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Operator: Good day, everyone. Welcome to the Sol Strategies' Fiscal Year-End 2025 Earnings Conference Call. [Operator Instructions]. On the call with us today is Mr. Michael Hubbard, Chief Executive Officer; Mr. Doug Harris, Chief Financial Officer; Mr. Max Kaplan, Chief Technology Officer; and Mr. John Ragozzino from ICR. At this time, I will turn the conference over to Mr. John Ragozzino with ICR. Please go ahead, sir. John Ragozzino: Good afternoon, and thank you for joining Sol Strategies' Fiscal Fourth Quarter and Full Year 2025 Earnings Conference Call. Before we begin, I want to remind everyone that certain statements on this call contain forward-looking statements subject to risks and uncertainties. Actual results may differ materially from these statements. We refer you to our latest press release, MD&A and SEDAR+ filings for a detailed risk factors and assumptions. All dollar amounts are in Canadian dollars unless otherwise noted. The company assumes no significant events occur outside our normal course of business and that current trends in the digital assets markets continue. However, listeners should note that crypto markets are volatile and our business metrics can fluctuate significantly. With that, let me turn it over to Michael Hubbard, Sol Strategies' Interim CEO. Michael Hubbard: Thanks, John. Good afternoon, everyone. Let me start with what matters. The last calendar quarter of 2025 and was the quarter institutional Solana infrastructure went from theory to reality, and Sol Strategies is winning. I'm not talking about incremental progress. I'm talking about a fundamental market shift that happens maybe once or twice in a technology cycle. The regulated capital that's been sitting on the sidelines for years is now moving on chain. Trading, settlement, property rights, cash movement and so much more, the entire existing financial system is moving on chain. Sol Strategies is at the epicenter of the growing Solana economy. Already today, you can trade real securities on chain via Superstate's platform, a large complement of wrapped and synthetic securities via backed and securitized and an ever-growing cohort of stablecoins' promise to make global payments seamless and instant. There has been a fundamental shift in government policy in the United States that is driving a significant shift by major financial institutions globally as blockchain technology is recognized and accepted more broadly. We are in the engine room of this system. Through the finding of the Laine validator and before joining Sol Strategies, I spent years in the trenches building Solana infrastructure. I've lived through the network outages, economic exploits and multiple bear markets. I know this ecosystem at the code level, not the PowerPoint level. And I can tell you with absolute certainty, this technology and the blockchain are operating at performance levels not previously seen with unprecedented adoption and capabilities. We are at the beginning of a multiyear institutional build-out and Sol Strategies is perfectly positioned to capture a significant share of it. Here's the thesis. One, Solana validators secure the core network while staking is increasingly attractive to institutions seeking competitive yields while maintaining SOL exposure. Through our fleet of enterprise-grade validators, we not only secure the network but are literally processing millions of Solana transactions every day, providing a critical foundation from which we believe we can build and unlock more value going forward. Two, we're one of the very few companies globally with a compliance stack being SOC 2 Type 2, SOC 1 Type 2, ISO 27001, being publicly traded and highly regulated, as well as the technical infrastructure and the institutional relationships and standing to be the gateway for traditional finance to the new global financial system on Solana. Three, Solana is already proving that distributed systems can rival existing centralized systems such as the NASDAQ or centralized cryptocurrency exchanges by offering the best price execution, growing adoption of real-world assets such as tokenized equities or money market funds as well as a vibrant and open builder ecosystem that encourages financial innovation and borderless global finance. Let me show you what that looks like in practice. Institutional adoption isn't coming. It's here. In the past 6 months, we've become the Solana staking provider for the ARK Invest's Digital Asset Revolutions Fund, VanEck Solana ETF, Neptune Digital Assets, Solana Mobile and Netcoins, just to name a few. These aren't pilot programs. These are partnerships deploying real capital with real fiduciary obligations, and they've all picked us for the same reason. We're the operator who meets their performance and compliance requirements, delivering institutional-grade performance and with the technical depth to handle complex custody integrations. But here's what gets me excited. The adoption isn't just coming on the asset management products, but the announcements of major companies like Western Union, JPMorgan and Galaxy building products for financial markets on Solana. Why this matters Again, we are an important part of the fabric of the Solana economy. And each time, more products and transactions occur on Solana, we benefit. Here's the math on the capital-efficient model. While everyone has been talking about DATs, which are just various financial engineering plays on holding SOL, it's our operating model plus the holding of a Solana treasury that sets us apart from the competition. Let me explain why our operational business model creates more value per dollar than any pure DAT. Traditional digital asset treasury companies, and there are now almost 300 of them, have 1 playbook, raise capital, buy tokens, hold hope for price appreciation. When the token goes up 50%, they are heroes. When it goes down 50%, they're underwater. There's no operational leverage with recurring revenue within the crypto or Solana ecosystem and no compounding beyond the price. We built something different. Our operational model combines 2 value drivers that compound on each other. Stream 1, owned validator revenue, staking yield on our own SOL treasury through our validators currently generating over 6% APY with no fee drag to third-party staking providers or custodians, plus all the transaction fees that validators earn that aren't usually paid to stakers since we operate our own validators. Stream 2, delegated third-party stake revenue, commission fees from over 27,000 third-party institutions and users who delegate to our validators as well as the transaction revenue generated, thanks to that stake. Here's how the unit economics work. Every $1 million we deploy into SOL generates staking yield at current rates. That's recurring. That's predictable, and that's entirely independent of token price. Every institution or individual that delegates to our validators generates commission revenues as a percent of their staked amount. We now have over USD 450 million in third-party assets under delegation. That's annual recurring revenue from assets we don't own and didn't have to capitalize or raise debt or equity to obtain. This is the flywheel. We raise capital at favorable terms. We deploy it into stakeable SOL. We generate yield from our treasury. We win institutional mandates. We earn commissions on delegated assets. We reinvest the cash flow into more SOL and validator infrastructure. Our improved performance attracts more delegation and our flywheel accelerates. And unlike pure treasury models, we generate meaningful cash flow even in sideways markets. Our validator business did $5.4 million in revenue in fiscal 2025. That's not price appreciation, that's operational income from running infrastructure. That revenue stream is only a year old, and we are just getting started. Looking forward to the next 12 months, this is our plan to extend the lead. Let me be very clear about our strategy for 2026. We're not hoping the market grows into us. We're going to aggressively capture market share while the window is open. Priority 1, validator scale and performance. We operate 6 institutional-grade validators today, 4 of which are proprietary and 2 white label validators operated on behalf of customers. We continue to grow the total assets under delegation to these validators. We capture retail staking flows through our competitive yields and industry-leading uptime. For example, our Laine validator has now had 22 months of uninterrupted uptime. Not even a single minute since February 2024, where it didn't operate to secure the Solana network. We capture institutional stacking flows through our compliance platform, standing as a well-known and trusted public company with competitive yields, institutional-grade compliance certifications and unparalleled uptime reliability. We're also investing heavily in validator performance optimization, MEV capture and automated failover systems as well as latency reduction. We have published several open-source software tools to support the Solana ecosystem and other validators to achieve similarly high levels of redundancy as we have through our internal automated failover detection and mitigation systems as a more resilient and performing network overall is critical to continued institutional confidence and adoption. We are also actively working on new staking products that will provide better utility and optionality to staking users across the Solana universe, enhancing our positioning as a premier staking provider and generating additional revenue. Why does all this matter? Validators produce blocks on the Solana blockchain. A block is a batch of transactions. There's a finite number of blocks per day. And the more stake you have, the more blocks you get to produce. Blocks have a finite capacity for transactions. Blockspace is a limited commodity in a blockchain. Solana has the most abundant blockspace of all blockchains, which is why it is a given that it will become the base layer for new globally distributed financial system. But our clear focus is on capturing as much of that commodity as possible as the future value of blockspace is only going to go up. Now moving on to priority 2. Institutional partnership pipeline. We're actively engaged with ETF issuers, asset managers and institutional allocators across the world. Our goal is to secure new institutional mandates in fiscal 2026, each representing a significant potential increase in delegation. Our pipeline continues to grow, and we're also expanding custody integrations. We validated partnerships with BitGo, Crypto.com and Tetra Trust. In 2026, we're targeting integrations with additional global custodians to enable seamless staking for their client base. Priority 3, strategic ecosystem investments. Beyond running validators, we're planning on making strategic investments in high-growth Solana ecosystem companies and protocols. These investments serve dual purposes, financial returns, and strategic positioning that drives delegation back to our validators. We look for opportunities where our validator and ecosystem expertise gives us investment edge and where portfolio companies can become long-term delegators, customers or beneficiaries. We're also leveraging strategic partnerships like Solana Mobile to integrate our validators into high-growth distribution channels. These aren't separate from delegated stake. They are smart ways to drive lower acquisition cost delegation at scale. Priority 4, treasury growth with capital discipline. We ended Q4 with over 435,000 SOL on our balance sheet, up over 430% from 2024. Our target is to efficiently grow the treasury through fiscal 2026 with a combination of strategic capital raises, cash flow reinvestment and opportunistic block token acquisitions. We will only raise capital when terms are accretive to shareholders. That means favorable pricing, strategic investor alignment and deployment into high-conviction opportunities like discounted block SOL or strategic M&A or tactical debt reduction. Every dollar we raise goes to work immediately generating yield. So what does winning look like? Let's look at the 3-year vision. Let me paint the picture of what success looks like for Sol Strategies. Its fiscal year 2028, an institutional asset manager decides to allocate to Solana staking. They don't run an RFP, they don't evaluate 20 providers. They call Sol Strategies first. In that scenario, we are generating millions in annual recurring revenue from validator operations. We have built proprietary technology that makes institutional staking operationally simple. We have established Sol Strategies as the definitive brand for institutional Solana infrastructure. But that's just the validation business. The bigger vision, we are the infrastructure partner of choice for any serious institution pursuing the inevitable adoption of Solana to tap into the new global financial system. We power tokenized securities on Solana and capital markets infrastructure that's being built on chain for processing tens of millions of transactions a day and maximizing our revenue. When traditional finance wants exposure to Solana's DeFi ecosystem, they come to us first because we have the compliance, the expertise and the track record. That's not a hope. That's not a stretch goal. That's the logical outcome as we execute on everything I've outlined today. The window is open, but it won't stay open forever, and we will take advantage of it. Before I turn it over to Max, Andrew and Doug, I want to say something about the team we've built. This isn't a group of crypto tourists who showed up in 2024 because tokens were pumping. Max Kaplan, our CTO, was at Kraken in 2017 as one of the first engineers, scaling infrastructure to handle institutional volume. He founded Orangefin Ventures, which consistently ranks top 3 network-wide for validator performance. He knows Solana infrastructure at a depth that maybe 50 people in the world understand. Andrew McDonald, our COO, scaled Bitaccess from a start-up to a company doing international expansion across regulated markets. He's navigated Canadian securities regulation, built institutional partnerships and knows how to execute complex operations under compliance constraints. He is responsible for much of the immense work to bring us to the NASDAQ and for closing most of our large M&A and financing deals. Doug Harris, our CFO, has done over $2 billion in M&A transactions. He's a CPA, CBV, has an MBA from Rotman. He's taken companies public, navigated complex financing and has a wealth of capital market experience. The strategic initiatives I've outlined today, the M&A pipeline, the institutional partnerships, the white label expansion, the treasury growth, all of that is actively happening right now with full Board alignment and organizational execution. We're not in a holding pattern, we're executing at full speed. This team has the technical depth, the operational experience and the institutional credibility to win, and we're hungry. Now let me turn it over to Doug to talk about our financials. Douglas Harris: Thanks, Michael. 2025 was a transformational year for the company. When we decided to transition the company from a Bitcoin holding company to a Solana company in late fiscal 2024, we had 2 main goals, to build a Solana treasury in a capital-efficient manner and create a Solana operating business. In year 1 of the plan, we've accomplished both goals. At September 30, 2025, we had over $126 million in our Solana treasury, up from $21 million the prior year. This conversion to a Solana treasury allowed us to build revenue and yield from our treasury cryptocurrency. We raised equity capital to grow our treasury in a capital-efficient manner, utilizing short- and longer-term debt facilities as early as January 2025 and equity raises as recently as last October through our LIFE transaction, which closed 1 day after year-end. When we complete a financing, our goal is to acquire Solana in a timely manner. We have a long-term directional view that Solana will increase. However, as we've seen, there is extreme volatility with any crypto asset. Where we set ourselves apart from other companies is that when we purchase Solana, we then delegate it as soon as possible to the company's validators. This increases the yield we earn beyond merely staking Solana and thus sets our flywheel in motion of increasing our treasury Solana without any additional debt or equity financings. During the year ended September 30, 2025, the company earned over 23,000 Solana-validated rewards from both wholly owned and third-party SOL delegated to our validators. This represents an average yield of 1.05% on the average total SOL delegated to our validators during the year, approximately 2.2 million SOL. We also earned approximately 19,000 SOL from staking rewards generated from staking our treasury SOL, representing a staking yield of 7.6%. Bear in mind that we acquired the validators at various times during the fiscal year and only the last fiscal quarter of the year included ownership of all the validators. Based on our 7.6% staking yield, the SOL earned from our validator operations during fiscal 2025 was the equivalent of the company holding an additional approximately 310,000 SOL in its treasury throughout the year. The revenue from validation staking rewards exceeded $10 million for the fiscal year compared to less than $300,000 from the prior year. In addition, the company earned approximately $4 million on sales of crypto during the year compared to approximately $7.5 million for the prior fiscal year, which represented the sales of the Bitcoin portfolio. Overall, first year of our revenue model proves that the decision to convert to a Solana ecosystem-focused strategy was the right call, and it is just the beginning of the overall transformation of the company. Comprehensive loss for fiscal 2025 was approximately $20.2 million compared to $9.3 million in income for fiscal 2024. The 2025 fiscal numbers include significant onetime and noncash items, including $27.5 million of impairment charges on intangible assets, $10.2 million of amortization on intangible assets and $7.9 million of stock-based compensation. This totals approximately $45.6 million of noncash charges, which, if removed, would convert comprehensive loss to a gain of $23.4 million. Additionally, the fiscal 2025 numbers include onetime charges of $3.9 million in professional fees, mainly due to increased legal and accounting costs related to the NASDAQ listing. The write-down of intangible assets is related to the company's validators. A third-party valuation was completed in compliance with IFRS standards and reflected a reduction in value primarily due to a significant amount of delegated assets being unstaked late in the fourth fiscal quarter. While this impacted the valuation of our validator intangibles subsequent to year-end, it has been partially offset by growth in SOL delegated to the Solana Mobile validator and the addition of the VanEck Solana ETF. In closing, I'm very proud of what the team has accomplished in fiscal 2025. The company has established itself as an important participant in the Solana economy and is well positioned for continued growth and success in 2026 and beyond. With that, I turn it over to Max Kaplan, our CTO. Max Kaplan: Thank you, Doug. 2025 marked the first full year I was with the company, and we were able to accomplish so much. On top of our treasury strategy, we grew our delegated stake to 3.3 million SOL by the end of 2025, making us one of the largest staking providers on all of Solana. While my colleagues before me spoke about tremendous milestones we hit this year and this quarter, I want to talk a bit further about all the work we did to get where we are today and what makes us respected within the Solana ecosystem. Our staking platform is backed by world-class automation and yield optimization. It's one of the main reasons why so many of our institutional customers decide to stake with us. Institutions need best-in-class yield availability and security. We offer this further backed by our institutional certifications. However, this is really just the start. This past quarter, we also revamped our entire reporting pipeline to serve institutional clients like VanEck. Many of you listening on the call today have a long background in financial services with some familiarity with crypto. As many of you know, crypto is a highly technical field. terminology like MEV, inflation rewards, block rewards and epoch is not something a manager of a traditional fund knows about. Additionally, one of blockchain's biggest appeals is how fast funds settle. Coupling crypto's highly technical nature with how fast funds settle, you might be able to imagine how difficult it might be to build out reporting for something like VanEck Solana ETF. This is one of the main developments we made this cycle within the engineering department. We added capabilities to our reporting stack to manage all of VanEck's reporting for them. On top of our high yield and enterprise-grade security, this is another reason why we are able to land such a big deal for the company. Our reporting platform now has the capabilities to map all of the Solana Blockchain rewards into a format that entities like State Street expect. These capabilities will allow us to target more regulated entities in the future, and we plan on building further on to our reporting platform in the months to come. This work is far from the most fun thing to build, but it solves real problems for major institutions, which we will always continue to do to make our product as best as possible for all of our customers. Additionally, we open-sourced several new tools this quarter to the wider validator audience across Solana. As a company that holds a large amount of SOL, we benefit from the Blockchain being as fast and reliable as possible. We open-sourced several new tools to allow validators to perform failovers faster. Solana is continuing to improve at a rapid pace. Many exciting improvements like Alpenglow are coming to Solana, which has one of the largest validator operators we are at the forefront of. This next quarter, we will continue to improve our staking platform and roll out new products that we expect to benefit our business. With that, I'll hand it over to Andrew McDonald, our COO. Andrew McDonald: Thank you, Max. My tenure at Sol Strategies began with the goal of leveraging my extensive background in the crypto ecosystem for the benefit of the company. Being promoted to Chief Operating Officer since joining has allowed me to directly drive forward key initiatives, including the successful NASDAQ cross-listing and the final receipt of our shelf prospectus. Following the successful closure of our LIFE offering, we finalized regulatory filings and readied ourselves. The ATM program is vital to providing necessary financial flexibility and capital access to support both our current projects and our future growth opportunities. Recently, I, along with several executive team members attended Breakpoint in Abu Dhabi, the year's most significant Solana conference. What truly inspires me about the future of Sol Strategies is the palpable evolution of the entire Solana economy and the tangible transition of traditional finance markets moving on chain. It is clear that the future of international finance will operate on chain, and we firmly believe Solana is poised to be the primary beneficiary of this. Sol Strategies is uniquely positioned to capitalize on this generational leap. Moving forward, I am committed to leading the company's growth. This will involve expanding our product offerings through both organic strategy and M&A, increasing our pipeline of new business and ensuring our existing operations are as lean and as efficient as possible. 2026 is shaping up to be an exceptionally exciting year, and we are well prepared to succeed. Michael Hubbard: Thanks, Max, Andrew and Doug. Before I wrap up, here's what I need you to understand. Sol Strategies is not a bet on Solana's price. It's a bet on institutional infrastructure adoption. It's a bet on a global unified financial system operating at the speed of light on the most capable and promising Blockchain for that purpose. And that reality is far more durable than any single tokens price movement. We filed our ATM with this in mind. It is a tool that is available to us and which we will draw upon when it is accretive to shareholders, not one we will be blindly firing away on. We are well positioned to take advantage of when the growth continues to accelerate. We will continue to position ourselves as a leader in the Solana economy, and everything we do is looking forward to that growth. We're going to be aggressive on strategic M&A. We're going to be disciplined on capital allocation. And we're going to move faster than anyone trying to catch us. We're going to be relentless on execution. Lastly, stay tuned for our next announcement of a brand-new product that we're announcing very soon that will further enhance our revenue platform. To our shareholders, thank you for backing us during this build-out phase. The institutional adoption we've been talking about for 18 months this year, now we execute. To our partners, thank you for trusting us with your capital and your reputation. We don't take that lightly. To our team, let's finish what we started. We didn't build this company to be second place. Operator, let's open it up for questions. Operator: [Operator Instructions] We'll go first this afternoon to Brett Knoblauch of Cantor Fitzgerald. Brett Knoblauch: I think you talked about how Solana is kind of seeing like the institutional momentum is here today, and you talked about your pipeline being maybe much bigger than what it's been in the past. Could you maybe just elaborate on that, kind of the north of $5 million of validator revenue this year? Where are you expecting that to go? How much opportunity do you see in the pipeline? How are those deals compared to the deals that you have signed with institutional clients today? And is this something where maybe the pipeline or activity or demand has increased recently? Has it been steadily growing? How should we think about that? Michael Hubbard: Yes. Thanks, Brett. That's a great question. Definitely, we've been seeing a very steady increase in institutional demand over the last 6 to 9 months, I would say, particularly. I think just today, we saw the Morgan Stanley Solana ETF announcement, which is great news. More and more big institutions coming into the space. As far as the pipeline goes, the way we're seeing it is that -- so we have a couple of different sort of products in the staking space. ETFs are one of our targets as we've seen with the VanEck ETF. And we're seeing some growth in the demand there and we're going to continue to target those. But we're also seeing that institutions and -- institutions is kind of a broad term, right? So institutions being kind of the traditional banks. But also more and more of kind of the financial midsized companies in the space are getting more interested in what Solana has to offer beyond just staking and just kind of the kind of vanilla options, right? So we're seeing opportunity there in how we can become an intermediary and offer services to all of these players and become their gateway to the entire Solana ecosystem and DeFi space. So what I'm trying to say here is that the pipeline has been growing consistently, and we're getting inquiries and we're talking to people and having conversations that are evolving beyond kind of just the simple plain staking type relationships. And as we have more to announce there and specific offers -- sorry, specific partnerships, we'll obviously be making those announcements. Operator: [Operator Instructions] We go next now to John Roy of Water Tower Research. John Marc Roy: So I know you mentioned a number of strategic initiatives. I wonder if you could maybe give us a little more maybe color on milestones we might see going forward? Obviously, the institutional growth is going to create announcements, but you can't obviously preannounce those. Just wondering if there's any specific milestones do you see coming that we could track? Michael Hubbard: Absolutely. Thanks, John. So right now, our primary products that we're offering is staking services, right? So we've got clients like VanEck or just anyone on the blockchain who can come and stake with any of our validators, completely permission us. Right now, we have over 27,000 people and/or companies that are staking with us across our validators that we're operating. We also offer white label validator services. So we operate validators for groups such as Solana Mobile. So if you buy a Solana mobile phone, the default validator on that phone and there's over 150,000 devices ordered, will be a validator operated by us. Now we're looking at expanding into new products in the staking space. And we will have an announcement relating to that later this month. So that will be coming up very soon. I can't say too much more right now, but keep your eyes out for that. And then we are looking at other opportunities in the broader infrastructure space as well, not directly related to staking but other infrastructure services that may be interesting to institutions and entities that want to become more active and operate in the Solana blockchain and ways that we can help them access that ecosystem. John Marc Roy: Excellent. That's very helpful. One follow-up. I know you may not have had a chance to react to this. I don't know how much you've seen from the MSCI announcement that DATs would not be excluded. I didn't know if you had any color. I know you had a response when they initially came out with their thoughts. It seems that they may have changed their thinking. Michael Hubbard: Yes, I haven't actually seen that yet. Look, generally speaking, I don't have too much of a reaction. We're not a DAT. We don't consider ourselves one. So we never really thought that this was going to be that relevant to us in particular. I think it's an interesting situation for other DATs, and it sounds like it may be a bit of a lifeline. But broadly speaking, I think the market as a whole has been very interesting in the last 6 to 9 months. We have seen a lot of DATs launch and we're going to see a lot of competition, I think, between ETF and DATs going forward. And we're very happy to be where we are, which is focus on the infrastructure and focus on building a revenue-generating business as opposed to being a pure treasury play. John Marc Roy: Yes, that makes a lot more sense from a business model. Thanks so much. Operator: [Operator Instructions] And gentlemen, it appears we have no further questions coming in this afternoon. Mr. Hubbard, I'd like to turn things back to you for any closing comments. Michael Hubbard: Awesome. Thank you so much. Thank you, everyone, for dialing in. We really appreciate your time and attention. It's been a great year behind us, a great deal of transformation and we're very excited for the year ahead. We think the Solana economy is going to be growing really, really massively. And thanks again for dialing in and keep an eye out for future announcements. Operator: Thank you very much, Mr. Hubbard. Again, ladies and gentlemen, that will conclude the Sol Strategies' Fiscal Year-End 2025 Earnings Conference Call. Again, thanks so much for joining us, everyone, and we wish you all a great day. Goodbye.
Operator: Good morning. Welcome to the AngioDynamics Fiscal Year 2026 Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. The news release detailing AngioDynamics' fiscal 2026 second quarter results crossed the wire earlier this morning and is available on the company's website. This conference call is also being broadcast live over the Internet at the Investors section of the company's website at www.angiodynamics.com. A webcast replay of the call will be available at the same site approximately 1 hour after the end of today's call. Before we begin, I'd like to caution listeners that during the course of this conference call, the company will make projections or forward-looking statements regarding future events, including statements about expected revenue, adjusted earnings and gross margins for fiscal year 2026 as well as trends that may continue. Management encourages you to review the company's past and future filings with the SEC, including, without limitation, the company's Forms 10-Q and 10-K, which identify specific factors that may cause the actual results or events to differ materially from those described in the forward-looking statements. The company will also discuss certain non-GAAP and pro forma financial measures during this call. Management uses these measures to establish operational goals and review operational performance and believes that these measures may assist investors in analyzing the underlying trends in the company's business over time. Investors should consider these non-GAAP and pro forma measures in addition to, not as a substitute for or as superior to financial reporting measures prepared in accordance with GAAP. A slide package offering insight into the company's financial results is also available in the Investors section of the company's website under Events and Presentations. This presentation should be read in conjunction with the press release discussing the company's operating results and financial performance during this morning's conference call. Unless otherwise noted, all metrics and growth rates mentioned during today's call are on a pro forma basis, which exclude the results of the Dialysis and BioSentry businesses that were divested in June 2023, the PICC and Midline products that were divested in February 2024 and the Radiofrequency and Syntrax support catheter products that we discontinued in February 2024. Also, unless otherwise noted, all comparisons will be the second fiscal quarter of 2026 versus the second fiscal quarter of 2025. Now I'd like to turn the call over to Jim Clemmer, AndioDynamics' President and Chief Executive Officer. Mr. Clemmer? James Clemmer: Thank you, operator. Good morning, everyone, and thank you for joining us for AngioDynamics' Fiscal 2026 Second Quarter Earnings Call. Joining me today is Steve Trowbridge, AngioDynamics' Executive Vice President and Chief Financial Officer. We delivered strong results in the second quarter. Revenue grew 8.8% with Med Tech up 13%, and we translated that top line performance into improved profitability. Adjusted EBITDA nearly doubled year-over-year, and we generated positive cash flow. These results prove that we can drive both revenue growth and profitability simultaneously. Based on our strong performance, we are raising our full year guidance for both revenue and adjusted EBITDA, which Steve will detail later in the call. What's particularly encouraging is the breadth of our execution across our portfolio. Auryon delivered another quarter of double-digit year-over-year growth. Our Mechanical Thrombectomy platforms continue to gain traction, both commercially and from a regulatory product development standpoint. NanoKnife is well positioned to capitalize on the prostate opportunity with the CPT code becoming effective a few days ago, and our Med Device business delivered solid results. Now let me walk you through each of our businesses. Auryon continues to perform exceptionally well. We delivered our 18th consecutive quarter of double-digit growth, and we continue to take share in the atherectomy market. Our strategy to increase penetration in hospitals is working, driving both higher volumes and better economics. International is starting to contribute following our CE Mark approval. We're also making progress on expanding the addressable market. The AMBITION BTK study is enrolling well, and we're advancing our work towards coronary applications. These initiatives will take time, but they represent opportunities to broaden where Auryon can compete. Moving to mechanical thrombectomy. We are pleased with the continued trajectory of our mechanical thrombectomy platform and we are thrilled with the 3 regulatory milestones that we announced today in this portfolio. Our combined mechanical thrombectomy portfolio grew 3.9% over the prior year, driven by continued growth in AlphaVac. In addition, we are pleased with the continued performance of AngioVac. AlphaVac maintained its momentum, delivering sequential quarterly growth and strong year-over-year growth this quarter. We continue to win new accounts, move through the hospital value analysis committees and see strong physician feedback on the unique design advantages of our platform. AngioVac was down year-over-year this quarter, impacted by a tough comparison against a particularly strong second quarter in 2025. We will continue to be excited about the trajectory of the business, and we remain confident in the long-term opportunity ahead. From a regulatory standpoint, we made significant progress this quarter with 3 important milestones for our mechanical thrombectomy portfolio, that strengthen our competitive position and expand our clinical applications. First, we received IDE approval for our APEX-Return study, a pivotal trial evaluating the AlphaReturn Blood Management System when used with AlphaVac for treating acute pulmonary embolism. AlphaReturn addresses a hurdle to initial adoption that a number of prospective new customers have raised, which is the ability to collect, filter and reinfuse aspirated blood during thrombectomy procedures. We believe that this additional offering will be a catalyst to accelerating the already impressive growth profile of AlphaVac. Second, we received IDE approval for our PAVE study, a pilot trial evaluating AngioVac for the percutaneous removal of right heart vegetation in patients with right-sided infective endocarditis. This addresses an underserved patient population with limited treatment options, particularly when surgical risk is high. Third, we received 510(k) clearance for a modified AlphaVac F18 85 system with expanded indications. The clearance expands the cannula indication to allow aspiration and injection of contrast media and other fluids and includes the sheath as an alternative introducer that minimizes blood loss. These enhancements give physicians greater flexibility in how they use the device across a broader range of cases. Together, these regulatory wins demonstrate the versatility and innovation of our mechanical thrombectomy platform. They represent meaningful opportunities to expand clinical applications, address unmet patient needs and strengthen our competitive position in the thrombectomy market by delivering improved treatment options that physicians are seeking to improve patient outcomes. NanoKnife delivered strong growth this quarter, driven by prostate procedures. The CPT code went live on January 1, which should provide a tailwind for adoption. We've been consistent in our messaging that this adoption will build over time rather than be an immediate step change, and that's what we're seeing. Physician interest is high. Procedure volumes are growing and we are executing on our commercial and awareness building initiatives. We believe we're well positioned as this market continues to develop. Finally, in October, we were excited that the NanoKnife system was named to TIME's 2025 Best Innovations list, which we believe will accelerate patient awareness in this growing market. Med Device grew over 5% this quarter, ahead of our expectations. The team running this business executes consistently, and it provides profitable cash flow that supports our Med Tech investments. Looking at the quarter overall, we're executing on multiple fronts. We grew revenue, expanded margins, we advanced important clinical programs, and we generated cash. Our first half performance gives us confidence in our ability to operate efficiently while investing in the initiatives that position us for sustained growth. That balance between delivering today and investing for tomorrow is what will drive long-term value creation. Now let me turn the call to Steve for the financial details. Stephen Trowbridge: Thanks, Jim, and good morning, everybody. As always, before I begin, I'd like to direct everyone to the presentation on our Investor Relations website summarizing the key items from our quarterly results. Unless otherwise noted, all metrics and growth rates mentioned during today's call are on a pro forma basis, which excludes the results of the Dialysis and BioSentry businesses that we divested in June 2023, the PICC and Midline products that we divested in February 2024 and the Radiofrequency and Syntrax support catheter products that we discontinued also in February 2024. Additionally, unless otherwise noted, all comparisons will be the second fiscal quarter of 2026 versus the second fiscal quarter of 2025. Top line revenue performance was strong again in the quarter. Revenue increased 8.8% to $79.4 million, driven by growth across both our Med Tech and Med Device segments. Med Tech revenue was $35.7 million, a 13% increase. We're very pleased with the performance of our Med Tech segment. Now the comp for our second quarter was much more difficult than the comp for our first quarter. And year-to-date, Med Tech is up 19.1%. In the quarter, our Med Device revenue was $43.8 million, an increase of 5.6%. For the second fiscal quarter, our Med Tech platforms comprised 45% of our total revenue, compared to 43% of total revenue a year ago, further illustrating the sustained execution of our strategy to increase the percentage of our overall revenue base coming from our higher growth, higher-margin Med Tech segment. Digging into our Med Tech segment, our Auryon platform contributed $16.3 million in revenue, growing 18.6% compared to last year. Auryon has now delivered double-digit year-over-year growth for 18 consecutive quarters. As Jim mentioned, this growth is supported by our strategy to increase the percentage of our atherectomy business in the hospital side of care. In addition to this mix shift, we continue to grow our customer base in both the hospital and OBL settings and are benefiting from continued adoption internationally following CE Mark approval in September of last year. Mechanical thrombectomy revenue, which includes AngioVac and AlphaVac sales, increased 3.9% year-over-year with revenue of $11 million. In the quarter, AngioVac revenue was $7.5 million, a 7.5% year-over-year decrease and AlphaVac revenue was $3.5 million, a 40.2% year-over-year increase. While AngioVac revenue was down year-over-year, we are pleased with the continued strength in this business, which delivered year-to-date growth of 11.2%. Q2 of last year exhibited the initial step-up in AngioVac revenue and therefore, provided for a tough comp. We remain bullish on AngioVac going forward and are particularly encouraged by the sustained procedure volumes for this product. The approval of our IDE to study the use of AngioVac to treat right-sided infective endocarditis will be an enabler of sustained growth for AngioVac in the future. AlphaVac continued its sequential quarter-over-quarter growth. And as Jim mentioned, the approval of our IDE for our blood return product will be an additional catalyst to accelerate momentum in AlphaVac. Combined mechanical thrombectomy portfolio continues to demonstrate strong momentum with our sales teams effectively positioning both AngioVac and AlphaVac based on clinical need and physician preference. Total NanoKnife revenue was $7.3 million, an increase of 22.2% with probe growth of 14.4%. Probe growth continues to be driven by increasing growth in demand and utilization of NanoKnife to treat prostate cancer patients, and Q2 was a record quarter for us for prostate procedure cases. NanoKnife capital sales, were bolstered by a transaction in France in which we moved from a direct sales model to a distribution model. As part of this transaction, the new distribution partner purchased NanoKnife systems that were previously placed at customer sites and were included on our balance sheet. In addition to NanoKnife sales, this transaction also included Auryon, Microwave and EVLT capital sales. NanoKnife capital sales in the transaction were approximately $1 million and Auryon, Microwave and EVLT capital sales were approximately $250,000 each. Now this represents a smart transaction that will enable growth in a strategic international market. I applaud the efforts of our international team and specifically Laura Piccinini, our GM of Global Cardiovascular International for executing on this deal. In the second quarter, our Med Device segment increased 5.6% year-over-year. Year-to-date, our Med Device segment is up 4%. We are very pleased with the performance of this segment. And while we do not expect our Med Device segment to grow at this level for the full year, as I will discuss in more detail in a moment, we are raising our expectations for Med Device for the full year, up from our previous guidance. Now moving down the income statement. Our gross margin for the second quarter of FY '26 was 56.4%, a 170 basis point increase from the second quarter of fiscal year 2025. The year-over-year improvement was driven by continued product mix shift towards Med Tech sales, accelerated benefits from our manufacturing transfer initiatives and the sales channel transaction in France. With respect to our manufacturing transfer initiative, our operations team has done a fantastic job executing on our manufacturing optimization strategy, and we have been able to accelerate a meaningful portion of the cost savings ahead of schedule. Touching briefly on tariffs, the expense in Q2 was in line with our expectations. And as we discussed last quarter, we continue to expect to incur between $4 million and $6 million of tariff expenses for the full fiscal year 2026. Total operating expenses in the quarter were $50.9 million, down to 64.1% of sales, compared to $51 million or 69.9% of sales last year as we continue to drive operating leverage in the business. Turning to R&D. Our research and development expense was $7.8 million or 9.8% of sales, compared to $6.4 million or 8.8% of sales a year ago. As previously mentioned, we remain committed to investing in R&D initiatives to support the long-term growth of our Med Tech segment and are targeting approximately 10% of sales going forward. Clinical initiatives that we previously mentioned, including the IDEs for blood return and infective endocarditis treated with AngioVac are included in our projections for the balance of the year. SG&A expense for the second quarter of FY '26 was $36.9 million, representing 46.4% of sales compared to $36 million or 49.3% of sales a year ago. Our adjusted net loss for the second quarter of FY '26 was $0.1 million or an adjusted loss per share of $0.10 compared to an adjusted net loss of $1.7 million or an adjusted loss per share of $0.04 in the second quarter of last year. This year-over-year improvement is largely attributable to our Med Tech revenue growth and the success of our gross margin initiatives and operating efficiencies. Adjusted EBITDA in the second quarter of FY '26 was $5.9 million compared to an adjusted EBITDA of $3.1 million in the second quarter of 2025. The France distribution transaction I discussed earlier contributed approximately $1.4 million of adjusted EBITDA in the quarter. We are very pleased with the adjusted EBITDA generation in the quarter, both including and excluding the France transaction. At November 30, 2025, we had $41.6 million in cash and cash equivalents compared to $38.8 million in cash and cash equivalents at August 31, 2025. In the second quarter of fiscal '26, the company generated $4.7 million of cash ahead of the company's expectations. We continue to expect to be cash flow positive for the full fiscal year 2026. Following the strong cash generation in the second fiscal quarter, we expect to utilize between $3 million and $5 million of cash in the third quarter and then generate substantial cash in the fourth fiscal quarter and in line with historical trends. Turning now to guidance. Based on our strong second quarter performance and our expectations for the balance of the year, we are raising components of our full year fiscal 2026 guidance. We now expect net sales to be in the range of $312 million to $314 million raised from our previously issued range of $308 million to $313 million. This increased range represents growth of between 6.6% and 7.3% over fiscal 2025 revenue of $292.7 million. On a segment basis, we continue to expect Med Tech net sales to grow 14% to 16%, and we now expect Med Device sales to grow 0% to 1%, an increase from our prior guidance of flat growth. For fiscal '26, we continue to expect gross margin to be in the range of 53.5% to 55.5%. This is inclusive of our reiterated estimate of $4 million to $6 million of tariff impact for the full year. As I mentioned, we've accelerated some of our gross margin improvement initiatives during the first half of this fiscal year, so we don't expect to see a significant step-up in gross margin during the balance of the year. We now expect adjusted EBITDA to be in the range of $8 million to $10 million, up from prior guidance of $6 million to $10 million, again, inclusive of our estimated tariff impact. We continue to be pleased about our ability to generate increasing adjusted EBITDA while accelerating investments into initiatives to support the long-term growth of our business, which speaks to the effectiveness of our overall strategy. As a reminder, adjusted EBITDA will be lower in the second half of the year than it was in the first half as our planned investments in clinical data development hit the P&L. And finally, we continue to expect adjusted loss per share in the range of negative $0.33 to negative $0.23, unchanged from our prior guidance. We're pleased with our second quarter performance and the momentum we're building across the business. Our raised guidance reflects confidence in our ability to deliver sustained profitable growth. Before ending, I want to briefly mention that following the quarter, we received notice that the U.S. Court of Appeals for the Fed Circuit affirmed the District Court's judgment in our previously settled port patent litigation with C.R. Bard invalidating Bard's patents. This decision concludes C.R. Bard's appeal and eliminates the potential that Angio would make a $3 million payment under the settlement agreement. This brings to a close litigation that we've successfully defended for more than a decade. Now with that, I'll turn the call back to Jim. James Clemmer: Before we open the line for questions, I want to share an update on the leadership transition we announced earlier today. After a decade with the company, I have announced my intention to retire. I have spent over 30 years in the industry and have made the decision, along with my family to move on to the next chapter of my life. The last 10 years at AngioDynamics have been tremendously rewarding as we have transformed the company into a leading innovator of novel solutions that directly address the world's 2 leading causes of death. Within our Med Tech segment, we now have products addressing over a $10 billion global addressable market, and we have set ourselves up to be a physician partner and focus on expanding the applicability of these platforms to help more health care providers and their patients. With all of the work we have done, particularly over the last few years, the organization has earned enormous trust through the efficacy of our life-changing platforms, and we are in a fantastic position to execute on our strategy and continue the momentum we have built. I worked with the Board with regard to the timing of my retirement and the Board has established a search committee and is conducting a comprehensive process, assisted by a leading executive search firm to identify our next CEO, which we expect to occur during fiscal 2027. Until my successor is appointed, I will continue to oversee the company's strategic and financial initiatives and will continue with the company to ensure a seamless transition. I will have plenty of time to reflect before my transition occurs, but I wanted to take this opportunity to thank each and every one of our employees, our partners and the talented health care providers that I have had the good fortune to work alongside during these last 10 years as we have collectively worked to help health care providers deliver the best care to patients with unmet needs. With that, we can open the line for questions. Operator: [Operator Instructions] Our first question is from the line of Frank Takkinen with Lake Street Capital. Frank Takkinen: Jim, congratulations on the retirement. Wishing you all the best in that new chapter. I was hoping to start with a question around gross margin. It feels like that really outperformed nicely in the quarter, and obviously saw the guidance stay unchanged. And I think I heard a comment around staying relatively stable, which would imply gross margin actually doing a little bit better than where the consensus is at right now for the year? Any comments around kind of gross margin expectations and why we shouldn't see that kind of mid-50% gross margin stay throughout the end of the year and into the following years? Stephen Trowbridge: Frank, this is Steve. I'll take the gross margin question. So you're right. We were very pleased with the performance that we've seen on gross margin, particularly in the first half. And as we mentioned, there's a couple of dynamics that are driving that. We're seeing positive price in both our Med Tech and our Med Device businesses. And we're seeing a benefit of the production related to us getting ready to do is the move of some of those materials down to Costa Rica. So increased price along with the mix shift to Med Tech and then some of those production volumes are what we're seeing as a nice positive for gross margin in the first half. In the back half of the year, the price that we took is still going to continue to stay there. That mix shift will continue, but we're going to have a little bit of a structural underabsorption as we move some of those final products out of Queensbury and having them being produced by our third-party manufacturing partner down in Costa Rica. As we talked about this plan originally, we knew that there was going to be some of that structural underabsorption. And we had mentioned that, that would be somewhat offset by taking costs out, and that has been the overall plan as we take some costs out of indirect labor. The good thing that our team has done is we've accelerated some of those costs coming out of the plant. So you're seeing that in the first half of the year. So really, the dynamic going into the second half is some of those products now finalizing their move according with our plans, you'll see some of that structural underabsorption. You won't have the offsetting cost cuts, but that's because those costs have already come out. So that's really the dynamic and the difference between the first and the second half. Frank Takkinen: Got it. Okay. That's helpful. And then maybe just for my second one, I was hoping to talk a little bit more about mechanical thrombectomy. I heard the comments around AngioVac had a more challenging year-over-year comp, but I was curious if there's anything else going on in that business. We were hoping it would be a little bit stronger growth, but I understand it was off a pretty tough comp. And then maybe as a second part to that, if you could talk about kind of ApexReturn and some of the other work in right heart and what that might do to the growth profile of that line item over time? James Clemmer: Yes, Frank, thanks for the question. Really, really pleased with the performance of AlphaVac and PE as we're gaining new cases, new doctors and getting awarded kind of status in the hospital through VAC committees, getting "on the shelf in inventory". In new accounts, the performance of AlphaVac is terrific. We see pictures every day, hear stories of new physicians using it because of the unique design elements that we innovatively put into the product. So really excited about that continued growth at a strong level for a long time to come. AngioVac will be fine. If you look back a year ago, we had a really strong Q2, and revenue went down in Q3 and back in Q4. There are cycles that just happen sometimes. So we're pleased. And you saw, I think we're up 11% in AngioVac in the first 6 months of the year. So we're really pleased with the platform. It will be one of our key growth categories for a long time to come. We have 2 amazing products that work really well in that place and it will drive growth. And then Steve, as far as... Stephen Trowbridge: Yes. And then, Frank, to follow up on the question on AlphaReturn. As we've always said, we've got the best product on the market. We're very confident in that. We think when we take the AlphaVac product, we get that into the hands of physicians, consistently, the feedback that we're getting is that it gives them what they need and it's the best product that is out there. As we've talked about, a hurdle to adoption in some areas because of the way that the market has been conditioned has been the ability to then return the blood. AlphaVac is designed upfront to limit blood loss and mitigate that. But there's no doubt that the market is looking for an opportunity to return that blood in certain scenarios. And so we think that the AlphaReturn product is really important for us to get over some of those initial humps to have people choose AlphaVac if maybe in the past, they've been used to using competitive products. So we're really excited about it. We've talked about the conversations we've been having FDA for a while. We are very pleased to get this over the finish line. We're excited about the IDE study starting it and then getting this into the bag of our sales force really as a way to take away an objection, and we expect it to be a catalyst to accelerating growth in the future. Operator: The next questions are from the line of Bill Plovanic with Canaccord Genuity. William Plovanic: Just first, Jim, congratulations. I know 10 years is a long time, and it's a lot of work that you've accomplished and some great outcomes. So my hats off to you and you'll definitely be missed. In terms of my questions are, I want to start with prostate. I know you're only a few days in. Just talk about the change to the Level 1 CPT code. How many insurers have really made that back-end change to reflect the coding change to prevent the automatic denials so far by your estimation? And then I noticed that the capital was a really strong quarter. I mean disposables were good. They saw a very strong, but it seems like capital was even stronger. And I'm curious, is that a precursor to the prostate is they're buying the systems to get ready to do procedures? Stephen Trowbridge: Bill, thanks for the question. This is Steve. And we want to congratulate Jim too, although he's not going anywhere right away. So he's going to be with us for a while. So we're happy about that, and there will be time to talk about everything that he's done. On your question on prostate, we're just a few days into it, so we don't have an estimate for the changes that you were talking about, but it's something that our team is absolutely keyed in on, and we're going to continue to watch and monitor. We think that this is going to be a catalyst for us, particularly on the Medicare side. So it's something that we're going to stay close to and watch. But we're pleased now with over the last year, I've been talking about the code going into effect. So the turn of the calendar was a good move for us, and we're excited about that. On capital, there's 2 dynamics. Capital was strong. There was also the capital sales that we talked about in the distribution channel move in France that added some additional NanoKnife capital. But on top of that, we were still pretty pleased with the capital sales that we saw. So as we've mentioned, capital sales are mostly going to be in the international markets. Here in the U.S., it's going to be a mixture of different models to make sure that we get capital into the hands of our physicians that could be through placement models, that could be through sales. I think the arbiter that we're looking at are those probe sales. And so we were really pleased with the nice increase in probe sales. And it's all coming from increased awareness and enthusiasm on the part of urologists. And it's really a prostate that's driving the NanoKnife results that we've seen so far. William Plovanic: And then just on EBITDA, you mentioned that the back half would be, I think, lower than the first half. And -- just directionally, how do we think of adjusted EBITDA in the third quarter? Is it going to be negative? Stephen Trowbridge: Yes. Thanks, Bill. So on EBITDA, we just wanted to make sure we were very pleased with the performance that we've seen here in the first half in EBITDA. We think it does prove out that the model is and can generate positive EBITDA, can generate cash as well as driving the top line. So we're excited to keep that continuing. We've also talked about wanting to balance that with investments that are necessary to continue to drive the top line growth in those Med Tech businesses. And so we've talked about investments into feet on the street in terms of the sales force as well as some of those R&D investments that Jim mentioned with his prepared remarks today for some of the nice trials that are coming up. So some of that's going to come into the back half. We don't expect negative in the third quarter. Maybe just not as robust as what we saw in the first half. Operator: The next question is from the line of Eduardo Martinez with H.C. Wainwright. Eduardo Martinez-Montes: Congrats on the quarter. I had a few questions on Auryon. You mentioned the CE Mark, and I'm just curious what your expectations are for international sales, if there are any specific regions you guys are going to target. And if that would be associated with any increased sales spend? And also if you could quantify the opportunity there and your expectations for this year? James Clemmer: Thanks, Eduardo. Good question. We're really pleased the fact that our team got the CE Mark for Auryon. And then our commercial and clinical teams have really done a great job driving awareness outside of the U.S. Atherectomy isn't chosen at the same rate outside the U.S. to treat PAD as it is here. But we've used a series of clinical forms and educational programs that our team has driven outside of the U.S. to really give people confidence in Auryon as a platform, how the science works. And it's important for us because once people see how the science works, how safe and effective the product is in treating that artery, above or below the need, flexible and safe. So it doesn't take a lot of hands-on user training by us. So we're able to use our really good distributor network to support growth, support customers during the use of the product. So we've not identified or targeted yet a size of the market that we think we'll capture, but we're really pleased with the uptake already in people getting new Auryon systems, buying the disposables, treating patients with PAD and having really good results. So over time, you'll see our international sales creep up as a larger percentage of our overall sales. Eduardo Martinez-Montes: Got it. That's really helpful. And also on Auryon, you mentioned expansion into coronary applications. I'm just curious if you had a time line for that? And also any increased spend, if that's something we can expect in the R&D line item this year in 2026? Stephen Trowbridge: I wouldn't expect a significant amount of spend in the R&D line item this year as we talk about coronary. Clearly, it's a strategic imperative of ours to take the product and move into the coronary space. It's a little bit of a longer-term initiative. As we talked about, it's probably a PMA trial. So we gave some highlights in the past of the ability to take our current platform technologies and through clinical and regulatory pathway expansion, move into additional TAMs. A very good example of that is Auryon moving into the coronary space, but it's not something that's going to be impactful in terms of the spend in this year. Operator: At this time, I'll hand the call back to Mr. Jim Clemmer for closing remarks. James Clemmer: Thanks, Rob. Rob, I'd like to thank all of our employees here at AngioDynamics, who've made these great results possible by their commitment and dedication to our customer and our products. So we've changed this company by its portfolio. You've seen us become active portfolio managers to make sure our company is positioned in the right places at the right time with the right products for future growth. The company is doing a really good job executing today, but we're also building for tomorrow and investing in opportunities to expand the application of our products geographically and in new clinical applications. So we're really pleased with where the company is headed. We can't wait to share more results with you in the future. Thanks to all of our teammates. Operator: This will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful day.
Up first is the monthly ADP National Employment Report for December, which will be released Wednesday.
Operator: Hello, and thank you for standing by. Welcome to AAR Corp's second quarter fiscal year 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. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Chris Tillett, Vice President of Investor Relations. You may begin. Chris Tillett: Good afternoon, everyone, and welcome to AAR's fiscal year 2026 second quarter earnings call. We are joined today by John Holmes, Chairman, President, and Chief Executive Officer, and Sarah Flanagan, Interim Chief Financial Officer. The presentation we are sharing today as part of this webcast can be found on the Investor Relations section on our corporate website. Before we begin, I would like to remind you that the comments made during the call include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's earnings release and the Risk Factors section of the company's annual report on Form 10-Ks for the fiscal year ended 05/31/2025. In providing forward-looking statements, the company assumes no obligation to provide updates to reflect future circumstances or anticipated or unanticipated events. Certain non-GAAP financial information will be discussed during the call today. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is set forth in the company's earnings release and slides. A transcript of this conference call will be available shortly after the webcast on AAR's website. At this time, we would like to turn the call over to AAR's Chairman, President, and CEO, John Holmes. John Holmes: Great. Thank you, Chris, and welcome, everyone, to our second quarter fiscal year 2026 earnings call. This was another outstanding quarter for AAR as we generated strong results across all areas of our business. We also completed two key strategic acquisitions and announced the third, which is expected to close in our fiscal fourth quarter. We are excited about these acquisitions as they enable us to accelerate our strategic objectives in two key areas of our business: our high-growth parts supply business segment, specifically new parts distribution, and in our repair and engineering segment. Turning to slide three, I would like to start with the key takeaways from the quarter. First, we delivered strong financial results with sales growth across all segments. Our 16% total sales growth was led by our parts supply business, which was up 29% in the quarter. This growth was driven by above-market organic sales growth of 32% in our new parts distribution activities. This has been our fastest-growing activity, averaging more than 20% organic growth in each of the last four years. Our two-way exclusive distribution model resonates with OEMs and is helping to drive continued market share gains. Second, we strengthened our portfolio with two strategic acquisitions. We previously shared that we are committed to enhancing our offerings with targeted acquisitions that advance our strategy, and we are delivering on that promise. Third, we continue to capture new business across the company, including the renewal of key exclusive new parts distribution agreements, as well as new customers for Traxx. In addition, we are continuing to enhance our digital capabilities, including through our newly announced partnership with Arrow Exchange, the premier commercial aviation supply chain secure network provider. Fourth, we are carefully managing our balance sheet to maintain strategic flexibility, and we ended the quarter with lower leverage, which is now within our long-term target range. Turning to slide four, we have a number of accomplishments within the quarter regarding our four strategic objectives, which are new business wins, operational efficiency, software and IP-enabled offerings, and disciplined portfolio management. I will highlight two of the objectives on this side: new business wins as well as software and IT-enabled offerings, with additional items to be discussed later in the presentation. First, our distribution model is unique in the industry in that nearly all of our distribution contracts, which typically range from five to ten years, are two-way exclusive. Meaning we do not represent competing products in a given market, and our OEM partners do not use a competing distributor. This model allows us to develop deeper relationships with our OEM partners, become technically proficient in their products, and help them take market share. This differs from a traditional distribution model where you acquire inventory and essentially act as a call center. We developed this approach more than ten years ago, and over the last several years, we have seen a 100% renewal rate in our contracts. Speaking of renewals, during the quarter, we announced the renewal of two key exclusive contracts with Collins Aerospace and Arkwin Industries, which is a unit of TransDigm. We are also leveraging synergies between our repair offering and our distribution activities. During the quarter, Eaton, one of our key new parts distribution OEM partners, named our Amsterdam facility as an authorized service center to support their hydraulic components across Europe, the Middle East, and Africa. This is a great example of the critical role our parts supply and repair and engineering businesses play in the aviation value chain, and the synergies that exist within our operating activities. Within our repair and engineering business, we continue to make progress on our Oklahoma City and Miami airframe heavy maintenance expansions. Both expansions are progressing well and will come online in calendar 2026, adding approximately $60 million in annual revenue. During the quarter, Trax announced an agreement with Aero Exchange. Air Exchange is a leading provider of secure commercial aviation supply networks, and this agreement will enhance our integration capabilities with our customers. Trax customers will gain access to Arrow Exchange's extensive networks of parts, repair, inventory pool, and consignment service suppliers through Trax applications. This collaboration advances our strategy to make it easier for Trax customers to buy parts and repairs. One more thing on Trax. We are excited to announce yesterday that Trax has been selected by Thai Airways, one of the most important Asian carriers, to provide its EMRO enterprise resource planning system suite of e-mobility apps and the cloud hosting solution. Turning now to slide five with more detail. I'll provide more detail on our recent acquisition of ADI. We acquired ADI in September for $108 million. ADI is a leading distributor of electronic components and assemblies, and it closely aligns with our strategic objective to expand our rapidly growing new parts distribution activities within our parts supply segment. As mentioned, new parts distribution has been growing at over 20% for the last four years, and ADI will add a new growth vector to this activity. The addition of ADI moves AAR up the value chain, up the supply chain, through ADI's production-facing distribution channel. This means we will now supply parts to our OEM partners for use in their own manufacturing. We plan to leverage our OEM relationships to grow ADI's business. With approximately $150 million in sales over the last twelve months, and a team of 400 skilled employees, we are increasing our access to a substantial, rapidly growing total addressable market. Additionally, over time, we see opportunities to improve margins through higher volumes and operational efficiencies. ADI has performed above expectations in the first few months, and the integration is progressing as planned. Turning now to slide six, I would like to provide an overview of our acquisition of HAYCO Americas. We acquired HAYCO Americas in November for $77 million, extending our leadership position in airframe heavy maintenance. Through our investments in proprietary systems and processes, we've achieved industry-leading quality, turnaround time, and have become the most sought-after airframe heavy maintenance provider in North America. While new parts distribution has been our fastest-growing business, airframe heavy maintenance has been the largest contributor to our margin expansion over the last four years. This acquisition builds on that success. HACO Americas operates facilities in Greensboro, North Carolina, and Lake City, Florida. As part of the integration process, we will be applying our successful operating model to these facilities to improve their operational and financial performance. This process will take twelve to eighteen months and has three key elements: revenue optimization, cost reduction and process improvements, and footprint rationalization. With respect to optimizing revenue, as part of the acquisition, we announced approximately $850 million of new contract awards with several customers over five years. These contracts will replace the existing revenue base at HAECO and more closely match the key terms we have with our current other airframe heavy maintenance customers. With respect to cost reduction and process improvements, at the HAYCO facilities, our actions to adjust the cost structure to match the new revenue base are already well underway. Additionally, over time, we will deploy our proprietary processes and systems to the facilities to achieve the same quality and efficiency levels we have achieved at our other airframe heavy maintenance facilities. Regarding footprint rationalization, we will be exiting our heavy maintenance site in Indianapolis over the next eighteen months and transferring that work to other AAR sites, with much of it moving to the HAECO facilities. As a result of our lease agreement with the airport, Indianapolis is our highest-cost location. Additionally, labor availability has been a persistent challenge. By exiting this high-cost location when the lease expires, and redistributing the work throughout the rest of our network, we will further improve the overall margin profile of our airframe heavy maintenance activities. As mentioned, all these actions will take twelve to eighteen months to complete, and will initially be margin dilutive. However, we expect the margin to steadily improve as we move through the integration process. Once this work is complete, we will have added approximately 40% additional capacity to our network, lowered our fixed costs, and gained access to a more predictable labor supply. Most importantly, we have the support and contractual commitments from our customers to execute this plan. Turning now to slide seven. We also recently announced an agreement to acquire Aircraft Reconfig Technologies, or ART, for $35 million. ART specializes in reconfiguring passenger aircraft interiors, providing project management, engineering, and certification solutions. This is an exciting addition to our airframe heavy maintenance capabilities that expands our ability to perform complex aircraft modification work, bringing proprietary solutions and a robust IP portfolio. It also brings engineering and self-certification capability that can accelerate our parts PMA development efforts. We expect this acquisition to close in the fourth quarter of this fiscal year, and we look forward to welcoming the skilled team to AAR. With that, I'll turn it over to Sarah to discuss the results in more detail. Sarah Flanagan: Thanks, John. Looking now to slide eight. Total sales in the quarter grew 16% year over year, including 12% organic growth to $795 million. We drove growth in each of our segments, with particular strengths in parts supply. Sales growth to government customers increased 23%, and sales to commercial customers increased 13% over the same period last year. For the quarter, total commercial sales made up 71% of total sales, while government sales made up the remaining 29%. Compared to the same quarter last year, adjusted EBITDA increased 23% to $96.5 million, and adjusted EBITDA margins increased to 12.1% from 11.4%. Adjusted operating income increased 28% to $81.2 million, with adjusted operating margins improving 100 basis points from 9.2% to 10.2%. Our focus on improving operating efficiencies, strong performance in our Parts Supply segment, and government programs were key drivers of the improved margins. The combination of sales growth and margin expansion resulted in a year-over-year adjusted diluted EPS increase of 31% to $1.18 a share from 90¢ a share in the same quarter last year. With that, I'll turn to the detailed results by segment, starting with part supply on slide nine. Total parts supply sales grew 29% from the same quarter last year to $354 million. We once again saw above-market growth in our new parts distribution activities, which grew 32% as compared to last year, excluding the contributions from ADI. Second quarter parts supply adjusted EBITDA of $46.5 million was higher by 37%, and adjusted EBITDA margin increased to 13.2% from 12.4% in the same quarter last year. Adjusted operating income rose 35% to $42.8 million, and adjusted operating margins also increased from 11.5% to 12.1%. Higher margins were largely driven by increased operating leverage as we are successfully scaling our business while maintaining cost discipline. Turning now to slide 10 for repair and engineering. Total sales increased 7% year over year to $245 million. Demand remains strong for our airframe heavy maintenance activities, and we continue to drive efficiency to increase throughput. Adjusted EBITDA of $31.2 million was 1% higher than in the same period last year, while adjusted EBITDA margins decreased to 12.8% from 13.5%. Second quarter adjusted operating income of $27.4 million remained consistent with the same period last year, with adjusted operating margins decreasing to 11.2% from 12%. This was largely due to the mix of work within our airframe heavy maintenance network, one-time costs, and component repair, as well as a slight impact on the HAYCO Americas acquisition, as we only had one month of HAYCO operations included in the quarter. As John mentioned earlier, we have initiated our integration activities and expect to improve their operating margin over the next twelve to eighteen months, taking them from low single-digit EBITDA margin to margins in line with our current repair and engineering margins. Going forward, we expect to continue to drive margin expansion in this segment through the improved performance of our two newly acquired HAECO facilities, driven by integration and synergy actions, continued rollout of our paperless hangar initiative, increased volume into our component repair facilities, and the hangar capacity expansions that are in process. Looking now to slide 11. Integrated solutions sales increased 8% year over year to $170 million, primarily driven by government programs. Integrated Solutions adjusted EBITDA of $18.5 million was 50% higher than the same period last year. Adjusted operating income of $15.1 million was 82% higher, with the adjusted operating margin increasing from 5.1% to 8.6%. Higher margins were driven by favorable mix and certain government contracts achieving key program milestones during the quarter. Turning to slide 12 of the presentation. During the quarter, our net debt leverage decreased from 2.82 times in the first quarter to 2.49 times, achieving our target range of 2.0 to 2.5 times. This decrease was driven by double-digit earnings growth, continued balance sheet management, and our equity offering. Turning to slide 13 of the presentation. With respect to our capital allocation strategy, our priorities remain unchanged. First, we will continue to fund organic growth in each of our three core areas: our high-growth new parts distribution activities, our airframe heavy maintenance and component repair activities, and our software and IP-enabled offerings. Second, we will allocate capital to M&A opportunities that meet our strategic and financial criteria and support our core segments. The three acquisitions we have discussed today—ADI, HAECO Americas, and ART—are all well aligned with our stated criteria and will help to accelerate our growth strategy of bringing our unique platform to market as a premier independent provider of aviation parts, repair, and software. John Holmes: Software. Sarah Flanagan: As we look to Q3, we expect to be cash positive in the quarter. We also expect interest expense to be slightly lower than the prior quarter. With that, I'll turn it back to John. John Holmes: Great. Thank you, Sarah. Turning to slide 14, we have an update on our outlook for Q3 and for the rest of our fiscal year. For Q3, we are expecting total sales growth in the range of 20% to 22%, which includes the impact of our two recent acquisitions. For reference, organic sales growth for Q3 is expected to be 8% to 11%, which excludes the divestiture of Land and Gear, as well as the impact of the ADI and HAECO acquisitions. For margin, we expect Q3 adjusted operating margin of 9.8% to 10.1%. For the full fiscal year, given our strong performance in the first half, and including our two recent acquisitions, we expect total sales growth approaching 17% and organic sales growth approaching 11%. In closing, I would like to highlight AAR's strength as a business and as an investment. We are well positioned in the most attractive segments of a growing aviation aftermarket. We have a broad, unique platform as a provider of parts, repair, and software that is unmatched in our industry. Our complete range of aftermarket solutions work together to drive a sustainable, self-reinforcing cycle of growth. We have enhanced our portfolio with high-quality acquisitions, and we are delivering stronger growth and higher margin. I would like to thank our talented team of global employees, particularly Sarah, for their dedication as they deliver excellence, quality, safety, and the critical work that we do for our customers every day. I would also like to thank our customers and our shareholders for your continued interest and support of AAR. With that, we'll turn it over to the operator for questions. Operator: Thank you. Please press 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press 11 again. Our first question comes from the line of Ken Herbert with RBC. Your line is open. Ken Herbert: Yeah. Hey. Good afternoon. Hey, John and Sarah, really nice quarter. Hey, John, maybe just to start on the parts supply, how do we think about with the 32% growth? Is it possible to parse that out a little bit more by, say, volume versus price? And if you're seeing anything unique on the price side from an airline perspective, then within volume, how do we think about maybe sort of same-store sales of that versus sort of new contract wins or expansions to the portfolio in the quarter? John Holmes: Yeah. I would say great question. I would say, overall, it's volume driving that growth. So the majority of that growth is driven by volume. Sure. We've had some, you know, some price escalation with certain of our OEM partners, but that would be, you know, not the majority of that. And then in terms of same-store sales, we are seeing significant growth out of existing distribution contracts that are, again, in that, you know, kind of 20 to 30% range, which is obviously driving the overall growth. So it is volume. It is new contracts ramping up. But it's also really healthy same-store sales performance. Ken Herbert: That's helpful. And as you think about moving here to calendar '26, the second half of your fiscal year, are there any concerns or are you seeing any risk about destocking at your airline customers after, obviously, several years of what seems to be maybe some buffer inventory level building there? John Holmes: Yeah. Great question. And the answer is no. We're not seeing evidence of that. The backlog for that business gives us confidence that the growth rates that we're seeing there are going to continue. And at this point, you know, no signals that would imply any destocking. Ken Herbert: Perfect. And just finally, if I could, the implied third-quarter margin represents a bit of a step down sequentially. I'm guessing this is really mix as you think about the acquisitions, but anything else going on besides mix in terms of sequentially second to third quarter on the margins? John Holmes: No. That's the driver. As we mentioned, the HAECO acquisition, long term, that will be margin accretive. In fact, since we've gotten into it, we expect it'll be even more margin accretive than we thought when we did the deal, which is a great thing. But it is going to take us a couple of quarters to move through that integration to get there, and you're going to see the impact of that in Q3 and Q4. Ken Herbert: Great. Thanks, John. John Holmes: Great. Thanks, Ken. Operator: Thank you. Our next question comes from the line of Louis DePalma with William Blair. Your line is open. Louis DePalma: John, Sarah, and Christopher, good afternoon, and happy 2026. John Holmes: Hey, Louis. Happy 2026. Louis DePalma: John, you became the heavy maintenance industry leader with the HEICO Americas deal. Do you see synergies with heavy maintenance and your other businesses, such as your component repair business and also with Trax? John Holmes: Yeah. Absolutely. And great question. For sure, there are synergies between the heavy maintenance business and the component business. Part of our strategy is to leverage the leadership position that we have in airframe heavy maintenance to drive volume to our component shops. Some of that comes from just having possession of the aircraft themselves. We now have well more than a thousand aircraft moving through our facilities each year, and that generates individual component repairs that we can perform. But mostly, it's going to be by doing deals with our customers where we sign up long-term commitments on the heavy maintenance side that are coupled with long-term commitments on the component repair side. And, you know, I just want to highlight we've invested a lot in proprietary systems and processes inside our hangars, and we have now achieved industry-leading turnaround time and quality. Our turnaround times are particularly important to the customers because, let's just say, a heavy maintenance visit is going to take thirty days, typical is going to take thirty days. If we can deliver that aircraft back to our customer in twenty-eight days or twenty-seven days, they love that because that's extra days that they have to put that aircraft in revenue service, and that's worth a lot. And that operational performance inside our hangars is driving the demand that we're seeing. And, you know, as I mentioned, when all this is said and done, we will have added 40% capacity, and that's sold out through the end of the decade. So that's a lot of demand. And we plan to leverage that leadership position again to drive volume through the component shops. As it relates to Trax in particular, Trax has synergy predominantly with our parts supply business. We intend to develop proprietary channels to market to sell new and used parts through Trax. And then also through component repair. The AeroStrat acquisition that we made last quarter does have direct synergy with heavy maintenance because that software allows customers to plan long-range heavy maintenance visits, which, of course, feeds directly into the heavy maintenance offering that we provide. Louis DePalma: Excellent. Thanks, John. And also, you announced the win yesterday with Thai Airways. And I was wondering, has the landmark win with Delta Airline that you announced over the summer stimulated the pipeline, as many airlines often follow Delta's lead given Delta's role as one of the largest MROs in addition to one of the largest airlines? John Holmes: Yeah. The answer is absolutely. And that's one of the reasons we were so focused on securing Delta as a win early on in our journey with TRAX because Delta is not only the largest, but it's an extremely well-respected airline amongst all airlines. And so the fact that they have selected Trax and endorsed that as a solution that can scale up to their size is hugely beneficial. And, absolutely, that has opened doors for Trax. The other thing I would just mention is that it's approximately a three-year implementation at Delta. So we're about seven months into that. It is going very well. And Delta has been willing to serve as a reference for us with other customers, which we're grateful for. Louis DePalma: Fantastic. That's it for me. Thanks, everyone. John Holmes: Great. Thanks, Louis. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Michael Luchak with KeyBanc Capital Markets. Your line is open. Michael Luchak: I wanted to ask on M&A. You've been highly acquisitive as of late, and you mentioned capital allocation priorities are unchanged. Do you see opportunities for further M&A over the next maybe six to twelve months? Or is there more of a shift to integration? Just any thoughts you can provide on the M&A pipeline and what you're seeing there? And then maybe what segments you might target going forward? John Holmes: Sure. The short answer is yes. We continue to believe that and continue to see M&A as a key part of our growth. And, you know, one of the things I'm particularly proud of is out of the last several deals that we've done, these have all been self-sourced. We have gone to these companies, we have developed relationships with the owners, and so all the deals that we've closed in the last three years, they've been sourced by us. So we've got very specific criteria that acquisitions need to meet. There are several other companies out there that we believe can meet those criteria, and we are actively pursuing them. We feel that we have the integration muscle, if you will, moving inside the company. We're definitely cognizant of our own bandwidth, so we want to make sure that we're successful with the integrations that are underway right now. But we also want to be in a position to curate attractive M&A opportunities and close on them. Michael Luchak: Great. And then one more question on Trax. If you could provide any color on Trax in the customer upgrade cycle, whether that be the percent of customers that have already upgraded or the timing of when you expect more upgrades to occur. I know it's a multiyear event, but any more color on Trax would be great. John Holmes: Thank you. Thanks, Michael. Now a great question there. We're approximately, I'd say, 30% to 35% of the way through the customer upgrades. And that's customer upgrades that have been agreed to but potentially not yet implemented. So we have a lot of current upgrades going on that are in various stages of implementation. Our goal is to have all of that completed by 2028. You know, like any software upgrade cycle, it may take longer, but our goal is to have the bulk of this done by 2028. Michael Luchak: Great. Thank you. John Holmes: Great. Thank you. Operator: Thank you. Our next question comes from the line of Scott Micas with Melius Research. One moment. Mister Micas, can I have you to press 11 again? Hey, Scott. Thank you. Your line is open, Mister Micas. Scott Micas: Yes. Can you hear me? John Holmes: Yeah. Hey, Scott. How are you? Scott Micas: Hey. Sorry about that. John, I wanted to ask on the ART acquisition. We're seeing a lot of airlines announcing interior refreshes as they try to better segment their cabins and increase the premium offerings. I'm just kind of wondering if you could provide what's the revenue now? What kind of growth CAGR do you see there, say, over the next three, four years? And what's the margin potential for that business? John Holmes: Yeah. Appreciate the question. We didn't disclose the revenue, but what we can say is that that is one of the main reasons we decided to make this acquisition. This is a market we do participate in in a limited way today, but ART brings much-needed engineering, IT, and self-certification expertise to allow us to become a much bigger player in that market. And you hit the nail on the head. This is an area that is very strong now and expected to grow as airlines are constantly looking to refine their offering and reposition the resources inside of their cabin to meet the demand. And this acquisition puts us in a really strong position to participate in that market, coupled with our heavy maintenance offering. Scott Micas: Okay. And then one more quick question. I mean, just think last quarter, you mentioned there was a meaningful pickup in USM sales. Wondering if that trend continued this quarter. And are airlines maybe reconsidering retiring aircraft and parting them out just given that demand looks like it's improved in recent months and now fuel prices are pretty low. John Holmes: Yeah. I would say we saw about the same level of activity in USM this quarter as we did last quarter. And I would say there has been no material change in the market in terms of since what we discussed last quarter. So it's pretty much status quo. But, you know, we're really focused, as you could tell, on the new parts distribution business, which has exceptional momentum in the market right now, and it continues to gain wide acceptance. Scott Micas: Okay. And then a quick one for Sarah. I just wanted to clarify. I think you said new parts distribution sales were up 32% organically. I was wondering if you could parse that out maybe between commercial and government. Sarah Flanagan: Yeah. I would say in the quarter, roughly 50% of that growth came from commercial, and the other 50% came from defense. So we had a really strong quarter on both fronts. Scott Micas: Okay. Got it. Thank you. And nice results. Thank you very much. Sarah Flanagan: Thank you. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Ken Herbert with RBC. Your line is open. Ken Herbert: John, on the USM front, one of your major partners, Eftai, has announced an aero derivative IGT offering for the CFM56. It sounds like overall activity for you on that engine with Eftai may have been trending down. But do you see this potentially as a risk longer term to engine volumes perhaps for your USM business as we maybe see more traction of aeroderivative engines in the non-aerospace markets? John Holmes: No. I appreciate you asking the question. I really don't see it as a risk. You know, in the immediate term, as you just indicated, Eftai, and they're a great partner, they've had such demand for these assets that we have seen our volume with them decline significantly over the last year plus. Yet, our team in the USM business has been able to continue to source CFM material out in the market to basically make up for the lack of volume with Eftai. So, you know, our skill in the USM business is finding material in the market where others cannot, and I'm very confident that, despite potentially this new demand vector for that engine, we will continue to be able to find material. Ken Herbert: Great. Thanks, John. John Holmes: Thanks, Ken. Operator: Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to John for closing remarks. John Holmes: Well, it looks like we have some more questions. Operator: Yep. They just popped up. One moment. Please stand by for our next question. Our next question comes from the line of Michael Ciarmoli with Truist Securities. Your line is open. Michael Ciarmoli: Hey. Evening. Thanks for getting me in there. Not sure what was going on, but real nice results. John Holmes: Great. Thank you, Mike. Hey. Michael Ciarmoli: Hey, John. Just how should we think, you know, you've given sort of the annual guidance in terms of revenues. We've got some dilution on the margins. Any thoughts on how we should think about that adjusted operating margin and maybe call it a 10% ceiling when you can kind of firmly punch through that? You know, it does seem like, I guess, you know, with more of a full quarter, you kind of talked about it, you get a little bit of that dilution from HAECO. It's going to take a little bit. But anything in terms of how we should think about those adjusted operating margins going forward, taking into account the synergies, the cost out, and some of the other benefits? John Holmes: Yeah. I would say, you know, first of all, we're really pleased with the trajectory we've been on. This is only the second time we've been above 10% in a quarter. We're up a full point from last year. And, you know, I think as we've said in various settings, we see the ability to achieve a couple of points above where we are now. The HAYCO integration is going to be a, you know, near-term dilution area, as you said, for, you know, the next couple of quarters. But as a result of the integration, as a result of exiting our higher-cost location in Indianapolis, we feel very good about punching above that 10% level over time. Michael Ciarmoli: Okay. Okay. And then just on the revenue outlook for the year, do you have any contributions from the new capacity coming online in this current fiscal 2026 guidance? Or is it going to be a more pronounced positive impact next year? John Holmes: It will be a more pronounced positive impact next year. Yeah. It'll be a more pronounced positive impact in our FY '27. We will see a slight contribution from the Oklahoma City site that will come online likely in February time frame. But the Miami site will come online fully in, call it, July time frame. Both of those will be at full run rate for our FY '27. Michael Ciarmoli: Okay. Perfect. And then I'm going to ask you this one anyway. I get this question a lot from clients and have gotten it. Just from the rationale to expand that lower margin MRO heavy maintenance, it often gets perceived as the wrench-turning aspect of the business. I mean, to me, it makes a lot of sense, but, you know, you're kind of adding to the lowest margin portion of your business. I know you talked about the... John Holmes: Yeah. Michael Ciarmoli: Yeah. Go ahead. Just the thoughts on maybe skewing more towards that higher margin parts business or how should we think about it? How should investors really think about that when they see deploying cash there? John Holmes: Yeah. So I'm really happy that you were able to get the question in because that's one that I'm happy to answer. It is not a low-margin business. We have made more margin gains in the heavy maintenance area since over the last since coming out of COVID than anywhere else. So now that business is a low double-digit margin business with potential to expand as a result of this acquisition as we improve the fixed cost base. Not only that, you know, we now have, you know, circa, you know, 45, 50% market share. And, you know, the customers are coming to us. And so the investments that we've made in our processes that improve the turnaround, as I described, I mean, they're allowing us to, you know, to sell out through the end of the decade and, in certain cases, achieve the premium in the market. So that business, I think, is misunderstood. If you look at the margins in our repair and engineering segment, and look at them compared to other publicly traded MROs that are actual that trade differently than we do, they're actually pretty similar. And we're telling you that we can expand margins from here. So I think the historical view that airframe is a tough business, it's low margin, etcetera, it is a tough business. We've developed a model that is succeeding significantly. That's thanks to our execution and the systems that we put in place. So I'm really excited about the HAYCO acquisition and the potential for further margin expansion across all of heavy maintenance. Michael Ciarmoli: Perfect. That's a good answer. I appreciate it. Thanks, John. Thanks, guys. John Holmes: Thank you. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Sheila with Jefferies. Congrats on a great quarter. Sheila: Thank you. John, maybe on the last line of questioning, if that's okay, sticking to repair and engineering. Maybe, I guess, just bigger picture, how do you think about margin expansion within the segment? And then second, as we think about HAYCO, and I know you already talked about it with Mike a little bit, how do you think about going from 3% margins or low single digits to double-digit margins? How much of that comes from the contract realignment versus the cost rationalization? John Holmes: I think it's okay. So I would say, in general, in the segment, we would see going back to the levels that we were a year ago in terms of margins, so low double-digit and then expanding from there. So I would view the moment that we're in right now in repair and engineering as a low point. We've got a couple of quarters to get through as we get through the bulk of the or the real heavy lifting as it comes to the as it relates to the HEICO acquisition. Then we'll go up from there and then ultimately exceed where we were prior to this. And, again, as I mentioned, we've got the customer support and the commitments over a multiyear period to achieve all of that. So, you know, feel good about the, you know, the overall margin possibility and repair and engineering. And again, and one other thing I should mention that I'm talking about heavy maintenance. The component repair business is a, you know, mid to high teens operating margin business. And as I talked about earlier, we intend to leverage the leadership position that we have in heavy maintenance to drive more volume to component repair, which will further enhance the margins of the overall segment. It relates to the HAYCO integration in particular, it would be a mix between the revenue realignment and the cost takeout. And I should mention that we are taking the revenues down from what HAYCO was doing before, pretty significantly. And so we're bringing the volume in that facility in across the facilities down to a level we can establish our processes, establish the rigor that we want to see, we've been able to achieve elsewhere. On the floor in the hangars and then ultimately build up from there. So, you know, we're utilizing we're not utilizing the full footprint. We're rightsizing the labor force to match the volume. To get the operations performing the way we want. But then over time, we would intend to build up from here. And I should mention that we've done that, you know, successfully in several of our other existing facilities, and we're obviously doing that in Miami and Oklahoma City because we're expanding those two sites. Sheila: Yep. Great. And then maybe just switching gears a little bit. Lots of questions already on your success in parts distribution accelerating over 30% in the quarter. Can you talk about what you're expecting? You mentioned 50% of that came from government customers. You're thinking about the second half of the year? John Holmes: Yeah. I would say, you know, again, we've been kind of on an annual run rate of, you know, circa 20% organic growth. And I would think that we would be, you know, slightly above that in the second half of the year. Sheila: Got it. Okay. Great. Thank you. John Holmes: Great. Thank you. Operator: Thank you. I'm showing no further questions at this time. I would now like to turn the call back over to John for closing remarks. John Holmes: Great. Really want to thank everybody for the time and the interest. As you can tell, we've got a strategy that's working. We're encouraged by the momentum that we have, and we expect it to continue. Look forward to getting back together next quarter. Thanks, everybody. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Penguin Solutions First Quarter Fiscal Year 2026 Financial Results Call. [Operator Instructions] I will now hand the conference over to Suzanne Schmidt with Investor Relations. Please go ahead. Suzanne Schmidt: Thank you, operator. Good afternoon, and thank you for joining us on today's earnings conference call and webcast to discuss Penguin Solutions first quarter fiscal 2026 results. On the call today are Mark Adams, Chief Executive Officer; and Nate Olmstead, Chief Financial Officer. You can find the accompanying slide presentation and press release for this call on the Investor Relations section of our website. We encourage you to go to the site throughout the quarter for the most current information on the company. I would also like to remind everyone to read the note on the use of forward-looking statements that is included in the press release and the earnings call presentation. Please note that during this conference call, the company will make projections and forward-looking statements, including, but not limited to, statements about the company's growth trajectory and financial outlook, business plans and strategy, market demand and shifts, strategic agreements and existing and potential collaborations. Forward-looking statements are based on current beliefs and assumptions, are not guarantees of future performance and are subject to risks and uncertainties, including, without limitation, the risks and uncertainties reflected in the press release and the earnings call presentation filed today as well as in the company's most recent annual and quarterly reports. The forward-looking statements are representative only as of the date they are made, and except as required by applicable law, we assume no responsibility to publicly update or revise any forward-looking statements. We will also discuss both GAAP and non-GAAP financial measures. Non-GAAP measures should not be considered in isolation from, as a substitute for or superior to our GAAP results. We encourage you to consider all measures when analyzing our performance. A reconciliation of the GAAP to non-GAAP measures is included in today's press release and accompanying slide presentation. And with that, let me now turn the call over to Mark Adams, CEO. Mark? Mark Adams: Thank you, Suzanne. We hope you all have a nice holiday season and appreciate your attending our first quarter fiscal 2026 earnings call. We are happy with our Q1 results. On our last call, we mentioned some headwinds we anticipated in the first half of our fiscal year. Despite these challenges, revenue came in at $343 million in Q1, up 2% sequentially and 1% year-over-year. We view this as significant as we were able to perform well in the first quarter despite not recognizing any hyperscale hardware revenue, which had been a meaningful contributor in the prior year period. Non-GAAP gross margins were 30%, which compares favorably to the midpoint of our full year outlook, reflecting favorable mix and execution in the quarter. As a reminder, our full year outlook incorporates expected variability across the year. Non-GAAP operating income was $42 million, up 1% year-over-year, which led to non-GAAP diluted earnings per share of $0.49. We continue to see indications of a broader market shift from hyperscaler deployments and early corporate pilot programs toward wider enterprise adoption and more production scale implementations. Within this broader transition, there are early signs that some workloads are evolving from training-centric environments toward inference-oriented use cases as organizations operationalize AI across the enterprise. As AI systems move into full production, enterprises are increasingly focused on performance, reliability, bandwidth and overall system efficiency, areas where Penguin's ability to design tailored systems can help customers address their specific workload requirements. We believe enterprises are looking for partners who can deliver complete production-ready platforms spanning infrastructure, software orchestration and advanced AI tooling supported with deep technical expertise. Penguin Solutions brings over 25 years of experience in this arena, starting in high-performance computing, or HPC, and expanding in the last five years to include large-scale AI factory build-outs. This expertise enables us to design, build, deploy and manage complex infrastructure solutions that align with the needs of our enterprise customers. During the transformation of our company into a leading provider of infrastructure solutions, we have communicated the challenges we faced from having a lumpy revenue model with customer concentration. Our fiscal year 2026 guidance was developed with our ongoing focus on new business development and customer diversification in mind, while recognizing that the timing of new customer deployments can vary. We are encouraged by the customer diversification progress we are making and we'll share additional detail later in the call. Let me now speak to the performance of each of our lines of business. Our Advanced Computing business achieved revenue of $151 million, up 9% compared to last quarter. We had several customer bookings in Q1, including two new Penguin customers, one in the defense sector and another in the education and research sector. In addition, we continue to see our pipeline expand into new customer opportunities in the financial services, oil and gas, telecommunications, manufacturing and education sectors. We are also currently engaged in a number of discussions with sovereign cloud customers outside the U.S. regarding potential large-scale AI deployments. This increase in sovereign AI opportunities internationally reinforces the need for Penguin's rapid deployment solutions and services, which enable faster time to production and thus enable a quicker return on AI capital investments. As customers evaluate the transition from proof-of-concept initiatives to larger production deployments, we believe the complexity of these environments underscores the need for a trusted partner with deep technical expertise across multiple technology domains, combined with proven experiences integrating in an array of technology building blocks to deliver high-performing and highly reliable AI infrastructure. In support of this need, we have recently launched the Penguin Solutions rapid development workshop program, which brings together our architecture leaders, software developers, managed service team members and supply chain experts to help potential customers better understand and plan for the complexity of implementing AI at scale. Penguin's design, build, deploy and manage framework is a proven methodology for high-performing, high-reliability AI factory deployments. Penguin's decades of experience in complex large data center installations is at the heart of what differentiates us from many of our hardware-centric competitors. The combination of our architectural design know-how, our ICE ClusterWare software platform and our managed services offerings reinforces Penguin Solutions role as a valued partner in helping our customers manage the complexity of AI. Our Integrated Memory business recorded $137 million of revenue in Q1, up 3% compared to the prior quarter and up 41% compared to Q1 2025. As we head into our second quarter, demand signals for our memory portfolio are strong across our networking, telecommunications and computing customers. One of the key performance challenges in implementing AI across both training and inference workloads is the limitation of GPU and CPU memory bandwidth. We have been an early developer of Compute Express Link or CXL solutions, which provide an open standard interconnect for high-speed, high-capacity GPU and CPU to device and GPU and CPU to memory connections designed for high-performance data center systems, including those built for AI computing. We are currently shipping early production units through our OEM partners while continuing to expand end-user qualification efforts. Looking ahead, future versions of CXL are expected to emphasize memory pooling, enabling blocks of memory to be dynamically allocated to specific system resources. In parallel, we continue to invest in the design of our optical memory appliance or OMA in collaboration with key technology partners, leveraging a photonic transport layer to further increase the performance of GPU, CPU and memory interconnects. We are seeing increasing memory demand as customers are looking for unique custom solutions to address their needs in supporting AI workloads. Beyond the core customer migration to DDR5 technology, our customers are evaluating how to best utilize memory to optimize the performance of their AI compute needs. In addition to our legacy OEM customers, we are seeing sales growth in direct-to-enterprise customer engagements and in large hyperscale customers. We believe that our over 30 years of developing specialty memory products originally under the SMART Modular brand for large Fortune 500 customers has positioned us well to capitalize on a new wave of higher performing and higher reliability memory for the AI era. We believe we are well positioned for future growth, leveraging our early investments in new technology to expand our addressable market. The Optimized LED business operating under the Cree LED brand generated revenue of $55 million in the first quarter, down 18% sequentially. We are seeing weak demand in our China business, along with pockets of softness among certain large U.S. OEM customers. We remain focused on driving profitability in our LED business by leveraging our specialty product portfolio, industry-leading intellectual property and capital-light outsourced front-end operating model. Despite the top line revenue headwind, operating income was $3.5 million, representing an increase of 24% sequentially. As part of our transition from a holding company to an AI solutions provider, we continue to streamline our corporate structure. To that end, in late December, we signed an agreement to sell our remaining 19% stake in Zilia Technologies, formerly SMART Modular do Brazil for $46 million. We expect this transaction to close in our third quarter of fiscal 2026. As we look forward, we remain focused on strengthening our partnerships with ecosystem partners such as NVIDIA, AMD and CDW. As the volume of corporate deployments accelerates, Penguin Solutions can provide our white glove design and implementation services to support our customer success. We are also customizing our ICE ClusterWare platform to be compatible with other open source industry software products, enabling a more robust infrastructure solution for managing large AI deployments at scale. We believe that the combination of our investments in technologies such as inference systems level products, memory advancements and our ICE software, together with our trusted design and managed services capabilities, positions Penguin Solutions as an ideal partner to help customers manage the complexity associated with implementing AI infrastructure. With a strong balance sheet, a growing customer base, continued investments in differentiated solutions and an experienced team that helps customers design, build, deploy and manage AI environments at scale, we remain confident in our position for long-term future success. Let me stop now and hand the call to Nate for a more detailed review of our financial performance. Nate? Nate Olmstead: Thanks, Mark. I will focus my remarks on our non-GAAP results, which are reconciled to GAAP in our earnings release tables and in the Investor Relations materials available on our website. Now let me turn to our first quarter results. In the quarter, total Penguin Solutions net sales were $343 million, up 1% year-over-year. Non-GAAP gross margin came in at 30%, which was down 0.8 percentage points versus Q1 last year. Non-GAAP operating margin was 12.1%, up 0.1 percentage points versus last year, and non-GAAP diluted earnings per share were $0.49, flat year-over-year. In the first quarter of fiscal 2026, our overall services net sales totaled $65 million, down 9% versus the prior year. Product net sales were $279 million in the quarter, up 3% versus the prior year. Net sales by business segment were as follows: in Advanced Computing, Q1 net sales were $151 million, which was 44% of total company net sales and down 15% year-over-year. This sales decline reflects both the wind down of our Penguin Edge business and hyperscale hardware sales in Q1 last year, which did not recur in Q1 this year. Q1 2026 advanced computing net sales, excluding Penguin Edge and hyperscale hardware net sales grew 52% year-over-year. In Integrated Memory, Q1 net sales were $137 million, which was 40% of total company net sales and up 41% year-over-year. And in Optimized LED, Q1 net sales were $55 million, which was 16% of total company net sales and down 18% year-over-year. Non-GAAP gross margin for Penguin Solutions in the first quarter was 30%, down 0.8 percentage points year-over-year and 0.9 percentage points sequentially, primarily due to the wind down of our high-margin Penguin Edge business, as we described last quarter. Non-GAAP operating expenses for the first quarter were $61 million, down 4% year-over-year and down 6% sequentially. Operating expenses as a percentage of net sales were down both year-over-year and quarter-over-quarter, driven by lower personnel-related expenses as well as lower subcontract services costs following the completion of our U.S. domestication in the fourth quarter of fiscal 2025. Q1 non-GAAP operating income was $42 million, up 1% year-over-year and up 6% versus last quarter. The combination of net sales growth and operating expense management translated into a 0.1 percentage point increase in non-GAAP operating margin versus Q1 last year. This is our sixth consecutive quarter of non-GAAP operating margin expansion year-over-year. Non-GAAP diluted earnings per share for the first quarter were $0.49, flat versus Q1 last year and up 14% versus the prior quarter. Adjusted EBITDA for the first quarter was $45 million, up 1% year-over-year. Turning to balance sheet highlights. For working capital, our net accounts receivable totaled $342 million compared to $276 million a year ago, with the increase driven by higher sales volumes and variations in sales linearity across the quarters. Days sales outstanding came in at 51 days, up from 45 days in the prior year quarter and flat with last quarter. Inventory totaled $213 million at the end of the first quarter, down from $247 million a year ago due to order and shipment linearity. Days of inventory was 38 days, down from 49 days a year ago and down from 51 days last quarter, primarily due to the timing of receipts and shipments. Accounts payable were $305 million at the end of the quarter, up from $244 million a year ago due primarily to higher sales volumes and the timing of purchases and payments. Days payable outstanding was 55 days compared to 49 days last year and 54 days last quarter. The year-over-year and quarter-over-quarter movements were due to the timing of purchases and payments. Our cash conversion cycle was 35 days, a decrease of 11 days compared to Q1 last year and down 14 days versus last quarter due to faster inventory turns resulting from materials shipped during the quarter and the timing of purchases and payments. Consistent with past practice, days sales outstanding, days payables outstanding and inventory days are calculated on a gross sales and gross cost of goods sold basis, which were $605 million and $509 million, respectively, in the first quarter. As a reminder, the difference between gross and net sales is primarily related to our memory businesses, logistics services, which are accounted for on an agent basis, meaning that we only recognize the net profit on logistics services as net sales. Cash, cash equivalents and short-term investments totaled $461 million at the end of the first quarter, up $68 million from Q1 last year and up $8 million sequentially. The year-over-year fluctuation was primarily due to free cash flow generated by the business over the past year. First quarter cash flows provided by operating activities increased by 125% to $31 million compared to $14 million provided by operating activities in Q1 of last year. The increased cash flow in the quarter versus last year was due primarily to lower investments in net working capital. We spent $15 million to repurchase approximately 791,000 shares in the first quarter under our stock repurchase program. As of November 28, 2025, an aggregate of $96.5 million remained available for the repurchase of our common stock under the current authorizations. For those of you tracking capital expenditures and depreciation, capital expenditures were $3 million in the quarter and depreciation was $5 million for the quarter. And now turning to our outlook. Given our solid Q1 performance, we are pleased to confirm our full company net sales and non-GAAP diluted EPS outlook for the year, which at the midpoint calls for 6% net sales growth and $2 of non-GAAP diluted EPS. Consistent with the outlook we provided last quarter, our full year outlook assumes that we will continue to diversify our customer sales mix and does not include any advanced computing hardware sales to hyperscale customers. And also consistent with our assumptions from last quarter, our FY '26 financial outlook reflects the wind down of our high-margin Penguin Edge business. We expect sales from this business to essentially cease by the end of fiscal 2026. The combined effect of these two assumptions in our FY '26 outlook remains approximately a 14 percentage point unfavorable year-over-year impact to our total company net sales growth and approximately a 30 percentage point unfavorable impact to advanced computing. Regarding sales linearity during the year and consistent with our commentary last quarter, we continue to expect second half sales to be stronger than first half sales. At the midpoint of our full year net sales outlook, we expect approximately 53% to 54% of total company net sales to come in the second half of the year as AI opportunities currently in our pipeline are assumed to book and ship in the second half. With that said, our full year net sales outlook reflects the following full year growth ranges by segment. For Advanced Computing, we continue to expect full year net sales to change between minus 15% and plus 15% year-over-year. As it has previously, this outlook reflects the Penguin Edge and hyperscale hardware sales impacts mentioned earlier. For memory, we now expect net sales to grow between 20% and 35% year-over-year. And for LED, we now expect net sales to decline between minus 15% and minus 5% year-over-year. Our non-GAAP gross margin outlook for the full year is now 29%, plus or minus 1 percentage point. We adjusted our gross margin outlook down by 50 basis points to account for a higher mix of memory sales, which have a lower gross margin than our company average. For non-GAAP operating expenses, we now expect a full year total of $250 million, plus or minus $10 million. For non-GAAP full year diluted earnings per share, we still expect approximately $2, plus or minus $0.25. Our FY '26 non-GAAP diluted share count is still expected to be approximately 55 million shares, and our FY '26 non-GAAP tax rate is still forecasted to be 22%. While we expect to use this normalized non-GAAP tax rate throughout FY '26 and beyond, the long-term non-GAAP tax rate may be subject to changes for a variety of reasons, including the rapidly evolving global and U.S. tax environment, significant changes in our geographic earnings mix or changes to our strategy or business operations. Our outlook for fiscal year 2026 is based on the current environment, which contemplates, among other things, the global macroeconomic environment and ongoing supply chain constraints, especially as they relate to our Advanced Computing and Integrated Memory businesses. This includes extended lead times for certain components that are incorporated into our overall solutions impacting how quickly we can ramp existing and new customer projects and fulfill customer orders. Overall, we believe our focused execution, disciplined expense management and balance sheet strength provide a strong foundation for sustained profitable growth. We expect these qualities to support our continued progress as we pursue opportunities to enhance long-term shareholder value. Please refer to the non-GAAP financial information section and the reconciliation of GAAP to non-GAAP measures tables in our earnings release and the investor materials on our website for further details. With that, operator, we are ready for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Brian Chin with Stifel. Brian Chin: A few questions. Maybe just first with the maintaining the outlook, although changing the components a little bit. Firstly, first half -- fiscal first half versus fiscal second half guidance, I guess does that suggest that the February quarter revenue is down maybe low to mid-single digits? And kind of which of the segments is driving that sequential decline? And then also for the full year, raising the memory revenue growth to 20% to 35% year-over-year. But certainly, pricing should be a favorable tailwind. Curious if there are any kind of challenges or constraints shipping product given sort of how constrained some of the memory wafer supply is at the moment? Mark Adams: Brian, thanks for the question. I'll take the first end of it, and then I'll hand it over to Nate. There's two implications to the kind of forward-looking assumptions. To speak to the memory one, we continue to do a fairly good job navigating the supply constraints you're alluding to, and that allowed us to think through kind of how that business should perform going forward. And so we haven't seen anything material impacting that business and which allowed us to kind of get more granularity on the forward-looking projection, so to speak. On the Advanced Computing piece, and we'll talk about some of this through the call. But when we're winning these new customers, there's a process of kind of getting the award. And then since they're new customers, in many cases, we have to negotiate a master agreement, and then from there that gets converted into a purchase order. There's just more timing involved in new customers. Now the exciting news is we are winning more new customers, but the predictability gets a little bit tougher for us in a given quarter, so to speak. And that's where, I guess, we're a little bit more cautious. I would say just -- we talked about an award with a major financial institution last quarter. I'm happy to announce that we've signed that agreement, and we expect the PO here shortly this week or worst case next. I can also tell you that we have the same -- we have a major new oil and gas customer that we've also signed a master agreement with and expecting a PO in here shortly as in the next week or so. And so as we go through that, the timing of then getting the POs in the system and then going out and sourcing components and staging the equipment, all of that becomes just tougher for a first-time customer in the model. And that's where you may sense a little bit of caution as we think about our Q2 and even back half guidance to when things will hit. Nate? Nate Olmstead: Yes. I mean I would say when you think about the full year outlook, obviously, the most significant changes would be memory looking a little bit stronger, as you alluded to, due to some benefits from pricing primarily, although the overall demand remains very strong and healthy there. But our ability to procure supply is going to be one of the key variables to think about the memory outlook for the full year. And then LED looks like it's going to be weaker. That was fairly broad-based across the regions in Q1. Q2 is always a little bit softer in LED because of Chinese New Year. So I'd expect some sequential pressure probably in the LED business. I also expect sequentially advanced computing to be down Q1 to Q2, but that's what we expected when we laid things out last quarter. I think Q1 came in right about where we thought. Q2 looks similar to what we thought. And in the back half of the year, we expect some strength due to the -- some of the opportunities we see in the pipeline and bookings that are starting to shape up. Brian Chin: Great. Maybe just for a quick follow-up. In terms of the pipeline in advanced computing, can you maybe elaborate on how some of your expansive channel partnerships with Dell, CDW, you've got sort of the strategic relationship with SKT. I think you alluded to maybe future cloud opportunities on a sovereign basis, and maybe that's contributing to the potentials for fiscal second half. Maybe can you kind of expand on how some of those partnerships are helping with the pipeline? Mark Adams: Yes. I think across the board, most of what you talked about have been fairly exciting for us to engage with and representing a much stronger pipeline for us. I'll try to break it down. In terms of CDW, you had mentioned, our capabilities in kind of the AI factory environment and large-scale deployments is a great addition to CDW's capabilities and competencies. And we've got some good customer opportunities that just in our managed services and software solution set that we can bring to customers that are of large scale. And they're definitely represented in our pipeline. If you contemplate our relationship with NVIDIA, it continues to get stronger and stronger as the enterprise deployments scale and grow in number, being a services solutions provider for NVIDIA-based AI factories, Penguin is very well positioned there, and we continue to strengthen that partnership. and evaluating how we can bring the best of what we do with NVIDIA to form a strategic solution offering for our customers long term. And so the engagements with NVIDIA continue to strengthen. SKT is an exciting partnership. We've talked about on prior calls. There continues to be opportunities with them both in Korea and outside of Korea. And then we've mentioned in my prepared remarks, we've had a couple of -- a few new sovereign cloud opportunities of large scale that are in the pipeline and very exciting just because given the raw investment that is going to go into each of these deployments, we stand to benefit from our involvement. And hopefully, we'll be able to update you on future calls here. Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan. Manmohanpreet Singh: This is MP on behalf of Samik Chatterjee. So, firstly, I wanted to ask about the enterprise engagements, like you have been talking about the shift from hyperscalers towards then enterprises deploying for pilot programs and then towards broader enterprise-wide applications. Can you please help us understand like what exactly are you seeing, which is helping you see clearly mark that trend out? And then other than that, I wanted you to double-click a bit on your diversification efforts. Mark Adams: Sure. Let me start with your first question. If I look back over the last three or four years, most of the capital expenditure dollars of massive -- of large-scale deployments was in the area of large language model training at large hyperscalers for the most part, okay? I don't want to be universal in saying 100%, but a majority of the spend that we saw was in a very consolidated set of customers. And if you want to triangulate that data with what's going on in the market, look at where NVIDIA was selling their GPUs as an example, you'll see that their major customers were consolidated to a few large hyperscale type environments. We saw the same thing. I'd say over the last 6 to 12 months, we've seen the beginning of an evolution where enterprise opportunities are accelerating in terms of just raw volume of enterprise opportunities. And I would say the capital behind that and the planning for future growth and expansion in our customer relationships in the enterprise back that up. And so it's really been an evolution, a shift from early-stage large language model training to corporate enterprise rollout. And just based on our own pipeline activity, but also just raw market data in terms of where the products are going, we're fairly bullish on the enterprise environment as well we are on these larger sovereign AI deals. The combination of that makes us feel pretty strong on our pipeline development and diversification efforts. Operator: Your next question comes from the line of Matthew Calitri with Needham & Company LLC. Matthew Calitri: This is Matt Calitri over at Needham. Last quarter, you noted an inventory increase to support shipments at the start of 1Q FY '26. And while inventory declined sequentially, it still remains elevated. How should we think about inventory levels as a leading indicator for future shipments? And how is your visibility into the remainder of the year? Nate Olmstead: Yes, you're right. Last quarter, we exited the quarter with some inventory. That was both in memory, where the price increases, when the prices go up, you're going to see that reflected in inventory. The cost of the goods goes up. And we also had some shipments in advanced computing, which shipped early this past quarter in Q1. So I think inventory being higher than where it was a year ago is not surprising given that the overall business is larger, especially in memory. It was up 41% year-over-year. But if you look at the inventory days or the inventory turns, they're in a very healthy position. So certainly no concerns there. returning inventory quickly. Our business model is not one where we're buying really ahead of orders. We're buying to orders rather than to forecast generally. Now in today's constrained memory environment, we'll look for opportunities where we can secure some supply to take some risk off the table, and we have a strong balance sheet that we intend to put to use if the opportunity is out there for us to do that. Matthew Calitri: Got it. Very helpful. Nate Olmstead: On the question the back half of the year, I think Mark talked already about some of the opportunities in the pipeline. It remains consistent with what we mentioned last quarter. We expect the second half of the year to be stronger in the first half. That will be especially true in advanced computing, perhaps in memory as well, again, contingent upon us being able to secure supply. But that's consistent with what we said last quarter. Matthew Calitri: Okay. Great. And then can you expand a little bit upon -- I think in the prepared remarks, you mentioned some work being done to customize ICE to be compatible with other open source platforms. What exactly are you guys working on there? Mark Adams: As we think about the software stack for AI factory rollouts, there's different layers of software. Like, for example, there's cluster management layers, there's security layers, there's orchestration layers. And so what we're trying to do is build a stand-alone stack, which is partly our ICE platform and then partly best-of-breed open software stacking components that allow us to have a unique solution and that we can manage all of it as opposed to our customers having to go out and pick pieces to it. And we're working with customers to define what that might look like in a Penguin stack that's partially our own developed ICE platform and partially best-in-class third-party software that gives the customer the best software features. And by the way, that includes working with companies like NVIDIA to have their software as part of a customized platform for future development deployments. Operator: [Operator Instructions] Your next question comes from the line of Maddie De Paola with Rosenblatt Securities. Madison de Paola: This is Maddie calling on behalf of Kevin Cassidy. I was just wondering, given the recent Marvell acquisition of Celestial AI and just a broader shift towards optical fabrics, are you seeing any change in optical memory and related technologies? Mark Adams: I wouldn't say we're seeing any changes. I think it's a strong validation of the market opportunity, broad macro opportunity. People are definitely looking at this dynamic of enhancing the bandwidth performance between memory and GPU/CPUs. So when I think about an established company like Marvell making such an investment that's publicly been announced, I -- it makes me feel good about the direction and the strategy that we're deploying here in developing that type of system-level product in memory. Operator: There are no further questions at this time. I will now hand it back to Mark Adams, CEO, for closing remarks. Mark Adams: Thank you, operator. I would like to thank our worldwide employees for their dedication and commitment. Our Q1 results reinforce that we are on the right path, and we continue to grow our pipeline of new opportunities, helping our valued customers manage the complexity of their AI infrastructure. Thank you all for joining today's call. Operator: This concludes today's call. Thank you for attending. You may now disconnect.
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