a strong quarter and grew organic revenue in constant currencies by 10% compared to Q4 2024. Currencies impacted revenue growth negatively by 0.5 percentage points in the quarter, resulting in reported organic revenue growth of 9.5%. Organic growth was driven by 20.7% growth in revenue from the private sector and 5.2% growth in revenue from the public sector. Revenue growth was driven by a mix of new wins related to our products and platforms and revenue generated from existing customers with contributions from all segments. Group revenue grew 35.5% in the quarter, of which 25.4 percentage points were nonorganic related to the inclusion of Netcompany Banking Services. Continued the strong performance in Q3, Netcompany Denmark revenue increased 10.2% compared to Q4 2024, mainly driven by 27.9% growth in the private sector with contribution from multiple verticals, most notably in the financial services industry with both new and existing customer engagements. Netcompany SEE & EUI grew revenue 6.9% compared to the same period last year. The growth was driven by both the public sector, including the EU and the private sector, which grew 4.9% and 12.7%, respectively. Netcompany U.K. also continued its strong growth from the previous quarters and grew revenue 28.1% compared to Q4 '24. The growth was driven by both the public and private sector with increased engagements within Tax and Customs and Defense and Resilience. In Netcompany Banking Services, revenue decreased 3.9% compared to pro forma revenue in SDC in Q4 2024. SDC results in Q4 last year were positively impacted by one-off revenues from customer "outconversions" and exit fees. In Netcompany Norway, revenue increased by 7.4% compared to the same quarter last year. And in Netcompany Netherlands, revenue was in line with the same quarter last year. And can we move to the next slide, please? During a year when most of our peers have seen little to no growth, Netcompany grew organic revenue by 7.9% in constant currencies compared to 2024, fully in line with our guidance given at the beginning of the year. Organic growth was driven by both public sector, including EU that grew 7.4% in '25 and the private sector that grew revenue 8.4%. Growth in both segments was supported by our go-to-market strategy, focusing on dedicated industry verticals, combined with our embedded AI product and platform solutions. Group revenue grew 20.8% in 2025, of which 13 percentage points were nonorganic related to Netcompany Banking Services. And can we move to the next slide, please? In Q4 2025, organic adjusted EBITDA, that means excluding NBS, before allocated headquarter cost increased 21.3% to DKK 346.4 million, yielding an organic adjusted EBITDA margin of 18.8%, an increase of 1.7 percentage points compared to the same quarter last year, all in constant currencies. Group adjusted EBITDA before allocated headquarter costs increased 41.2% to DKK 403 million in Q4, yielding an adjusted EBITDA margin for the group of 17.7% compared to 17% in Q4 2024, even with the inclusion of Netcompany Banking Services, which actually impacted margin negatively by 1 percentage point. In Netcompany Denmark, adjusted EBITDA margin increased 4.7 percentage points to 26.2% in Q4. The significant development was a result of improved utilization and our continued focus on scaling revenue without a one-to-one relation in FTE growth, underpinned by a 2.5% increase in client-facing FTEs compared to double-digit revenue growth in the quarter. In Netcompany SEE & EUI, adjusted EBITDA margin was 13.3% in Q4 2025 compared to 15.5% in the same quarter last year. The decrease in margin was a result of lower license revenue income recognized in this quarter compared to the same quarter last year. In Netcompany U.K., adjusted EBITDA margin increased by 4.4 percentage points to 14% in Q4, an improvement reflected by better project execution as well as continuing focus on converting freelancers into own employees and especially public deliveries. In Netcompany Norway, adjusted EBITDA margin was breakeven in Q4. And in Netcompany Netherlands, margin decreased to 18.8% based on timing events. In Netcompany Banking Services, the adjusted EBITDA margin was 13.3% in the quarter compared to pro forma adjusted EBITDA margin of 6.4% in SDC in the same quarter last year. On a sequential basis, margin in Netcompany Banking Services more than doubled compared to Q3 as the integration is progressing faster than anticipated, and we're starting to see the impact from synergies materializing. The performance in Q4 2025 fully supports and validates our expectations for synergies. And with the recent win of OBOS in Norway, we are confident that Netcompany Banking Services will be able to take market shares going forward. Can we have the next slide, please? For the full year 2025, organic adjusted EBITDA margin before allocated headquarter cost was 17.8% compared to 17.6% last year despite increased time spent on product and business development during the first half of the year as well as time spent on preparation for the SDC integration. Group adjusted EBITDA margin before allocated cost from headquarter was 16.9% compared to 17.6% in the same period last year. The lower margin was fully attributed to the inclusion of Netcompany Banking Services into the group. Can we have the next slide, please? In Q4 2025, we employed an average of 9,752 FTEs, equal to an increase of 1,500 FTEs or 18.2% compared to Q4 2024. Of this, 7.8 percentage points were organic and 10.4 percentage points were nonorganic as a result of including Netcompany Banking Services into the total number. Attrition rate for the last 12 months was 18.1% for the organic part of the group, which was in line with Q4 2024. Netcompany Banking Services is right now in the initial phase of a significant structural reorganization. Stand-alone attrition rate for Netcompany Banking Services was 27.5% for the last 6 months. And can we go to the next slide, please? Along with previous years, a continued focus within our group is that of working capital management. And while our cash conversion ratio was lower at 98% compared to 147% in 2024, we are still satisfied with our result. First of all, we are comparing against an extraordinarily high cash conversion ratio in 2024. Secondly, two of the most important metrics indicating whether we are on the right track in our focus on working capital management, both improved in 2025. The relative share of net work in progress and accounts receivables combined relative to revenue decreased compared to last year as did days of sales outstanding. We ended the year with DKK 287 million of cash at hand, up slightly from last year. Our leverage was 1.6x, naturally impacted by the acquisition of SDC, but still at a level giving us strong balance sheet momentum into 2026. During the year, we have executed share buybacks of DKK 500 million, bringing our accumulated share buyback to DKK 1.3 billion in the period 2024 to '25. We canceled 2.5 million shares in March 2025, and we plan to cancel another 1.5 million shares in connection with the upcoming AGM, reducing our outstanding capital by more than 8% over the last years. To complete our 3-year committed share buyback program of DKK 2 billion, we have today initiated another share buyback program of DKK 750 million, of which DKK 700 million are to be executed in the calendar year 2026. And can we have the next slide, please? Revenue visibility for the group, excluding Netcompany Banking Services for 2026 amounts to DKK 5.3 billion, an improvement of 8.1% compared to 2025. Revenue visibility for Netcompany Banking Services for 2026 amounts to DKK 1.4 billion and solely relates to the private sector. And can we go to the next slide. Taking the current macro and geopolitical uncertainty into perspective and observing pipeline and revenue stability at the beginning of the year, we expect our group revenue to grow between 15% and 20% measured in constant currencies in 2026, including Netcompany Banking Services. Excluding Netcompany Banking Services, we expect revenue to grow between 5% and 10%. From a margin perspective, we expect to deliver adjusted EBITDA margin between 15% and 18%, also in constant currencies and also including Netcompany Banking Services. Excluding Netcompany Banking Services, we expect adjusted EBITDA margin between 16% and 19%. Based on our market position, our superior product and platform offerings, we remain committed to our long-term targets, and we expect to keep winning market shares in existing and new markets in the years to come. And with that, we've concluded the presentation of Q4 and the annual report. And if we move to the Q&A slide and open the call for questions. Thank you. Operator: [Operator Instructions] The first question will be from the line of Daniel Djurberg from Handelsbanken. Daniel Djurberg: Congrats to a solid year-end. I have two questions, if I may. And I could start off with a little bit on how to think of the license revenue. I think it was roughly 1% of group's organic revenue in '25, in line with '24. But now we also have the banking services and the OBOS deal, et cetera. But should we still expect the license revenue to account for roughly 1% of the group also for '26, '27? That's my question. Thomas Johansen: Yes, I can start with that, Daniel, and thanks for the question. We don't give specific guidance on the different revenue lines in our group. But it's clear that with the focus we have on our products and platforms and with the maturing and commercialization of these, we would expect license revenue to be a larger and larger percentage of our total group. So without giving you any number, which you know what you asked for, but without giving you any specific number, we would expect that relative share to increase in the years to come. Daniel Djurberg: That's fair enough. And if I may ask you on -- you have increased the organic growth in client-facing FTEs, while you have had a reduction in non-client facing, partly due to internal work made in early '25. But my question is, is the mix now between the non-client and the client-facing FTEs now is at the optimal level or if you could ask for more improvements or have to think? Thomas Johansen: I'm quite sure that both Andre and I agree on this answer. So I'm going to give it because otherwise, Andre is going to give it for me. We would expect the level of non-client-facing FTEs that is the administrative part. We will expect that to continue to come down as it should. André Rogaczewski: Yes. Daniel Djurberg: Perfect. And may I also ask you a little bit on the geopolitical opportunity, if you call it. Recently, EU took a little bit more clear view on the need for the growing digital sovereignty and push towards tech funds and infrastructure funds, et cetera. But have you seen anything more taking place so far from this? André Rogaczewski: Yes. I think you can say that our dialogues with both governments and large enterprises are obviously affected by the whole movement towards more resilient and a much more strategically independent solutions in the EU space. That goes for both public and private solutions. Now all the new platforms we have been launching in the last 3 or 4 years, they've been launched in a way where they can be moved and they're very flexible and containerized. So in that sense, many of the customers are truly interested in using our technology. Operator: The next question will be from the line of Claus Almer from Nordea. Claus Almer: Also from my side, congratulations with a strong Q4. The first question goes to Denmark and the private sector. You had a very solid growth in Q4. To what degree does this come from, let's call it, AI-based projects? That would be the first one. André Rogaczewski: Yes. Thank you, Claus. That's a great question. Now what we see is that we don't sell AI like an independent offering. We sell AI as embedded offering. And that's something that's happened over the last 1 to 2 years. So customers are really interested in our experience and knowledge about specific industrial processes, for instance, in the financial industry. If you know something about life and pension or insurance or you know something about banking, that's the entrance ticket. But then at the same time, you have to show AI capabilities and treating that data with high levels of confidentiality and track where you use AI and why. If you're able to do that, you have a very compelling offering, and that's what we've been doing in Denmark. And that's what we see happening in the private sector. I hope that was answering your question. Yes. Claus Almer: Yes, it definitely did. Then coming to the MPS division. It seems like your synergies is coming in a bit faster than initially communicated at least. Should we also expect that compared to the split you did at the CMD that you might be a little more front-end loaded? And then secondly, what about the commercial opportunities? I think, Thomas, you said you expect to take market shares. Have you been more confirmed about your potential or it's more following the business plan? That will be the second question. Thomas Johansen: I'll start with the first part of the question, Claus, and Andre will take the second part of the question. When it comes to realization of synergies, what we can say at this point in time is that we reconfirm the plan that was laid out in connection with the Capital Markets Day, which is DKK 300 million to DKK 350 million, more or less evenly split over the years to come. And then with that said, we'll see how fast it goes. But as of now, there's nothing in our performance in Q4 that leads us to be worried about our ability to execute on that promise given earlier. So that's as far as I will go. And then I'll leave the other part to Andre. André Rogaczewski: Yes. I think that when it comes to commercial possibilities here, I mean, the market is definitely in Denmark is much more dynamic now than it was just 1, 2 years ago for certain. But what is maybe even more interesting is that you don't really need to be the core system vendor in order to be relevant, delivering all other types of modules. And if you measure on the frequency and the quality of the meetings we have with the overall sector in Denmark, but actually also in Scandinavia, that frequency is going up. We have a lot of meetings. We have some really qualified discussions of how to use separate modules, not necessarily engaging with the entire banking platform. And I see that as very promising. Claus Almer: Sounds great. And then just a small last question. VERA, is there any opportunity or possibility for you to share some thoughts about the progress you're doing with that solution? André Rogaczewski: VERA is -- well, there's a huge interest in VERA. And technologically, I think we have one of the best solutions in the market space. We have a lot of qualified dialogues, and we also have prototypes running with several customers. But unfortunately, I can't go into further details at this moment, but it looks promising. Operator: The next question will be from Balajee Tirupati from Citi. Balajee Tirupati: Two from my side, if I may. Firstly, you have cited focus on efficiency gains from AI to be supportive for the group's growth. Are you seeing clients also looking at Netcompany for cost-out projects expecting your ability to better leverage AI for productivity gains? And secondly, I appreciate Netcompany doesn't have time and material-based pricing. But even for fixed price contracts, do you believe the industry would be able to retain productivity gains and not required to pass that on to clients? André Rogaczewski: Yes, that's two very good questions. I mean your first question is, yes, we actually see that occurring now more and more. Not that it's a big part of what we do. Normally, we are hired to bring in an IT solution that will come up with the necessary effects. But yes, we also see some customers asking us to engage with them to realize the benefits. And when it comes to fixed price, I think the most important thing at the moment is to be relevant and price is important, absolutely. But the business case is even more important. So if you can show a time to deliver within, say, 1 year or even less, benefits that can be realized within 2 or 3 years and with a compelling business case, I don't find the fixed price and trying to bring that down somehow as an obstacle for our business model at all. So I think we are ahead of the curve. I mean, obviously, some services will become cheaper over time when AI inflects the businesses. But you have to be ahead of the curve and you have to be the one with the most compelling business model. And in that way, you can actually have a very, very good business. Balajee Tirupati: If I may have one follow-up question on margins. So Thomas, could you share building blocks within 2026 margin outlook? It would appear that most of the margin improvement is coming from the banking services business, while outlook for the organic business suggests margin being broadly stable over 2024 level. Are you still factoring sourcing of Danish talents across the group as well as our efforts in product and business development in your 2026 outlook? Thomas Johansen: So without giving you what you asked for, by the way, and that would also be the first time I'm doing that then, right? But without talking in details on the margin buildup, when you decompose the 16% to 19% on organic and 15% to 18% on group and then you can calculate backwards what that implied would be on Netcompany Bank Services. You're right in your math. Now we will do everything we can to continue to improve our efficiency within Netcompany call within Netcompany Banking Services and within the group. So at this point in time, early on in the year, we are comfortable with the guidance that we have laid out, both for the group and for the organic part and the implied part that has to do with Netcompany Banking Services. And then rest assured that we will do everything we can to be as effective and as good to deliver the services that will continue to make Netcompany the standout name in the industry. Operator: The next question will be from Yiwei Zhou from SEB. Yiwei Zhou: Yiwei Zhou from SEB. Also a couple of questions from my side. Firstly, I just want to follow up on the cost synergy. Thomas, if you can elaborate a bit here. So the cost synergy here materialized in Q4, is it a part of the 2026 target or it will be addition to it? Thomas Johansen: What we realized in 2025 has nothing to do with 2026. So what we're realizing now, you can say, will be on top of what we're realizing. So it's not that we have taken something that was planned for '26 and done it in '25 or anything. So we're following the plan for '26 to '28 of the DKK 300 million to DKK 350 million. And then we've just had the opportunity to accelerate certain things that we've done in Q4, but we'll continue with the same pledge in '26 and forward. Yiwei Zhou: Okay. And could you also comment a bit on the phasing of the materialization of those cost synergies during 2026. I previously got the impression that it will be back-end loaded. Is it still the expectation? Thomas Johansen: Yes. Without giving any specific guidance on the quarters of when the synergies are going to be realized because that would then imply that we would give input as to what the margins are going to be in the different quarters. But we don't necessarily expect all the synergies for '26 to be back-end loaded. Yiwei Zhou: I see. Okay. And then lastly, I also realized in the provision did increase quite a lot here in '25. And I can understand the provision for restructuring, but I can see you also booked a sizable project provision here. Could you elaborate a bit here? Thomas Johansen: It's related to the merger with SDC into Netcompany Banking services as part of the purchase price allocation. So that has to do with the period before we took over ownership of SDC. Yiwei Zhou: And is there -- is it fair to understand that you see the risk here that it will be a bad project? Thomas Johansen: No. Operator: The next question will be from the line of Aditya Buddhavarapu from Bank of America. Aditya Buddhavarapu: First, on Denmark. Could you comment on how you're thinking about the public sector development this year, given you saw probably slower tender activity last year, how are you thinking about that going into '26? Second, just a follow-up on the question on margins for the core business. Why do you think -- why is sort of the implied margins for the core business flat? Is that because of maybe some more investments or headcount growth? If you could just maybe offer some color on that? And then could you just comment on how to think about the tax rate for 2026, given you have elevated tax rate in H2? André Rogaczewski: Yes. Thank you for those questions, Aditya. Let me just take the first one and leave the other ones to you, Thomas. So the public sector, yes, I mean, we are looking into a very exciting year in Denmark at the moment. I mean we have some large public engagements to be had. We won a recent one that we mentioned in the presentation. But we're also looking into what's going to happen at some of the core major Danish institutions, both tax office and of course, also police force and defense. And at the same time, we see public sector running at a decent pace. However, we will also see an election coming somehow during the year. But we are very confident that many of the deals that we need to have in '26, we will be able to get signed and executed upon before elections, and that plan is running accordingly to what we've scheduled. And overall, I believe we will have a very decent year in '26 in public sector because there's so much digitization happening everywhere. And for the margins and tax things, I better leave that to you, Thomas. Thomas Johansen: Sure. Thanks, Andre. And for the margin, like I said on the previous question that also was on margin. We don't comment per se on the bridge or the buildup on the margin for 2026 for the group or for the organic part. We've given a guidance of 16% to 19% for the organic part, of which we are comfortable at this point in time. And then we will do our utmost to do as good as we can. For the tax rate, we expect that to come down during 2026 to a more normalized level. It is impacted for the first half negatively with the special items that are nontaxable -- nontax deductible, sorry. So that, of course, has a big impact on the tax rate in 2025, which will not have the same impact in 2026. We will see that we can deduct the taxable depreciation on the purchase price for SDC, which will then have a full year effect of 2026 and have a positive impact, meaning a lower tax rate for 2026. So it will normalize in 2026, Aditya. Aditya Buddhavarapu: Understood. Also just a follow-up on the free cash flow. You mentioned that what you're looking at in terms of the DSOs, work in progress, all of that is looking in the right direction. So how should we think about the cash conversion in '26? Thomas Johansen: If you look at 2024, that was really high, right, especially in Q4, more than 400%, underpinning that, that was an abnormal quarter, 147% in 2024 and 98% in 2025. So we're probably looking into a year which is more in line with what we've seen from a cash conversion perspective like 2025. Operator: [Operator Instructions] The next question will be from the line of from ABG Sundal Collier. Unknown Analyst: Just one question on my end here. So it's obviously very encouraging to see the integration of NBS is tracking well, and we all know that you have high ambitions in terms of growth. I'm okay with Denmark and the Nordics, which I also appreciate are sort of the starting point. But I'm just still curious regarding the expansion you're aiming for into the rest of Europe at some point. Can you confirm that you, at this point in time, have all the regulatory approvals you need, i.e., is it theoretically something you could do tomorrow? Or would it take some time to get these? And if so, how extensive would that be able to get? Would it be -- would it require? That would be my question. André Rogaczewski: That's a good question. So that depends definitely on the specific type of solution you want to build in a specific European country. Obviously, if you're in -- within EU, many of the regulatory things you need to build particular solutions are already in place. And when it comes to supporting European banks with particular modules or processes, we can do that without any problems at the moment. Now there are definitely some things that need to be regulated even further in EU. For instance, if you want to put things into the EU wallet and you want payment services in that, that still -- there's still some regulation to be had. But overall, I have to say 80%, 90% of what we can deliver to European banks, we can do without any problems at the moment. So that's not a big obstacle. Having that said, the most important thing right now is obviously Scandinavia. We have -- we see a big market there. And of course, the integration of NBS absolutely important. So we have a very, very strong focus on that. I think that alone can bring us to a very interesting place alone in '26 and '27. Operator: The next question will be from the line of Poul Jessen from Danske Bank. Poul Jessen: I have 3 questions. First question is coming to Yiwei's question about NBS and the guidance. With DKK 56 million in the fourth quarter and a guidance of DKK 180 million to DKK 230 million for full year '26, then you actually guide flat earnings described that you would see slight growth. And I assume also you will have further initiatives coming in '26. So how should we get to that you will have lower earnings on the full year run rate next year in '26 than you had in the fourth quarter? That's number one. Thomas Johansen: What we can say in terms of specific guidance for NBS is that we are comfortable with the guidance set out at this point in time. And clearly, Q4 was good and Q4 was based on realization of synergies. So that's also good. Integration is going fine, and we see some very, very strong interest into the business. So let's see where we end the year with both the group and with NBS. At this point in time, we are comfortable with the guidance. Poul Jessen: Second question, public sector Denmark. Andre, you said that you saw contracts coming up from police tax on defense. We're waiting with consensus moving for an election, do you actually believe that we will see those contracts awarded in before end of April? André Rogaczewski: I think you were falling out a bit there, but I hear your question is the public sector in Denmark and whether some of the contracts with the tax defense and police will fall into place before spring time. Now I'd say -- okay. I'd say that you will see some of it happening definitely before the summer. The good thing about taxes, a lot of these funds have already been allocated. I think so too, when it comes to Defense '26, even in you will see defense and resilience sector acquiring what they need to acquire in '26, that's not going to be influenced by the elections and the same thing goes. So I'm very confident that '26 will be a year with all those 3 government institutions will actually invest more into IT than we've seen for a long time. So I think it looks promising, yes. Poul Jessen: Okay. And then a final question is about Schleswig-Holstein. There has been some local German press writing that you are doing a tax solution, a very small one in Italy for the municipalities there. But they also state that it could be run out across all municipalities in Schleswig-Holstein and also more than just the tourist tax. Can you put a little or elaborate a little about what kind of opportunities you see for this isolated, but also how it can be used in Germany to further expand into tax in Germany in general? André Rogaczewski: Well, it is true that we are delivering minor -- smaller tax solution in Schleswig-Holstein. But we're also in dialogues with other German states about similar solutions based on our AMPLIO platforms. Now the ability to scale those solutions and whether they can be made into larger deals, I think we have to await that. But we are working continuously actually right now in 5 or 6 different areas in Germany, trying to -- trying to use our platforms as an entry point to do new modern case management systems. It's very difficult at this time because it's early days to discuss whether it can be scaled or not. But obviously, that's our intention. Operator: The next question will be from the line of William Richards from Morgan Stanley. William Christian Richards: Just a single one for myself. So for the quarter, we saw SEE & EUI segment growth slow a bit sequentially. I think we are now around 7% for the fourth quarter. I know for a while you've been talking about growth slowing in this region to more normalized levels. So I guess my question is, is 2026 the year where we can expect this normalization to take hold? Or was there something else on the growth front in the fourth quarter for that segment that drove this deceleration? Any more color there would be really helpful. Thomas Johansen: So the deceleration of Q4 stand-alone was driven by lower license revenue in Q4. So that's the main reason for that. We don't necessarily expect the growth to be had in SEE & EUI to come to an end in 2026 on the contrary. I think we lost William. Operator: Yes. As we have no further questions in the queue, I'll hand it back to the speakers for any closing remarks. André Rogaczewski: Well, thank you all for joining in, and have a wonderful day.
Peter Pudselykke: Good afternoon, everyone, and welcome to the Conference Call for Demant's 2025 Annual Results. My name is Peter Pudselykke, and I'm heading up the Investor Relations activities here in Demant. With me here today, I have the usual team, our President and CEO, Soren Nielsen; our CFO, Rene Schneider; as well as Gustav Hoegh from the IR team. For the call, we will do a presentation, which will be followed by a Q&A. We expect the session to last no more than 1 hour in total. [Operator Instructions] before we dig into the presentation, please do pay notice to the disclaimer on Slide #2. And with that, I will go to Slide #3, we'll pass the baton to Soren, to kick-off the presentation. Søren Nielsen: Thank you very much, Peter, and welcome, everybody. The agenda for today is key events for 2025 financial takeaways, and then comment on sustainability advancement. More details on business area reviews, not the least the fourth quarter. Then Rene he will do group financial and also take us through outlook and initiatives to improve profitability. And if we take a 2025 in total, at group level, we delivered 2% organic growth, 5% in local currencies. Of course, a significant element from acquisitions, headwind from currencies leaves us with 2% reported growth and biggest, you say, expansion is in Hearing Care, which now is the biggest business area, as you can see in the business mix split. Gross profit, up 2%, but down on margin related, to I would say, hearing aids, some extent, diagnostic, but I'll get back to that. EBIT down 10% before special items and free cash flow down 11%. Key events in 2025, we acquired the KIND Group in Germany, closed the deal in December, so we have 1 month in the books, one of the world's leading retailers and with that a significantly expanding our position globally, but in particularly in Germany, to a #1 in Hearing Care. In October, we introduced Oticon Zeal in selected markets and a launch that so far have created a lot of excitement and a lot of good momentum to carry into '26. During 2025, we signed agreement to divest both EPOS and Oticon Medical in line with our overall strategy to be more focused hearing healthcare company. The hearing aid market in 2025 was softer than normal, and particularly in the U.S. where we saw flat market growth for 2025 in total. Hearing Care delivered very solid performance in -- solid performance, not the least in the view of the global hearing aid market, whereas hearing aids and diagnostic delivered softer growth. All 3 business areas showed an improved and strong performance in Q4. Key financial takeaways for the second half group organic growth of 4% for the second half in total. So a sequential improvement from the first half fueled by all 3 business areas. Gross margin decline versus second half '24 due to ASP headwinds in hearing aid and increasing share of rechargeability, I'm going to get back to it, but the ASP headwind comes from channel and geography mix, so selling [ more ] in countries and channels with a lower ASP and less in higher-priced markets like U.S. Diagnostic was also a minor drag on the gross margin coming from their product mix and some geography. OpEx grew 5% organically, but -- and as already guided for, and expected flat sequentially from H1, so still reflecting a cautious approach to cost expansion when we look at in sequentially the 5% to some extent, originates from a significant holdback at the end of '24. Acquisitions added 5 percentage points growth compared to second half last year. EBIT before special items, DKK 2.1 billion, negatively impacted by exchange rate effects and by lower operating leverage. EBIT margin, therefore, before special items contracted 2.6 percentage points. Special items amounted to minus DKK 128 million. Strong cash flow from operations of DKK 2.3 billion and free cash flow of just around DKK 2 billion. Outlook, Rene's going to elaborate further on it for '26. Organic growth of 3% to 6% and EBIT before special items of DKK 4.1 billion to DKK 4.5 billion and continued pause on our share buyback to bring down the group leverage. Sustainability achievements quickly, we saw a increase as expected of improved lives by overcoming their hearing loss to 12 million and a growing number of tests in our own clinics following the expansion of that. And when we look at our main -- or 3 main sustainability goals under the headline of Respect for the planet, a planet decrease in our scope 1 and 2 greenhouse gas emissions. We have now achieved 16% reduction compared to baseline with a target of 46% by 2030. Gender diversity in top-level management now at 33%, so 1 in 3 and with the aim of getting above 35% by 2030. And the number of people that have read and understood out of the people for whom it's relevant should be 100% by 2030. And you could say, basically already tomorrow, if at all possible, and we are almost there. Business area review, well, hearing aid market in '25 have definitely been special and fourth quarter, which is the new release is no different. We have seen a high unit growth, and this is all units in Europe, but it's all driven or mainly driven by NHS in U.K., the National Health Service that have -- had strong growth partly to expand the inventory levels, et cetera. And then France also showing high growth as expected due to the annualization of the [ reform]. If we allow ourselves to exclude NHS and France, unit growth was 3% in Europe, in Germany, specifically growth declined year-over-year. North America saw a sequential slowdown from two quarters with 2% growth to 0 and leaving the year with 1%. U.S. or Canada saw a good growth. So it was offset by a flat growth in the U.S. commercial and a slightly negative in the VA. Rest of the World delivered growth, Australia, positive growth, while Japan saw minimal growth. China saw a sequential improvement, and we estimate that several emerging markets saw good growth. So again, the ASP, we normally believe in a flat ASP, but no doubt that with the geography mix and channel mix in the year and fourth quarter as much, then we estimate that we should see a negative impact on ASP in -- it's not exact science, but in the area of percentage points at least. So a global hearing aid market that have assumably grown just around 2% in value for the year. Hearing aids fourth quarter organic growth also in fourth quarter improved despite of the U.S. market weakness and the loss of share in U.S. the main area in which we have lost share in U.S. remains to be a large retailer where the number of providers or suppliers have been expanded. We introduced Oticon Zeal in selected European markets, which have created excitement and momentum change in these 4 countries. We have really seen Zeal lift the sales also in general in these markets. However, with limited impact on the total group level in fourth quarter simply by the size of these 4 countries and the potential, even though Germany is a big country, the premium market in Germany is not that big. So again, not something that financially impacts that much, if, of course, does some, but not that much in the fourth quarter. So unit growth was very solid. Representing overall market share gains in units across several key markets, I would say, almost with the main exception being U.S. the ASP was negative, as I said, due to geography and channel mix changes. So France, U.K., Germany, good growth in Europe, all big markets, strong performance in Canada. U.S. growth was negative, as I said, good growth in Japan, South America, and also relatively broad-based growth in Asia, except for China, which, I still would say is market related. And the rollout of Oticon Zeal, just a few more comments to that. We launched it in Europe and in both Germany, Switzerland, U.K. and Denmark, the conclusion is the same. It is undisputed, seen as a new very innovative concept by both hearing care professional and end users. It does help in having end users take the choice to get going and see less obstacles. So very positively seen uptake with first-time users. It does also lift sales of our other portfolio because it opens door to new customers. And if an end user have tried a Zeal and happy with the sound quality and the quality of the instrument, but for some reason, don't continue with a -- or prefer to continue with an in year. There might be some comfort issues. The ear canal doesn't work. It's natural to then fit an intent because you'll have more or less exactly the same sound quality and something you just like. So we do see additional sales to customers that did not work that watch with us. And we have actually also seen limited cannibalization with customers that we already were doing business with and that have taken in Zeal. So this is the conclusion from the 4 markets. We have also I think, been open about that it's only in a premium price point and that we have lifted pricing in some markets significantly compared to intent. And so far, we have seen acceptance of the price and it has not prevented us from creating excitement and driving sales. That being said, it is a premium price point. It is a premium category type of products, but it definitely also makes some people spend more than they might have thought they would. They had to pick a [ receiver ] on ear instruments where there are more options available at different price points. I also think we can say that you cannot really say, okay, what is the potential and what's the share and the in-ear market? Because that's not how people is basically first-time users think about hearing aids. They will look at what's available at the table and pick the one they find most attractive. And there's no doubt that by first-time users, this is seen as much more attractive than carrying a traditional right instrument. So all in all, very good takeaways and we bring this excitement into '26, where we have now launched in U.S., where we will, in the coming weekend launch in Canada and where we -- early March, will launch in France, and then onwards with all remaining significant and major markets. Germany will also expand activity significantly here in first quarter to make sure they get to a full rollout, which was not the case in the initial launch. So we move on. And again, not to open the discussion already, when we then say we still have something ahead of us, it is because it remains to be a sequential launch so we have to take it market by market to make sure we get off on the right foot. And of course, with U.S. market have been the most muted and a big premium potential, then it also, to some extent, depends on how the market develops, but maybe Zeal can be part of creating renewed excitement and also interest from end users. So I would say there's still some uncertainty left around that, which I'm sure Rene will come back to. We continue to expand our portfolio also in Q1, we released devices of our latest technology containing disposal batteries, which in some channels and geographies are still important and then also a new offering in part of the pediatric portfolio and then all these new products offer latest and greatest sound quality and connectivity similar to Zeal, where we also get very good feedback on the latest technology, which is also a connectivity technology, which is also available in Oticon intent. Hearing Care in Q4, solid performance in a weaker than normal hearing aid market, of course, strong tailwind from a month with KIND. So in the quarter, doing 17% in local currencies, 5% organic in -- across the geographies, strong performance in Poland and a number of other midsized European markets continued solid growth in France, driven by the anniversary of the '21 reform. Good organic growth in North America, driven by continued improved performance in U.S. very positively. However, some negative development in Canada. Australia saw a good growth continuing improved momentum and China also delivered good organic growth, driven by ASP tailwind from a continued better product mix. So all in all, well done in hearing care in the fourth quarter. And also diagnostic came in strong in the fourth quarter, delivered organic growth of 8% in local currencies. So clearly best performing quarter this year here and in general, a good uptake. Strong growth in U.K. and Germany, good performance across several midsized markets. U.S. and Canada saw a strong growth, however, driven by service and consumable business again, back to gross margin, which is a little bit lower in these areas. Australia delivered strong growth primarily on instrument sales, and China continued to be impacted by general weak markets and there was some drag on growth in Asia in general. With that, over to you, Rene. René Schneider: Thank you, Soren. So let's push through the financials, a little bit of repetition. So I will be quick on this. So the revenue for second half year, we saw solid organic growth of 4%. Hearing Aids and Diagnostics saw a good organic growth and especially Diagnostics improved in the fourth quarter. Growth from acquisitions contributed 3 percentage points to growth, and we had a FX headwind of 4% predominantly due to the decline of the U.S. dollars. Turning to gross profit. It increased by 3% to DKK 8.8 billion. We saw a slight decline in the gross margin against second half of last year. And this decline was driven primarily by geography and channel mix changes in our hearing aids business. And we also saw some headwind in the Diagnostics business partly affected by tariffs. And last, also a slight headwind on the gross margin from the FX development. On operating expenses and EBIT. So we increased OpEx by 5% organically half year over half year, partly due to very low comparative figures as we pulled back on cost significantly in '24. And we have seen a flat development sequentially from first half year into second half year, which is a reflection of our continued focus on cost management. Acquisitions added an additional 5 percentage point to growth to OpEx in the second half year of '25. And again, also here, we see an offset from a declining U.S. dollar. When it comes to EBIT, we ended second half at DKK 2.1 billion, negatively impacted by exchange rates and by lowering operating leverage in hearing aids. The decline in EBIT was due to weaker than normal growth in the overall hearing aid market as the main contributor and for us, specifically a loss of market share in the U.S., primarily due to lower sales to a large retailer. And this resulted in a contraction of the EBIT margin to 18 percentage points. Special items in the period was related to the acquisition of KIND and a noncash adjustment. All in all, DKK 128 million in H2. Cash flow continued to be very strong. Cash flow from operations in H2 of DKK 2.3 billion and just shy of DKK 2 billion of free cash flow. So again, continued very strong cash flow generation. Our capital expenditure of DKK 409 million is an increase compared to same period last year primarily driven by higher investments in production facilities. Cash out to acquisitions amounted to DKK 5.4 billion. And this, of course, predominantly related to the acquisition of KIND that closed beginning of December. We did not purchase any more shares under the share buyback program in second half year. So we end the year at a total of DKK 582 million as a previously disclosed. When it comes to the balance sheet items, our net debt increased significantly. Again, this is solely due to the acquisition of a KIND and fully in line with our expectation, our gearing multiple at the end of the year, ended at 3.4%, which is above our medium- to long-term gearing target of 2% to 2.5%. We will prioritize deleveraging and expect to return to our medium- to long-term gearing target of 2% to 2.5% within 18 to 24 months after the first of December of '25. And net working capital had a modest increase of 3% and this again, predominantly related to the result of adding acquisitions to the balance sheet. So in good control here. Thus, summing up the financial key takeaways for the full year. As such, we're ending up at 2% organic growth, again, driven by the weak overall hearing aid market. A contraction of the gross margin by 0.6 percentage points, driven by weak market growth, particularly in the U.S. and ASP headwinds in hearing aids due to geography and channel mix changes. The operating expenses for the full year increased by only 3% organically due to our continued focus on cost management. EBIT before special items, DKK 3.96 billion and an EBIT margin of 17.2%. And special items amounting to DKK 128 million. And as just reviewed, strong cash flow of DKK 3.85 billion of cash flow from operations for the full year and free cash flow of above DKK 3 billion for the full year also. And share buyback DKK 582 million. So that was the quick review of the financials, and that brings us into the outlook section and initiatives that we have taken there. So if we start on some of the assumptions that goes into our outlook and assumptions, of course, alluding to that we don't have certainty around these things, but we go in with a starting hypothesis. And of course, the main hypothesis that goes or assumption that goes into our outlook for the year is our projection for the global hearing aid market to grow 2% to 4%, and in 2026 in value, which obviously is a conservative assumption being temporarily below our medium to long-term assumption of 4% to 6% and also, of course, low seen in the light of the last decade of growing exactly in line with these 4% to 6%. So we believe it's prudent and in line with what we have seen in the last quarter to take a cautious stand on the market going into the year, and that is what we do with the 2% to 4% for the market. We will come back to it, but we believe that Demant in all scenarios will grow above the market in '26. Another key assumption on the right-hand side is that as part of our plans for '26, we have launched a company-wide initiative to exactly improve profitability and lower cost growth and specifically in some areas, lead to cost reductions. These initiatives will positively impact EBIT before special items of around DKK 250 million in '26. Since this is an initiative that is starting now, we foresee that the majority of this impact will be materialized in second half year, which is why, we, for '26 see an EBIT's good more than usual towards the second half year. Also, product launches impact the phasing of EBIT for '26. So this is an important note. We have seen a significant decline in the U.S. dollar in particular, but also other currencies. And we expect a negative impact on EBIT from FX of DKK 200 million compared to '25, with the impact evenly split between H1 and H2. We expect the KIND Group to contribute with DKK 300 million on EBIT before special items in '26. This is in line with our previous communication. And we expect a limited impact on tariffs on the group -- from tarrifs on the group, DKK 25 million in our Diagnostics business, also nothing new in that. So summing up on the special items where we see particular things to take into the account for '26 is now totaling DKK 325 million, of which DKK 125 million related to the previously announced integration cost related to the KIND acquisition. And then we do add to that an additional DKK 200 million related to the foreseen restructuring and also adjustment to the organization and size as part of this cost reduction initiative. Here, we see DKK 200 million of one-off costs. So all in all, DKK 325 million. So these are some of the core assumptions. And if we -- based on that build up and say some of the components in a more [indiscernible] visual schematic way on the graph on the right. The starting point is our EBIT for the full year '25 or DKK 3.96 billion. From that, we need to subtract the DKK 200 million that is the FX headwind in '26. That brings us to an FX adjusted EBIT for '25 of DKK 3.76 [ billion]. To that, we would -- in line with the guidance we give here at a contribution from KIND incremental contribution from KIND which means 11 months of EBIT. As a reminder, we did have 1 month in '25. So this is a 11 months of the DKK 300 million, DKK 275 million. And then we need to add the organic part of our business, which includes the before mentioned cost savings initiatives that we are confident will bring DKK 250 million of savings to the OpEx line. And then adding to that, whatever else we will see of organic impact from profitability in the remaining part of the group. And this builds up to an EBIT outlook of DKK 4.1 billion to DKK 4.5 billion. And important to notice here, the backdrop for this outlook is, of course, the starting point of a market assumption of 2% to 4%. And we have in our plans, and we aim to grow above that 3% to 6%. So taking market share essentially in all scenarios. So in this light, you can say, of course, that the DKK 4.1 billion which is the lower end of this guidance reflects a very, very conservative scenario where the market, of course, is in the conservative end of the already contributive outlook here and also that our market share gain is modest, but still there. But this is the starting point for the year, and we feel comfortable with that. Lastly, just a few more comments on the initiatives to improve profitability. I did mention before the effect in '26 of DKK 250 million, but this is a 2-year program that will -- beginning '28 and onwards bring around DKK 500 million of cost savings to the group. We also announced today that we estimate that this will affect approximately 700 people globally in Demant in '26, of which 150 are located in Demant. The associated costs that we recognized under special items is DKK 200 million in '26 and an additional DKK 100 million in '27, both, of course, of a one-off nature, whereas the expected cost savings will be structural and permanent. So summing up, in total, this brings us to our outlook for '26. Organic growth of 3% to 6% EBIT of DKK 4.1 billion to DKK 4.5 billion. Share buyback is foreseen to be paused throughout '26 as we focus on deleveraging. And for modeling purpose, we estimate acquisitive growth of 8%. FX growth of minus 2%, and special items, minus DKK 325 million and an effective tax rate of 23%. With this, we would hand over to Q&A, please. Operator: [Operator Instructions] The first question today comes from Richard Felton with Goldman Sachs. Richard Felton: The first question is on the -- on your guidance and the midpoint of the organic growth guidance does imply growing ahead of the market in 2026. I think you said you expect to do that in all scenarios. So my question is sort of what -- what is giving you that confidence in outperforming the market in 2026 in all scenarios? And then secondly, Rene, I just wanted to follow-up on your comments on EBIT phasing linked to product launches. Is that due to the phasing of the Zeal rollout or anything else to consider as you think about EBIT phasing? Søren Nielsen: Yes. I'll take the first one, Rene can comment on the other. This is in hearing aids market share gains, that is the main driver for that. We, of course, also going to see share gain coming from lifting our share in the German market after the acquisition of KIND. But the predominant is the momentum that I'm sure Zeal will create once we get full rollout in all channels at the end are opened. And also, of course, we continue to have a strong launch program for the remaining of this year and next year. So it's the comfort and all that, that make us be firm on the market share gains in all scenarios. René Schneider: Yes. On the phasing of EBIT, there are 2 factors to be aware of. One is the effect of our cost savings initiative that will obviously have a little effect in Q2 but predominantly in Q3 and Q4. That is the one. And the second one is the gradual launch of Zeal that, of course, will have an effect here in the first half year, but a full half year effect in H2. Operator: The next question comes from Martin Parkhoi with SEB. Martin Parkhoi: Just a couple of questions. Firstly on -- again, back to the 3% to 6% organic growth guidance. Can you elaborate a little bit about the organic growth assumption across divisions. Now we saw a little bit of a dream run for dynastic in the fourth quarter, but what are you assuming [ genostics ] going into being in '26. And then, of course, also, the split on wholesale and Hearing Care on our organic growth. I understand that KIND will add of course, acquisitive growth. And then secondly, just on, Rene on the gross margin expectations, for 2026. It was not a pretty year in '25. What have you assumed of gross margin development in '26 on an underlying basis. And of course, also say how much is the contribution from KIND in that context as well. Søren Nielsen: Yes, Martin, I will do the first one quick. At this stage, I would say it's equal organic growth opportunities for all businesses. So for modeling purposes, I would be relatively equally spread across the 3. René Schneider: Yes. And on gross margin, we have our, let's say, general guidance of being in the range of [ DKK 76 million to DKK 77 million ] on an underlying basis, as you referred to, you are probably in the low end of that range, but with the contribution from KIND, we are likely to see a gross margin in the high end of that range. Martin Parkhoi: Just a follow-up, Soren, on organic growth. I appreciate that it's unknown yet if CEO will be included in VA from 1st of May, but have you included that scenario in the high end of your guidance? Søren Nielsen: It's very specific with the individual channels. We have estimates of -- we entail a growing business in VA during '26, and we do our utmost to ensure Zeal can also become available for veterans. We have not yet achieved that conclusion. Operator: The next question comes from Hassan Al-Wakeel with Barclays. Hassan Al-Wakeel: Firstly, on your comments around intense competition, could you help quantify the impact in the quarter from Costco and how you're factoring this into your guidance for 2026? And how would you characterize share trends in the commercial market in the U.S. And if there are any other adverse share dynamics that you would flag? And then secondly, on margin guidance for the -- I appreciate a weaker market. But can you help us understand some of the building blocks for a margin which is down year-over-year despite a benefit from the restructuring program in the second half? And just your comment around launches and that. Can you talk about how that would impact phasing and whether you're on track for a platform launch in 2026? Søren Nielsen: Yes. Let me start with the first on the very last. We don't comment on any new launches before they're there. I think you all know the tradition for that. I can only repeat, we have a strong program in front of us, we believe, for the coming year, including the second half of this year. Share trends in -- and U.S., you, of course, have visibility to VA where we after recent launches, have seen a minor dip to Oticon but have held, I think, well two things. We year-over-year does see a declining share with a large retailer after expanding the number of suppliers, but relatively stable after that change. And then with the independent, I can only say it's a very intense fight whether some have been holding that a little bit in the way for Zeal. I can't rule out, and therefore, I would say, sequentially a little bit softening towards the end of the year. But I'm sure and hopeful that we will pick up on that now Zeal out in the U.S. market. I think that's what I can speak to for now. René Schneider: Yes. And when it comes to the margin, let's say, development in '26, it is, of course, challenged by our starting assumption of a market growth of 2% to 4%. That is the, you can say, fundamental margin headwind that we sit with. And of course, in this slide, our cost initiative becomes extremely important because this is what brings us, let's say, at the midpoint of our guidance, it leads to a flat EBIT margin in local currency and then, anything above that would be margin expansion. But of course, when we assume a market growth of 2% to 4% margin expands which is not in line with our mid- to long-term then margin expansion per se is a challenge, but at least the midpoint, we are flat. Operator: The next question comes from Julien Ouaddour with Bank of America. Julien Ouaddour: So I have two. The first one is on Zeal, where, I mean, you said the feedback was like pretty good. My understanding is that Zeal is the main moving part for the share gain in '26, as you said. Just could you tell us a little bit what kind of market share assumptions have you embedded in the '26 guide for the ITE category? I'm just asking because we see a complete project working pretty well right now. And I think another of your competitors just announced new ITE project this morning. And also on Zeal, could you confirm if it's already margin accretive to the group and how the volume pickup could impact the profitability? And a very quick second question is on the ASP. It was down 2% in '25. I think it's below your midterm assumption. You're also feeling intense competitive pressure at the moment. So do you feel the need to have some -- maybe some kind of price discounts in the [ REIT ] category until you have a new premium platform as Intent gets old? So just what could it imply on the pricing for H1 '26? Could it be down again? Søren Nielsen: Yes. Let me start with the pricing and then return to Zeal. ASP, when we see it down is a channel and geography mix. We still uphold I think, a strong ability to have significant better pricing than many and most in the independent sector. So no, I don't see the call out for selling Intent because it should be not competitive. I would also like to stress maybe a little bit back to Hassan's question on product launches. We are very, very happy with the performance of Oticon Intent and Zeal. This platform allows us to exactly do these very high-performing products at now unprecedented small sizes. It is with full connectivity, it is with full AI-driven signal processing that we enable Zeal, and that's why Zeal gets such a good reputation. It's not the first product that you can do as an in-ear instant fit type of product. But you have never before seen it with such a feature list that is totally comparable to any RIC. So back to my initial comments as well, when we open new doors with Zeal, the conclusion from the first 4 markets is, we also see growing sales of Intent, because it's equally a very good product. So Zeal is a door opener to a broader sales, and that's also why you cannot measure Zeal's, ASP effect. You cannot measure Zeal comes in with very strong ASP and of course, additional Zeal volume will lift ASP, everything else equal, it's higher price than anything else we sell. So yes, very positive for ASP. If we sell a lot in U.S. and the U.S. market growth, our ASP will go up the ASP effect in '25 is geography and channel related. Zeal IT category, we have no other products that offer same features all new rechargeable with connectivity type of in-ear products are custom made. They are what's called in-canal which are relatively big devices that don't offer the same discreteness and invisibility as Zeal, if they are to be near as smaller Zeal, that connectivity is not there and typically also limited signal processing in order to accommodate for a much smaller battery. The core element of Zeal is that it offers a much larger battery than any competitor, and therefore, in this size. And therefore, we uphold the full functionality we know from RICs. And that's the strength. And therefore, you cannot just measure share in the EMEA category, and I don't see any new releases that challenge the position of Zeal. Julien Ouaddour: And just if I can very quickly follow up on your last point. So should we expect at least market share in line with the global average for Zeal in the IT category, I mean, given everything that you just said? Søren Nielsen: It will naturally go above because Zeal will capture share outside in your category. So you will see compared to -- you, of course, have to look at a certain higher end of that market. There could be markets where there's a lot of relatively cheap in-ear products sold if I allow myself to exclude those, Zeal will take significant share in the premium segment both from existing in-ear solutions, which are typically only the smaller, more cosmetically attractive or primarily and also from RIC products because that's the preference of the first-time user. Operator: Next question from Andjela Bozinovic, from BNP. Andjela Bozinovic: Maybe the first one, again on the guidance. Can you give us your assumptions on the competitive environment and especially the competitor launches that are planned in H2 and more specifically in the ear category? Have you embedded the competitor launch that was announced this morning? And second question on the cost initiatives. Can you please give us more details on the initiatives that you're implementing, which areas, which regions would be affected? Søren Nielsen: Yes. First of all, we, of course, expect competition to continue to try to innovate and bring new products to the market. We don't have anything special in and I would definitely see what I've seen today from a single competitor. Yes, it's an in-ear product, but in -- as I understand, lower price category and nothing special when it comes to functionality. So I don't see anything changing the fundamental competitiveness and uniqueness and an innovative level of Zeal. And I don't expect others to launch products down that Elite there is a very close relation between the production technology and the ability to make this small form factor with all the features and benefits, as I just said. And no, I don't expect competition to be able to close that gap very short and not in this year. Cost initiatives, they are widespread across the group. They come basically in all geographies to various extent, of course, depending on our size and footprint. They -- comes in all areas. It's not just operation, it's not just R&D, it's not just any of it is basically the entire company that we have looked at. But of course, in selected areas, so we can be even more firm in our commitment to invest in R&D in new products in a continued expansion of our hearing clinic footprint, et cetera, all the things that matters to growth. But we will find areas where you could say, inside the box, we can find more cost-effective ways of doing things. Andjela Bozinovic: Perfect. And just a follow-up on the first question on the traditional RIC and behind the ear, do you embed any competitive launches in your guidance? Søren Nielsen: I don't have a specific assumption on exactly who's going to introduce what except that in the last 12 months, we have seen a high number of launches from our competitors. So new premium launches, I would find less likely. Operator: Next question comes from Martin Brenoe with Nordea. Martin Brenoe: I just have 2 relatively simple questions. The first is on the cost program which will affect a lot of people in the organization. So I would just like to hear about the timing of the cost reduction and the reduction in the number of employees. I guess that we should expect this to be relatively quickly announced and the cost program to be more of a Q1 and Q2 program rather than back-end loaded to avoid unnecessary uncertainty. That's the first question, and then I'll take the second one afterwards. Søren Nielsen: I'll do that quickly. Yes, when it comes to staff and organizational changes, of course, as quickly as possible to make sure we can move on with the business. It always takes up time and energy. But on the other hand, there's also part of this program, which is centered around cost of goods sold where we want to work against the more and more expensive types of hearing aids we have to do. That takes some effort from selected groups of R&D, et cetera, before they come in. And before you have used existing parts if it entails a redesign. So there's also elements of the program, which have a longer run but the majority and most of what's related to people will happen here very soon. Martin Brenoe: And then just the second question is on value growth. I think 2025 was growing around 2%. And some of that were driven by France, which has been benefiting from the replacement cycle, also from the VA with a quite significant price increase, which will lap in May. So you can say that the market growth is maybe a little bit inflated by these 2 channels and markets. So I'm wondering in your assumption going from 2% to 2% to 4%. And where do you see the sequential step-up happening if you look at the global market from here? Søren Nielsen: I would say that would be a more equal growth or different split in market growth between U.S. and rest of the world. U.S. was basically down to flat, where the rest of the world grew more. And I would say that's in the assumption of the 2% to 4% that we see a slightly better U.S. market, which will then help on global ASP. Operator: The next question comes from Veronika Dubajova with Citi. Veronika Dubajova: I have 2, and apologies, they're going to be slightly bigger picture. The first one, I just want to push you a little bit on the sort of EBIT guidance. I think if we sort of build the bridge, I think adjusting for FX, adjusting for the cost savings, adjusting for, obviously, the contribution from [indiscernible] I think the guidance implies sort of EBIT that's year-on-year minus 4% to plus 5% against sort of revenue growth of 3% to 6%. So even at the top end really isn't a huge amount of margin expansion. And I guess sort of right big picture question is, is this the new normal? I mean if we end up in a market where growth is continuously challenged, not just in 2026, but let's say, maybe even in 2027, should we assume it's going to be quite difficult, not just for you, but for the industry as a whole to drive earnings growth? I think that's kind of the question that we've been having lots of discussions around. My second question, and I apologize for being forthright and blunt about this, but Intent is now 2 years old. You have normally followed 2-year launch schedules. We are clearly not getting a platform in February this year. Can you reassure us that there is nothing wrong with the R&D process and that the delay is a deliberate tactic on your part as opposed to something going wrong in the background? I think given the experience with Zeal last year, it'd be helpful to understand your thinking around that. Søren Nielsen: Yes. Thank you very much, Veron. And you to some extent, have to see the cost savings in combination with the remaining business. We would still like to continue to invest in R&D. We would still like to invest in further expanding our footprint. And that's why we, in other areas, take cost out. So you have to, in my book, see the 2 together, you can't just take the cost out and then look at the rest. So in all scenarios, when you take the 2 together, there is a growing EBIT and there is also improving margins, the better we are in the range, of course. On the more blunt question, no, I don't think there is anything wrong in the R&D. We have made a priority to bring our Zeal, because Zeal is possible due to the platform we have, and we think it holds a big potential half of all users in the hearing aid industry are first-time users around half. And this is a major opportunity there. And also for some the product, they really want, even if they already have one. It holds a significant innovative element. So our product road map is a conscious choice and not a broken bike. Operator: The next question comes from Susannah Ludwig with Bernstein. Susannah Ludwig: I have 2, please. I guess, first on Viola you talked about it having a higher ASP and then sort of being a positive contribution to ASP. Could you just clarify in terms of the impact on margins, I guess, sort of whether the margin is also sort of higher than the rest of your portfolio, given that higher ASP or given sort of the different manufacturing process, if there's any sort of negative impact on margins? And then second, I guess, on the cost reduction program, are you able to share a little bit more in terms of which business areas you are targeting? Should we expect, for example, in retail, are there any closures of stores that you're expecting to do as part of this program? Søren Nielsen: Yes. Thank you very much. Selling more premium is super positive for profitability. And Zeal is intended and will grow our premium share. And this way, yes, definitely. I think we have said before that the cost of producing Zeal is higher than a RIC. So if it was just a substitution and the price was not significantly higher, it would not be. It's better than classic in-ear instruments and the price is set higher than RIC. So all in all, good profitability, lifting premium sales, which we have seen so far in the markets we have launched definitely good for profitability. On the cost saving program, it is for all business areas to deliver of course, a little bit different in form and shape. And yes, we would like to do the most on cost of goods sold because that helps everybody. we are very cautious on our retail footprint and network, but there are also optimization opportunities within a network where certain regions, geographies, areas down to cities, you could find that you have stores that are not optimally placed and don't deliver the profit you expect. So we will look also at the network, but it's not the majority of things. Operator: The next question comes from Niels Granholm-Leth with DNB. Carnegie. Niels Granholm-Leth: Could you provide a little bit more color on the phasing of your growth for this year? So would you expect the year to begin on a slightly weaker note and then end on a stronger one. And also, could you talk about for how long you would expect to maintain Zeal only available in your premium price version would -- should we expect this to go on for the remainder of this year? Søren Nielsen: Yes. Thank you very much. The phasing of the growth is relatively normally phased and with a little uptake during the year as we see a full rollout of Zeal, of course, but not very different from first half to second half if we keep it at that level. And Zeal only in premium, this is, of course, also a careful choice. We think it holds a very significant potential for value. And as long as it's unique and that potential is, you could say, not fully tapped, then we will be cautious in adding more price points. Will it eventually happen? Yes, it will, but for now it's off the table. Operator: The next question comes from Carsten Lonborg Madsen with Danske Bank. Carsten Madsen: I only have one question left, and that's actually sort of a high-level question. So the question we are being asked a lot about from investors is whether now that you're implementing AI and hearing aids across the sector, you, your competitors and you're seeing other AI players invest massively in CapEx. Are we seeing sort of a step change in R&D cost to develop the next hearing aid with AI capabilities? Or are you seeing more of a continuation of R&D budgets that you have seen historically? That's the question, I guess. Søren Nielsen: Yes. And thank you for the question. I don't -- I wouldn't say we see a step-up. But yes, if you look relatively to years back, this is definitely where you put in more and more effort and the complexity of what we have to develop increases. And that's also why a continued commitment to investment in R&D is key and back to our structural changes. They are part of making sure we can continue to invest in R&D and a lot of that is into AI-driven signal processing and benefiting from AI, you could say, in all aspects of running a modern hearing aid system. Carsten Madsen: And a quick follow-up. So should we expect you longer term to sort of enter into more external collaboration in order to drive the AI agenda? Søren Nielsen: I would say we have an example of that at our research center where the William Demant Foundation have given quite a significant grant to make sure further programs in the research community can be done under the umbrella of our Eriksholm Research Centre. So yes, we do more collaboration also with external parties to build on this agenda. Operator: The last question today comes from Jack Reynolds-Clark with RBC Capital Markets. Jack Reynolds-Clark: Two, please. First on Zeal manufacturing. Could you just remind us whether this is fully scaled? Or is this going to be a limiter for launch globally? And then how long until you're fully ramped and launched across all of your markets for Zeal? And then the second question is, I mean, is the profitability initiative a signal that you're more cautious around the timing of the recovery in market growth kind of over the longer term versus where you were in the past beyond 2026? Søren Nielsen: Okay. I think I got your questions. I'm not really sure. But the first one, no, we have made a sequential launch to make sure we don't create demand we can't fulfill. That's why we take one market at a time, and we feel comfortable about that and have a good production capacity and can also or have plans to ramp up significantly. So all good. We're a little bit ahead of the curve, if anything. So I think that's the answer to that. René Schneider: Just to make sure, Jack, to understand your second question, whether that relates to the fact that we have a different view on if and when the market returns back to the normal growth, that's the reason why we introduced profitability initiatives. Søren Nielsen: Yes, you could say you should -- we always do that. I would say we accelerate it to make sure we remain a strong company that can continue to invest in the things that matters the most to our customers, R&D strong service, et cetera. So is there some link, yes, there is, I would say, the acceleration definitely has happened also as it reacts into a continued weak assumption of a continued weak market. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to the company for any closing remarks. Søren Nielsen: Thank you, operator, and thank you so much to everybody for joining us here today. I see we still have a couple of people in line in the queue, so please do reach out after the call and we'll be happy to follow-up. As always, we expect to be on the road in the coming weeks and do look forward to see all of you when we could get there. Have a good rest of the day.
Operator: Good afternoon, everyone, and welcome to the Digital Turbine, Inc. Fiscal 2026 Third Quarter Earnings Conference Call. 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 and then one on your touch-tone telephones. To withdraw your questions, you may press star and two. Please also note this event is being recorded. I would now like to turn the conference call over to Brian Bartholomew, Senior Vice President of Capital Markets. Please go ahead. Brian Bartholomew: Thanks, Jamie. Afternoon, and welcome to the Digital Turbine, Inc. Fiscal 2026 Third Quarter Earnings Conference Call. Joining me today on the call to discuss our results are CEO, William Gordon Stone, and CFO, Stephen Andrew Lasher. Before we get started, I would like to take this opportunity to remind you that our remarks today will include forward-looking statements. These forward-looking statements are based on our current assumptions, expectations, and beliefs, including projected operating metrics, future products and services, anticipated market demand, and other forward-looking topics. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. Except as required by law, we undertake no obligation to update any forward-looking statements. For a discussion of the risk factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements, please refer to the documents we file with the Securities and Exchange Commission. Also, during this call, we will discuss certain non-GAAP measures of our performance. Non-GAAP measures are not substitutes for GAAP measures. Please refer to today's press release for important information about the limitations of using non-GAAP measures, as well as reconciliations of these non-GAAP financial results to the most comparable GAAP measures. Now I'd like to turn the call over to our CEO, William Gordon Stone. William Gordon Stone: Thanks, Brian, and thanks, everyone, for joining our call tonight. Our December quarter showcased accelerating business momentum across both our on-device solutions and app growth platform segments. Strong demand for our platform combined with our disciplined operational execution drove top and bottom-line results that exceeded our expectations. Revenue for the quarter came in at $151.4 million, representing 12% year-over-year growth. We also achieved $39 million in quarterly EBITDA, that was 76% year-over-year growth with EBITDA margins of 26%. All of these results are proof points demonstrating the inherent operating leverage in our model. In particular, there are three things at a corporate level I wanted to call out before getting into my detailed segment remarks. First is the diversification of our revenues, the double-digit growth across so many of our products and geographies. We are seeing many drivers of our growth versus being tied to a single thing. Second is our improving use of AI and machine learning tools not only in our data and targeting that power revenue, but also for our operations that's driving improved efficiency in our coding, quality assurance, regression timelines, and a variety of other administrative and back-office tasks. As an example of this, in December, our gross profit dollars increased by more than 25% while our operating expenses declined. And finally is the strong progress we've made in strengthening our balance sheet. Our debt leverage ratio now stands at roughly three turns down from more than five turns just a year ago. This disciplined deleveraging is positioning us exceptionally well to pursue the $5 trillion market opportunity in front of us. Now turning to breaking our results out by segment, our On Device Solutions business generated nearly $100 million in revenue, which was up approximately 9% from December. In particular, our international business continues to be the driver of this growth, with a greater than 20% increase in both devices and revenue per device, or RPD, that drove more than 60% year-over-year international growth. And for the first time in our history, more than 30% of our revenues on our Ignite platform were from outside the United States. Our application growth platform or AGP business was another bright spot for the quarter and continued its momentum from September with December year-over-year growth of 19% posting $53 million in revenue. In particular, I was pleased with the strong results in our Brand business and also growth in our DTX or SSP business of over 30%. The hard work we did over the past few years to stay the course and integrate our legacy tech stacks into a common platform is now paying dividends. And we expect the momentum to continue into the future. For our growth drivers, improving supply and demand trends power the improved performance. First, on increased supply. While we continue to see softness for U.S. Devices, our overall devices grew 20% year-over-year driven by strong volumes from our international partners. In addition, our AGP supply volumes increased impressions by over 20% year-over-year, driven by strong performance internationally and strong increases in nongaming inventory. We also had higher advertiser demand, which translated into improving pricing and fill rates. Particularly for premium placements on our platform. The strong advertiser demand resulted in year-over-year growth in revenue per device in both the U.S. and international markets. For our on-device business. For our brand business, we reorganized our sales teams last year around verticals and I'm pleased to see those changes bearing fruit in our results. As our focus on vertical sales areas, consumer packaged goods, retail, telecom, and technology, all demonstrated increased spend. In particular, our retail vertical had 5x growth compared to last holiday season, as our retail media efforts are bearing fruit with large retailers wanting to extend their audiences. As we now enter 2026, we have five strategic priorities that we believe will continue to build on our profitable growth trajectory of both our ODS and AGP segments into the future. The first strategic priority is unlocking the value in our first-party data. This effort is centered on leveraging data signals across all of our DT products to create and enhance the IGNITE graph and apply the DT iQ AI machine learning models to drive better outcomes across your end consumer experiences. Our second priority is building the flywheel effect between our supply and demand. We have over 80,000 applications that have integrated our ad monetization technology. Leveraging that position in our demand-side technology to acquire more users for these apps creates a flywheel effect of increased monetization and higher investment into our platform. Our third priority is scaling our brand business. Over the last couple of years, we've established a brand and agency-facing business that diversifies and differentiates our monetization activities. This business has been showing positive growth and scaling it is the key to the next phase of our growth. Fourth is expanding the services offered through our IGNITE. Ignite's been the backbone of our highly scalable app distribution business, we're looking to leverage its footprint across more than 500 million devices to unlock better monetization and a superior user experience for our carrier and OEM partners. And finally is the alternative app opportunity. We believe the app economy is entering an era of democratization beyond the traditional duopoly. And that the ecosystem will benefit from solutions that are agnostic to the format or path developers use to distribute apps or how users choose to discover and use them. Made some recent progress with three of the largest global mobile game developers signed in December now using single tap capabilities in their alternative distribution efforts. Combined, these five things have a half trillion-dollar market opportunity in front of them, and our assets are uniquely positioned to go after this growth. You'll hear more about our progress on these areas on future calls. To wrap up, our business momentum is accelerating, our priority is to continue our growth are focused and clear. We showed solid year-over-year double-digit growth in both revenue and EBITDA driven by a healthy mix of disciplined execution innovation, and favorable industry dynamics. We're building the right foundation through operational discipline and strategic investment to drive sustained profitable growth. We're excited by the traction we're seeing across our business and confident in our ability to continue delivering value to partners, advertisers, users, and shareholders. With that, I'll turn it over to Stephen Andrew Lasher to take you through the financials in more detail. Stephen Andrew Lasher: Thank you, Bill, and good afternoon, everyone. The fiscal third-quarter results were reflective of sustained business momentum. We delivered another quarter of double-digit revenue growth, further expanded profit margin, and delivered top and bottom-line results that surpassed expectations. We also made significant progress in strengthening our balance sheet in the process. Now let's get into the numbers. Total revenue for the fiscal third quarter was $151.4 million, representing 12% growth year-over-year. Both segments of our businesses, ODS and AGP, contributed positively to the overall growth and upside versus expectations. Our ODS business delivered $99.6 million in revenue, up 9% year-over-year. This growth was primarily driven by higher device volumes and RPDs primarily with our international partners. Our AGP segment delivered $52.6 million in revenue, up 19% from the prior year. These results reflect positive outcomes of our strategic focus to better utilize first-party data and showcase our AI-driven capabilities. The combination of strong top-line growth and efficient operational execution yielded 76% year-over-year growth in adjusted EBITDA in the quarter. Adjusted EBITDA for the fiscal third quarter totaled $38.8 million, representing a 76% increase year-over-year. EBITDA margin reached 26%, marking the seventh consecutive quarter of expansion and improvement of more than 900 basis points versus the prior year. This comparison includes approximately $3.5 million of one-time benefits in the period primarily related to a sublease settlement and improved working capital. Free cash flow for our third quarter totaled $6.4 million. Our non-GAAP gross margin in the fiscal third quarter was 49%, well above the prior year figure of 44%. This expansion was primarily the result of a more positive product and segment mix during the quarter. Cash operating expenses were $36 million, down 4% year-over-year. We're pleased with the progress we've made on our cost controls and operational discipline, which allowed us to achieve double-digit year-over-year revenue growth with lower cash operating expenses. We will continue to do that to identify areas of additional efficiency while maintaining targeted, disciplined investments to support future growth. Turning to the bottom line. We reported a GAAP net income of $5.1 million or $0.03 per share in the fiscal third quarter. On a non-GAAP basis, we generated net income of $21.7 million or $0.18 per share on 120 million shares outstanding. Looking at the balance sheet. We ended December with a cash balance of $40 million, up approximately $1 million from the end of September. Meanwhile, our total debt net of debt issuance cost declined during the quarter by more than $41 million and ended the quarter at $355 million. This decline was a result of tax-positive cash flow generation supplemented by proceeds from our at-the-market offering. The company sold a total of 6.8 million shares at an average price of $6.54 during December, yielding $44.6 million in gross proceeds. We are pleased with the progress we have made to our balance sheet in recent months. To that end, we made the decision to terminate our existing at-the-market equity program. Given our performance and improved leverage profile, we believe our current liquidity and balance sheet strength eliminate the need for this funding source as a component of our long-term capital management strategy. Now let me turn to the updated outlook for fiscal 2026. Following the stronger-than-expected December performance, and with improved visibility into the current March, we are once again raising our full-year revenue and adjusted EBITDA guide. We now expect revenue to be in the range of $553 million to $558 million and adjusted EBITDA to be in the range of $114 million to $117 million for fiscal year 2026. At the midpoint, this represents an increase of $10 million in revenue guidance and over $13 million in EBITDA guidance compared to our prior outlook. In closing, I want to reiterate Bill's earlier comments. That momentum across our core business remains strong and we're increasingly confident in our ability to build on this performance as we move forward. With that, let me hand the call back to the operator to open up the line for questions. Operator: Jamie? Ladies and gentlemen, at this time, if you would like to ask a question, you may press star and then one. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then 1. Join the question queue. We'll pause momentarily to assemble the roster. And our first question today comes from Anthony Joseph Stoss from Craig Hallum. Please go ahead with your question. Anthony Joseph Stoss: Great. Thanks. I have a couple, so I'll just go one at a time. Bill, I love to hear, you know, you used the word flywheel. What are you seeing in terms of maybe the app install business? If those same customers are now giving you advertising within the app, any thoughts just on how things are starting to come in faster and faster? Love to hear it. William Gordon Stone: Yeah. Sure, Tony. Yeah. This is, as I mentioned, this is one of our five strategic priorities in the business. And there's enormous opportunity given that we have over 80,000 different applications with our technology, and those applications are all out trying to acquire users. So the ability for us to integrate their budgets that we're paying them back into acquiring users both with our own DSP as well as our own device business then feeds back into the monetization and becomes a flywheel feeding on itself to generate incremental growth in revenue and better margins. So this is a big area to integrate those. Now that we have the tech stacks integrated that we had not had over the few years, we can put a lot more energy behind this. So, you know, we're really excited about this being a driver for growth for us as we look into the future. Anthony Joseph Stoss: Got it. And then, Bill, I've fielded a couple of calls in the last few days regarding the Google Gemini announcement. You can help us understand how you think that'll impact you. William Gordon Stone: Yeah. So, you know, first, you know, for us, we made a concentrated effort I mentioned in my remarks, to diversify away from just strictly gaming inventory and increase nongaming inventory. And so that's been a growth driver for us. As it relates to Google's announcement specifically, I think it's a great thing for our company. And what I mean by that is we don't not in the game business. We don't we don't we don't make games. You know, we distribute them. And so as more games come into the market, they're all gonna need distribution. So our ability to leverage our extensive distribution footprint both on device and with our DSP, I think it's going to bring more games to market, and those they're gonna need more distribution to acquire the users regardless of how they're generating the technology to make the game. So I view it as positive, you know, for our business. And as I mentioned in our remarks more broadly around AI, it's driving revenue growth for us and it's driving efficiencies in the back office. So I look at it as a net positive. I can't speak for other companies. But for us, we're excited about it. Anthony Joseph Stoss: Got it. And, yeah, I just wanna call out your mentioning of the three largest global gaming companies have signed in December for Single Tap. How do they plan on using it? What's kind of the timing? And how quickly do you think it'll ramp? William Gordon Stone: Yeah. So I'm excited to say they're live today. And so they're using it today to distribute all alternative applications of their own versions that can be their own house billing, if you will, versus using, you know, one of the duopolies billing for that. They're also using it for a thing called dual downloads. And what that is is the ability to download an application with Single Tap, but also download the store that goes with that. So in other words, if a large gaming studio, you want you, Tony, want wanted wants a game, download it. Well, you also get the store that can be delivered in the background once you enter in your credentials and pay through that app or game you've downloaded, now it's prewired for anything that that publisher wants to do. So it reduces the friction in the future. It lowers the cost structure for the app publishers. So Single Tap's a key enabler to make that happen. So yeah, we're excited about that, and it's already generating revenue today. Anthony Joseph Stoss: Thanks, Bill, for everything, and great job, guys. Nice results. William Gordon Stone: Thanks, Tony. Operator: Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and 2. Our next question comes from Arthur Chu from Bank of America. Please go ahead with your question. Arthur Chu: Hey, guys. This is Arthur on for Omar. Thanks for taking my question. Bill, there's been some recent chatter about Meta back on iOS bidding for non-IDFA traffic. I think after a couple of years of only bidding on the IDFA traffic, any sort of observations you have around maybe just, you know, any changes in the competitive landscape as a result of Meta being carrying a little bit more active on iOS? William Gordon Stone: Yeah. So nothing to comment specifically on them and iOS here. I would just say from a competitive perspective, I'm excited to see that the overall market grew kind of mid to high single digits, you know, in December. And our growth, you know, on the AGP side was 20%. So in other words, you know, our growth is 2x the market. From a competitive perspective, we're out taking share. Obviously, we're focused we have iOS and Android. We're focused more on Android, you know, given our unique on-device position there. So nothing specific on Meta to comment on this call. But in terms of what we're doing, you know, we're outgrowing the market right now. Arthur Chu: Got it. That's really helpful color. Thanks a lot, guys. Operator: And ladies and gentlemen, I'm showing no additional questions at this time. I'd like to turn the floor back over to William Gordon Stone for any closing remarks. William Gordon Stone: Thanks, everyone, for joining our call tonight. We'll talk to you again on our fiscal '26 fourth-quarter call in a few months. Thanks, and have a great night. Operator: Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Operator: Greetings, and welcome to the Varonis Systems, Inc. Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Tim Perz, Investor Relations. Please go ahead. Tim Perz: Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis Systems, Inc.'s fourth quarter and full year 2025 financial results. With me on the call today are Yakov Faitelson, Chief Executive Officer, and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis Systems, Inc. After preliminary remarks, we will open the call to a question and answer session. During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of future operating results for our first quarter and full year ending December 31, 2026. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captioned Forward-Looking Statements, and these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views as of any subsequent date. Varonis Systems, Inc. expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. The reconciliation for the most directly comparable GAAP financial measures is also available in our fourth quarter 2025 earnings press release and our investor presentation, which can be found at varonis.com in the Investor Relations section. Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. With that, I'd like to turn the call over to our Chief Executive Officer, Yakov Faitelson. Yakov? Yakov Faitelson: Thanks, Tim, and good afternoon, everyone. We appreciate you joining us to discuss our fourth quarter and full year 2025 results. Over the past year, we have talked about Varonis Systems, Inc. as a story of two companies. The first is our strong SaaS business, which reflects the present and future of our company, and the second is a legacy on-prem business, which is serving as a headwind to our total company ARR growth. In Q3, the headwind was especially pronounced. As a result, we are now disclosing additional metrics. The purpose of this is to allow investors to understand all the drivers of our business. Guy will expand upon this later. In the fourth quarter, our SaaS business continued its momentum, and our decision to end-of-life our self-hosted platform, combined with the lessons we learned in Q3, led to a record number of conversions. In Q4, SaaS ARR was $638.5 million or 86% of total ARR. Q4 SaaS ARR increased 32% year over year, excluding the impact of conversion, and total ARR increased 16% year over year to $745.4 million. Now I would like to give you some additional color on last quarter's decision to announce the end-of-life for our self-hosted deployment model and the decision to transition our business to be 100% SaaS by the end of 2026. Prior to the introduction of Varonis SaaS, we believed self-hosted software was the best way to secure data, but the downside of this software was that it required significantly more resources to do so. Our SaaS product is fully automated. It is different from our self-hosted solution, like a self-driving car to a bicycle. You can get to the same destination in either method, but with one, you do the majority of the work yourself, and with the other, it gets you there automatically and with minimal effort. We can do this because we built our SaaS platform using world-class architecture, the newest technologies, and the lessons we learned with securing data in large, complex, dynamic environments for thousands of customers. This allows us to protect our SaaS customers in ways that were not possible with our self-hosted solution. For instance, we can only provide MDDR to our SaaS customers because of the automation and centralized visibility within our platform. It is important to understand that for most other companies that underwent SaaS transition, the technological gap between their self-hosted and SaaS products was not as large as it is with our platform. This provides our SaaS customers with much higher satisfaction, which leads to higher renewal rates when compared to our remaining self-hosted customers, many of which are what we call single-threaded customers. This means they only use Varonis Systems, Inc.'s self-hosted platform for a single use case on one data store, and because they do not use the full data security platform, they began to show a greater resistance toward paying a premium to move to Varonis SaaS in Q3. In order to move quickly and maximize customer retention, we are focusing less on uplift or conversions of our remaining on-prem customers. We believe we can show even more value to SaaS to these customers and then have opportunities to upsell them in the future. In the fourth quarter, our decision to end-of-life our self-hosted platform was a catalyst that caused many of our remaining self-hosted customers to convert to SaaS. We converted approximately $65 million or one-third of our remaining non-SaaS ARR in the quarter and believe that between $50 to $75 million of the remaining self-hosted customers will convert by the end of the year. At the same time, we continue to see strong demand from both new and existing customers because they can secure data with minimal effort because of our automation. Other DSPM tools may be able to identify a portion of sensitive data, but no other tool can find sensitive data in the complete way, fix misconfigurations at scale automatically, and alert and respond to threats, delivering automated outcomes like Varonis Systems, Inc. does. Within our SaaS portfolio, MDDR and CoPilot continue to show strong adoption trends, and Varonis for cloud environments continued its momentum, which was driven by the investment we have made in our platform to expand our use cases and protect many more data platforms. We are seeing this demand because customers are realizing that visibility alone is not enough and classification without protection is a liability. Automation is necessary to achieve real outcomes. Early conversations with customers on our database activity monitoring and email security products underscore our belief that these are a strong fit for our portfolio in 2026. We expect our reps to put significantly more focus on new business and SaaS customers. Over time, we believe this focus will help us unlock the potential of this market. Now, I would like to step back from our near-term results and discuss why we believe we are best positioned to help companies safely adapt AI and prevent data breaches. Varonis Systems, Inc. was founded on the belief that managing and protecting data would be impossible without automation. Over time, our goals have been fueled by the constant balance between productivity and security. Today, the emergence of AI is accelerating both the volume and complexity of data at an unprecedented rate. The scale of data growth is matched only by the AI's ability to increase the sophistication of modern cyber threats. Cybercriminals are leveraging AI agents to infiltrate organizations with minimal human involvement. Recent incidents, such as Chinese state actors using cloud code to breach major corporations, highlight the sensitivity and ease of these attacks. Most of these AI-powered attacks start with social engineering. Attackers are not hacking computers; they are hacking trust, and users cannot tell what is real or fake anymore. Cybercriminals are using AI without Companies want to adapt AI as quickly but struggle to due to concerns over data security. The deployment of AI agents raises critical compliance questions: What data does the agent have access to? Is that data sensitive? Is the agent behaving as expected? Most organizations struggle to answer these questions for human users, and the challenge is amplified as they must now secure exponentially more AI agents. Agents are nothing without data. The more data agents can access, the more useful and more risky they become. They operate faster than humans, collaborate autonomously, and maximize their privilege by design. AI security depends on data security. In addition, companies will need guardrails and controls around their AI agents and toolsets. To accelerate our ability to help companies safely adapt AI, Varonis Systems, Inc. announced today that it has acquired Altu, an AI security company. The acquisition strengthens Varonis Systems, Inc.'s ability to protect enterprises from emerging AI risks by combining Altu's end-to-end visibility and guardrails for AI tools with Varonis Systems, Inc.'s ability to protect the underlying data and identities using my AI agent. Altu adds end-to-end visibility and control across the AI lifecycle. It inventories AI components and infrastructure, locks it down, monitors AI tools, and automates compliance. The acquisition reinforces our data-first strategy and extends our platform to secure all AI systems and the data powering them. Our SaaS platform allows for much faster organic innovation and integration of tuck-in acquisitions, which enhance our customers' ability to stay ahead of bad actors. Since launching SaaS, we have gone wider and deeper with our customers, stopped breaches everywhere, and we can now tap into more budgets than ever, including data and AI security, database activity monitoring, and email security. We have unified unstructured, semi-structured, and structured data security into a single platform, which is essential in an age of AI because AI uses all data types. When you combine Interceptor, which is our image security offering, with our SaaS platform and MDDR, it becomes a force multiplier. It stops threats even faster and keeps threat actors even farther from data. With that, I would like to briefly discuss a couple of key customer wins from Q4. We continue to see strong demand from new customers. One example of this was a healthcare service organization that was performing a risk assessment during a multi-cloud migration and realized that the native tools were insufficient to lock down their data. As a result, they launched a DSPM RFP process and ultimately chose Varonis Systems, Inc. after we immediately uncovered several hundred physical misconfigurations, many of which were automatically fixed. We also identified over 900,000 exposed PII records and executive strategy materials. Varonis Systems, Inc.'s simplicity, advanced threat detection, unified interface, and automatic remediation were decisive against competitors, and they ultimately purchased Varonis SaaS with MDDR for hybrid environments, CoPilot, AWS, Azure, and Google Cloud Platform, as well as Unix and Linux, and the Universal Database Connector. In addition to strong new customer momentum, we continue to see existing customers realizing the benefits of SaaS. One example was a hospital system of 45,000 employees that originally bought Varonis Systems, Inc. to remediate overexposure of on-prem HIPAA data. As they began a cloud migration process, they noticed gaps in the ability of native tools to remediate overexposure and label data at scale. During our cloud risk assessment, we discovered over half a million instances of HIPAA and PII data open to everyone in the organization. Our ability to identify and remediate these exposures led this customer to convert to Varonis SaaS with MDDR for hybrid environments, CoPilot, and data lifecycle automation for Windows SaaS. In summary, we are excited by the performance of our SaaS business, which is being driven by the automated value proposition that we deliver to our customers on top of our scalable architecture. We look forward to continuing our momentum and ending the year as a fully SaaS company, which will unlock many more benefits as we capture our growing market opportunity, and we believe in the path to achieving our 2027 financial targets. With that, let me turn the call over to Guy. Guy? Guy Melamed: Thanks, Yakov. Good afternoon, everyone. Thank you for joining us today. We are excited by the momentum we are seeing in our SaaS business, which now accounts for the vast majority of our ARR. SaaS is both the present and the future of our business, and the new disclosures we are making today are intended to enable investors to evaluate the progress of both our SaaS business and the end-of-life of our self-hosted business. We plan to disclose these additional metrics for the duration of 2026, after which we will be 100% SaaS, and we will revert to more traditional metrics. You can find more on this in our investor deck. In 2026, we will provide guidance for SaaS ARR excluding conversions on a quarterly basis. Specifically, we will report the following on a quarterly basis: one, SaaS ARR; two, SaaS ARR excluding conversion; three, conversions ARR; and four, non-SaaS ARR to help you understand how much conversion opportunity remains available. On an annual basis, we will disclose and also provide guidance for one, SaaS ARR, and two, SaaS ARR excluding conversion. We will also continue to report subscription customer count and SaaS dollar-based net retention on an annual basis. Our intention is to provide you with the tools to understand the various drivers of our business and to illustrate how we believe our SaaS business can continue to grow at very healthy levels in 2026 and beyond. In the fourth quarter, SaaS ARR was $638.5 million or 86% of total ARR, and SaaS ARR increased 32% year over year when excluding the impact of conversion. We are proud of our record number of ARR conversions in Q4, which totaled approximately $65 million, including the uplift. We believe that this result was driven by our lessons learned in Q3 and our decision to end-of-life our self-hosted platform. At the end of Q4, we had approximately $105 million of non-SaaS ARR remaining. In 2025, ARR from new customers was approximately $80 million. We ended the year with approximately 6,400 subscription customers, which grew 14% year over year. Our dollar-based net retention rate for SaaS customers was 110% at the end of 2025. To be clear, this metric only includes customers that were SaaS customers in the prior year and therefore is reflective of the organic expansion of ARR within our SaaS customer base. We believe that this metric can trend higher over time as we put more focus on the upsell motion with our SaaS customers. Our renewal rate for the year ending December 31, 2025, continued to be over 90%. Although our renewal activity from our non-SaaS customers was slightly below our historical level, it was better than what we experienced in the third quarter. Our renewal rate disclosure going forward will be the SaaS renewal rate. This metric aligns with our new business model and how we view the business. Now I'd like to recap our Q4 results in more detail. In the fourth quarter, ARR was $745.4 million, increasing 16% year over year. In 2025, we generated $131.9 million of free cash flow, up from $108.5 million in the same period last year. In the fourth quarter, total revenues were $173.4 million, up 9% year over year. SaaS revenues were $142.3 million. Term license subscription revenues were $21 million, and maintenance and services revenues were $10.1 million. Moving down to the income statement, I'll be discussing non-GAAP results going forward. Gross profit for the fourth quarter was $138.7 million, representing a gross margin of 80%, compared to 84.4% in 2024. Our gross margin continues to be healthy and in line with our long-term target set at our Investor Day. Operating expenses in the fourth quarter totaled $134.1 million. As a result, fourth-quarter operating income was $4.6 million or an operating margin of 2.6%. This compares to an operating income of $15.3 million for an operating margin of 9.7% in the same period last year. Fourth-quarter ARR contribution margin was 15.9%, down from 16.6% last year. If our non-SaaS business would have renewed at historical levels this year, our contribution margin would have shown a significant improvement versus 2024. In 2026, we expect a lower ARR contribution margin and lower free cash flow due to the impact of the end-of-life announcement. While this announcement negatively impacts 2026 ARR contribution margin and free cash flow by $30 to $50 million based on our guidance, we believe it will allow us to show a healthier financial profile beginning in 2027 due to the removal of our lower renewal self-hosted customer base. During the quarter, we had financial income of approximately $9.6 million, driven primarily by interest income on our cash, deposits, and investments in marketable securities. Net income for 2025 was $11.1 million or net income of 8¢ per diluted share, compared to net income of $23.9 million or net income of 18¢ per diluted share for 2024. This is based on 133.3 million diluted shares outstanding and 135.1 million diluted shares outstanding for Q4 2025 and Q4 2024, respectively. As of December 31, 2025, we had $1.1 billion in cash, cash equivalents, short-term deposits, and marketable securities. For the twelve months ended December 31, 2025, we generated $147.4 million of cash from operations, compared to $115.2 million generated in the same period last year. And CapEx was $15.5 million, compared to $6.7 million in the same period last year. During the fourth quarter, we repurchased 448,439 shares at an average purchase price of $33.45 for a total of $15 million. I will now briefly recap our full-year 2025 results. Total revenues increased 13% to $623.5 million. Our full-year operating margin was negative 0.6%, compared to 2.9% for 2024. Turning now to our initial 2026 guidance. Apart from conversions, which we included a wide range to account for a pessimistic and optimistic scenario, our guidance was set using the same philosophy that we have used historically. As a reminder, our new KPI for this year is SaaS ARR growth excluding conversions, which reflects our ability to add new SaaS customers and also expand with existing ones, as this will be the primary growth driver of our business in the years ahead. In 2026, we will provide quarterly SaaS ARR including conversion guidance, for this year only. We are doing this because of the difficulty in modeling the year-over-year growth rates due to the impact of conversions in 2025 and 2026. We will also provide a bridge to quarterly total SaaS ARR in our investor deck, which assumes zero conversions for the upcoming quarter. For the full year 2026, we will provide annual guidance for both SaaS ARR excluding conversions and total SaaS ARR. We have provided a wide range of outcomes for the conversions of our non-SaaS ARR to SaaS ARR within our guidance framework in order to bridge SaaS ARR excluding conversion to SaaS ARR for modeling purposes. We believe this range of conversion captures a pessimistic and optimistic scenario, with a midpoint representing our base case for 2026. From a modeling perspective, we have assumed no uplift for these conversions. The largest cohort of customers that we do not expect to convert to SaaS are federal and state government customers. As a reminder, we expect this to have a $30 million to $50 million headwind on free cash flow and ARR contribution margin in 2026. For more information, please see our earnings deck on our Investor Relations website, which includes a more detailed breakdown of our financial guidance. For 2026, we expect SaaS ARR growth of 27% to 28%, excluding conversions, total revenues of $164 million to $166 million, representing growth of 20% to 22%, non-GAAP operating loss of negative $11 million to negative $10 million, and non-GAAP net loss per basic and diluted share in the range of 6¢ to 5¢. This assumes 118 million basic and diluted shares outstanding. For the full year 2026, we expect total SaaS ARR of $805 million to $840 million, representing growth of 26% to 32%. This represents SaaS ARR growth of 18% to 20% excluding conversion. Free cash flow of $100 million to $105 million, total revenues of $722 million to $730 million, representing growth of 16% to 17%. Non-GAAP operating income of breakeven to $4 million, non-GAAP net income per diluted share in the range of 6¢ to 10¢. This assumes 134.2 million diluted shares outstanding. In summary, we are continuing to see momentum across our SaaS business. This demand is coming from both new customers and existing SaaS customers looking to secure more of their data footprint with Varonis Systems, Inc. We remain focused on executing on the many tailwinds we see ahead. With that, we would be happy to take questions. Operator? Operator: We will now be conducting a question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. One moment, please, while we poll for questions. The first question is from Matthew Hedberg with RBC Capital Markets. Matthew Hedberg: Guys, thanks for taking my question. Thanks for all the additional disclosures. I think it will be really helpful when we think about the standalone SaaS business on a go-forward basis. I think we're getting some inbound from some investors, and I think some of the confusion is around kind of the growth rate assumptions from this year. You're guiding for 18% to 20% SaaS ARR growth excluding conversions. Yet, you know, if you look at sort of just, like, your exit rate SaaS ARR for '26 relative to kind of like the $745 million that you ended 2025 with, it looks like closer to 10% growth. So I know there's some headwinds to conversions here and some churn, but maybe could you just help sort of like again, sort of like square off like the 10% kind of total ARR guide with, you know, how optimistic you are on the SaaS side of the house. Guy Melamed: Thanks, Matt, for the question. I think we had many conversations with investors throughout the last several months, and they've all asked for the SaaS growth excluding conversion to really understand the true growth of the business. And, really, what we want to try and help everyone understand all of this better. So we're providing today more disclosures around our business to help you understand what drives our business in the present and in the future. Now the SaaS ARR excluding conversions is really the most important KPI, which we're going to focus on the ability to sign new customers and expand existing SaaS customers. And that's what's going to drive the business in 2026, 2027, and beyond. When we sit here today, we feel very good about guiding this growth rate of 18% to 20%, which really calls for $120 million of net new organic SaaS ARR versus the $109.5 million that we had in 2025. And that's our starting point. So we're still keeping the same philosophy of guidance. This is our starting point. And we know what we need to do in order to continue throughout the year and increase that number going forward. So as a starting point, looking at the ARR would be extremely misleading because it takes into account the conversions, which are really the rearview mirror of this company. If you want to focus on the present and the future, the right thing to look at is SaaS ARR, excluding conversion, and as a starting point with this with the same guidance philosophy, we're at $120 million versus $109.5 million in 2025. Matthew Hedberg: And, Matt, you also believe Move to the next one. Thank you. Our next question is from Saket Kalia with Barclays. Saket Kalia: Great. Guys, thanks for taking my questions here. And echo the point earlier just on appreciate the additional disclosure. I think it's really helpful. And to your point, really focuses on kind of what the future of the business will look like. Right? That SaaS part. And so for that reason, I just want to dig into that 18% to 20% growth excluding conversions. Guy, maybe the question is for you. Can we just talk about how much of that you think comes from new customers versus existing? And, again, SaaS is the future, but just to make sure we're all squared away, can you touch on whether there's going to be any remnants of on-prem ARR at the end of '26 as well? Guy Melamed: So I'll start with the last part of your question. Our assumption is that we won't have any non-SaaS ARR at the end of the year. So, basically, 2026 is going to be equal ARR. So for this year, if you want to focus on what is right for the business, what is driving the business, in the present and in the future, the right metric to look at is SaaS ARR excluding conversion. Now when you look at the performance in 2025, we had SaaS NRR of 110%, and we had approximately $18 million of new customers ARR. When you look at our expectation going forward, we believe that with the fact that reps won't have to focus on the conversion the way they focused on conversions in 2025, they can go back to selling to new customers and selling to existing customers. And we have so much more to sell, so our expectation is that the SaaS NRR can increase. And, obviously, with the offering that we have, we can increase our sales to new customers. So as a starting point, I'm going back to that 18% to 20%. It's a good starting point that we feel very confident with where we sit here today. Obviously, we believe that we can increase that throughout the year. Brian Essex: Our next question is from Brian Essex with JPMorgan. Brian Essex: Hi, good afternoon. Thank you for taking the question. Thank you for me as well for all the additional color. I guess, Guy, I wanted to dig in a little bit to current period results. 110% net dollar retention, how does that compare with prior periods? And then maybe you can also help us understand how much has Copilot and, you know, AI driven some of the demand? Do you have maybe an attach or an exposure rate you can provide for the SaaS business attributable to that demand in the quarter? Thank you. Guy Melamed: So I'll take the first part of the question. When we look at the SaaS, you have to remember that this only takes SaaS customers last year and compares what their ARR is a year later. So, obviously, it's on a much larger base, and it's at 110, and we absolutely think that it was impacted with some headwind because reps had to focus their time on the conversions. Keep in mind that we had close to $190 million of conversions in 2025 alone. So that doesn't happen in itself. The reps had to focus on those conversions. And when we think about NRR, when you only take SaaS customers and look at the progression, that is actually an indication of how we can grow within our SaaS customer base going forward. We actually believe that that number can improve. So, again, when you look at kind of the mix between existing and new customers, I think that going forward, as we kind of went through the transition and there's not much of a non-SaaS ARR left, the reps can actually focus on acquiring new customers in a better way and can actually go back to the base and sell them additional products going forward. Yakov Faitelson: My definitely was, you know, just a big driver, but AI in general is a big driver because everything that's related to AI, these agents are as good as as risky as the data they can access. And, definitely, the AI train left the station, and the ability to understand the identity and the data that it can access is everything. So it's not just the conversion and Copilot. The other thing that we saw in the fourth quarter is this a lot of success with everything that related to other cloud repositories in, you know, AWS, and Azure and also the database activity monitoring with pipeline is starting to sell the product and everything that is happening with the acquisition of Fleishnex. Important to understand that AI, just from the agency, is a big problem, but also from bad actors. So everything that's related to a compromise to get compromised from trusted sources is something that the Fleishnex acquisition, the product called Interceptor, is doing extremely well. So definitely in terms of the platform, we hit on all cylinders and also have a very good understanding of the cohort of customers, as we explained before, that will not go to SaaS. And with the 86% SaaS business, it's just the end of it, and the SaaS KPIs are extremely strong. And we are very, very happy with where the platform is and how it will perform. And primarily, we believe that the whole AI revolution is a big tailwind to everything we want. Our next question is from Rob Owens with Piper Sandler. Rob Owens: Great. Good afternoon. Thanks for taking my question. I wanted to focus a little bit on go-to-market. I know there were some changes to the federal team back in Q3. Just curious, as you enter the new fiscal year, any broader changes overall, where you are from a sales capacity perspective, and how you're feeling from a sales maturity perspective relative to the folks you have in those seats? Thank you. Guy Melamed: So there are two elements to that question that I want to address. One is in terms of the federal business, we're still focused on trying to sell. As you remember, our federal business is approximately 5% of total ARR. But we still see an opportunity there. We did make some adjustments in terms of our investments there. I will say that the second component that I want to address is the conversion. The non-SaaS ARR we're actually baking a good portion of that federal business that will not convert. And that's why we gave a range of more of a bare case and an optimistic range, which is a really wide range, that $50 million to $75 million that will convert in 2026. So when you look at the element and what is impacting kind of the conversion number, the assumption that we have had is that many of the federal and state and government customers might not convert, and that was baked in that number. And the expectation is that we can go and sell to new customers in that federal space, but some of them will not move to SaaS with us. But in terms of the coverage and capacity, you believe we, you know, the new product's now building a good pipeline. And that will kick in, and we can have a we believe that we can have strong productivity gain. We have now these sales motions that are attaching to, you know, the budget and everything that's related to social engineering and business email compromise, the in the email space, and we have some other in the API and the browser extension. Very good assets there. Database activity monitoring. You know, most of the install base of the incumbent wants to replace them. This is another one for us. Everything, the expansion of the data security, including the MDR, and now the Altu acquisition that really just finalizing the whole vision to be end-to-end in the AI world. So when the we believe and we're starting to see that we see a lot of budgets that are related to AI from security and AI, and we really believe that we can be the foundation for acceleration and adoption of SecureAI within organizations. So we're really happy with where we are. And the way that the pipeline is developing, and we think that, you know, in the next few quarters, we are going to reverse. Joshua Tilton: Alright. Thank you. Our next question is from Joshua Tilton with Wolfe Research. Joshua Tilton: Thanks for sneaking me in here. I have two. One is a follow-up. One is not. I'll start with the non-follow-up one, and that's when we look at kind of the benefits of SaaS from converting the on-premise base relative to kind of, you know, the dollars that you lost in on-premise business last year. It kind of feels that you the uplift that you were getting was below that 26% to 25% ish blended rate that you've been communicating to us. Is there any way to help us understand, like, what you are actually getting from a conversion at Uplift? Or what you're getting on Uplift at a conversion and, you know, what we should expect that rate to be if you can, you know, sustain that for next year. And then I have a follow-up. Guy Melamed: So I want to focus the analysts and the investors on what's important. And what's important is SaaS growth excluding conversion. We've been asked many times by investors recently to try and break it out and show what would be the growth rate. Because if you think about it, by the end of 2026, the assumption is that there will be no non-SaaS ARR left. So the question that you're asking actually relates to 2026 only. Our assumption for 2026 is that from a modeling perspective, is that the conversions will come in flat. The intention is to break down on a quarterly basis what is the SaaS growth excluding conversion, so every single investor can understand how the business is performing, present, and what is the driver for the business going forward. To us, the conversions are obviously an important factor, but they're not the driver. They are the rearview mirror that every investor obviously, we care about getting as many customers over to SaaS as we can. But that's not the driver of the business. The driver of the business is SaaS ARR excluding conversions. And that's why we spent a lot of time in order to break it out in what we hope is a very simplistic way for investors to be able to understand what is the growth rate of SaaS ARR excluding conversion. We gave a range of what the expectation of the conversion is. And remember, at the end of Q3, we got asked every single investor asked us what is the expectation to get the conversions over? We talked about approximately $180 million of non-SaaS ARR that are up for renewal, and we said that about a third of them. And we were able to get in Q4, including the uplift, were up for renewal in Q4, approximately $65 million. So the non-SaaS ARR left has come down significantly. It's now approximately $105 million going into 2026. We're giving this range of $50 million to $75 million, but our desire and the way management is focused in terms of the forward-looking health of the business is SaaS ARR excluding conversions. Yakov Faitelson: It's also critical to understand that this massive expansion we did in the platform, this is what will grow the business, the new licenses. This is not the uplift. It's selling new licenses and adding more value, covering more data, securing our customers end-to-end from a data breach, making sure that they can use AI in the right way, making sure that they don't have a compliance fine, and doing everything on an architecture with tremendous scale. You need to understand that the amount of data that we need to crunch in order to provide this value is massive. And this is the whole growth is driven by the just the new license. Our next question is from Jason Ader with William Blair. Jason Ader: Yes, thanks. Hi, guys. Guy, can you help us understand the $30 million to $50 million headwind to contribution margin and free cash flow in 2026? I'm not sure I quite get that. Guy Melamed: Yeah. So first of all, I want to say that there's really no change from a philosophy perspective of how we are trying to run the business. We believe the business should grow on the top line at healthy levels, but also generate better margins and more meaningful cash flow over time. I think that's been the way we ran the business for many, many years, and there's really no change in the way we're thinking about that going forward. We're facing that $30 million to $50 million headwind from the end-of-life announcement in 2026, but what's important to note is that, one, the announcement of end-of-life actually generated a sense of urgency for customers to move. The second thing that's important to note is that we would have had a headwind, and we did see that in Q4, from the remaining self-hosted customers having a lower renewal rate that would have really masked the strength of our SaaS business. And you can see that in the H2 2025 results and also in the 2026 guidance. And the third thing to keep in mind is that if we didn't have the end-of-life announcement, the cost of maintaining the same set of customers would have increased exponentially over time. So when we look at this $30 million to $50 million headwind, that's really with a lower expected renewal rate for the non-SaaS business, but I think we've proven over time our ability to show better margins and cash flow, and we believe in our ability to continue to do that going forward. So when we think about the 2027 target, we really completed the transition two years ahead of schedule. But as we sit here today, we see a path to achieving the 2027 targets laid out in the investor day. So we feel confident with that. Shaul Eyal: Our next question is from Shaul Eyal with TD Cowen. Shaul Eyal: Thank you. Good afternoon, Yakov and Guy. Thanks for the new disclosures. Yakov, I know you might have touched on that earlier, but I want to go back to that topic du jour in recent weeks. AI eating software. Maybe not so much in the security category, but definitely we're seeing a guilt by association, you know, cyber-related names in recent days. If I have to look at today's performance, can you offer us and investors your viewpoint as to whether AI is augmenting security or whether there's room for concerns based on potential market disruption? And maybe also just a word about your current relations with Microsoft over the past quarter. Thank you. Yakov Faitelson: Yeah. I think that in terms of the market, it's what we and primarily our market, as I said before, AI is as good as as risky as the data that it can access. And you are going to see velocity that we have never seen before and also for bad actors, the ability just to get in to do, you know, everything that related to the initial port to get identity, session token, and so forth is going to grow. The ability to build very sophisticated advanced persistent threats that don't need to, you know, to call home, can talk with local LLMs and agents talking to agents. And, also, the just the human mistake. I think that definitely AI is tremendous impact on development cycles, but we believe that still complicated architecture and deep tech would need a lot of expertise, and this is what we have. And believe that even in this environment, we have a very strong moat. And we also believe that in order for organizations to adapt AI, they need to make sure that they understand what it the data can access and if it's behaving correctly. This is the core competency of Varonis Systems, Inc., and you need to do it at a tremendous scale. And the second thing, Shaul, that it needs to do, and this is related to the Altu acquisition, is you need to understand the actual agents of stemming from which tool. The intent of what they plan to do, and also the pipelines, what data they are going to access. So in terms of AI, Altu starts from the beginning. To make sure, okay. This is the tool. This is the intent. And the pipeline. Then massive force multiplier with Varonis Systems, Inc. is what is the identity and the data that they can access. And, also, then back from Altu, how agents talk to each other. So, you know, maybe an agent can ask another agent that has the permission to do something on his behalf. And this is a big issue. Regarding Microsoft, you know, we have just a lot of synergy with them, and, you know, we're building a pipeline together and feel comfortable about the partnership. So we feel comfortable about the partnership, but the one thing that we are very excited about is just where the platform is. If you look at the year ago, you know, starting from where ataxo starting with Interceptor with Fleishnex, taking the database activity market with classification, the user behavior analytics, we have a lot of success on the cloud data stores, and these data stores have tremendous scale and, you know, and Varonis Systems, Inc. is doing the Varonis platform extremely well there. And now everything that we are doing today AgenTiKi and we combine it with our cost. Thanks. So we are very excited where the platform is. Where the platform is, and the value that you can provide in the marketplace. Our next question is from Meta Marshall with Morgan Stanley. Meta Marshall: Great, thanks. Maybe building on that last answer that you gave, just as you guys look at products that you can now with more focus on kind of the core SaaS business, whether it's MDR or identity or database activity monitoring, or, you know, the acquisition that you just announced, like, what do you see as the biggest driver of upsells over the next year? Thanks. Yakov Faitelson: I think that all of them. I think that all of them, and it's also, you know, we created this data security market. Now it was very natural expansion to go to other places. So, you know, the database activity monitoring is, you know, big market with just incumbents that we can replace. Everything that's related to social engineering, business email compromise, this is a type of product that every organization needs, and we're attacked are starting today. And we believe that in terms of multimodality, the problem starting with trusted sources, and we have the best solution for that. And every organization in this stage trying to use AI in order to survive and thrive. And we Altu together with what we have is a big force multiplier. So we are really excited about everything, and we're also excited about everything is integrated with everything else. Great. Thank you. Our next question is from Roger Boyd. Roger Boyd: Great. Thanks for the question. Guy, I know this is not the focus point going forward, but I wonder if you could just unpack the rebound you saw in 4Q conversion rates. And as you look forward, you said $105 million of remaining on-premise software with the expectation that $50 to $75 million of that converts with zero uplift. When I back out Fed and SLED, my gut reaction is that's a pretty optimistic view on conversions going forward. So maybe just talk about kind of your confidence over the remaining commercial customer base there and in terms of timing, just any sense of how quickly you could get in front of this or if you expect to be maybe more back-half weighted? Thanks. Guy Melamed: So let's start with the fact that we converted in Q4 approximately $65 million. That's a really large number. You can see that in comparison to any of the other quarters. It's 50% higher than Q2. It's close to 60% higher than Q3. I think part of it was absolutely driven by the fact that we had the end-of-life announcement. That generated a sense of urgency with our customers and actually helped us get customers to convert. In terms of 2026, we put a bare case and an optimistic case, and those are the two ranges. I would say that in terms of guidance, the $50 to $75 million is not expected to our expectation is to be within that range. Our base case is kind of that midpoint. We do expect some of the customers from the federal and state government to convert. So it's not like we're writing off every single customer. But I would say that the focus from a kind of a perspective of a vertical that would convert at lower rates is that federal business. But it's not an expectation that none of them will convert. So we feel very good with that $50 to $75 million range. And as you can see, that range is wide because there are a lot of uncertainties, but we do feel confident with that range itself. So our base case scenario is that midpoint. And I think we can do a really good job of getting those customers over. Keep in mind, we got questions about the $180 million of non-SaaS ARR at the end of Q3. And so many of the investors wanted to get a number and wanted to get a range. And many of the investors that we talked to had an expectation that we won't get any, which we thought was not reasonable either. So I think when you look at the actual performance of Q4, the fact that we were able to convert such a large portion had to do with the end-of-life announcement and the urgency that that generated within our customer base. And the expectation for 2026 is within those ranges of $50 to $75 million. Yakov Faitelson: It's also critical to understand that in most other companies that they are doing the SaaS transition, there is not a big discrepancy in features between the on-prem and the cloud. For us, it's something that is completely different in our cloud moving extremely fast, and we integrate the new acquisitions there. And these customers, as Guy said, these federal customers and some just local government customers and some customers that have hesitation and don't want to go to SaaS, I was just it's a huge, huge difference. And then when you have this growth business that is strong and profitable, and as Guy said, you know, we believe that we can get to the 2027 goals with these customers that will not convert to the 2027 goals that we in the investor day. Very important to understand that it's just it's something that is completely different. And not only that, with the way that we move and release features, the SaaS platform works, the discrepancy is growing and growing. And what will happen is that you will have a small cohort of customers that will take this a lot of operational resources to do something that is just not relevant. So this is what you see from us. We just, you know, we are now 86% there, and we just want to be 100% there and make sure that we, you know, we have this SaaS platform. We have high-quality SaaS metrics, and this is where we invest. This is how we move forward. And we just want to make sure that, you know, the last leg of conversion, anybody that we can convert will convert and fight for it. But folks who will not go to the cloud, we need to end the cloud. And partway with them. Fatima Boolani: Our next question is from Fatima Boolani with Citi. Fatima Boolani: Good afternoon. Thank you for taking my question. Guy, I wanted to just zero in on the OpEx and free cash flow expectations. You've been very clear about a number of different factors that are impacting that trajectory. But I was hoping you could sort of recrystallize some of what you shared with respect to the end-of-life headwind, the ARR contribution compression as it relates to some of the nonrenewal assumptions, as well as maybe some organic investments that you are making in growing your sales capacity and then also in the context of the Altu acquisition. So hoping you can stack rank the level of impact from an operating expense and free cash flow headwind perspective between the organic inputs and inorganic inputs, especially kind of given the number of acquisitions that you're absorbing into the cost base? Thank you. Guy Melamed: Absolutely. I'll start by the fact that when you look at the free cash flow progression, I think we've done a good job of increasing kind of the free cash flow number over the last couple of years. And when you look at the ARR contribution margin, we've actually increased it to levels that are just below the 2027 model that we laid out in our 2023 investor day. So I think from a profitability perspective, we have proven to investors that we have the path, and we know how to improve and increase the top-line growth with bringing some of it to the bottom line. When you look at the 2026 numbers, especially when you look at some of the lower renewal rates for the non-SaaS business, that have been below our historical levels, obviously, when you think about renewals, they go directly to the bottom line. That's your pure profitability component, and they are way more profitable than the acquisition of new customers that have a higher cost. So when you think about kind of the non-SaaS ARR that is not going to renew, that obviously has that headwind, and we talked about the $30 to $50 million of headwind from that end-of-life announcement. But I think what's important to note is that if we didn't call that end-of-life, the impact would have been much higher. So if I have to break down kind of that headwind, I would say that for the most part, it relates to the lower renewal rate for that non-SaaS business. Obviously, the acquisitions have a cost. And when you think about the guidance, we didn't bake in any upside from those acquisitions. We saw very good momentum in Q4 with Interceptor. But we need to see how that progresses from 2026. So I think there's upside there for us. And the acquisition that we announced today, we feel good about our ability to capitalize on that as well. So from an expense perspective, we baked in those expenses as part of that guidance, obviously. We didn't fully bake in any real upside for 2026. And we do believe that we can get there. So if you had to break down that headwind, I would say that for the most part, it comes from the renewals, but, obviously, some of it is from the acquisitions themselves. Mike Cikos: Our next question is from Mike Cikos with Needham. Mike Cikos: Great. Thanks for taking the questions here, guys. And just, Guy, to be perfectly clear on the M&A assumptions. So you're not assuming any revenue or ARR contribution from Cyril or Slashneck even though both those products launched last year? And then I guess the follow-up, given some of the changes that were announced following Q3 with the 5% headcount reduction, and the downsized federal team, can you just help us think about your go-to-market organization today? What is the typical tenure of your sales rep? Have there been any changes to incentives as we enter the new year? Thank you. Guy Melamed: Absolutely. So, yeah, when you think about kind of the assumptions that we had for guidance for 2026, we didn't bake in any real top-line contribution from any of the acquisitions. That doesn't mean that we don't think we can generate activity and top-line growth from them. But our starting point assumed a real modest contribution from them and nothing major, but we do feel that there's a path there, and we're seeing good momentum in conversation with customers. Keep in mind, the INTERCEPT acquisition only closed in September. So it's a really short runway when we sit here today for a company that didn't have any material ARR, but we definitely see significant opportunity going forward. In terms of kind of the rep profile, I think that one of the things that is interesting going into 2026 is that with those acquisitions, we actually do have a near-marked budget that we can go and replace. Which does change and simplify some of the go-to-market for the sale of those Interceptor and the viral acquisition. And it's definitely something that we need to see how that progresses, but we feel very good with that path. And when you think about the comp plan for 2026, and I want to touch on the 2025 comp plan. I know many of the investors asked us a lot about it throughout the year. But in 2025, reps had a lot of ways to make money. They could sell to new customers. They sell to existing customers. And they could make money from the conversion. In 2026, they cannot retire quota on the conversions themselves. So their way to make money is by selling to new customers and by selling to existing customers. And I want to put another caveat in. They can make money by selling to both. But they have absolutely no way of making big money if they don't sell to new customers. So there is a threshold from a new customer perspective for them to sell. And we believe that as we have gone through the non-SaaS ARR and got to 86% and can go back to focusing on new customers and existing customer sales and don't need to have the reps cannibalize their time by focusing on the conversion, that actually opens up their ability to increase their productivity levels. And that's the way the comp plan was structured. With no ability for them to make money towards their quarter retirement on the conversion side. Rudy Kessinger: Our next question is from Rudy Kessinger with D. A. Davidson. Rudy Kessinger: Hey. Great. Thanks for sneaking in here. So, Guy, actually, I again, as everybody on this call said, appreciate the new disclosure here. I actually want to dig into the SaaS net new ARR guidance, excluding the conversions midpoint of about $121.5 million. I certainly hear your comments about, you know, reps were really bogged down and tied up with conversions last year, and yet you still did about $110 million of net new SaaS ARR excluding those conversions. And so if I consider the reps being much more freed up to really focus on SaaS expansion, new logos this year, $121.5 million actually to me seems, you know, pretty conservative and or lower than it should be if I assume you maintain at least a 110% SaaS net retention rate. So could you just maybe take it a step further? Like, what are the assumptions in that $121 million figure around new logo contribution, net retention rate, etcetera? And just how conservative are those assumptions? Guy Melamed: So you're absolutely right. We are guiding in a conservative way as a starting point for the year. And you're absolutely right that if you look at the net new SaaS ARR excluding conversions being at $109.5 million, but also accounting for approximately $190 million of conversion ARR, when you don't have that component, the conversion side, then you can go and sell to new customers and existing customers in a better way. So I agree with your statements, and I think that we fully understand what we need to do in order to execute and grow this business in the way that we believe we can grow the business. Sitting here today, we feel very comfortable with the guidance that we provided. And know what we need to do in order to execute and improve it throughout the year. But the assumptions from an NRR perspective is that we actually can do better. There's a lot for us to sell. Going back to the base. And we think that we're selling to new customers, freeing that time that was cannibalized by our reps, they can actually go to many more new customers and sell to them as well. So I agree with your statement. And that is our starting point for 2026. Yakov Faitelson: If you look at the offering today versus just a year ago, we, you know, doubled the platform in terms of value. The focus needs to be not on the conversions to create value and make sure that the data of our customers is protected in an automated way. This is our mission, and this is what we are going to do. Joseph Gallo: Our next question is from Joseph Gallo with Jefferies. Joseph Gallo: Hey, Really appreciate the question and thanks for all the extra disclosures. Guy, can you just help me understand a little bit more the end-of-life headwind to free cash flow? I mean, your billings and ARR were really strong in 4Q. You're still guiding for ARR to grow in calendar '26. So I'd imagine billings and bookings are growing. So just is there something different with the cash collections? And then just any more that you can kind of quantify on, you know, what the benefit for not having to support on-premise can be? Is that a few points to margin? And is that a '26 story or '27? Thank you. Guy Melamed: So, Joe, I actually think that the free cash flow headwind is a much simpler story than anything else, honestly. When you think if you took the renewal rate, the historical renewal rate of the business, and baked it into the non-SaaS ARR, that is the delta. That is the headwind. And we're obviously not getting the same oh, at least the assumption is that we won't be getting the non-SaaS ARR at the same renewal rate historical level, a, because we didn't see that in Q3, and, b, although Q4 renewal rates they were still below historical levels for the non-SaaS business were better than Q3. And I think the end-of-life actually helped us get a lot of the customers converted, and the expectation is that the end-of-life announcement will actually help us get a lot of our customers converted in 2026. But as you can see, that $50 to $75 million range from approximately $105 million denominator is not over 90% renewal. And I think it's a much simpler math, and I know we're getting a lot of questions on it. But to me, it's a pretty straightforward calculation in terms of the headwind itself. So when I look at the actual kind of profitability profile for us as an organization, nothing really has changed. We're not changing kind of the philosophy of investment. We're not trying to invest more in order to generate a lower top-line growth rate. If you look at the trajectory from an ARR contribution margin perspective, and you bake in the additional kind of loss on the headwind from the non-SaaS component, you would see that we would continue to grow at the same historical level. But the announcement of the end-of-life and I said this before, and I probably want to reemphasize this. The announcement of the end-of-life actually helped us in three ways. One is generating that sense of urgency for customers to convert. The second one and I think this is actually important to note, if we would have kept the on-prem subscription going forward, and we would have had a renewal rate that is historically lower than or lower than our historical levels, then the growth rate would have been masked. The total growth rate would have been masked by that component versus a really strong SaaS business. And that's why we spent so much time on breaking out the SaaS excluding conversions and putting the conversions as a separate bucket. Because that allows investors and analysts to actually see the two companies that Varonis Systems, Inc. is right now, the forward-looking and the rearview mirror, which is that conversion component. And, yes, we believe that announcing that end-of-life going to 2027 and beyond can actually generate benefits on the bottom line on savings, and that's why we feel confident with our 2027 model. Junaid Siddiqui: Our next question is from Junaid Siddiqui with Truist. Junaid Siddiqui: Great. Thank you for taking my question. You've talked about MDDR having software-like gross margins over time. As it becomes a material contributor to your business, how do you envision gross margins? Do you anticipate any changes from the range that in that high seventies, low eighties? Guy Melamed: No. We don't expect any material change there. The MDDR has been very well received by both our customers and our sales force. And has been adopted very well. Keep in mind, we only introduced it in 2024, and it's been in a very positive way. We still believe that every single customer should have MDDR. It's going to take time, but we're definitely feeling very good about the path that we have taken so far and what is lying ahead with MDDR as well. Yakov Faitelson: But, also, it's very important to understand that the MDDR is really an AI-based offering. It's just a genetic offering in most of the alerts are being reviewed and closed by the AI agents, the robot. And this is the beauty of it. Operator: Thank you. There are no more questions at this time. I'd like to turn the floor back over to Tim Perz for any closing remarks. Tim Perz: Thanks, everybody, for the interest in Varonis Systems, Inc. We look forward to meeting with you all later this quarter. Goodbye. Operator: This concludes today's conference. You may disconnect your lines at this time. Thank you again for your participation.
Operator: Ladies and gentlemen, thank you for standing by. My name is Crista, and I will be your conference operator today. At this time, I would like to welcome you to the Jacobs Solutions Inc. Fiscal First Quarter 2026 Earnings Conference Call and Webcast. 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 at that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star 1. Thank you. I would now like to turn the call over to Bert Subin, Vice President, Investor Relations. Bert? You may begin. Bert Subin: Thank you, Krista, and welcome, everyone. Following market close, we issued our earnings announcement, filed our Form 10-Q, and we have posted a slide presentation on our website we'll reference during the call. I would like to refer you to slide two of the presentation for information about our forward-looking statements, non-GAAP financial measures, and operating metrics. Now let's turn to the agenda on Slide three. Speaking on today's call will be Jacobs Solutions Inc.'s chair and CEO, Bob Pragada, and CFO, Venkatesh R. Nathamuni. Bob will begin by providing comments on the business, as well as highlights from our first quarter results and a recap of notable awards. Venk will then provide a detailed review of our financial performance, including commentary on end market trends, cash flow, and balance sheet data. Finally, Bob will provide closing remarks, and then we'll open up the call for questions. With that, I'll turn it over to our chair and CEO, Bob Pragada. Bob Pragada: Good afternoon, everyone, and thank you for joining us to discuss our first quarter 2026 business performance. We delivered very strong results for Q1, exceeding our expectations across all key metrics and made incremental progress toward achieving our FY 2029 targets. I'll quickly highlight a few key takeaways. First, adjusted EPS grew 15% to $1.53, supported by robust 8% net revenue growth and solid underlying margin performance. Second, our backlog grew 21% to over $26 billion, setting a new record, with our trailing twelve-month book-to-bill rising to 1.4 times. And third, we announced an agreement with the shareholders of PA Consulting to acquire the remaining stake in the company. We see PA's core competencies in digital consulting, innovation, and AI advisory as a force multiplier for Jacobs Solutions Inc. and a key accelerant in our strategy to redefine the asset life cycle. In summary, we are exiting Q1 with momentum, and the strong start to the year gives us confidence to increase our FY 2026 outlook for net revenue, adjusted EPS, and free cash flow margin, which Venk will go through in detail shortly. Turning to slide four, we provide a detailed overview of our quarterly results. We are very pleased with Q1 results as a strong operating performance paired with our lower share count drove the fourth straight quarter of double-digit growth in adjusted EPS. We also reported a substantial increase in our quarterly book-to-bill during Q1, to 2.0 times, positioning us well for the rest of FY 2026 and beyond. Turning to Slide five, I'd like to highlight a few notable INAF project awards for the first quarter. Q1 included several marquee wins that reflect the breadth of our capabilities and the strength of our demand across our end markets. Starting with water and environmental, we were selected to lead the engineering design for the Bolivar Roads Gate System along the Texas Gulf Coast. Spanning the narrow strait connecting The Gulf to Galveston Bay, this project is expected to be among the largest storm surge barriers in the world. Once completed, it will help protect more than 6 million people while safeguarding businesses and maintaining operations along the Houston Ship Channel, a critical energy corridor. This major program underscores our leadership in delivering complex and high-impact water infrastructure focused on long-term resilience. In life sciences and advanced manufacturing, we were selected to provide engineering, procurement, and program management services for Hut 8 Riverbend data center in Louisiana, a flagship AI high-performance computing project. The facility is poised to be one of the largest of its kind in North America. The region's power-dense utility infrastructure enables the speed, reliability, and flexibility required for next-generation AI workloads. This project demonstrates how we're leveraging our deep domain expertise in data centers, power, water, and digital twin technology to deliver increasingly complex facilities. In critical infrastructure, we continue to secure high-value mission-critical programs that underscore the strength of our combined Jacobs Solutions Inc. and PA Consulting capabilities. Notably, in the UK, the health security agency selected PA, supported by Jacobs Solutions Inc., to act as a delivery partner in its trust program, an initiative focused on strengthening resilience and safeguarding critical health data and infrastructure. Through advisory, technical, and delivery support, we'll help the agency meet data security and cyber requirements, ensuring the systems that underpin public health and emergency response remain resilient and secure. This award reflects the growing demand for our integrated consulting and delivery approach and reinforces our role in supporting some of the UK government's most critical priorities. Also within critical infrastructure, we were selected to lead program and construction management services for the $1.6 billion modernization of Cleveland Hopkins International Airport. The program will modernize aging infrastructure and improve accessibility and passenger flow at Ohio's busiest airport. Jacobs Solutions Inc. is ranked as Engineering News Record's number one firm in aviation, a sector where we continue to see significant growth in demand for terminal upgrades, master planning for new builds, digital implementation, and AI advisory. In summary, we are deepening our relationship with key clients, which is driving multifaceted, multiyear program wins as demonstrated by our significant backlog growth in the quarter. Now I'll turn the call over to Venk to review our financial results in further detail. Venkatesh R. Nathamuni: Thank you, Bob, and good afternoon, everyone. I'd like to echo Bob's earlier comments on our announcement to acquire the remaining stake in PA Consulting. Our partnership over the last five years has truly differentiated our approach to our clients' business, and we look forward to accelerating the integration of our combined offering. A year ago at our Investor Day, we talked about the power of focus, and increasing our ownership in PA Consulting to 100% will support our goal to simplify our structure, execute on our strategy, and produce predictable high-quality earnings over the long term. Now please turn to slide number six where I'll walk through our results for Q1. In the first quarter, gross revenue increased 12% year over year, and adjusted net revenue, which excludes pass-through revenue, grew by more than 8%. Q1 adjusted EBITDA was $303 million, growing more than 7% with our margin coming in about 13.4%. We absorbed less PTO than anticipated last year during Q1, resulting in a margin tailwind that did not recur this year. Overall, adjusted EPS rose 15% year over year, a great start to fiscal year 2026. Consolidated backlog was up 21% year over year to a record $26.3 billion, with our trailing twelve-month book-to-bill rising to 1.4 times. Book-to-bill was particularly strong in Q1, driven in part by several large awards in the life sciences and advanced manufacturing end market. We expect these awards to contribute positively to net revenue growth through fiscal year 2026 and beyond, but do note that they carry higher than normal pass-through revenue. Importantly, gross profit in backlog, which would not be impacted by this pass-through dynamic, highlighting the underlying strength of our sales performance, increased 15% year over year during Q1. Regarding our performance by end market, and infrastructure and advanced facilities, let's now turn to slide number seven. At a high level, all of our end markets performed well during the quarter, with strong revenue growth in life sciences and advanced manufacturing and critical infrastructure within INAF, as well as a forecast for enterprise net revenue growth. Focusing in on life sciences and advanced manufacturing, net revenue grew 10% in Q1, a nice improvement from Q4 as programs in our advanced manufacturing vertical ramp up. As we have noted in past quarters, strong award activity in both the data center and semiconductor sectors is now helping drive higher growth. Additionally, we continue to see favorable trends in life sciences, and this combination positions us well for the remainder of the year. Our current expectation is that growth in this end market will lead INAF in fiscal year 2026 as programs ramp up during the second half of the year. Shifting now to critical infrastructure, net revenue increased 8% over Q1 2025. Critical infrastructure is performing well across the board, with robust growth in transportation, particularly in rail and aviation, driving strong overall growth for the end market. Net revenue growth in our water and environmental end market increased sequentially to 4%, driven by high single-digit growth in water and a modest easing of headwinds in environmental. We forecast year-on-year performance for environmental will improve as we move into the second half of the fiscal year. In summary, we performed well across our end markets during Q1, and we believe we are positioned nicely for the remainder of fiscal year 2026 and beyond. Now moving on to slide number eight, I'll provide a brief overview of our segment financials. In Q1, INAF operating profit increased modestly year on year, with similar constant currency performance. PA Consulting operating profit increased 27% on 16% revenue growth and a strong operating margin of 24%. On a constant currency basis, operating profit grew 22%. PA continues to benefit from rising demand for digital consulting and advisory services in the public, national security, and energy sectors. As we look ahead, expect PA's revenue growth to remain solid with fiscal year 2026 tracking in the high single-digit range year on year. Moving on to slide nine, we provide an overview of cash generation and our balance sheet. For Q1, free cash flow came in at $365 million, supported by solid working capital performance, as well as a favorable cash timing item at the end of the quarter. Excluding this timing item, that will reverse in Q2, underlying free cash flow performance was still very strong and gives us confidence to raise our full-year free cash flow outlook, which I'll discuss shortly. Focusing in on capital returns, we increased our share repurchase quantum during Q1 to take advantage of the dislocation in our shares in the second half of the quarter. As a result, we're starting the year well on our way to returning at least 60% of our free cash flow to shareholders. Bob Pragada: Additionally, Venkatesh R. Nathamuni: we announced last week that we will be raising our quarterly dividend from 32¢ to 36¢ a share, a 12.5% increase. We have now more than doubled our quarterly dividend per share since 2019. Additionally, our net leverage ratio currently stands just below 0.8 times on LTM adjusted EBITDA, which is well below our 1.0 to 1.5 times target range. Our balance sheet strength has enabled us to increase share repurchases, raise our quarterly dividend, and enter into an agreement to purchase the remaining stake in PA Consulting. The acquisition of the remaining stake in PA will raise our net leverage to slightly above the high end of our 1.0 to 1.5 times target range upon closing, but we expect to return to the target range within a year. Finally, please turn to slide number 10 for our updated fiscal year 2026 outlook. Increasing our forecast adjusted net revenue growth, adjusted EPS growth, Bert Subin: and free cash flow margin Venkatesh R. Nathamuni: relative to our guidance from last quarter. We're increasing our fiscal year 2026 net revenue range to 6.5% to 10% year over year, adjusted EPS range to $6.95 to $7.30, and free cash flow margin range to 7% to 8.5%. Our expectation remains unchanged for an adjusted EBITDA margin range of 14.4% to 14.7%. Notably, our outlook for fiscal year 2026 implies over 16% year-on-year growth in adjusted EPS at the midpoint. We provide relevant assumptions on the right side of the page to help with your modeling. Please note that our guidance does not reflect the announced acquisition of the remaining stake in PA Consulting, and we plan to update our outlook once the deal closes, likely with our Q2 results in May. Based on current assumptions, we expect the acquisition to be accretive to adjusted EPS in the first twelve months following closing. We anticipate the $16 million to $20 million projected cost synergies will begin to phase in during fiscal year 2026, with revenue synergies providing incremental upside. As it pertains to Q2, we expect our adjusted EBITDA margin to be in the range of 13.8% to 14% with year-over-year net revenue growth of approximately 6.5%. In summary, we're off to a great start in fiscal year 2026, and remain focused on strong execution, profitable growth, and continued capital returns. With that, I'll turn the call back over to Bob. Bob Pragada: Thank you, Venk. In closing, we're tracking very well to the start of the new fiscal year. We performed ahead of our expectations in Q1, enabling us to increase our full-year outlook across three key metrics after just one quarter. Our strong execution, secular growth tailwinds, and the announced acquisition of the remaining stake in PA Consulting position us extremely well to deliver on our FY 2029 targets. Operator, we will now open the call for questions. Operator: Thank you. We also ask that you limit yourself to one question and one follow-up. For any additional questions, please re-queue. And your first question comes from the line of Sabahat Khan with RBC Capital Markets. Please go ahead. Sabahat Khan: Great. Thanks, and good afternoon. Maybe just the higher-level question on sort of the outlook here. And obviously, this last calendar quarter to end the year had some concerns about a government shutdown. Doesn't seem to have flown into your numbers. Similarly, obviously, some puts and takes on the macro. If you can just walk us through kind of what's reflected in your guidance, what it would take to get to sort of closer to that higher end of the top line guide versus the lower end, and how you have sort of baked in some of the potential green shoots and potential sort of government-related considerations into this updated guidance? Just start off? Thanks. Bob Pragada: Yeah. Sure. Savi, just on your first one with regards to kinda how we position ourselves within that revenue range that we talked about. I'd say it would be the burn profile of the backlog. We had some really nice wins within our life sciences and advanced manufacturing group driven by data centers and chip manufacturing. Those tend to have pretty high velocity to them. And so, you know, if those continue to go at the pace that they are, that would be a driver. And we're also seeing a nice tick up across the international business. An international business that grew over 9% this year, and that was pretty broad-based. In Europe, Middle East, as well as in APAC. And so I think that balance of our business and, you know, not feeling the effects of the government shutdown has given us confidence in the range that we put out there. But, again, it'd be the velocity of that private sector work that would get us to the higher range. Sabahat Khan: Great. And then just for my follow-up, I think I was Venk's comment around the environmental services side of the business doing better in H2. That was a business that investors had some questions about last year just given some of the evolutions and sort of the backdrop. Nice to hear that's trending in the right direction. Can you maybe just talk about is it a specific end market that's driving that? Is it just maybe some, you know, catch up in that? We're just con kind of bigger picture demand drivers of the environmental services business because it's been a bit of a focus for investors. Thanks, and I'll pass the line. Bob Pragada: Yeah. Yep. So I kinda I would segregate it into three buckets of how it affected us over the course of calendar '25, and now we're starting to see a bit of an inflection point in our pipeline. That's why we're pointed to the second half as a recovery. The government component of that for us is very centric towards US Department of Defense. And now we're starting to see some larger programs specifically for the Navy and the Army Corps of Engineers come through with some optimism on where we're positioned, longtime clients of ours. And so that's kinda one piece. The second piece that and that was had some of the indirect effects of dose if you think back to 2025. So now we're seeing that flow through. The second is around this transfer around the disaster relief work from the federal government to state and local. That has taken a longer time to settle down. And so as that continues to play out, we're starting to see some early indications of that in our pipeline. And then the third is, in this we have seen a pickup in this component is the private sector, and this is kind of the diversity of how we apply our environmental practitioners across our private sector in whether it be industrial or in life sciences and advanced manufacturing those jobs have started to pick up. Now they're smaller in scale. So they're not having an effect right now. But as that continues to grow, and we're seeing it again in our pipeline, and that pipeline is up double digits, so that's where we're kinda pointing to the second half. Operator: Your next question comes from the line of Michael Dudas with Vertical Research Partners. Please go ahead. Michael Dudas: Good afternoon, gentlemen. Mike, good afternoon. Very impressive certainly on the book-to-bill. Sure. Seems like the projects are Operator: Pardon the interruption. Michael, we are having a hard time hearing you. Michael Dudas: Can you hear me now? Bert Subin: Yep. Got you now, Mike. Michael Dudas: Okay. Thank you very much. So my bad. Bob, on very impressive on the book-to-bill backlog growth in Q1. Maybe you could share on the it looks like the projects are getting larger, a little longer for gestation, but much more complex. And how that plays towards what your current pipeline looks, maybe that two-year pipeline outlook. And the ability to gain more, I guess, life cycle revenues or business out of the bidding that you're working on with the negotiation with these larger projects, which the clients that are certainly we've been reading about in the press that seem to be accelerating their cap spend in your especially in your important private sector markets. Bob Pragada: Yeah. Thanks, Mike. I'd say maybe one comment on the overall portfolio, and then I'll talk specifically about what we're seeing in the private sector accelerate at a faster pace. Overall, this is always in our strategy. We talked about it. You know, we talked about it at investor day with regards to redefining the asset life cycle and continuing to work across that. That is happening on a broad base. I'd say that gestation period of the work probably is going faster within water. Little longer in transportation and energy and power, but we're moving at pace. Private sector is happening in real time. And a lot of it is for just the demand cycle that's happening in those end markets, whether it be data centers, chip manufacturing, and life sciences. So for us, that business is in growth mode. We are seeing the pipeline grow at some significant rates. I'd say that two-year pipeline that you're referencing one year, it's greater than 50%. If I were to have a composite rate. And as you get past that period, private sector, we don't really get past eighteen months with any kind of high level of a surety and pipeline, but that twelve to eighteen months definitely greater than 50% on a composite rate. Michael Dudas: I appreciate that. Excellent, Bob. And my follow-up for Venk, you know, the very strong Q1 start on cash flow and the dynamics throughout the year, so given the financing that you're participating on PA and such, the 60% free cash off the company is still targeted towards, again, the share repurchase on a more ratable basis. You feel still comfortably to delever and add opportunistically when the market requires on your cap allocation in this year? Venkatesh R. Nathamuni: Yeah, Mike. Thanks for the question. And as you pointed out, you pretty strong start to the year in terms of free cash flow generation. And we feel pretty good about where we end the year, which is why we raised the guidance. So as it relates to our current position is in terms of repurchases, obviously, we to take advantage of the market dislocation as I mentioned in the script. Increased our repurchases in Q1. But we also increased our dividend. So we feel very good about our commitment to returning 60% plus of free cash flow to shareholders. At the same time, with a solid balance sheet and the good cash flow that we're generating, we also wanna quickly delever from the one to 1.5 x range. When we do the PA financing, we'll we have good line of sight to be able to get to that range within the first four quarters. So a solid cash position to start with, really good cash flow, and we have enough firepower to allocate our capital between repurchases as well as debt pay down. Michael Dudas: Thanks, gentlemen. Bob Pragada: Thank you. Operator: Your next question comes from the line of Sangita Jain with KeyBanc Capital Markets. Please go ahead. Thank you. Good afternoon. Thanks for taking my questions. Sangita Jain: If I can follow-up on the cash flow question, Venk, you said cash flow in the quarter was quite high, but some of it may reverse in the second quarter. Could you elaborate on what that reversal relates to? And, also, I was under the impression there was gonna be some cash tax payments that you would have to take care of in the first half. Has the timing of that changed? Venkatesh R. Nathamuni: Yeah. So, yeah, thanks for the question. So as you pointed out, you know, a really good cash flow in the first fiscal quarter, I would say the vast majority of that strong cash flow was driven by really fantastic working capital performance across the entirety of our customer base. So that was number one. We also had a onetime, you know, impact from a customer in the data center space, you know, where we collect the revenue and the cash during a particular quarter. And then we pay the subcontractor in subsequent quarters. So that's what's gonna drive the free cash flow performance in Q2. But we have a very good visibility that, you know, in the first half, we'll still be free cash flow positive. And the tax payment, as you mentioned, is gonna be a Q2 phenomenon. That'll impact Q2. But when you look at first half and first couple of quarters, in aggregate, we feel pretty good about our free cash flow being positive for the six months of the year and, obviously, continued strength in Q3 and Q4. Such that we're able to get to the seven to eight and a half percent range. Sangita Jain: Got it. Thank you. Appreciate that. And then as a follow-up, can I ask about the size of fee contract that you press released a while back in the UK? And if you can elaborate on the size of that and if there is further scope if there's a chance that the scope on that may increase over time. Bob Pragada: It could. We're doing just to clarify on that, Sangita, we're performing the enabling works and the program management around the enabling works. And so that has continued through '24 actually, it started even before '25. '24, '25, and we'll continue into '26. There is for continued scope growth on that, and our relationship there with sizable c is strong. So we would anticipate so. Sangita Jain: Got it. Thank you so much. Operator: Your next question comes from the line of Steven Fisher with UBS. Please go ahead. Steven Fisher: Just in light of the backlog growth, obviously, we know from some of the press releases, descriptions of what scope is on some of these projects, but just curious what some of the pass-through things are that are going through there. And maybe if you can give us maybe a sense of maybe looking at the profit increase in backlog might be more representative. I know you said 15% year over year. Curious if you can give us some measure of that sequentially. Bob Pragada: Yeah. Let me go I'll go back to the sequential gross profit in backlog. But I'd say that see, the majority of the pass-through is related to, as you know, in a data center, tremendous amount of electrical equipment and equipment purchase that will be and it was announced on who's gonna be providing that equipment in modular form. So the interconnects and how that equipment is arriving to site in modular form would all be around the envelope of a pass-through. We would do the design and not just that, but also the balance of plant to house as well as the interconnections of all the utilities. The trade contractors also end up making that pass-through too. And traditionally, we put a fee on both of those. On the gross profit sequentially, growth, say it's high single digits sequentially quarter to quarter, year on year, that 15% number is a strong number. Steven Fisher: Okay. Very helpful, Bob. And then just obviously, last quarter, and last few months, there's been lots of discussions and follow-ups about AI, and I'm just curious if there's been any change to either what you've observed in your own business, anything that has developed or your own thinking or message that you'd like to give on sort of the AI outlook and impact for the industry and the company? Bob Pragada: Yeah. Absolutely, Steve. Nothing has changed. We felt strongly about AI before the November event. That happened, and we feel equally and more strong about AI moving forward. Kinda the main things we've been about, not just in Q1, I'm sorry. For the Q4 call in Q1 and that we've been talking about since 09/02/2019. We are getting great data advantage in what we do. Our datasets and our information are continue to be strong, strong platforms for us to use as for insights as well as build the models that we're building for our clients. It is helping I say it, digital enablement and AI with the scarcity of resources that we are continuing to face. We are growing headcount while we're using digital enablement to continue to grow at the same time of that scarcity. And I'd say the biggest piece has really been around you know, what's happening in the AI ecosystem from chip manufacturing to power and water requirements all the way to the data center, you know, we're playing across that continuum. And seeing that we well, we're seeing it in the numbers. Right? So kind of the ultimate test of the power of AI is coming through in our bottom line results. Steven Fisher: Terrific. Thanks, Bob. Operator: Your next question comes from the line of Adam Bubes with Goldman Sachs. Please go ahead. Adam Bubes: Hi, good afternoon. Maybe just one follow-up on the AI point. So you've been talking about AI machine learning for a couple of years now. So, just wondering if you could expand on to what extent AI machine learning is impacting projects and productivity today and just how those conversations with clients have gone in terms of your ability to capture value from either improved productivity or high grading your offerings? Bob Pragada: Yeah. So a couple of things. One, as far as how we're talking to our clients about it and how we are driving it as a value differentiator for our clients, if you think about the speed right now that we are going at especially just in the private sector, but also in the water market as well. And transportation. The schedules and the delivery model for these can't be done without the use of the AI platforms. When I say AI, machine learning, the automation of tasks that we put into play. So it is driving backlog growth through differentiation in us in our award rates and the bookings. The other is that in the field, we're using some strong predictive analytics. It's a platform called Acuity in order to really get out in front of field level issues that are coming up in real time. And that's been a real game changer for us. We've got Acuity deployed across all of our end markets. In the field program management work that we do. And then the last thing and we've talked about this several times, but we're seeing more you know, we use replicas, our digital twinning. But now digital twinning not just in the water sector, but now in the manufacturing sector, and the data center sector is allowing for us to get to the data insights in the simulation technologies. Well, with the simulation technologies in a much faster rate in order to solve for some really, really complex issues that we're solving for our clients. So overall, it's coming through. We've got a whole slew and suite of platforms that we're using. Adam Bubes: And then a really strong PA consulting margin performance, I think 24% this quarter. Any outsized benefit to call out there, or what's the right way to think about sustainability of those margins in the balance of the year? Venkatesh R. Nathamuni: Yeah, Adam. Great questions. I would say, yeah, as you point out, really strong performance. I know most of it is driven by the fact that, you know, there's solid top line beat, and we had some operating leverage there as well. What we have stated all along is that we wanna balance, you know, really high single-digit growth for PA with margins that are, as you know, already industry best. So a 22% margin is kind of the way we think about the long-term model there, and we wanna make sure that we have a good balance between high revenue growth and high industry-leading margins. So the way to model the PA margins going forward is about 22%. But, clearly, we had a really strong performance there in the just concluded quarter. Adam Bubes: Great. Thanks so much. Venkatesh R. Nathamuni: Welcome. Operator: Your next question comes from the line of Jamie Cook with Truist Securities. Please go ahead. Jamie Cook: Hi. Congratulations on a nice quarter. I guess, sorry, Bob, another on AI. Just as you sit here today, and think about AI and the opportunity for Jacobs Solutions Inc. both on the revenue on the margin side, how do you balance the two know what I mean? I mean, over time, do you if you had to pick one versus the other, do you think there's an opportunity to grow the top line at a quicker rate and perhaps operating profit more so versus the margin, just sort of how you're thinking about that balance as AI impacts your business model. I guess it's my first question, and then I'll then I'll ask another one after that. Bob Pragada: Okay. Great. Jamie, if the world was plentiful with qualified resources for all the work that's out there, from, you know, filling the denominator of the TAMs that we play in. I think that, you know, we would probably be making choices between top line and bottom line. We're not. We are in a resource-constrained market that AI is enabling us to grow the top line, while we're operating with, you know, in a resource-constrained environment and driving efficiencies in the type of solution that we're delivering to our clients. So not a choice as well as not a pivot. We feel like we're well-positioned to do both. Jamie Cook: Okay. Thank you. And then, I guess, Venk, just on the margin performance in I and AF in the back half of the year. Obviously, we're expecting some margin improvement to achieve besides PA Consulting strong margins to help get to your full-year adjusted EBITDA margin forecast? Just what's driving that? Is it more mix? Is it self-help? Just trying to understand what's driving the margin improvement in I and AF in the back half of the year. Thank you. Venkatesh R. Nathamuni: Yes. Jamie, thanks for your question, and thanks for your comments as well about the quarter. I'd say, you know, lots of really positive trends for us from a margin perspective. You know, obviously, Q1, you know, we came in at 13.4%. And Q2, we're guiding for a 50 basis point sequential improvement. And then we see a linear progression in Q3 and Q4. So few things, you know, that drive that margin expansion for us. Number one, you know, continued operating leverage. So gonna maintain the discipline in terms of ensuring that our OpEx grows at a slower pace than revenue growth. And then, you know, clearly from the standpoint of some of the gross margin drivers that we talked about Investor Day, with the way we expect our global delivery to step up, which is already happening, and we see more of that coming in Q2, Q3, and Q4. And then also on the commercial model side. Right? So with the extent to the extent that we are engaging more with the life sciences and advanced manufacturing clients, that also helps, you know, from the standpoint of driving those commercial models. So I'd say it's not one thing. It's a combination of several things that we talked about in Investor Day, more of that coming to fruition in Q3 in Q2, Q3, and Q4, and we feel really good about our margin performance for the full year. Obviously, you know, just for context, you know, in fiscal 2025, we grew our margins by 110 basis points. And we're guiding for a range of 50 to 80 basis points increase in fiscal 2026. Bob Pragada: Maybe one add to that is that in the second half, is really where we're starting to see the advanced facilities or some of these bookings that we have from a mix perspective. Have contribution to that linear progression in our margins. Jamie Cook: And confidence. Operator: Thank you. That's very helpful. Your next question comes from the line of Andy Wittmann with Baird. Please go ahead. Andy Wittmann: Great. Thanks for taking my questions, guys. I wanted to ask about this very good backlog. Very exciting. Obviously, some of these really marquee projects, Bob, I thought maybe given that there's a little bit more mix here to some of this EPCM scope, I'd wanna ask about how you're managing the risk criteria here. Are these contracts are you basically able to offload any risk to these to the subcontractors that you are managing on this? Or do you bear any? I'm just wondering because obviously, some of these projects are pretty significant and you know, percent changes on large numbers can actually kinda matter in the future. So maybe I'll let you address that, please. Bob Pragada: Yeah. Absolutely. So our risk profile, Andy, has not changed. And so the same EPCM delivery model that we, you know, that we've been very focused in for the balance of twenty years. In life sciences. We do a lot in the water sector as well. Those are the same risk profiles we're taking now. And as you know, we've been pretty consistent on how we flow those to our supply chain. So the awards that we're getting right now, we have not inflected to a different risk profile. Utilizing the same risk profile we have for the balance of the twenty years in those sectors. Andy Wittmann: Okay. Great. And then I just wanted to get a clarification. On PA and the capital deployment that went along with that as well. You know, it's obviously a large capital deployment. So when I was looking at the press release, the EBITDA increase that you're getting from PA is because PA is already consolidated, the EBITDA that you're picking up is really only the reduction of the noncontrolling interest. Obviously, noncontrolling interest is after tax. You'd have to gross that $52.3 million up to a larger number. But even when you do that, against the $1.6 billion capital outlay, the math that I get here from the multiple is substantially larger than the 13 times. And so I know there's some kind of different accounting GAAP accounting that's maybe around this, and I just thought for to the benefit of everybody, you could address, how that works and why it works out that way. Please. Venkatesh R. Nathamuni: Yeah. Andy, thanks for the question. And I know that we know, obviously, you mentioned that in your report as well. So at a high level, as you rightly pointed out, there's a slight difference between the accounting and economic ownership. Just for everybody's benefit here, you know, the economic ownership was 65% and the accounting ownership was 70. But there's obviously some dilution from what we call c shares, which are basically shares that the employees own. So, to make a long story short, you know, that the delta. But in terms of the absolute valuation, as we mentioned in the press release, you know, it's a 13 x multiple on EBITDA. And then if take into account the synergies, it's a 12.3 multiple. So we feel really good about the valuation for this and the value creation. But, you know, happy to take additional questions and maybe Bert, you can add to it as well. Happy to be Yeah. Sure. Andy, Bert Subin: you know, what is actually what's happening here is when you take the accounting ownership, which was 70% you reduce it by the employee benefit trust, we get down to 60% ownership. And so we acquired 40% of the stake, which we highlighted. On the NCI, what we did is we reduced EBITDA by an after-tax number, and so it reduced the EBITDA by a smaller amount. So essentially, you know, we'll be adding back that NCI component to our EBITDA going forward. I think the important takeaway that we, like, highlighted in his prepared remarks is you know, we expect this to be accretive to earnings and we see a lot of opportunity from both the revenue and cost synergy with the collab with the combination of PA and Jacobs Solutions Inc. So we can take some of the more specifics offline, you know, when we talk later on. Andy Wittmann: Okay. Thanks for clarifying that, guys. Bob Pragada: Yep. Operator: Your next question comes from the line of Chad Dillard with Bernstein. Please go ahead. Chad Dillard: Hey. Good evening, guys. So I wanted to spend some time on the project pipeline. I think you talked about it being up double digits. Could you break that down by the core end markets? And then you can comment about fixed versus reimbursable. And then finally, just on the global delivery model, you know, how much of that is deployed using that method versus what's in your revenue today? Bob Pragada: Yeah. Maybe I'll simplify it, Chad. If you look at our three main verticals, water and environmental, up the pipeline is up when I say double digits, pretty much double digits that are 25% and above. In life sciences and advanced manufacturing, double-digit pipeline growth. Those are 50% and up. And then our transfer and our critical infrastructure, we're talking kinda high single digits and low double digits pipeline growth. That's not acutely focused on the US. That's a global number. And so, you know, the pipeline is strong, and that's a twelve to eighteen-month pipeline that we look at. That you know, then there's win rates and everything else. But the markets that we're serving are in a really strong state right now. Chad Dillard: Gotcha. That's helpful. Then just maybe circling back on the AI topic. So how are you communicating to your customers the value creation from deploying AI? Like, in a particular project? Are you having explicit conversations about sharing that? Maybe just, like, talk about, you know, if you can even give, like, a particular example. That'd be very helpful. Bob Pragada: Yep. Well, in order to do that, you think you gotta go back and our client's issues right now, we're not solving for issues that were around or even contemplated five years ago, ten years ago, twenty years ago. And so how we're articulating this to our clients is not in the form of bots or agents or people being replaced with AI figures. How we're discussing it is the use of data, to get greater data insights to solve for complex issues and deliver outcomes at a faster, and more predictable rate. That's how we're describing it to our clients. And our clients are cocreating with us in the platforms that we develop. Kind of part one. The second where we go to market is around AI advisory. But we have whether it be in the aviation space, or it be in the transportation space, we've got, you know, a lot of our clients that want to understand how AI can enable their business even more. And so now with PA, we've now doubled the size of our AI, not just on the development side, but also AI consultancy. Component as well. And this is an AI consultancy just driving business transformation. This is AI consultancy on how they can effectively serve their client base even greater. So we've you know, the investment thesis around increasing our investment in PA coupled with how PA is growing in that space across all the end and then us going to market together is really creating an exciting story going forward. Chad Dillard: K. Thanks, Bob. Operator: Your next question comes from the line of Andy Kaplowitz with Citigroup. Please go ahead. Andy Kaplowitz: Hey. Good afternoon, everyone. Bob Pragada: Hi. Good afternoon. Andy Kaplowitz: Bob, I just wanna dig in on a couple of areas. I think historically, you guys have been very strong at semicon, particularly on the side. So what are you seeing in terms of investment there? Could we actually be in acceleration mode again? Like, seems like we are, but maybe any more detail there would be helpful. Bob Pragada: Absolutely. Short answer is yes. Yes, Andy. We are in acceleration mode. You know, there are three main players around the world. One is American. And in the advances in high bandwidth memory that the American provider is going to market with. At record pace. You know, to twenty years during the traditional DRAM cycle to advance nodes. That twenty years is now being shortened into two to three. And so to get the plant ready and delivering on those chips is a big deal. So they've made some announcements. In Idaho and New York, and we're squarely in the middle of those. Andy Kaplowitz: And then, Bob, like, just following up on the water vertical. I mean, I think you answered a question earlier about environmental. Water has been strong for you guys for a while. I get some questions occasionally about municipal spending, what eventually happens as IIJ starts to run down. So maybe you can talk about I think you've had good bookings here in water, but maybe you can talk about the longevity of the water infrastructure cycle as you see it. Bob Pragada: Yeah. It's high single digits for us right now and how it's flowing through, Andy. And so maybe I'd kinda divide it between US and international. Maybe start with the real positive. You know, the result of the AMP eight cycle in the UK is driving kind of double-digit growth for us in the water market. There in Europe, but we're also seeing strong tailwinds in The Middle East and in Australia. Australia has been a real highlight for us both in water and in transportation. You know, the municipal spending and the tie to IJ never really was a strong one. IHA really was focused heavily on transportation. And so that has continued. And, again, the whole water scarcity aged assets and just the sheer effects of climate. These aren't I'm not saying they're completely delinked from funding opportunities that states and locales have. But definitely have risen up on the priority list just because of the severity. So we see kind of a long-term tail on that. And, Andy, if you could add to this what Rob said, you know, there's been tremendous Venkatesh R. Nathamuni: strength in bookings in water over the last several quarters. I know we've highlighted some marquee wins that typically take multiple years to play out. So we see that pipeline continue to grow, and the visibility for a multiyear period, so we feel really good about our water market overall. Andy Kaplowitz: Appreciate the color, guys. Operator: Your next question comes from the line of Jerry Revich with Wells Fargo. Please go ahead. Jerry Revich: Hi. Good afternoon and good evening. Can I ask on Critical Infrastructure, really impressive performance relative to the end markets that you folks are clearly gaining share? Could you just double click for us in terms of the drivers of the share gains? Is it just part of the market where you folks have higher concentration? Have you been on the right projects moving forward? Can you just expand on the drivers of what looks to be about five, six points of end market outgrowth that you're delivering? Bob Pragada: Well, maybe I'd most succinctly talk about it in two main areas. Jerry. One is that our international business in transportation not that it has been strong, very strong. And that's been highlighted by really key wins that we've had in Europe, in The Middle East, and in Australia. Australia it's been real, really nice growth there as well. Aviation and rail. Has really been the strong drivers there. We still do a lot of work on the highways work. But those two have been really strong drivers. And then The US, you know, with continued growth in the aviation sector there, coupled with now some high-speed opportunities as well as pass-through rail. In locations. We've been capturing share gain in that area as well. So strong internationally, driven by aviation and rail and highways, strong in The US. Driven by aviation and rail. Jerry Revich: And, you know, if we could just pull on that market share thread, you know, into the AI theme you folks on the semi plant side with the use of digital twins have been able to allow your customer to deliver projects really quickly. Just it sounds like based on your comments earlier on the call, Bob, you see yourselves as gaining share in that type of environment. What's the outlook for the broader industry structure as you see it? Five years down the line, ten years down the line? Do companies that look like Jacobs Solutions Inc. can share companies like Jacobs Solutions Inc. do more EPCM type work? For an integrated solution like you're doing here on the data center example that you gave us. Can you just talk about how you see this all playing out for the industry as a whole? Because you know, you folks have been ahead of the pocket terms of your digital twin investments, etcetera. Bob Pragada: Yeah. So maybe and just to clarify, Jerry, you were talking specifically about semi, or were you talking kind of broader base across the you know, kind of the tech landscape? Jerry Revich: Yeah. Thank you, Bob. I was just talking across the broader tech landscape. Right? So in other words, you folks have clearly used digital tools and let the market have gained share. And I'm just want your perspective on where you see the industry headed in five years now that the tools are getting better and better. Bob Pragada: Got it. Got it. So I kind of talk about it from with our participation across the ecosystem. Of call it the electron landscape, everything from the chip at the semi side through power and water whether it be at the grid level or eventually goes into the data center. Our participation across that ecosystem, I think, has been a big differentiator. And so when I look out five years from now, you know, the partnership that we have with NVIDIA and the kind of the tech relationship down to the chip design. And how that affects utilities for these plants whether it be with any of the high bandwidth memory players or other traditional logic players. That's what's driving that out year growth. Because as these plants no plant is the same. As these plants are continuing to become more and more complicated, we're out in front. Of those. And you back all that up with design automation, AI tools in order to get greater data insights, and we're continuing to really end that digital twins like you said in I'm sorry, Jerry? Then your you know, that protective I don't know if I'm allowed to call it a mode, but I will. That mode starts to develop, and we go from there. So we're excited about where we're positioned. This is something we've been in for the better part of forty years, and we see that going forward for another forty. Jerry Revich: Thank you. Operator: And that concludes our question and answer session. I will now turn the conference back over to Bob Pragada for closing comments. Bob Pragada: Thank you, Krista. Thank you, everyone, for joining the earnings call. Some great questions. Really excited about the performance last quarter. And our performance for the balance of the year, and we look forward to engaging with many of you over the coming days and weeks. Everyone. Operator: Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation, and you may now disconnect.
Operator: Hello, and thank you for standing by. My name is Tiffany, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Q3 fiscal year 2026 quarterly earnings results 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 that time, simply press star, then the number one, on your telephone keypad. I would now like to turn the call over to Nicole Shevins, Senior Vice President of Investor Relations and Corporate Communication. Nicole, please go ahead. Nicole Shevins: Good afternoon. Thank you for joining our conference call to discuss our results for the 2026 ended December 31, 2025. Today's call will be led by Strauss Zelnick, Take-Two Interactive Software, Inc.'s Chairman and Chief Executive Officer, Karl Slatoff, our President, and Lainie Goldstein, our Chief Financial Officer. We will be available to answer your questions during the Q&A session following our prepared remarks. Before we begin, I'd like to remind everyone that statements made during this call that are not historical fact are considered forward-looking statements under federal securities laws. These forward-looking statements are based on the beliefs of our management as well as assumptions made by and information currently available to us. We have no obligation to update these forward-looking statements. Actual operating results may vary significantly from these forward-looking statements based on a variety of factors. These important factors are described in our filings with the SEC, including the company's most recent annual report on Form 10-Ks, quarterly report on Form 10-Q, including the risks summarized in the section entitled Risk Factors. I'd also like to note that unless otherwise stated, all numbers we will be discussing today are GAAP and all comparisons are year-over-year. Additional details regarding our actual results and outlook are contained in our press release, including the items that our management uses internally to adjust our GAAP financial results in order to evaluate our operating performance. Our press release also contains a reconciliation of any non-GAAP financial measure to the most comparable GAAP measure. In addition, we have posted to our website a slide deck that visually presents our results and financial outlook. Our press release and filings with the SEC can be obtained from our website at take2games.com. And now I'll turn the call over to Strauss. Strauss Zelnick: Thanks, Nicole. Good afternoon, and thank you for joining us today. I'm pleased to report that we delivered another outstanding quarter, including net bookings of $1.76 billion, which surpassed meaningfully the high end of our guidance. All of our labels outperformed substantially our expectations and contributed to our ongoing success. Due to our strong results and positive momentum that has continued in the current quarter, we're once again raising our outlook for the full fiscal year. We now expect net bookings to range from $6.65 billion to $7 billion, which represents 18% growth compared to fiscal 2025. At the midpoint, our revised net bookings forecast is approximately $725 million above the initial outlook we provided in May 2025, which reflects the creative passion, hard work, and consistent execution of our teams. Turning to highlights from the period, I'll begin with the fantastic performance of our mobile business. Peak's forever franchise, TuneBlast, grew 43% year-over-year and surpassed $3 billion in lifetime net bookings, an extraordinary achievement for a title that has been engaging players for more than eight years. The game continues to rank among our most valuable franchises, showcasing the long-term value of our match-three portfolio. Match Factory, another hit from Peak, grew approximately 17% over last year. The title remains a top contributor two years after its launch, affirming our strategy of building a diverse portfolio of games with vast global appeal. Color Block Jam remains Rolex's all-time top-performing title and was featured in Apple's 2025 free games list in the US, underscoring the title's success. Empires and Puzzles and Words With Friends grew 116%, respectively, over last year. Advertising revenues grew 10% over last year, driven by higher average revenue per daily active user, and we're highly confident in the future of this component of the business. 2K's mobile offerings also had another solid quarter, with WWE SuperCard surpassing 38 million lifetime downloads, NBA 2K's Mobile continuing to expand its audience, NBA 2K26 Arcade Edition holding its top five position on the Apple Arcade charts, and NBA 2K All-Star in China growing to nearly 9 million registered users after less than one year in the market. Mobile direct-to-consumer business delivered its strongest quarter on record. We've introduced recent enhancements that enable more personalized offers, flexible pricing, reduced payment friction, and alternative payment methods. With the regulatory environment becoming even more favorable to us, we view direct-to-consumer as a meaningful growth driver that will help accelerate net bookings, margins, and profitability. NBA 2K26 delivered another stellar quarter, yielding significant upside to our forecast. To date, the title has sold in approximately 8 million units, representing a high single-digit percentage increase over NBA 2K25. Recurrent consumer spending, daily active users, and MyCareer daily active users all grew 30% year-over-year. Based on its phenomenal year-to-date performance, NBA 2K is on track to generate the highest level of annual net bookings and recurrent consumer spending in franchise history. I'd like to thank the NBA and NBA Players Association for their extraordinary partnership and support. Grand Theft Auto series also vastly outpaced our forecast, with recurrent consumer spending growth of 27%, led by GTA Online's A Safe House in The Hills update, which featured long-awaited mansion properties and the return of the fan-favorite protagonist, Michael DeSanta. Full game sales of Grand Theft Auto V remain strong, with the title now having sold in over 225 million units since its launch in 2013. GTA Plus continues to thrive with membership levels nearly doubling over the same period last year, and we're excited about its potential to add even more value to the player experience in the future. In December, Rockstar Games expanded Red Dead Redemption and Undead Nightmare onto new platforms, bringing these classic blockbusters to PlayStation 5, Xbox Series X and S, Nintendo Switch 2, and iOS and Android mobile devices for Netflix subscribers. We're immensely proud of our teams and their ability to deliver consistently the highest quality and most engaging entertainment experiences. As we continue to explore and invest in new technologies, particularly AI, we'll unlock greater efficiencies that will allow our talent to focus on the kind of innovation that has enabled us continually to set new creative and commercial benchmarks in interactive entertainment. Our execution throughout fiscal 2026 has been extraordinary, and we're highly confident as we approach fiscal 2027, which promises to be groundbreaking for Take-Two Interactive Software, Inc. and the entire entertainment industry, led by the November 19 release of Grand Theft Auto VI with Rockstar's launch marketing set to begin this summer. With ongoing momentum in our business, coupled with our robust forward release schedule, we continue to project record levels of net bookings in fiscal 2027, which we believe will establish a higher financial baseline, set us on a path to enhanced profitability, and further provide balance sheet strength and flexibility. I'll now turn the call over to Karl. Karl Slatoff: Thanks, Strauss. I'd like to thank our teams for delivering another fantastic quarter, which reflects our world-class talent and the breadth and depth of our portfolio. I'll now discuss our recent and planned product offerings for the balance of fiscal 2026. On January 14, 2K and HP Studios announced an array of new content for PGA Tour 2K25, including three new courses for the 2026 major championships: the 2026 PGA Championship at Oraneman Golf Club, the 126th US Open at Shinnecock Hills Golf Club, and the 154th Open at Royal Brookdale Golf Club, with more to come, including new seasons. Additionally, we look forward to growing the community with the launch of PGA Tour 2K25 on Nintendo Switch 2 on Friday. Paroxys Games will continue to deliver a steady cadence of updates for Sid Meier's Civilization VII, and on Thursday, 2K will launch Civilization VII for mobile devices exclusively on Apple Arcade, representing an exciting opportunity to expand the Civilization audience. On March 13, 2K and Visual Concepts will once again raise the bar for a wrestling franchise with the release of WWE 2K26. Featuring the biggest roster in the series' history, players will be able to choose from over 400 legends and current superstars and enjoy new customization options throughout the game. We plan to support the release with a new ringside pass live service model and a series of add-on packs that can be purchased individually or together as part of the season pass. 2K and Gearbox Software will continue to support Borderlands 4 with new content and updates, and we expect the title to achieve strong sell-through over its lifetime. Zynga will continue to deliver new features and drive innovation across its live services, as well as pursue the development of new titles. Looking ahead, we believe strongly in our upcoming launches and will provide our initial three-year pipeline for fiscal 2027 through fiscal 2029 with our Q4 results in May. I'll now turn the call over to Lainie. Lainie Goldstein: Thanks, Karl, and good afternoon, everyone. Our third-quarter results were fantastic, with all of our labels delivering excellent results, and we are pleased to once again raise our outlook for the fiscal year. Many of our core franchises continue to thrive, and fiscal 2026 is on track to be one of our strongest years in recent history. I'd like to thank our teams for their vision, passion, and dedication. Turning to our performance, we delivered third-quarter net bookings of $1.76 billion, which was significantly above the high end of our guidance range of $1.55 billion to $1.6 billion. This reflected better-than-expected performance from NBA 2K, the Grand Theft Auto series, and several mobile titles, including TuneBlast, Empires and Puzzles, and Top Eleven. Recurring consumer spending rose 23% for the period, which strongly outperformed our guidance of 8% growth and accounted for 76% of net bookings. NBA 2K grew 30%, Grand Theft Auto Online increased 27%, and mobile increased 19%, all of which exceeded our expectations. During the quarter, we launched WWE 2K's Mobile for Netflix and Red Dead Redemption and Undead Nightmare for several new platforms. GAAP net revenue increased 25% to $1.7 billion. Cost of revenue increased 26% to $754 million, and operating expenses increased 10% to $984 million. On a management basis, operating expenses rose 13% year-over-year, which was in line with our guidance and represented significant operating expense leverage on our fantastic top-line growth. Turning to our guidance, I'll begin with our full fiscal year expectations. We are once again raising our net bookings outlook and now expect to achieve $6.65 billion to $6.7 billion, which represents 18% growth at the midpoint over fiscal 2025. The increase reflects our third-quarter outperformance and higher expectations for several of our key titles during the fourth quarter. The largest contributors to net bookings are expected to be NBA 2K, the Grand Theft Auto series, TuneBlast, Match Factory, Empires and Puzzles, Color Block Jam, Borderlands, Red Dead Redemption series, and Words With Friends. We now expect recurrent consumer spending to grow approximately 17% and represent 78% of net bookings. This is up significantly from our prior forecast of 11%, driven by strong momentum across most of our major franchises. Our revised recurrent consumer spending forecast assumes that NBA 2K grows 37%, mobile increases approximately 13%, and Grand Theft Auto Online increases slightly. All of these expectations are raised from our prior forecast. We project the net bookings breakdown from our labels to be roughly 46% Zynga, 38% 2K, and 16% Rockstar Games. We are raising our operating cash flow forecast to $450 million, which is up from our prior expectation of $250 million, with the increase reflecting the strength in our business. We remain on track to deploy approximately $180 million in capital expenditures. We are also updating our forecast for GAAP net revenue, which is now expected to range from $6.55 billion to $6.6 billion, and cost of revenue, which is expected to range from $2.78 billion to $2.8 billion. Our total operating expenses are now expected to range from $3.96 billion to $3.97 billion, compared to $7.45 billion last year, which included a $3.6 billion impairment of goodwill and intangible assets. On a management basis, we now expect operating expense growth of approximately 8% year-over-year, which is down slightly from our prior forecast due to a shift of some marketing expenses into next year. Given our strong net bookings outlook, this assumes meaningful operating expense leverage over last year. Now moving on to our guidance for the fiscal fourth quarter. We project net bookings to range from $1.51 billion to $1.56 billion, compared to $1.58 billion in the prior year. Our release slate for the quarter includes Sid Meier's Civilization VII for Apple Arcade, PGA Tour 2K25 for Switch 2, and WWE 2K26. The largest contributors to net bookings are expected to be NBA 2K, the Grand Theft Auto series, TuneBlast, Match Factory, WWE 2K, Empires and Puzzles, Color Block Jam, Red Dead Redemption series, and Words With Friends. We project recurrent consumer spending to increase by approximately 7%, which assumes a high 20% increase for NBA 2K, mid-single-digit growth for mobile, and a modest decline for Grand Theft Auto Online. We expect GAAP net revenue to range from $1.57 billion to $1.62 billion, and cost of revenue to range from $675 million to $692 million. Operating expenses are planned to range from $973 million to $983 million. On a management basis, operating expenses are expected to grow by approximately 3% year-over-year, primarily driven by higher performance-based compensation and user acquisition investments to support robust performance in our mobile portfolio, which is partly offset by lower production expenses. In closing, our business momentum remains outstanding. We are very confident in our future. With Grand Theft Auto VI and other eagerly anticipated titles on the horizon, we believe that we will generate higher earnings power, strengthen our balance sheet, and deliver sustainable shareholder returns. I'd like to thank you all for your support and look forward to sharing more details in the coming months, including our initial outlook for fiscal 2027 when we report our fourth-quarter results in May. Thank you. I'll now turn the call back to Strauss. Strauss Zelnick: Thanks, Lainie and Karl. On behalf of our entire team, I'd like to thank our colleagues for their shared commitment to excellence and Take-Two Interactive Software, Inc.'s long-term success. To our shareholders, I want to express our appreciation for your continued support. We'll now take your questions. Operator? Operator: Press star, then the number one on your telephone keypad. To withdraw your question, simply press star 1 again. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Doug Creutz with TD Cowen. Please go ahead. Doug Creutz: Hey. Thank you. The last few days, the equity markets have really punished your stock and those of other video game makers because of fears about what AI means for your business. I wondered, Strauss, if you'd like to expound upon whether you think what's happening in the market is an accurate reflection of the threats and opportunities you see coming from AI. Thank you. Strauss Zelnick: Thanks, Doug. Oh, I have to admit I'm a little confused. You know, the video game business since its inception was built on the back of machine learning and artificial intelligence. We create our games in computers with technology. And ever since questions began about generative AI about eighteen months ago, I've been incredibly enthusiastic about what the future can bring. As it happens now, we're actively embracing generative AI. We have hundreds of pilots and implementations across our company, including with our studios, and we are seeing opportunities to drive efficiencies, reduce costs, and create the opportunity to do what digital technology has always allowed, which is the mundane tasks become easier and less relevant, which frees up our creators to do the more interesting tasks of making superb entertainment. The history of the interactive entertainment business has been one of great creators using technology to do amazing things to please audiences. And that's our job around here, and that remains unchanged except perhaps accelerated. Just a reminder, our strategy has three parts: be the most creative, be the most innovative, and be the most efficient company in the entertainment business. And generative AI squarely falls within the category of innovation and is already moving into the category of efficiency. I'm hopeful that it will also move into the category of creativity as it allows our creators to use digital tools to expand what we do to make it even more beautiful, engaging, and exciting. Thank you. Operator: Our next question comes from the line of Eric Handler with ROTH Capital Partners. Please go ahead. Eric Handler: Yes. Good afternoon. Thanks for the question. Strauss, you just had another really strong quarter with mobile. Strauss Zelnick: And mobile has just been on a very big tear for the last seven quarters now. Wondering if you could talk about some of the initiatives or bold beats, as they used to call them, that you thought what are you finding that's really resonating? What is keeping these games that have been out for a number of years still relevant and drawing in new players? Strauss Zelnick: Well, our Zynga team still refers to bold beats. They're a big part of what we do. And just to put a fine point on it, you're right. Our mobile business is up 19% year-over-year. TuneBlast was up 43%, Match Factory 17%, Empires and Puzzles 11%, Words With Friends 6%, and Color Block Jam is a huge hit for Rolex. And that really is the tip of the iceberg. We really are firing on all cylinders at Zynga and also with 2K's mobile properties. What do I think is going on? Look, I think we are actually making hits, and that is still pretty unusual in the mobile business. The hardest thing to do is create new hits in the mobile business. And Zynga has proven an ability to do so by doing what we do, which is creating a home for the best talent in the business, encouraging them to pursue their passions, and supporting them and marketing with an A-plus structure and a really strong balance sheet. It's really hard to do that. There aren't very many companies that are doing it. I believe we're the only company that's doing it over and over again. You are right also, though, that the backdrop is strong. There was a disappointing moment in mid-2022, which is as it happens when we acquired Zynga, where for the first time the mobile market was down post-pandemic. And it was down more than we expected, and it took a while to rebound. The market has rebounded. There are tailwinds. So much as I'd like to take credit for all of the team's success, that's not really my style. I do think a rising tide lifts all ships, and we are benefiting from consumer engagement with mobile games. Eric Handler: Great. That's helpful. I also wondered, would you be willing to sort of give some type of indication of what percentage of your mobile recurring spending is coming from direct-to-consumer? Strauss Zelnick: It's meaningful. We haven't given a number. The environment for direct-to-consumer is improving. It has been a big strategy since we acquired Zynga. You may recall we talked about the synergies that we would find on the revenue side. I said in calls right after the acquisition that we thought the potential for direct-to-consumer could be seen as a revenue synergy because effectively what happens is we are actually capturing a higher share of those revenues and enhancing our margins. The recent regulatory environment has become much more favorable, and we also predicted that. I do think we're going to continue to see third-party take rates decline, which will drop to the bottom line. Eric Handler: Thanks. Operator: Your next question comes from the line of Colin Sebastian with Baird. Please go ahead. Colin Sebastian: Yes. Thanks, everyone. A couple of questions for me. And maybe first, continuing on the RCS theme of growth. Maybe you could expand a bit on the SafeHouse expansion in terms of driving higher levels of engagement. Are there specific learnings from that informing other future content updates? And I guess, secondly, maybe to Strauss, how are you thinking about capital allocation priorities with the growing cash balance, which is likely also going to expand quite a bit later this year? Thank you. Strauss Zelnick: So what we learned from a Safe House in the Hills update is that you deliver great material, consumers show up. And Rockstar always aims to do the best possible work. Some of the content updates have performed better than others, and this one has been nothing short of stellar. But I think the broader point is the one that matters, which is as we head into the release of GTA VI, I think there was some trepidation on the part of market participants that GTA V or GTA Online would somehow become less relevant. And I think the contrary is true. The anticipation is yielding even more engagement with GTA. GTA V, of course, has now sold in 225 million units. But what's it all driven by? It's the reason that GTA is so extraordinary is because Rockstar makes an extraordinary game and continues to make extraordinary features and additions and opportunities, and the Safe House update basically shows that. So this is an example of where our strategy pays off. We're focused on creativity, and it pays off. Strauss Zelnick: I'm sorry. On your second question, capital allocation remains unchanged. So you know, we have three uses of our capital. And I agree that if things go well and as planned, our cash balance should continue to grow. And, of course, we are generating significantly more operating cash flow than expected this year. These results. The first is, of course, to support organic growth. That's been our story here. This is an organic growth company with a handful of very selective acquisitions, thankfully, all accretive ones, most notably the acquisition of Zynga in 2022. So that leads me to the second use of our capital, which is inorganic growth opportunities, and we'll continue to pursue those in just a selective and disciplined way, and we are looking only for accretive opportunities. And the third is to return capital to the shareholders, which we've done over and over again. We've typically done so opportunistically with buybacks. And, thankfully, our buybacks have all turned out to be good for the shareholders in the fullness of time. I am a believer that you do buybacks when your balance sheet can afford it, on the one hand, and when you can do so at deep value, on the other hand. Our most recent buyback was executed at about $158 a share. There were some moments where people thought that was a bad thing. Turns out it was a very good thing. Operator: Your next question comes from the line of Chris Schoell with UBS. Please go ahead. Chris Schoell: Great. Thank you. You've seen consistent outperformance with NBA 2K and continue to post very strong growth despite the difficult comparisons. Can you just touch on what is resonating most, do you think, with players? And as you think about the next leg of growth for the franchise, what do you see as the biggest opportunity? Is it going to be growth internationally, expanding the user base, or enhancing monetization? Thank you. Karl Slatoff: So it's hard to say that one particular thing is driving the success of NBA. Obviously, it's been an incredible year for us, selling a lot of units, and also the performance of RCS across the board and engagement has been off the charts, 30 plus percent year-over-year on basically every mode that we have. Those things don't come easy, and I think the best way to describe why this works for us is because of the way that VC and 2K run their business, which is really in a state of perpetual diligence. They're constantly communicating with the consumer, seeing what the consumer is doing, watching how they play, seeing what works, doesn't work, and refining the game year after year. And it's that maniacal attention to detail when you add it up year over year, that culminates in so much success. And this is one of those years where everything was just humming in the right direction. And on top of that, there's always an effort every year to do something a little bit different, a little new. For example, the cruise this year, which is a really interesting concept. People can pair up together with 50 people, play against other teams, and it's a really exciting thing, a social thing, which has had a pretty big impact on the MyCareer mode. So it's not one thing. It's everything. And I'd say it's culture, as much as it is anything else. I think there was a second part. Oh, biggest opportunity. Well, first of all, the biggest opportunity is to continue to do more of what I just described, which will lead to a higher installed base of folks and also to higher engagement, which ultimately leads to higher monetization. I do believe that there is a significant international expansion opportunity. The NBA continues to be an amazing partner for us. They're expanding internationally. Basketball is a global sport, and we've got that going for us. So I think that will help us drive. And just without regard to just the NBA expanding, there are lots of opportunities for us to expand also in North America as well. As we grow with the brand and partnership with NBA. So at this point, I think the sky is still the limit. We surprise ourselves every year. The game does better and better, so we're very optimistic about the future, obviously. Operator: Your next question comes from the line of Andrew Marok with Raymond James. Please go ahead. Andrew Marok: Hi. Thanks for taking my question. Maybe specifically, again, back to the commentary on generative AI. You know, we hear loud and clear Take-Two's ability to harness that. But maybe on Genie specifically, we've been getting a lot of questions from investors about the similarities and differences between world models and game engines. Can you maybe give us an overview of what you think tools like Genie can and cannot do as it relates to some of the proprietary game engines that you operate? Thank you. Karl Slatoff: So in terms of commenting on the specific technology, I think we're not going to go into great details about the tech differences because, frankly, Genie's early in its iteration at this point. And trying to make a comparison to a game engine is just really they're not even in the same ballpark. Genie is not a game engine, and I would it's very exciting technology, and I think the question is, how can it benefit our creators? And I think there will be a moment in time where that will become more defined. It certainly doesn't replace the creative process. And I would say, look, it looks to me more like a procedurally generated interactive video at this point. There are limitations, and Google has said as much. So to compare the technologies, I think there's really no way to do that because they're so far apart. And there are so many more elements to game development that go beyond, you know, quote, world creation. And the question is, what is a world creation? So even beyond world creation, there's everything else that's involved. There's the storyline, there's emotional connection, there's vibe, there's mission structure. All of those things, you cannot capture through AI. And certainly not through a world builder. So that's just a very, very small component of what we do. And if this tool bears out, it will make a component of what we do all that much better and more efficient. Andrew Marok: Great. Thank you. Operator: Your next question comes from the line of Edward Alter with Jefferies. Please go ahead. Edward Alter: For the question. I want to dig into your app mobile advertising results. I think it's the second time you guys have grown that year over year since acquiring Zynga. I wanted to dig into what's going so right there and where kind of the opportunity for continued growth in the mobile advertising space is for you guys. Strauss Zelnick: That's pretty simple. When we took over Zynga, there weren't a lot of ad units in most of the games, and we have selectively added ad units pretty much across the board, not entirely certain games. Don't merit that. Also, I think Zynga's been very smart about the way they go about monetizing that advertising. And there really is much more opportunity there without interfering with the experience at all. The strategy ultimately is to make sure that one way or another, we monetize the bulk of our users. As you know, in the mobile games business, fewer than 20% of your users actually engage with you to pay. Edward Alter: And given your comments on how the impending GTA VI is a positive for GTA Online in its current form, what is your view on what GTA Online is going to continue to be the current iteration once GTA VI does come out? Strauss Zelnick: Look, Rockstar Games is the locus of information about, you know, where the titles go, content, and marketing. Generally, you know, we have a pretty light touch when we talk about the labels' creative activities. At the same time, I have every reason to believe we'll continue to support GTA Online. There's a great community that loves it, that stays engaged. And, again, in this quarter, Rockstar has shown that when you deliver great additional content, despite how long GTA Online has been in the market, people show up. Edward Alter: Great. Thank you. Operator: Your next question comes from the line of Jason Bazinet with Citi. Please go ahead. Jason Bazinet: I think this is a while back, but I think when you first talked about GTA VI coming out, you noted that you expected your non-GAAP earnings to grow the year after it was released, not just the year. You know, the year is released being the base. I just wonder, is that still true? And do you mind just sort of unpacking sort of the main drivers of that? Presumably, one of it is just getting four quarters attribution, but what else would you say are the key drivers of that expectation if it is still true? Lainie Goldstein: What we have been saying is that we expect that our release schedule is going to drive sequential growth next year. And then that will bring us to establish a new baseline for our business going forward. So we haven't really been talking about detailed guidance beyond fiscal year 2026. And now in our May earnings call, we'll give our guidance for fiscal year 2027. And we're not planning on providing detailed guidance for any years beyond that at this time because our release schedule includes numerous titles each year, and even modest shifts can have a significant effect on results in any given period. So all of our years will be driven by our release schedule, and we have a very robust release schedule over the next couple of years, and that's what's really driving the growth in the business. Jason Bazinet: Perfect. Thank you. Operator: Your next question comes from the line of Alec Brondolo with Wells Fargo. Please go ahead. Alec Brondolo: Yeah. Hey. Thank you so much for the question. It seems like the market is creating potential opportunities for M&A. So in that light, could you maybe refresh our understanding of what makes a studio appealing to Take-Two? You noted in response to a prior question that any M&A has to be accretive. And so with that said, what are the other qualities in the studio you look for? Thanks. Strauss Zelnick: Well, you're right to ask that because accretive is a financial calculation based on the decision to proceed. The decision is based on the talent, the technology, and the intellectual property. And we think there may be some opportunities out there that, you know, you have to be incredibly selective. You know, broadly in the market, as you know, most corporate M&A fails because most corporate management teams love the notion of presiding over a bigger and bigger empire. Don't look at the world that way. You know? Our job is to entertain the world. Our job is to make the most creative properties that anyone can make and to bring them to consumers wherever they are. If there is an enterprise available on favorable terms that sits within that strategy and can operate within our unique culture, then it's potentially interesting to us. Alec Brondolo: Thank you. Operator: Your next question comes from the line of Michael Hickey with Benchmark Company. Please go ahead. Michael Hickey: Hey, Strauss, Karl, Lainie, Nicole. Good quarter, guys. Congratulations. I guess the first question, you've got two. Is on GTA VI. Glad to hear that summer marketing is going to start here. That's encouraging. But just sort of curious, Strauss, how much marketing you really have to do here if there's leverage versus prior releases just given the strength of GTA V, GTA Online, in fact, this is, you know, massive pent-up demand for what will be probably the largest entertainment release of all time, seem like you have to market much. So just curious your view there. And then, I guess on the topic of affordability, which is obviously very topical, certainly within the video game space, just curious your specific thoughts given that we're sort of year five here approaching year six of the current console cycle and pricing of consoles are going up. We've got now memory cost issues, so they can even go up further by the time the GTA VI comes out. We've also seen some inflation on software. So just broadly speaking, how do you think your fits within that affordability picture and how you think about providing value, which I know is a centerpiece of what you've done in store? Thanks, guys. Strauss Zelnick: Hey. Thanks, Mike. I mean, I love your question, your first question. Like, are we just going to sit back and relax as we head into the release of GTA VI? And I think the opposite is true. You're talking to a team that you've known for seventeen years, and the business of eating red meat for breakfast. I think we'll be having a lot more red meat in the coming months. So we are very fortunate. The consumer anticipation for GTA VI is indeed huge. And one does have to be judicious in the way one markets such an extraordinary property. But rest assured that you'll be pretty astonished by the creativity that Rockstar's marketing team brings to consumers in the coming months. On the affordability question, you know, we do feel a compact with the we've talked about for a very long time to deliver way more value than what we charge. I think we're known for that. And you know, we're in the business of entertaining people. We're not in the business of creating revenue. Revenue comes from entertaining. And interactive entertainment on a real basis is getting more and more affordable all the time because we offer extraordinary value for the money. You know, people engage with our properties for hours and hours and hours, and on a real basis, frontline prices have declined in the past twenty years. Meaningfully declined. So we see it the same way, which is we, you know, we do believe in democracy access to what we do around here. We want everyone to be able to engage. I just mentioned it in terms of mobile. You know, you want to have a great mobile experience. We offer the best mobile experiences on earth free. And you can play them and have a wonderful experience completely free. On the console side, of course, you know, that's not expected by consumers. Because of the deep value that we bring, and consumers do expect to pay for that. But on a real basis, we're making it more and more affordable and more and more accessible. Operator: Your next question comes from the line of Drew Crum with B. Riley Securities. Please go ahead. Drew Crum: Okay. Thanks. Hey, guys. Good afternoon. So you have a few undated mobile titles as part of your frontline release schedule. Recognizing it's been a tough launch market for new titles for a while now, based on the strength you're experiencing with your mobile business, can you comment on what you're seeing in terms of market dynamics for launching new games and whether the backdrop is more supportive of delivering new hits? Strauss Zelnick: Thanks. You know, there are really only two companies in the mobile space who are delivering new hits in the last five years. We're one of them. It's super hard. Incredibly hard. It's been hard. You're quite right. Ever since you had to pay for user acquisition, which is, you know, the better part of, I guess, nine years, it's become much more difficult. And, you know, the early days of mobile, of course, now is a new market and people are very accepting of new IP and new markets. So we're exceedingly respectful of the difficulty of launching any new hit, that includes in our mobile space. I do think the Zynga team has come up with an approach that is more likely to succeed more regularly than our prior approach because while they arrive at this. And once again, it's sort of, you know, be selective. And focus on the best talent in the business and make sure that that talent pursues their passion. And then, of course, listen to the data. Iterate according to the data. But you can't iterate at the beginning to create a hit. You need creative passion to create the hit from which you build. Operator: Your next question comes from the line of Brian Pitz with BMO Capital Markets. Please go ahead. Brian Pitz: Thanks for the question. Strauss, we saw your recent announcement of the CFX marketplace, which appears to be a push in the direction of UGC gaming. Can you talk more about this launch and how you're thinking about the broader opportunity? And also, maybe any insights around developer economics in the marketplace with respect to bookings? Thank you. Strauss Zelnick: I mean, I think that we've always welcomed quite some time user-generated content. We have that in numerous parts. Of course, we have the role-playing server business at Rockstar. So we see this as an important and interesting development with more opportunity to come. At the end of the day, you know, what we're known for here is our creators making the very best in entertainment. That's our job, and we think that that never goes away as a driver of the business. At the same time, there are users who want to create and engage, and we want to create a home for them as well. And tools that make that more viable and more accessible could be an opportunity for us. Brian Pitz: Great. Thanks. Operator: Your next question comes from the line of Martin Yang with Oppenheimer. Please go ahead. Martin Yang: I have a question on engagement and a follow-up on monetization. Personal engagement, can you maybe talk about how the GTA player base is engaging with the game? Is it primarily GTA Online? Or do you see still the full game getting substantial playing hours per user or MAUs? Strauss Zelnick: Look. We've, you know, we sold a whole bunch of units of GTA V in the quarter. And Rockstar continues to bring new consumers into the tent. It's both. It's the full game and it's the online version, which, you know, is up meaningfully year-over-year, about 27%. Operator: Your next question comes from the line of Omar Dessouky with Bank of America. Please go ahead. Omar Dessouky: Hi. It's Omar Dessouky. So I think you mentioned that Zynga comprised a little bit less than half of your revenue of the entire business. You know, over the last couple of years, it's been well known that, you know, solutions to avoid App Store fees would become commercially available, and, you know, there have been several that have been announced, such as, for example, Unity's cross-platform ecommerce solution that would help reduce the amount of fees that game developers have to pay to the app stores. How much of your fees that the distribution fees that you pay to the app stores do you think are addressable, you know, through such a third-party solution, you know, outside of the fact that you already have, you know, growth in your own DTC channel, are the two mutually exclusive? And how much, how much do you think you can save and how much time will it be before you implement, you know, such a third-party solution? Karl Slatoff: So I'm not really going to comment on third-party solutions. So the fact is a lot of our DTC efforts, we really do in-house at this point. That's not to say that third-party solutions can't be helpful now or in the future. But primarily, this is an internally driven thing for us. And in terms of the opportunity, I think we've said before, right now, it's still pretty early. It's growing in terms of not all of our games, even some of our really large games, don't have DTC components to them. I think all of them at one point could. We'll see how that shakes out. So we're pretty early in the process, and we think there's a lot of growth ahead of us. But it's something that we're certainly excited about. It improves our margins. And as Strauss mentioned earlier, the legislative environment has been favorable towards that. Strauss Zelnick: Thank you. Operator: That concludes our question and answer session. I will now turn the call back over to Strauss Zelnick for closing remarks. Strauss Zelnick: Thank you so much for joining us today. Obviously, we're thrilled with the company's results. We're thrilled with our revised outlook for the rest of the year. And we're beyond thrilled with our expectations for next year, including WWE coming up this year and, of course, NBA 2K, and then most notably, GTA VI. I want to just take a minute to thank our teams, our creative teams, for showing up every day, bringing their passion to the table, not taking no for an answer, and always willing to push as far as they can to deliver the most extraordinary entertainment experiences. And I want to thank our executive teams who subscribe to our strategy of creativity, efficiency, and innovation and who also show up every day doing their very best work in service of our collective goal to be the best entertainment company on earth. Thank you too to our shareholders for your support. These are really exciting times, and we're happy that you're along for the ride. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.
Jessica Hazel: This dynamic is reflected in the $0.11 year-over-year increase in adjusted loss per share, even as our net loss improved. Our disciplined approach to capital allocation continues to drive meaningful value for our shareholders. We generate significant, stable cash flow, and expect this year to be no different. We then invest in the business, grow the dividend, and return excess capital to shareholders through share repurchases. In the first half of this fiscal year, we have returned $508 million to shareholders in the form of dividends and share repurchases. We have approximately $700 million remaining on our current share repurchase program. Turning to our full year outlook, we are reaffirming the following ranges as provided in today's earnings release: Revenue between $3.875 billion and $3.895 billion, EBITDA between $1.015 billion and $1.035 billion, an effective tax rate of approximately 25%, and adjusted EPS between $4.85 and $5. Our outlook continues to contemplate certain key assumptions: First, industry growth in line with historical norms, or about 1%; continued emphasis on achieving a healthier balance of volume, price, and mix over time; the strategic prioritization of assisted and paid DIY, the two areas that deliver the strongest lifetime value for H&R Block; an expanding contribution from small business as a meaningful revenue driver in fiscal 2026 and beyond; and continued franchise acquisitions when opportunities arise at attractive EBITDA multiples, which remains a prudent and value-accretive use of capital. Taken together, these inputs underpin our fiscal 2026 outlook and reinforce our focus on disciplined execution of our strategy, which we believe positions us well to continue delivering meaningful value for our shareholders. With that, I'll turn it back over to Curtis for closing remarks. Curtis Campbell: Thanks, Tiffany. Our priorities are clear: focused on the client, equipping our tax pros to build trust and deliver meaningful outcomes at every turn. Coupled with products designed for clarity, confidence, and convenience, we focus on meeting clients where they are, on their terms. Combining disciplined execution with a commitment to progress, we're positioning H&R Block, Inc. for lasting growth. I am confident in our team's ability to adapt, deliver, and strengthen our company for the future. Thank you for your continued trust and partnership. Now, operator, we will open up the line for questions. Operator: Star 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q and A roster. Our first question comes from Alex Paris with Barrington Research. Your line is open. Alex Paris: Hi, guys. Thanks for taking my call. Congrats on the better-than-expected off-season quarter. Jessica Hazel: Thanks, Alex. Curtis Campbell: Yeah. How are you doing, Alex? Thank you for the question. So, Yeah. I'll go ahead and jump in. We don't see any material impact from the government shutdown, and I'll remind everybody that Block has been in business for seventy years, so we are not unfamiliar with government shutdowns. Our tax pros are prepared to guide our clients through any uncertainty, especially any connected to the one big beautiful bill. Alex Paris: Gotcha. And then, you know, again, it's very early in the tax season. But any trends to note out of the first ten days or so? Curtis Campbell: It's early in the tax season without a doubt. So e-file opened up last Monday. Tiffany talked about this, but we expect the industry to grow at approximately 1% this year. I'll tell you, I'm confident in the work the teams have done to prepare for this season. I mentioned in my prepared remarks, we're focused on executing not just for the season, but we're also focused on testing and experimenting with new capabilities and experiences that are connected to our multiyear strategy that we'll share more about as we go throughout the year. I also want to highlight, Alex, a couple of important changes that we made: the second look to scale it, the work we've done to embed AI-enabled tax pro assistance into the tools of our tax pros, advancements we've made to TPR, the work we've done to optimize our assisted virtual experience, and especially the training our tax pros have to help clients navigate any uncertainty due to the one big beautiful bill. I feel like we're well positioned for the season. Alex Paris: Yeah. No. Sounds like it. One of the other things I think we talked about in the call is you expect, not only normal growth, 1% ish, you know, for tax filing this year. But also, that assisted should, take some share from DIY again, say, to the tune of about 20 basis points. Any change in that expectation? You know, perhaps driven by one big, beautiful bill, and increased complexity. Curtis Campbell: No. We'd expect the tailwind from the One Big Beautiful bill. What we have historically seen is when there's significant tax complexity, it drives clients to seek assistance. Alex Paris: And you're still thinking low single-digit price increases across both assisted and DIY? Curtis Campbell: That's correct. Alex Paris: Great. Alright. Well, thank you for that. I appreciate it. Good luck on the balance of the season. We'll have checkpoints between now and then, and I'll get back in the queue. Curtis Campbell: Thank you, Alex. Operator: Thank you. Our next question comes from Kartik Mehta with Northcoast Research. Your line is open. Kartik Mehta: Hey. Good evening. Curtis, as you look at this tax season, are you anticipating similar behavior to last year in terms of the peaks, or do you think the One Big Beautiful Bill will change that in any way? Curtis Campbell: Hey, Kartik. How are you doing? Thanks for your question. You know this, what we've seen over the last several years is slower starts to the season from an industry perspective, I wouldn't expect that to change. Without a doubt, the one big beautiful bill will drive uncertainty. Don't think that it's going to dramatically change taxpayer behavior other than the fact that they may reach out for assistance more. But I don't think that's going to change the timing of which they reach out to get their taxes done. Kartik Mehta: And then, Curtis, I know it's early, but have you seen a change in the refund amount? Is that know, the expectation is that it'll be larger than last year. Have you is that come to fruition? Curtis Campbell: Yes. It's really, really early, but I would say that I expect, depending on the client, there to be a portion of their client base that does receive a bigger refund. You know this, look at the standard deduction, that's up $750. Incremental changes with the tips income deduction, the overtime pay deduction, the new senior deduction. Increase in default deduction are, in some cases, pretty big moves. Depending on who you are as a taxpayer, you could see a slightly higher refund. Perfect. Thank you very much. It's too early for us to share data that confirms what we're seeing, but I would expect that to be the case. Kartik Mehta: Okay. Thank you. I appreciate that. Curtis Campbell: Thanks, Kartik. Operator: Thank you. Our next question comes from George Tong with Goldman Sachs. Your line is open. Sammy for George Tong: Hi, this is Sammy on for George. Given expectations for greater complexity and a shift towards the assisted filing this tax season, what's driving your outlook for assisted share loss rather than stabilization or even gain since this type of environment is your strength? Curtis Campbell: Yeah. Let me jump in on this one. What's important to understand is why our market share hasn't consistently grown in assisted. I start with a CEO perspective. We've got names of clients that choose to with us every year. And we lose far too many in our mid to lower funnel. This comes down to, at the end of the day, us understanding why. We've spent quite a bit of time over the last six months examining every aspect of the client journey in our assisted business, and the same thing for our tax pros, examining every step of the journey for tax pros as they work to engage with our clients. A large portion of the reason why we've had some challenges is a significant amount of manual processes that are dependent on our tax pros to operate consistently at a high level. As I mentioned in my prepared remarks, we're focused on leveraging technology to reduce that manual non-value-added work. We believe this will help automate workflows, ensure consistent funnel management, and at the end of the day, deliver a better client experience. Our clients care about confidence, convenience, and the way they get every dollar they deserve. Enabling tax pros via technology ensures that. This journey will be multi-year, not overnight, but we believe it's the best for improving client experience at Block. Tiffany Mason: And just to clarify, we've been chipping away at assisted share loss over the last couple tax seasons, That's point number one. Number two, for our full-year outlook, the high end assumes we hold share in the assistant category. That’s top of guidance, and I want to make that point clear today. Sammy for George Tong: Got it. Implementing AI tools like AI Assist, is that a long-term threat to the assisted business if DIY becomes easier? Curtis Campbell: Thank you for your question. We don't think so. Meeting clients where they are makes blended experiences important. DIY clients can connect with pros when facing uncertainty, aligning with our multiyear strategy. Sammy for George Tong: Got it. Helpful. Thank you. Operator: Thank you. As a reminder, to ask a question or reenter the queue, please press Again, that is 11 to ask a question. Our next question comes from Scott Schneeberger with Oppenheimer. Your line is open. Scott Schneeberger: Thanks very much. Good afternoon. Curtis and or Tiffany, with the 1% industry volume growth, what drivers might lead to upside or downside as you look out over the season? Thanks. Tiffany Mason: Hi, Scott. Thanks for the question. Surely, 1% industry growth is historical. For both channels, especially assisted, we expect a positive shift due to the One Big Beautiful Bill. Any larger refunds might modestly boost growth, but I anticipate no outsized impact. So, 1% seems right and is reflected in guidance. Scott Schneeberger: Okay. Thanks, Tiffany. On marketing approach this year? Timing and spending nuances year over year, if you care to share. Thanks. Curtis Campbell: Sure. No big change in historical marketing spending. But focus this season is on meeting customers where they are, highest lifetime value. Expertise of tax pros navigating complexity is in TV commercials, digital ads. Connecting AI impacts marketing as consumer behavior shifts toward AI engine optimization, not just SEO. Jessica Hazel: From H&R Block’s perspective, AI as an enabler of significant client and pro experience improvements. AI tools like the AI-tax pro assistant, streamlining manual processes, and enhancing experiences, aim for pros to build relationships, guidance, and coaching. Clients choose assisted for confidence, trust, judgment, not just math. Fifty-five percent consistently seek assistance, seeing AI as an opportunity, not a disruptor. Scott Schneeberger: Great. Thank you, Curtis. Tiffany, on increased consulting costs year over year, will that continue? Tiffany Mason: Thanks, Scott. Engaged a consulting firm for strategic sourcing to drive cost efficiency. This engagement completed first half of the year, will yield sustainable savings to reinvest in strategic growth areas. This was all in our outlook, no step changes. Scott Schneeberger: Understood. Alright. Thanks very much. Curtis Campbell: Thanks, Scott. Operator: Thank you. I’m showing no further questions at this time. I would now like to turn it back to Jessica Hazel for closing remarks. Jessica Hazel: Thank you, everyone, for joining us today. Look forward to reconnecting with you soon.
Operator: Good day, and welcome to the Chipotle Mexican Grill, Inc. Fourth Quarter and Full Year 2025 Results Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on a touch-tone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations. Please go ahead. Cindy Olsen: Hello, everyone, and welcome to our fourth quarter and full fiscal year 2025 Earnings Call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.tpole.com. Additionally, supplemental investor information is available on our site as a reference for today's call. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-Ks and in our Forms 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussion today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Scott Boatwright, Chief Executive Officer, and Adam Rymer, Chief Financial Officer, after which we will take your questions. Our entire executive leadership team is available during the Q&A session. And with that, I will turn the call over to Scott. Scott Boatwright: Good afternoon, and thank you for joining us. Today, I will spend a few minutes upfront discussing the highlights of our financial results, and Adam will cover the details. My remarks will cover a broader view into my vision for Chipotle Mexican Grill, Inc., and my deep confidence in our growth strategy, as well as opportunities we have to sharpen our competitiveness by harnessing the core values of our brand. The results we issued this afternoon were in line with expectations and guidance for the full year. 2025 should be seen as a year of progress and resilience for our brand. For the year, revenue grew 5.4% year over year, which included a 1.7% decline in comparable sales. Adjusted diluted earnings per share grew 4.5% year over year to $1.17. We opened a record 334 new company-owned restaurants and 11 international partner-operated restaurants. We also made progress in the strategic areas that matter most for our long-term success, including investing in operational excellence, marketing and menu innovation, deploying new back-of-house technology, and growing our footprint internationally. It's important to emphasize all of this was achieved against a dynamic consumer backdrop, with our guests placing heightened focus on value and quality and pulling back on overall restaurant spending. This makes our investments and progress even more significant and highlights Chipotle's commitment to succeed through consumer cycles. With that in mind, I want to commend the incredible efforts of our teams for their thoughtful response and dedication during the recent winter storm. We have not seen a multistate storm like this in many years, and our operational excellence and prioritization of speed and agility were instrumental in reopening restaurants as quickly and safely as possible to serve our guests. Turning to our path forward, serving as Chipotle CEO is an incredible honor. From our guests to our people, to our partners around the globe, there is a deep love for our brand and the food we serve. Over the past year, I've had the privilege of visiting Chipotle restaurants around the world, including our restaurants in Europe, Canada, as well as the opening of our CityWalk restaurant in Dubai. These experiences have reinforced my conviction and our momentum and our ability to continue delivering exceptional service and elevated experiences for our guests in our restaurants. So what actions are we taking to build a stronger, more profitable Chipotle? Over the last several months, we conducted a comprehensive review of our business as well as the current market landscape and consumer trends, which are fundamentally different from what we experienced a year ago. Here are a few key learnings. Chipotle's brand and value proposition built on high-quality, delicious culinary, and best-in-class operational throughput remain strong and relevant across all age groups and income cohorts. We are seeing positive momentum in the business, with room to accelerate our growth and sharpen our competitiveness without compromising on the core values that define our brand. Our path for further success lies in leaning into what differentiates our brand, accelerating innovation into new offerings and occasions that are of growing importance to our guests, and optimizing the in-restaurant and digital experience. And the strength of our business model and balance sheet allows us to execute against our long-term strategy and emerge from this consumer cycle in a position of greater strength. These insights have shaped the next evolution of our five key strategies, which we are calling our recipe for growth. These strategies include protecting and strengthening the core by driving operational and culinary excellence to deliver exceptional value for our guests, evolving the brand messaging and accelerating menu innovation and new occasions that drive demand in our restaurants, modernizing our business model with industry-leading technology in leveraging AI and relaunching our rewards program to elevate the experience for our guests and our teams, expanding our global reach by scaling with intention proven company-owned and partner-operated markets, as well as strategic new regions, and cultivating the best talent in the industry that is energized and focused on speed and agility. We are acting on these strategies now and are already seeing results. First, we enter 2026 with a strong foundation. We aim to solidify that through a relentless focus on and culinary excellence across all our channels. This will be critical as we continue to scale our brand and meet the need or demand for the future. Driving this key strategy is the acceleration of our rollout of our high-efficiency equipment package, which will improve speed and consistency in our restaurants, delivering a better experience for our teams and our guests. As a reminder, this equipment improves prep by two to three hours, helps eliminate prep time during peak periods, and results in stronger and more consistent throughput execution. It also diminishes the learning curve for new team members in more challenging areas like the grill and improves the consistency of culinary with juicier steak and chicken and is cooked to perfection every time to meet our guests' expectations. For now, we are reinvesting the two to three hours of efficiency back into our restaurants to deliver greater hospitality. The results in the restaurants with the new equipment are compelling. In addition to higher taste of food and overall guest satisfaction scores, we are beginning to see better throughput and meaningful improvement in comp sales. A reminder, 350 restaurants have the full equipment package today, and we anticipate about 2,000 by year-end. Second is our brand positioning and menu innovation. Beyond our food, Chipotle excels at brand marketing. We have strong insights into what our guests want and powerful brand-building and demand-generating programs that have helped to establish our company as an industry leader. As we move into 2026, the consumer landscape is shifting with a heightened focus on value as well as high-quality protein, fiber, and clean ingredients, all of which are fundamental to Chipotle's North Star brand positioning. There remains significant opportunity to expand our leadership in this fast-growing segment by sharpening our positioning, increasing spend, and refreshing our campaigns to strengthen our value perception and further engage our guests through new occasions and increased menu innovation. A perfect example of this is the recent rollout of our high-protein line, which highlights our extraordinary value across a range of price points. Starting with a single taco with 15 grams of protein, at just $3.50, to a double protein bowl with over 80 grams of high-quality protein. Also includes a new high-protein cup for around $3.80 and is inspired by hacks that our guests rely on to boost their intake and offers a solution to those looking for smaller portions, which is a fast-growing trend with the adoption of GLP ones. Early results are strong, with incidence of extra protein increasing 35% and our recent double protein promotion achieving a record digital sales day. When I said that we will harness what is great about Chipotle and reinforce our value proposition to propel us forward, this is it in action. We also know from our data that our core guest is more likely to choose a restaurant that has a new menu item. To further drive demand, we will increase our menu innovation cadence to four limited-time offers in 2026, giving our guests more reasons to visit Chipotle. This will include the return of Chicken Al Pastor next week, which is the most celebrated limited-time offer in history, with two times the request on social media to bring it back compared to any other LTL. Limited-time offers are not just delicious. They yield traffic by bringing in new guests while increasing the of the existing base. Additionally, the LTO acquired guests demonstrate higher long-term value, maintaining elevated spend and frequency levels throughout the year. In addition to limited-time offers, we will roll out new sauces and build a strong pipeline of innovation in untapped sales layers like sides and beverages. As new menu items make their way through the stage gate process, we can pace and sequence these growth layers to provide a long path for transaction growth for years to come. We also see the group occasion as a big longer term. We are currently building awareness around build your own Chipotle for families or groups of four to six as well as testing the expansion of catering. Today, these two group occasions represent less than 3% of combined sales yet could be double-digit percentage of sales longer term. Build Your Own Chipotle continues to perform. It is also highly incremental and driving strong repeat purchases, which is why we are extending our trial promotion into 2026. To build on our momentum, we will scale awareness across our marketing channels, leaning into moments that bring people together like sports, holidays, and other shared occasions where we have seen our highest incidents. Regarding our catering tests, our teams are getting up to speed with the new equipment and technology that will support a bigger catering business. And we are ramping up our marketing efforts, including the recent rollout of one of the large third-party delivery platforms. While it is still early in a testing phase, we are seeing the catering orders begin to build, and we remain optimistic that we have found the right solution to help scale our catering business moving forward. Third, we are in the process of relaunching our rewards program this spring to widen the funnel, leverage our data and AI to power more personalized and impactful user experiences. In 2025, we grew our active members to over 21 million, thanks in part to our summer of extras campaign, as well as more engagement through programs like Free Potlait throughout the second half of the year. Through that, we experienced an acceleration in loyalty comps in the back half of the year that outpaced total comps by several hundred basis points. Currently, about 30% of sales are realized through our rewards platform, and the momentum gives us confidence that there remains significant runway for growth by bringing more guests into the funnel, deepening engagement, and driving sales throughout the year. One of the biggest opportunities is in-restaurant, as only about 20% of transactions are through our rewards program, compared to nearly 90% of our app transactions. Looking ahead, we have a strong campaign planned around the spring launch of a more engaging rewards program specifically designed to target the in-restaurant guest and remove friction from the checkout experience. Additionally, the campaign will include more programs like summer of extras and continuing to leverage gamification, which has resonated well with our guests. We look forward to sharing more details about rewards in the coming months. Fourth, accelerating global expansion. In 2025, we opened a record 345 new restaurants and saw over 9% new restaurant growth. We opened 334 company-owned restaurants where we surpassed 4,000 in December. This included 21 openings in Canada, an increase of 38% year over year for that country. We remain confident in our ability to reach 7,000 restaurants in North America longer term. And we are accelerating growth globally. In Europe, we ended the year with positive comps and another step change in the economic model. In fact, Central London and Frankfurt have reached strong cash-on-cash returns, which has unlocked growth for these markets in 2026. Now turning to the Middle East. With our regional partner, Al Shia Group, we opened seven more partner-operated restaurants in the fourth quarter and 11 for the year, with a total of 14 restaurants in the region. I recently had the opportunity to experience an opening in Dubai, where the energy was electric and thousands of guests chanting Chipotle as we unveiled the new restaurant, powerfully demonstrating the brand's affinity and enthusiasm for our delicious food. With Al Shire Group, we plan to nearly double our footprint and sales in 2026, including entering new markets like Saudi Arabia. Longer term, we believe we can have hundreds of restaurants in this region. Additionally, we remain on track to open our first restaurants in three new partner-operated markets this year, including Mexico, Singapore, and South Korea. The global growth story is gaining momentum across all markets, and we know that when we deliver our fresh, delicious culinary experience, with speed and exceptional hospitality, it resonates around the world. Fifth is the team. None of these strategies would be executable or goals attainable without our people. We know that when we take care of our team members, they take care of our guests. It's that simple. I'm extremely proud of the way in which our teams work this year, both in restaurants and at our support centers to deliver for our guests. Key to our culture that sets us apart from the others is promoting top talent from within. In fact, in 2025, Chipotle had 23,000 internal promotions, including 100% of our regional vice president roles, over 83% of our field leader positions, and nearly 90% of our restaurant management. We will always keep opening doors for our people, creating more pathways for career growth, and advancement at every level in our company. We move forward are building a culture of speed and agility and adding exceptional talent to drive our strategy. As you may have seen last month, we announced that Roger Theodoretas and Chris Brandt transitioned out of their current roles. I want to thank Roger and Chris for their leadership and many contributions. Roger has been a trusted adviser while Chris has been instrumental in helping Chipotle become a purpose-driven lifestyle brand as we grew our footprint more than 4,000 restaurants. We have promoted Aileen Eskenazi to be chief legal and human resources officer. He will bring her extensive experience overseeing a broad range of legal and compliance matters as well as talent management and compensation and benefits to help us execute our talent strategy. As I mentioned earlier, our marketing team and how we engage with our guests are at the heart of Chipotle's success. We have grown our marketing capabilities by leaps and bounds over the past eight years, which makes us the exact right moment to take it to the next level build upon our strong foundation. We are conducting a national search for our next chief marketing officer, I look forward to sharing more on that front soon. Additionally, to accelerate our approach to technology and innovation, we are hiring a new chief Digital Officer and a Vice President of Emerging Technologies. Each will play a critical role in helping us to become more efficient, enhance our operations, and develop and deploy industry-leading technology. Combination of our existing team, internal succession planning, and external response to searches gives us a high degree of confidence that we will have exceptional talent executing the recipe for growth strategy. And our leadership teams are committed to staying close to our guests and the frontline experience because the fact is the answers are in the restaurants. To close, I want to highlight that we recently celebrated the twentieth anniversary of Chipotle's IPO in 2006. Looking back over the last twenty years, what stands out to me is the consistency of our brand. Two decades later, we still have the same unwavering transparent commitments to sourcing the best ingredients. We continue to deliver exceptional value for our guests, and we are investing in the development and growth of our world-class teams. We look forward to the next twenty years I've never been more confident in the strength of this brand and our ability to win. Our recipe for growth and 2026 plan will position us for success in any environment. And we're confident it will drive transactions allow us to move faster, and create long-term sustainable growth for our people, our guests, and our shareholders. I will now turn it over to Adam. Adam Rymer: Thanks, Scott, and good afternoon, everyone. I'm pleased to report that we delivered sales results that were in line with our expectations with the accelerating trends throughout the quarter and into January. To support this performance, we made the strategic decision to elevate our marketing activity to ensure Chipotle remained top of mind with our guests. Now turning to our results. For the fourth quarter, sales grew 4.9% to reach $3 billion, with a comp decline of 2.5%. Sales benefited from a $27 million true-up following an annual gift card breakage analysis. This true-up did not impact comparable restaurant sales. Digital sales were 37.2% of total sales. Restaurant level margin was 23.4%, down 140 basis points year over year. Restaurant level margin also included a 70 basis point benefit from the gift card true-up. Adjusted diluted earnings per share was 25¢, consistent with last year. And we opened 132 new restaurants, including 97 Chipotlanes as well as seven additional partner-operated restaurants. As we move into 2026, we anticipate our full year comparable restaurant sales to be about flat. We are confident in our recipe for growth strategy, and we are encouraged by the meaningful improvement and underlying trends we've seen in January following the launch of our new protein menu and marketing campaign. However, we believe it's prudent to keep our full year guidance grounded in a conservative baseline given the evolving consumer dynamic. We will continue to take a disciplined and measured approach to pricing but do not expect it will fully offset inflation in the near term as we remain committed to delivering exceptional value for our guests. We anticipate the impact of pricing in the first quarter will be about 70 basis points compared to our expected inflation approaching the mid-single-digit range. We expect the gap between our pricing and inflation to be at its widest point in the first quarter, and then we'll narrow meaningfully throughout the year. I will now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 30.2%, a decrease of about 20 basis points from last year. The benefit of menu price, lower dairy prices, and cost of sales efficiencies offset inflation, primarily in beef, and chicken, as well as the impact of tariffs. Tariffs impacted the quarter by about 30 basis points. For Q1, we anticipate our cost of sales to be in the mid-30% range primarily driven by higher costs across several items. Most notably beef, avocados, and cooking oils, partially offset by the benefit of carne asada ramping down, modest pricing leverage, and lower tariffs. With the recent removal of tariffs on beef and other agricultural goods, we now anticipate our ongoing tariff impact to be around 15 basis points. Overall, we anticipate cost of sales inflation to be higher in the first half of the year, and will step down to the low to mid-single-digit range in the second half of the year as we lap elevated beef costs. This results in full-year cost of sales inflation in the mid-single-digit range. Labor costs for the quarter were 25.5%, an increase of about 30 basis points from last year. As higher pricing and lower performance-based bonuses were more than offset by lower volumes, and wage inflation. For Q1, we expect our labor cost to be in the high 25% range, with wage inflation in the low single-digit range. Other operating costs for the quarter were 15.5%, an increase of about 100 basis points from last year. Primarily driven by higher marketing, delivery, utility costs, as well as lower sales volumes, an increase of about 50 basis points from last year. Marketing costs were 3.5% of sales in Q4. As I mentioned earlier, we accelerated our marketing spend in the quarter which helped us remain top of mind with our guests. We expect our marketing costs to remain in the mid-3% range for Q1 and in the low 3% range for the full year. For Q1, we anticipate other operating costs to be in the mid-15% range. G&A for the quarter was $160 million on a GAAP basis, $162 million on a non-GAAP basis. Excluding a $4 million reduction in legal contingencies and around $2 million related to retention equity awards granted to key executives in August 2024. G&A also includes $145 million in underlying G&A, $21 million related to noncash stock compensation, which included a reduction in our performance share accruals, $1 million related to our upcoming all-manager conference which will be held in Q1 of this year, offset by $5 million lower bonus accruals. We expect G&A in the first quarter to be around $203 million on a non-GAAP basis, which will include $142 million in underlying G&A, around $26 million in noncash stock compensation, although this amount could move up or down based on our actual performance, and is subject to the final 2026 grants, which are issued in Q1. Around $28 million related to our upcoming all-manager conference, and around $7 million related to employer taxes associated with shares that vest during the quarter. Depreciation for the quarter was $93 million or 3.1% of sales. For 2026, we expect it to remain around 3% of sales. Our effective tax rate for Q4 was 23.7% for GAAP and 23.4% for non-GAAP. Our effective tax rate benefited from an increase in US federal income tax credits. For fiscal 2026, we estimate our underlying effective tax rate will be in the 24% to 26% range, though it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $1.3 billion in cash, restricted cash, and investments and no debt. During the fourth quarter, we purchased $742 million of our stock at an average price of $34.14, bringing our full year 2025 total to a record $2.4 billion at an average price of $42.54. During the quarter, the board authorized an additional $1.8 billion to our share purchase authorization and at the end of the quarter, had $1.7 billion remaining. To close, the momentum we are seeing today reinforces our confidence in our recipe for growth strategy, enabling us to build on what differentiates Chipotle and to compete and win with greater efficiency and impact. We remain committed to the financial discipline required to both protect and strengthen our strong economic model. And with our brand strength and customer loyalty as our foundation, we will continue executing our strategy and expanding our runway for extraordinary growth. We look forward to sharing our progress along the way, and we are ready to take your questions. Operator: We will now begin the question and answer session. For the interest of time, please limit yourself to one question and one follow-up. To ask a question, you may press star then one on your touch-tone phone. If you were using a speakerphone, please pick up your handset before pressing the keys. Please press star then 2. At this time, we will pause momentarily to assemble our roster. First question comes from Brian Bittner with Piper Sandler. Please go ahead. Brian Bittner: Hey, thank you. Just a question on the guidance for about flat same-store sales. I guess, one, can you just help us understand the components embedded in there? For transactions and menu price and mix, that would be helpful to understand. And then just to anything you can offer on the cadence you'd expect. And I'm asking because you mentioned being encouraged by January. It would seem like there's some easy compares ahead, so just anything you could offer there would be helpful. Adam Rymer: Yeah. Definitely. Thanks, Brian. So for the full year, like we said in our prepared comments, we're excited about the momentum that we've seen in our underlying trends in January after the launch of the protein menu and that whole campaign. We're confident in our recipe for growth strategies and that they'll continue to drive transactions up throughout the year, including with chicken al pastor launching next week. But with that said, we think that it's still very early in the year, and consumer trends have been really tough to predict. So we wanted to be conservative in our full year guide to account for this. And our full year guide only includes, I would say, really a modest impact from the initiatives that we have this year. And then when you're thinking about how this works out throughout the rest of the year, we expect comps to improve throughout the year as our initiatives drive transactions. And as our compares get a little bit easier throughout the year. Brian Bittner: Okay. Thank you. And then just on the high-efficiency package, in the prepared remarks, you're referencing some increased throughput, maybe a lift to comp sales at those 250 restaurants. Just wondering at those restaurants, any quantification you could provide on what you're seeing at those stores and that's something you might I think you said 2,000 at the end of the year, but would you look to accelerate that over the next couple of years? Scott Boatwright: Hi, Brian. Excuse me. It's Scott. Thanks for the question. We're really excited and encouraged by the results we're seeing with the heat package. We're seeing better engagements, consumer engagement scores, we're seeing better scores around food quality and taste of food. And like we said in the prepared remarks, we're seeing hundreds of basis points of improvement in comp sales in those restaurants alone. That gives us confidence that we are approaching the strategy the right way, and it's having a meaningful impact for our team members and for our guests. We have already accelerated the program. We should be at 2,000 restaurants by the end of the year. And then you could see that there is a path to probably finish the rollout at some time in 2027. And we will go as absolutely fast as we possibly can. Brian Bittner: Thank you. Operator: Our next question comes from Sara Senatore with Bank of America. Please go ahead. Sara Senatore: Thank you very much. I guess maybe two quick questions. One is if you could talk about the LTO. I know that that's something you're gonna do more frequently. You talked about chicken al pastor being, I guess, twice as requested as anything else. I think about the fourth quarter, I think carne asada was maybe it didn't act exactly how you expected, although you can correct me if I'm wrong. So I guess how are you thinking about the LTOs? Are you gonna market it differently, or maybe it's more accessible price point just in terms of, you know, ensuring that you get the biggest lift from the LTO that, you know, what you would normally expect. So and then I'll have a follow-up, please. Scott Boatwright: Hi, Sara. It's Scott. Thank you for the question. So carne asada did perform as it relates to incidents just as well as it did in 2023, and I'm confident it did move the needle on transactions. To what extent, I can't really parse out at present. Here's what I will tell you is what we know from what we learned in 2025, which is really a year of progress, as I said, and resilience, is that the LTO consumer, the consumer that chooses an LTO at Chipotle has a higher lifetime value, visits the brand more often, and spends more. We're gonna lean into that moment with our core consumer. We've done exhaustive work around who the Chipotle customer is this past year. What they're looking for from our brand, and menu innovation and new news really at the top of the list. As it relates to how we'll market those components, we've increased the spend this year to account for fully supporting four stand-alone LTOs. I think the marketing message you'll see will begin to evolve. Hopefully, you've already seen the high protein wash that just happened, the Choices ad that just ran a couple of weeks ago. We're approaching the messaging differently, and we're gonna celebrate what is unique and different about Chipotle in a more meaningful way in the upcoming year. And you'll see that evolve as we continue to as the year unfolds within the marketing strategy. Sara Senatore: Okay. Thank you. Very helpful clarification. And then just a follow-up as related. You mentioned doing a national search for Chief Marketing Officer. Just curious, since you are, as you noted, spending more, you know, the percentage of revenues and, you know, multiple LTOs. Does that the fact that you, you know, perhaps are doing a search, is there any, I don't know, just risk of disruption or that, you know, the plan changes? Just trying to understand kind of the cadence. Scott Boatwright: Yeah. I would think of this, Sara, more as a chapter change. And here's what I would tell you. As we have both great internal candidates for the position as well as a lot of interest externally, and what we want to do is ensure that we stay on brand. We're gonna stay core to who we are. And we're just gonna lean into celebrating what, again, our points of differentiation. And our uniqueness in a more compelling way. So think of it as a chapter change for the brand. Chris Brandt did a tremendous job making us a purpose-driven lifestyle brand. That doesn't change, and that doesn't go away. They give us the next evolution of the marketing strategy. That really pushes us into the next phase of growth for Chipotle. Sara Senatore: Thank you. Operator: Our next question comes from Lauren Silberman with Deutsche Bank. Please go ahead. Lauren Silberman: Thank you very much. I have a question on comp and then one on the value side. Just on the comp in January, I know there's a lot of noise. Can you just help level set what you're seeing quarter to date, perhaps pre-storm, if that's the best you know, thought on what's going on there. And then are you assuming underlying trends from January continue throughout the year? Or just help contextualize what's embedded there. Scott Boatwright: Yeah. You know, I've said in the prepared remarks, we saw a lot of momentum coming into January. Recall that the protein menu launched kinda late December. And we really saw an acceleration in the trends. All the way up until the storm hit, you know, a multistate impact with massive restaurant closures. So it's a lot of noise in the underlying trend at present. But I'll pass it to Adam. Adam, do you have anything you want to add to that? Adam Rymer: Yeah. And I would just say, you know, for Q1, this gets us to an underlying trend somewhere in that minus 1% to minus 2% range, and that's what's embedded in our expense line guidance and our prepared comments. But you have to keep in mind that that comp range includes about 100 basis points impact from the restaurant closures from the large winter storm that Scott mentioned. And that's 100 points of impact on the quarter. On the quarter. Correct. Yeah. Lauren Silberman: Okay. Very helpful. On the value proposition side, you guys have you're talking about opportunities to strengthen that. You've been promoting protein. With a single taco, the cup of protein for under $4. Is there more opportunity for entry-level pricing or how you're thinking about smaller portions overall and just how you're thinking about balancing that with not cannibalizing the core business? Scott Boatwright: Thank you. Yeah. What's great about the offering in the protein menu is we're not discounting the product. We're just celebrating something that's on the menu that may have little awareness today. I think having a taco at $3.50 and a protein cup around $3.80 across the country is really an approachable price point that really gives the consumer a meaningful way into the brand, but also solves for, you know, those people that are looking for a different choice whether they're GLP one users, or looking for other dietary restrictions, more high protein, or high fiber. We will test and learn on a couple of new ideas that may be price-pointed throughout the year. And see if they make their way through Stage Gate and actually make a national calendar. But we feel really comfortably situated where we are today. Given the pace of LTOs that will all unfold starting with chicken al pastor on February 10, we have some new news. We have a, you know, a couple of tried favorites. True favorites that have performed well historically. I think the marketing calendar I don't think the marketing calendar this year is more robust and it'll be better supported. With targeted media than we've seen historically in the brand. Thank you. Operator: Our next question comes from David Tarantino with Baird. Please go ahead. David Tarantino: Hi. Good afternoon. I have a question on the margin outlook. And Adam, I was wondering if you could comment on where you think the full year restaurant margin would shake out on a comp that's about flat. I, yeah, I think you have some pricing coming in. You said you're gonna narrow the gap versus inflation. But just any comment on where the full year might shake out given the guidance on the comp? Adam Rymer: Yeah. Yeah. Definitely, David. So margins in 2026 will be under pressure, and it's mostly due to our investment of taking less price compared to the inflation that we're experiencing. But again, I would emphasize that's temporary. And we'll balance it out towards the end of the year. And like I said in my prepared comments, that gap will be the widest in the first quarter. So to put some numbers into it, we expect pricing to be about 70 basis points of impact in the first quarter. While inflation is closer to about 4%. So just then and there, that's about a 250 basis point margin headwind. We'll chip away at throughout the year. When you think about it on a full year basis, I would anticipate pricing to be in that 1% to 2% range. While inflation will be closer to that 3% to 4% range. So just that dislocation alone will be about a 150 basis points. On a year-over-year decline. And then there's a little a couple other adjustments in there, like ad promo is gonna go up maybe 10 or 20 basis points. You have the gift card benefit in 2025, which is another 20 basis points or so. Then, of course, you've gotta make the adjustment for transactions on a flat guide. There'll be a slight degradation in the margin from there. But the good news is that dislocation is temporary. We'll get that back by the end of the year. And all the initiatives that we have in place to drive transactions will resonate with our guests this year, and we're confident that we can drive up above that full year guide with some upside potential from us. So that's a good way to think about it, though, thinking from '25 to '26. Scott Boatwright: David, I would add to that. You know, we still have confidence in the long-term algorithm. Of getting to $4 million AUVs and approaching 30% margins. Although this year will be challenged for a couple of reasons, we have no reason to think that the long-term algorithm doesn't hold. David Tarantino: Great. I was just gonna ask about that, Scott. So thanks for preempting my question. But I guess, what is the path then from this baseline to get to, I guess, margins approaching 30%? I guess, is as simple as getting the volumes up, you know, a million dollars or so a unit? Or, I guess, is there something else, you know, or levers that you have to pull to strengthen, you know, productivity or, I guess, what is your framework for getting to that higher margin? Adam Rymer: Yeah. I'll start and then Scott definitely jump in. And so in the short term, it's definitely that dislocation that I talked about earlier, but we'll solve that by the end of the year. From there, it's all about driving transactions north and getting the flow through on those additional transactions. That will allow us to get not only back to the historical margins that we're a year or two ago at the volumes slightly above where we're at now, but to continue to increase those margins into the 27-28 range and beyond as we approach $4 million in AUVs. Scott Boatwright: Great. Yeah. And I'll tell you, David, the pricing approach we're taking this year at 1% to 2% compared to where the industry is closer to 4% will continue to strengthen our value proposition and give us pricing power in years to come. And so that combined with other initiatives that we have identified, whether it's in supply chain, or in labor, as we make this reinvestment in the business around heat, could still be opportunity down the road to capture some margin savings there as well. David Tarantino: Great. Thanks very much. Operator: Our next question comes from David Palmer with Evercore ISI. Please go ahead. David Palmer: Thanks. Just a couple of follow-ups on that topic of pricing power and, you know, efforts you could make to lean into boosting your value perception. I, you know, first, you know, there's been some pricing rolled out so far. Is there any learnings you have from that pricing? You know, what does price elasticity look like as you've rolled those out selectively? Adam Rymer: Yeah. Yeah. So as you know, we started the approach probably about, what, October, November, so last year. And it's going really well, and it's pretty much as anticipated. And so we expect to continue down this path of this really disciplined and measured approach to raising prices throughout the year. As I mentioned earlier, I expect the full year impact to be about 1% to 2%. But the beauty of this approach is it allows us to adjust throughout the year depending on what we're seeing, get much better data points, as well as get better reads throughout the year on inflation. But so far, so good with this approach. David Palmer: And I wonder, you know, you're gonna be existing among these giant fast food players that are rolling out value menus. And you know, you've done some things along the way. You've you have an entry price point cup with the new protein menu. You said you have some price-pointed things. Looks like you have a new style of advertising where you've pointed out, you know, pretty clearly there's a difference in the way Chipotle makes food versus what you'd see at a traditional fast food place. I just wonder if is there any, you know, do you feel like the offense might be working with these price-pointed things and the messaging and I'm just wondering if there's anything you can do to really shorten this cycle, this, you know, reinvestment in cycle rather than just wait for your price to underprice inflation for a while? And thank you. Scott Boatwright: Yeah. Thanks, David. You know, I'll tell you, you know, with what the momentum we saw in early January, the January gives us confidence that the strategy is exactly what our consumer is looking for. I talked earlier about doing this deep dive on the core Chipotle consumer to truly to really parse out who that consumer is and what they want. What we've learned is the guest skews younger, a little more higher income, is typically a digital native. And that their grounded purpose aligns with our North Star as a brand around clean food, clean ingredients, high protein, and we are the way they wanna eat. We're gonna lean into that in the most meaningful way. I'll tell you, after looking at the data last week, we learned that 60% of our core users are over $100,000 a year in income. In average household income. That gives us confidence that we can lean into that group in a more meaningful way, whether it's the solo occasion and or group occasions to really drive meaningful transaction performance in the year. Operator: Our next question comes from John Ivankoe with JPMorgan. Please go ahead. John Ivankoe: Hi. Thank you. Okay. I'm gonna follow-up on the income question, and then I'll have a question on development. You know, first on the income side, 60% of customer is over $100,000. You know, there's a lot of puts and takes, you know, with tax refunds and just overall changes in tax rate and student loans, what have you. Do you think the core consumer that Chipotle has will actually benefit in '26 from all the different puts and takes that are just, you know, kinda happening out of DC in terms of affecting the customer's wallet and spending ability? Scott Boatwright: Yeah. Hey. I would tell you that we believe it's gonna be a nice tailwind to spend and aligns nicely with our ramp-up and menu innovation. As it is a larger percentage of overall guests. And I think initially for the under $100,000, there'll be a nice bump after tax season and spending in general. And I think we have an opportunity to really garner more than our fair share in that window as well. John Ivankoe: Okay. Thank you. Helpful. And the second question is on development, specifically North America company development. Have we, you know, don't know if, you know, exactly the number 330, 340, 350, you know, something, you know, between 25 and 26. So just correct me on that exact number. Are we kind of hitting a natural level of, hey, we should be thinking about nominal growth rates of units in this core important market as opposed to expecting. What has been historically some, you know, pretty decent leg ups. You know, in development. In other words, now I'll ask the question more succinctly. Are we at the kind of development level in company North America that should just be the absolute level going forward, or do you think you actually have an ability to ramp it? Maybe that's a better way to ask it. Scott Boatwright: You know, we built 334 restaurants in 2025. And we did it successfully. And we had the right teams ready, prepared, at the right development level to take on new growth. And not affect or impact negatively the core business. This year, we'll build 350. So think one new Chipotle restaurant almost every day. And we think that's the right growth rate for our brand. And gives us a lot of confidence that we'll continue to build them and have returns in the 60% range. And so we still can neck up to the 9, 10% new unit growth if we add in partner-operated restaurants into the mix as well. But we feel really comfortable at that growth rate out to 7,000 restaurants in North America. John Ivankoe: And the final one, you know, just give confidence outside of Central London and Frankfurt. Those are obviously two very specific type markets. Are you feeling, you know, good elsewhere in UK, good elsewhere in Germany? And I'll conclude there. Scott Boatwright: Yeah. France is a tough one, I'll be honest with you, because of wage inflation, because of occupancy costs. It's not to say we don't like France as an opportunity. We're just not seeing we're seeing some recovery there, but not at the same pace. But so we just need a little more time in France, I believe. As it relates to London proper or UK proper, Central London is our biggest opportunity. We've made some strategic bets a couple of years back outside of Central London. That didn't perform at the level we wanted them to perform at. So we think about the strategy for London more lot more similar to New York or Downtown Chicago, where there's so much opportunity to build within Central London and have, you know, very successful return on investment. That that's where we're gonna lean into. But then we'll look to expand to other adjacent markets, whether that's Benelux, the Nordics, Poland, or Spain. Operator: Our next question comes from Danilo Gargiulo with Bernstein. Please go ahead. Danilo Gargiulo: Great. Thank you. Scott, in the past, you mentioned that you may have identified 100 to maybe 150 basis points of margin upside opportunities that over time, you should be able to unlock. Was wondering if you can give more color on the timing of those opportunities and what levers you can pull today without impacting demand? Thank you. Scott Boatwright: Yeah. So we are in the throes. Great question. Thank you for that, Danilo. We're in the throes of going through a very comprehensive supply chain review and there are strategic savings that are there that don't affect the ingredient quality that we bring in the back of our restaurants. So we have a lot of confidence we'll be able to pull margin there. But, also, the equipment high equipment high equipment package has margin savings that we are reinvesting at present. That over time could have a meaningful impact to margin as well. Danilo Gargiulo: Great. And I would like to follow-up also on the snacking occasions. Specifically, handheld seem to be another area where you could be leaning more into. I was wondering how does this fit into your marketing strategy, and more importantly, how are you gonna be enhancing your value orientation while ensuring that you're not cannibalizing your own sales and using consumers to trade down. Thank you. Scott Boatwright: You know, that was, you know, consumer trade down concern was one of the concerns we had around the high protein menu. And, frankly, we just didn't see it. Extra protein incidence is up 35% during the menu launch. Which gives us confidence that the core consumer is not like necessarily looking for a smaller, lower price-pointed component to the menu. What they are looking for is excellent culinary, excellent in-restaurant and digital experiences, and then product that is on brand and on trend. And so that gives us confidence in the strategy. We will test ideas like, dare I say, a happier hour to see what that looks like for our brand. I don't know if it'll be a meaningful unlock for Chipotle, but we're gonna test the idea. And stage gate it and give it the appropriate resources necessary. Operator: Our next question is Dennis Geiger with UBS. Please go ahead. Dennis Geiger: Great. Thank you. Wondering if you guys could talk a little bit more about how you're sizing up those key sales drivers in '26, many of which I know you commented on. But I believe you mentioned only embedding a modest impact from the initiatives this year. So I'm just curious if you could sort of unpack is that sort of consistent with your methodology on often not embedding LTOs in the comp guide or is it much more of a let's be conservative in thinking about a lot of these impactful initiatives, just given the environment that we're in. Just curious if you could unpack that for us, guys. Thank you. Scott Boatwright: Yeah. I'll let Adam jump in on his reference as it relates to embedding in guide. LTOs, or other strategies. Here's what I'll tell you. We have sized up the opportunities whether that's, you know, relaunching or reimagining rewards. Or group occasions, or what the heat equipment package will do for our brand. Of course, we're still early days on many of those things, so we dare say, you know, what that will look like. We have a pretty broad range on each of those items. But I think they're more multiyear than a 2026 initiative. Adam Rymer: Yeah. And then in terms of, you know, looking at the guide, if you look at more of our short-term guides, what I mentioned example for Q1 of a minus one to a minus -two percent, that does not include any further initiatives the quarter. So think of Chicken Al Pastor, or that momentum that we're getting from the protein menu and campaign that can provide upside to it. But then when we're thinking about full-year guides, we usually include a modest impact from the initiatives throughout the year. And this year, we definitely took into account there, like I said earlier, just what's going on in the consumer environment. We just wanted to be a little bit more conservative on that full year just because of that. Dennis Geiger: Thanks, guys. I appreciate it. Operator: Our next question is Chris O'Cull with Stifel. Please go ahead. Chris, your line may be muted. We're unable to hear you. Chris O'Cull: Sorry about that. Can you hear me now? Scott Boatwright: We have you, Chris. Go ahead. Chris O'Cull: Okay. Great. Scott, I had a follow-up question regarding the CMO search. I'm just wondering what specific next-level expertise are you looking for in a leader to help drive Chipotle into this next phase of growth? Scott Boatwright: Yeah. We're just looking to evolve our key messaging, really talk about our points of differentiation in a new way that's compelling. Continue to drive strong menu innovation for our brand that is on brand, and that drives really consumer demand. And then support and help as it relates to digital to help support our new chief digital officer as we think about digital commerce differently in the years to come, whether that's reimagining the loyalty program which you talked about, or better partnership with our third-party aggregators and really figure out meaningful ways to drive transaction through those channels. Because we know those channels to be different whether you're talking about Uber or DoorDash. One is heavily focused on price differentials for in-restaurant versus delivery. Other one's more promotionally driven. And so figuring out the right approach to that. And then also, really making our white label experience more approachable to really accelerate the transactions we're seeing in that channel as well. So holistically, I know I said a lot there, Chris. Looking for I guess, a unicorn. Good news is, I talked about this earlier, we have great internal talent. We have great external excitement for the job. So I think we'll have someone in the chair in the coming months that is world-class, and that'll deliver on the expectation. And deliver on our recipe for growth strategy. Chris O'Cull: Okay. And then just my second one. How are you thinking about communicating to light or lapsed users who probably represent a big opportunity but are likely not going to see the first-party loyalty offers? Scott Boatwright: Yeah. So I think we've talked about personalization in the past, Chris, and we're starting to really accelerate the personalization journey. I'll give you an example. We're leveraging the AI model to really identify those lapsed users and create journeys that get them reengaged with our brand. More importantly is we're able to parse out deals or offers for based on how often they frequent our brand in the past. And what we anticipate their lifetime value to be. Which is really a meaningful step change in how we really drive demand in the channel and targeting lapsed and at-risk consumers. Chris O'Cull: Okay. Great. Thanks, guys. Operator: Our next question is with Andrew Charles from TD Cowen. Please go ahead. Andrew Charles: Great. Thank you. Scott, you reiterated the 2026 development guidance, and I'm curious what you would need to see to slow development to intensify the focus on improving traffic. Is it overly simplistic to think if 2026 comps were to be negative instead of flat, then this would make you reconsider development plans? Scott Boatwright: Yeah. I think it's a couple of things. I think number one, is if we started to see cannibalization that exceeds our historical levels, which we haven't seen any deterioration there to date, or in the last couple of years. And or if we stop seeing the performance of new restaurants at 80% or better of the existing asset base, or we see margins or return on investment start to be marginalized, that would cause us to slow down. Fortunately, we're not seeing any of that to date, which gives us confidence we're on the right track. Andrew Charles: Very clear. Okay. Thank you. Then my follow-up question is just for the four new LTOs this year, should we think about them being roughly evenly spaced around three months each? Or Al Pastore obviously has been a hero for you guys in 'twenty three and 'twenty four. Might that one run a little bit longer than the, you know, implied three months each? Scott Boatwright: Yeah. So think about them between eight to twelve months in total. So there'll be different cadences, and we have the ability to extend or reduce that timeline based on how we see the market trending. But I think you're thinking about the right way. Andrew Charles: Very helpful. Thanks, guys. Operator: Our next question is from Sharon Zackfia with William Blair. Please go ahead. Sharon Zackfia: Hey. Thanks for taking the question. There was a lot of talk over the summer about the younger consumers slowing down. And I'm curious as you've seen the comps accelerate, it sounds like through the fourth quarter and into January, have you seen that consumer as well kind of a comeback? Is there anything to call out from a demographic standpoint? Scott Boatwright: Yeah. So I'll tell you, Sharon, that I'll give you an anecdote, then I'll tell you the story. So we started down the path in the fourth quarter of really finding out how to reengage that younger consumer or lower-income consumer and get them reengaged with the brand. I'll tell you our digital team worked wonders as it relates to finding ways to gamify the experience and create rewards that were meaningful enough to drive that cohort back into our restaurants. One of those examples, I was in Florida just before the holidays, and we launched our free potlait campaign. I was in a restaurant, and I was like father time standing in the line that was out the door. The average age of the customer in the line that day had to be 20 maybe 21 years old. And so I'll tell you that worked tremendously getting those consumers back in our restaurants, and it will be used to inform the 2026 strategy as we engage that cohort more meaningfully. Adam Rymer: Yeah. And I would just add to that as well. I mean, a lot of the initiatives that we've done since last summer, especially with Red Chimichurri, the new protein menu and campaign, as well as just LTOs in general, really have outsized performance with that group. So you're gonna see us continue to lean in on those well for that reason. Sharon Zackfia: Thanks for that. And then as a follow-up, on the high protein launch, was that successful in bringing in new customers to Chipotle or was it really kind of a frequency or upsell kind of dynamic? Scott Boatwright: It did both actually, Sharon. So new customers to our brand, who really didn't know about the high-quality proteins that we have. And I shared this with the marketing team, and they share my enthusiasm around the topic. We have the best proteins in the world. Why wouldn't we celebrate those in the most meaningful way to really, again, drive our points of differentiation compared to our competitors who may also be promoting protein at the same time. And I think we had a meaningful impact on the trend change in the business. But more importantly, the adoption of the protein cup protein side being up 35% is evidence that the strategy works. Operator: Thank you. Our final question will come from Christine Cho with Goldman Sachs. Please go ahead. Christine Cho: Hi, thank you for taking the question. So just a quick follow-up on the performance of the high protein cup. So are you seeing any specific consumer cohorts responding more favorably, such as the younger consumers? And did you also see any impact on the late afternoon traffic? And then also, incremental color on your plans to address the new kind of side and beverage occasions throughout the year would be appreciated. Thank you. Adam Rymer: Yes. I'll start on the protein side. So absolutely. I think this protein trend that we're seeing across the nation right now is having an outsized impact on the younger cohort. Really is across the board. But we're definitely seeing an outsized impact there. And again, it's mostly coming through additions. There's a little bit coming in and just getting the cup or just getting the single taco, the vast majority are utilizing that as a checkout on. And then you had a second question about drinks. Christine Cho: Yes. Your plans for the sides and drinks. And occasions throughout the year. Scott Boatwright: Yeah. So we will, Christine, we will pepper in new sides and beverages. We'll do a beverage in the summer. And we will look at different sides that we're bringing, whether they're dips or other sides that we'll bring in that really tested really well through Stage Gate that we're really excited about. I wish I could tell you. I think if I did, my marketing team would throw me out of the building. But we're super excited about what we have to offer. Look forward to an incredible year. Thank you. Operator: This concludes our question and answer session. I would like to turn the conference back over to Scott Boatwright for any closing remarks. Scott Boatwright: Thanks, everyone. Hey, I just want to close by thanking our team members for their hard work and dedication across our 4,000 restaurants and around the globe. They truly are the backbone of this great brand. I also want to reiterate my deep confidence in our growth strategy. We are doubling down on what uniquely differentiates our brand to position Chipotle for what I talked about earlier, our next phase of growth. We will win by investing in operational excellence, accelerating innovation into new offerings and occasions, relaunching our rewards program, deploying new back-of-house technology and equipment, and growing our global footprint. As I laid out, we're already seeing progress and validates that our focus on these strategic priorities is already resonating with our consumer. Our recipe for growth plan will position us for success in any environment and I am confident we'll drive transactions, allow us to move faster, and create long-term sustainable growth for the brand. And with that, I just want to say thank you, and have a great day, everyone. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to Banca Mediolanum Full Year 2025 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Alessandra Lanzone, Head of Investor Relations. Please go ahead, madam. Alessandra Lanzone: Good morning -- good afternoon, actually, everyone, and thank you for joining us. We can certainly look back on 2025 as a year of strong momentum on our business and results that keep us very well positioned as we head into '26. Today, we'll walk you through our full year performance, what has driven it and the priorities we're taking into the year ahead. A quick note on Q&A. As usual, feel free to ask your questions in the language of the line you're calling from. We will answer in Italian with a real-time translation into English. With that, I'm pleased to hand this over to our CEO, Massimo Doris, joined by our CFO, Angelo Lietti. Massimo, over to you. Massimo Doris: Thank you, Alessandra, and good afternoon to all of you. After a record 2024, the question was whether it was a one hit wonder? 2025 answered that question. This wasn't a one-off. We raised the bar and went one step further. The results speak for themselves, but they also speak to something deeper than numbers, the quality of our growth and the strength of a model that delivers consistently. This trend translates into tangible value for our shareholders, and it is reflected in the strong dividend we are proposing for the year. But before we go into the figures, let me start with a quick word on the macro backdrop because it matters since it sets the context for what you're about to see. In 2025, 3 forces continued to pull in different directions: rates moving into a normalization phase, markets shifting mood quickly and geopolitics remaining a generator of volatility through international tensions, trade policy and uncertainty around energy and supply chains. And a regulatory and fiscal backdrop that keeps evolving, especially in Europe and discipline becomes the differentiator. Within that noise, there were also tailwinds. As rates began to ease and markets held up, households started looking beyond part liquidity again. And that's where the difference shows between a model that sells financial products and one that builds long-term relationships through advice. The real question we are going to -- into today is not how was 2025? That is now clear. But how repeatable is it in 2026? The market is looking for visibility on 3 things: continuity of net inflows even if volatility returns, the trajectory of NII in a lower rate environment and continued discipline on costs, including the network component, which is exactly why our guidance -- our read on 2026 matter as much as the numbers we are about to present. With that in mind, we'll be very clear today on what supported our 2025 performance. While we see a structural versus more context-driven and how we are positioning the business to keep growing with quality in 2026. Let's move into the numbers. I'll start with the economic and financial highlights in Slide 4. The headline news is that 2025 was another best ever year for Banca Mediolanum, surpassing last year's record and reaching new peaks across virtually all key indicators. At the group level, net income came in at an outstanding EUR 1.238 billion, up 11% over the previous record level in 2024. What matters most behind this bottom line number is not the one-off impact of tax refund nor the strong contribution from performance fees, but the same engine we've been building for years: customer relationships, smart solutions, sound and needs-based advice and a network that keeps converting engagement into long-term assets. In fact, our core profitability was exceptionally strong. Contribution margin exceeded EUR 2.1 billion, and operating margin was just shy of EUR 1.2 billion, improving 10% versus the prior record. Results were supported by net commission income growth, up 12% to EUR 1.3 billion and a truly exceptional commercial performance, especially the quality of net inflows into managed assets. We also managed the interest rate transition with discipline. Rates continue to normalize through the year and the tailwind to net interest income naturally softened. Even so, we protected profitability through mix and pricing actions to reduce the cost of funding by keeping the balance between growth initiatives and margin management. For sure, recurring fees increasingly carried the weight. Higher average managed assets in the year and strong net inflows supported management fees, which went up 10% to over EUR 1.4 billion. In other words, the revenue mix did what it was supposed to do in a shifting rate environment, less reliance on NII, more support from recurring fee income linked to customer assets. Below the revenue line, we stayed cost conscious, in line with our guidance of a cost-to-income ratio below 40%, while continuing to invest in the levers that matter, namely technology, network productivity, including NEXT and the customer experience, cost-to-income ratio resulted at 37.6%. Slide 8 provides more detail on the other income statement lines. Let me flag a few highlights. Banking service fees climbed 38% to nearly EUR 259 million, driven by strong certificate sales, solid in Q2 and even stronger in Q4. As you know, certificate fees are recognized upfront in the P&L. Net income on other investments was around EUR 22 million, down 35% year-on-year, entirely explained by the different perimeter. We sold our Mediobanca stake in July, so dividend income was limited to Q2. From the second half award, that contribution is simply no longer part of the run rate. Provisions for risks and charges increased by 21%, reflecting the same dynamic we saw in H1. As for risk provisions, last year's favorable legal outcomes led to one-off partial releases that did not recur this year. And for network indemnities, the increase remains volume driven. Higher commissions naturally require higher provisioning. Provisions also increased because we started to build the reserves for the growing Prexta unsecured lending business. It's a prudent forward-looking approach in line with expected loss models as volumes grow. Contributions to banking and insurance industries were down 36% year-on-year, as banking sector contributions did not recur this year. The only notable movement came in Q4, driven by a one-off supplementary extraordinary levy from the banking scheme. Below the operating margin, market effects were definitely positive, thanks to favorable market performance and effective investment management in 2025. The contribution of performance fees for the year was considerable, although 32% lower than in 2024 to the tune of EUR 257 million gross, boosting our bottom line. Remember that performance fees for us are a bonus, not a pillar. They are certainly welcome when they come, but never something we rely on or plan for. Of course, it's the health and consistency of the underlying business that matters. Fair value improved significantly to EUR 28 million from EUR 17 million last year. We fully disposed of our stake in Next in Q2, resulting in a substantial uplift compared with the negative mark-to-market recorded last year. We also saw a positive contribution from treasury trading. Now let's look at extraordinary items. Following a specific ruling by the European Court of Justice last August, we received a refund of EUR 140 million relating to IRAP regional tax we overpaid for the years 2012 to 2024. For completeness, the same ruling also brings a benefit on the tax line, around EUR 17 million of lower IRAP in 2025. Although this benefit is expected to be largely offset in the coming years as IRAP increases. One important clarification on this line, the EUR 140 million refund is partially offset by the financial effects of the required advanced payment of the stamp duty on unit-linked policies as well as by the commissions related to the Mediobanca sale, but especially by a one-off recognition bonus we have decided to award across the group for a total impact of nearly EUR 23 million. I'll come back to the rationale behind this in a bit. Taken together, the nonrecurring items in our P&L were broadly in line with last year, around 4% higher, and this doesn't change the overall picture. Now let's launch into an overview of the business results for the year. Turning to Slide 5. Commercial momentum score new all-time highs across the all-net inflows metrics versus an already very strong 2024, accelerating in the last quarter and taking total net inflows up 11% to EUR 11.64 billion. These results were fueled by the success of our time deposit campaigns, where flows were supported by both new and existing customers, confirming the reach of our marketing and acquisitions engines. If there is one number to call out, it's managed assets. Flows reached EUR 9.06 billion beating our 2024 record by 18% and ahead of our guidance of EUR 8 billion to EUR 8.5 billion. And this is the most meaningful mix for us because it reinforces the quality and durability of our revenue base and supports predictable earnings over time. So driven by these inflows and deposit growth, total assets ended 2025 at EUR 155.8 billion, increasing 12% year-on-year. Keep in mind that positive market performance overall more than offset the weaker U.S. dollar. The credit book also expanded, ending the year just shy of EUR 19 billion, while asset quality stays strong with a cost of risk of 16 bps. The growth of the credit book was supported by higher loan origination with loans granted increasing 28% year-on-year to a total of nearly EUR 4 billion. General Insurance also delivered a strong uplift. Gross premiums rose 20% to EUR 246 million, protecting customers' wealth and earning capacity remains a core priority for us. Growth was supported by stand-alone policies and even more by the renewed momentum of loan protection cover, consistent with the expansion in mortgages. Turning to Slide 6. Our customer franchise continued to grow strongly. We ended 2025 with well over 2 million customers, expanding the base by 6% year-on-year after acquiring 199,500 new customers. Our group family banker network kept step with this growth, also up 6% to 6,798. Intelligent investment strategy has gathered real momentum. Over EUR 5 billion is currently in money market funds with a planned gradual switch into equities over an average 3.5-year horizon. Since the beginning of the year, some EUR 2.2 billion of new money has been invested through this strategy, taking the total up by an impressive 76%. In addition, close to EUR 3 billion is in the pipeline to move into mutual funds over the next 12 months, as highlighted in the last 2 lines of Slide 6, including EUR 840 million from double chance deposits and more than EUR 2.1 billion from installment plans flows, which are building progressively. Our model continues to do what it was designed to do, make it easy for customers to invest regularly while giving the bank a more predictable flow of fee income and a more resilient revenue base. Let's move on to another key pillar of our model. Balance sheet ratios shown on Slide 7. It's a picture of strength and discipline and of continued value delivered to shareholders. Capital and liquidity remain strong and comfortably above requirements, and we further broadened and diversified our funding profile, while keeping our risk stance unchanged. Starting with profitability. ROE came in at a best-in-class 29.1%, a clear proof point of our model at work. Our CET1 ratio remained extremely robust at 23%, even after our solid shareholder distribution. In fact, at the shareholder meeting, we will propose a EUR 1.25 dividend per share, increasing 25% versus 2024. Having already paid an interim dividend of EUR 0.60 in November, this leaves a balance of EUR 0.65 to be paid in April. Let me be super clear. The EUR 1.25 we are now proposing is entirely an ordinary dividend. It comprises a base dividend of EUR 0.80 per share and an additional EUR 0.45 attributable to the exceptional contribution from nonrecurring items as well as the one-off benefit from the Mediobanca sale we executed in July. But value creation for us is not only about shareholders, it is also about the people who make these results possible every day. So alongside the shareholder distribution, every employee and every family banker across the group around 11,000 people, we received a EUR 2,000 bonus, a simple concrete way to say thank you for an outstanding year. Let's take a moment to focus on our family banker network in Italy that reached 5,148 financial advisers at the end of 2025. During the year, on top of the many new colleagues who have joined us with strong background as branch managers or customer relationship managers in other sectors, we also welcome a strong pool of young talent through the project NEXT. As you all know by now, our banking consultants are high caliber graduates. They start with a 6-month executive master at our Corporate University, earn the FAA certification and then move straight into the field, working alongside a senior private banker or wealth adviser, with their remuneration totally covered by the senior. The numbers in Slide 37, reflect the success of the project. At year-end, 590 banker consultants were already active in the network, with an additional 213 currently in training. We expect to overcome 800 by the end of 2026. This strategic initiative is already delivering. Among the 726 senior bankers who have worked with a banker consultant for at least 12 months, productivity has increased materially. They were already ahead of their peers and the lead has widened further. The advantage in managed asset inflows has increased more than ninefold from 4% to 37%. It's up around 1.3x in loans from 31% increase compared to their peers to 40% and up close to 1.8x, both in protection policies from 32% to plus 57%; and in customer acquisitions, from plus 46% to plus 81%. The trajectory is encouraging, and it's getting stronger. The network is accelerating, and we see further upside in productivity. With that in mind, let's turn to Slide 30. It tracks 5 years of productivity for the top tier of our network. 1,074 private bankers and wealth advisers measured by average assets per banker. As Slide 30 shows, average asset per banker stand at EUR 64.2 million, almost twice the industry average of EUR 34 million. And the gap has stood still. It has widened year after year not by accident. It reflects the investment and discipline we've put into upgrading our network quality and the stronger recurring revenues per banker that follow. This is an edge we build, and we see it continuing to improve. Now let's turn our attention to Spain by commenting on Slide #32. As we've seen quarter after quarter, Spain's strong volume momentum gave us the confidence to commit to a meaningful step change in scale. This came with a higher cost base, mainly due to the expansion of our platform, increased activity across the country and additional marketing spend. So the P&L impact reflects a deliberate investment to support growth and build long-term value. One important dynamic to keep in mind: net interest income was down 18% year-on-year and at the current scale of our Spain operations, higher net commission income there couldn't fully close the gap. Keep in mind that stronger commercial momentum in managed assets translated into higher incentives for our network, a natural consequence of delivering more and better business. On top of this, performance fees were materially lower than last year. Operating margin reached EUR 56.4 million, reflecting a 26% decrease compared to 2024. And net income stood at EUR 57.7 million, 29% lower, mainly due to the factors we just mentioned. As a clear sign of Spain's commercial momentum, total assets grew by 18% year-on-year approaching EUR 15.5 billion, with managed assets rising 23% to EUR 11.9 billion. Indeed, Spain delivered another strong year on net inflows, EUR 1.95 billion, jumping 30%, but the real highlight is the quality behind the number. All of it came from managed assets, with flows up an impressive 35%. That's exactly the kind of growth we want to carry forward. Turning to lending. The credit book continued to grow, reaching EUR 1.74 billion, up 17% versus 2024. Meanwhile, the number of family bankers hedged up by 2% to a total of 1,650. The key point here is the step-up in productivity over the past 5 years, mirroring what we've delivered in Italy. Average assets rose from EUR 5.5 million in 2020 to EUR 9.4 million today. Finally, our customer base in Spain expanded to 285,760 marking a meaningful 12% increase versus the previous year. Now I'd like to shift your attention to one initiative that deserves a quick spotlight. Because it's a priority, we are pushing hard. The strength of our brand, combined with the caliber of the top tier of our network, gives us a real advantage in serving the top end of the market. It allows us to focus with increasing confidence on a high wealth segment that is growing rapidly across the industry and expanding just as clearly within our own customer base, those with assets above EUR 2 million. Over time, we've been steadily strengthening our position in this space from private banking customers with EUR 500,000 to EUR 2 million of investable assets to even more so high net worth customers above EUR 2 million. And as you may recall, a few months ago, we launched our Grandi Patrimoni program, introducing a new service model built to raise the service standard where it matters most, meaning customers above EUR 2 million. In practical terms, it's built around 4 pillars: fee-based advisory models, the so-called enhanced advisory including fee over administered assets and fee-only solutions; a dedicated product set, spanning lending and wealth management; a tailored investment banking and fiduciary proposition alongside highly specialized wealth services; an enhanced coverage approach, including wealth adviser teams to bring broader expertise to customers. This is how we intend to earn more share of wallet at the top end with a service model that matches the complexity of their needs. Even though the program only launched midyear, we've already seen encouraging results in 2025. The number of high-end customers with more than EUR 2 million assets grew by 20% versus the previous year, reaching close to 4,000, and they hold a total of EUR 19.4 billion in assets, up 22%. In 2026, we will keep building on this and further scale the model. Well, to wrap up, 2025 was a year of extraordinary milestones for us. We faced challenges. We delivered and showed what excellence looks like. And we did it with the same engine we've been building for years, 45 years to be exact actually yesterday. Looking ahead, it's important to be clear of what we are aiming for in 2026. Our 2026 guidance is as follows: We expect net inflows into managed assets to be around EUR 9 billion assuming normal market conditions. We see net interest income up approximately 10% versus 2025. We are targeting a cost-to-income ratio of around 38%. We expect cost of risk to be around 20 bps. We intend to increase dividend per share versus the EUR 0.80 base dividend. The road map for the year is targeted and built around our main priorities: growth, productivity, durability and sharing the value we create. Our goal is to make it look routine even though it never is. Thank you for your time. And as always, we appreciate your continued support. Alessandra, over to you. Alessandra Lanzone: Thank you, Massimo, and we can now open the Q&A section. Operator: [Interpreted] [Operator Instructions] We'll now have the first question from Mr. Enrico Bolzoni JPMorgan. Enrico Bolzoni: [Interpreted] First question on banking fees. You had a very good print for the quarter. So I would like to understand whether you can give some more color. I believe this is due to the sale of certificates and what do you expect for the coming quarters? Maybe you can give us some color as to how they fared and they performed in January? Second question it's on fee-on-top that is, so-called unbundled model. I was reading the Assoreti reports. And apparently, they are harvesting a lot of interest. If I calculate and examine your margins, net of the commissions that are going to be remitted to consultants, your margins are quite hefty above 1%. Do you think that in a world where advisory will be more and more based on the fee-on-top top model, will be able to retain these margins because basically, you will have 1%, 1.1%, 1.2% fee that will have to be added on it. It seems rather high compared to a market like that in U.K. where commissions are already fee-only -- based on a fee-only model. Unknown Executive: Right. As far as banking service fees are concerned, in 2025, markets have performed very well. And setting aside the certificate we sold in the past upon maturity, there were many calls as well, that is certificates had already met the targets and there, they were redeemed earlier. This -- I mean, certificate that had to last 4 to 5 years, lasted 1 year, reaping an excellent result for our clients, and therefore, clients reinvested in new certificates. Enrico Bolzoni: What can we expect for 2026? Unknown Executive: It really depends on how markets will perform. If markets will keep rising, many certificates will be redeemed earlier and therefore, we are going to see reinvestments. If markets will instead remain flat or trend down, there will be no early redemptions, there are going to be the normal maturities and the normal operations and trades. But we don't have only certificates in this figure, we have [ monetics ], we have bank account fees. There are many, many items under this line item. So if the markets are fair, well, we can expect this item to grow next year. If markets sort of slug around, probably this line item will remain flat. Other fees and commissions will increase and maybe fees and commissions generated by certificates remain flat or slightly dip. Having said this, if I don't sell certificates, I'm going to sell funds or unit-linked. Yes, there's an impact on the P&L because the certificates are upfront, whereas the others are ongoing in terms of recognition. But what is important is to have managed assets. As far as the fee on top issue is concerned, this advisory model most likely is going to be rolled over on high net worth individuals, as we can see on the market. On high net worth individuals already today, we obtained lower commissions because on high net worth individuals, we have a higher number of third-party funds, and therefore, this means a lower margin for Banca Mediolanum. Talk about my life policies, the unit-linked policies that then as an underlying have a number of own funds or third-party funds that family bankers can enter in the -- as an underlying. A normal my life have safeguard and monitoring fee equal to 1.75%. If the investment is above EUR 1 million, the commission goes down to 1.25%. If it's more than EUR 5 million being invested, it goes down to 1%. And the mix and the underlying mix changes because we go from a higher percentage of own funds to a higher percentage of third-party funds, and therefore, margins change accordingly for us and for family bankers as a consequence. So if we take the average sort of rule of thumb calculation, this commission payment model devoted to high net worth individuals is going to weigh on the commission average we receive. But we have to really take another view. If I don't introduce this type of commission model, I may lose some market share. So my margins will remain higher, but on a much lower asset volume, a much smaller asset volume. Having said so, not only will we acquire top clients with lower margins, thanks to the Grandi Patrimoni program. But we will keep on acquiring upper mass and affluent clients who are going to invest in classical managed assets with the product we know. We will keep on working on both the fronts trying to constantly growing our masses, providing the right service at the right price to the different client segments. Operator: The next question comes from the line of Luigi De Bellis, Equita SIM. Luigi De Bellis: [Interpreted] The first is on the 2026 guidance on the managed asset -- well, net inflows into managed assets. What other volumes did you expect to have in the next 12 months and that will be turned into managed assets? And what is the trend in this January of net inflows into managed assets? And then the NII growing about 10%. Can you remind us of the assumptions, Euribor assumptions, growth of value deposit and growth of the banking portfolio -- or sorry, the loan portfolio? Massimo Doris: As to the first question, we have about EUR 3 million between installment -- EUR 3 billion between installment plans and double chance. And in the next 12 months, over 2026, they will go from deposits or bank accounts to managed assets. So we already have EUR 3 billion worth of gross managed inflows so to say, but EUR 3 billion, nonetheless. And the IIS, we have EUR 5 billion in monetary funds that are tied in with the Intelligent Investment Strategy service are already part of the net managed inflow. So the shift of transfer of about EUR 1.5 billion with market markets being as they are now because, of course, if markets go down, there's a shift between money funds to equity funds. So with things standing still, we would have EUR 1.5 billion going from money funds to equity-based funds. But from the point of view of managed assets, the impact is 0 because the money funds, the money market fund is already considered to be managed assets. So -- and we would go from 1 to 1.25 recurring fees. So that would be a very limited impact. As to the NII, the Euribor assumptions, let me get it for you. The average Euribor assumption is 1.95 at a steady state, 3 months Euribor as well. And then why do we foresee assume growth volumes first and foremost, because we assume there will be growing volumes where the inflows that goes to bank accounts at 0 cost. And this 10% growth implies and includes 2 initiatives. One is ongoing already at 3% today. And the next initiative will be in the second half of this year with propositions where the cost of inflow will have -- of funding, sorry, the cost of funding will have a major impact. So there should be an increase in volumes in bank accounts where we have 0 interest applied. And then, of course, there will be increase in volumes also in loans as well and mortgages. And then the cost of funding comparing 2026 to 2025. In 2026, we expect a lower cost of funding because in 2025, for instance, in the first half or first part of 2025, we had the offering on 6-month deposits that have been launched in September, October in Q4 2025, where we were granting 5%. So in the first part of 2025, we paid 5% interest on time deposits, now we are paying 3% on time deposits. So -- and then it went down to 4%, et cetera. So low cost of funding, as I was saying, and higher volumes. That's our assumption to get to the plus 10% that we are assuming. Operator: Next question comes from Alberto Villa, Intermonte SIM. Alberto Villa: [Interpreted] Congratulations for your results. I really would like to talk about the competitive scenario. Yesterday, we heard the presentation of Intesa's presentation. This bank has been focusing for a long time on distribution and asset management, they're also trying to grow through Banca de territory, converting their distribution network also from this point of view. So generally speaking, is this focus that all banks are showing on asset management, something that can somehow affect more specialized players as you rightly are? And do you believe that the growth opportunities will still remain significant considering that Intesa is quite aggressive also in terms of recruiting. Do you think that you might have a stronger churn rate in the future or are you quite carefree? Back to the net interest income. Can you give an idea of volumes, a guidance with respect to volumes are concerned to concerning loans. Loans have been growing above average. Do you think that you still have a significant growth opportunity ahead from this point of view? Unknown Executive: You're talking about loans alone? or are you talking about loans, mortgages, you mean the entire lending volume? Alberto Villa: Yes, total figure. Unknown Executive: Let me answer to your first question first regarding networks. Now first of all, large banks, creditor talked about this, Massimo said this as well. In Italy, they already have Fideuram. If I got it right it was really more focused on international banks. But really, this is not that important. But if everybody wants to develop their networks, it means they are working well and they have a future because otherwise, they would not be investing in their network development. They probably acknowledge the fact that this trend is keeping up that is traditional banks based on [indiscernible] statistics. Traditional banks in 2010 had a market share of 72% with respect to Italian financial assets. Networks had 9% -- held a 9%. At the end of 2025, traditional bank went from 72% to 59% give or take and networks went from 9% to 21%. The difference is made by Poste and insurance companies, Poste Italiane 14%; and insurance companies around 5%. So this constant trend from 72% to 59% decrease from traditional banks. And the increase from 9% to 21% by networks, the fact that traditional banks want to invest on networks is rather comprehensible. I said 14% for Poste, it's 15% and then we don't see the insurance companies, but it's 5%. So it's quite natural and -- that they want to invest. What I'm worried about -- I mean, am I worried? Honestly, no, I'm not. It's not that I don't care or I don't pay attention. Of course, I do track what my peers do. They are managed by smart people, I'm not going to underestimate that. But I also take into consideration our capability of acquiring new clients of growing our network and managing our network. We've been doing that for 44 years, as Banca Mediolanum. My father did that even before that for a longer time. So let me say we've been piling up quite a long experience. As far as loans are concerned, we believe that loans granted could increase by 5% and then you see the trend. Alberto Villa: If I may ask a question. In the next 5 years, the percentages you illustrated, how may they change between banks and networks? Is there still room for growth? Unknown Executive: Yes, I saw a projection where the movement is 1% per year. 1% shared by traditional banks and taken over by networks. But take into consideration that, that is the total figure in your -- when you ask your questions, you mentioned Intesa. Intesa is part of the 59.2%. The 1% they are going to shed -- also Intesa might shed a little bit of that 1% or maybe Intesa is going to grow that number, and that will be eroded from some other bank. But the same goes for networks as well. Some will lose and some will earn market shares. Second thing is that these are percentages. But take a look at the bar chart below. These are Italian's financial assets that are on an upward trend. 59.2% out of 4,000 billion is more than 73% of 2,700. So in absolute terms, assets have increased with respect to inflows that have been reaped by banks. But the pie is getting larger. And, I mean, the mix changes, but the pie is growing. Operator: The next question comes from the line of Elena Perini with Intesa Sanpaolo. Elena Perini: [Interpreted] As far as I'm concerned, I would like to ask the following. I have questions on admin expenses. You were heading for cost-to-income lending at 38%. But as far as year-on-year growth is concerned, I'm talking about costs, of course, what is your assumption? And then the second question is on loans, you are granting and then you will be granting going forward for artificial intelligence, how does artificial intelligence come into play in your business proposition going forward? And then another question on your dividend. You always refer back to your base dividend, and this year, you stated it's EUR 0.80. I would say that right now, we're just thinking of a growth trend, taking this line item as a reference, considering your CET1 ratio, which is very, very sound, by the way, I think market expectations are for growth on this base dividend, a major or a material growth in your base dividend now and in the coming years. I know that you want to be above 22% in your CET1 ratio. Could you elaborate on that? Well, capital and dividends? Unknown Executive: [Interpreted] Well, as far as cost -- the cost income ratio is concerned, we gave around 38% as guidance. So that means well, general costs, overhead cost is 8% to 9%, should be around 8% to 9% higher. And please correct me if I'm wrong, I'm speaking to my coworkers, of course, as far as artificial intelligence is concerned, we are investing in it. And we, too, of course, are. And we are doing so for our back office, for instance, in managing mortgages, for instance. When we look into the full documentation being provided for the granting of a mortgage, of course, you need people reading papers, documents, making sure all the documents are being provided. And sometimes, depending on what the document states, more information is requested. So there are many people working on that and a lot of time being allotted to that process to, of course, process the individual sites. We are testing artificial intelligence for that. Just to give you an example, there are many of them. And time is really cut because artificial intelligence looks into documents much faster and with the level of accuracy which is quite high, by the way. And right now, we are in a test phase because these documents are then also still edited and revised by people. But by year-end, I think it will be used most extensively, more extensively at least. We are using AI for that, and we are also using that in the tools that are made available to our family bankers because they have a huge amount of info that they have to process. But of course, first and foremost, we have to retrieve info, be aware that the info is available and then use info in the correct way, use data in the right way. And there too, artificial intelligence can really help our family bankers not only to have data, more accurate data available in a faster way, but also to have and get suggestions and prompts from the system telling them you did this for this type of customer, why don't you do the same for this other cluster of customers that might need the same things. And so we are investing heavily along those lines. Let me say, dividend -- base dividend. I am the first to hope, of course, as I'm a shareholder, there's conflict of interest they are telling me here. Other times, we have mentioned this. Elena, you mentioned that we have a CET1 that is very, very sound. And I'm confirming that. But let me remind you that a bank has a lot of obligations. So it's not just CET1, that's the ratio we have to bear in mind. There are a number of other things that have to be taken into account. MREL ratio, for instance, the request made by the Single Resolution Board, and we are around 22% as far as the request from that regulator is concerned. And then the capital bank holds is also has an impact on other ratios. It could be interest rate risk of a possible change or delta in the NII. CET1 -- focusing on CET1 alone may lead to drawing maybe the wrong conclusions. Having said that, the EUR 0.80 we are currently offering it's about EUR 600 million of distributed dividend or paid out dividend. So when we suggest that going forward for next year, we're thinking of paying out slightly more than EUR 0.80, we always refer to a performance that does not include one-off effects if we consider performance fees and tax refunds, our profit was very close to EUR 1 billion so already paying out 60%, 70% of one's profit every year and still growing at a constant rate at a steady state with all the objectives and goals we have to grow and as your colleague said before with your question, also lending wise, we expect a 5% growth on stock and another 5% on the granted loans. So we think we are providing the right information by taking into account all of these factors. And as the CEO said, if results, if the performance during the year, as we had last year, we had a base of EUR 0.75, and we distributed EUR 1, thanks to performance fees. And so we had one-offs to be taken into account also on the EUR 0.80 we're paying out now. So it's EUR 1.25 -- EUR 1.25 that we're paying out. We want to be sound in our positions when it comes to the capital ratios as well. And let me remind you that in 2022, we had about EUR 0.50 of base dividends. And in 2023, we moved to EUR 0.70. So it was a major leap. And then we went from EUR 0.70 to EUR 0.80. Next year, what will it be? We'll see. Let's wait and see depending on how we perform over the year, and we'll make a decision on it, but it might be another good leap. It's according to me, it's useless to have a leap in our base dividend of another EUR 0.10 per share to then, of course, the following year and then go from EUR 0.80 to EUR 0.90, then the following year do EUR 0.91 because we are still getting very close to the limit, so to say. So the base dividend according to us must be something where we are really confident we're not going back on the contrary that we can move forward upon. And as we said this year and for last year as well and a few years before, but let's say, let's focus on this year and last year. If there are special situations and the markets are helping us, and we get one-off revenues, so to say, we will pay them out, distribute them as we have done in the past. Alessandra Lanzone: We'll now take the next question from Mr. Giovanni Razzoli, Deutsche Bank. Giovanni Razzoli: [Interpreted] I have 3 questions. Can you give us an indication of the Grandi Patrimoni program scope? How many clients have already been included in this initiative? In the third quarter, you talked about BTPs that were going to expire in 2025 in the second half of the year, and they would have been renewed at higher rates. Can you tell us how many BTPs are going to expire in 2026 and if you're going to have the same effect? Last question, do you still have funds that are under the high watermark? And if you can give us a percentage because this would give us a greater visibility on performance fees considering the market performance. Massimo Doris: [Interpreted] The current -- the customers that could be interested in Grandi Patrimoni are more or less 4,000 clients and it is more than 2 million invested with us right now. This is what we already have, but the objective is not so much that of asking these clients to invest even more, which we'll be willing to accept if they are investing also with other peers. But the main target is to acquire more clients. But we already have 4,000 potential clients. As far as BTPs are concerned, in 2026, we have EUR 3.8 billion maturing, but BTP is only EUR 150 million. So the BTP maturity is really very limited, EUR 1.5 billion worth of CCTs and the rest is securities from other countries that were purchased. These are fixed rate securities that were purchased in previous years in terms of diversification. Giovanni Razzoli: [Interpreted] What is the yield of these maturing securities? Angelo Lietti: [Interpreted] The yield goes from 2.7% to 2.9%. This is more or less the yield from 2.7% to 2.9%. I'm talking about the bonds that are going to expire in 2026 because most of these government bonds were purchased a couple of years ago when we started to diversify between Italy and Europe. So yields are still more or less the same. As to maturities and the renewal, once they mature, I believe that we will get close to these yields. There will -- we will see no true upgrade, but we'll maintain the yield, the return we get from these securities stable. As to funds, on December 31, we had 5 funds that were below the high watermark with a total NAV of EUR 4 billion. Alessandra Lanzone: Next question from the line, Gian Luca Ferrari with Mediobanca. Gian Ferrari: [Interpreted] I have 3 questions. The first one is about the backdrop. We read about -- we've seen that there are trends to transfer wealth from one generation to another, EUR 100 billion from now to 2023. Do you think your advisory will change its nature to follow that trend? Will you adjust that to keep up with the trend? And second question on the ETFs. There's a lot of impact of passive managers. Have you changed your approach? Or are you going to have ETFs with active management, active ETFs? Are you going to create your own? And as another question, the introduction of value for money in your retail investment strategy bundle. Can you give us an update on that? Massimo Doris: [Interpreted] As to the first question, well, generational shifts, there will be a change in generations indeed. But I don't think there'll be any radical changes, so to say, any deep-rooted changes. But savers will -- well, they will have to find a banker, a consultant that will speak the very same language. We have our next project. Project Next enables us to be very well positioned to keep up with that generation shift. By year-end, we expect to have 800 of these banker consultants. They are aged between 25 and 26 on average. And when they join the network, they are even 24, 25. Some of them have been in the network in the Next program for a few years now. So maybe they are older than 25 or 26. But out of the 600 we already have, they are not older than 26 years of age on average. So if these are the people who will get in touch with the next generation, the sons and daughters of our own clients. So they will grow together. So we think this is one of the keys so that when money -- when the wealth goes from one generation to another, we are still -- we are already there with the client, and we already have a relationship with the person receiving the wealth and not starting the relationship at that very moment that is when they receive the wealth ETFs. They are more and more used. Yes, that's true indeed. Let us remember that one thing is looking at figures or data in absolute terms and something totally different is looking at things from a relative perspective, looking at percentages rather than individual data. ETFs does not necessarily imply lower commissions or fees. ETFs are not sold directly, but they are -- indeed, we are also selling them directly. But normally, they are included in asset management products. As of last year, we have a line for wealth management that can be done exclusively in ETFs. Of course, it is devoted to our top-tier clients, but it's not -- we're not focusing on the margin that we would get by selling an ETF. It's much -- something much more material. Do I think there'll be more use? Yes, I think there'll be more use, but that won't mean that's the end of investment funds. Are we going to create and issue our own ETFs? It's -- we're not planning it yet, but I'm not ruling it out. It's something that we are thinking about. We are focusing on if and when we'll do that remains to be seen, but it's not something we are ruling out as such. And as far as value for money, there are -- we started from MiFID I, then MiFID II and all the different interpretations of the different regulations that are being applied. Sometimes interpretations are different from country to country. They could be more or less restrictive. Sometimes, they start from ideas and concepts that may seem meaningful, but then in practice, they could not be, they cannot be applied. Having said that, let me say that at the end of the day, if you provide a good service to your clients, and by service to one client, it's not just a matter of money, what they can earn with the service or we can earn with the service. Let me quote a survey we did quite a few years ago. We looked into customer satisfaction. And we tried to understand if customer satisfaction was more tied in with the actual performance of the investment or something else as well. And what we had realized and noticed is that the most satisfied customers were the ones that had a higher frequency of contact or being in touch with a family banker. If the market is not faring well, clients that have a high frequency in getting in touch with family bankers and are therefore aware of what is happening in the market. They've discussed -- they've looked into asset allocation and possible modifications of it. So the client is fully aware of what is happening. That equals a satisfied customers, say, growing markets, markets that are improving, that are -- but they're not seeing their family bankers. There's a performance, but the client has no idea if something has to be changed in the portfolio, they have to sell, they have to buy something more. And that equals an unsatisfied or dissatisfied customer. And -- but this regulation or the trend only looks at returns, but there's a missing chunk that has to be taken into account, too. And I'm sure that if we work well with our clients, no matter or regardless what regulations impose or provide, they will not have an impact on the customer satisfaction because this regulation does not only apply to Banca Mediolanum, but to the full -- the entire market. And if we're going uphill, we're all going uphill. It's enough for you to run a little faster than the others and you're running first, even though you're being -- even though it's a slower run because of the market conditions. Alessandra Lanzone: The next question comes from Adele Palama Hama, UBS. Adele Palama: [Interpreted] I have 3 questions. First one on NII and the NII guidance, in particular, the lending stock increase. You talked about a 5% increase in loan stock being the assumption. If I actually make a calculation, the loan book increased by 8%. So the 5% refers to the retail loan book. And if so, why do you expect to have a lower growth rate than the one you reported this year? I don't know whether this is a matter of mix. Then second question, again, has to do with NII. Can you clarify your customer interest income or loan yield. This quarter, it went up to 3.36% from 2.20%. How is it you had this increase in gross yield? Because the cost of funding declined with respect to deposit promotions, but I don't understand how you got to this yield increase quarter-on-quarter. Then guidance with respect to inflows how much more for maneuver do you have to improve from the EUR 9 billion amount that you reported? Because actually, there is an 8% compared to the initial stock compared to the one you reported this year, which was 9%. Massimo Doris: [Interpreted] If you can show the chart with the bars -- I mean, the bar chart to make it simple. I will answer to the first question on NII guidance and loans. Between 2024 and 2025, we have reported a significant increase. That was actually an important leap because rates had gone down, and therefore, there was a higher demand. Rates are going to remain stable, most likely. So this jolt, if you want, if we take a look at the trend in -- I mean, if you compare 2023 to 2022, there is a EUR 0.5 billion increase. 2024 over 2023, again, EUR 0.5 billion, more or less EUR 600 million. 2025 compared to 2024, it increased by EUR 1.3 billion basically, EUR 1.4 billion almost. So there has been a strong acceleration that was driven by interest rate decline, which according to projections is not going to take place in 2026. Should they decline by 1%, we would see an even greater momentum, an even greater boost. But since interest rates are possibly are going to remain stable, growth is going to be standard. Really, 2025 was a sort of one-off because it was really pushed by interest rate performance. Angelo Lietti: [Interpreted] I was not clear. Granted loans of the year compared to the previous year increased by 10%. So you have to see the growth comparison in terms of granted loans. If the stock increases, also the repayment and the actual mass increases. So it's obvious that you will have this type of dynamic. I'm not saying that we are not going to see an increase in loans granted. It's going to be plus 10%. Loans granted '25 over '23 grew even more from EUR 3 billion, it went up to EUR 4 billion, driven by interest rates and it reflects on total amount. And then as far as NII is concerned, in the last quarter, Euribor on mortgages increased. And this is why we had this increase on -- referring to the spread. This is why we reported this increase. Massimo Doris: [Interpreted] And then, of course, there is an additional effect clients entering -- taking mortgages with us can skip a certain number of payments at no cost. When interest rates were high, many clients decided to take advantage of this option, and they would skip and defer certain payments. If the client does not pay a given payment, we are not going to earn the interest, and this is an impact on NII. Since rates have stabilized, many clients opted in and especially in the last quarter, and this had a good positive impact on interest income for the bank. And then EUR 9 billion in terms of managed assets, will it be possible to improve this? First of all, this was a blockbuster result. Can we do even better? Yes, if the market goes up 20%, most likely, we might even improve and exceed the EUR 9 billion, which I hope will be so. If the market were to remain flat, keeping the EUR 9 billion will be a hefty battle. If the market is going to go down 20%, we will never make it up to EUR 9 billion because it will be more difficult to retain the assets of our clients and to acquire new clients. This holds true not only for Banca Mediolanum, but for the market at large. For example, on this slide, you see that in 2022, we reached more or less EUR 6 billion worth of net inflows in assets under management. 2025 was a difficult year because both fixed income and equity markets went down. All asset classes went down. And in 2023 -- sorry, I was talking about 2023 and not 2025. All clients were looking at their results, and they were reporting losses. So 2023 was a very, very tough year for the entire sector. I remember that back then, Assogestioni, when analyzing the retail market, they reported net outflows of EUR 22 billion. If I remember correctly, Assoreti reported EUR 6 billion worth of net inflows, 5% of which were retail Banca Mediolanum. Now you saw 4 there. I talked about 3 because Assoreti does not include Spain on the one hand and then also because certain products such as certificates are being classified under different line items, not only for us, but for everybody. This means that we went from EUR 6 billion to EUR 4 billion because of the rough market, but those 4 accounted for half of the entire market inflows, plus EUR 4 billion net inflows compared to EUR 22 billion worth of outflows for the entire market. So was that a bad year? From my point of view, that was a great year because we have increased our market share quite a lot, even though we slowed down because it was really, really uphill. The slope was steep. Alessandra Lanzone: There are no more questions. Let me now turn the conference to the English channel. Operator: [Operator Instructions] There are no questions on the English line at this time. I would like to hand back over to the Italian line. We have no more questions in the Italian conference. Let me hand it over to Mrs. Lanzone for the closing of the conference call. Alessandra Lanzone: Thank you very much. I'd like to thank all of you for joining us. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good day, and thank you for standing by. Welcome to Banca Mediolanum Full Year 2025 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Alessandra Lanzone, Head of Investor Relations. Please go ahead, madam. Alessandra Lanzone: Good morning -- good afternoon, actually, everyone, and thank you for joining us. We can certainly look back on 2025 as a year of strong momentum on our business and results that keep us very well positioned as we head into '26. Today, we'll walk you through our full year performance, what has driven it and the priorities we're taking into the year ahead. A quick note on Q&A. As usual, feel free to ask your questions in the language of the line you're calling from. We will answer in Italian with a real-time translation into English. With that, I'm pleased to hand this over to our CEO, Massimo Doris, joined by our CFO, Angelo Lietti. Massimo, over to you. Massimo Doris: Thank you, Alessandra, and good afternoon to all of you. After a record 2024, the question was whether it was a one hit wonder? 2025 answered that question. This wasn't a one-off. We raised the bar and went one step further. The results speak for themselves, but they also speak to something deeper than numbers, the quality of our growth and the strength of a model that delivers consistently. This trend translates into tangible value for our shareholders, and it is reflected in the strong dividend we are proposing for the year. But before we go into the figures, let me start with a quick word on the macro backdrop because it matters since it sets the context for what you're about to see. In 2025, 3 forces continued to pull in different directions: rates moving into a normalization phase, markets shifting mood quickly and geopolitics remaining a generator of volatility through international tensions, trade policy and uncertainty around energy and supply chains. And a regulatory and fiscal backdrop that keeps evolving, especially in Europe and discipline becomes the differentiator. Within that noise, there were also tailwinds. As rates began to ease and markets held up, households started looking beyond part liquidity again. And that's where the difference shows between a model that sells financial products and one that builds long-term relationships through advice. The real question we are going to -- into today is not how was 2025? That is now clear. But how repeatable is it in 2026? The market is looking for visibility on 3 things: continuity of net inflows even if volatility returns, the trajectory of NII in a lower rate environment and continued discipline on costs, including the network component, which is exactly why our guidance -- our read on 2026 matter as much as the numbers we are about to present. With that in mind, we'll be very clear today on what supported our 2025 performance. While we see a structural versus more context-driven and how we are positioning the business to keep growing with quality in 2026. Let's move into the numbers. I'll start with the economic and financial highlights in Slide 4. The headline news is that 2025 was another best ever year for Banca Mediolanum, surpassing last year's record and reaching new peaks across virtually all key indicators. At the group level, net income came in at an outstanding EUR 1.238 billion, up 11% over the previous record level in 2024. What matters most behind this bottom line number is not the one-off impact of tax refund nor the strong contribution from performance fees, but the same engine we've been building for years: customer relationships, smart solutions, sound and needs-based advice and a network that keeps converting engagement into long-term assets. In fact, our core profitability was exceptionally strong. Contribution margin exceeded EUR 2.1 billion, and operating margin was just shy of EUR 1.2 billion, improving 10% versus the prior record. Results were supported by net commission income growth, up 12% to EUR 1.3 billion and a truly exceptional commercial performance, especially the quality of net inflows into managed assets. We also managed the interest rate transition with discipline. Rates continue to normalize through the year and the tailwind to net interest income naturally softened. Even so, we protected profitability through mix and pricing actions to reduce the cost of funding by keeping the balance between growth initiatives and margin management. For sure, recurring fees increasingly carried the weight. Higher average managed assets in the year and strong net inflows supported management fees, which went up 10% to over EUR 1.4 billion. In other words, the revenue mix did what it was supposed to do in a shifting rate environment, less reliance on NII, more support from recurring fee income linked to customer assets. Below the revenue line, we stayed cost conscious, in line with our guidance of a cost-to-income ratio below 40%, while continuing to invest in the levers that matter, namely technology, network productivity, including NEXT and the customer experience, cost-to-income ratio resulted at 37.6%. Slide 8 provides more detail on the other income statement lines. Let me flag a few highlights. Banking service fees climbed 38% to nearly EUR 259 million, driven by strong certificate sales, solid in Q2 and even stronger in Q4. As you know, certificate fees are recognized upfront in the P&L. Net income on other investments was around EUR 22 million, down 35% year-on-year, entirely explained by the different perimeter. We sold our Mediobanca stake in July, so dividend income was limited to Q2. From the second half award, that contribution is simply no longer part of the run rate. Provisions for risks and charges increased by 21%, reflecting the same dynamic we saw in H1. As for risk provisions, last year's favorable legal outcomes led to one-off partial releases that did not recur this year. And for network indemnities, the increase remains volume driven. Higher commissions naturally require higher provisioning. Provisions also increased because we started to build the reserves for the growing Prexta unsecured lending business. It's a prudent forward-looking approach in line with expected loss models as volumes grow. Contributions to banking and insurance industries were down 36% year-on-year, as banking sector contributions did not recur this year. The only notable movement came in Q4, driven by a one-off supplementary extraordinary levy from the banking scheme. Below the operating margin, market effects were definitely positive, thanks to favorable market performance and effective investment management in 2025. The contribution of performance fees for the year was considerable, although 32% lower than in 2024 to the tune of EUR 257 million gross, boosting our bottom line. Remember that performance fees for us are a bonus, not a pillar. They are certainly welcome when they come, but never something we rely on or plan for. Of course, it's the health and consistency of the underlying business that matters. Fair value improved significantly to EUR 28 million from EUR 17 million last year. We fully disposed of our stake in Next in Q2, resulting in a substantial uplift compared with the negative mark-to-market recorded last year. We also saw a positive contribution from treasury trading. Now let's look at extraordinary items. Following a specific ruling by the European Court of Justice last August, we received a refund of EUR 140 million relating to IRAP regional tax we overpaid for the years 2012 to 2024. For completeness, the same ruling also brings a benefit on the tax line, around EUR 17 million of lower IRAP in 2025. Although this benefit is expected to be largely offset in the coming years as IRAP increases. One important clarification on this line, the EUR 140 million refund is partially offset by the financial effects of the required advanced payment of the stamp duty on unit-linked policies as well as by the commissions related to the Mediobanca sale, but especially by a one-off recognition bonus we have decided to award across the group for a total impact of nearly EUR 23 million. I'll come back to the rationale behind this in a bit. Taken together, the nonrecurring items in our P&L were broadly in line with last year, around 4% higher, and this doesn't change the overall picture. Now let's launch into an overview of the business results for the year. Turning to Slide 5. Commercial momentum score new all-time highs across the all-net inflows metrics versus an already very strong 2024, accelerating in the last quarter and taking total net inflows up 11% to EUR 11.64 billion. These results were fueled by the success of our time deposit campaigns, where flows were supported by both new and existing customers, confirming the reach of our marketing and acquisitions engines. If there is one number to call out, it's managed assets. Flows reached EUR 9.06 billion beating our 2024 record by 18% and ahead of our guidance of EUR 8 billion to EUR 8.5 billion. And this is the most meaningful mix for us because it reinforces the quality and durability of our revenue base and supports predictable earnings over time. So driven by these inflows and deposit growth, total assets ended 2025 at EUR 155.8 billion, increasing 12% year-on-year. Keep in mind that positive market performance overall more than offset the weaker U.S. dollar. The credit book also expanded, ending the year just shy of EUR 19 billion, while asset quality stays strong with a cost of risk of 16 bps. The growth of the credit book was supported by higher loan origination with loans granted increasing 28% year-on-year to a total of nearly EUR 4 billion. General Insurance also delivered a strong uplift. Gross premiums rose 20% to EUR 246 million, protecting customers' wealth and earning capacity remains a core priority for us. Growth was supported by stand-alone policies and even more by the renewed momentum of loan protection cover, consistent with the expansion in mortgages. Turning to Slide 6. Our customer franchise continued to grow strongly. We ended 2025 with well over 2 million customers, expanding the base by 6% year-on-year after acquiring 199,500 new customers. Our group family banker network kept step with this growth, also up 6% to 6,798. Intelligent investment strategy has gathered real momentum. Over EUR 5 billion is currently in money market funds with a planned gradual switch into equities over an average 3.5-year horizon. Since the beginning of the year, some EUR 2.2 billion of new money has been invested through this strategy, taking the total up by an impressive 76%. In addition, close to EUR 3 billion is in the pipeline to move into mutual funds over the next 12 months, as highlighted in the last 2 lines of Slide 6, including EUR 840 million from double chance deposits and more than EUR 2.1 billion from installment plans flows, which are building progressively. Our model continues to do what it was designed to do, make it easy for customers to invest regularly while giving the bank a more predictable flow of fee income and a more resilient revenue base. Let's move on to another key pillar of our model. Balance sheet ratios shown on Slide 7. It's a picture of strength and discipline and of continued value delivered to shareholders. Capital and liquidity remain strong and comfortably above requirements, and we further broadened and diversified our funding profile, while keeping our risk stance unchanged. Starting with profitability. ROE came in at a best-in-class 29.1%, a clear proof point of our model at work. Our CET1 ratio remained extremely robust at 23%, even after our solid shareholder distribution. In fact, at the shareholder meeting, we will propose a EUR 1.25 dividend per share, increasing 25% versus 2024. Having already paid an interim dividend of EUR 0.60 in November, this leaves a balance of EUR 0.65 to be paid in April. Let me be super clear. The EUR 1.25 we are now proposing is entirely an ordinary dividend. It comprises a base dividend of EUR 0.80 per share and an additional EUR 0.45 attributable to the exceptional contribution from nonrecurring items as well as the one-off benefit from the Mediobanca sale we executed in July. But value creation for us is not only about shareholders, it is also about the people who make these results possible every day. So alongside the shareholder distribution, every employee and every family banker across the group around 11,000 people, we received a EUR 2,000 bonus, a simple concrete way to say thank you for an outstanding year. Let's take a moment to focus on our family banker network in Italy that reached 5,148 financial advisers at the end of 2025. During the year, on top of the many new colleagues who have joined us with strong background as branch managers or customer relationship managers in other sectors, we also welcome a strong pool of young talent through the project NEXT. As you all know by now, our banking consultants are high caliber graduates. They start with a 6-month executive master at our Corporate University, earn the FAA certification and then move straight into the field, working alongside a senior private banker or wealth adviser, with their remuneration totally covered by the senior. The numbers in Slide 37, reflect the success of the project. At year-end, 590 banker consultants were already active in the network, with an additional 213 currently in training. We expect to overcome 800 by the end of 2026. This strategic initiative is already delivering. Among the 726 senior bankers who have worked with a banker consultant for at least 12 months, productivity has increased materially. They were already ahead of their peers and the lead has widened further. The advantage in managed asset inflows has increased more than ninefold from 4% to 37%. It's up around 1.3x in loans from 31% increase compared to their peers to 40% and up close to 1.8x, both in protection policies from 32% to plus 57%; and in customer acquisitions, from plus 46% to plus 81%. The trajectory is encouraging, and it's getting stronger. The network is accelerating, and we see further upside in productivity. With that in mind, let's turn to Slide 30. It tracks 5 years of productivity for the top tier of our network. 1,074 private bankers and wealth advisers measured by average assets per banker. As Slide 30 shows, average asset per banker stand at EUR 64.2 million, almost twice the industry average of EUR 34 million. And the gap has stood still. It has widened year after year not by accident. It reflects the investment and discipline we've put into upgrading our network quality and the stronger recurring revenues per banker that follow. This is an edge we build, and we see it continuing to improve. Now let's turn our attention to Spain by commenting on Slide #32. As we've seen quarter after quarter, Spain's strong volume momentum gave us the confidence to commit to a meaningful step change in scale. This came with a higher cost base, mainly due to the expansion of our platform, increased activity across the country and additional marketing spend. So the P&L impact reflects a deliberate investment to support growth and build long-term value. One important dynamic to keep in mind: net interest income was down 18% year-on-year and at the current scale of our Spain operations, higher net commission income there couldn't fully close the gap. Keep in mind that stronger commercial momentum in managed assets translated into higher incentives for our network, a natural consequence of delivering more and better business. On top of this, performance fees were materially lower than last year. Operating margin reached EUR 56.4 million, reflecting a 26% decrease compared to 2024. And net income stood at EUR 57.7 million, 29% lower, mainly due to the factors we just mentioned. As a clear sign of Spain's commercial momentum, total assets grew by 18% year-on-year approaching EUR 15.5 billion, with managed assets rising 23% to EUR 11.9 billion. Indeed, Spain delivered another strong year on net inflows, EUR 1.95 billion, jumping 30%, but the real highlight is the quality behind the number. All of it came from managed assets, with flows up an impressive 35%. That's exactly the kind of growth we want to carry forward. Turning to lending. The credit book continued to grow, reaching EUR 1.74 billion, up 17% versus 2024. Meanwhile, the number of family bankers hedged up by 2% to a total of 1,650. The key point here is the step-up in productivity over the past 5 years, mirroring what we've delivered in Italy. Average assets rose from EUR 5.5 million in 2020 to EUR 9.4 million today. Finally, our customer base in Spain expanded to 285,760 marking a meaningful 12% increase versus the previous year. Now I'd like to shift your attention to one initiative that deserves a quick spotlight. Because it's a priority, we are pushing hard. The strength of our brand, combined with the caliber of the top tier of our network, gives us a real advantage in serving the top end of the market. It allows us to focus with increasing confidence on a high wealth segment that is growing rapidly across the industry and expanding just as clearly within our own customer base, those with assets above EUR 2 million. Over time, we've been steadily strengthening our position in this space from private banking customers with EUR 500,000 to EUR 2 million of investable assets to even more so high net worth customers above EUR 2 million. And as you may recall, a few months ago, we launched our Grandi Patrimoni program, introducing a new service model built to raise the service standard where it matters most, meaning customers above EUR 2 million. In practical terms, it's built around 4 pillars: fee-based advisory models, the so-called enhanced advisory including fee over administered assets and fee-only solutions; a dedicated product set, spanning lending and wealth management; a tailored investment banking and fiduciary proposition alongside highly specialized wealth services; an enhanced coverage approach, including wealth adviser teams to bring broader expertise to customers. This is how we intend to earn more share of wallet at the top end with a service model that matches the complexity of their needs. Even though the program only launched midyear, we've already seen encouraging results in 2025. The number of high-end customers with more than EUR 2 million assets grew by 20% versus the previous year, reaching close to 4,000, and they hold a total of EUR 19.4 billion in assets, up 22%. In 2026, we will keep building on this and further scale the model. Well, to wrap up, 2025 was a year of extraordinary milestones for us. We faced challenges. We delivered and showed what excellence looks like. And we did it with the same engine we've been building for years, 45 years to be exact actually yesterday. Looking ahead, it's important to be clear of what we are aiming for in 2026. Our 2026 guidance is as follows: We expect net inflows into managed assets to be around EUR 9 billion assuming normal market conditions. We see net interest income up approximately 10% versus 2025. We are targeting a cost-to-income ratio of around 38%. We expect cost of risk to be around 20 bps. We intend to increase dividend per share versus the EUR 0.80 base dividend. The road map for the year is targeted and built around our main priorities: growth, productivity, durability and sharing the value we create. Our goal is to make it look routine even though it never is. Thank you for your time. And as always, we appreciate your continued support. Alessandra, over to you. Alessandra Lanzone: Thank you, Massimo, and we can now open the Q&A section. Operator: [Interpreted] [Operator Instructions] We'll now have the first question from Mr. Enrico Bolzoni JPMorgan. Enrico Bolzoni: [Interpreted] First question on banking fees. You had a very good print for the quarter. So I would like to understand whether you can give some more color. I believe this is due to the sale of certificates and what do you expect for the coming quarters? Maybe you can give us some color as to how they fared and they performed in January? Second question it's on fee-on-top that is, so-called unbundled model. I was reading the Assoreti reports. And apparently, they are harvesting a lot of interest. If I calculate and examine your margins, net of the commissions that are going to be remitted to consultants, your margins are quite hefty above 1%. Do you think that in a world where advisory will be more and more based on the fee-on-top top model, will be able to retain these margins because basically, you will have 1%, 1.1%, 1.2% fee that will have to be added on it. It seems rather high compared to a market like that in U.K. where commissions are already fee-only -- based on a fee-only model. Unknown Executive: Right. As far as banking service fees are concerned, in 2025, markets have performed very well. And setting aside the certificate we sold in the past upon maturity, there were many calls as well, that is certificates had already met the targets and there, they were redeemed earlier. This -- I mean, certificate that had to last 4 to 5 years, lasted 1 year, reaping an excellent result for our clients, and therefore, clients reinvested in new certificates. Enrico Bolzoni: What can we expect for 2026? Unknown Executive: It really depends on how markets will perform. If markets will keep rising, many certificates will be redeemed earlier and therefore, we are going to see reinvestments. If markets will instead remain flat or trend down, there will be no early redemptions, there are going to be the normal maturities and the normal operations and trades. But we don't have only certificates in this figure, we have [ monetics ], we have bank account fees. There are many, many items under this line item. So if the markets are fair, well, we can expect this item to grow next year. If markets sort of slug around, probably this line item will remain flat. Other fees and commissions will increase and maybe fees and commissions generated by certificates remain flat or slightly dip. Having said this, if I don't sell certificates, I'm going to sell funds or unit-linked. Yes, there's an impact on the P&L because the certificates are upfront, whereas the others are ongoing in terms of recognition. But what is important is to have managed assets. As far as the fee on top issue is concerned, this advisory model most likely is going to be rolled over on high net worth individuals, as we can see on the market. On high net worth individuals already today, we obtained lower commissions because on high net worth individuals, we have a higher number of third-party funds, and therefore, this means a lower margin for Banca Mediolanum. Talk about my life policies, the unit-linked policies that then as an underlying have a number of own funds or third-party funds that family bankers can enter in the -- as an underlying. A normal my life have safeguard and monitoring fee equal to 1.75%. If the investment is above EUR 1 million, the commission goes down to 1.25%. If it's more than EUR 5 million being invested, it goes down to 1%. And the mix and the underlying mix changes because we go from a higher percentage of own funds to a higher percentage of third-party funds, and therefore, margins change accordingly for us and for family bankers as a consequence. So if we take the average sort of rule of thumb calculation, this commission payment model devoted to high net worth individuals is going to weigh on the commission average we receive. But we have to really take another view. If I don't introduce this type of commission model, I may lose some market share. So my margins will remain higher, but on a much lower asset volume, a much smaller asset volume. Having said so, not only will we acquire top clients with lower margins, thanks to the Grandi Patrimoni program. But we will keep on acquiring upper mass and affluent clients who are going to invest in classical managed assets with the product we know. We will keep on working on both the fronts trying to constantly growing our masses, providing the right service at the right price to the different client segments. Operator: The next question comes from the line of Luigi De Bellis, Equita SIM. Luigi De Bellis: [Interpreted] The first is on the 2026 guidance on the managed asset -- well, net inflows into managed assets. What other volumes did you expect to have in the next 12 months and that will be turned into managed assets? And what is the trend in this January of net inflows into managed assets? And then the NII growing about 10%. Can you remind us of the assumptions, Euribor assumptions, growth of value deposit and growth of the banking portfolio -- or sorry, the loan portfolio? Massimo Doris: As to the first question, we have about EUR 3 million between installment -- EUR 3 billion between installment plans and double chance. And in the next 12 months, over 2026, they will go from deposits or bank accounts to managed assets. So we already have EUR 3 billion worth of gross managed inflows so to say, but EUR 3 billion, nonetheless. And the IIS, we have EUR 5 billion in monetary funds that are tied in with the Intelligent Investment Strategy service are already part of the net managed inflow. So the shift of transfer of about EUR 1.5 billion with market markets being as they are now because, of course, if markets go down, there's a shift between money funds to equity funds. So with things standing still, we would have EUR 1.5 billion going from money funds to equity-based funds. But from the point of view of managed assets, the impact is 0 because the money funds, the money market fund is already considered to be managed assets. So -- and we would go from 1 to 1.25 recurring fees. So that would be a very limited impact. As to the NII, the Euribor assumptions, let me get it for you. The average Euribor assumption is 1.95 at a steady state, 3 months Euribor as well. And then why do we foresee assume growth volumes first and foremost, because we assume there will be growing volumes where the inflows that goes to bank accounts at 0 cost. And this 10% growth implies and includes 2 initiatives. One is ongoing already at 3% today. And the next initiative will be in the second half of this year with propositions where the cost of inflow will have -- of funding, sorry, the cost of funding will have a major impact. So there should be an increase in volumes in bank accounts where we have 0 interest applied. And then, of course, there will be increase in volumes also in loans as well and mortgages. And then the cost of funding comparing 2026 to 2025. In 2026, we expect a lower cost of funding because in 2025, for instance, in the first half or first part of 2025, we had the offering on 6-month deposits that have been launched in September, October in Q4 2025, where we were granting 5%. So in the first part of 2025, we paid 5% interest on time deposits, now we are paying 3% on time deposits. So -- and then it went down to 4%, et cetera. So low cost of funding, as I was saying, and higher volumes. That's our assumption to get to the plus 10% that we are assuming. Operator: Next question comes from Alberto Villa, Intermonte SIM. Alberto Villa: [Interpreted] Congratulations for your results. I really would like to talk about the competitive scenario. Yesterday, we heard the presentation of Intesa's presentation. This bank has been focusing for a long time on distribution and asset management, they're also trying to grow through Banca de territory, converting their distribution network also from this point of view. So generally speaking, is this focus that all banks are showing on asset management, something that can somehow affect more specialized players as you rightly are? And do you believe that the growth opportunities will still remain significant considering that Intesa is quite aggressive also in terms of recruiting. Do you think that you might have a stronger churn rate in the future or are you quite carefree? Back to the net interest income. Can you give an idea of volumes, a guidance with respect to volumes are concerned to concerning loans. Loans have been growing above average. Do you think that you still have a significant growth opportunity ahead from this point of view? Unknown Executive: You're talking about loans alone? or are you talking about loans, mortgages, you mean the entire lending volume? Alberto Villa: Yes, total figure. Unknown Executive: Let me answer to your first question first regarding networks. Now first of all, large banks, creditor talked about this, Massimo said this as well. In Italy, they already have Fideuram. If I got it right it was really more focused on international banks. But really, this is not that important. But if everybody wants to develop their networks, it means they are working well and they have a future because otherwise, they would not be investing in their network development. They probably acknowledge the fact that this trend is keeping up that is traditional banks based on [indiscernible] statistics. Traditional banks in 2010 had a market share of 72% with respect to Italian financial assets. Networks had 9% -- held a 9%. At the end of 2025, traditional bank went from 72% to 59% give or take and networks went from 9% to 21%. The difference is made by Poste and insurance companies, Poste Italiane 14%; and insurance companies around 5%. So this constant trend from 72% to 59% decrease from traditional banks. And the increase from 9% to 21% by networks, the fact that traditional banks want to invest on networks is rather comprehensible. I said 14% for Poste, it's 15% and then we don't see the insurance companies, but it's 5%. So it's quite natural and -- that they want to invest. What I'm worried about -- I mean, am I worried? Honestly, no, I'm not. It's not that I don't care or I don't pay attention. Of course, I do track what my peers do. They are managed by smart people, I'm not going to underestimate that. But I also take into consideration our capability of acquiring new clients of growing our network and managing our network. We've been doing that for 44 years, as Banca Mediolanum. My father did that even before that for a longer time. So let me say we've been piling up quite a long experience. As far as loans are concerned, we believe that loans granted could increase by 5% and then you see the trend. Alberto Villa: If I may ask a question. In the next 5 years, the percentages you illustrated, how may they change between banks and networks? Is there still room for growth? Unknown Executive: Yes, I saw a projection where the movement is 1% per year. 1% shared by traditional banks and taken over by networks. But take into consideration that, that is the total figure in your -- when you ask your questions, you mentioned Intesa. Intesa is part of the 59.2%. The 1% they are going to shed -- also Intesa might shed a little bit of that 1% or maybe Intesa is going to grow that number, and that will be eroded from some other bank. But the same goes for networks as well. Some will lose and some will earn market shares. Second thing is that these are percentages. But take a look at the bar chart below. These are Italian's financial assets that are on an upward trend. 59.2% out of 4,000 billion is more than 73% of 2,700. So in absolute terms, assets have increased with respect to inflows that have been reaped by banks. But the pie is getting larger. And, I mean, the mix changes, but the pie is growing. Operator: The next question comes from the line of Elena Perini with Intesa Sanpaolo. Elena Perini: [Interpreted] As far as I'm concerned, I would like to ask the following. I have questions on admin expenses. You were heading for cost-to-income lending at 38%. But as far as year-on-year growth is concerned, I'm talking about costs, of course, what is your assumption? And then the second question is on loans, you are granting and then you will be granting going forward for artificial intelligence, how does artificial intelligence come into play in your business proposition going forward? And then another question on your dividend. You always refer back to your base dividend, and this year, you stated it's EUR 0.80. I would say that right now, we're just thinking of a growth trend, taking this line item as a reference, considering your CET1 ratio, which is very, very sound, by the way, I think market expectations are for growth on this base dividend, a major or a material growth in your base dividend now and in the coming years. I know that you want to be above 22% in your CET1 ratio. Could you elaborate on that? Well, capital and dividends? Unknown Executive: [Interpreted] Well, as far as cost -- the cost income ratio is concerned, we gave around 38% as guidance. So that means well, general costs, overhead cost is 8% to 9%, should be around 8% to 9% higher. And please correct me if I'm wrong, I'm speaking to my coworkers, of course, as far as artificial intelligence is concerned, we are investing in it. And we, too, of course, are. And we are doing so for our back office, for instance, in managing mortgages, for instance. When we look into the full documentation being provided for the granting of a mortgage, of course, you need people reading papers, documents, making sure all the documents are being provided. And sometimes, depending on what the document states, more information is requested. So there are many people working on that and a lot of time being allotted to that process to, of course, process the individual sites. We are testing artificial intelligence for that. Just to give you an example, there are many of them. And time is really cut because artificial intelligence looks into documents much faster and with the level of accuracy which is quite high, by the way. And right now, we are in a test phase because these documents are then also still edited and revised by people. But by year-end, I think it will be used most extensively, more extensively at least. We are using AI for that, and we are also using that in the tools that are made available to our family bankers because they have a huge amount of info that they have to process. But of course, first and foremost, we have to retrieve info, be aware that the info is available and then use info in the correct way, use data in the right way. And there too, artificial intelligence can really help our family bankers not only to have data, more accurate data available in a faster way, but also to have and get suggestions and prompts from the system telling them you did this for this type of customer, why don't you do the same for this other cluster of customers that might need the same things. And so we are investing heavily along those lines. Let me say, dividend -- base dividend. I am the first to hope, of course, as I'm a shareholder, there's conflict of interest they are telling me here. Other times, we have mentioned this. Elena, you mentioned that we have a CET1 that is very, very sound. And I'm confirming that. But let me remind you that a bank has a lot of obligations. So it's not just CET1, that's the ratio we have to bear in mind. There are a number of other things that have to be taken into account. MREL ratio, for instance, the request made by the Single Resolution Board, and we are around 22% as far as the request from that regulator is concerned. And then the capital bank holds is also has an impact on other ratios. It could be interest rate risk of a possible change or delta in the NII. CET1 -- focusing on CET1 alone may lead to drawing maybe the wrong conclusions. Having said that, the EUR 0.80 we are currently offering it's about EUR 600 million of distributed dividend or paid out dividend. So when we suggest that going forward for next year, we're thinking of paying out slightly more than EUR 0.80, we always refer to a performance that does not include one-off effects if we consider performance fees and tax refunds, our profit was very close to EUR 1 billion so already paying out 60%, 70% of one's profit every year and still growing at a constant rate at a steady state with all the objectives and goals we have to grow and as your colleague said before with your question, also lending wise, we expect a 5% growth on stock and another 5% on the granted loans. So we think we are providing the right information by taking into account all of these factors. And as the CEO said, if results, if the performance during the year, as we had last year, we had a base of EUR 0.75, and we distributed EUR 1, thanks to performance fees. And so we had one-offs to be taken into account also on the EUR 0.80 we're paying out now. So it's EUR 1.25 -- EUR 1.25 that we're paying out. We want to be sound in our positions when it comes to the capital ratios as well. And let me remind you that in 2022, we had about EUR 0.50 of base dividends. And in 2023, we moved to EUR 0.70. So it was a major leap. And then we went from EUR 0.70 to EUR 0.80. Next year, what will it be? We'll see. Let's wait and see depending on how we perform over the year, and we'll make a decision on it, but it might be another good leap. It's according to me, it's useless to have a leap in our base dividend of another EUR 0.10 per share to then, of course, the following year and then go from EUR 0.80 to EUR 0.90, then the following year do EUR 0.91 because we are still getting very close to the limit, so to say. So the base dividend according to us must be something where we are really confident we're not going back on the contrary that we can move forward upon. And as we said this year and for last year as well and a few years before, but let's say, let's focus on this year and last year. If there are special situations and the markets are helping us, and we get one-off revenues, so to say, we will pay them out, distribute them as we have done in the past. Alessandra Lanzone: We'll now take the next question from Mr. Giovanni Razzoli, Deutsche Bank. Giovanni Razzoli: [Interpreted] I have 3 questions. Can you give us an indication of the Grandi Patrimoni program scope? How many clients have already been included in this initiative? In the third quarter, you talked about BTPs that were going to expire in 2025 in the second half of the year, and they would have been renewed at higher rates. Can you tell us how many BTPs are going to expire in 2026 and if you're going to have the same effect? Last question, do you still have funds that are under the high watermark? And if you can give us a percentage because this would give us a greater visibility on performance fees considering the market performance. Massimo Doris: [Interpreted] The current -- the customers that could be interested in Grandi Patrimoni are more or less 4,000 clients and it is more than 2 million invested with us right now. This is what we already have, but the objective is not so much that of asking these clients to invest even more, which we'll be willing to accept if they are investing also with other peers. But the main target is to acquire more clients. But we already have 4,000 potential clients. As far as BTPs are concerned, in 2026, we have EUR 3.8 billion maturing, but BTP is only EUR 150 million. So the BTP maturity is really very limited, EUR 1.5 billion worth of CCTs and the rest is securities from other countries that were purchased. These are fixed rate securities that were purchased in previous years in terms of diversification. Giovanni Razzoli: [Interpreted] What is the yield of these maturing securities? Angelo Lietti: [Interpreted] The yield goes from 2.7% to 2.9%. This is more or less the yield from 2.7% to 2.9%. I'm talking about the bonds that are going to expire in 2026 because most of these government bonds were purchased a couple of years ago when we started to diversify between Italy and Europe. So yields are still more or less the same. As to maturities and the renewal, once they mature, I believe that we will get close to these yields. There will -- we will see no true upgrade, but we'll maintain the yield, the return we get from these securities stable. As to funds, on December 31, we had 5 funds that were below the high watermark with a total NAV of EUR 4 billion. Alessandra Lanzone: Next question from the line, Gian Luca Ferrari with Mediobanca. Gian Ferrari: [Interpreted] I have 3 questions. The first one is about the backdrop. We read about -- we've seen that there are trends to transfer wealth from one generation to another, EUR 100 billion from now to 2023. Do you think your advisory will change its nature to follow that trend? Will you adjust that to keep up with the trend? And second question on the ETFs. There's a lot of impact of passive managers. Have you changed your approach? Or are you going to have ETFs with active management, active ETFs? Are you going to create your own? And as another question, the introduction of value for money in your retail investment strategy bundle. Can you give us an update on that? Massimo Doris: [Interpreted] As to the first question, well, generational shifts, there will be a change in generations indeed. But I don't think there'll be any radical changes, so to say, any deep-rooted changes. But savers will -- well, they will have to find a banker, a consultant that will speak the very same language. We have our next project. Project Next enables us to be very well positioned to keep up with that generation shift. By year-end, we expect to have 800 of these banker consultants. They are aged between 25 and 26 on average. And when they join the network, they are even 24, 25. Some of them have been in the network in the Next program for a few years now. So maybe they are older than 25 or 26. But out of the 600 we already have, they are not older than 26 years of age on average. So if these are the people who will get in touch with the next generation, the sons and daughters of our own clients. So they will grow together. So we think this is one of the keys so that when money -- when the wealth goes from one generation to another, we are still -- we are already there with the client, and we already have a relationship with the person receiving the wealth and not starting the relationship at that very moment that is when they receive the wealth ETFs. They are more and more used. Yes, that's true indeed. Let us remember that one thing is looking at figures or data in absolute terms and something totally different is looking at things from a relative perspective, looking at percentages rather than individual data. ETFs does not necessarily imply lower commissions or fees. ETFs are not sold directly, but they are -- indeed, we are also selling them directly. But normally, they are included in asset management products. As of last year, we have a line for wealth management that can be done exclusively in ETFs. Of course, it is devoted to our top-tier clients, but it's not -- we're not focusing on the margin that we would get by selling an ETF. It's much -- something much more material. Do I think there'll be more use? Yes, I think there'll be more use, but that won't mean that's the end of investment funds. Are we going to create and issue our own ETFs? It's -- we're not planning it yet, but I'm not ruling it out. It's something that we are thinking about. We are focusing on if and when we'll do that remains to be seen, but it's not something we are ruling out as such. And as far as value for money, there are -- we started from MiFID I, then MiFID II and all the different interpretations of the different regulations that are being applied. Sometimes interpretations are different from country to country. They could be more or less restrictive. Sometimes, they start from ideas and concepts that may seem meaningful, but then in practice, they could not be, they cannot be applied. Having said that, let me say that at the end of the day, if you provide a good service to your clients, and by service to one client, it's not just a matter of money, what they can earn with the service or we can earn with the service. Let me quote a survey we did quite a few years ago. We looked into customer satisfaction. And we tried to understand if customer satisfaction was more tied in with the actual performance of the investment or something else as well. And what we had realized and noticed is that the most satisfied customers were the ones that had a higher frequency of contact or being in touch with a family banker. If the market is not faring well, clients that have a high frequency in getting in touch with family bankers and are therefore aware of what is happening in the market. They've discussed -- they've looked into asset allocation and possible modifications of it. So the client is fully aware of what is happening. That equals a satisfied customers, say, growing markets, markets that are improving, that are -- but they're not seeing their family bankers. There's a performance, but the client has no idea if something has to be changed in the portfolio, they have to sell, they have to buy something more. And that equals an unsatisfied or dissatisfied customer. And -- but this regulation or the trend only looks at returns, but there's a missing chunk that has to be taken into account, too. And I'm sure that if we work well with our clients, no matter or regardless what regulations impose or provide, they will not have an impact on the customer satisfaction because this regulation does not only apply to Banca Mediolanum, but to the full -- the entire market. And if we're going uphill, we're all going uphill. It's enough for you to run a little faster than the others and you're running first, even though you're being -- even though it's a slower run because of the market conditions. Alessandra Lanzone: The next question comes from Adele Palama Hama, UBS. Adele Palama: [Interpreted] I have 3 questions. First one on NII and the NII guidance, in particular, the lending stock increase. You talked about a 5% increase in loan stock being the assumption. If I actually make a calculation, the loan book increased by 8%. So the 5% refers to the retail loan book. And if so, why do you expect to have a lower growth rate than the one you reported this year? I don't know whether this is a matter of mix. Then second question, again, has to do with NII. Can you clarify your customer interest income or loan yield. This quarter, it went up to 3.36% from 2.20%. How is it you had this increase in gross yield? Because the cost of funding declined with respect to deposit promotions, but I don't understand how you got to this yield increase quarter-on-quarter. Then guidance with respect to inflows how much more for maneuver do you have to improve from the EUR 9 billion amount that you reported? Because actually, there is an 8% compared to the initial stock compared to the one you reported this year, which was 9%. Massimo Doris: [Interpreted] If you can show the chart with the bars -- I mean, the bar chart to make it simple. I will answer to the first question on NII guidance and loans. Between 2024 and 2025, we have reported a significant increase. That was actually an important leap because rates had gone down, and therefore, there was a higher demand. Rates are going to remain stable, most likely. So this jolt, if you want, if we take a look at the trend in -- I mean, if you compare 2023 to 2022, there is a EUR 0.5 billion increase. 2024 over 2023, again, EUR 0.5 billion, more or less EUR 600 million. 2025 compared to 2024, it increased by EUR 1.3 billion basically, EUR 1.4 billion almost. So there has been a strong acceleration that was driven by interest rate decline, which according to projections is not going to take place in 2026. Should they decline by 1%, we would see an even greater momentum, an even greater boost. But since interest rates are possibly are going to remain stable, growth is going to be standard. Really, 2025 was a sort of one-off because it was really pushed by interest rate performance. Angelo Lietti: [Interpreted] I was not clear. Granted loans of the year compared to the previous year increased by 10%. So you have to see the growth comparison in terms of granted loans. If the stock increases, also the repayment and the actual mass increases. So it's obvious that you will have this type of dynamic. I'm not saying that we are not going to see an increase in loans granted. It's going to be plus 10%. Loans granted '25 over '23 grew even more from EUR 3 billion, it went up to EUR 4 billion, driven by interest rates and it reflects on total amount. And then as far as NII is concerned, in the last quarter, Euribor on mortgages increased. And this is why we had this increase on -- referring to the spread. This is why we reported this increase. Massimo Doris: [Interpreted] And then, of course, there is an additional effect clients entering -- taking mortgages with us can skip a certain number of payments at no cost. When interest rates were high, many clients decided to take advantage of this option, and they would skip and defer certain payments. If the client does not pay a given payment, we are not going to earn the interest, and this is an impact on NII. Since rates have stabilized, many clients opted in and especially in the last quarter, and this had a good positive impact on interest income for the bank. And then EUR 9 billion in terms of managed assets, will it be possible to improve this? First of all, this was a blockbuster result. Can we do even better? Yes, if the market goes up 20%, most likely, we might even improve and exceed the EUR 9 billion, which I hope will be so. If the market were to remain flat, keeping the EUR 9 billion will be a hefty battle. If the market is going to go down 20%, we will never make it up to EUR 9 billion because it will be more difficult to retain the assets of our clients and to acquire new clients. This holds true not only for Banca Mediolanum, but for the market at large. For example, on this slide, you see that in 2022, we reached more or less EUR 6 billion worth of net inflows in assets under management. 2025 was a difficult year because both fixed income and equity markets went down. All asset classes went down. And in 2023 -- sorry, I was talking about 2023 and not 2025. All clients were looking at their results, and they were reporting losses. So 2023 was a very, very tough year for the entire sector. I remember that back then, Assogestioni, when analyzing the retail market, they reported net outflows of EUR 22 billion. If I remember correctly, Assoreti reported EUR 6 billion worth of net inflows, 5% of which were retail Banca Mediolanum. Now you saw 4 there. I talked about 3 because Assoreti does not include Spain on the one hand and then also because certain products such as certificates are being classified under different line items, not only for us, but for everybody. This means that we went from EUR 6 billion to EUR 4 billion because of the rough market, but those 4 accounted for half of the entire market inflows, plus EUR 4 billion net inflows compared to EUR 22 billion worth of outflows for the entire market. So was that a bad year? From my point of view, that was a great year because we have increased our market share quite a lot, even though we slowed down because it was really, really uphill. The slope was steep. Alessandra Lanzone: There are no more questions. Let me now turn the conference to the English channel. Operator: [Operator Instructions] There are no questions on the English line at this time. I would like to hand back over to the Italian line. We have no more questions in the Italian conference. Let me hand it over to Mrs. Lanzone for the closing of the conference call. Alessandra Lanzone: Thank you very much. I'd like to thank all of you for joining us. [Statements in English on this transcript were spoken by an interpreter present on the live call.]
Operator: Good day, everyone, and welcome to the Lumentum Holdings Second Quarter Fiscal Year 2026 Earnings Call. Please also note this event is being recorded for replay purposes. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. At this time, I would like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead. Kathy Ta: Thank you, Kevin, and welcome to Lumentum's 2026 earnings call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Michael Hurlston, President and Chief Executive Officer, Wajid Ali, Executive Vice President and Chief Financial Officer, and Wupen Yuen, President, Global Business Units. Today's call will include forward-looking statements, including, without limitation, statements regarding our future operating results, strategies, trends, and expectations for our products and that are being made under the safe harbor of the Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risks set forth in our SEC filings under Risk Factors and elsewhere. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the fiscal quarter ended September 27, 2025, and in our most recent 10-Q for the fiscal quarter ended December 27, 2025, to be filed by Lumentum with the SEC. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update or revise the statements except as required by applicable law. Please also note that unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials have inherent limitations and are not to be considered in isolation from or as a substitute for or superior to financials prepared in accordance with GAAP. You can find a reconciliation between non-GAAP and GAAP measures, information about our use of non-GAAP measures, and factors that could impact our financial results in our press release and our filings with the SEC. Lumentum's press release with the fiscal second quarter results and accompanying supplemental slides are available on our website at www.lumentum.com under the Investors section. We encourage you to review these materials carefully. With that, I'll turn the call over to Michael. Michael Hurlston: Thank you, Kathy. Good afternoon, everyone. Lumentum delivered a standout second quarter with over 65% year-over-year revenue growth and non-GAAP operating margin increasing by greater than 1,700 basis points. At $665.5 million, we set a company record for quarterly revenue for the second reporting period in a row. We are now recognized as a foundational engine of the AI revolution. Virtually every AI network is powered by Lumentum technology, either through our direct hyperscaler partnerships or as the critical component supplier that enables our network equipment manufacturer customers. Our momentum is accelerating. While we previously projected crossing $750 million in quarterly revenue by mid-2026, we now expect to comfortably surpass that milestone next quarter. Our March revenue guidance, with an $805 million midpoint, represents an impressive 85% plus year-over-year increase. We previously identified three primary catalysts for Lumentum's future growth: cloud transceivers, optical circuit switches (OCS), and co-packaged optics (CPO). The headline for this quarter is that the vast majority of this growth is still ahead of us, and we have increased confidence as to the timing and magnitude of the ramps. While our Q2 results and Q3 guidance reflect meaningful contributions from cloud transceivers, we are only just beginning to unlock the massive potential of OCS and CPO. Beyond these high-growth drivers, our Q2 performance was anchored by sustained execution on our foundational components business, specifically in laser chips for cloud applications and in specialized components for DCI. I will now break down our Q2 performance, starting with execution and our primary growth drivers. Our OCS business is exceeding internal expectations. While we originally targeted our first $10 million quarter for fiscal Q3, we cleared that bar three months ahead of schedule. This outperformance is a direct result of the seamless collaboration between our engineering and operations teams, proving our ability to scale complex technology at pace. Customer demand for OCS is intensifying. Our order backlog now has surged well past $400 million, the majority of which is slated for shipment in the second half of this calendar year. Barring any unforeseen manufacturing or supply chain disruptions, we are well-positioned to deliver on this substantial pipeline. Our execution in cloud transceivers is a definitive turning point. In Q2, transceiver revenue grew significantly and outperformed the legacy cloud-like run rate, and we expect continued growth in Q3. We have focused on time to market in the business and have greatly improved our execution through the design cycle. As a result, we are now in the lead pack of transceiver suppliers as customers transition their networks to 1.6T speeds. Beyond design execution, we are also improving the profitability of our transceiver business, with better yields and lower scrap rates. Turning to CPO, we have secured an additional multi-$100 million purchase order for ultra-high-power lasers that support optical scale-out applications. We expect shipments for this incremental order in 2027. Meanwhile, we continue to execute on the initial orders we have discussed previously and remain firmly on track for material shipment inflection of UHP ships in the second half of this calendar year. Furthermore, we have established a clear line of sight into the broader external light source (ELS) market, which would enable us to participate more holistically than as a standalone laser chip supplier. By expanding into pluggable external light source modules, we would dramatically increase our serviceable market. In addition, the ELS allows us to diversify our customer base as several new partners adopting next-generation scale-out architectures are looking for more turnkey solutions. We have built significant momentum through our leadership in cloud transceiver, OCS, and scale-out CPO. Now, a fourth growth driver is taking shape, one poised to be a generational game-changer for the industry: optical scale-up. Today, data center architectures have a clear divide. Optical links handle scale-out networking, connecting relatively longer links within the data center. Conversely, copper links dominate scale-up connectivity, referring to the ultra-short reach high-speed paths within a single rack or a cluster. While copper has long been the gold standard for scale-up for simplicity and cost, it is hitting a physical wall. An industry pivot is underway to bypass the scaling limits of copper. By late calendar 2027, we would expect our first scale-up CPO shipments replacing longer copper connections. We are already deeply embedded in design-in cycles for this, leveraging our ultra-high-power lasers and external light source modules. As we look into the not-so-distant future, it is only right to assume that optics begins to capture more and more of the connectivity, eventually subsuming copper. In response to these demand projections, we have initiated proactive capacity planning. Given the sheer magnitude of the scale-up optics market, we are carefully assessing our projected wafer output plans. We are in active negotiations with leading customers to offset our capital requirements in exchange for long-term supply assurances. These discussions underscore the critical nature of our technology and their roadmap. Now, let's look closer at the key performance metrics that defined our second quarter. In our last earnings call, we introduced two primary product categories: components, the foundational building block for larger solutions, and systems, which are standalone products providing full functionality such as optical transceivers, optical circuit switches, and industrial lasers. Components revenue for the quarter reached $444 million, representing a 17% sequential increase and 68% year-over-year growth. This performance was fueled by broad-based demand across laser chips, laser assemblies, and inline subsystems going primarily into inter-data center DCI and long-haul applications. Our laser chip business, serving cloud transceiver customers, drove outsized sequential growth this quarter. We achieved another quarterly company record in EML laser shipments led by 100 gig lane speeds and bolstered by a ramp in 200 gig devices. Simultaneously, we expanded our footprint in next-generation architectures, shipping CW lasers for 800 gig manufacturers and increased volumes of ultra-high-powered laser shipments for CPO applications. Our indium phosphide wafer fab capacity remains at a premium, fully allocated to meet surging customer demand. We have front-loaded our 40% expansion target, delivering on over half of that this past quarter. We are scaling rapidly through precision tool optimization and yield gains. This execution will help to ensure that additional capacity comes online as planned over the next two quarters and beyond. While not able to size it, we now have line of sight to a significant block of additional capacity starting in 2026, both through current activities in Sagamihara and better utilization of our Caswell, United Kingdom, and Takao, Japan fabs. Beyond sheer volume, our Q2 revenue was propelled by a favorable mix shift toward 200 gig lane speeds, which provide a meaningful ASP uplift. While these high-speed devices represent approximately 5% of unit volume, they contributed roughly 10% of data center laser chip revenue. Moving to our scale-across business, we continue to see sustained momentum in components supporting optical links ranging from inter-campus to longer-reach topologies. Shipments of our narrow linewidth laser assemblies grew for the eighth consecutive quarter, a clear proof point of robust market demand and our successful manufacturing expansion. Our long-haul portfolio also saw gains, with both coherent components and aligned subsystem products growing sequentially and year-over-year. In addition, we achieved another record quarter for our pump lasers, supporting not only long-haul terrestrial and subsea networks but also new scale-across architectures, with revenue in this product line surging over 90% compared to the prior year. Finally, 3D sensing grew modestly, following a new smartphone launch and some incremental share gains. In systems, revenue reached $222 million, representing a significant 43% sequential and 60% year-over-year increase. Cloud transceivers accounted for the lion's share of this growth, increasing by approximately $50 million on the quarter, as we successfully leveraged our expanded manufacturing capacity in Thailand. As noted last quarter, we have moved past the production volatility seen in earlier calendar 2025 and are now on a sustainable growth trajectory. Our Q3 guidance reflects this momentum, as we begin to see the revenue layering benefits typically enjoyed by larger transceiver makers. As noted earlier, optical circuit switches continue to grow and were the good news story of the last quarter. On the other hand, as our cloud-related business continues to accelerate, we see a different dynamic in the industrial end market. Here, shipments remained roughly flat sequentially in Q2. This performance reflects the persistent cyclical softness we continue to see in the broader industrial market. With that said, we have an increasing design win funnel for our newly introduced PicoBlade Compact line of products. Looking ahead to Q3, we expect to achieve a new quarterly revenue record, our guidance midpoint exceeding historical revenue levels by a substantial margin. Within this outlook, we anticipate that approximately two-thirds of the sequential increase in revenue will be driven by our components portfolio, reflecting broad-based strength across cloud applications. The remaining one-third will stem from systems, fueled by the continued ramp of high-speed transceivers and additional contributions from OCS. In summary, Lumentum has established itself as a market leader in transformative optical technologies. Our position across OCS, optical scale-out, and optical scale-up is the envy of the industry. Furthermore, we are now meaningfully participating in the well-documented growth in the optical transceiver market. With all that said, we continue to believe that our current performance is only a precursor of things to come. Now I'll hand the call over to Wajid. Wajid Ali: Thank you, Michael. Second quarter revenue of $665.5 million was at the high end of our guidance, and a non-GAAP EPS of $1.67 was well above our prior expectations, demonstrating the leverage of our business model. GAAP gross margin for the second quarter was 36.1%, GAAP operating margin was 9.7%, GAAP net income was $78.2 million, and GAAP net income per share was $0.89. Turning to our non-GAAP results, second quarter gross margin was 42.5%, which was up 310 basis points sequentially and up 820 basis points year-on-year due to better manufacturing utilization across the majority of our product lines, increased pricing on select products, and favorable product mix. Mix improvement was primarily driven by our ramp in data center laser chips. Second quarter non-GAAP operating margin was 25.2%, which was up 650 basis points sequentially and up 1,730 basis points year-on-year, primarily driven by revenue growth and components products. While continuing to invest in critical R&D programs serving cloud and AI customers, we have maintained the rigorous cost controls necessary to optimize our business model. Second quarter non-GAAP operating profit was $167.7 million, and adjusted EBITDA was $198.3 million. Second quarter non-GAAP operating expenses totaled $114.9 million or 17.3% of revenue, an increase of $4.4 million from the first quarter and an increase of $16.6 million from the same quarter last year in order to support our expanding cloud opportunities. Q2 non-GAAP SG&A expense was $45 million. Non-GAAP R&D expense was $69.9 million. Interest and other income was $4.6 million on a non-GAAP basis. Second quarter non-GAAP net income was $143.9 million, and non-GAAP net income per share was $1.67. Our diluted weighted shares for the second quarter were 86.1 million on a non-GAAP basis. Turning to the balance sheet, during the second quarter, our cash and short-term investments increased by $33 million to $1.16 billion. Our inventory levels increased by $39 million sequentially to support the expected growth in our cloud and AI revenue. In Q2, we spent $84 million in CapEx, primarily focused on manufacturing capacity to support cloud and AI customers. Turning to revenue details, components revenue was $443.7 million, which increased 17% sequentially in Q2 and 68% year-on-year. Systems revenue of $221.8 million increased 43% sequentially in Q2 and 60% year-on-year. Now let me move to our guidance for Q3 2026, which is on a non-GAAP basis and is based on our assumptions as of today. We anticipate net revenue for Q3 2026 to be in the range of $780 to $830 million. The $805 million midpoint would represent another new all-time quarterly revenue record for Lumentum. We project third quarter non-GAAP operating margin to be in the range of 30% to 31% and diluted net income per share to be in the range of $2.15 to $2.35. Our non-GAAP EPS guidance is based on a non-GAAP annual effective tax rate of 16.5%. These projections also assume shares used for non-GAAP diluted earnings of approximately 92 million shares. With that, I'll turn the call back to Kathy to start the Q&A session. Kathy Ta: Thank you, Wajid. To allow as many people as possible an opportunity to ask questions, please keep to one question and one follow-up. Kevin, let's now begin the Q&A session. Operator: We will now begin the question and answer session. A reminder that if you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press 9 to raise your hand and 6 to unmute. And your first question comes from the line of Simon Leopold with Raymond James. Your line is open. Please go ahead. Simon Leopold: Hopefully, you can hear me okay? Great. Thank you for taking the question. Yeah. We can hear you, Simon. Yeah. Yeah. Yeah. I can work Zoom. So I just wanted to see if you could maybe double click on the OCS market, which sounds quite a bit better than what you discussed last quarter. Michael Hurlston: So maybe if we could hear a little bit more color in terms of how you're seeing the market, the exit rate, and the customer diversifications. And I'll give you my follow-up because it's relatively quick. In that, you've raised prices. Is there any way you can help us quantify what impact your price increases have had on the growth? Thank you. Michael Hurlston: Yeah. Hey, Simon. Yeah. The OCS market is definitely developing a lot better than we believed. It's accelerated certainly from a time standpoint. So the data point we gave today is that our backlog has increased to well in excess of $400 million, most of which is going to be shipped in 2027. We're really going to exit the calendar year on quite an increased velocity. If you remember, you and I discussed last time we believed our Q4, the calendar Q4, would be around $100 million. It looks like it'll be quite a bit higher than that, although we're not breaking up that 400 between the two quarters. So it's a broad-based, you know, that there's multiple customers making up that backlog. You know, we've talked about shipping to three customers, and that continues. But those customers are increasing their demands rather significantly, and thus the demand on us has gone up quite appreciably. So we feel pretty good about that. I think as we enter calendar year 2027, it should go up from there in terms of what we see in our backlog and in terms of our revenue. On the second question, you know, obviously, price increases are definitely having an impact both on top line and gross margin. You know, they are starting to flow through in the Q1 or the March guide, right, where we're seeing a lot more of that. As we said last quarter to you and to others, expect a little bit of an impact in December, and we'd had a little bit, but not a lot. See a little bit more in March. I don't know if we've quantified how much of it is. I think it's relatively modest, you know, in terms of the overall revenue margin, certainly a little bit more, but, you know, we're doing a lot of things to benefit margin, including cost down, a lot of work on manufacturing scrap and yield. There's been a lot of intense focus from myself, Wupen, Wajid on the gross margin line. So a lot of things are contributing to that. And, you know, for the first time, we're moving up into the forties. Kathy Ta: Thank you. And thank you, Simon. Operator: And your next question comes from the line of Samik Chatterjee with JPMorgan. Your line is open. Please go ahead. Samik Chatterjee: Thank you. Thanks for taking my questions. Now, Michael, Wajid, Kathy, good to speak to you. Maybe I'll start off on the indium phosphide capacity ramp and just to clarify what you said in your prepared remarks, you pulled forward or front-end loaded some of that capacity increase that you had planned, and we're gonna see the effect of that in the March guide just to confirm that. And then what does it mean for the end state in terms of the sort of 40, 50% capacity increase that you had planned? Does that change the end state in terms of how much capacity you can add in those existing fabs? And as you're talking about alternatives with your customers, does it really sort of focus on the existing fab, or are you assessing sort of new fabs? And then I have a quick follow-up. Thank you. Michael Hurlston: Yeah, Samik. Look. You know, we're definitely doing better than expected. I think that we characterized in the last call that we'd see a 40% impact from our September over the next three, so December, March, and June. What we're saying here is that we probably got somewhere a little bit north of 20% in the December alone. So in the results in December, and the guide, you know, we're not necessarily saying how much of the increase is there. There's obviously more. I would expect at this point that given that we see kind of half of the impact in the first of the three periods that we'd outlined, that we were gonna do a little bit better than 40%, but we haven't quantified that. You know, what we are saying is now we have line of sight to more capacity increases through the next four quarters, meaning probably the second half of 2026, calendar 2026 into early 2027, by virtue of the improvements that we continue to see in Sagamihara. So that 40% is all Sagamihara, but we would now start to see some impact from our Caswell facility in the United Kingdom. Also contributions from our second fab in Japan, Takao. All of these things together say that we have line of sight to do a little bit better than we outlined on the last call, and certainly extend the ramp more appreciably than perhaps we said on the last call. Samik Chatterjee: Got it. Got it. And, Michael, I mean, just following up on that, any new fabs being considered when you're sort of talking to your customers? And then for my second question on transceivers, I mean, you took a sizable step up here in December. I think you're taking another bit of a step up into March. You had previously indicated you sort of want to maybe manage that business to a $250 million quarter run rate. I mean, is that still sort of how you're thinking about it? Or because most of the demand is from one customer, you sort of can scale further than that. Any updated thoughts on that? Thank you. Michael Hurlston: Yeah. I mean, on the transceiver question, I do think that it's gonna be more difficult than we outlined in the last call to sort of cap that to a billion dollars. We're definitely seeing a lot of demand for our transceiver products, not only from the primary customer but from other customers as well. So suddenly, you know, as I said, we've turned a bit of a corner. Wupen is here, and I think he's done a super job with the transceiver business, improving margins, improving executions, primarily improving our design time, our time to sample. And as I said, we've actually got into the front of the pack as a result of that. So I feel a lot better about the transceiver business. That being said, still a margin headwind. Right? So no change from where we are before. A little bit of a margin headwind because we made these improvements. But still a margin headwind. I think, however, it will be a challenge. We are seeing appreciable growth in the demand of our transceiver products. Wajid is here. I think we can manage the portfolio to increasing gross margins and increasing operating margins in the face of a business that might be greater than a billion dollars. Wajid Ali: Am I wrong? Yeah. No. That's fair. I mean, I think when we made the comments about $250 million a quarter or a billion dollars that Michael alluded to, our thinking on the rest of the business probably wasn't as large as how we're thinking about it today. Certainly, OCS, CPO, the multi-$100 million order that Michael talked about in his prepared remarks, all of those things are contributing to a larger pie for Lumentum. And so as part of the operating margin profile as revenues grow. So, you know, the fact that the rest of the business is growing faster than we expected allows us to grow the transceiver business. And then, you know, because 1.6T margins are significantly better than 800G, that's also helping us, you know, say yes to more orders that are coming in. And Michael's right. They're coming in substantially higher than we had expected. Michael Hurlston: Kathy, what was Samik's first part of the question? New fabs. Operator: New fabs. Okay. Yeah. Samik, I mean, to that question, yes, that is an active investigation. We're certainly looking at how we can bring on more capacity, whether it be creatively in the current fabs that we have or bringing on new fab capacity by, you know, acquisition or something of that nature. So it's an active discussion of the company. You know, nothing to talk about at this particular point, but it is certainly something that's top of mind for us. Samik Chatterjee: Thank you. Thanks for taking my questions. Kathy Ta: Yeah. Thanks, Samik. Operator: And your next question comes from Ryan Koontz of Needham and Co. Your line is open. Please go ahead. Ryan Koontz: Great. Thank you. Wanna double click on the transceiver market if we could in the transition to 1.6T. Obviously, some great progress at 800 here. Is that primarily being driven by EMLs today? How do you see the readiness of Sypho at 1.6 being prepared? And then what are your kind of derivative, you know, laser supplier opportunities? How are they stacking up overall for the 1.6T transition? Thank you. Michael Hurlston: Yeah. Ryan, let me talk a little bit to the laser part of the market and then maybe throw the ball to Wupen. It's two separate things, and certainly for our business, transceivers as we've characterized a couple of times, our transceivers are mostly silicon photonics. But what we're seeing right now from our customers is strong EML demand. Most of the initial transceivers that are going to 1.6T are based on EMLs, and that's good. Our 200 gig lane speed, as we said, is actually doing a little bit better than we expected. I think in the last call, we had said that the 5% of mix would be this quarter. It's a quarter earlier than we'd expected, and that's primarily because 1.6T is coming on, I think, faster than we initially anticipated. And that is heavily being driven by 200 gig EMLs. That being said, I still think, you know, consistent with what we've said over the past, would expect silicon photonics to be the majority of the transceiver shipments at the 1.6T node. We think the numbers are so large, you know, based on what we're seeing in terms of the demand from our customers, that our EML shipments, even in the face of a mix shift toward silicon photonics, the absolute number of EMLs will go up for us and rather appreciably. So we feel really, really good about the way the market is shaping up. Our lead on EMLs is, you know, second to none. We're introducing 200 gig differential EMLs now to give us another leg up in that market. So we feel pretty good about the way that's setting up. Wupen, on the transceiver side, you wanna talk about our transceivers and how we're thinking about 1.6? Wupen Yuen: Yeah. Thanks, Michael. So, you know, on the transceiver of 1.6T product, there's still really by and large two groups of applications. One group requires a WDM-based solution. One group requires basically a parallel fiber-based solution. And therefore, you will see that EML is pretty dominant in the WDM-based architectures. And then the single topic is starting to take more share on a kind of parallel fiber application. We see these kind of hand in hand grow at a similar pace. And that's why, you know, Michael was talking about EML continuing to grow despite the fact single photon will take up more share in the 1.6 generation. But overall, as what you talk about, see 1.6 generation products having a higher gross margin at the module level. And then we'll, of course, benefit continuously on the laser front in this generation as well. Ryan Koontz: Right. And any update on your plans on, you know, vertically integrating your own CW lasers at 1.6? Is that still the plan? Michael Hurlston: Still the plan. Yeah. We had shipped, you know, CW lasers to the external market for the first time, Ryan, last quarter. Those shipments continue to sort of help us develop and improve our CW laser technology. I would say our timeline is pushed out a bit in terms of that introduction. We were talking about introducing our own CW lasers and our own transceivers kind of Q2-ish, and I think it's probably pushed out to late Q2, early Q3. It's probably been a two to three-month push out relative to that introduction, but still very much part of the plan to continue to increase the gross margin in our transceiver business. Ryan Koontz: Great. And maybe just a quick follow-up on the laser opportunity in CPO. Do you view that competitive landscape any different than you view the transceiver laser market? Are there nuances there that investors should be aware of relative to bigger barriers to entry or your capabilities relative to the overall market for CPO? Michael Hurlston: Yeah. I mean, look. I think on CPO, we feel really good about our position. I mean, certainly, for EMLs, we also feel very good about our position, but I think we feel even better about our position on high-powered lasers going into CPO. Remember, a couple of things, right? One, the power level that needs to be delivered here, 400 milliwatts, is not something that many people can do. Perhaps more importantly, remember when you and I have talked about this, and technology has been proven out in our subsea applications. One of the big issues with CPO has always been reliability. And I think now we've gained real customer confidence. I mean, it is much more broad-based, I think, than people think in terms of customer engagement now on CPO, and that is primarily driven by the reliability we're able to prove out. Ryan Koontz: Perfect. Thanks for the commentary. Michael Hurlston: Thanks, man. Good question. Kathy Ta: Thanks, Ryan. Operator: And your next question comes from Vijay Rakesh of Bank of America. Your line is open. Please go ahead. Vijay Rakesh: Yeah. Hi. Thanks, Wajid, and Kathy. This is Vijay from Mizuho. On a great fantastic set of numbers here. Just a quick question. I know you're on CPO. You mentioned another multi-million, multi-$100 million order there. And, you know, also your own SIP ramping well. Can you size what the CPO quarterly run rate would be with the new multi-million dollar, multi-$100 million order? And, also, I believe, CPO for scale-up as you mentioned, sir. Michael Hurlston: Yeah. I mean, what we're talking about now is mostly scale-out. Right? So what we've said in the past is that we would expect, you know, somewhere around $50 million in the fourth calendar quarter. Perhaps more, but we're, you know, we're kind of pegging it there. And then this multi-$100 million order, while we're not prepared to give the size, really is clicking in in the first half of 2027. So it kind of gives you a rough feel. This is definitely ramping. It's ramping across not just one but multiple customers. The strain on our fab is high. Right? We're very much sold out in our powered laser fab. And this is one of actually Wupen's primary tasks is to figure out how we can bring more capacity online much more quickly. I mean, this ramp is hitting us probably faster than we forecast even last quarter. So we have a lot of confidence in the ramp. We have a lot of confidence in the demand and backlog that we see. Now it's gonna be really a matter of servicing that. Vijay Rakesh: Got it. And then on the indium phosphide side, I know you said a lot of the capacity is sold out. You're adding some 40% capacity more front-end loaded. But as you look through into '26, '27, given this very strong ramp on EML, new technology EML, and also in what you're seeing on the transceiver side, would you expect pricing to be a tailwind most of this year and into next year too? Thanks. Michael Hurlston: Yeah. I mean, look. We really are sold out. I mean, I think that we've talked about sort of trailing demand. Even as we add capacity, it seems that the demand-supply imbalance increases. We talked about that last quarter, and I'd say again, even as we've added this 20% additional capacity, the demand-supply imbalance has increased, and I'm gonna have Wupen comment. I think his team is spending a tremendous amount of time trying to squeeze product into our allocation bucket. It's really like a jigsaw puzzle for these guys to figure it out. The good news for us is that we'd expect now to increase supply throughout the calendar year. We've obviously sort of indicated that we have another 20% to go over the next couple of quarters. That probably is gonna come up a bit just given our current trajectory. And now what we're saying is we have line of sight for additional capacity in the last two quarters of the calendar year. In that, we obviously have this mix issue where our 200 gig lasers are a big portion of the mix. Today, small, 5%. We've said that by the end of the calendar year, we'd expect to be 25% of our mix to be 200 gig, and you can see in the prepared remarks, roughly two to one on the pricing. So our ASP will increase, margins will increase in that balance as we get more and more 200 gig. The really good news for a story for us, I think, is the differential 200 gigs, which offers significant price power reductions for customers, that is yet another tailwind on ASP that we'd expect to see. And another big, big enhancer on gross margin. Wupen, I mean, how are you thinking about it? Wupen Yuen: Yeah. Thanks, Michael. So, yeah, in addition to what Michael described, right, in terms of capacity increase, and I think our team continues to really drive the yield up. Reduce the die size of the chips. For example, the capacity output that we can get. Definitely, we're trying to squeeze every bit of the from our current fabs. As Michael already pointed out, the demand-supply imbalance continues to increase. And, therefore, we're doing everything we can trying to grow that supply base and then continue to drive the yield up. So all very good, but very challenging. We look forward to serving the market as better chips and more chips. Vijay Rakesh: Got it. Thanks. Fantastic. Thanks, Michael, Wajid, Wupen, and Kathy. Thank you. Michael Hurlston: Thank you, Vijay. Good speaking. Operator: Thanks. And your next question comes from Papa Sylla of Citi. Your line is open. Please go ahead. Papa Sylla: Thank you. Thank you for taking my questions, and congrats on the impressive result. So, Michael, I guess for my first question, it is on visibility. I'm curious if you continue to see further visibility from your key AI customers on the EML front. I think previously, you quantified for us that the supply-demand gap has moved from 20% to 25 to 30%. Has that gap extended? And tied to that, it will be helpful to understand how has your longer-term contract or commitment with customers changed now versus one to two years ago? Are new commitments, for instance, kind of longer in duration? Are we able to add more pricing versus before? Just any color. Michael Hurlston: Yeah, Papa. Look. First, I wanna thank you for some of the insightful notes you've written over the last couple of weeks. We certainly appreciate the diligence you're doing on the business. You know, number one, obviously, the supply-demand imbalance is still very much there. I would say that it's about the same this quarter as last quarter, even in the face of adding the 20% and what we anticipate in the March guide. If anything, it's incrementally up, but I'd still say it's roughly 25 to 30% off or 30. We're undershipping our customers' demand by somewhere around 30%. It's a relatively big gap, and, again, tremendous pressure, you know, on Wupen's team. With respect to the long-term agreements, I mean, frankly, and I'll have Wajid comment, the company never had these long-term agreements. I mean, it was a very tactical business until, you know, Wajid and I got involved in the business and started seeing that there was a lot of value to institute these long-term agreements. All of our capacity, just to be very clear on EML, is spoken for in these LTAs. We have very tight LTAs that run through the balance of calendar 2027, and even as we increase the capacity, everything is spoken for. So we projected out what we could do. Look. If we do better in capacity, we might have a little more to sell. But that is really spoken for. We're really proud of the LTAs. We were able to get it in place, and look, our customers are very happy. We do have pricing leeway in there. I mean, I think as conditions change, Wajid, Wupen, and I will continue to look at the pricing. As you know, we've done a couple of step-ups, and, you know, our products are just in high demand right across the board. I think it gives us some pricing latitude. And we'll certainly look at that. I mean, Wajid, any comments from you on the LTAs? Wajid Ali: No. I mean, I think you've captured it. Actually, the whole LTA process has actually helped us from a pricing standpoint overall because there aren't those same type of quarterly negotiations for price downs. If anything, prices are holding or they're increasing for what customers want. What we're actually seeing is that customers are coming back and asking for even more capacity and more products than we had agreed to in the LTA. And that's actually allowing us to have incremental pricing discussions around those incremental units that they're asking for. So the LTAs are serving as a nice baseline. And if customers want more than that, then it allows for a discussion with Wupen's team and our sales team to ask for incremental pricing optimization. So it's worked out very well for us from a process standpoint. And for those customers that are not willing to sign an LTA, are having, you know, concerns about their continuity of supply because we are allocating to those partners that are committing to us first, and then whatever's left over, then we can talk to those that are not. Papa Sylla: Got it. Thank you. That's very helpful. And thank you, Michael, for the feedback. Just quickly on the follow-up, and apologies if it's a little bit of a long-winded type of question. But I just wanted to double down on the CPO opportunity, particularly if we contrast it with the opportunity you have on the EML/transceiver front. I think previously, you discussed in terms of content per accelerator or content per AI server. The two opportunities are mostly on par. And you really benefit from having a higher market share on the CPO side versus the transceiver front. Now that, I guess, you have more sales, you have more visibility, any change on how you are thinking about content or CPO versus the transceiver business? Michael Hurlston: Yeah. I mean, it's exactly as you said. I mean, obviously, the dollars are lower for our lasers than they would be if we were able to sell a transceiver. But given the strength of our product in the laser product, we have quite high market share. So in general, and Kathy's run the numbers for us a number of times, the math works out very favorably for us as CPO comes online. What I'll say, and I wanna highlight again what we said in our prepared remarks, which is new, there is an opportunity for us to participate now in something that looks like a module, this ELS, the external light source. And that is obviously a much higher ASP. Wupen and team are looking at that now. It looks like we can preserve very decent margins and attack that market at another step up in terms of ASP. It's, you know, somewhere around two, two and a half times content gain from a revenue standpoint as compared to just our lasers. Wanna give two seconds of color? Wupen Yuen: Yeah. Certainly. Thanks, Michael. Yeah. Not only the possible ELS opportunity, but we talked about earlier, actually, this scale-up opportunity there. I think that's brand new. Right? When we compare before, the module opportunities, double module opportunity versus the CPO opportunity, it was a wash. Just from a scale-out kind of a comparison. But now in the scale-up opportunity here is a brand new market that didn't exist before. So, therefore, I will say that, you know, our overall market share on the scale-up market will be improving because of our position in the laser front, and then by extension, the pluggable light source market. And then on top of that, when the scale-up actually happens, then that's another big chunk of TAM that didn't exist before. Therefore, overall, I think this scale-out and scale-up with CPO will benefit us meaningfully going forward. Papa Sylla: Very helpful. Thank you so much. Kathy Ta: Thank you, Papa. Operator: And your next question comes from Ruben Roy of Stifel. Your line is open. Please go ahead. Ruben Roy: Yeah. Hi. Thank you. Michael, apologies if you answered this already, I just wanted to go back to the OCS momentum and just seeing through the order backlog improving. Is that still sort of relegated to a single customer? And just sort of momentum at that customer? Are you seeing a broadening of orders from multiple customers? And I guess a follow-up for Wupen on that topic. Is just in terms of applications, what are some of the new applications for OCS that are coming? And, you know, have you seen actual orders for things outside of maybe spine switch replacement and some of the other applications that you've already been delivering to? Thank you. Michael Hurlston: Yeah. Hey, Ruben. And, you know, thanks again for your support over the quarter. Appreciate some of the things you've helped us with. You know, number one, the strength in the backlog. We did this previously. It is coming from multiple customers, not just one. We feel very good about our volumes in the business. You know, this $400 million that we're talking about primarily deliverable in the back half of the year sets us up well above what we previously outlined, which was sort of a $100 million exiting calendar Q4. So our run rate going into 2027 is quite a bit higher, and we would expect, obviously, in 2027 to do better again. So it is setting up for us. It's broad-based. Right? It's three customers making up that backlog. And, you know, we definitely have stepped on the accelerator relative to deliveries even this quarter to all three of those customers. On the applications. Right? Again, fairly broad-based, but why don't you give color to Ruben? Wupen Yuen: Yeah. I would say no changes to the recall. I think we talked about before, they were primarily, you know, four different applications. Right? One is the spine replacement, as you mentioned. One is the, you know, the scale-across applications. We also talk about two more are really the optical scale-up application. And the for protection or redundancy in the network. Actually, we see these applications in all the customers to different degrees. Therefore, I would say that these multiple customers are covering these four different use cases in the applications. I think there may be some other potential scenarios showing up. I would have been watching very, very closely. But these four, to us today, they're the dominant application scenarios. Ruben Roy: Great. Thanks. Just a very quick follow-up. Has anything changed with the way you guys are thinking about 800 gig versus 1.6 terabit module mix this year? One way or the other? Is it accelerating towards 1.6 for any reason? In terms of volumes from a single customer or multiple customers? Or is it relatively unchanged from how you were thinking about it ninety days ago? Michael Hurlston: Yeah. It's 1.6T is definitely stronger than we felt, you know, than we felt ninety days ago. So 1.6T is definitely accelerating. Our 800 gig volume actually is doing better than we would have expected. So an 800 gig, what you're seeing right now from us is an acceleration in revenue on our 800 gig shipments. But in the market, to your question, Ruben, 1.6T is definitely going better. You know, we have exposure to a couple of customers, a couple of large customers on 1.6, and we've been surprised by how quickly they're trying to push us to deliver and their forecast to us relative to the different SKUs that we're being asked to deploy. I mean, any different thoughts from Wupen? Wupen Yuen: Yeah. Definitely, I think the two factors there. Right? So one is the 800 is still a very large market today. However, you know, our market share of 1.6, as I was talking about earlier, is actually higher as we kind of get all acts together on the development side. So we definitely are seeing for our business, the 1.6T growth trend is a lot stronger than 800G, though the 800G continues to be going forward, but the surge in 1.6 business is coming our way for this calendar year. Ruben Roy: Very helpful. Thank you, guys. Michael Hurlston: Thanks, Ruben. Kathy Ta: Thanks, Ruben. Operator: Kevin, I think we have time for just one more question. Operator: Alright. Your next question comes from George Notter of Wolfe Research. Your line is open. Please go ahead. George Notter: Hi, guys. Thanks very much. I just wanted to kind of get in here and ask some questions about supply. You know, it just seems like, obviously, there's a tremendous amount of demand here. You guys have been trying to consolidate more and more of your manufacturing into the Nava facility down in Thailand. And I'm just curious about what that looks like right now in terms of capacity available capacity in Nava. Is it possible that you guys would look to outsource more, you know, given the demands you're seeing? Walk us through kind of, you know, how you plan to ship all this product. Thanks. Michael Hurlston: Yeah, George. That is the right question. I mean, we have pivoted from a manufacturing strategy to really look at more contract manufacturing. We have stepped on the gas at Nava. We're doing everything we can to clear out some of our factory footprint actually in China to help us with some of the most important SKUs that we're going to be able to deliver to. So we've really tried to work to optimize our floor space that we have for the high-value products that we think we need to deliver. That being said, we simply don't have enough. I mean, right now, one of the significant challenges we're facing is, you know, in addition to fab capacity, which is well documented, is our factory capacity. And there, we're starting to look a lot more to contract manufacturing than we have in the past. We did hire a new leader for our back-end operations. They came from Jabil. He is very familiar with the contract manufacturing community. He and Wupen were actually meeting last week in Thailand, outlining a strategy by which we can move a lot more of our products to contract manufacturers just to help us accelerate these various ramps. We're facing so many challenges right now from a ramp perspective that to not rely on partnerships would be would be unwise. George Notter: Got it. Then just one quick follow-up. You mentioned the LTAs, I think, more in the context of the EML supply that you have. But, you know, if I look at the telecom business, I look at transceivers, other components in the business that are really sort of asymmetric in terms of supply and demand. Are you also putting LTAs into those product lines as well? I'm just curious, like, how much of the business is now covered with LTAs? Thanks a lot, guys. Michael Hurlston: Yeah. We are. I mean, that is definitely been a pain point because I think that there's been a lack of recognition from the historical telecom customers as to, you know, right now, it's a seller's market. And so a couple of our key customers have been problematic around the LTAs, and Wupen and I have been able to sort of get to a reasonable compromise with those customers. But honestly, we'd like to do more there. I think there's more opportunity for us to increase price on the telecom customers than we have in the past, and we're gonna look at that, you know, and pick some partners that really are working with us. Quite frankly, and those customers, I think, we're gonna treat favorably, and, you know, we'll figure out how to service the rest with the volume that's left over. George Notter: Thank you. Kathy Ta: Thank you, George. Operator: And that is all the time we have for questions. I will now turn the call back to Ms. Kathy Ta for closing remarks. Kathy Ta: Thank you, Kevin. We look forward to connecting with you at upcoming investor conferences and meetings this quarter. I would also like to invite all of you to please take a moment to register for an upcoming investor briefing at OFC, which is taking place in Los Angeles on March 17. Whether you can join us in person or via our live virtual webcast, we look forward to seeing you there. And with that, I'd like to thank you for joining us today. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Thank you for standing by. Welcome to the Amdocs First Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 11 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 11 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Matt Smith, Head of Investor Relations. Please go ahead, sir. Matt Smith: Thank you, operator. Before we begin, I need to call your attention to our disclaimer statement on slide two of the presentation. Note that some of our comments today may be forward-looking statements and are subject to risks and uncertainties, including as described in Amdocs' SEC filings. We will discuss certain financial information that is not prepared in accordance with GAAP. For more information regarding our use of non-GAAP financial measures, including reconciliations of these measures, we refer you to today's earnings release, which will also be furnished with the SEC on Form 6-K. Participating on the call with me today are Shuky Sheffer, President and Chief Executive Officer of Amdocs Limited, and Tamar Rapaport-Dagim, Chief Financial and Operating Officer. To support today's earnings call, we are providing the presentation which can be found on the Investor Relations section of our website. As always, a copy of today's prepared remarks will also be posted immediately following the conclusion of this call. On today's agenda, Shuky will recap our business and financial achievements for the first fiscal quarter 2026, including our strategic progress in generative AI and data services. Shuky will finish by addressing our financial and business outlook, after which Tamar will provide additional details on our first quarter financial performance and guidance for the full fiscal year 2026. And with that, I'll turn it over to Shuky. Shuky Sheffer: Thank you, Matt, and everyone joining us on the call today. Beginning on slide six, I am pleased to report a solid start to fiscal 2026 as we continue to focus on our primary goal of accelerating Amdocs' long-term growth and positioning ourselves as a market leader for the Gen AI era. First quarter financial results were consistent with our expectations. Revenue of $1.16 billion was slightly above the midpoint of guidance, rising 4.1% from a year ago and 3.5% in constant currency. Profitability improved by 40 basis points from a year ago and was unchanged on a sequential basis, reflecting our commitment to balance internal efficiency gains with accelerated investments to support long-term growth. Non-GAAP diluted earnings per share was $1.81, above the guidance range, primarily due to a lower than expected tax rate for the quarter. We finished Q1 with a 12-month backlog of $4.25 billion, up $60 million sequentially and 2.7% from a year ago. Turning to slide seven, I'd like to thank our people around the world for their part in delivering best-in-class mission-critical operation support over the holiday period and for achieving a high number of milestone deliveries under the many outcome-based projects and managed service engagements we are supporting for our customers. Q1 includes several important developments which strengthen our underlying business, accelerate our global growth potential, and advance our generative AI strategy. First, I am proud to announce that we signed a new multiyear agreement with T-Mobile that includes managed services, software development, and AI innovation. Under the new agreement, T-Mobile and Amdocs will collaborate to support T-Mobile's growth strategy and business objectives. Amdocs will continue to support T-Mobile's consumer and business domains, including the implementation of GenAI technology where applicable. As part of this agreement, Amdocs will also support integration activities related to common systems. Additionally, we are supporting T-Mobile in the integration of UScellular. As a reminder, integration activities by nature are nonrecurring and are ramping down by design once the integration is completed. Overall, this important agreement extends our long-standing strategic collaboration with T-Mobile. Having said that, as mentioned last quarter, we expect a revenue decline with this customer in fiscal 2026 due to a lower level of spending. Matt Smith: Second, Shuky Sheffer: we expanded Amdocs' global customer footprint and progressed our international diversification strategy this quarter through a combination of organic and inorganic moves. We signed an expanded multiyear engagement at Vodafone Germany, the largest of Vodafone's operating companies, and won significant transformation awards with two new logos in Western Europe. Additionally, I'm excited to report that we closed the acquisition of Matrix Software for $197 million in cash at the end of Q1. Based in California, Matrix is a strategic consolidation move which complements and extends our leading market position around the core of billing, monetization, and charging solutions. As such, we believe there is an amazing potential to bring our full suite of products and managed services in support of Matrix's impressive customer base. These customers include major tier-one service providers such as Verizon, Telus, Telefonica, Swisscom, Three, Virgin Media O2, and Telstra, as well as a growing list of many smaller field operators and MVNOs. Third, I'm encouraged by the highly positive recognition Amdocs is receiving as a market leader in data and generative AI from customers and industry analysts like Gartner. In my opinion, such recognition directly reflects Amdocs' very deep domain expertise, which is unmatched in the telco vertical. During Q1, our commercial momentum continued with digital GenAI-related wins at Telus and other customers. Our next-generation AI platform development is also progressing to plan, with today's announcement of AOS, an agentic operating system purpose-built for telecommunications, which we plan to showcase at Mobile World Congress in early March. Now turning to slide eight, I'd like to provide some additional color with respect to our growth strategy designed to deliver the tech-led products and services our customers need to maximize the value of generative AI data across our customer footprint, accelerate the journey to the cloud, digitalize customer experience in consumer and B2B, monetize next-generation network investments, and streamline and automate complex network ecosystems. Starting with data and generative AI on slide nine, we are busy executing the recent GenAI-related commercial awards we won with Optimum, Consumer Cellular, Telefonica Germany, and other first-mover adopters of Amdocs Amaze, our generative AI platform that leverages NVIDIA's AI capabilities. These early awards provide proof points as to the important role of generative AI in the telecom industry and transformation, as witnessed by the consistent pipeline expansion and growing commercial progress we are seeing. As an example, Telus, Amdocs, and NVIDIA recently teamed up to deliver an advanced AI-powered quality engineering solution on the Telus Sovereign AI Factory, specifically designed to meet Canadian data residency and compliance mandates. This strategic integration will enable secure autonomous testing, automation, and validation for Canadian enterprises and government agencies, helping them to adopt generative AI securely and to roll out digital services faster. As to our long-term strategy, last quarter, we shared that we are accelerating our investment to fast-track the development of Cognitive Core, a next-generation AI platform built on the foundation of Amdocs Amaze, which integrates prebuilt telco-specific agent libraries and actionable insights. I'm pleased to say that our development roadmap is progressing as planned with today's exciting announcement of AOS, the world's first agentic operating system purpose-built for telecommunications, which we plan to showcase at Mobile World Congress in Barcelona a few weeks from now. Designed to help service providers accelerate their generative AI strategies and innovate at scale, AOS operates on top of any BSS or OSS stack, embedding cognitive core and intelligence directly into telecom operations to elevate customer and employee experiences, unlock new growth opportunities, and drive measurable operational efficiency by executing complex end-to-end workflows across BSS/OSS environments. Overall, we are excited by the announcement of AOS, which we believe can emerge as a long-term growth engine for Amdocs as telcos realize the potential to simplify and accelerate their AI transformation journey. Switching to cloud on slide 11, Amdocs remains uniquely positioned as the preferred partner to lead the telco industry's journey to the cloud, reflecting our proven ability to accelerate public, private, and hybrid cloud migrations. We are continuing to grow our cloud migration collaboration with AT&T, supporting them as they move another key infrastructure stack to the cloud. This represents an important next phase in AT&T's cloud modernization journey. By applying Amdocs' AI-driven migration capabilities and deep telecom domain expertise, we are helping AT&T modernize core infrastructure faster, reduce transformation risk, and improve operational efficiency while creating the foundation for future innovation. As discussed last quarter, our SaaS-based platforms, including Amdocs ConnectX, Amdocs MarketONE, and Amdocs eSIM, are also contributing to growth with rising customer adoption. This quarter, Amdocs MarketONE was selected by Vizio, formerly Vizio, a leading smart TV platform powering over 50 million TVs globally. MarketONE will rise Vizio's global OTT subscription and streaming bundles on home AOS-equipped smart TVs, streamline OTT partner onboarding, enabling innovative subscription bundling, and digital services expansion across its international footprint. Looking forward, cloud will remain a primary focus for Amdocs as we continue to support our global telco customer base, many of which are just getting started on their multi-year cloud journeys. Turning to slide 12, I'd like to spotlight some additional deal wins across Amdocs' other strategic domains this quarter. Matt Smith: First, Shuky Sheffer: I'm delighted to announce that Vodafone Germany has extended its multiyear digital transformation engagement with Amdocs. As part of this, it will decommission multiple legacy technology stacks to simplify its IT infrastructure across its fragmented cable portfolio. The program will complete with a gradual migration following proven agile delivery, running fully in the public cloud, and utilizing GenAI tools to increase delivery efficiency. In Western Europe, we won significant digital transformation awards with two new logos that further expand our strategic relationship with large global telco service providers. In Italy, Swisscom's Fastweb broadened its use of the Amdocs platform as the unified orchestration layer to manage end-to-end order management across both wireline and wireless consumer domains in the new core resulting from the post-merger integration with Vodafone Italy. Within the BSS and OSS sphere, Swiss service provider Sunrise has extended its collaboration with Amdocs to support AI evolution in CRM, setting the foundation for further increasing its Net Promoter Score and offering customers the best service at any time. We also signed a new four-year agreement with Telefonica Germany to renew our Actix mobile network platform. Actix plays an important role in optimizing linear network performance, helping Telefonica Germany enhance coverage and network quality at scale. This renewal reflects the ongoing value we deliver in mission-critical network operations and further strengthens our long-term collaboration with the customer. Finally, we recently signed a proof of concept with a leading operator in Japan, deploying Amdocs RevenueONE with billing capabilities to run real operation scenarios. This engagement reinforces the strength of our revenue management portfolio in supporting complex, strategic customer environments and creates a path for potential expansion. Matt Smith: Now, Shuky Sheffer: to the current operating environment. We believe many growth opportunities exist across our several addressable markets of roughly $60 billion. By tapping new domains at our largest long-standing customers, capturing additional wallet share at existing customers and new logos, diversifying into new geographies such as Japan, Africa, and the Middle East, and bringing innovation in emerging strategic domains such as generative AI, fiber rollout, cloud migration, and the rapidly evolving MVNO segment. With our deep telco domain expertise and unique tech-led customer-based business model, we are well-positioned in the market and laser-focused on monetizing the rich deal pipeline we see in front of us. That said, we are, of course, closely monitoring our customers' demand and spending behavior within the prevailing global macroeconomic environment. Bringing everything together on slide 14, with our solid first-quarter performance and our visibility for the remainder of the year, we are reiterating our guidance for revenue growth of between 1.5% and 5.5% in constant currency for fiscal 2026. Similarly, we are on track for non-GAAP diluted earnings per share growth of between 4% to 8% in fiscal 2026, the midpoint of which equates to an expected total shareholder return in the high single digits, including our dividend yield. On a personal note, after many years serving Amdocs in a range of leadership roles, including more than seven years as President and Chief Executive Officer, I've decided to retire from my role as President and Chief Executive Officer. It has been the greatest privilege of my professional life to lead this incredible organization and its talented people for the past seven years. I'm immensely proud of what we've accomplished together. We didn't just navigate and choose the cloud and the rise of GenAI; we transformed Amdocs into a true catalyst for the digital age. I am pleased to announce that Jimmy Olfic, a long-time colleague and trusted partner who is here with me today, will succeed me as the President and Chief Executive Officer effective March 31, 2026, following a planned transition period. Matt Smith: I take Shuky Sheffer: this step with deep confidence in Amdocs' position, long-term strategy, and leadership team. Having worked closely with Jimmy over many years, I've seen his ability to lead the company through significant industry and technological change while maintaining a strong focus on customer execution. This planned succession reflects the depth of talent within Amdocs' management team and ensures continuity in our strategic direction. I am confident that Jimmy, supported by an experienced, highly capable executive team, will build on Amdocs' strong foundation and lead the company to new heights. I'm delighted to say that Jimmy is here with me in the room today. So let me hand things over to him to say a few words before moving to Tamar. Jimmy Olfic: Thank you, Shuky, for the kind words and for our partnership over the years. I'm excited to lead Amdocs into the next chapter. During my career at Amdocs across different leadership roles, I've come to appreciate what makes Amdocs a leader: our people and culture, our customer trust, and our technology innovation. As we look ahead, Amdocs is well-positioned to combine emerging technologies with deep domain expertise to drive value to customers and shareholders. I'm looking forward to building on everything we have accomplished and taking Amdocs to the next level. Shuky Sheffer: Thank you, Jimmy. And with that, let me turn the call over to Tamar for her remarks. Tamar Rapaport-Dagim: Thank you, Shuky, and hello everyone. Thank you for joining us, and Jimmy, best of success. To begin, I'm pleased with our solid financial performance for the first fiscal quarter as summarized on slide 17. Q1 revenue of approximately $1.156 billion was up 3.5% year-over-year in constant currency. Revenue was slightly above the midpoint of our guidance even after unfavorable foreign currency movements of roughly $3 million compared to our guidance assumptions. On a reported basis, revenue was up 4.1% from a year ago. Revenue from the acquisition of Matrix Software was immaterial in Q1 since the deal closed in the last week of the quarter. On a regional basis, North America was up nearly 4% from a year ago and was higher on a sequential basis for the fourth consecutive quarter. Europe was up by 17% year-over-year and increased by 1% sequentially, driven by organic growth initiatives and the December 2024 acquisition of Profinet, which made little contribution to the year-ago quarter. Rest of the world was down from a year ago but improved slightly as compared to the prior quarter. Consistent with our prior guidance, our strong sales momentum provides clear visibility to continued growth in Rest of the World this year. Let me remind you that quarterly trends may fluctuate given the project orientation of our customer activities in this region. Shifting down the income statement, non-GAAP operating margin of 21.6% improved by 40 basis points from a year ago and was stable on a sequential basis as we continue to balance the benefits of internal cost and efficiency initiatives with investments designed to accelerate our long-term growth, including the development of our next-generation AI platform. Interest and other expenses amounted to roughly $10 million in Q1. On the bottom line, non-GAAP diluted EPS of $1.81 was above the guidance range, primarily due to a lower than expected non-GAAP effective tax rate in the quarter. Similarly, diluted GAAP EPS of $1.45 exceeded the guidance range, which was also primarily due to a lower than expected GAAP effective tax rate in the quarter. Additionally, diluted GAAP EPS included a restructuring charge of roughly $0.09 per share, which was not included in our guidance for the quarter. Turning to Slide 18, Managed Services revenue of $746 million was up 2.3% from the prior year in the first fiscal quarter. As a share of total revenue, managed services accounted for roughly 65%, consistent with the last several quarters. During Q1, we maintained very high managed services renewal rates, signing expanded multiyear engagements, which together strengthen our business resiliency. In addition to the new agreement with T-Mobile and the new engagement with Vodafone Germany, we signed an agreement with Telefonica Mobile Argentina to operate water maintenance services, application managed services, and our software factory. Moving to the balance sheet and cash flow highlights on slide 19, DSO of 76 days decreased by five days from a year ago and was up by two days sequentially. Unbilled receivables net of deferred revenue was down by $32 million sequentially and by $6 million versus a year ago in Q1, aggregating the short-term and long-term balances. As a reminder, the net difference between unbilled receivables and deferred revenue fluctuates from quarter to quarter in line with normal business activities as well as our progress on multiyear engagements. Free cash flow before restructuring payments was $237 million in Q1, driven by strong earnings to cash conversion to begin the year. In fact, Q1 free cash flow already equates to roughly 33% of our full-year target, which is higher than usual after just one quarter. Including restructuring payments of $49 million, reported free cash flow was $188 million in the quarter. We ended Q1 with a healthy cash balance of approximately $248 million and aggregate borrowings of roughly $780 million, including a drawdown of $130 million on our $500 million revolving credit facility to fund the acquisition of Matrix Software, and our $650 million senior notes, which mature in June 2030. Overall, we have ample liquidity to support our ongoing business needs while retaining the capacity to fund our future strategic growth. Switching to capital allocation on slide 20, this quarter, we repurchased $146 million of our shares. We had up to $840 million of remaining repurchase authority as of December 31, 2025. We paid cash dividends of $57 million in the first fiscal quarter. Looking to fiscal 2026, we are on track to generate free cash flow of between $710 million to $730 million, not including payments we expect to make under our current restructuring program. Our free cash flow outlook equates to a conversion rate of roughly 90% relative to expected non-GAAP net income and translates to a healthy free cash flow yield of roughly 8% relative to Amdocs' current market capitalization. Regarding our capital allocations for the coming year, we expect to return the majority of our free cash flow to shareholders. Moving to slide 21, 12-month backlog was $4.25 billion at the end of Q1, up $60 million sequentially and 2.7% from a year ago. Now turning to our revenue outlook on slide 22, we are continuing to closely monitor the prevailing level of macroeconomic, geopolitical, business, and operational uncertainty in the current business environment. The second quarter and full fiscal year 2026 financial guidance reflects what we consider to be the most likely outcome based on the information we have today, but we cannot predict all possible scenarios. For the full fiscal year 2026, we expect revenue growth of between 1.5% and 5.5% as reported, roughly half of which will be inorganic in nature. This includes the acquisition of Matrix Software, which was already incorporated in our assumptions when we provided our fiscal 2026 guidance last quarter. This expected range compares with 1.75% to 5.7% previously, with the change reflecting foreign currency movements which are now assumed to provide the benefit of 0.5% for the full year as compared to 0.7% previously. For the full fiscal year 2026, we are reiterating our outlook for revenue growth of between 1.5% and 5.5% in constant currency. As for the second fiscal quarter, we expect revenue of between $1.15 billion to $1.19 billion. Moving down the income statement, we are on track to deliver non-GAAP operating margins within our target range of 21.3% to 21.9% in fiscal 2026, the midpoint of which is roughly 20 basis points higher than the prior year of 21.4%. Our profitability outlook reflects an intentional decision to accelerate our R&D, sales, and marketing investments with respect to generative AI and our next-gen agentic operating system, while balancing this with ongoing cost and efficiency gains resulting from our continuous focus on operational excellence, automation, and the internal deployment of generative AI-based tools across our business. As a reminder, our non-GAAP operating margin may fluctuate slightly on a quarter-to-quarter basis. Additionally, our margin outlook excludes additional restructuring charges we may take. Below the operating line, we expect non-GAAP net interest and other expenses to be impacted by higher finance costs this year, resulting from a reduced cash balance and funding of our strategic long-term growth plan. As anticipated at the beginning of the year, we expect our non-GAAP effective tax rate to be within an annual target range of 16% to 19% for the full fiscal year 2026. For your modeling purposes, in Q2 specifically, we expect our non-GAAP effective tax rate to be above the high end of this annual range. Bringing everything together on slide 24, we are reiterating our outlook for non-GAAP diluted earnings per share growth of 4% to 8% in fiscal 2026, the midpoint of which positions us to deliver high single-digit expected total shareholder return, when including our dividend yield of around 2.7%. With that, back to you, Shuky. Shuky Sheffer: Thank you, Tamar. I am pleased with our solid start for the fiscal year and the important progress we've made in respect to our long-term strategic partnerships, the expansion of our customer base globally, and today's announcements for the new agentic operating system AOS, which we believe can provide an additional engine for long-term growth. With that, we are happy to take your questions. Operator: Certainly. And as a reminder, ladies and gentlemen, if you do have a question at this time, please press 11 on your telephone. We ask that you please limit your questions. Our first question for today comes from the line of Shlomo Rosenbaum from Stifel. Your question, please. Shlomo Rosenbaum: Hi. Thank you very much for taking my questions. Shuky, Tamar, just the T-Mobile announcement, obviously, a significant positive. Everyone's kind of waiting for this renewal. I was wondering if you could give us just a little bit more color on that because it's just discussed as a multiyear agreement, doesn't say how long it is. You know, how could we compare this to the prior agreement? I know you talked about revenue being down in '26. Is there a continued trajectory that way? Or should we assume there's a new baseline? And just you know, is the scope the same with what you were doing? I know there's T-Mobile in the third quarter announced a very sizable charge against its, you know, its billing system. Including what it seems like, you know, stuff that was still in development. And maybe you could just kind of put a, you know, a finer point on what's going on over there since it is a very significant client, and then I have one follow-up. Thank you. Tamar Rapaport-Dagim: Sure. Hi, Shlomo. Let me try and give some more color. We're talking about a five-year agreement. This is quite typical for a long-term services engagement and additional engagement with the top customers. We are covering in this agreement, as we indicated, managed services. We are covering development services, some AI-related activities, integration of common systems. So there's plenty of, I would say, breadth to the engagement that is covered there. We also indicated, beyond this agreement, that we are going to support in the integration of UScellular, which is, of course, a strategic move that T-Mobile announced already in the past. We feel that the relationship, of course, needs to take us to continuous support at T-Mobile both on the consumer side of the business as well as the support of the business segment of T-Mobile. We continue to see specifically, we are guiding now for 2026, so we're talking about the fact we want to be very transparent about the fact we still expect revenue to decline in 2026 as the spending appetite is lower. Not just with that. I think if you look into the commentary from T-Mobile, they are much more cost-cautious. And the other point that we say is that specifically, again, it's not specific to the contract. It's just to remind you that the kind of work we do for integration of systems, like the one we are doing with UScellular, is one that is typically not, you know, it's not recurring by nature. Integration has a beginning and an end, and, hopefully, of course, it will be successful. And, therefore, we wanted to make it clear this is not the what we're talking about multiyear agreement in other activities with T-Mobile. Integration of UScellular is not a five-year thing. Right? Usually, integration is measured by quarters rather than years. Shuky Sheffer: Okay. Overall, I agree with what Tamar said. I think it's we have a relationship with T-Mobile since 1999. So I think this extends our partnership with T-Mobile for days to come. Shlomo Rosenbaum: Okay. Thank you. And then just I want to dig in a little bit more on the Matrix acquisition. Just you guys you already bought a charging platform with OpenNet, like, five years ago, and I want to ask just what strategically you know, is this adding to what you had? And you know, if you could put a finer point onto the revenue that you're expecting from it this year? Is it, you know, if I take kind of the midpoint of your revenue guidance, assume half of it is you know, coming from acquisitions. I would you know, you and and kind of that over three quarters, sounds like it's like around $90 million run rate business. Is that the way to think about it? Shuky Sheffer: I would start with the value of the products, and Tamar will answer more of the financial question. Look. We are dealing with the world with different sizes and different complications of customers. Some of the tier-one customers need different types of charging and capabilities compared to what we call low tiers or mid-tiers. So I think the rationale of this acquisition was also it was a consolidation of a competitor with a very strong product. So I think the rationale, a, it gives us an additional charging engine that we can it's more like what we call tier-two level rather than tier-one. This is one. It gives us a very nice set of customers as we mentioned. And I think that between all our capabilities, I think it's it's trying to position us by far as the market leader in this critical domain of charging and monetization. Tamar Rapaport-Dagim: Yeah. Maybe just to add, you mentioned the acquisition five years ago of OpenNet. OpenNet is an amazing solution that we see deployed in many leading customers and, of course, latency is a significant thing on there. It's a beta solution for the high scale. Back to your point about the revenue contribution coming from M&A. So we did incorporate in the original guidance of the year about half of our growth coming from M&A. And Matrix was definitely mature in the pipe of M&As when we gave that guidance. So that's why I wanted to emphasize that it was planned, and now it's materializing. Now relative to the model of Amdocs, Matrix is a product, software product company. So less visibility into the model than our own regular model. We have taken that into consideration, of course, being the first year of integrating Matrix. We want to be cautious on the revenue view. So I think we are appropriately conservative there. Yes, it's in the numbers. It's not necessarily the end of the M&A plans we have for the year. We don't have any major buildup of expectations in terms of not only talking about revenue. I'm just talking about the fact we do see also an additional pipeline of good ideas on the M&A side that we may execute upon. But as I always say, M&A is not something you can plan for in a linear way. We want to do the right deals for the right reasons with the right prices. So I think we'll be able to get in a very prudent way in our guidance. Shlomo Rosenbaum: Thank you. Matt Smith: Thank you. Operator: And our next question comes from the line of Dan McDermott from Oppenheimer. Your question, please. Dan McDermott: Hi, guys. Dan on for Tim Horan. Thanks for taking our questions. Just two quick ones. Can you give us some more color on your new agentic operating system you announced today? You know, why it's unique and how it can serve as a new growth engine. And then second, Verizon has been very vocal about aggressively cutting expenses. We were wondering if you're doing anything there to help them with their restructuring and their AI initiatives. Thanks again. Shuky Sheffer: So the what we call AOS, the agentic operating system, and if you remember last quarter, we started to talk about this as we are developing a next-generation platform for GenAI. At the time, we talked about Cognitive Core, which is part of the overall AOS. And in a simple way, and I want to avoid becoming an architecture discussion, it's a layer that can sit on top of any BSS/OSS infrastructure. And actually can provide with, obviously, giving our knowledge of this very deep and intimate knowledge of this industry. We are building an agentic platform that actually eventually, you can operate all the activities through agents. And we are going to showcase this in Barcelona, meet with many customers, and so today, we announce it, and the full showcase will be roughly a month from now. We believe this will, in the future, serve as a new growth engine for Amdocs. We did not include any revenue for this in this current fiscal year, but we believe that from everything that we hear in the industry, this is going to be the probably the most, I would say, prominent and strong foundation to leverage GenAI, and we're very proud of what we are in the process of building. And regarding Verizon, I cannot comment more than you need to assume that we are engaging with Verizon to see how we can help them in the future. Operator: Thank you. And our next question comes from the line of George Notter from Wolfe Research. Your question, please. George Notter: Hi, guys. This is Terron on for George. Could you talk a little bit more about how the telcos are progressing in terms of looking to accelerate and simplify their AI journey? Specifically, can you talk about how the pipeline is progressing? And any new opportunities that have popped up for you? Shuky Sheffer: Thanks. I think overall and definitely, we talked about this before, we were very active in working with our customers, you know, building and developing different use cases in the call center, in the retail store, or any upsell or care type of scenarios. But this was more, I would say, different solutions to different needs, different use cases. The difference with AOS, it is a complete holistic value proposition to address all what we believe the future telco needs to level up this technology. All our customers are obviously trying successfully in many cases to leverage this, but it's more, I would say, it's like moving from opportunistic to strategic. From different use cases and different capabilities that all our customers are already experiencing, both in the IT and the network domain, to a much more holistic value proposition that actually will translate or converge in the future the way our customers work to a full agentic way. So this is the difference from what we've done so far to this daily solution. But, obviously, in the early days, I mean, most of our customers, as I said, are trying fields. We do a lot of field trials. In many cases, also, are getting some value, but I think this is very, very, very early days in this domain. George Notter: Great. Thanks. Operator: Thank you. And as a reminder, ladies and gentlemen, if you have any further questions, please press 11 on your telephone. Our next question comes from the line of Tal Liani from Bank of America. Your question, please. Tomer Zilberman: Hey, guys. This is actually Tomer Zilberman on for Tal. Maybe two for me. You mentioned in the prepared remarks that you had a slight beat to your expectations this quarter on revenues, and your Q2 guidance was also slightly above the street. But you were consistent in maintaining the fiscal year. I just wanted to ask if this is more about rightsizing when you expect the ramp down of T-Mobile revenues this year, if there's anything else to look there. And my follow-up is, as we think about this new multiyear agreement with T-Mobile, can you give us the progression and the trajectory of the milestones you need to hit to really ramp the revenues there? Thank you. Tamar Rapaport-Dagim: So, on the first question, it's not anything specific in particular. It's not a customer that caused that. Actually, I'm happy about the fact that we were able to show now faster performance on the revenue to meet the numbers. You know, we talked from the beginning of the year of a stronger half two than half one, but even then, it wasn't like a big difference. So I would say it's a slight change. And nothing in particular that I can point out that caused that. On your second question, it's not a matter of meeting a specific deliverable that is singular in nature. What we do for T-Mobile includes many activities. So we are doing the managed services that cover the ongoing IT operations. We are doing development work. Some of it is new project-oriented. Some of it is helping them to enhance existing systems. We are going to embed AI activities. We are doing the UScellular integration. We are going to help with other rationalization of common systems. So it's many, many things. It's not like a single project that I can point to a specific milestone. So it's mainly a matter of continuing to execute, bring value, and push forward to the demands and the desires of T-Mobile. Tomer Zilberman: Understood. Thank you. Tamar Rapaport-Dagim: Thank you. Operator: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Matt Smith for any further remarks. Matt Smith: Okay. Thanks, operator, and thanks, everyone, for joining the call tonight. If you do have any additional questions, please give us a call in the IR group here. With that, have a great evening. Thanks. Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Cirrus Logic Third Quarter Fiscal Year 2026 Financial Results Q&A Session. At this time, all participants are in a listen-only mode. After a brief statement, we will open up the call for questions from analysts. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference call over to Ms. Chelsea Heffernan, Vice President of Investor Relations. Ms. Heffernan, you may begin. Chelsea Heffernan: Thank you, and good afternoon. Joining me on today's call is John Forsyth, Cirrus Logic's Chief Executive Officer, and Jeff Woolard, our Chief Financial Officer. Today at approximately 4 PM Eastern Time, we announced our financial results for the third quarter fiscal year 2026. The shareholder letter discussing our financial results, the earnings press release, and the webcast of this Q&A session are all available at the company's Investor Relations website. This call will feature questions from the analysts covering our company. Additionally, the results and guidance we will discuss on this call will include non-GAAP financial measures that exclude certain items. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in our earnings release and are all available on the company's Investor Relations website. Please note that during this session, we may make projections and other forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially from projections. By providing this information, the company expressly disclaims any obligation to update or revise any projections or forward-looking statements, whether as a result of new developments or otherwise. Please refer to the press release and the shareholder letter issued today, which are available on the Cirrus Logic website and the latest Form 10-Ks, as well as other corporate filings registered with the Securities and Exchange Commission, for additional discussion of risk factors that could cause actual results to differ materially from current expectations. Now I'd like to turn the call over to John. John Forsyth: Thank you, Chelsea, and welcome to everyone joining today's call. As you have seen in the press release, Cirrus Logic reported outstanding results for December, delivering revenue of $580.6 million, above the top end of our guidance range. This was driven by stronger than anticipated demand for components shipping into smartphones and a favorable mix of end devices. We are also proud to have delivered record GAAP and non-GAAP earnings per share in the third quarter. In a few moments, I'll hand the call over to Jeff to discuss the financial results for December in detail, along with our outlook for March. Before we get to that, I'd like to provide an update on the recent progress we have been making across the key pillars of our strategy. As I've outlined previously, our long-term strategy for growth at Cirrus is based around three principles. First, we seek to maintain a strong leadership position in our core flagship smartphone audio business. Second, we aim to expand the value and range of high-performance mixed-signal solutions with which we serve our customers in smartphones and similar products. And third, we aim to leverage our world-class expertise in IP in both audio and high-performance mixed-signal to grow and broaden our business in new markets. I want to say a few words now about the progress we've made in the past quarter in each of these areas. In our flagship smartphone audio business, we saw very strong demand for our latest generation custom boosted amplifier and 22-nanometer smart codec. These products are based on innovative new architectures that are designed to enable system-level improvements with each new smartphone generation, extending our product life cycles while also providing longer-term visibility and sustained revenue contribution. In our high-performance mixed-signal business, customer engagement around our camera controller roadmap remained strong during December. We are actively developing next-generation camera products that will deliver enhanced features, improved performance, and greater system efficiency. And we are excited about the opportunities in this space for the future. We also continue to invest R&D dollars in IP and capabilities around advanced battery and power applications, where we believe there is both opportunity to enhance existing content and grow content further. Across a range of areas, we see considerable opportunity to expand our value in smartphones with HPMS solutions and believe this will be an important driver for shareholder value creation in the coming years. Our third strategic priority is to leverage our audio and high-performance mixed-signal expertise into new applications and markets outside of smartphones. We've made great progress here, particularly in PCs where we continued to build momentum. Our progress in December included ramping the first shipments of our latest generation amplifier and codec in mainstream PC platforms, ahead of new customer product launches. An important milestone as we focus on expanding our footprint in higher volume mainstream PCs and capturing a larger share of our serviceable addressable market. During the quarter, we also sampled a new component designed to enable and enhance the use of voice as an interface for future AI-enabled PCs. And we were pleased to see strong interest in this product from several leading OEMs and PC platform vendors. Finally, we were excited to see multiple new customer products introduced at the Consumer Electronics Show in January that use a variety of our amplifiers, codecs, and haptic drivers. These product launches included our first win with a new customer in their high-end platform that features up to six Cirrus Logic amplifiers and our latest generation codec, setting a new standard for the audio experiences end users can expect from PCs. While we are very pleased with our achievements in PCs, the company also continued to gain momentum in other applications within our general market business. A growing number of our new general market components span the professional audio, automotive, industrial, and imaging end markets. Leveraging our world-class IP, these products typically enjoy long product life cycles and gross margins that are well above our corporate average, and hence act as a strong complement to the rest of our business. In December, we began sampling a new prosumer audio product family that will expand our addressable market by delivering solutions that span additional tiers and categories of products. This builds upon our portfolio of class-leading components that already service many of these markets today, particularly in professional audio and prosumer applications. Further, we also announced a new series of automotive haptic components that are designed to consistently deliver a range of tactile responses in real-time for applications across a wide range of in-cabin interfaces. Although we are in the early stages of participation in the automotive haptic market, we believe this represents an important growth opportunity for Cirrus Logic. In summary, we are proud of our progress this past quarter as we continue to execute on our strategy to diversify our product portfolio and drive growth in new applications and markets. And that concludes the latest update on our long-term growth strategy. So let me now turn the call over to Jeff to provide an overview of our financial results as well as the outlook. Jeff Woolard: Thank you, John. Good afternoon, everyone. I'll now walk through our Q3 financial results and provide guidance for Q4. In Q3 fiscal 2026, we delivered revenue of $580.6 million, which was above the top end of our guidance range driven by demand for components shipping into smartphones and a favorable mix of end devices. On a sequential basis, revenue was up 4%, due to higher smartphone unit volumes partially offset by a decline in general market sales. On a year-over-year basis, sales were also up 4%, primarily driven by higher smartphone unit volumes. This was partially offset by previously anticipated pricing reductions and lower general market sales. Turning to gross profit and gross margin. Non-GAAP gross profit in December was $308.2 million and non-GAAP gross margin was 53.1%. On a sequential basis, the 60 basis point increase in gross margin reflects the benefit of reduction in inventory reserves and, to a lesser extent, supply chain efficiencies. On a year-over-year basis, a 50 basis point decrease in gross margin was largely due to the impact of previously anticipated pricing reductions which were mostly offset by cost reductions. Now I'll turn to operating expenses. Our non-GAAP operating expense for the third quarter was $133 million. On a sequential basis, OpEx was up $5.3 million, primarily due to higher employee-related expenses. This was partially offset by lower product development costs largely associated with the timing of tape outs. On a year-over-year basis, operating expense was up $3.8 million, primarily due to higher employee-related expenses, and, to a lesser extent, professional expenses. This was partially offset by a decrease in product development costs associated with lower wafer and tape out expenses. Non-GAAP operating income for the quarter was $175.1 million or 30.2% of revenue. Turning now to taxes. For December, our non-GAAP tax rate was 15.1%, which incorporates the impact of the One Big Beautiful Bill Act. And lastly, on the P&L, non-GAAP net income was $156.7 million, resulting in record earnings per share for December of $2.97. Let me now turn to the balance sheet. Jeff Woolard: Our balance sheet continues to be strong, and we ended December with $1.08 billion in cash and investments. Our ending cash and investments balance was up $185.9 million from the prior quarter as cash generated from operations was partially offset by share repurchases. We continue to have no debt outstanding. Inventory at the end of the third quarter was $189.5 million, down from $236.4 million in the prior quarter. Days of inventory were down sequentially, and we ended the quarter with approximately sixty-three days of inventory. Turning to cash flow. Cash flow from operations was $290.8 million in December, and CapEx was $5.2 million, resulting in a non-GAAP free cash flow margin of 49%. For the trailing twelve-month period, cash flow from operations was $129.6 million, and CapEx was $21.6 million. This resulted in a non-GAAP free cash flow margin of 31%. On the share buybacks, in Q3, we utilized $70 million to repurchase approximately 591,000 shares of our common stock at an average price of $118.33. At the end of Q3 fiscal 2026, the company had $344.1 million remaining on its share repurchase authorization. Now on to guidance. For Q4 fiscal 2026, we expect revenue in the range of $410 million to $470 million. GAAP gross margin is expected to range from 51% to 53%. Non-GAAP operating expense is expected to range from $124 million to $130 million. The fiscal year 2026 non-GAAP effective tax rate is expected to range from 16% to 18%. In closing, we delivered strong results for December. We remain focused on executing our strategy to drive long-term growth across our business and deliver shareholder value. Before we begin the Q&A, I would like to note that while we understand there is intense interest related to our largest customer, in accordance with Cirrus Logic company policy, we will not discuss specifics about our business relationship. With that, let me turn the call over to Chelsea to start the Q&A session. Chelsea Heffernan: Thanks, Jeff. We will now start the Q&A portion of our earnings call. Please limit yourself to a single question and one follow-up. Operator, we are now ready to take questions. Operator: If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, please press 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Tore Svanberg with Stifel. Tore, your line is open. Please go ahead. Tore Svanberg: Yes. Thank you. Congrats on the record earnings, and especially those impressive cash flows. First question is, you came in $50 million higher for this quarter. You're guiding quite a bit better than seasonal for the quarter. So was hoping you could just add a little bit more color on what's going on. I mean, I understand, obviously, your largest customer and the higher mix. But, you know, any more color you could show us because those are pretty, pretty big beats. Jeff Woolard: Yeah. Tore, it's Jeff. You know, I think from a seasonality perspective, it does still look like from Q3 to Q4, you know, in the range of where we've been historically transitioning between those two quarters. I think the color commentary is really while the seasonal shape is the same, we just were further away from the peak than we thought when we gave guidance last quarter. So I think the peak of units and a favorable mix is really the story there. It really is just we were not we just didn't call the peak, and we were a little further away from the top than we thought. Tore Svanberg: Sounds good. And as my follow-up, for you, John, you mentioned some interest in the voice as an interface for AI. I mean, I assume that's primarily in the notebook market, but you know, perhaps there's some interest in other applications as well. And, you know, when should we expect to start seeing revenues from a technology like that? John Forsyth: Yeah. Thanks, Tore. In the first instance, yes. I was referring to, in particular, a product that we've been sampling to PC OEMs, which is focused on really significantly enhancing the voice interface for interaction with conversational agents and AI through their laptop. So that's something that today is pretty limited. We believe we can bring a lot in terms of new features and performance improvements to that. We started sampling the first product targeting the PC market, which is aiming to do that, to customers. And the interest has been really strong. That obviously gives us the opportunity to grow the value of some of the products that we ship into the PC space. Specifically, when you look at that voice product, it's a codec with a lot of smart voice features and processing capability on it. That could represent, you know, anywhere up to something of the order of double the value of the preceding generation of codec when you look at it from an ASP perspective. It also has the potential, I think, to be stickier and obviously have a direct impact on the user experience. So we're excited about that in the PC space. Us sampling it right now means that that's really gonna be something that we see in calendar '27 and '28. It's obviously part of a roadmap of products that we're working on and looking at around that area. And, yeah, to your broader point, although that's something which specifically I was referring to in the context of the PC market, I think those are features which are gonna be relevant elsewhere as well. And one of the areas where we've had some great engagement with customers is around AI devices that we're anticipating coming to market over the couple of years. And I think, again, that's a place where over time, we'd like to be bringing voice and voice-enabling features. Operator: Your next question comes from the line of David Williams with Stonex. Oh, sorry. Just one moment here. Your next question actually comes from Christopher Rolland with Susquehanna International Group. Your line is now open. Dylan Ollivier: Hi. Thanks for taking my question. This is Dylan Ollivier on for Chris. Congrats on the great result. So for my first question, it seems so from your shareholder letter, it seems like the revenue of your largest customer represented a higher percentage of your mix at 94%. So this would imply that your revenue outside of this flagship declined pretty significantly quarter over quarter. I was wondering if you had any color on what sort of caused that decline and if you anticipated to remain at that run rate or tick back up. John Forsyth: Yeah. Thanks, Dylan. I'll start us off here and Jeff can chime in if he has additional commentary. But yes, definitely, this is an area we'd like to add color on. Partly, of course, that proportion of our revenue is very high because of the product launch from our largest customer. But there have been some other temporary factors that have acted as headwinds in our general market business, which we're mostly through now, but I think are worth calling out for our investor community. One of those, when you look at the strategic shift that we made away from focusing on Android a few years back, that obviously has led to a decline over time in our Android revenues. That's the single biggest contributor to the year-over-year decline from our general market revenue perspective there. There is another factor, which is that we have a long tail of products. There's a rather large number of products which address automotive, industrial, prosumer, imaging segments where the products themselves are ten plus years old. And typically based on old process nodes, in many cases, in facilities which are no longer gonna be functioning. So, a number of those have been coming to their end of life. Which, you know, resulted in customers ordering ahead, giving us some sales momentum, but ultimately, that gets unwound as those products are end of life. Now we've been in parallel to all that, of course, we've been strategically investing in new growth markets like the PC market, and in new product families in the past few years. That will more than make up for those headwinds. So that's the all the PC opportunity that I've talked about other opportunities in AI devices that I alluded to, and then these products, which we've been announcing periodically and sampling to customers, and beginning to ramp around ProAudio imaging timing, and so on. So I think the positive thing is that where we're at now to between FY26 and FY27 that those are the points where a lot of those new products are starting to ship. And so when we look at over the next few years, we have a very healthy growth ramp for our general market business. Which, of course, includes the PC space, but goes well beyond that as well. Jeff Woolard: Yeah. I think the only thing I'd add is, you know, we're still very pleased with where we're at from a PC perspective and how we're growing there per our plans and think there is a lot of runway for us to continue to grow that business. And the products that we've refreshed that John mentioned, while early, we're very pleased with the customer traction they're getting. And the design wins we're getting and think, again, there's a lot of room to grow there. And it's just against those headwinds, but we're very pleased with the progress in those segments. Dylan Ollivier: Yeah. Thanks. That's helpful. And that's actually a nice segue for my next question. Because I wanted to pivot to the PC opportunity. So first of all, I mean, you addressed it a little bit, but I was wondering if you had any color on how you're tracking to what you've previously said for your revenue opportunity in PCs in fiscal 2026 and to see if you had any expectations for fiscal 2027. John Forsyth: Yeah. I think it's a little early to put something on the scoreboard for fiscal 2027, and, you know, we'll see how the next quarter goes. But I previously said that we expected PC revenue in fiscal 2026 to roughly double from the low tens of millions that we saw in fiscal 2025. And, you know, I think that continues to be our ballpark expectation there. I think we'll exit the fiscal year with very good growth momentum into fiscal 2027. I don't wanna put a number on that yet, but we're feeling very good about the momentum that we've got across the customer base there. And that's really that optimism is driven by what we see when we look at key indicators around the PC space. So firstly, we're shipping with the top six PC vendors at this point or laptop vendors, I should say. And then we also look at penetration of the mainstream category or mainstream tier. I've highlighted that as being important. In fiscal 2027, we expect that the revenue driven by mainstream platforms will roughly double for us. That'll be a very significant proportion of the overall revenue that we see from this PC space. And then another indicator that is a really good kind of leading indicator for our market penetration, I think, is the adoption of the SDCA interface, the SoundWire device class audio. Because coming into this year, SDCA represented only about 15 to 20% of the overall PC market. By the end of this calendar year, we expect that to be closer to 50%. And that will continue to increase. And in those SDCA slots, you know, we've been winning to date somewhere of the order of 75% of the sockets. So, certainly, you know, even if that figure gets diluted a bit as it goes more across the portfolio, it indicates how well positioned we are to take advantage of the SDCA opportunity. So we see that transition underway now at scale. And that's also visible in the sheer number of programs that we're active in in the PC space. You look back to fiscal 2025, we had 19 SDCA programs that came to market. In fiscal 2027, they'll be over 60. So when we look across those indicators, and the momentum that we're exiting the fiscal year with, we feel really good about the opportunity and what's ahead of us there. Operator: Your next question comes from the line of David Williams with Stonex. Your line is open. Please go ahead. David Williams: Hey, good afternoon, and congrats on the really solid results here. And I guess maybe first, just kind of thinking about the guidance where you guys are, are you seeing any major supply constraints that could have impacted either the quarter or the outlook? Jeff Woolard: We don't currently see any supply constraints. You know, I think things are tighter in the industry. And so we'll continue to manage that. You know, we do have the benefits. A lot of our products have a very long life. So if we need to shuffle things around to make sure we can manage that capacity on both sides, we're able to do that. But right now, there's no constraints. David Williams: Okay. Great. And then, maybe a little bit longer term, but just thinking about the automotive opportunity. It sounds like the zonal architectures and just the increased haptics maybe in the in-cabin. Be a big opportunity. Is there a way to kinda think about when you could start seeing the revenue real contribution from that? And then how do you think that market plays out over the next two to three years in terms of dollar content for Cirrus? Thanks. John Forsyth: Yeah. One of the things you're alluding to there, I think, is the quarter, we announced a family of haptic products that deliver high-definition haptics experiences for automotive. So that's part of a range of products that are either in development or announced or sampling to customers. For the automotive space covering timing, audio, haptics, telematics, and some other areas where we believe we can innovate and really bring some highly differentiated solutions to market. I haven't put a time frame or a revenue target for us out there publicly yet in the automotive market, but I'd say a couple of things. One is that we think there's a really healthy SAM when you look across those areas that I talked about. We're in '26 today. If you look out to '29, we think the SAM is, our products, is certainly north of $800 million. And the other thing I'd say is just, you know, general philosophical and strategic point about how we approach going after new markets, we have to be able to see multiple pathways to our participation in a new market becoming at least a 10% business for us over time. So, you know, anything that we're going after and talking about, then you can be sure that we've, you know, we've got various ideas and grounds for belief that we can ultimately build that into a 10% business or more. Operator: A reminder, if you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, please press 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Your next question comes from the line of Gary Mobley with Loop Capital. Your line is open. Please go ahead. Alex: Hey. Thank you. This is Alex calling for Gary. My question to you is how should we think about your seasonality in fiscal '27 given your biggest customer's staggered product launch across the high end and low end of the models? Jeff Woolard: Well, we're only giving guidance for the next quarter, but at this point in time, when we look at the long-term forecast signals we have, we don't see anything that significantly changes our historic seasonality. Alex: Got it. Thank you for the add. And just as a quick follow-up, how do you view the rising cost of your largest customer? And how does that influence negotiations? How does that influence component pricing negotiations for you? John Forsyth: I'm gonna assume you're referring to the much-talked-about increase in memory pricing there and, you know, what the knock-on effect might be for us. I think it comes down to this. Look. I've highlighted previously that we've been in a normalized pricing environment for some time now. So that means, yeah, we've been working collaboratively with our customers on pricing over the past several quarters. And we'll continue to do so. That's really a standard part of our business. Actually, on a year-over-year basis, as you've seen in the shareholder letter, the 50 basis points that gross margin contracted by was largely due to pricing reductions, anticipated pricing reductions. Which are obviously greater than that, but we have to work very hard to offset those pricing reductions with cost reductions and efficiencies in our supply chain and so on. I guess I'd also say we're very much in the kind of normal pricing environment where, you know, I would say some of our larger customers are not exactly known for being gentle in price negotiations no matter what's happening with commodity prices. So this is very much, you know, business as usual for us. I think over time, as we look forward, you know, we anticipate we'll see further pricing adjustments to our products. We'll continue to work on the supply chain to drive cost improvements that will help maintain gross margin. And, you know, the effects of that will continue to be reflected in our guidance as they have been today. Operator: There are no further questions at this time. We will now turn the call back to Chelsea Heffernan. Chelsea Heffernan: Thank you, operator. With that, we will end the Q&A session, and I will now turn the call back to John for his final remarks. John Forsyth: Thank you, Chelsea. In summary, Cirrus Logic delivered outstanding results for December driven by strong demand for smartphones. We're extremely pleased with our progress on each pillar of our long-term strategy, and remain focused on executing our technology roadmap to drive profitable growth across our business and to deliver long-term shareholder value. I'd like to thank everyone for participating today. Thank you. Goodbye. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: Good day, everyone, and welcome to 8x8, Inc. Third Quarter 2026 Earnings 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. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 11 again. Please note, this conference is being recorded. Now it's my pleasure to turn the call over to the Head of Investor Relations, Kate Patterson. Thank you. Good afternoon, everyone. Today's agenda will include a review of our results for the 2026 with Samuel Wilson, our Chief Executive Officer, and Kevin Kraus, our Chief Financial Officer. Kate Patterson: Following our prepared remarks, there will be a question and answer session. In addition to our prepared remarks, we have posted a more detailed letter to shareholders in the Quarterly Results section of our Investor Relations website. Before we get started, let me remind you that our discussion today includes forward-looking statements about future financial performance, including investments in innovation and our focus on profitability and cash flow, as well as statements regarding our business, products, and growth strategies. We caution you not to put undue reliance on these forward-looking statements as they involve risks and uncertainties that may cause actual results to vary materially from forward-looking statements as described in our risk factors and our reports filed with the SEC. Any forward-looking statements made on this call and in the presentation slides reflect our analysis as of today, and we have no plans or obligations to update them. All financial metrics that will be discussed on this call are non-GAAP unless otherwise noted. These non-GAAP metrics, together with year-over-year comparisons in some cases, were not prepared in accordance with US generally accepted accounting principles, or GAAP. A reconciliation of these non-GAAP metrics to the closest comparable GAAP metric is provided in our earnings press release and our earnings presentation slides, which are available on 8x8's Investor Relations website at investors.8x8.com. With that, I'll turn the call over to our Chief Executive Officer, Samuel Wilson. Good afternoon, everyone, and thank you for joining us today. Samuel Wilson: I'm excited to share the highlights of our third quarter results, which show our strategic investments across innovation, operational efficiency, and distribution are beginning to yield measurable results. More details are included in our letter to shareholders posted on the Investor Relations website. I could summarize our Q3 results and our outlook in a single sentence. We're seeing encouraging momentum across multiple dimensions of the business, though we remain focused on the execution work ahead. The most visible evidence of our growing momentum is our return to top-line growth. This marks our third consecutive quarter of year-on-year service revenue growth and our twentieth consecutive quarter of positive operating cash flow. We exceeded the high end of our guidance range for service revenue, total revenue, operating profit, and cash flow. I believe this shows our operating model is working. We're driving growth in strategic components of our service revenue while maintaining discipline on profitability and cash generation. A key driver of our growth was our increased consumption of our usage-based offerings, which grew nearly 60% year over year and now represents more than 20% of our service revenue, up from mid-teens a year ago. Much of this growth comes from our CPaaS APIs. We are also seeing an acceleration in the adoption of digital channels and AI-based offerings as customers move beyond pilot projects into production at scale. This is clear from some of the metrics we shared in a separate press release. Customer contracts for our intelligent customer assistant increased 70% year over year. Voice AI interactions increased more than 200% and now represent a vast majority of all AI interactions on our platform. Voice remains the channel of choice, and our core IP in voice communications is an increasingly valuable competitive advantage. We've built this capacity over decades, and it positions us uniquely as voice becomes the preferred interface for AI-powered customer experiences. The increase in consumption of our usage-based solutions reflects a broader industry shift away from pure SaaS subscriptions to hybrid and tokenized pricing models. The pay-as-you-go approach appeals to customers because it reduces risk as they adopt new technologies. It also raises the bar for vendors. Revenue is linked directly to successful customer outcomes and business activity instead of long-term subscriptions that may or may not be implemented. We believe this is the way of the future. We are positioning ourselves ahead of the curve in multiple ways. Investments that enable simplified consumption-based pricing across our portfolio. Process improvements that make it easier to do business with us. Product-led growth initiatives that allow customers to try before you buy. And AI-driven automations that allow us to scale our customer success organization. We are customer zero as we reimagine every aspect of our business for the AI era. We are seeing the impact of these transformational initiatives across our business. Our multiproduct strategy is gaining traction. All of our top 20 customers now have multiple products, and most have three or more. This matters because customers with multiple products see us as a strategic platform partner rather than a point solution. This results in substantially higher revenue, customer satisfaction, and retention. On average, customers with three or more products generate more than three times the revenue of customers with two products. We are seeing a reacceleration in sales of new products reflecting our investments in innovation. Four of our strategic new products grew triple digits year over year, including 8x8 Engage. 8x8 Engage is one of the fastest-growing products in our history, and it continues to gain momentum across industries like healthcare, retail, and professional services. A substantial portion of customer interactions routinely occur outside the formal contact center in these industries, making Engage a compelling solution. Engage recently won gold at the London Design Awards for user experience. A strong external validation of our product strategy and design focus. This is one of many awards won by Engage for its incredible user interface. We are seeing increased momentum in our revenue from our channel partners. We know we have work to do to expand our distribution globally. But we are seeing early traction from newly implemented partner programs and incentives. Importantly, channel source pipeline is showing sequential improvement as new programs take root. Let me share three examples that bring the momentum we're seeing across the business to life. First, a regional healthcare system with over 850 employees selected 8x8 over both Zoom and RingCentral for a competitive UC and contact center deployment. We went on-site when competitors didn't. We provided industry-matched references and demonstrated a deep understanding of their patient care operations. We won because we approached the sale as a strategic partner, not just a technology vendor. Next, a major national early education provider with over 43,000 employees chose us for significant UC expansion. This complex sale required a flexible OpEx model aligned with their finance-driven process. We acted as a transformation partner maintaining strong alignment across IT procurement finance and professional services throughout their buying cycle. Finally, a large veterinary and pet hospital company expanded their contact center capacity with us. We earned this business through weekly engagement with their leadership team, aligning on roadmap priorities, and then demonstrating how our solution supported their evolving initiatives. This is land and expand done right. These wins reflect a common theme. Customers are choosing integrated platforms over point solutions. Valuing strategic partnerships, and selecting vendors positioned for the future of AI-powered communications. These also reflect our internal commitment to leveraging AI the organization. In our sales process, we're using AI to map customer journeys, tailor solutions to customers' requirements, and improve the quality and quantity of customer interactions. Over the last year, we've made huge progress in using AI to improve our go-to-market analytics and coaching it's starting to show up in our results. Beyond new customer wins, we reached a significant milestone in Q3 with the completion of the final upgrade of Fuze customers to the 8x8 platform. Every 8x8 customer is now on our modern integrated 8x8 communications platform. This sets the stage for improved customer interaction, better expansion opportunities, and higher satisfaction. And more meaningfully more efficient operations across our network and back office. While the decommissioning of the Fuze platform is created a near-term revenue headwind as not all the remaining Fuze customers elected to upgrade, resulting in higher churn in Q3 we reflected in Q4 and fiscal 2027 revenue. The strategic benefit is clear. We can now focus 100% on our energy on growth and customer success rather than managing legacy infrastructure. To wrap up, we are seeing encouraging signs across the business. Usage-based revenue is scaling rapidly. Adoption of our AI-based solutions is accelerating. Multiproduct customers are expanding. New products are gaining traction. And our outcome-focused platform strategy is resonating with customers and partners. As we look ahead, we're realistic about the competitive and the evolving marketplace. We know we need to accelerate installed base expansion and drive stronger channel momentum. Kevin's updated guidance ranges reflect this realism we navigate through these market dynamics. We believe that Q3 marks a true inflection point. We have momentum entering Q4 and strong confidence in our ability to deliver sustained profitable growth and shareholder value. With that, I will turn it over to Kevin for the financial details. Thanks, Sam. Good afternoon, everyone, and thank you for joining us. Kevin Kraus: For our fiscal Q3 2026 earnings call. In addition to the shareholder letter Sam mentioned, detailed financial results, are available in our press release and in the trended financials on our Investor Relations website. Therefore, I'll focus my remarks on a few key highlights. Unless otherwise noted, all figures other than revenue and cash flow are presented on a non-GAAP basis. First, let me put our Q3 results in context. This was our third consecutive quarter of year-over-year revenue growth. And an all-time record high for service revenue. We exceeded our guidance ranges for service revenue total revenue, operating profit, earnings per share, cash flow from operations. Total revenue was $185 million, and service revenue was $179.7 million, both exceeding the high end of guidance by approximately $3 million and growing 3.4-3.6% year over year, respectively. These results reflected strong growth in consumption of our usage-based offerings combined with improved sales execution. Looking into the details, our usage-based offerings which include our CPaaS communication APIs, digital channels, and AI solutions, saw another record quarter and accounted for approximately 21% of service revenue. Compared to approximately 14% in Q3 2025. 8x8 service revenue, excluding revenue from Fuze customers, both upgraded and those still on the legacy 6% year over year, a growth rate similar to the previous quarter. As of 12/31/2025, we met our commitment to successfully complete the upgrade of the Fuze customer base to the 8x8 platform. Operating on a single platform improves efficiency, reduces complexity, and supports higher customer and engagement. Gross profit was approximately $120 million, about $3 million above the gross profit implied by the midpoint of our Q3 guidance ranges for revenue and gross margin. Gross margin as a percent of revenue was 64.8%, down sequentially due to the continued mix shift toward our usage-based offerings, which carry a lower margin profile but add meaningful operating profit dollars as usage-based revenue continues to scale. Operating income came in at $21.7 million, an increase of over $4 million sequentially. Resulting in an 11.7% operating margin, substantially above the high end of our guidance of 9 to 10%. Additionally, year-to-date operating expenses are down approximately $8 million compared to the first nine months of fiscal 2025. We are on track to reduce our operating expenses by about $12 million in fiscal 2026 compared to fiscal 2025. Reflecting continued discipline in how we manage our cost structure. Interest expense of $4.2 million was consistent with our previous guidance, but down more than 20% from Q3 2025 as we continue to reduce our debt. The combination of higher revenue lower operating expenses, and lower interest expense resulted in net income of $17.1 million and fully diluted EPS of 12¢ per share. Which was 3¢ above the high end of our guidance range. Cash flow from operations was $20.7 million for the quarter. Well above the high end of the guidance range due to a net timing benefit from our collections and payments. We ended the quarter with $88.2 million in cash, cash equivalents, and restricted cash. After making a $5 million principal prepayment on the term loan. Since August 2022, we have reduced our debt principal by $224 million or 41%. As a result, we have reduced our annualized interest expense by more than 50% versus the second half of fiscal 2023. Following our strong Q3 results, we are raising our fourth quarter revenue and operating margin guidance relative to the implied Q4 guidance midpoint from our prior earnings call. This outlook continues to reflect expected seasonality in our usage-based offerings as well as the remaining revenue dynamics associated with the Fuze upgrades and related churn resulting from the December 31 end of life of the Fuze legacy platform. For fiscal Q4 2026, we are providing the following guidance. Service revenue is expected to be between $1,735 million and $178.5 million. An increase of approximately $7 million versus the midpoint of our prior implied guidance. Total revenue is anticipated to be between $170.5 million and $183.5 million. Also a $7 million increase over the midpoint of our prior implied guidance. Our revenue guidance ranges reflect a year-over-year decrease in revenue generated by former Fuze customers of approximately $4.5 million compared to Q4 2025. And a quarter-over-quarter decrease of approximately $3 million. We also expect typical seasonality in revenue from our CPaaS APIs related to holidays in the Asia Pacific region. We anticipate gross margin between 64-65%. Our operating margin range of 8.5-9.5% reflects the lower revenue compared to the prior quarter and a seasonal uptick in operating expenses associated with the January 1 restart of employee-related expenses like FICA taxes and 401k matching. This is a typical pattern for us. This results in a range for fully diluted non-GAAP earnings per share of $0.07 to $0.08 per share based on approximately 145 million fully diluted shares outstanding. In fiscal Q4, we expect to make cash interest payments of approximately $6.1 million which reflects both the term loan interest payment plus the semiannual interest on our 2028 convertible notes. We anticipate cash flow from operations to be between $1 million and $4 million reflecting the higher cash interest payments compared to Q3, Note that our updated Q4 cash flow range and a lower balance of collectible receivables starting Q4 compared to Q3. plus our year-to-date performance implies an increase in fiscal 2026 operating cash flow of about $4 million. We are updating the rest of our full-year guidance as follows. Service revenue is anticipated to be between $708.6 million and $713.6 million. An increase of $12 million compared to the midpoint of our prior guidance. Total revenue is anticipated to be between $729 million and $734 million an increase of $12.5 million compared to the midpoint of our prior guidance. Our guidance ranges for service and total revenue reflect our Q3 overperformance and the increase to the previously implied Q4 guidance. We anticipate gross margin to be between 65-66%. Full-year operating margin is projected between 9.5-10%, translating to non-GAAP operating of approximately $71 million at the midpoint. The additional $6 million of operating income compared to our prior guidance midpoint We expect non-GAAP net income to increase year over year, Reflects overperformance relative to the guidance midpoint in Q3 and our confidence in Q4. supported by lower interest expense compared to fiscal 2025. We expect fully diluted non-GAAP earnings per share to be in the range of $0.36 to $0.37 for the year, assuming approximately 142 million average diluted shares outstanding. Before we finish, I want to provide a little more context around the impact of the Fuze acquisition. As of 12/31/2025, we met our commitment to successfully complete the upgrade of the Fuze customer base to the 8x8 platform. This marks a major milestone for us both culturally and financially comparing 8x8 pre and post Fuze it is clear the acquisition was a catalyst for our transformation to a larger and more efficient organization. Over the last four years, the former Fuze customers generated cumulative revenue of more than $300 million The resulting cash flow from the acquisition allowed us to increase our investments in innovation just as the market's pace of change accelerated. It also enabled us to aggressively pay down the principal balance of our debt while still maintaining healthy cash balances. As we look at the business today versus Q3 2022, the quarter preceding the Fuze acquisition, our service revenue is up 20%. Operating income has increased nearly seven times. And our net income has increased nearly nine times. Our solid financial foundation and proven ability to achieve operational efficiency efficiencies, sets the stage for the future. While we are not providing guidance for fiscal 2027 at this time, I would note that we will continue to experience year-over-year growth headwinds related to Fuze churn as we move through the next fiscal year. We expect these impacts to be most pronounced in 2027 and to fully roll off by the fourth quarter. Even with this headwind, we expect to deliver service revenue growth in fiscal 2027. In summary, the quarter reflected continued steady consistent profitability, and ongoing progress in strengthening our balance sheet. With disciplined expense management and a clear focus on profitable growth, we enter the final quarter of the fiscal year with solid momentum and confidence in our ability to deliver sustained shareholder value. With that, I will turn the call over for Q and A. Operator: Thank you so much. And as a reminder, to ask a question, 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 and A roster. Right? Our first question comes from the line of Josh Nichols with B. Riley Securities. Please proceed. Josh Nichols: Yeah. Thanks for taking my question. Congratulations on the exceptionally strong quarter. But also getting infused across the finish line. I know that was a big undertaking for the company as a whole. Kevin Kraus: Just wanna touch on I think you talked about it a little bit, but backing out some of the numbers for fiscal 4Q, I think you said Fuze was, a $4.5 million service headwind in fiscal 4Q. So if you adjust for that, that kind of implies that service revenue guidance in the fourth quarter ex Fuze is up like 5% plus year over year, which is kind of in line with the last couple of quarters. Is that right? Samuel Wilson: Yeah. It's a fair assessment of it. And as you as we go into next year, you can think about it as, like, a $4 million, $3 million, $3 million kind of headwind from Q1 to Q3, Josh. And then we anniversary it in Q4. Josh Nichols: And, Josh, thank you for the large number of people that had to shut down Fuze, they may appreciate your thanks. Josh Nichols: Yep. Yeah. Then I wanted to touch on this. Like so the gross margin has been trending lower, you know, as expected with higher growth in the in the service revenue component. But the operating margin performance was a standout. I think that kind of shows that while the gross margin is lower, there's a lot of operating leverage as you continue to scale this usage-based business model. And what needs to happen or what type of levels do you need to get to so that the company is gonna get to, like, a sustainable level where the operating margins are back? Into, like, the double-digit category like you did for this quarter? Is that something that you're targeting for '27? Samuel Wilson: Alright. So let me let me back this up because you raised a number of good points, and I think sometimes no matter how many times I repeat myself, it's not quite understood. So I'm gonna use this as a bit of a soapbox answer, Josh, and thank you for asking it because I get to do this. Gross margins on our usage-based business are probably structurally slightly lower than on our SaaS business because you don't have shelfware, and you don't have a bunch of other things that lead to sort of higher structural gross margins. But on an operating margin side, they're perfectly fine. And I think we've tried to say this over and over and over again. But it seems to get lost in the noise. And if you look at a pure usage-based business, a la Twilio or somebody like that, one of our competitors, you see that they have structurally lower gross margins. And I'm not saying we're heading for 52, 53, wherever they're at on a non-GAAP basis. But what I am saying is you know, their operating margins are just fine. And so as we get more scale in this usage-based business, I think you'll continue to see this. You'll continue to see a slight downward trend in gross margins, and I don't know where it's gonna because I don't know yet where usage is gonna peak. And then offsetting that is we'll get scale over time, and we're working very diligently on that. And so when exactly we'll get back to double-digit sustained operating margins? I don't know. Is it a target? Absolutely. Josh Nichols: Appreciate the context there. I'll hop back in the queue. Thanks. Samuel Wilson: Thanks, Josh. Thank you. Operator: Our next question comes from the line of Siti Panigrahi with Mizuho. Please proceed. Great. Thanks for taking my question. Siti Panigrahi: I just wanna dig into one of your commentary about Voice AI. I guess the interaction you talked about how it grew now 2200% and now 80% of all interaction. Wondering what are you seeing from customer their adoption of voice AI Are you seeing, like, lately any kind of increased adoption there? Any color would be helpful there. Samuel Wilson: Yeah. Absolutely. So I what I would say is, you know, we and I think we've commented on this in the past is we're starting to see all the AI products start to move out of the first phase prototyping, beta sites, etcetera, and really move into production. I think the idea, you know, two years ago that you would have a voice spot at the front end answering every support question triage it or these kinds of things was a little bit foreign. And today, we're seeing that run of the mill. Our voice technology is so fantastic. And our voice AI technology is awesome. And I'm not talking about just the stuff we resell from Cognigy. There's other voice AI technologies we have in house that are doing absolutely fantastic. And so what we're seeing is as those move from that prototyping you know, beta stage to production, we're seeing that they're working. And then once they're working, the customer comes back and starts adding more and more use cases. And this further validates the usage-based model because it doesn't require a whole new sales cycle and everything else. They just slap down another use another use case on it. Usage goes up and they pay the bill because they're getting the ROI. And so I think it shows not only that people still wanna focus on voice. I'm a big believer in that. We as human beings you know, type in bullets and speak in paragraphs. Number two is the usage-based business model is absolutely the right way to go for these technologies, and it's working. I've been signaling this for a while that we'll do more and more of this. And number three is AI is the real deal, and we are getting positive ROI out of the AI we sell. Siti Panigrahi: Great. Thanks for that color. And quick quick house question. Did you see any kind of FX impact on this quarter in the revenue? And how should we think about revenue contribution from Mavenlab? Samuel Wilson: No. Maven Lab closed in January, so there was zero contribution for the quarter. And I believe I'm sorry. Further guidance. Kevin can yeah. Oh, no. No. No. It's too small. It's too small to move the needle. It's very Kevin Kraus: it's just a little teeny technology tuck in. I see. Samuel Wilson: Kevin can speak on on Yeah. Relative to the beginning of Kevin Kraus: quarter guidance, we had a little bit of a headwind, well under a million dollars on a year-over-year basis, we had a bit of a tailwind. Yeah. A million ish plus, so pretty small. Alright. And then do you wanna speak as a natural hedge? Yeah. The other thing is thanks, Kate. This is important for for the analysts to know. We have basically a natural hedge built into our company. Operationally. So we may incur headwinds or tailwinds on revenue, but the opposite effect occurs on the expense base. So our net profit is neutralized. Samuel Wilson: And, Kent, do you like to say it, but I'll say it. Like, we beat by five and one million of that plus minus on a year-over-year basis. Actually, it was a headwind for the for the quarter, but 12 that's the last quarter. So the beat was clean. Siti Panigrahi: Yeah. Thank you. Samuel Wilson: Thank you. Operator: Our next question comes from Peter Levine with Evercore. Please proceed. Peter Levine: Great. Thanks guys for taking my questions here. Maybe to piggyback off Sam the comment you made earlier on the usage base, but a comment you made on the call you know, you kinda called out some customers moving from pilot projects to, like, larger scale deployments. Can you maybe just be a little bit more specific on what kind of projects how these customers are using it? In terms of just the monetization? Samuel Wilson: I'm more than happy to, Peter, and we may have to go back forth a little bit depending on what level of detail you want. So what we're seeing right now with the AI stuff is a lot of it is very use case based centric. And I can talk about this extensively, but when we first went into market a couple years ago, we tried to sell like an AI platform that customers could build their use cases on top of. And that really struggled. And we sort of switched to taking the platform and going in and targeting customers on a more use case base type thing. So what's a use case? Having a person say their serial number front end of a call and routing the call differently based on that or answering simple questions that are out of the FAQ or doing the biometric identification so that they can be passed to the proper agent. And financial service firms pulling the bat you know, doing the biometrics security check and pulling the balances. We also have a lot of self-service capabilities. So if you wanna pay your bill, let's say you call and you say, I just wanna pay my bill. You don't need an agent. We'll just, you know, pull it. We'll authenticate you, pull it, send you an SMS message, let you pay with Apple Pay via phone, and take care of that stuff. And so I know you're asking me, like, what's happened? What I'll tell you is right now, we're still the phase that these are micro use cases. Each individual customer is seeing a land and maybe it's, you know, their second one or their third use case, but we're still at the micro use case data What I believe we'll start to see out several years is those all come together in more macro use cases. Right? So what do I mean by a micro? Micro As I said, self-service payments. Right? Very simple use case that are macro be paid. You can come in. You can authenticate a user. You can interact with them extensively. You can do different things with them on the phone. Those kinds of things. That'll be, I think, still several years out. So we're seeing those first case use cases. We gotta big healthcare deal, and all it does is book appointments. But it books at seven by twenty four, and that took four agents and moved those agents into more productive roles. A question you're not asking that I do wanna address on the call up front. Is our total number of contact center seats was up quarter and quarter and year on year. So one of the questions we've gotten with all this AI stuff is, oh my god. All the agents are going away. Well, if they're going away for some reason, our customers are buying more seats. So total seats, I'm gonna repeat this, Total seats for contact center up quarter on quarter and year on year. Peter Levine: Maybe to that point, Sam, is you know, you're not seeing seats compressing now, but if you look out, twelve, twenty four, thirty six months, the is this a different conversation? Samuel Wilson: Maybe. I mean, I'm not opposed to see counts coming down if they're not being used. That's why we're moving more and more to usage-based capabilities to make sure that ROI adoption's there. As long as I'm sell as long as my total revenue per customer is going up and my stickiness is going up, I sorta don't care if they buy a via seats or buy it versus digital messaging. Or buy it versus AI bot interactions or any of those other things. As long as we're sort of solving customer problems, they'll pay us. But I think this notion that contact center seats are gonna go off a cliff any quarter is just a misnomer. It's so far, we don't see it. What we see is total number of cases being handled by agents going down handle times going up, and customer satisfaction trying to catch up to where, you know, people want it to be. Peter Levine: And just the last question. Another comment made, new partner programs starting to see some real momentum building. Maybe just talk about what know, what you're seeing, what's working, and then look out over the next twelve months, any additional changes to your go-to-market, or you just kinda doubling down on the strategy that you've deployed? Samuel Wilson: Look. We're seeing quarter on quarter increases in pipeline. We're seeing quarter on increase, especially around the new products. And we're seeing really the channel like, channel is also on a journey a la the customer, about understanding AI. And now that we're moving out of this phase, of prototyping experimentation more into production, The channel is getting a lot more comfortable selling AI-based products. And we're starting to see that show up in the pipeline experience, etcetera. So that's what I was trying to hint at is we're seeing growth that you know, for a while, our channel business was a bit behind our direct business, and now we're seeing our channel business to do better than our direct business. Peter Levine: Thank you for taking my questions. Operator: And as a reminder, ladies and gentlemen, if you do have a question, press 11 to get in the queue. Alright. As I see no further questions in the queue, I will pass it back to Mr. Wilson for closing comments. Samuel Wilson: All right. Thank you to all the people listening to call today. We appreciate it. We'll talk to you again in three months. We as you heard from the commentary in the Q and A, we feel pretty comfortable where the company is right now. We're seeing our usage-based business grow nearly 60% and now 21% of service revenue. So I just wanna highlight that that we expect that trend to continue. And we think the company is on the right track and where it's going right now. Thank you very much, and feel free to call us in in our investor relations team or myself or whatever the case may be if you have any questions. Operator: This concludes our conference. Thank you for participating, and you may now disconnect.
Operator: Greetings, everyone, and welcome to Lumen Technologies Fourth Quarter and Full Year 2025 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press the star followed by one on your telephone. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded Tuesday, February 3, 2026. Your speakers for today are Kate Johnson, CEO, and Chris Stansbury, CFO. I would now like to turn the conference over to Jim Breen, Senior Vice President, Investor Relations. Please go ahead. Jim Breen: Good afternoon, everyone, and thank you for joining Lumen Technologies on today's call. On the call today are Kate Johnson, President and Chief Executive Officer, and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, this conference may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found on our earnings press release. In addition, certain metrics discussed today exclude costs for special items, as detailed in our earnings materials, can be found on our Investor Relations section of the Lumen website. With that, I'll turn it over to Kate. Thanks, Jim, and thanks, everybody, for joining the call. Kate Johnson: We had a great 2025, laying a solid foundation to execute our strategy, become the trusted network for AI. And, of course, the big news is that yesterday, we closed the transaction with AT&T. This marks a defining moment for Lumen. Completing our pivot to become a simpler, stronger, enterprise-focused technology infrastructure company. The impact of the deal on our capital structure and financials is very significant. With the $4.8 billion in net proceeds and cash on hand, we've paid off all our super priority bonds in the last twenty-four hours. Recall that in the last month, we also paid off our second lien debt. Our total debt now stands at less than $13 billion and our net leverage has been reduced by a full turn now below four times. All of this capital markets activity has reduced our interest expense by roughly $500 million or nearly 45% down from 2025 levels. And lastly, this divestiture reduces our annual CapEx by over $1 billion driving a significant reduction in capital intensity as we stop fiber to the home builds and focus our capital on building a digital network services company. Closing this transaction marks a new day for Lumen. We're focused on serving public and private enterprises as the trusted network for AI. And our 2025 results clearly demonstrate the power of this focus. We reported strong 2025 financial results for revenue, EBITDA, and free cash flow. Our business revenue mix continues to improve with fourth quarter North American enterprise revenue totaling 52%. Eclipsing nurture and harvest revenues. We continue to expect this trend to inflect our business revenue back to growth in 2028. EBITDA was at the high end of our guidance range, which included the RDOF giveback in 2Q, and free cash flow was solid even without the $400 million tax refund that is now expected to come in 2026. We exceeded our increased target for cost reduction, ending the year at over $400 million in run rate savings. Exiting 2026, we're targeting another $300 million of cost out, totaling $700 million run rate savings which positions us to hit our three-year $1 billion cost out target as well as our expected EBITDA growth this year. As previously guided. Also noteworthy, we had a banner performance in PCF sales in the fourth quarter. You may recall that just over eighteen months ago, we announced our first $5.5 billion in PCF deals with a goal of reaching $12 billion over time. As of today, we are now at nearly $13 billion with more deals in the pipeline. And we had another strong quarter of growth in our NAS business, Rising ports per customer show that enterprises are starting to standardize on aluminum fabric as their programmable network control plane for cloud 2.0. Each additional port expands our platform economics by unlocking higher margin digital services revenue, accelerating cloud and AI on-ramp adoption, and deepening ecosystem network effects, for Lumen and partner-delivered services. Lastly, we added two amazing new executives to our team. Jim Fowler, our new Chief Technology and Product Officer who is uniquely suited to help us execute our vision, and Jeff Sherez, our new chief revenue officer, who is uniquely suited to help us drive commercial scale. We're proud of the team we've built and all of their accomplishments throughout 2025. And we're pleased to see both the credit and equity markets rewarding the Lumen team for all of that work. Looking ahead to '26 and beyond, I'd like to reiterate our belief that there's an urgent need for structural change in network architectures and business models to more closely align with customer needs in a multi-cloud AI-first world. This is the investment thesis behind our three-pillar strategy, as we build the backbone for AI, Cloudify and identify telecom, and expand our connected ecosystem. I'll briefly touch on each strategic imperative starting with the backbone work. We successfully reached our 2025 goal of implementing 17 million intercity fiber miles, The roughly $2.5 billion of new PCF deals that we inked in Q4 will raise our total network expansion to a whopping 58 million fiber miles in 2031. While simultaneously expanding our capacity for enterprise customers. But as we've shared, our physical expansion is about more than just the number of fiber miles. It's also about giving customers bandwidth expansion, lightning-fast implementation timelines, rich data center interconnect, and investment in geographies where they need it most. And as we all know, every five miles isn't created equal. That's why we're investing significantly in three major network upgrades. Building 400 gig rapid route waves across 36 routes, with more on the way, enabling 400 gig services for data centers across key markets, and focusing on metro expansion so that we connect the most needed routes data centers, and cities across America. To support this work, we've expanded our partnership with Corning, ensuring we have priority access to the newest state-of-the-art fiber technology delivering the AI backbone for today's and tomorrow's most important customers. In a world of cloud 2.0, the largest tech companies are choosing Lumen to help construct the supply side of the AI economy. And that's because of our physical network prowess. Our network size, scale, and quality position us to provide superior performance on three key metrics emerging in the AI race. Fastest time to first token, GPU idle time, and interconnect latency. What's more, as data centers begin to decentralize to accommodate energy supply constraints, our vast network provides valuable proximity Together, our capital investments and PCF deals create a strategic competitive advantage. And we're expanding and upgrading our network alongside the most influential companies in the AI race. Making it easier for enterprises to consume AI. And speaking of the consumption side of the economy, this is where businesses are recognizing that yesterday's network doesn't support AI and cloud 2.0. They need quick, secure, effortless, on-demand services to move their data from anywhere to anywhere in real-time. That's why Lumen is cloudifying and agentifying the network. Think of it as building a programmable network platform that finally puts networking on par with compute and storage in the world of cloud. And our customers love it, as shown by another great quarter of adoption metrics. The number of active customers grew by 29% quarter over quarter. The number of 31% and the number of services sold grew 26% in that same period. Recall that in October, we announced 900 off-net ports sold so far. The investments we're making in building a programmable network are driving significant growth in high-value digital revenues. We believe will ultimately drive higher return for Lumen investors. We'll share more on this and Project Berkeley at Investor Day. Finally, let's talk about the progress we're making since launching the LumenConnect ecosystem six months ago. The team is fully staffed and building a commercial flywheel to marry AI-ready Lumen-validated designs with partner cloud solutions enhancing joint value props and accelerating our collective time to value for customers. Not only do these partnerships give us greater commercial reach, they give us a seat at the table where business decisions are being made. Instead of networking being purchased by infrastructure procurement teams as an afterthought, our Lumen team is included in the entire life cycle of the sale, elevating awareness of the critical importance of network and differentiating our company in the marketplace. We've signed 16 connected ecosystem partnerships to date, yielding more than 180 potential sales opportunities so far. Recently, we've made a slew of announcements, including at AWS we shared a gated preview for AWS Interconnect to help AI workloads dynamically scale bandwidth while providing high availability and security. At Microsoft Inspire, we announced Lumen Defender, with Microsoft Sentinel. And at MeterUp, we launched our joint network management offering to give customers preferred connectivity solutions and faster time to value. With every connected ecosystem partner, we're working to deliver scenarios and outcomes that transcend legacy telco capabilities. We're uniquely positioned to do this because of our API-driven programmable network and digital services portfolio. All of which enable a new world of customer-obsessed partner-delivered technology solutions. Alright. To wrap it up, it's a new day for this company. Lumen is separating itself from the traditional telecom pack. It's not a story about share take or price protection. In a declining legacy market. This is about taking a once commoditized asset innovating new architectures and capabilities, and commercializing it through a modern business model so that enterprises can focus on using AI to reimagine their workflows and business models during the biggest technology shift in history. It's a strategy that for several quarters has helped us slow overall revenue decline more effectively than our peers, And as our strategic revenues eclipse the size of our declining legacy revenue, it's a strategy that we expect will ultimately deliver new revenue streams that are both margin accretive and require less capital investment ultimately improving overall margins and free cash flow even further. I'll hand it over to Chris to talk more about our financial performance and guidance. Thanks, Kate. Chris Stansbury: As Kate said, since the debt restructuring in 2024, we set out to achieve four major financial goals. Return free cash flow to growth, fix our capital structure, inflect adjusted EBITDA to growth in 2026, and return to business revenue growth in 2028 and total revenue growth in 2029. In 2025, our team executed numerous transactions and reached key milestones along our path to achieving these goals and Lumen's overall financial transformation. Over the past twelve months, we signed almost $4.5 billion in new PCF deals taking the total amount of signed deals to nearly $13 billion. These deals provide us with cash to strengthen the balance sheet and invest in growth. Cementing our place with the trusted network for AI, and highlighting the value of our assets to customers in a multi-cloud AI world. We reached over $400 million in run rate cost reductions on track for a billion dollars 2027. We launched phase one of our new ERP system, streamlining our accounting processes and reducing long-standing systems complexity. We continue to improve our revenue mix with 52% of North American enterprise revenue now coming from growth products. Up from the mid 40% range in 2024, which supports our confidence in a return to business revenue growth in 2028. We successfully executed seven debt refinancing transactions with a total value of over $11 billion Extending and smoothing our maturity profile while materially reducing our annual interest expense by more than $180 million. Through these transactions, we also simplified our capital structure, We eliminated the second lien layer at level three and reduced the number of debt tranches outstanding by ten. And it's 16 when you include the recent super priority pay down. Almost a 40% reduction. These disciplined actions help to materially improve our financial flexibility and today, our capital structure is no longer a headwind It's a position of strength. And finally, yesterday, we announced the close of our fiber to the home business to AT&T for $5.75 billion. The net proceeds and cash on hand were used to pay down the full $4.8 billion of super priority bonds, which reduces annual cash interest expense by an additional $300 million. In total, annual interest expense has been reduced by nearly half $1 billion in the last twelve months. Wanna give a little more detail on the debt transactions, because we're particularly proud of what we've accomplished. At levels no one outside of Lumen. Investors, analysts, advisers, and the broader media thought was possible over such a short period of time. We have that confidence in ourselves, and we have delivered. After the AT&T close, we now have under $13 billion in debt. More than $5 billion retired since 01/01/2025. These actions have reduced our overall leverage to 3.8 times trailing twelve months adjusted EBITDA, and we're not done. There are just additional steps that we can and will take to improve and simplify our balance sheet and overall capital structure. We'll share more details at our Investor Day on February 25. Our team's hard work has delivered impressive results and created opportunities for Lumen's future through a transformed financial profile. This is what playing the win looks like. Now turning to results, fourth quarter revenue and adjusted EBITDA were in line with our expectations and updated 2025 guidance. As we've mentioned at recent investor conferences, this quarter, we also introduced a new reporting view, strategic and legacy. To better reflect how we run the business. Increases transparency by separating the growth engines we're investing in the legacy revenues we're actively managing for cash and simplification. Lumen's transition from grow, nurture, and harvest to strategic and revenue segmentation reflects our commitment to driving sustainable growth by focusing investment and innovation on our most scalable future-oriented businesses. Simplifying our financial reporting and aligning with our enterprise-first strategy, we're better positioned to accelerate margin expansion and deliver long-term value. Now let's move to the discussion of financial results for the fourth quarter and full year. Total reported revenue declined 8.7% to $3.041 billion Business segment revenue declined 8.8% to $2.425 billion which includes over three fifty basis points of anticipated downward impact from one-time dark fiber and elevated public sector harvest revenue growth in 2024. Mass market segment revenue declined 7.9% to $616 million Adjusted EBITDA was $767 million with a 25.2% margin percent margin, and free cash flow was negative $765 million. Total business grow revenue was roughly flat year over year in the quarter, as expected and previously communicated impacted by those one-time revenue items in 2024. For the fourth quarter and full year 2025, we recognized revenue of roughly 41 million and $116 million respectively associated with the nearly $13 billion in PCF deals we've announced today. These prefunded deals have both strategic and financial impacts for Lumen. Allowing us to expand our capacity and build alongside the largest technology companies while also providing capital to fully fund our business plan. Will provide a longer view of the pre of the PCF business at our investor day. Within North American enterprise channels, excluding wholesale, international, and other, revenue declined approximately 8.9%. North America enterprise revenue increased slightly driven by continued strength in IP. We saw expected and typical declines in nurture and harvest, and overall, including wholesale, North American business revenue declined 8.6%. Wholesale revenue declined approximately 7.8% year over year, in line with our expectations. And international and other revenue declined 16.3% or $15 million driven primarily by managed services, VPN, and voice declines. Now turning to adjusted EBITDA. For 2025, adjusted EBITDA excluding special was $767 million compared to approximately $1.052 billion in the year-ago quarter. Year-over-year declines were largely impacted by expected revenue trends, including those one-time revenue items in '24. Increased healthcare cost, as well as increasing cloud migration cost that we've talked about in previous quarters. Special items impacting adjusted EBITDA totaled $280 million This includes severance, transaction and separation costs and our modernization and simplification initiatives. Lastly, capital expenditures were approximately $1.6 billion in the quarter as we expected and in line with our full-year guidance. Free cash flow, excluding special items, was negative $765 million As we discussed previously, fourth quarter free cash flow was negatively impacted by a delay in a $400 million tax refund, which we now expect to receive in 2026. Now moving on to our financial outlook for the full year 2026. Which includes the impact of yesterday's February 2 close of the AT&T transaction, we estimate adjusted EBITDA to be in the range of $3.1 billion to $3.3 billion We expect adjusted EBITDA to inflect a growth in 2026. Our adjusted EBITDA guidance includes organic business revenue declines roughly 75 basis points better than 2025 as we continue to focus investment on our growth products and manage our legacy portfolio for cash. Excluding from the guidance excluded from the guidance above, is roughly $400 million in transformation costs to associated with the multiyear goal of reducing expenses by a billion dollars by year-end 2027. As Kate mentioned, for year-end 2026, we now target a $700 million run rate associated with our modernization and simplification program. Moving to capital spending and our other outlook metrics, For the full year 2026, we expect total capital expenditures in the range of $3.2 billion to $3.4 billion The majority of the reduction in CapEx from 2025 to 2026 associated with the sale of our fiber to the home business to AT&T. As a reminder, CapEx spent on the assets held for sale from January 1 until close was reimbursed at close. Estimate the CapEx associated with the nearly $13 billion in PCF deals be approximately $1 billion The majority of the remaining CapEx is associated with our core enterprise business. We expect to generate free cash flow in the range of $1.2 billion to $1.4 billion for the full year 2026. Additionally, we estimate net cash interest expense to be $650 million to $750 million a reduction of over $550 million at the midpoint versus 2025. Taxes are expected to be a cash inflow of 350 to $450 million in 2026 inclusive of the aforementioned tax refund but exclusive of divestiture taxes. In terms of other special items for 2026, we continue to expect dedicated cost support transaction services for the divestitures. The reimbursement for these services will be another income with no material net impact to our cash Additionally, special items include costs associated with Lumen's $1 billion in project takeout. By the year-end of 2027. We continue our journey in disrupting enterprise networking, we'll also evolve how we guide, measure, and report our performance. Especially around PCF impacts to our financials because it's a meaningful contributor but not the whole story. Well, the growth in the PCF revenue certainly helps, it does not fully reflect the improvements you'll see in our core enterprise business over the next several quarters. We'll share more specific details at our upcoming Investor Day. Now at the beginning of my remarks, I laid out four goals we set for ourselves twenty-four months ago. We've already successfully achieved the first two. Free cash flow growth and fixing the capital structure. And expect to deliver the third adjusted EBITDA inflection in 2026, and remain on track to the fourth returning business revenue to growth in 2028. We've achieved the goals we've communicated to investors over the past year and we continue to see multiple paths to reaching business revenue growth inflection in 2028. We will continue to provide investors with adoption metrics and other proof points along the way to increase confidence in our ability to reach that goal. We're pleased with our performance in 2025 as we made great strides across all three layers of the business, physical, digital, and ecosystem. And the early results for our digital growth engine are encouraging. Over the next few years, our cost structure optimization and increasing digital revenue are expected to help improve margins and free cash flow, reduce our capital intensity, further lower our leverage and borrowing costs, and continue to increase our financial flexibility to invest in Lumen's growth. The future is bright. We look forward to providing you with more details on our long-range plan in a few weeks. And with that, I'll hand it back to Kate before we move to Q and A. Kate Johnson: Thanks, Chris. Before we open it up for questions, just wanna say how proud we are of all the luminaries who continue to execute our strategy to build the world's trusted network for AI. Whether you're doing a PCF deal driving NAS adoption, helping us do a major strategic divestiture, It takes every single function operating as one team from HR to operations to product, IT, and engineering to marketing and sales and to finance and legal. All of you matter deeply. And it's because of your work that Lumen's future is so very bright. Moderator, we'll open it up for questions now. Operator: Thank you. We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q and A roster. Your first question comes from the line of Michael Rollins with Citi. Your line is open. Please proceed with your question. Michael Rollins: Thanks, and good afternoon. Wanted to focus on the PCF deals announced today. So with the $2.5 billion in this tranche, can you share with us how that business may be similar or different to the first $1 billion that you announced especially with respect to margins and returns? And then secondly, can you just help frame the timing of CapEx investments and cash receipts just given now the quantum of these deals maybe relative to the CapEx that you spent over the last couple of years, and it seemed like there's more to go. So just curious if you could frame how that's going to pace out over the next few years. Chris Stansbury: Yes. Thanks, Mike. So the recent deals, the 2.5 billion, or so the structure is really the same as what we've experienced today because we're doing these deals on existing network conduit, so they don't have new routes. So the economic profile is very similar. You know, on your follow-up question, we will get into that detail at investor day. We're gonna give you visibility into the PCF versus non-PCF impact on cash flow. I think the thing that I would definitely share with everyone today, though, is if you think about our capital intensity, I'm gonna speak in rough numbers because it's easier. Know, $4 billion in CapEx last year, a billion of that went away. With the sale of a consumer business without much of a loss in EBITDA. So in effect, we've reduced our capital intensity by almost 25% right there. As I mentioned in my prepared remarks, a billion of the three or so that we're guiding for this year relates to PCF. And remember, those deals are prefunded because of the quantum of those dollars. So when you get to the underlying capital intensity, outside of PCF, we're at about a $2 billion business. And so as PCF builds will eventually go away, again, we're prefunding all of those. We're really looking at a CapEx intensity profile. It's roughly half of where we were last year. So you know, that combined with the margin improvements really do drive ROIC improvement for investors. Jim Breen: Next question, please. Operator: Your next question comes from Sebastiano Petti with JPMorgan. Your line is open. Please proceed with your question. Sebastiano Petti: Hi. Good evening, and thanks for the Just wanted to quickly I mean, follow-up on the, I guess, guidance for 2028 business revenue. Growth. I mean, with and I think last quarter, you kind of talked about I think NAS was supposed to contribute you know, 4 to $500 million in 2028, and then PCF about 300 to 400 million correct me if I'm wrong, more or less in that quantum. Or 4 to 500 rather on the PCF, 3 to 400 on the on the digital. So 5 to 600 on digital. And why is there not upside to that numbers given what you guys have talked about today? Right? PCF I guess, 25, 35% larger than what we talked about exiting the third quarter call. And the NAS and digital adoption seems to be accelerating. And so any kind of color, you know, Chris, or Kate, you could provide on maybe the shaping of revenue and maybe there's upside relative last quarter's expectations. Thank you. Kate Johnson: Yeah. Thanks, Soshan. I'll let Chris handle the financial side of it. I just me talk about the structural side of change in the industry. So any sort of change to critical infrastructure takes a long time. And what we're doing, just like the world of technology did in the, you know, transformation in the cloud era. A decade or two ago. It's the same kind of thing. Everything changes. The product changes. The way you deploy it changes. The way you buy it changes, the way you service it is gonna change. And we're being, I think, pretty conservative in the way that we think about not just our ability to deliver everything, but the market's ability to absorb that change We see the catalyst of AI in cloud 2.0 you know, driving a clear and pressing need for that change. But, you know, we're being cautiously optimistic you know, and making sure that, that we're doing everything we need to do to prepare and provide change management for our customers as well. Chris, if you I don't know if you wanna give any financial guidance on top of that. Yeah. So Chris Stansbury: know, Sebastiano, you're certainly right that the additional $2.5 billion of deals does help. But keep in mind, we're in 2026. It's gonna take three years for those for those routes to get built at scale. So where will there be some revenue impacts know, in 2028, yeah, I would expect it. Does that impact maybe pull and pull forward in the year when we inflect the growth? Yeah. That's possible. I think the more important thing as we as we move to investor day, we will, again, give you those the PCF map there. But it's really on the digital side to your point with and NAS is obviously a big piece of that. But the other leading metrics that Kate talked about. Right? That's not the number of circuits and the number of ports and the number of customers, but the number of services and the fact that we now have the ability to have a significant off-net presence is really the opportunity we have to drive that digital adoption. And I will be very candid with you and give you a spoiler alert for Investor Day. We're humans. We're projecting kind of linear growth in digital. The reality is we all know that at some point that the j curve but we're not gonna try to predict where that j curve comes into play. So, you know, I think what we're what we're showing is a middle of the fairway estimate with the possibility for us to overachieve. But time will tell. Great. Thank you. Jim Breen: Next question, please. Operator: Your next question comes from the line of Batya Levi with UBS. Your line is open. Please proceed with your question. Batya Levi: Great. Thank you. Can you provide a bit more color on bridging to 26 EBITDA? It's think you mentioned fiber sold was contributing about 300 million of EBITDA. You exited the year with higher cost savings than planned, but it also looks like SG and A ramped up higher as you exited the year. So how should we think about these cost items in totality as we go through 2026, maybe pacing of the EBITDA could be helpful as well. And I'm not sure if you mentioned this, but did you quantify the PCF sale contribution for '26? Thank you. Chris Stansbury: Not yet. No. We'll give you some more visibility to that at investor day because we'll talk about how PCF is impacting revenue by year and free cash flow. To your question, we are going to be releasing an 8-K tomorrow with the pro forma economics that'll get specifically to your question, Batya. So I don't wanna get into the details, but when you take out the EBITDA from the 25 base year, you take out a little bit of EBITDA that we would have generated in the first month of this year, and then you compare what's left, that's where you see, the growth. Batya Levi: Okay. And, the other cost items, how much should we think in terms of what's embedded in there for maybe higher SG and A as you exit the as you exit the year, and then maybe the modernization that you've been incurring. Is that all done, or do you anticipate more? Chris Stansbury: Yeah. So the modernization is largely in special items. So we tried to separate that out. Terms of its impact. We have, you know, projected in kind of the run rate that we're seeing on things like medical costs into the year. But the reality is, as Kate mentioned, you know, we exited with our MNS savings at $400 million in '25. We're projecting $700 million in '26. So that's gonna mute a lot of that. And, again, we'll share five years of financials at investor day. I do wanna again, I wanna share one other thing that we've shared with investors. And I think it's really important What that five-year model is gonna show is that we are fully funded. We are not required to borrow money to fund our future anymore. We have excess cash over the five years, and we'll get into specifics on that. And our objective is to, one, fully fund our growth initiative and our and our the transition of the company. And that is fully funded in that mod. You know, the second thing would be to continue to reduce leverage a little bit And after that, if there's nothing that achieves those first two objectives, then we'll look to start buying back stock. Batya Levi: Okay. Thank you. Kate Johnson: Next question. Operator: Your next question comes from the line of Frank Louthan with Raymond James and Associates. Please proceed with your question. Frank Louthan: Thank you. So on the slide where you list the about of fiber that you that you have that you're building out. How much of that fiber are you retaining for your own purposes versus what you're building for the customers? Kate Johnson: Yeah. I mean, not I'm not exactly sure of the question. So we break it down into all the various consumers of it. We've got the hyperscalers connecting their data centers. That's the supply side. We've got enterprise utilization. That's the demand side of our role in the AI economy. And then we have available capacity for growth on the bottom line. And I think what's really interesting is in 2031, when we'll have 58 million miles of fiber installed in the ground, we will have more available for growth than when we started this journey in 2022. Frank Louthan: Okay. Thank you. Chris Stansbury: Next question. Operator: Our next question comes from the line of Gregory Williams with TD Cowen. Your line is open. Please proceed with your question. Gregory Williams: Great. Thanks for taking my questions. Just on PCF, since you announced all those deals back in August 2024, Have you completed any of those projects? I know you said it takes, you know, up to three years on these things. I'm getting at is is is there any more are there any amortized PCF revenue running through the business at this point? How much? Or is it still too early in seeing that revenue? Question is just on the NAST metrics on Slide nine and alluding to the earlier network as a service or digital revenue question. So are you basically trying to say that you're conservative on your estimates for 2028 inflection and that the metrics I see on slide nine, the new customers, new ports, you're pacing ahead of that or you're pacing, you know, in line with the sort of 5 to 600 million in digital revenue? Thanks. Kate Johnson: Okay. So I'll take the first piece. So when I was talking about conservatism and structural change, I just want to be super clear. The pipes that are in the ground today that are running mission-critical applications for businesses, businesses are gonna be very cautious in how they approach changing that infrastructure. And we think the buying patterns in NAS represent exactly what this looks like They buy a port, they test it. They buy a second port, and they run an against it. When they have success, they start to buy three, four, and five ports to run more of their locations. It's a standard land and expand model, and it's still pretty early to draw the curves to figure out exactly what's gonna happen, but we're confident in the numbers we've given to the street with an over and an under. On that. And we've given you a range because it's very hard to predict the exact revenue outcomes for a massive change in industry. And that's what we've you know, are basically presenting. Regarding the PCF infrastructure sales, the ranges we've given you there are tied to whenever we finish construction, we light it up and we start to recognize the revenue. And the $13 billion the bills go all the way out through 2031. And the ranges that we gave you for exiting '28 are not inclusive of what we just sold in Q4 because those bills won't be completed until after 2028. Chris? Chris Stansbury: Yeah. And just a few more details. So in my prepared remarks, I said that in all of last year, we had a $161 million of revenue recognized. Six. Sorry. A 116. Thank you. And 41 of that was delivered in the fourth quarter. So you can see it's starting to scale and ramp now. But we are either on or ahead of delivery schedule at this point with all of our customers. Gregory Williams: Super helpful. Thank you. Next question. Operator: Your next question comes from the line of Michael Ng with Goldman Sachs. Your line is open. Please proceed with your question. Michael Ng: Hey, good afternoon. I wanted to ask about the new segment reporting between strategic and legacy. You know, I think strategic is made up of a portion of grow and nurture Could you just talk a little bit about what's in strategic what part of grow didn't make it in? I would assume it's like VoIP, but would love to hear a little bit more about that. And then So Chris Stansbury: Yep. What what are your assumptions in terms of, like, the the strategic revenue growth and the legacy revenue declines as we inflect to business revenue growth in 2020 Thank you, Chris. Chris Stansbury: Yeah. Yeah. No problem. So the shift, what we did is take the grow items that didn't cut. And, again, grow really relates to the most modern forms of connectivity, everything from Verdish you know, delivered in a traditional manner to deliver digitally. But what we took out were specific product lines that are in decline. So when you think about lower capacity connectivity versus higher capacity connectivity, there are parts of those businesses that are in decline. And in effect, those are legacy businesses And and and by the way, this is something that is very rules-based internally, and as we go forward because of product life cycle, you'll continue to see us move products through that life cycle. That we're giving you a very clear view. The items that moved out of nurture and into strategic were really things like Ethernet on demand. Right? VPN on demand. Those are digitally delivered products that are in demand and grow products. Products that our sales team should be selling. Now to the second part of your question, we will continue to see the mix shift in our favor and that strategic bucket grow from the 52% from here forward. And we'll give you a better view of that in a few weeks at investor day. Jim Breen: Great. Thanks for the talk. This is Chris. Operator: Okay. Your next question comes from the line of Nick Del Deo with MoffettNathanson. Your line is open. Please proceed with your question. Nick Del Deo: Hey. Thanks for taking my questions. So you talked about sales being strong interest in PCF seems pretty strong. Can you talk more broadly about what you're seeing with respect to gross sales for the remainder of the business? And maybe share some insights into churn trends? And then second, just to follow-up on Greg's question earlier, thinking about the PCF revenue that you disclosed this year, should we think of that as sort of a ninety-ten non-cash versus cash split akin to the overall mix that you originally described? Or was there a different noncash versus cash mix? Chris Stansbury: So in terms of the first part, Nick, we saw particular strength in IP this quarter. But, again, there's really across all connectivity solutions there's demand right now. So no surprises there. Churn trends in total have remained fairly consistent with where they have been, which obviously was an improvement you know, in '25 versus '24. But one thing we are seeing and and we don't have numbers to disclose, But on our NAS offering, the churn rates are dramatically less than what we see on traditional sales. It's a much stickier sale. Jim Breen: Nick, what was the second part of your question? Nick Del Deo: Oh, so the the the PCF revenue that you disclosed, the 41 and the million in quarter and the 1 and 16 million for the year, should we think that as being like 90% noncash, 10% cash? Or is there a different mix because you're kind of early in the in the process? Chris Stansbury: I think that's reasonable just to assume as we go forward. Because, again, 90 to your point, you know, our guidance has been that 90% of the cash is received upfront for the bills, and then and then 10% as we as we light that fiber. We don't recognize the revenue until we until we light the fiber. So I think that's a good assumption. And, again, we will give you the five-year outlook for the impact to revenue from those deals in a few weeks. Nick Del Deo: Okay. Kate Johnson: Great. Thanks, Chris. Next question. Operator: Your next question comes from the line of Michael Funk with Bank of America. Your line is open. Please proceed with your question. Michael Funk: Great. Yeah. Thank you for taking the questions. So for first one, lot lot of reports of construction delayed for you specifically data center build. So know, what what are you doing specifically to, to avoid construction delays just to understand better, in in the contract that you have with with customers, and revenue recognition, for the TCF, they able to delay acceptance for delivery? Or once finished, you light it up as to recognizing revenue at that point. Kate Johnson: Couple things. First, what are we doing to deliver on time? We have scale. And scale across many different elements that really matter. So scale across the supply chain. So our contracts are very favorable and terms of first off the line priority status We have scale in terms of workforce. So, you know, if you if you wanna join a construction team that's gonna be at this for several years, you wanna join one of our partners because they're building the largest expansion of the Internet at large for Lumen. And so our scale really, really matters here and gives us the accessibility to all the things that we need to ensure that there are no constraints put on, you know, on our our ability to execute on time. Regarding demand and, you know, pressing pause, the general feeling in the market is how fast can you go? And it's widely recognized that we can go fast because we're oftentimes already there. And the, you know, amount of work that we have to do is about overbuilding and not building, for the first time. I will tell you, I can't I can't reveal any names here. But we did a large deal with with a company, a cloud company, and it was the first time that we'd done work with this company. And went so fast that we got a call from the head of operations that said, I we've never experienced this kind of speed before. With the telco. You know, can can we meet more regularly so that we can your true capacity and ability to go at this pace? Because we're not we weren't quite ready for it. So that was one of the more fun phone calls I've ever gotten. I'm gonna be very honest with you. And then Chris, did you wanna add something? Yeah. I'd say a couple other things. On the on the first part of the construction, again, we've got a very special relationship with Corning. And and we we are doing very well in terms of access to fiber. I think the other the other point though, and I'm I'm gonna kinda go with the nuance of your question, which is can they hit pause because of concerns over a bubble? I can say consistently, and and in terms of our engagements with those customers, and you can hear it in the market. Hyperscalers are not talking about a bubble. They are talking about they don't have enough fast enough And I I would also tell you that many of our contracts have performance bonuses in them for us to go faster. So that's the reality that we live with every day and we're delivering against it. Kate Johnson: Yeah. And I think one of one of the the final things I'll mention is that the reason why we're able to execute as as swiftly as we are the same reason why we get chosen, and that's because a lot of the deals that we're doing are are two existing data center areas where our network has proximity. Michael Funk: Great. Thank you all. Operator: Your last question comes from the line of Sam McHugh with BNP. Your line is open. Please proceed with your question. Sam McHugh: I have a couple of follow-ups for you, Chris. If you don't mind. The first one was on the EBITDA guide. I think you mentioned about the growth in '26, the $3.5 billion prior guide. I just wanted to clarify the range of 3.1 billion to 3.3 we saying it's still growth versus 25 throughout the whole range? Or at the midpoint in the range. And then the second was and and I'll try, but Chris Stansbury: Go. Sam McHugh: You go first. Yeah. Yeah. So that that just to to answer that. So the three and a half was when we still had the consumer business in there. And I think the estimate for for 2026 at that time was about 300 million in EBITDA. Adjusted EBITDA. So that's broad numbers. That's that's really what's driving us there. As it relates to inflection, we're saying inflection on the year. It's not gonna be in every quarter. And, again, when you see the pro forma math in the 8-K tomorrow, that that will help with that. But, sorry, you had a follow-up. Sam McHugh: No. At the end, the follow-up was one on on PCS, and I I guess maybe I won't get an answer, until the CND, but rough math would suggest like, working capital and PCS cash inflows around 1.7 billion or something based on the guide. I can my miles off with that, and is there any reason why working capital could be massively positive or negative? Chris Stansbury: Yeah. I mean, working capital will definitely be positive. I that's obviously the we're we're those PCF inflows and outflows or inflows show on the on the balance sheet, and then the outflows obviously show up in in CapEx. So again, as we've said to the market, at some point, when PCS stops, we'll have trailing CapEx that we've already received the cash for. But with 2.5 billion coming in and and, you know, more demand in the pipeline, that's just not something that we're encountering right now. And that that obviously increased our guide for next year. And I think that's why people are seeing that we're higher than consensus on that estimate. Sam McHugh: Cool. Well, thank you very much. Operator: There are no further questions at this time. I'll now pass it back to Kate Johnson, CEO, for closing remarks. Kate Johnson: Thanks, moderator, and thanks, everybody, for engaging in today's call. We look forward to speaking with you more about the future of Lumen at our Investor Day in just a few weeks. Have a great night. Operator: That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.
Joelle: Good afternoon. My name is Joelle, and I will be your conference call operator today. At this time, I would like to welcome everyone to the Carlisle Companies Fourth Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will conduct a question and answer session. I would like to turn the call over to Mr. Mehul Patel, Carlisle Vice President of Investor Relations. Mehul, please go ahead. Mehul Patel: Thank you, and good afternoon, everyone. Welcome to Carlisle's Fourth Quarter 2025 Earnings Call. I'm Mehul Patel, Vice President of Investor Relations for Carlisle. We released our fourth quarter financial results today. You can find both our press release and the presentation for today's call in the Investor Relations section of our website. On the call with me today are Chris Koch, our board chair, president, and CEO, along with Kevin Zdimal, our CFO. Today's call will begin with Chris providing key highlights for the full year and the fourth quarter. Kevin will follow Chris and provide an overview of our Q4 financial performance and our outlook for the full year of 2026. Following our prepared remarks, we will open up the line for questions. But before we begin, please refer to Slide two of our presentation where we note that comments today will include forward-looking statements based on current expectations. Actual results could differ materially from these statements due to a number of risks and uncertainties which are discussed in our press release and SEC filings. As Carlisle provides non-GAAP financial information, we provided reconciliations between GAAP and non-GAAP measures in our press release, and in the appendix of our presentation materials, which are available on our website. With that, I will turn the call over to Chris on Slide three. Chris Koch: Thank you, Mehul, and welcome to our fourth quarter 2025 earnings call. I want to thank everyone for joining us today as we close out 2025 and look ahead to 2026. One note: This call will be slightly longer than our normal calls as it is our year-end, and we'd like to provide additional transparency and clarity, especially with the elevated levels of uncertainty we see in our markets today. The full year 2025, Carlisle delivered solid results in a very challenging environment. We generated $5 billion in revenue. Adjusted EPS was $19.40. Adjusted EBITDA margins were 24.4%, and ROIC was approximately 25%, which is not only well above our cost of capital but is also considered best in class. We take a great deal of pride in consistently operating at this level. Looking ahead, we remain convinced that driving adjusted EPS to $40 per share and maintaining ROIC above 25% as contemplated under Vision 2030 are the right long-term goals to maximize value creation for our shareholders. We were extremely pleased with our cash flow performance in 2025, which was our fourth consecutive year of generating more than $1 billion of operating cash flow. Free cash flow was $972 million, representing free cash flow margins of 19.4%. Well ahead of our Vision 2030 target of 15% and again, best in class. The M&A environment in 2025, while active overall, presented challenges in our target markets as sellers expected elevated valuations for quality assets, and we remain disciplined with limited appetite to deploy capital into premium-priced acquisition targets that exhibited less than premium results in the recent past. With M&A activity more muted, we continue to lean into share repurchases as an attractive use of capital, especially given our expected returns on those share repurchases. Ultimately, we repurchased $1.3 billion of Carlisle shares in 2025. In addition to share repurchases and consistent with our past practices, we returned $181 million to shareholders through dividends in 2025. August marked our forty-ninth consecutive annual dividend increase, up 10% year over year, and we are excited for the prospect of reaching the half-century mark this coming summer. Our 2025 performance clearly positions Carlisle as a leading cash return story in the building product sector. We are pleased with our ability to maintain a strong balance sheet and ample financial flexibility to consistently invest in our business, especially in the areas of customer experience, operational excellence, and innovation while simultaneously pursuing disciplined value-creating acquisitions when opportunities meet our return thresholds. Turning to Slide four, for the fourth quarter, we generated revenue of approximately $1.1 billion. Adjusted EPS was $3.90, and adjusted EBITDA margin was 22.1%. During the quarter, we also returned $346 million to shareholders through share repurchases and dividends. More importantly, in 2025, we stayed disciplined in our activities and focused on things we could control. Guided by Vision 2030, we advanced our innovation agenda, continued to automate our operations, strengthened our leadership team, and further enhanced the Carlisle experience for our customers. Those same priorities are part of the core pillars that will drive our performance in 2026 and beyond, regardless of broader market conditions. Speaking of core pillars, let me now turn to the core of Carlisle's strengths. Since the 1970s, our commercial roofing and broader building envelope business at CCM, the largest part of our continuing performance story at CCM, has been the reroofing market. Reroofing is a significant part of Carlisle's ability to deliver consistent sales and earnings growth. Reroofing is driven by the nondiscretionary need to maintain, upgrade, or repurpose North America's vast and aging nonresidential building stock. Looking at our reroofing business, it is important to note that at CCM, reroofing represents roughly 70% of the business. When one couples this with the fact that over 70% of the US nonresidential footprint is older than 25 years, and roofs typically need to be replaced every 20 to 30 years, it is apparent that this market provides consistency and resiliency to our overall business. Looking at the reroofing market, reroofing permits have grown at a low single-digit rate over the past years, and when you layer on 150 to 200 basis points of content per square foot growth per year, you get the mid-single-digit growth in reroofing demand we are forecasting for the foreseeable future. Reroofing is not optional for building owners. It is an imperative investment to keep assets operational, safe, code compliant, and increasingly energy efficient. North America is the most roofing and building envelope market in the world, given an enlarged and aging building base of low slope roofs, increasing energy efficiency regulation, and pressure from rising utility rates, especially now with the outsized impact of AI and data centers consuming unprecedented levels of electricity, structurally high labor costs, and a decreasing labor pool that increases contractors' desire for easy-to-install, labor-saving solutions and products that get them off the roof quicker. In most areas we operate in, there is a growing awareness of total cost of ownership and the life cycle performance with building owners, architects, and specifiers. Within this market, Carlisle is a recognized leader and a differentiated provider of integrated building envelope solutions and systems comprised of roofs, walls, foundations, waterproofing, and insulation. Our systems approach, long-term warranties, and specification strength give Carlisle a meaningful and sustainable competitive edge and it positions us to take advantage of a robust North American building products market for years to come. Looking ahead, our operating narrative remains clear, well understood by our investors, and consistent with what we saw drive our 2025 results. Steady reroofing demand, accompanied by a weaker new construction market. In CCM, reroofing is expected to grow low to mid-single digits in 2026, broadly consistent with its long-term trajectory and our past experience. New commercial construction at CCM remains soft and saw continued declines in 2025. Based on our current indicators, including our Carlisle market survey, we are not projecting a sharp recovery in our 2026 plans. But we are assuming a gradual bottoming out midyear and an upward inflection in the second half of the year. In CWT, we continue to see pressure from softer residential and nonresidential new construction. But we are seeing growth from our recent acquisitions of PlastiFab, ThermoFoam, and Bonded Logic, from our change in our selling approach in spray foam, and from increased demand for energy-efficient and weatherproofing solutions. Kevin will provide more detail on our 2026 outlook, but at the consolidated level, we expect approximately low single-digit revenue growth and approximately 50 basis points of adjusted EBITDA margin expansion versus 2025. Importantly, while we are setting conservative targets for 2026 given the end market uncertainties we face, our intent is anything but conservative. Over the next several years, we are very focused on sales faster than our end markets and expanding our EBITDA margins. Our Vision 2030 ambition continues to be to achieve adjusted EPS of $40 per share, EBITDA margins for Carlisle of at least 25%, and ROIC of 25% plus. Accompanying these targets are our goals of 30% plus EBITDA margins at CCM, and 25% plus EBITDA margins at CWT. While we are not issuing a specific year for those levels today, we want to be clear about the direction of travel. We will get there by executing consistently on the key pillars of Vision 2030, which I'll touch on now. Moving to slide six, Carlisle's performance and strategy are built around five core pillars. One, operational excellence rooted in the Carlisle operating system or COS. Two, the Carlisle experience. Three, innovation. Four, acquisitions. And five, talent management. When we talk about operational excellence, we need to focus on the Carlisle operating system because as we approach our second full decade of COS, it really has become our core continuous improvement methodology and permeates our culture. Introduced in 2008, the Carlisle operating system is how we run the company every day. It drives lean principles, standard work, and continuous improvement across our plants, supply chain, and offices. COS is also the framework that led us to top industry safety metrics. In 2025, we expanded automation and AI into our COS programs across key manufacturing sites, seeking improved changeover times, reduced scrap, and enhanced safety and quality metrics. COS is a major reason we have maintained strong margins through a multiyear period of volatile volumes, inflation, and supply chain disruption. It will continue to be the engine behind our margin expansion objectives in both CCM and CWT. Moving to our next core pillar, the Carlisle experience. The Carlisle experience is our promise to our customers. And that promise is the right product to the right place at the right time. Supported by people who understand the jobs, the challenges, and have many years of experience in dealing with customers in our markets. The Carlisle experience touches many of our key stakeholders, contractors, distributors, architects, and building owners. For contractors operating in a tight labor market, our ability to ship complete on-time orders directly to the job site is a real advantage. Our field technical teams and in-house roof designers work alongside distributors, contractors, architects, and building owners to ensure systems are specified correctly and installed correctly. Our long-dated warranties, many over twenty years, are backed not just by a document, but by knowledgeable and well-trained employees who drive excellent service and support across the life cycle of the roof. This reliability helps our contractor partners work more efficiently and win more projects, and it supports our ability to price the value by delivering that superior value at every touchpoint. It also underpins our strong specification history. Roughly half of Carlisle sales are tied to project specifications where Carlisle is the preferred system of record. Innovation remains one of the most important drivers of our future growth and competitive differentiation. To that end, we will increase our investments in R&D and product development to 3% of sales under Vision 2030 with a clear objective. By 2030, 25% of Carlisle's revenue will come from products that are five years old or younger. To achieve this, we have made substantial structural enhancements to our innovation engine. We implemented a robust voice of customer process to identify the most pressing contractor and building owner pain points. We refined and drove further discipline in our stage gate governance model for new product development to allocate resources to the products with the highest expected returns. Lastly, we strengthened our innovation leadership and cross-functional collaboration between R&D, manufacturing, and our commercial teams. You can already see the results in the marketplace. ThermaFin seven polyiso insulation, an industry first, delivers high R-value per inch. This means building owners get superior thermal performance and contractors can use fewer boards to meet code, reducing trucks, fasteners, material handling, and labor. Early feedback from this market launch has been outstanding. Our newly launched temperature sensing gun for flexible fast adhesive, this new application device transforms adhesive application from a manual error-prone process to a controlled data-driven system. With real-time temperature sensing and visual indicators, it reduces installation errors, material waste, and callbacks. It is included with every flexible fast dual tank system we sell. Products like RapidLock, SameShield, Appeal, and VP Tech continue to gain traction by addressing real contractor needs around installation speed, energy performance, and long-term durability. Importantly, these are not science projects. They are commercial products generating revenue today, helping contractors work faster and safer, and allowing building owners to meet increasingly stringent energy and performance standards. They also support our desire to grow content per square foot 150 to 200 basis points per year. A key component of our Vision 2030 expectations. The fourth pillar is acquisitions and importantly, acquisitions executed within a disciplined capital allocation framework. Over the past several years, we have strategically pivoted Carlisle to a pure-play building products portfolio focused on the building envelope. Roof, wall, and waterproofing. We estimate our broader building envelope addressable market at approximately $70 billion and today, we have direct exposure to just under half of that. Our M&A strategy is straightforward. Focus on bolt-on and adjacent acquisitions in the building envelope that enhance systems offering and increase our content per square foot. Target businesses where we can apply the Carlisle operating system and the Carlisle experience to improve operations, grow sales, and expand margins. Maintain strict ROIC and return thresholds ensuring deals are accretive to growth and returns over time. Recent acquisitions such as MTL, PlastiFab, ThermoFoam, and Bonded Logic are good examples. MTL strengthens our position in prefabricated metal edge systems, allowing us to sell more content per roof and offer more complete warranty-backed systems. PlastiFab and ThermoFoam expand our capabilities in EPS insulation. Our scale gives us material cost advantages and broader geographic reach. Bonded Logic, through ultra-touch denim recycled insulation, opens an attractive opportunity in sustainable insulation addressing customer demand for both performance and environmental attributes. We do not pursue acquisitions for headlines. We integrate, optimize, and capture synergies. Commercial, operational, and supply chain-related. That track record reinforces Carlisle's reputation as a superior capital allocator in our space. Last but not least is our fifth pillar, talent management. Nothing we have discussed today would be possible without Carlisle's team of over 5,000 dedicated employees. We focus on attracting, developing, and retaining people who want to win in the marketplace and grow their careers. At CCM, I'm excited about the recent leadership appointment that exemplifies this. In November, Jason Taylor joined us as president of CCM, bringing deep distributor and contractor relationships from his extensive industry experience. His fresh perspective, combined with his strong familiarity with our business, positions CCM exceptionally well as we execute our growth strategy. Let me now turn to our Vision 2030 financial targets on slide seven. We are reaffirming our Vision 2030 targets of $40 of adjusted EPS and more than 25% ROIC. We believe these targets are credible and achievable, driven by low to mid-single-digit organic revenue growth, led by reroofing volumes and content per square foot gains. EBITDA margin expansion at both CCM and CWT as COS, automation, AI, and self-help initiatives compound. Disciplined, synergistic M&A focused on the building envelope, and significant capital return through dividends and share repurchases. It is important to remember our history. Under Vision 2025, we achieved our EPS target three years early, and that journey was not a straight line. We managed through COVID, supply chain shocks, raw material inflation, and shifts in construction activity. Expect a similar pattern as we execute Vision 2030. There will be quarters where new construction is soft, where raw material costs move against us, or where competition intensifies. But our track record shows that Carlisle can adapt quickly, adjusting price, mix, cost structure, and capital deployment while staying true to our long-term strategy. Vision 2030 is not simply a set of aspirational numbers. It is anchored in clear priorities and measurable actions across our five pillars. Operational excellence through COS, exceptional customer service through the Carlisle experience, product and systems innovation, targeted synergistic acquisitions, and talent management and leadership development across the enterprise. With that, I'll turn it over to Kevin to go through the fourth quarter results in more detail. Kevin? Kevin Zdimal: Thank you, Chris, and good afternoon, everyone. I will review our fourth quarter financial results and provide additional details on our full year 2026 outlook. Moving to Slide eight. We generated fourth quarter consolidated revenues of $1.1 billion, an increase of 0.4% compared to the prior year. Our recent acquisitions of PlastiFab, ThermoFoam, and Bonded Logic contributed incremental revenue of $30 million in the quarter. Organic revenue declined 3% due to the continuation of soft new construction activity in commercial and residential end markets, partially offset by solid commercial reroofing demand. Adjusted EBITDA for the quarter was $249 million, resulting in an adjusted EBITDA margin of 22.1%. A decrease of 300 basis points compared to last year. This decrease was primarily due to strategic investments in the business to support our long-term growth as well as lower volumes at CWT. Adjusted EPS was $3.90, down 13% year over year. This decline was driven by lower organic earnings and higher interest expense, partially offset by the benefit of share repurchases and contributions from our strategic acquisitions. Our segment performance starts on Slide nine. CCM delivered fourth quarter revenue of $827 million, a decline of 0.8% year over year. The macroeconomic uncertainty we discussed on our third quarter call continued to pressure new construction activity in the fourth quarter, which was mostly offset by the continuation of solid demand for commercial reroofing. Fourth quarter adjusted EBITDA for CCM was $222 million, a 10% decline from the prior year. Adjusted EBITDA margin of 26.8% decreased 260 basis points primarily due to our continued investments in innovation and other strategic initiatives to enhance the Carlisle experience, including investments in our customer service capabilities and digital tools that improve order visibility and make contractors' jobs easier. Moving to CWT on slide 10. CWT reported fourth quarter revenues of $301 million, up 4% year over year, supported by revenues from PlastiFab, ThermoFoam, and Bonded Logic. Organic revenue declined 7% due to continued softness in residential and nonresidential new construction markets resulting in lower volumes. CWT's adjusted EBITDA was $48 million, down 10% from last year. CWT's adjusted EBITDA margin of 15.9% decreased 240 basis points year over year primarily due to increased unit cost resulting from higher absorption of fixed costs on lower volumes. For your reference, slides eleven and twelve provide our fourth quarter and full year adjusted EPS bridges, respectively. Turning to slide 13. Carlisle's financial position remains strong. As of December 31, we had $1.1 billion of cash and cash equivalents and $1 billion available under a revolving credit facility. This financial strength provides us with significant flexibility to execute our superior capital allocation strategy, including investing in innovation and capital expenditures, pursuing strategic M&A, and consistently returning cash to our shareholders through share buybacks and dividends. Moving to Slide 14. As Chris mentioned earlier, in 2025, we generated operating cash flow of over $1 billion for the fourth consecutive year. Free cash flow from continuing operations was a record $972 million, resulting in a free cash flow margin of 19.4%. Well above our Vision 2030 target of 15%. During 2025, we invested $241 million in the business, with $131 million in capital expenditures and $110 million in acquisitions. We also returned nearly $1.5 billion to shareholders through $1.3 billion of share repurchases and $181 million of dividends. Now turning to our 2026 outlook on slide 15. We expect consolidated revenue growth in the low single-digit range for the full year of 2026. This reflects CCM revenue growth in the low single digits driven by continued strength in reroofing offsetting slower new construction, and CWT revenue also up low single digits as contributions from share gain initiatives offset continued end market softness. I also want to provide some color on the quarterly cadence for revenue. With the recent harsh weather throughout most of the country, combined with a tariff pull forward in 2025 that we discussed on the Q2 earnings call, we expect first quarter 2026 revenue will be down low single digits versus last year. On a positive note, harsh weather in the first quarter often leads to a strong construction season. Our full-year guide assumes Q2 revenue will be flat year over year with a strong second half of the year leading to full-year sales growth of low single digits. We expect consolidated adjusted EBITDA margins to expand by approximately 50 basis points supported by our focus on operational excellence, cost-saving initiatives in both segments, and volume leverage. We also plan to repurchase $1 billion of shares and maintain our industry-leading financial performance, including return on invested capital of approximately 25%, and free cash flow margin over 15%. Consistent with our Vision 2030 targets. I will now hand it back to Chris for his concluding remarks. Chris Koch: Thank you, Kevin. In summary, Carlisle today is focused, strong, and disciplined. We are generating substantial cash flow and returning significant capital to our shareholders while preserving balance sheet strength for future opportunities. Our operating narrative is clear. Steady reroof demand offsetting weaker new construction, particularly in CCM, with CWT positioned to benefit as residential and commercial construction recovers, and as energy efficiency requirements tighten. We are accelerating innovation tied directly to customer needs, with tangible products and solutions in the market today and a robust pipeline aligned to Vision 2030. We continue to integrate acquisitions with discipline, capturing synergies and strengthening our competitive position in key categories like prefabricated metal edge systems, EPS insulation, and sustainable insulation solutions such as UltraTouch, sold through Home Depot. We are investing in our people, ensuring that Carlisle remains a place where talented individuals can build careers while helping us deliver outstanding performance. Carlisle operates in an imperative business in what we believe is the most attractive building products market globally. The long-term trends of energy efficiency, labor savings, and growing reroofing demand are firmly in our favor. Coupled with our five pillars, the Carlisle operating system, the Carlisle experience, innovation, acquisitions, and talent management. Guided by Vision 2030, we're confident in our path to $40 of adjusted EPS and beyond. I'd like to thank all of our employees for their perseverance in 2025. Joelle: For the sake of time, we kindly request each person limit themselves to one question to give everyone the opportunity to participate in the question and answer session. Should you have a question, please press star followed by the one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Susan Maklari with Goldman Sachs. Your line is now open. Susan Maklari: Good evening, everyone. This is Charles Perron in for Susan. Thanks for taking my question. Hey, Charles. Maybe hey, Chris. Maybe first, I would like to discuss a little bit about Vision 2030 and get an update on where we are today. As you consider the progress you've made since 2023 along with the changing macro environment, including a softer housing backdrop than you probably expected back then, which of the key pillars you highlighted earlier in this call do you think provide the greatest lever to reach your $40 objective? Can you still reach this objective organically, or is M&A increasingly important to reach that $40 target given the progress today? Chris Koch: Well, the two pillars for me that are most important, I think, are the margin expansions at CWT, obviously, and that's going to come with a return to what I'll call a market recovery. We had CWT making progress on margins, you know, right now up to 25% and obviously with the resi housing market. We went in the opposite direction. So that recovery is going to be an important part. The second one is technology. We're very excited at IRE. This year, we launched a couple of signature products, ThermaThin for sure, and then our new higher technology gun that has a lot of embedded controls in it. The second thing I would say about that is there I think we've got another 10 products we're going to launch this year. New products across the board. So a big emphasis on new technology, and as we said, new technology brings sales, but it's also going to bring a higher content per square foot. Hopefully increase margins as we do that. You asked if we'd still think $40 of EPS is in play. We still do. M&A was always going to be a part of that. We think that it continues to remain a key part of it. As you've seen this year, we did some acquisitions in 2025. But I think we would like to have done more and maybe a little bit bigger. So we'll see if this disparity between buyers and sellers can get resolved, then we can have a productive 26 on the M&A front, which will obviously help us a lot getting towards that $40 of EPS. Charles Perron: Alright. That's my one. Thank you so much for your time, guys. Good luck. Chris Koch: Alright. Thanks, Charles. Yep. Joelle: Your next question comes from Tomohiko Sano with JPMorgan. Your line is now open. Tomohiko Sano: Hi, everyone. Thanks, Hugo. Hello? Hi. And congrats on the tenth anniversary for Chris on his as a CEO. Cool. My first question is CCM demand trends and your strategies based on the recent customer surveys and distributor contract feedback and upcoming new entrants of the capacities? How do you see the sustainability of the reroofing demand and any signs of the recovery in new and pricing and strategies wise could you talk about that please? Chris Koch: Well, first of all, thank you for my tenth anniversary. I appreciate that. It's nice of you to do that. It's been an excellent time with Carlisle for me. As far as CCM, I think we see CCM in a very good position. You know, we said in this call in greater detail that, you know, 30% plus EBITDA margins are what we're driving towards. We've always had good ROI and CCM. If we touch on the market, obviously, the new construction market is not as vibrant as we'd like it to be, but we do see that coming back. Especially under things like the big beautiful bill and more investment in the United States and perhaps some interest from overseas players building. That's all good for us. Right? So we see that happening. We also see Resi plays a role in nonresi construction, commercial construction. So we know that as residential housing demand increases and we have more people investing in their homes, we know that means more traffic at the Home Depot. We know that means more traffic at the Walmarts and the CVSs, and we also know that those companies will build as well. So I think when the economy returns, we're going to see both nice play I should say when the economy returns, when resi returns, we're going to see a nice play that overlaps into some of the non-resi as well. Pricing has been relatively good for us. I think that'll be a positive for us as we start to build pricing in the new technology. We continue to invest actually at higher rates to make go in the new technology that's coming out of CCMS, CWT, and in the physical plant and in the PhDs and in the people that are bringing this out. So we really are putting a lot of emphasis on new technology, and that'll bring a lot of good things for CCM. So I think the outlook's good this year, of course. The first quarter is going to probably look similar to the fourth quarter. It is our lightest quarter of the year. And just because we moved from December to January doesn't mean that trends change all that much. But as we get into the reroof or the roofing season, we think we should see some pickup and bottoming out, and then, hopefully, new construction comes back. So I don't know if Kevin wants to add anything to that. Kevin Zdimal: Yeah. I would say exactly that first quarter. We do think that we could be down, as Chris said, around 3% in the quarter, but then flat in the second quarter, and then it picks up in the second half of the year. And for the full year, we do expect revenue to be up low single digits for the year. Tomohiko Sano: Thank you very much. That's all from me. Kevin Zdimal: Thank you. Joelle: Your next question comes from Garik Shmois with Loop Capital Markets. Your line is now open. Garik Shmois: Hi. Thank you. I was wondering if you could speak to in your volume assumption for 2026, are you anticipating any distributor restocking activity? Maybe if you can address some of the impacts of the disruption and distribution that you had called out. In the prior quarter, has that since resolved? Chris Koch: Well, first of all, on that one, we definitely said there was an impact. What I would say is we also said that it would get resolved and they would make progress. I'm pleased to say that I think progress has been made as we went into the fourth quarter, and that's a difficult time when you think about volumes because in most cases, there is a desire to hold less inventory as you move into the fourth and first quarter. General seasonal destocking. So the fact that we saw progress with some of our channel that had issues earlier in the year, I think that's a real positive sign. Obviously, they're going to work hard to continue to make progress moving to '26, and we should be the beneficiary of that. Also, when you think, Garik, about volume, even though there was a seasonal effect and we see it go down, I think higher interest rates caused people to want to have less working capital in inventory. We think we're seeing less inventory. Our Carlisle market survey said that inventory levels were lower than in the historical average in the respondents that we talked to. I think as we move in, if we can get a positive start to the summer construction season, we should see some nice volume improvements as we move into Q2. Garik Shmois: Okay. Thank you. Best of luck on the year. Kevin Zdimal: Thanks, Garik. Thank you. Joelle: Your next question comes from David MacGregor with Longbow Research. Your line is now open. David MacGregor: Yeah. Good afternoon, and thank you for taking my questions. I guess, I was to ask you about the 2026 price outlook for single ply. It seems right now, there's very little, if any, pricing in the market. Do you expect fundamentals may tighten the season's underway and support a second half? Price increase or how much forward visibility do you have right now in CCM and are you thinking about that pricing in? Chris Koch: Yeah. I think that's a good question. The market survey we had and pretty much like our results, it's been relatively flat. We've seen a little bit, but I'll say relatively flat because it hasn't been a big move in either direction. Do we see the opportunity to see some pricing come back? We've said in the past that we had four keys kind of making price move. Obviously, it was reroofing demand being there. Continued labor shortage. Rational capacity expansion, and then even a slightly positive new construction market. So I think if we think about new construction rebounding, that's the one to me that everything else is kind of in play. I know we're seeing some additional capacity added, but I think on the commercial roofing side, it's rational. The labor shortages are still there. The reroofing market is still good. So if we can get that new construction to see a more positive '26 than 25, then I do think it helps put some upward pressure on pricing. Obviously, that's kind of the traditional price increases that would happen maybe in that mid-year time frame. I think the other one that you're going to it's going to be a little bit masked is this R7, for example, or other new technologies where that price increase gets kind of embedded in the product. We elevate the price, but we're elevating the price because we're providing more value in that product. As we begin to replace old polyiso technology with R7, then there's an implied price increase. So it doesn't come out in a price line. But you do end up seeing it on the P&L. David MacGregor: Got it. You characterized labor shortages as a constant. But that's not getting worse? At the job site labor? Chris Koch: Oh, I should say the concept of labor continuing to be in a shortage position and potentially, I think it could be getting a little worse. Yes. So, a little bit of a correct. You're absolutely right. David MacGregor: Okay. Thanks very much, and good luck. Kevin Zdimal: You bet, David. Thank you. Joelle: Your next question comes from Adam Baumgarten with Vertical Research Partners. Your line is now open. Adam Baumgarten: Hey, good afternoon. Just a couple of questions. How are you thinking about price-cost for the year? Then also within your assumption for low single-digit revenue growth in CCM, does that build in that flattish pricing outlook? Kevin Zdimal: Yes. So as we're looking at that, we do have a little bit of tailwinds on the raw materials entering the year. We have one, overall, it's been a deflationary environment in those key buckets. That we have from polyols, PPO resins, that's MDI, it's all been a positive trend where that's going. It's obviously steel. That's negative. From the steel side of it. So we do have a little bit of a mixed bag. We still have some of the ATO, TCPP that we talked about. Little carryover on that. On a negative in the first quarter. So I don't see any benefit of raws in Q1. But starting in Q2, we should start to see that. The positive draws come through. Then, yeah, pricing in that flattish range, flat. Down 1%, something like that for the full year is what we're looking at. Adam Baumgarten: Great. Thanks so much. Kevin Zdimal: You're welcome. Joelle: Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press 1. Your next question comes from Keith Hughes with Truist. Your line is now open. Keith Hughes: Thank you. Kind of building on the last question. Pricing in CWT, could you talk about what it was in the quarter and what kind of your expectation within this guidance spend market will be for 2026? Kevin Zdimal: Yeah. It's really in the quarter. It was down less than 1% in Q4. Then as we get into next year on the CWT side, it's pretty flat is what we're looking at throughout the year. Obviously, it could be up a little bit or down a little bit, but we're looking at flat for the most part for CWT pricing in 2026. Keith Hughes: Okay. Thank you. Joelle: There are no further questions at this time. I'll hand the call over to Chris Koch for closing remarks. Please go ahead. Chris Koch: Well, thanks, Joelle. This concludes our fourth quarter earnings call. I want to thank everyone for your participation, your patience, and allowing us the opportunity to share our results with you for the fourth quarter and full year of 2025. Look forward to speaking with everyone on the next earnings call. Joelle: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Welcome to the Match Group Fourth Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, after today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Tanny Shelburne, Senior Vice President of Investor Relations. Please go ahead. Tanny Shelburne: Thank you, operator, and good afternoon, everyone. Today's call will be led by CEO Spencer Rascoff and CFO Steven Bailey. They'll make a few brief remarks and then we'll open it up to questions. Spencer Rascoff: Good afternoon, and thanks for joining us. Just one year ago, I became CEO of Match Group. From day one, my focus was clear. Prioritize user outcomes to rebuild trust and position Match Group to lead the next chapter of human connection. Given Tinder's scale and importance, I also took direct ownership of its turnaround. To guide this work, I laid out a simple three-phase transformation: reset the company, revitalize the products, and drive a resurgence with our audiences and, over time, our financials. We completed the reset phase by putting user outcomes at the center of everything we do, rationalizing costs, and shifting from a siloed organization to a more collaborative one MG approach. With that foundation in place, we are now firmly in the revitalize phase. Focused on delivering clear value to users and building experiences that lead to real human connection. And at Tinder, I'm confident we have compelling 2026 product roadmaps across the company, that by the end of this year, the product will feel meaningfully different. Before focusing on Tinder, I first want to highlight our financial performance in 2025 and our expectations for 2026, which Steve will then cover in more detail. In 2025, we achieved our Match Group revenue and margin goals, excluding the discrete items we've called out in prior quarters, and generated over $1 billion in free cash flow. Which we returned to shareholders through nearly $800 million of share buybacks and nearly $200 million in dividends, reducing our diluted shares outstanding by 7% year over year. And we did this while making meaningful progress on the Tinder turnaround and continuing to invest in Hinge. In 2026, we expect Tinder year-over-year direct revenue declines to be similar to 2025, as we continue to make product changes to improve user outcomes and drive long-term sustainable growth, but with short-term revenue trade-offs. Across the rest of the portfolio, we expect continued strong direct revenue growth at Hinge, while Evergreen and Emerging, or E and E, and MG Asia continue to face headwinds. We are reinvesting savings from last year's workforce reductions and alternative payments initiative into Tinder and Hinge product and marketing to drive long-term growth and shareholder value. Together, we expect this to result in relatively flat Match Group total revenue year over year in 2026 and adjusted EBITDA margins broadly in line with last year's, excluding the discrete items we've discussed. Now let me go a level deeper on Tinder. The most important leading indicators we track for product efficacy are sparks and spark coverage. Sparks reflect the number of users engaging in a six-way conversation which we believe is a strong proxy for real connection. Spark coverage measures what percent of our users get a Spark in that period. Both metrics are improving, including among Gen Z users in the US. Globally, total sparks were down 11% year over year in December 2024, compared to down 5% year over year in December 2025. Similarly, global spark coverage improved from down 1% to up 4% year over year over that same period. Our product work is paying off. Our data indicates that sparks drive retention, retention helps stabilize monthly active users or MAU, and stabilized MAU supports revenue recovery over time. It is the earliest measurable signal that the ecosystem is healing, and I'm very encouraged by these trends. We also closely tracked new registrations as a leading indicator of future MAU growth. Globally, new registration trends have improved significantly, down 5% year over year in Q4 compared to down 12% year over year in Q2, also a very positive signal. Now naturally lags, but, again, we're starting to see some progress here as well. MAU was down 9% year over year in Q4, compared to down in fact, year over year MAU declines in December improved by at least 10% year over year in Q3. Two points across 15 countries, together representing approximately one-third of Tinder's global MAU. And in 10 of those markets, we're actively testing new marketing strategies. This momentum has continued into early 2026 driven by better retention of existing users. Much of this progress is a result of our increased focus on improving the experience for women, and in turn, for all users, through greater relevance and stronger safety. For example, we've been testing new AI-driven recommendation algorithms, which affect the order of profiles shown to women. Project Aurora has been an important learning engine, allowing us to test multiple high conviction product changes together in a single market, Australia. In tests, sparks went from down 14% in December 2024 to down around 8% year over year in December 2025, and Spark coverage reversed declines from down 2% to up 2% year over year over that same period. Now trends have also improved in Australia from down 12% in January 2025 to down 9% in December 2025. An improvement was even more pronounced among women over that same period. Importantly, the negative revenue impact from these product changes continues to be less than we expected. This gives us a lot of confidence that the turnaround is working. Our 2026 product roadmap at Tinder directly addresses the most common Gen Z pain points. They want better outcomes, so we're focusing on relevance match quality. They want authenticity and trust, so we're further strengthening verification and safety. And they are feeling dating fatigue, so we're redesigning discovery to be more expressive and less repetitive. The early indicators give us confidence in our strategy, and I expect more lagging indicators like year over year MAU trends to improve throughout the year as we execute on the product roadmap. Our objective is to reestablish Tinder as a sustainable growth business in 2027 and beyond by restoring durable user engagement and relevance at scale. While this approach involves making some near-term revenue trade-offs, we believe it ultimately strengthens Tinder's long-term monetization engine and will provide opportunities to increase both payer penetration and revenue per payer. As user outcomes and the overall ecosystem improve. On March 12, Tinder will host our first-ever product event in Los Angeles, to showcase upcoming feature updates AI-driven innovations, and a deeper look into our roadmap. The event will be webcast and available via our investor relations website. Turning now to Hinge. Our latest research with Harris Poll shows that roughly 80% of Gen Z singles want meaningful relationships. Much higher rates than older generations. And we believe our platforms will increasingly be where those connections begin. Hinge continues to be the leading app in this intentional or focused dating space. With strong user growth and revenue momentum. Hinge's exceptional performance reflects clear positioning, disciplined execution, and a simple north star of getting users on more great dates. Trust and safety is the foundation for this Hinge experience. Built upon Tinder's successful rollout of face check, Hinge is also rapidly rolling this feature out in key markets. By the '1, we expect Tinder to launch FaceCheck globally in the majority of markets, and Hinge to have rolled out in some of its major markets. On Tinder, FaceCheck has led to a more than 50% reduction in interactions with bad actors in markets where it's been rolled out. With only a minimal impact on revenue. And we expect it to meaningfully improve Hinge's user experience as well. In Q1, Hinge is also testing features that help users get out on great dates faster, including direct to date, which clarifies intent to accelerate IRL or in real life plans, and a redesigned onboarding experience to build confidence in profile creation. Hinge will also roll out an AI-driven feature, convo starters. To more countries following its successful rollout in the US in December. Hinge is poised to stay at the forefront of product innovation in the category, and it continues to show broad appeal, not only in the US, but also across every international market it has entered. Hinge officially entered its first non-English speaking market in 2022, supported by already strong organic traction. Since then, Hinge has actively marketed in 12 European countries, European expansion markets, where it is the top downloaded app as of December 2025. In these markets, Hinge ended 2025 with over 3.3 million monthly active users, up from only 200,000 at launch. User growth continues to scale rapidly with now growing nearly 50% year over year in 2025. We expect Hinge to deliver over $100 million of direct revenue in 2026 in its European expansion markets with significant runway ahead. In 2025, Hinge successfully launched in both Mexico and Brazil. Where very early results have far outpaced our expectations. Hinge was already the second most downloaded dating app in and Brazil as of December 2025 and is clearly resonating with intentioned daters. Building on this momentum, Hinge plans to expand to three additional Latin American markets in 2026, Argentina, Chile, and Peru. And into its first APAC market, India. Hinge has already built a meaningful organic presence in India with over 1 million monthly active users in 2025, growing 40% year over year, without marketing spend. Overall, Hinge is on track with the targets we've shared previously and demonstrates how a strong focus on product market fit and user outcomes can drive durable growth and long-term shareholder value. Taken together, the work at Tinder and Hinge gives us greater clarity on how the portfolio fits together and how we can unlock new value with focus and investment. Our robust multi-brand portfolio provides scale, rich data from multiple apps, in a multi-app usage category, and the ability to serve different user intents. While preserving strong and distinct brand identities. We've introduced a simple internal framework to articulate how we position our brands based on how they solve users' needs. At one end of the portfolio is fun, where Tinder leads with social low-pressure connection. At another is focus, where Hinge leads with intention and depth. Purpose. And across familiarity, our affinity brands serve communities with shared intent and some of our apps sit at the intersection of these user needs. For example, the league, our app for intentional dating among highly ambitious people, sits at the intersection of focus and familiarity. This rubric shows how we think about future growth, including M&A and incubations. It helps us identify white and gray space where unmet user needs exist, and where we can build or acquire products that meaningfully expand how people connect. Let me close with this. At the core of our vision for Match Group is a simple truth. Humans need humans. In a world facing a growing loneliness and mental health crisis, we believe Match Group is uniquely positioned to make a positive impact by helping people form real connections. We believe Match Group plays a fundamentally different role in people's lives than most digital platforms. Our goal is clear. Help users get off their phones and into the real world. Where meaningful relationships actually form. Long-term value creation depends on delivering successful outcomes for our users. People will only use our products if they work. We believe AI is a core enabler of how we improve relevance and matching strengthen trust and safety at scale, increase the speed at which we learn and iterate. The early progress we're seeing in our technology, product quality, and user outcomes reinforce our decision to double down on these initiatives, all while maintaining a commitment to returning meaningful capital to shareholders through buybacks and our dividend. And boost our confidence in the turnarounds already underway at Match Group. With that, I'll turn it over to Steve. Steven Bailey: Thanks, Spencer. Today, I'll share more details on our latest performance and discuss our guidance for Q1 and full year 2026. Unless otherwise noted, all amounts are on an as-reported basis and comparisons will be discussed on a year-over-year basis. More details can be found in the financial table below. We finished 2025 with another quarter of strong execution. Total revenue and adjusted EBITDA both exceeded the high end of our Q4 guidance. Total revenue benefited from a smaller than expected impact from Tinder's user experience. These tests had a $6 million negative impact on Tinder direct revenue in Q4 which was $8 million less than we expected at the time of our last call. And adjusted EBITDA benefited from our ongoing cost efficiency efforts. Diving deeper into Q4, Match Group delivered total revenue of $878 million, up 2% and flat on a foreign exchange neutral basis. Payers declined 5% to 13.8 million, while RPP increased 7% to $20.72. Adjusted EBITDA was $370 million, up 14%, representing an adjusted EBITDA margin of 42%. Excluding an $8 million gain on the sale of an LA office building, and $2 million of restructuring costs, adjusted EBITDA margin would have been 41%. For the full year 2025, Match Group delivered total revenue of $3.5 billion, flat both as reported and FXM. Adjusted EBITDA for the full year was $1.2 billion, down 1% representing an adjusted EBITDA margin of 35%. Excluding the legal settlements, restructuring costs, and the sale of an LA office building, each of which we've discussed in prior quarters, adjusted EBITDA margin would have been 38%. Which meaningfully exceeded our 36.5% margin target provided at the 2025, primarily due to our restructuring efforts alternative payment initiative. Tinder Q4 direct revenue was $464 million, down 3% down 5% FXM. Tinder payers declined 8% to 8.8 million, and RPP grew 5% to $17.63. Adjusted EBITDA in the quarter was $263 million, up 1%, representing an adjusted EBITDA margin of 55%. For the full year, Tinder delivered direct revenue of $1.9 billion, down 4%, down 5% FXM. Adjusted EBITDA was $941 million, down 7%, representing an adjusted EBITDA margin of 49%. Excluding the $61 million candle or legal settlement charge, and $5 million of restructuring costs, adjusted EBITDA margin would have been 52%. Hinge Q4 direct revenue was $186 million, up 26%, up 24% FXM. Payers were up 17% to 1.9 million, and RPP grew 8% to $32.96. Adjusted EBITDA was $67 million in Q4, up 54%, representing an adjusted EBITDA margin of 36%. For the full year, Hinge delivered direct revenue of $691 million, up 26%, up 25% FXN. Adjusted EBITDA was $226 million, up 36%, for an adjusted EBITDA margin of 33%. E and E Q4 direct revenue was $145 million, down 7%, down 9% FXM. Payers were down 14% to 2.1 million, and RPP grew 8% to $22.53. Adjusted EBITDA was $48 million, flat year over year, representing adjusted EBITDA margin of 33%. For the full year, E and E delivered direct revenue of $594 million, down 8%, down 9% FXM. Adjusted EBITDA was $140 million down 18%, for an adjusted EBITDA margin of 23%. Excluding the $14 million Federal Trade Commission legal settlement charge and $6 million of restructuring costs, adjusted EBITDA margin would have been 26%. Match Group Asia direct revenue in Q4 was $66 million, down 2%, down 1% FXM. Azure direct revenue was up 1%, both as reported and FXM. Payers direct revenue was down 5%, down 4% FXM. Across Match Group Asia, payers increased 3% to 1 million. While RPP declined 5% to $20.91. Adjusted EBITDA was $16 million, up 2%, representing an adjusted EBITDA margin of 25%. For the full year, Match Group Asia direct revenue was $267 million, down 6%, down 5% FXM. Excluding the exit of our live streaming businesses, Match Group Asia direct revenue would have been flat year over year. Up 1% FXM. Adjusted EBITDA was $66 million up 9%, for an adjusted EBITDA margin of 25%. Including stock-based compensation expense, total expenses in Q4 were down 7%. Cost of revenue decreased 6% and represented 25% of total revenue, down two points as a percent of total revenue, driven by alternative payment savings. Selling and marketing costs increased $6 million or 4% but was flat seven at 17% of total revenue. Primarily due to higher marketing spend at Hinge. General and administrative costs decreased 22%, down three points as a percent of total revenue to 10%. Driven by the gain on sale of an LA office building and lower legal fees. Product development costs remained flat at 12% of total revenue. Depreciation and amortization decreased by $10 million to $21 million due to lower internal internally developed capitalized software costs primarily at Tinder. Our trailing twelve-month gross leverage was 3.2 times, We ended the quarter with $1 billion of cash, and net leverage was 2.4 times at the end of Q4. Cash equivalents, and short-term investments on hand, plan to use $424 million of cash to pay off the 2026 convertible notes on or before their maturity in June. In Q4, we repurchased 7.3 million shares at an average price of $33 per share on a trade date basis, for a total of $239 million and paid $45 million in dividends. For the full year 2025, we delivered operating cash flow of $1.1 billion and free cash flow of $1 billion. Free cash flow was negatively impacted by the timing of the final Apple payment of the year, which we expected in December but did not receive until early January. For the full year 2025, we repurchased 24.7 million shares at an average price of $32 per share on a trade date basis for a total of $789 million paid $186 million in dividends, and deployed $129 million of cash towards net share settlement of employee equity awards to reduce share dilution. Equating to 108% of free cash flow in total. As of 01/31/2026, we've reduced diluted shares outstanding, by 7% year over year, a meaningful accomplishment. Our board of directors declared a cash dividend of 20¢ per share, representing a 5% increase from our prior quarterly dividend. The dividend is payable on 04/21/2026, to shareholders of record as of 04/07/2026. The increased dividend reflects our commitment to providing shareholders with a predictable and consistent form of capital return. Dividend is expected to be paid on a quarterly basis going forward subject to approval by our board of directors. Now for guidance. We expect Q1 total revenue for Match Group of $850 million to $860 million, up 2% to 3% year over year. This range assumes a three and a half point tailwind from FX. FXN, we expect total revenue to be down 1% to flat. We expect Match Group adjusted EBITDA of $315 million to $320 million representing a 15% year over year increase, and an adjusted EBITDA margin of 37% at the midpoints of the ranges. Q1 total revenue guidance assumes a $6 million negative impact to Tinder direct revenue from user experience tests. For the full year 2026, we expect Match Group to deliver total revenue of $3.41 to $3.535 billion approximately flat year over year at the midpoint of the range. This year over year range assumes a one-point tailwind from FX. A nearly one and a half point headwind from Tinder user experience tests and a one-point headwind from the planned rollout of face check across the portfolio. We expect full year 2026 indirect revenue to decline in the mid-teens percent. We expect total Match Group adjusted EBITDA of $1.28 to $1.325 billion and adjusted EBITDA margin of 37.5% at the midpoint of the ranges. As we reinvest savings into Tinder and Hinge to drive the revitalization phase of our transformation. Our guidance assumes approximately $110 million of adjusted EBITDA based on current App Store policies. Savings in 2026 from alternative payments, The App Store fees we pay could change based on evolving litigation and regulatory changes both in the US and in other jurisdictions. Including the Epic Games versus Apple case, which was recently sent back to the lower court. We continue to monitor these events closely, will determine the appropriate course of action if and when there are future changes to App Store policies. At Tinder, we expect direct revenue to decline approximately the same rate as 2025. Our guidance assumes a three-point headwind from user experience tests and a one-point headwind from the full rollout of face check. It also includes a $50 million increase in Tinder marketing spend for a total budget of approximately $230 million. As we test in the marketing to support our product turnaround and user growth efforts. We expect adjusted EBITDA margins of approximately 50% with alternative payment savings helping to offset higher marketing spend. At Hinge, we expect continued strong direct revenue growth in the low to mid-20 percents and adjusted EBITDA margins in the mid to high 30 percents with robust margin expansion driven by our plan to reinvest only one-third of Hinge's expected savings from alternative payments. Hinge remains on track to achieve $1 billion in revenue in 2027, with continued margin expansion. At E and E, we expect direct revenue to decline in the low double digits as we work to reinvigorate emerging brands growth by improving user outcomes. We expect adjusted EBITDA margins to expand to the high 20 percents with the completion of our platform consolidation efforts and from alternative payment savings. And at Match Group Asia, we expect direct revenues to decline in the high single digits reflecting Azara's ongoing block in Turkey and a global rollout of a new user verification technology, which builds upon face check. We also expect a three-point FX headwind to Match Group Asia direct revenue. We expect adjusted EBITDA margins to be in the low to mid-20 percents. We expect free cash flow of $1.085 billion to $1.135 billion in 2026. An 8% year over year increase and representing 85% free cash flow conversion at the midpoint. Due in part to the Apple payment we originally expected in December but received in January. We expect SBC expense of $250 to $260 million and capital expenditures of $55 to $65 million. Effective tax rate is expected to be approximately 19%. Our capital allocation strategy remains unchanged, prioritizing organic in our business, capital return to shareholders through buybacks and the dividend, and selective M&A. We plan to continue net selling employee equity awards in 2026 to reduce dilution. Expect to use 100% of free cash flow for buybacks, dividends, and net selling employee equity awards over time. However, the percent of free cash flow used in any particular quarter or calendar year could vary due to a number of factors. Including market conditions. While execution in our existing businesses remains our top priority, we may use free cash flow for selective M&A. Evaluated on a case-by-case basis. Will continue to target net leverage of two to three times. Taking a step back, we've reduced our diluted shares outstanding by 7% over the last year, and our plan calls for a similar reduction in 2026. While we're hard at work turning around Tinder's MAU trends, we're also aggressively reducing shares outstanding, which we expect will leave us in a very attractive spot on the other side of this. With that, let's turn it over to Q&A. Tanny Shelburne: Before we call, we may discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate or similar statements. These statements are subject to risks and uncertainties. And our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release periodic reports with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the published materials on our IR website. These non-GAAP measures are not intended to be substitutes for our GAAP results. Spencer Rascoff: Operator, we're ready for the first question, please. Operator: We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. Our first question today comes from Jason Helfstein Oppenheimer. Please go ahead. Jason Helfstein: Thanks for taking the question. I guess just to Spencer, any more details you can share around the early learnings from Project Aurora? And is the idea that, you know, is it one kind of one thing or the idea is that you know, you may take pieces of it and use some, use all, etcetera, etcetera. So the point is, like, I guess, just just just expand there. And then just second, can you connect the dots with us to Tinder between the fourth quarter improvement in new registrations? And MAU and the 4% increase in December sparks? And did sparks improve throughout the quarter? Thanks. Spencer Rascoff: Yes. Thanks, Jason. So Aurora is our focus on Australia in Q4, and we gave Australia everything we had in terms of product improvements, up to that point in time and marketing spend and tactics. And so, you know, I'll give you some Australia specific data I don't think I I think some of this I referenced some of this is in the earnings script, but some of it is not. So, for example, Australia Sparks in December 2024 were down 14% year over year. In December 2025, they were down 8% year over year. Sparks coverage, we mentioned, went from negative 2% year over year to positive 2% year over year. Australia MAU in December 2024 went from negative 12% year over year to negative 9% year over year and female now improved even more. Overall now improved by three points but female now improved by five points. Australia double date usage also went up quite a bit. So last quarter, I said one of six Australians, 18 to 22, were using double date. This most recent quarter was one out of four. Were, 18 to 22 year olds were using DoubleDate. And overall in Australia, 10% of users are now doing using DoubleDate. So very encouraging results in Australia. It shows that a good product roadmap and, a lot of hard work and effective marketing can start to change these user metrics. In terms of the scope of what was in Australia and how we roll that out elsewhere, there are some aspects of Aurora which are already rolled out. Elsewhere. So, for example, face check was just in Australia at at some point in 2025. Now it's in much of the world. By March, it will be you know, in most in in almost in most territories. Globally. So face check is not just in in Australia, The marketing spend and tactics that we tested and learned our way through in Australia that also is being rolled out globally. Specifically, in 2026, focused more on user acquisition or performance marketing not top of funnel brand marketing. What I mean by that is, if you think of our past campaigns, such as it starts with a swipe, which generate overall awareness for Tinder, that would be an example of top of funnel brand marketing. But most of our marketing in 2026 following the results from Aurora, going to be bottom of funnel focused. These are things like, you know, real user generated content on TikTok or Instagram of young young users saying, I'm using double date, or this this is a totally Tinder. This is not what I thought Tinder was like. Check it out. So, so shift in marketing tactics and marketing scale globally based on what we learned from Aurora. But there are some things that are still only in This is, examples like chemistry, which we haven't rolled out into many other geographies yet. But we will know, but more to come on that soon. So that's how what we learned in Australia with project Aurora is informing the rest of the world. To your second question, Jason, about Q4 registration improvements where we went from negative 12% new regs in Q2 to negative 5% in Q4 how that ties to Sparks and MAU. I would describe it as this. If you think of our audience as a funnel, where at the bottom of the funnel, we have sparks, that six-way conversations, And at the very top of the funnel, you have new registrations. It's easiest to impact the bottom of the funnel. And so that's where you would expect this product-driven turnaround to start showing up the most in in our numbers, and and that is, in fact, what we're seeing. We can improve the user experience of the product relatively quickly with enough enough focus by improving our recommendation algorithms, by improving the apps performance and uptime, the design of the apps, the quality of our push notifications, you know, many other things that we've done on the roadmap over the last six months. So you see that in Sparks at the bottom of the funnel. It's much harder to drive top of funnel MAU growth and registration growth because that for that to grow, we need to drive reconsideration. We need to convince people to give Tinder another shot. It's very encouraging. You know, it it gives me a lot of confidence that we're even starting to see any improvement yet in MAU and new registrations given how recent the start of this turnaround really is. Operator, we're ready for the next question, please. Operator: And the next question is from Cory Carpenter with JPMorgan. Please go ahead. Cory Carpenter: Yes, thanks for the question. I had two. I know Australia has gotten a lot of focus but you mentioned that engagement improved by two points in 15 countries. Maybe Spencer, could you expand a bit on what you think is driving that and how that's trended to start the year? And then just a second question, user experience headwinds. You called called that out as coming in less than expected. Could just give some color on maybe in particular, where are you seeing less of a headwind? You had anticipated? Thank you. Spencer Rascoff: Yeah. Absolutely. So I'll give you some some data here. For example, I said in the prepared remarks that countries representing one-third of our MAU have improved by two or more points. And you know, we said it's it's over around 15 countries. So, for example, Korea, went from in December 2024 Korea, MAU South Korea, MAU, was down by 8% year over year. And in December 2025, South Korea MAU was up 2%. Year over year. In December 2024, Japan MAU was down 12% and in December 2025, it was down 6%. And as I've already said, Australia went from down 12% to down 9% from December 2024 to December 2025. So really nice swings in MAU in some key countries. It's hard to put a single finger on what is driving these numbers because we've made so many encouraging product changes. But the you know, if I if I had to if I had to put a finer point on it, I'd say it is change improvements to our recommendation algorithm Number two, it's double date. Number three, it's face check. Improving authenticity. And number four, it's marketing. Those, I think, are the four biggest drivers of those MAU improvements in those countries I mentioned. And then to think about the revenue, kind of the revenue trade-offs, I'll give you a couple quick examples to try to understand how this happens. One, we've already talked about, which is face check. When we first launched face check, Canada, it we saw immediate improvements in trust and safety, but it was a 10% revenue hit. Two to 3% revenue hit Through a lot of hard work and iteration, we got that down to a and we started rolling it out into other countries. And but we kept at it And now it's about a 1% revenue headwind, but a 50% reduction. In your interactions with, with fake accounts or bad actors. So well worth it for just a 1% revenue shortfall. But from negative 10% to negative 1% revenue hit over a couple months of iteration. I'll give you another quick example. We have a new For new users. You know, we're testing some work on the week zero experience. And if we show new users a couple of free user accounts who like them, every time they open the app, we've seen a 9% improvement in Spark coverage for Gen Z users, but it impacts revenue an unacceptably large amount. And so now, just as with the face check example, now we iterate. Now we see how we can mitigate that and how we can reduce it. And when we get it to a reasonable revenue hit or perhaps if we get it to revenue neutral, then we'll roll out initiative like that, which will really improve user outcomes for Gen Z at some smaller tolerable revenue impact What we saw in Q4, and I think Steve mentioned this in his remarks, is we continue to underspend our revenue give back budget. I think in Q4, it was we spent $9 million out of $15 million. Expecting $14 million, and it came in, much less than that, around $6 million. Okay. And, you know, what we've bracketed for 2026, is, $60 million and you know, we we intend to spend that. That's not a sandbag. That's a that's a real number. But what we have found is that we are very good at iterating as in the face check example, to mitigate revenue impact and still retain the user benefits from these types of initiatives. Operator, next question, please. Operator: The next question is from Shweta Khajuria with Wolfe Research. Please go ahead. Shweta Khajuria: Okay. Thanks for taking my questions. Let me try two, please. On the improvements that you are talking to right now, Spencer, in the letter and in your prepared remarks, you mentioned that you saw material improvement in experiences for women. Which is one of the drivers through greater relevance and safety. So could you please talk to how you're measuring relevance for women? Any quantifiable data points that suggest that that that drove relevance? And then second is when we think about the relationship to payers eventually, much of a lag do you think there will be so we start seeing new registrations sparks and sparks coverage MAUs and then eventually payers. How should we think about that timeline? Thanks a lot. Spencer Rascoff: Sure. Thanks, Shweta. We look at retention and spark coverage and user satisfaction by all types of of breakdowns by age, by demo, by gender, by sexual orientation, and many other factors. So I don't have at my fingertips here specific data on female retention, for example, or, you know, improvements. From it. I'm trying to I'm trying to rack my brain here to think about how I can be responsive to your question. You know, I'll I'll I guess I'll talk about double date for a moment, which has been such an feature to change perception of what Tinder is. Articulating that Tinder is for fun, low-pressure, ways to meet new people with friends. And this is a product that really appeals to female Gen Z users. It's only been out for a couple months in the US, but already forty-eight percent of Gen Z women in the US cite double date as a unique reason to use Tinder. And sixty-nine percent of US Gen Z women say they're aware of the feature and forty-six percent of US Gen Z women say that DoubleDate is the most defining feature of Tinder. So know, the other the other metric I'd draw your attention to as I think I already stated that female MAU in Australia is up even more than total MAU in Australia. So, actually, if you compare female MAU male MAU, it would be quite a bit higher over the Q4 period. And that's due to several things. As I said, it's due to double date. It's due to, REx improvements. And it's due to better marketing. So, you know, we we're definitely seeing stronger female retention female MAU growth as a result of our product initiatives. And marketing. Steve, you had the the second question. Yeah. And just how does that translate? Yeah. Look, the improving the expectation for improving MAU trends over 2026, we do believe will also lead to improving payer trends. So we expect those to improve throughout the year. So we we do see it translating to payers, and we expect that to continue to happen throughout the year. Next question? Thanks, Spencer. Thanks, Steve. Operator: The next question is from Dan Salmon with New Street Research. Please go ahead. Dan Salmon: Great. Good evening, everyone. Spencer, kind of a two-part question. Kind of wanted to go back and just review a little bit about the leadership transition at Hinge. And maybe more importantly, the the creation of Overtone. But then kind of dovetail that into some of the comments you walked through in your prepared remarks about the refreshed look at the portfolio and sort of the areas of fun, focus and familiarity and trying to place your bets within that framework. And and ultimately get to, you know, the sort of room you've left yourself here for both you know, small tuck in M&A and incubation. And just to see your, you know, obviously, your your last action here was was an incubated launch. But maybe just to expand on your thoughts on what the potential is there as you look at the portfolio and how it might evolve over the year? Spencer Rascoff: Thanks. Yeah, absolutely. Good question, Dan. So Hinge didn't miss a beat when we changed CEOs in Q4 because Jackie, who's been running marketing and was effectively running Hinge for 2025, stepped in seamlessly to the CEO role. So the Hinge leadership team is is all is in place, is incredibly mission-oriented, capable, incredible, stewards of the Hinge business and just and just fantastic and really understands the Hinge user. And the product roadmap. So Hinge continues to to march on know, I'm glad you brought up what we call the gem, which is this portfolio strategy work This is one of the first things that I kicked off when I joined this company about a year ago, and and I said, I need to understand how all these brands fit together. And our employees were really anxious for this as well. They were saying, why do we have 20 something brands, and how do they connect with one another? What problems are they trying to solve and where should they overlap or not. And that work that we did, which was really important work that required and utilized a lot of consumer insights and and brand strategy work, gave us this framework that has been really, illuminating for us as a company. I would I'll I'll use that to talk for a moment. I would hinge, and then I'll answer your question about other other potential, additions the portfolio. With respect to Hinge being the leader in the focused space, Hinge's runway in that area is massive. I actually think the focus section of that gem has more total potential over the long run than even the fun side of that gem. Because demographically, it's a much bigger potential audience. It ranges from people in their mid-twenties up to people in their mid-seventies or mid-eighties that are looking for a focus find your soulmate, find your person, app that's designed to be deleted. And Hinge is really just getting started as it marches country by country. Globally. So massive potential for monthly active user growth for Hinge. And that segment, the focus segment, should monetize over time better than the fund segment because people are more willing to pay for a focused outcome than for a fun outcome. And those users also have more disposable income. So the monetization potential for Hinge as the leader in the focus space is is really significant. To answer your question about other white space or gray space we might find in the in the based on that brand strategy work. You know, we're we're always incubating new ideas. For example, we have, one right now called Slide focused in Korea, which is a three on three dating app concept concept only in Korea. And so, you know, we we launched something like that. We test. We learn from it. We decide whether to invest in it. Or to bring that feature set to other apps of ours or to or to stop investing in it. So right now, we have we have that one. We have another one, which I I don't I'm not gonna talk about at this moment. And, you know, we're always exploring new concepts as well as looking at potential investments or acquisitions. Operator, next question please. Operator: The next question is from Nathaniel Feather with Morgan Stanley. Please go ahead. Nathaniel Feather: Hey, everyone. Thanks for taking the question. Want to touch a little bit more on the new registration trends and the improvement there. You mentioned a lot of changes in the marketing side. What have been the main source of those new registrations? Are you seeing improvements? Registrations through organic channels, word-of-mouth or is it more marketing led? And then interested to hear about the learnings from chemistry to date. What's the consumer behavior been as you've added that new surface area to the app? Thank you. Spencer Rascoff: Yeah. Thanks. Thanks, Nathaniel. So there have been a variety of sources of new Certainly marketing has been an important part of it. But double date also drives new invitations because existing Tinder users invite their friends to be their double day partner. So I I you know, it's been a a variety of of initiatives. And then, actually, organic social has been a big driver. You you know, you'll see you've seen things on on TikTok or Instagram today that you probably wouldn't have seen a year ago. People talking organically, oh, Tinder is back. Tinder is cool again. You know, I don't know what Tinder did, but I'm not not seeing bots or spam accounts anymore. I mean, that's that's how face check makes its way into the real world, into the the the Gen Z language on social. So that's driving organic new regs as well. And regarding chemistry, you know, chemistry is really two things. Chemistry is a, an AI way to interact with Tinder and answer questions in order to then get just a single drop or two rather than swiping through many, many profiles. It's also a way to connect your camera roll to Tinder and then let Tinder draw out insights from your camera roll. And in today, it's that's in service of driving a a custom AI-driven recommendation drop. But in the future, it will have other applications So we're learning a lot from chemistry. We think it helps on the first point, think it helps solve swipe fatigue. Which is, you know, an objection that we hear from users who say, I just wanna get to the good stuff faster. I wanna get to a a spark more quickly. And, of course, we have lots of ways to to do that. We improve recommendations. We improve lots things about the product. But another way to do that is to give people a new way to use Tinder. With this single drop. And then as I've alluded to, we have a lot of a a long-term roadmap regarding what to do how how to integrate the camera roll insights into the user experience as well. So still learning a lot about chemistry. You know, more to come. Next question, please. Operator: The next question is from Ross Sandler with Barclays. Please go ahead. Ross Sandler: Great. I thought I'd bring Steven into the Q and A here a little bit. So I guess high-level puts and takes on the 26% guide. If there's something that could surprise to the upside, what do you think that might be? And is this 50% Tinder EBITDA margin the new kind of right way to think about the longer term or should we head back north once the revenue starts to grow again? Thanks a lot. Steven Bailey: Yeah. Happy to take this question. Here's the way I would think about the guidance. You know, it's a little bit low. It's flat it's flat revenue. In 2026, which is a little bit lower than what we had guided to about a year ago. The reasons for that are are really three reasons. One, some softness at E and E in Asia. If you look at kinda what we were expecting those businesses do in '26 verse a year ago to what we're expecting today. About a three-point headwind to total Match Group year over year revenue growth. So that's a pretty big factor. And then the other two is one, the Tinder user testing, which Spencer mentioned, that's about a point and a half headwind and that's $60 million budget to continue to test. Obviously, that's one where there could be upside if we continue to see we've seen in the last couple quarters where the impact to near-term revenue is less than we expect, you know, that could that could drive some upside, but we think it's prudent to keep that budget in place and allow the the product team to continue to to test. And then there's another point headwind from the global rollout of face check more broadly across the portfolio. That's a point headwind that we think as well we're taking, like Spencer mentioned. Then there's about a there's a point of FX benefit that we're getting this year. So if you add all those up, that's four and a half points of revenue headwind. And it kind of explains how we get to from the mid-single digits growth that we were sort of shooting for a year ago to the flat growth we were at today. But we think are all necessary investments to improve the long-term prospects of the business. If you go let let's let me just take a minute to go be through each of the BUs real quickly and hit the highlights. I think Hinge, you know, continues to do phenomenally well. Revenue is right on track with our expectations. Margins are ahead of where we expected. Tinder you know, we said it's gonna be down about the same as it was last year, call it four points. That's really the the user test budget 60,000,000 I mentioned and the and the rollout of face check. Combined, that's a four-point headwind. So plus or minus a point of FX that kind of gets you from the flat we were expecting a year ago to the four points we're down today. But again, I think well worth, you know, worthy trade-offs to make. You know, we talked about the payers. You know, the the one other thing I'll I'll mention again is you know, the composition of the revenue at Tinder, we're expecting to, you know, achieve this minus 4% decline through improving payer trends on flat RPP, which is a little bit different than what we've seen in the last couple of years and sets us up pretty well for improved revenue growth in '27. And then on E and E in Asia, you know, that underperformance is really slowing growth within the affinity brands, particularly at E and E. And Azar within the Match Group Asia BU Spencer, do you wanna touch on on those two? Spencer Rascoff: I'll take this group quickly, and then you can hit the margin impact or the quarterly piece. So on Azar, Azar has been is currently not permissible in Turkey, and we think we have a path on that. We're working very hard on getting, usage in Turkey restored. But that contributes to a 2026 headwind, at least for now. Regarding E and E, the weakness on E and E is on Affinity. These are our brands that are race or ethnic specific, such as Chispa for Hispanic daters or BLK for black daters or Swans for Muslim daters, for example, those apps are on the focus side of the brand portfolio And, of course, the reason for that is if you're using an app just trying to find people of a particular of a particular ethnicity or race, you're probably in that focused zone where you're looking for your spouse or your soulmate. And so what we saw there was we saw, audience headwinds starting about a year ago on the affinity apps. And rather than just focus on monetization and sort of accept that audience decline, we decided to get ahead of it. And regain product market fit. So what we're doing on Affinity is we're moving from the swipe model to the vertical profile model, which we think makes a lot of sense for this user type. That has a revenue hit as we make that shift but we think it's the right thing to do to improve product market fit. Steve, you wanna finish the question on that? Steven Bailey: Yeah. Let me just give a little bit more detail on a few other things to keep in mind. One is on the the cadence of revenue. Either we expect to be flat to down about a point in Q1 on a FX neutral basis, that's what we guided to. And we expect to be down about a point FX neutral for the full year if you take the flat guide and that one-point tailwind from FX we mentioned. And so that should be pretty stable revenue trends each quarter of this year. And then on profitability side of the equation, know, we're taking the savings we achieved from the workforce reductions and alternative payments. And we're investing that back into Tinder and Hinge and marketing. We mentioned the $50 million increase in in Tinder marketing spend. To about $230 million. We think they're all the right decisions to make, and that's puts you at the 37.5% margins for the full year. On the cadence on the margin side, I do think it will look a little different this year than in in years past. We guided to 37% margin to Q1. And then increase in margins in Q4 as we I'm expecting similar margins in Q2 and Q3. Spend down on marketing as we typically do. For the 37 and a half percent for the full year. So that hopefully gives you some better insight into the guide. On the Tinder margin question more long term, you know, we're not I'm not gonna guide. I don't think we wanna guide to Tinder Tinder margins will go. I will tell you, know, just we do not see these user givebacks as a structural change to the profitability of Tinder. We see them as necessary to improve user growth and and and the ecosystem. You know, once we can do that, I think there'll be plenty of opportunity to improve monetization at Tinder and get back to revenue growth in 2027 and beyond. Spencer Rascoff: One data point on that Just looking at Australia of, you know, what happened in Q4. When we look at revenue per MAU in Australia as we started improving MAU there, The revenue per MAU is basically flat. So we you know, to to Steve's point, we're not expecting a structural change to the profitability of Tinder. We still think Tinder will have category leading and and, frankly, Internet leading margin structure. But, you know, but we're we are making these targeted user givebacks in order to improve MAU and and, especially certain types of MAU. That help improve the whole app ecosystem's health. Next question, please. Operator: The next question is from Benjamin Black with Deutsche Bank. Please go ahead. Benjamin Black: Great. Thank you for taking the question. Spencer, can you talk about balancing the need to sort of maintain the cadence of buybacks and the dividend versus perhaps being more aggressive on the product? And and prioritizing user outcomes, which ultimately may create or have been creating some near-term revenue EBITDA dislocation Do you see the potential to maybe sacrifice more on the top line to accelerate the momentum in user outcomes as we look ahead to the next year or two? And then just one quickly on Project Prism. Maybe dig into the early learnings and how is that shaping your marketing strategy going forward? Spencer Rascoff: Yeah. Thank you. So I'm turnarounds are hard, and being the CEO of a turnaround is hard. But I'm blessed to be turning around a company that is immensely profitable. So with our enormous profits, we're doing five things at the same time. Number one, we're improving or increasing Tinder's marketing budget from a 180 to 230 Number two, we're giving users more value from Tinder by having this user give back budget of $60 million this year. Number three, we're fully investing in Hinge both on marketing and headcount so that Hinge can achieve its full potential. And then number four, we're funding a significant buyback, buying back about 7% of the company this year and 7% last year. And pay funding the dividend, increasing the dividend. So the fact that we're able to do all all five of these things simultaneously is a blessing. And I think we've right-sized each of those five levels of investment relative to to where they all need to be. So that's how I'd approach it. Regarding Prism, Prism, for those that don't know, is our first-ever Match Group wide analysis of measuring marketing efficacy across brands. So we've been able to put every single penny we spend on advertising across every single brand on an apples-to-apples basis and look at and and look at the efficacy of ad spend. What it, what it exposed to us was the benefits for brands like Tinder to be more focused on down funnel advertising performance and user acquisition advertising rather than top of funnel brand advertising. And it informed the increased spend on Tinder from a 180 to 230. And it also unlocked a lot of other learnings in the E and E brands as well as the, the Hinge brand. The former SVP of marketing at Tinder is now the CMO of E and E, which was a very important you know, cross-brand way for us to bring Tinder insights over to the E and E brands and and great expertise and and confidence over, you know, across the company as well. I think we have, we only have a couple more minutes, and we've got a couple more questions let's go to the next question. We'll see if we can get through all of them. If not, we might have follow-up offline. Next question, please. Operator: The next question is from Brad Erickson with RBC. Please go ahead. Brad Erickson: Yes, thanks. Spencer, I just wanted to follow-up on that last comment on Prism. You know, bottom of funnel for this space hasn't been that sort of common. And so obviously, you guys are gonna get a pretty good feedback loop, right, going here in in '26. Is there I guess, question is, like, why was $50 million the right number? And if you see more success, might you ramp it up? Or, you know, call an audible midyear? How should we think about that? Spencer Rascoff: Yeah. Good question. I mean, we you know, what we we've we're following the same guidance that I had at Zillow, which is we always go one quarter out on guidance. And then in February earnings, we also also do a full year. We make the marketing decisions constantly real I mean, I'm I do The the Tinder marketing team is sitting down with me every three days to go through all of the data that we're seeing globally real time. So you know, what we're putting out today is what we think are the most likely scenarios for the full year. But if the ROI is not there, we'll pull back. And if the ROI is great, you know, we'll evaluate other other potential changes. But for now, is what we think is the most likely scenario for the year. But we are watching it real time constantly. Extremely hands-on on this one. The the Tinder marketing team, we've moved into the open space. At our building in the LA office, and that's who I sit with is the Tinder marketing and social media team because that's where I wanna be most aware of exactly what's happening. Day to day and week to week. Operator, perhaps time for one more one, maybe two more questions. Next question, please. Operator: Next question is from John Blackledge with TD Cowen. Please go ahead. Logan Whalley: Hey, guys. Thanks for the question. It's Logan Whalley on for John. So it's good to see the hinge rollout go well in Mexico and Brazil. Could you talk about what the timeline to monetization looks like for Hinge when it launches in new markets at this point? Like, how long, before the app kinda reaches critical scale? And then after that, how long is it before you you begin to focus on monetization? And then also, any any early learnings from Mexico and Brazil that you plan to apply to the South America launches for later this year? Thanks. Steven Bailey: Yeah. Why don't I take the the monetization question? The the short answer is it takes time. It it it does. And then we you we've seen that with Hinge in Europe. I think that's the best sort of case study You know, they've been at it at in Europe for a couple years now. They've done phenomenally well, obviously. Know, that's the playbook. We've seen the MAU growth first. We're now starting to see revenue growth. It it's gonna it's gonna only be about a $100 million of revenue in 2026 from those countries. Which is a pretty small piece of the total. And if you compare that to you know, what Tinder's doing in that region, for example, it's still far below where Tinder's at. And so it takes time to build that liquidity to make sure the product's working. You know, at full scale. And then what we see is a couple things. One, you can optimize monetization for that region. And two, you get a natural increase in pair penetration in RPP just as the liquidity builds. And so I'd expect to see the same thing in Latin America, but I would not expect Latin America to be a major contributor to revenue. 2026 for Hinge or probably even in 2027 either. Especially, you wanna Spencer Rascoff: Yeah. Have one thing I have one thing to add, which is the way Hinge is rolling out new markets today is different than the way it did in the past. Today, we are operating under a one MG philosophy. So everything is much more coordinated between Hinge and Tinder and E and E. In fact, have a single unified go-to-market motion in Asia, and a high degree of collaboration and coordination everywhere else in the world. So that's, know, that's a significant improvement as compared in the past. I think, unfortunately, we have to leave it at that. I'll I just wanna kind of give a high level. You take a big step back from all of this. We're doing three things at the same time. The first thing we're doing is a product-led turnaround at Tinder, which is underway, progressing well. Off to a great start. We shared a lot of encouraging data today. Second thing we're doing is fully funding Hinge's rollout and and ramp and helping Hinge achieve its full potential. But the third thing that we're doing is we are reducing our share count meaningfully. So by buying back 7% of the company last year, by increasing the dividend and buying back another 7% this year, We are creating an environment where free cash flow per share will compound And on the other side of Hinge's expansion and Tinder's product-led turnaround, we think there'll be this kind of coiled spring as we, you know, as we combine these three things together. So we're confident in the business. We're confident in the status of the turnaround and the hinges global expansion, and we think investors will increasingly take notice as we put more points on the board as 2026 rolls on. Thanks very much for joining. Those of you that are going to join the March 12 event in LA or on webcast, we'll tell you more about Tinder product then. And until then, it was great speaking with everyone. Bye bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Greetings. Welcome to the Columbia Sportswear Fourth Quarter 2025 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please note, this conference is being recorded. I will now turn the conference over to your host, Reed Anderson. You may begin. Reed Anderson: Good afternoon, and thanks for joining us to discuss Columbia Sportswear Company's fourth quarter results. In addition to the earnings release, we furnished an 8-K containing a detailed CFO commentary and financial review presentation explaining our results. This document is also available on our Investor Relations website investor.columbia.com. This conference call will contain forward-looking statements regarding Columbia's expectations, anticipations, or beliefs about the future. These statements are expressed in good faith and are believed to have a reasonable basis. However, each forward-looking statement is subject to many risks and uncertainties, and actual results may differ materially from what is projected. Many of these risks and uncertainties are described in Columbia's SEC filings. We caution that forward-looking statements are inherently less reliable than historical information. We do not undertake any duty to update any of the forward-looking statements after the date of this conference call to conform the forward-looking statements to actual results or to changes in our expectations. I'd also like to point out that during the call, we may reference certain non-GAAP financial measures, including constant currency net sales. For further information about non-GAAP financial measures and results, including a reconciliation of GAAP to non-GAAP measures, and an explanation of management's rationale for referencing these non-GAAP measures, please refer to the supplemental financial information section and financial tables included in our earnings release in the appendix of the CFO Commentary and Financial Review. Following our prepared remarks, we will host a Q&A period during which we will limit each caller to two questions so we can get to everyone by the end of the hour. Now I will turn the call over to Tim, our Chairman and Chief Executive Officer. Timothy P. Boyle: Hey, Reed, and good afternoon. With me on the call today are Co-Presidents Joe Boyle and Peter Bragdon, our Executive Vice President and Chief Financial Officer, Jim Swanson, and our Executive Vice President, Chief Administrative Officer, General Counsel, Rochelle Luther. This is our first earnings call for Joe and Peter in their new roles. As announced in November, these role changes are part of our ongoing process to advance our succession plans. I'm glad to have such a strong bench of leadership to help grow the company over the coming years. Now turning to the fourth quarter, we're pleased to have delivered net sales and profitability exceeding our guidance for the fourth quarter driven by better-than-expected demand in the U.S. While our U.S. business remains challenged, I'm encouraged with continued growth internationally combined with early signs of momentum. Indicating that the Columbia Accelerate Growth strategy is resonating with consumers, including new and enhanced product collections and differentiated marketing. I'd like to thank our global workforce whose hard work and dedication have enabled us to make this meaningful progress. Highlights from 2025 include international sales growth, which was strong and broad-based reflecting wholesale and DTC growth. The launch of Columbia brand Accelerate Growth strategy is beginning to attract younger consumers into the brand, with new product collections such as the Amaze Puff. The Engineered for Whatever campaign launched in August drove robust consumer engagement with key activations such as Expedition Impossible. Inventories are healthy and essentially flat as we exit 2025 inclusive of increased tariff costs in the U.S. The rate of SG&A growth has slowed as we optimize spending to allow us to increase the level of marketing to drive engagement and demand. We remain steadfast in our commitment to driving shareholder value, returning meaningful cash to shareholders, including $201 million in share repurchases, and $66 million in dividends. We continue to maintain our fortress balance sheet exiting the year with $791 million in cash and equivalents, and no debt. While we made progress in many areas, our 2025 financial performance was short of my personal growth and profitability goals. Overall, our full year '25 net sales increased 1% to $3.4 billion. As growth in the international markets was mostly offset by continued headwinds in the U.S. The impact of unmitigated tariffs, brand impairments, and increased marketing spend contributed to operating margin contraction and a decline in earnings. Looking forward, we see positive indicators from each of our brands. For the Columbia brand, the Amaze Puff collection was an outstanding success for fall '25. For spring '26, we introduced a seasonally appropriate Amaze collection. We're also excited about the potential of the Rock Pant program and recently launched the Rock Light series. New for spring '26, the Rocklite short includes a differentiated stretch waistband, the Rock Band providing all-day comfort. Throughout our spring '26 offering, we have invested in a diverse range of new styles across apparel and footwear, from high-performance hiking, fishing, and trail running products to contemporary outdoor lifestyle products designed to resonate with consumers in the outdoor communities that we serve. Another key highlight for spring '26 is OutDry Extreme. Our patented technology delivering industry-leading waterproofness in a post-PFAS world. OutDry Extreme combines enhanced functionality and sustainability as the base material is made from recycled textiles. As we look forward to the year ahead, our initial full-year net sales outlook contemplates growth of 1% to 3%. In addition to Columbia brand growth, all of our emerging brands are expected to grow led by Prana. Our initial 2026 operating margin outlook contemplates expansion from 2025 despite ongoing headwinds from incremental U.S. tariffs. We expect modest SG&A expense growth with the goal of offsetting gross margin contraction. Turning to fourth-quarter financial performance. We delivered fourth-quarter results that exceeded our guidance range as stronger-than-anticipated demand in the U.S. more than offset unseasonably warm weather in most direct international markets. Net sales decreased 2% year over year to $1.1 billion driven by a 7% decrease in wholesale net sales partially offset by a 1% increase in direct-to-consumer sales. Recall that earlier than planned shipments of fall '25 orders shifted some wholesale sales to earlier in the year. Gross margin expanded 50 basis points to 51.6% driven by cleaner inventories that contributed to lower promotions, clearance activities, and lower inventory loss provisions which more than offset the impact of incremental U.S. tariffs. SG&A expense increased 3%, reflecting higher DTC expenses and other nonrecurring SG&A expenses associated with our profit improvement program partially offset by the effective cost reduction efforts lowering expenses in targeting areas of the business. This performance resulted in operating income and diluted earnings per share above our guidance range. Looking at net sales by geography, U.S. net sales decreased 8%. The U.S. wholesale business was down high teens percent reflecting earlier shipment of all wholesale orders from a lower order book. Results were partially impacted by inventory supply constraints as we curtailed all '25 inventory purchases as a precautionary measure upon U.S. tariff announcements earlier in the year. U.S. DTC net sales declined low single-digit percent in the quarter. Brick and mortar was down low single-digit percent, reflecting the closure of temporary clearance locations, and lower mall traffic. Partially offset by higher productivity from existing stores and contribution from new stores. We exited the quarter with eight temporary clearance locations compared to 28 in the prior year. Ecommerce was down low single-digit percent as soft traffic and less clearance and promotional activities were partially offset by ongoing efforts to refine our marketing investments for the Columbia brand. We saw modest sales growth in the Columbia brand offset by declines in emerging brands. The improved photography on the redesigned uscolumbia.com website helped to drive discovery and engagement. For my review of fourth-quarter year-over-year net sales growth in international geographies, I will reference constant currency growth rates that illustrate underlying performance in each market. LIAP net sales increased 10%. China net sales increased low double-digit percent driven by wholesale and e-commerce growth despite the impact of warm weather on demand for seasonal products. The outdoor category remains robust in China. We continue to drive high levels of brand engagement with young active consumers by emphasizing iconic products, and styling as well as premium localized product offerings, including the transit, and hike 365 collections. During the quarter, we educated consumers about our technologies, through an Omni Heat Infinity roadshow that our team executed in four of China's largest cities. In addition, we saw strong engagement from the Sunset Lure PFG campaign launched on TikTok as well as our titanium ski campaign. Japan net sales increased to high single-digit percent reflecting increased fall '25 wholesale shipments shifting into the fourth quarter. Our Japan business remains healthy despite declines in tourism, and lower domestic consumer sentiment. Omni Heat Infinity outerwear and winter boots performed well during the quarter. Korean net sales increased low single-digit percent driven by wholesale and e-commerce, as we gain share in a soft outdoor category. We're thrilled with our team's execution across brand and market initiatives that drive digital sales. The team delivered improvements in both conversion and marketing efficiency during the quarter. The Engineered for Whatever campaign is driving brand momentum, including strong engagement from a local brand ambassador partnership that resulted in millions of Instagram impressions and exceptional product sell-through. LAP distributor markets delivered high teens percent growth driven by a strong order book for spring '26 further reinforcing the enduring strength of the Columbia brand in these important markets. Our distributor teams are successfully engaging young active consumers through localized marketing activations and elevated brand retail experiences. That showcase our best products and innovations. EMEA net sales increased 3% Europe direct net sales increased slightly as growth in brick and mortar retail was partially offset by lower wholesale sales, reflecting earlier shipments of fall wholesale orders. Warm weather across Europe dampened consumer demand for cold weather products, Europe offers strong growth potential. We're determined to capitalize on our brand momentum and drive broader awareness led by younger active consumers. Our EMEA distributor business increased low teens percent reflecting healthy order book for spring '26. Canada net sales increased 3% in the quarter driven by improved store productivity and DTC and wholesale growth. Looking at fourth-quarter performance by brand, Columbia net sales decreased 1% as international growth was more than offset by declines in the U.S. Reflecting earlier timing of fall shipments along with the closure of temporary clearance stores and soft consumer mall traffic. The Amaze Puff collection was our top product story for the fall season. By pairing an incredible product with a campaign that resonated with a focused and engaged audience of stylish young females we were able to deliver amazing success. Many of the amazed consumers in our U.S. e-commerce channel were new first-time purchasers of the brand. The Engineers for Whatever campaign had a profound impact in the fourth quarter, driving and amplifying our messaging and building buzz. We executed the campaign across consumer touchpoints, including key trade outlets Thursday Night Football, our social channels, certain of our wholesale accounts, and our U.S. branded retail stores. Since the launch, there have been distinct changes to certain of our brand metrics including measurable increases in unaided brand awareness, and branded search as well as the perceptions of irreverence in style. The impact of the campaign underscores the success of Engineered for Whatever and provides us confidence in the direction of the brand and our Accelerate Growth strategy. We drove large-scale buzz with our activations which has been a key part of the Accelerate Growth strategy. In December, we executed the Expedition Impossible activation a marketing campaign that dared Flat Earthers to find the literal edge of the earth. We promised that anyone who could actually find the edge of the earth, photograph it, and send evidence would receive everything owned by the company, LLC. Including gear, office equipment, and assorted used corporate assets. The campaign kicked off with an open letter published in The New York Times, and on Columbia's social channel. Challenging Flat Earthers to put their beliefs to the test. The campaign engaged online communities playfully interacting with flat earth content and sparking conversation. We're excited for the upcoming 2026 Winter Olympic Games. It's an incredible honor to be the official uniform sponsor for the USA Curling National Team. We've been working closely with USA Curling to support these athletic ambassadors as they compete at the highest level. On the Olympic stage. Lastly, our latest marketing activation combines our passion for the outdoors with American's enthusiasm for the biggest game in football. With Nature Calls, the only beer that uses bear scat in the brewing process. We've taken our active engineering excellence to a new level to make even the worst parts of mother nature bearable. Or in this case, palatable. In a series of short videos that dropped on social media, beginning January 26, consumers were introduced to a bear whose GI routines deliver the foundational ingredient in nature calls. The campaign culminates with our activation at a tailgate pregame event in Santa Clara where consumers can enjoy our new favorite beverage Nature Calls. Turning now to our emerging brands, As a reminder, each of these brands derives almost all of their revenue from the U.S. marketplace. Additionally, Torella Mountain Hardwear heavily promoted PFAS inventories in the fourth quarter last year in advance of U.S. regulatory deadlines. Which impacts year-over-year comparisons. Terrell net sales decreased 18% due to the earlier shipment of fall wholesale orders along with less clearance activity. Full price demand for the brand was healthy, with demand exceeding supply for key styles. In e-commerce, we continue to acquire new consumers and drive strong traffic. The team had successful launches during the quarter and unveiled the Horizon Collection which delivered particularly strong results from the call sign style. The team also created brand heat through collabs with Barbara Neighborhood, and Aspen. Prana net sales increased 6% driven by DTC, reflecting strong momentum for the brand's updated product offering, supported by enhanced full-funnel marketing. Our team has been successfully expanding the product marketplace by targeting more lifestyle fitness accounts and the active original consumer. More broadly. We're very encouraged by positive sales trends in Shea Soft and women's seasonal products. During the quarter. Mountain Hardware net sales decreased 5% driven by lower clearance and promotional activity compared to elevated levels in the prior year. Underlying business trends were healthy with notable strength in outerwear, as well as fleece, led by our Summit Grid franchise. Ongoing optimization of Mount Merdler's full-funnel advertising approach drove online traffic during the quarter. Additionally, branded in-store environments are continuing to deliver strong results and are poised for growth next year based on the current order book and planned door expansion. The brand also released its celebrated methogen kit a new high-tech snow kit sold exclusively with EVO and on its e-commerce site, with a launch party at EVO's Salt Lake City location. And a pop-up experience at the Brighton Resort in Utah in the quarter. I'll now discuss our 2026 financial outlook, This outlook and commentary include forward-looking statements. Please see our CFO commentary and financial review presentation for additional details and disclosures. Related to those statements. For the full year, we expect net sales growth in the range of 1% to 3% based on recent weakening of the U.S. dollar foreign currency is expected to be a slight tailwind contributing 50 to 100 basis points to the top line. With greater than 80% of fall '26 advanced global bookings orders in hand, we project second-half global wholesale net sales to increase up to a mid-single-digit percent. We are encouraged that our U.S. wholesale business is expected to return to growth in the second half including growth from all brands. That said, retailers remain cautious as tariff-induced price increases are just now beginning to hit the marketplace. Gross margin is expected to contract 70 to 50 basis points to 49.8% to 50%. The decline in gross margin is primarily driven by the impact of incremental unmitigated tariff costs. We continue to evaluate and have taken actions to mitigate the financial impact of tariffs through a combination of price increases, vendor negotiations, resourcing production, and other tactics. For both spring '26 and fall '26, we increased U.S. pricing by a high single-digit percent. When combined with our other mitigation tactics, our goal in '26 is to offset the dollar impact of higher tariffs. Longer term, our goal is to restore our product margin percentage to historical levels. SG&A is expected to increase but at a slower rate than net sales growth. SG&A leverage reflects the effect of previously executed and planned cost reduction actions partially offset by continuing strategic investments internationally along with maintaining accelerate marketing spend. Based on these assumptions, we expect an operating margin of 0.2% to 6.9% leading to diluted earnings per share in the range of $3.20 to $3.65. This range includes a positive impact of approximately $0.10 to diluted earnings per share due to changes in foreign currency exchange rates. For the first quarter, we anticipate sales will be down approximately 2.5% to 4% reflecting overall softness year to date. This will result in SG&A deleverage and when combined with our anticipated decline in gross margin, resulted in earnings per share of $0.29 to $0.37. In closing, I'm thrilled with the successful launch of the Columbia brand Engineered for Whatever platform. Over the past few months, we've witnessed brand momentum as consumers embraced our new product collections with even more exciting launches on the horizon. Engineered for Whatever has not only reenergized our unique brand voice, but has provided powerful differentiation in a competitive marketplace. This momentum positions us well for continued success as we execute our vision and continue investing across all of our brands to accelerate profitable growth, create iconic products that are differentiated, functional, and innovative, drive brand engagement with increased focused demand creation investments, enhance consumer experiences, by investing in capabilities to delight and retain consumers, amplify marketplace excellence, that is digitally led, omnichannel, and global, and empower talent that is driven by our core values. That concludes my prepared remarks. Operator, could you help us get questions for the remainder of the hour? Operator: Absolutely. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. You may press 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll. Once again, please press 1 if you have a question or a comment. The first question comes from Bob Drbul with BTIG. Please proceed. Bob Drbul: Hi. Thank you. Good afternoon, and Peter, Joe, and Rochelle, welcome. And, Peter, let her do her job. Okay? Timothy P. Boyle: Thank you, Bob. Alright. So I guess the first question generally, Tim, is when you look at the trends in the business, the initiatives underway, and I would even say incorporating current weather, can you talk about how the business has developed over the last, let's call it December, January, into February? I think you talked about the order book. Yeah. I think maybe you said 85% complete. I guess your updated thoughts around what remains to be booked and how that might trend, given the trends that we're seeing today. Timothy P. Boyle: Yeah. Certainly. I mean, we're very encouraged. The bookings have been strong. We were quite cautious entering the sales period for spring '26. As were our retailers. The impact of tariffs was not fully known and frankly still not yet, but we were quite conservative in terms of our approach to winter products for the first quarter and our spring business. So the business could frankly have been a lot better had we been more aggressive. But the trends right now with, of course, the great weather we're having in the first quarter, inventory should be very low in the U.S. And I just see great things happening. Including the terrific acceptance of our Amaze collection, and other products which are really leading the fall categories. And then we've got some really exciting projects underway to create an impact on the brand and the awareness for the brand and products, which are quite differentiated. We don't think anybody else in our space can do these things. So we're very excited. Bob Drbul: Great. And I guess just on the brand advertising and you talked about the progress that you're seeing. When you consider the marketing, the level of spend that you put into the business in '25, the needs to continue to invest in marketing in '26 generally, do you think you're at the right level? And I don't know if you could give us any more of the metrics around progress, for the brand equity, especially here in the U.S. Thanks. Timothy P. Boyle: Yeah, I think we could spend more. I don't think we need to spend a significant amount more than what we're spending today. And Jim will remind us what our delta in ad spend has been over the last several years. But I think we've found an efficient way to get noticed. We've found a way to break through the clutter in a way that's incredibly efficient. So I think we always could use some more, but I think we're in the right spot for right now. Jim Swanson: Yeah, I think Bob just to add a couple of comments on to that. We do believe that the incremental investments that we're making in marketing allow us to have a louder voice in the marketplace. That's pretty clear from a differentiation standpoint over last year. Just in terms of the rate of spend, we were at 5.9% last year. This year, being '25, we finished at six and a half. So it's one of the major drivers of our increase in SG&A. And as we go into '26, our plan would be to more or less maintain a marketing spend. It's down slightly at 6.4%, but by and large, seeking to maintain the strategic investment that we're fully committed to behind the Accelerate strategy. Bob Drbul: Great. Thank you very much. Good luck this year. Timothy P. Boyle: You too. Operator: The next question comes from Laurent Vasilescu with BNP Paribas. Laurent Vasilescu: Good afternoon. Thank you very much for taking my question. Tim, I want to ask focus on your business, but over the last twenty-four hours, there's a lot of news around Eddie Bauer potentially closing 200 stores in North America. Love to get your take in terms of if there's an overlap there. I don't think your guide is assuming a potential liquidation of those 200 stores. Is there any way you can maybe, for the audience, quantify, like, what's the overlap if Eddie Bauer does liquidate? Thank you very much. Timothy P. Boyle: Okay. Well, we've actually been a supplier for many years at Eddie Bauer when it was more of a typical retail operation. And, of course, the brand is well known but it's certainly fallen on hard times. And the brand relied heavily on sort of its existing reputation as opposed to building in marketing efforts and marketing spend to make it a bigger business. It's well known. We don't overlap in every store that they have in centers. But we would expect that as they leave the centers, we'll be in a position to accept more responsibility. More business from outdoors folks who would typically buy that brand. That brand, I would say, generally is a notch below the Columbia pricing. So we hopefully will get some of that, but there'll be a question as to exactly how much. Laurent Vasilescu: Okay. Fair enough. Yeah. Unfortunate news, but the opportunity is for you to gain share. Jim, I'd love to focus on the gross margin. Your CFO presentation is always helpful. And I think in 3Q, you had $50 million to $20 million of unmitigated $20 million for 4Q. You know, if I do the quick math, the three hundred basis points of unmitigated for fiscal year '26, I think, is about $100 million. So I'm trying to understand, like, what's the cadence here? Like, I would think, like, it crescendos right now and then it tapers off. For the audience, maybe can you kind of walk us through, like, how do we think about that $100 million for fiscal year '26 over the coming quarters? Thank you very much. Jim Swanson: Yeah. You bet. Thanks, Laurent. I think you're thinking about it best in the right way from an overarching standpoint. Maybe just to step back for a minute. When you think about the tariff, the unmitigated tariff cost we incurred in '25, of just over $30 million and an incremental 300 bps. Those are stacking. So effectively on a two-year basis, the impact of these unmitigated tariffs is about 400 basis points. And, of course, offsetting a fair amount of that through the price increases that Tim spoke to with high single-digit price increases for both spring '26 and fall '26. Keep in mind, as we get into the first part of this year, as we're continuing to sell fall winter goods, we did not increase price on that. So I think there'll be a disproportionate impact on gross margin, particularly in the front part of the year, Q1 in particular. You'd note that when you look at the outlook that we provided for Q1, which is weaker from an overall standpoint, both from a top line and from a gross margin perspective. And as we work our way through the year in particular, in the latter part of the year where there's more effect as it relates to those price increases, that we've planned into our margins. While still also allowing us some room in that gross margin outlook for the uncertainty of how consumers react to broad price-based increases and just making sure that we've got some room to move within that. Laurent Vasilescu: Very helpful. Thank you very much, Jim. And best of luck with this great weather. Jim Swanson: Okay. Thanks, Laurent. Operator: Next question comes from Peter McGoldrick with Stifel. Please proceed. Peter McGoldrick: Hey, guys. Thanks for taking my questions. I wanted to get a sense of the health of the U.S. market, after pulling out some of the one-time items around the timing of wholesale shipments and then store closures, I was curious what's embedded in the outlook? Should we expect a return to growth in the fourth by the fourth quarter or just the shape of guidance to get to the annual guide of modest declines? Timothy P. Boyle: Yeah. The annual estimations for the company include a softer first half and a much stronger second half. So as we were saying, we've got over 80% of our fall order book in hand, and we know where our emphasis is going to be both from a marketing standpoint as well as how that will link to our customers' inventories. So we're excited about the possibilities for the business. In wholesale. And then in retail, we will just continue to improve on our performance there in terms of all the typical metrics of a retailer. Where we believe there's lots of room for improvement for the company. Jim Swanson: And then Peter, just in thinking through the puts and takes from a revenue standpoint, as you look at the CFO commentary, you'll note that our U.S. wholesale business for the quarter was down a high teens percent. And just to unpack that a little bit, the wholesale shipment timing represents over half of that decline from an overarching standpoint. And then the balance is effectively the lower orders for the fall '25 season. Coupled with we did curtail some inventory purchases that Tim touched on at the height of the tariff announcements that left us a bit light on inventory that we're unable to fill some demand. Peter McGoldrick: That's really helpful. And then Jim, to follow-up on Laurent's question about leaving some room in the gross margin guide, can you help us think about the puts and takes around the tariff mitigation strategy and the pathway to get gross profit dollars or to offset tariffs at the gross profit dollar line? Whether it be pricing or your other mitigation actions? Jim Swanson: Well, certainly, the actions that we've taken to date in the most meaningful of them will be the price increases that we've put into the market. And on average, as we've described, it's a high single-digit percent price increase for both the spring '26 and fall '26 seasons. Those aren't stacking. That's a high single-digit percentage effectively for the year. So that's the major mitigation factor. We've also had some successes. We worked across our strategic factory groups in doing some degree of tariff cost sharing. And then to a lesser degree, there's also some work that we've done in terms of resourcing and moving production around to achieve the lowest tariff rate that we possibly can. So those are the major movers. And, of course, we're certainly focused on the balance of the P&L from an SG&A standpoint. And to the degree, we can't get it through SG&A, we're committed to ultimately driving operating margin leverage, but that is our goal for this year and then longer term you know we're going to stay after it. We know that we need to expand our gross margins. We've got to get our product margins back up to pre-tariff levels and beyond. Peter McGoldrick: Excellent. Thank you. Operator: The next question comes from Mitch Kummetz with Seaport Research. Please proceed. Mitch Kummetz: Yes. Thanks for taking my questions. I must say, Tim, I did not have BearScat on my bingo card for today's call. Timothy P. Boyle: I know you've experienced a lot of winners, a lot of order books. When you kind of think about where we are today, with where channel inventory is, in the order of 80% in and the cold weather that we're experiencing right now across a lot of the country, you've seen things like that in the past. Do you see much out opportunities for the order book to improve from where it is today over the next, you know, two, three months? Timothy P. Boyle: Yeah. I think in my experience, the weather impact on our company is much larger than almost any other category of impact. And when we're talking about the weather that we have ongoing now, I would expect that we're going to get some small lift where retailers will go back and look at their order book, look at their carryover inventory, which should be quite negligible at this point. And they may impact their orders somewhat, but I think we've probably got what we've got for the foreseeable future. There might be one or two more percent left to be gotten, but the important thing that retailers are doing now is still trying to gauge the impact of the tariffs and what the flexibility will be on consumers in terms of how they would expect to be buying for next season. So still quite a bit of cautiousness out there. Jim Swanson: And since we do take orders through March, you know, so there's still some opportunity to chase and we're still placing inventory through that period as well. So we'll look forward to providing an update, you know, as we wrap up taking that order book and sharing that in April. Timothy P. Boyle: Yeah. I guess I would also comment that our footwear deadlines are later than the apparel deadline. So there's very likely to be in the footwear category more. Mitch Kummetz: I appreciate all that color. And then Jim, on the guide for the year, I'm struggling. I'm trying to pencil it out, and I'm having a hard time reconciling the range you've given for op margin. Based on the gross and the SG&A. Is there something unique happening on the licensing line, or am I missing something? Jim Swanson: Well, the biggest thing that doesn't lap year over year are the impairment charges of $29 million that we took on Crown Mount hardware in '25. And so those are nonrecurring. That's effectively, I think, probably what your issue is, Mitch. Mitch Kummetz: Okay. Great. Thanks again. Operator: The next question comes from Paul Lejuez with Citigroup. Please proceed, Paul. Tracy Cogan: Thanks. It's Tracy Cogan filling in for Paul. I think you guys said your fall order book supports mid-single-digit growth. And I was just wondering how this breaks out by region. And if the U.S. is up a similar amount. Also just wondering what it looks like in units in the U.S. if we're assuming there's a high single-digit price increase in there. Thank you. Timothy P. Boyle: Yes. So the U.S. business has been, frankly, over the last period, our most challenged. So the biggest improvements are happening there. Our international businesses have been quite strong. And our expectations are that those businesses will continue to outperform the U.S. business. And then again, as I said, our back half of the year is going to be much improved over the front half of the year, U.S. Jim Swanson: And then Tracy, just a couple more comments on that. As Tim touched on, we're incredibly pleased with what we're seeing in the fall '26 order book. From a geographic standpoint, you know, we would contemplate the international businesses outpacing growth from the U.S., and that's going to continue to be the region that we've described from China, Europe, and the distributor business. Just continued momentum in each of those markets. And then the U.S. will be a low to mid-single-digit rate of growth. And then excitingly, I think Tim indicated as well. We do anticipate growth across all four brands and the emerging brands. Growing at a faster rate than the Columbia brand. Tracy Cogan: Got it. And are you guys pretty much taking price increases in the U.S. only, or are you taking them globally to offset tariffs? Timothy P. Boyle: Yeah. The primary impact of price increases is in the U.S. Tracy Cogan: Got it. Thank you. Operator: Next question comes from Mauricio Serna with UBS. Please proceed. Mauricio Serna: Our questions. Just a point of clarification. In the CFO presentation, you mentioned something about better conversion of fall 2025 U.S. wholesale orders. It's just, like, explain a little bit more what that means? Jim Swanson: Yeah. Certainly. And that was the driver in terms of the revenue beat. In the quarter. Better conversion essentially consists of a combination of looking at our cancel rates, our reorder rates, and our replenishment metrics. And from an overarching standpoint, we look back over the last several seasons, this has been our best-performing season in several across those overall metrics. I would say there's a couple of different things that are underlying that. One of which is we've touched on we did curtail inventory purchases. And so the demand has exceeded supply in certain cases. So that's had an impact as retailers really needed that inventory. So we've seen better conversion on the order book. And then secondly, I do believe that the Engineered for Whatever campaign the new product collections that we have in the marketplace is sold through exceptionally well. So that's certainly aided our conversion rate as well. Mauricio Serna: Got it. And then just, like, maybe on the U.S. following up, like, you know, it's something you've mentioned that and I'm sorry you've mentioned this, but you expect the U.S. wholesale to return to growth in the second half like I guess, just curious on like, kind of growth would you be expecting in U.S. wholesale in the second half? And just on the DTC side, you know, is like, for the DTC business in the U.S., are you considering any new stores, new store openings for the business? And if that and if so, what's the cadence? Jim Swanson: Yeah, so as it relates to the second half from a wholesale perspective in the U.S., our fall '26 order book is up for the wholesale business. It's up less than the international businesses. So with the overall book being up a mid-single-digit percent, the U.S. is going to touch the low end of mid-single to low single-digit rate of growth. In the second half. And then in terms of looking at our direct-to-consumer business, we have a modest degree of stores planned for opening this year worldwide. In the U.S. our new store openings more or less offset with closures as we continue to rationalize the fleet, make sure we're closing underperforming stores. Those essentially balance out. Mauricio Serna: Great. Thanks so much, and best of luck. Operator: Once again, if you have a question or a comment, please press. The next question comes from Tom Nikic with Needham. Please proceed. Tom Nikic: Hey, everybody. Thanks for taking my question. In terms of just kind of follow-up on U.S. wholesale. I think it was flattish in Q3 and down high teens, in Q4. So I guess that means something like that down high single digits for the season overall. You know, how did sell-through compare to sell-in? And, you know, is it safe to assume that, you know, given the improvement in order both for fall 2026 that, you know, the sell-throughs in fall '25 were better than sell-in. Timothy P. Boyle: Yeah. The sell-through was quite good this year, which indicates which gave us confidence in our order book for fall '26. And remember, the bulk of our fall '26 order book was taken prior to the great weather that we're seeing right now in much of the United States. So we're confident that we've got a good order book for fall '26, one that will we'll be delivering into empty shelves. So we're pretty excited about what the opportunities are. Jim Swanson: And Tom, maybe just add a little bit more color. On that. You directionally you're accurate. When you look at combined second half, the U.S. wholesale business being down. A high single-digit percent despite the sell-in being lower when we look at the overall sell-in as Tim's touching on. I think we were up slightly. So, you know, but in that up slightly, that's up in dollars. So we're encouraged that, you know, despite lower sell-in, sell-through is actually better and the inventory in the marketplace is quite clean. I think spring '26 will be similar to that in terms of the order book and the softness that we saw in that from a wholesale standpoint. We'll look to capitalize on in-season demand and driving sell-through with the collections and the marketing campaigns. Tom Nikic: Alright. Sounds good. And just a quick follow-up. So it sounds like for fall '26, U.S. wholesale order book is up, I guess, a little bit less than mid-single digits. With high single-digit pricing, which would imply that units are down a little bit. Is that just retailers being cautious given some of the uncertainty out there and then how would we think about potential upside if the consumer remains resilient, if inventories are really lean, etcetera. Timothy P. Boyle: Yeah. I think retailers that we deal with are still unsure about what the elasticity rate is going to be on some of these more expensive products. So you're right in the units have gone down slightly as the prices have gone up. But, you know, we'll have to see what happens. And, again, as I said earlier, weather is almost more impactful than almost any other variable. Operator: Okay. We have reached the end of the question and answer session. I will now turn the call over to Tim Boyle for closing remarks. Timothy P. Boyle: Well, thank you for joining us today. We're very excited to see our Accelerate Growth strategy truly come to life. The Engineer for Whatever brand platform is driving strong energy and engagement. With this strategy and platform, combined with great new products, such as the Amaze collection, we are building momentum. We look forward to sharing our continued progress when we report our first-quarter results. Thanks very much for your support. Operator: This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.