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Operator: Considered as representing our views of any subsequent date. These statements are also subject to material risks and uncertainties that could cause actual results to differ materially from expectations reflected in the forward-looking statements. A discussion of these risk factors is fully detailed under the caption Risk in our filings with the SEC. During this call, we will also refer to certain non-GAAP financial measures. For information regarding our non-GAAP financials and a reconciliation of GAAP to non-GAAP measures, please refer to today's press release regarding our first quarter fiscal 2026 results to the investor relations portion of our website, investors.sonos.com. After the call concludes, we will upload our revised supplemental earnings presentation, including our guidance, as well as a conference call transcript to the IR website. I will now turn the call over to Tom. Tom Conrad: Good afternoon, everyone, and thank you for joining us. Coming into fiscal 2026, my focus was straightforward. Build on the stability we reestablished in 2025 and start bending the trajectory of the business towards durable growth and profitability. I'm proud to say the fiscal year is off to a good start. We delivered Q1 revenue of $546 million with gross profit dollars growing 5% year over year. Adjusted EBITDA grew 45% year over year to $132 million. Revenue came in above the midpoint of our guidance range and on the bottom line we generated as much adjusted EBITDA in this one quarter as we did in all of fiscal 2025. That performance reflects the fiscal discipline and structural changes we put in place over the past eighteen months which have driven more than $100 million in run rate savings while still preserving room to invest in innovation. We're encouraged by the strength of Q1. But our ambition is far greater than one quarter. The work ahead is about building durable, repeatable growth over time. Returning our company to growth is not about a single quarter, single launch, or a single trend. It's about sustained coordinated action anchored in the power of the Sonos system. At the center of our strategy is a simple idea. Sonos is not a collection of products. It's a system that gets more valuable as you add to it, use it across more rooms, and rely on it over time. That system behavior is what drives repeat purchase, longer customer lifetimes, and ultimately more durable growth. So we're now executing across five growth dimensions each designed to strengthen that system advantage. The first growth dimension is product innovation. We are focused on creating new products that are genuinely differentiated deeply tied to the home, and designed to strengthen Sonos as a system rather than standalone devices. Our hardware and software roadmaps are tightly connected and the goal is simple. Products that work better together, unlock more use cases, and make the system more powerful with every addition. The second growth dimension is a return to customer advocacy. Built on excellence in performance, reliability, ease of use, and customer service alongside a broader and more coherent software platform. When the system works well, customers trust it expand it, and recommend it. System reliability is not just a quality metric for us, it's a growth driver. The third growth dimension is more intentional and effective marketing. With the arrival of our new CMO Colleen DeCourcy, we are rebuilding our go-to-market engine around a full funnel brand architecture that connects long-term brand storytelling with a clear, consistent system narrative. Sonos is the easiest way to build a sound system for the home, and it gets better as you add to it. That clarity is sharpening both how people enter the system and how quickly they expand once they're in. The fourth growth dimension is accelerating our success in geo expansion. We see a meaningful opportunity to expand our global footprint through the right mix of products, pricing, partnerships, and local relevance, while making it simple for new households around the world to start with Sonos and then grow their system over time. The fifth growth dimension is tapping demand from emerging external trends. Our system position allows us to explore new inaction models including conversational AI in the home and new modes of content interaction, ways that feel additive rather than uninvited or far afield. These are experiences that only make sense because a trusted system is already in place. Let me highlight a few areas where you can already see progress against these growth dimensions. Starting with product innovation. Our hardware and software roadmaps are now tightly aligned around the opportunities ahead. After an intentional pause in new hardware launches last year while we focused on strengthening our software foundation, are back to introducing new products with a lot planned for the rest of 2026. Last week, we unveiled Sonos Amp Multi, It offers our installer partners a powerful new building block combining flexible, best in class multi-zone amplification with simpler installation, configuration, and tuning. AMP Multi makes complex systems easier to design deploy, and manage while advancing both sound quality and reliability. More importantly, AMP Multi is a clear expression of our system strategy. This is what we mean by building products that don't just perform on their own, but make the whole home experience easier and better. As homes become more connected, Sonos can become the audio platform that underpins whole home experiences, and Amp Multi allows Sonos to be built directly into the architecture of sophisticated homes. This product is designed specifically for our installer and integrator partners. It helps them take on larger projects, work more efficiently, and grow their businesses with Sonos as a trusted system at the center. The relationships we built with professional installers over the past few decades are a real differentiator for Sonos. When our installers do well, Sonos does well, and we see meaningful opportunities to continue investing in products software, and support that help them scale with confidence. Turning to customer advocacy. We continue to make meaningful progress this quarter on system performance and reliability across 10 software upgrades. These improvements are showing up in higher customer satisfaction across all channels and measures, and better system performance accelerates everything we do. On marketing and demand creation, we are getting more precise about how people enter the Sonos system and how quickly they expand once they're in. One early decision we made was to reduce the price of Arrow 100. Recognizing its role as a critical gateway into Sonos. That move is paying off Q1 marked the third consecutive quarter of accelerating new customer growth among households that start with Arrow 100. Up more than 40% year over year. Arrow 100 is doing exactly what we designed it to do. Introduce new households to the Sonos system in a way that naturally leads to expansion across rooms and use cases. Expanding lifetime value within our installed base is another lever. Customers who start with Arrow 100 have historically shown strong repurchase behavior and that pattern continued this quarter with newer cohorts. We also saw growth in multi-product customer starts, which matters because customers who experience Sonos as a system from the outset build deeper, longer-lasting relationships with us. As a reminder, increasing lifetime value represents a significant opportunity within our existing installed base alone. If we move from today's average of almost four and a half devices per multiproduct household to six devices per household, that represents roughly $5 billion in incremental revenue. Converting single product households to current multi-product levels adds another $7 billion. That upside is driven by system behavior, when customers use Sonos across more rooms and moments they buy more over time and stay with us longer. Looking beyond our installed base, we currently hold about 6% of the $24 billion global premium audio market. There is substantial room to grow that share, particularly outside our core markets, while continuing to expand the sound system category that Sonos created. A great example of this is we saw another quarter of dollar share gain in premium home theater in both The US and EMEA. Finally, our platform positions us well to tap into new external demand trends. More than 53 million connected devices and over 17 million homes, Sonos is a trusted platform where services old and new can coexist giving households real choice anchored in a system they value. That puts us in a strong position to explore new interaction models including conversational AI in the home in ways that complement the people already love. As I've said before, our vision for Sonos is to be every dimension of sound for the home. Music, movies, stories, rooms, formats, conversations, and control all connected through a single cohesive and radically easy system. That idea of systemness is the lens through which we make decisions and the foundation of our long-term advantage. What ultimately drives all of this is the world we're building for our customers. A home that comes alive with sound, experiences that move naturally between moments, moods, spaces, where products and software work together and the whole becomes meaningfully greater than the sum of its parts. You'll see more of that vision come to life with the products we have planned for the second half of fiscal 2026. After a year inside the company, seeing the people, the craft, and the ambition up close, my conviction has only grown that Sonos has everything it needs to return to durable growth. Q1 mattered not just because of the results, but because it showed that the underlying business is getting healthier. We proved we can manage through tariffs with discipline, deliver profitability above expectations, and do it while continuing to strengthen the system. The second quarter will be quieter as it is often for us, but the first half as a whole reflects a business that stabilizing and beginning to turn. For the past year, as we focused on software performance and reliability, we've been operating without new products to bring new customers into the system or spark repurchase. That changes in the back half of the year. We are entering that period with the system performing better and more reliably than it has in many years. With customer sentiment improving and with a slate of new products designed to strengthen the system rather than just add devices. We're already gearing up for that moment now. With a solid Q1 behind us, modest growth expected at the midpoint of our Q2 guidance, and a clear line of sight to acceleration in the second half, we are executing against a clear plan to return Sonos to growth in fiscal 2026. With that, I'll turn things over to Sayori. Saori Casey: Thank you, Tom. Hi, everyone. In Q1, we generated revenue of $546 million above the midpoint of our guidance range. Marking our sixth quarter of execution delivering on our commitments. On a year-over-year basis, revenue was down 1% compared to guidance of down 7% to up 2%. While GAAP gross profit dollars grew 5%. Revenue in The Americas grew 1% year over year, while EMEA revenue declined by 4%. And APAC by 5%. We also saw continued momentum in our growth markets, which once again outpaced the rest of our markets. On a product basis, plug-ins deliver double-digit growth, driven by strong performance from ERA100. As Tom mentioned, Q1 was the third quarter of acceleration in new customer growth since we reduced the price of AR101 100 as part of our pricing strategy we've spoken about over the past few quarters. Q on GAAP gross margin was 46.5%, and non-GAAP gross margin was 47.5%. Both modestly above the high end of our guidance range. A nearly 300 basis points year-over-year improvement in gross margin resulted in gross profit dollars growing 5% year over year, driven by lower cost, FX, and some favorability in one-time items partially offset by unfavorable product mix. Consistent with expectations we outlined last quarter, tariff expense was an approximately 300 basis point headwind to gross margin, which we were able to offset with mitigation actions led by the pricing adjustments we made towards the September. Q1 GAAP operating expenses of $153 million decreased by 21% year over year while non-GAAP operating expenses of $137 million were down 19% year over year. As a reminder, Q1 operating expenses were unseasonably low due to timing of product launches and associated spend. Stock-based compensation was $15.2 million down 40% year over year from $25.3 million last year. Adjusted EBITDA was $132 million at the high end of our guidance range, representing growth of 45%, $91 million last year. As Tom mentioned, we generated as much adjusted EBITDA in Q1 as we did in all of fiscal 2025, reflecting how far we have come in our transformation journey. Adjusted EBITDA margin grew seven sixty basis points to 24.2% our highest in the last four years. Non-GAAP earnings per share grew 37% to $0.93 up from $0.68 last year. As I've said in the past, returning capital to shareholders is a key pillar of our capital allocation framework. Accordingly, we've spent $25 million on share repurchases in Q1 at an average price of $16.79, reducing our share count by 1.2%. We have $105 million remaining in our current share repurchase authorization. Our balance sheet remains strong as our net cash balance ended the quarter at $363 million which includes $51 million of marketable securities, as we hold some excess cash in short-duration treasury bills. Our period-end inventory balance of a $125 million to declined $16 million or 11% year over year. And 27% compared to last quarter. Our inventory consists of $111 million of finished goods, and $15 million of components. Q1 free cash flow was $157 million up from $143 million last year, primarily due to higher earnings. CapEx was $6 million, down from $13 million last year. Turning to our guidance. The Q2 outlook we're providing today reflects the trends that we have observed quarter to date and are our best estimates. We expect Q2 revenue to be in the range of $250 million to $280 million down 4% to up 8% year over year and up 2% at the midpoint. Please note that this does not include any revenue contribution from AMP multi which is not generally available until the 2026. Taken together with our Q1 results, we expect revenue in the 2026 to be $796 million to $826 million. Flat year over year at the midpoint. This represents a continued improvement from a 6% decline in the 2025 and a 3% decline in the 2025. Looking ahead, with AMP Multi and other yet to be announced products slated to launch in the 2026, we expect the further improvement in our year-over-year revenue trends returning us to growth. We expect Q2 GAAP gross margin to be in the range of 44% to 46%, with non-GAAP gross margin approximately two twenty bps higher than GAAP. This represents a year-over-year increase of 130 basis points at the midpoint of GAAP and 10 basis points for non-GAAP, implying gross profit dollar growth. 52%, respectively. Please note our gross margin guidance range embeds higher memory costs In Q2. While we are not immune to memory cost inflation, our products have modest memory requirements between 512 megabytes to two gigabytes, with many products containing one gigabyte or less. For the 2026, the midpoint of guidance implies that our gross profit dollars grow 5% year over year on a GAAP basis, 4% on a non-GAAP basis. We expect Q2 GAAP operating expenses to be in the range of $150 million to $160 million down 11% at midpoint from last year. As we comp over last year's reduction in force and its associated restructuring charges. We expect non-GAAP operating expenses to be lower than GAAP by approximately $16 million As previously mentioned, our operating expense seasonality this year reflects the timing of our product introductions in the 2026 Driving a modest sequential increase in operating expenses from Q1 to Q2. For the 2026, midpoint of our guidance implies GAAP operating expenses of $3.00 $8 million down 16% year over year, a decline of $60 million On a non-GAAP basis, implied operating expenses of $276 million will be down 9% year over year, a decline of $28 million. Bringing it all together, expect Q2 adjusted EBITDA to be in the range of negative $18 million positive $10 million implying first half adjusted EBITDA of $128 million, up 42% year over year, improvement of $38 million from $90 million last year. Our guidance for the first half shows that we're building momentum through fiscal 2026, while maintaining the financial discipline groundwork we laid in fiscal 2025, At the midpoint, we expect revenue to be flat, gross profit dollars to be up mid-single digits, non-GAAP operating expenses to be down 9%, adjusted EBITDA growing by 42% implying four seventy basis points of margin expansion. This significant improvement in our financial performance is the direct result of the progress we made in becoming leaner, execution-focused organization. With AMP Multi announced and additional new products planned for the 2026, we're increasingly confident in the trajectory of the business and our plan to return to growth in fiscal 2026. Our focus remains on returning to durable top-line growth balancing continued profitability improvements and disciplined reinvestments of our efficiency gains toward product innovation, customer advocacy, intentional and effective marketing, zero expansion, and tapping into the demand from external trends like proliferation of conversational AI in the home. With only a small fraction of the global market captured so far, we see a vast opportunity in front of us to expand our household base and improve customer lifetime value. After the call, we will update our earnings slides to reflect our Q2 guidance. With that, I'd like to turn the call over for questions. Thank you. Operator: We'll now begin the question and answer session. If you have dialed in and would like to ask a question, please press 1 on your telephone keypad to raise your hand and join the queue. 1 a second time. If you're called upon to ask your question and are listening via speakerphone on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, it is 1 to join the queue. And our first question comes from the line of Steven Frankel with Rosenblatt. Your line is open. Good afternoon, and thank you for the opportunity. I'd like to start by following up on the comments you made about memory cost. That's obviously an area where there's a lot of investor concern. I've gotten lots of questions. So could you address both what you're doing to deal with the rising cost and its impact on gross margins? And also, are there any availability issues? Do you feel like the ramp of new products in the back half could be somewhat gated by the ability to procure sufficient amounts of RAM. Tom Conrad: Hi, Steven. Thanks for joining us. Know, of course, memory pricing is a headwind across the entire hardware industry. But we have a a really great team on this, you know, and as last year's tariff mitigation demonstrated, they have a real track record of managing through these kinds of cost inflation, supply chain volatility. So as you can imagine, this team has been taking action on this for some time. I I think what's most important is ensuring that we have adequate supply to reduce reliance on spot market pricing. So the team has secured and certified additional memory suppliers. I think it's also important to highlight as as Thierry shared in her prepared remarks, our products have modest memory requirements between 512 megabytes and two gig gigabytes of RAM with many of our products containing a gig or less. And just as important as that is that, you know, relative to PCs and phones, customers don't buy Sonos products based on a memory configuration. They buy them for the experiences they deliver. So we are also actively driving cost efficiencies across our product architecture. To just to touch on the the the impact of the supply situation on the products we have planned for the second half of the year. I think I think we have the dimensions I just outlined well in control. And we should be good on that front. Steven Frankel: Great. And then in terms of the team, you've made some changes. When will we see the beginnings of choline's impact on marketing programs and our do you feel like the team is complete today, or should we anticipate a few more changes? Tom Conrad: I'll take the second part first. I'm super excited about the team that, I have around the table with me today. Just incredible folks to the last. And not least of all, Colleen, who has been with us for for just three weeks, but is already making great progress in how our marketing organization shows up. With respect to when you'll start to see the impact of her contribution, she already has work well underway aligning our creative and messaging and channel execution around a more consistent system, narrative, and she's, you know, really moving as quickly as she can to implement all of those changes and everyone should expect to see that activity to ramp relatively quickly. Broadly, our goal is to move away from the sort of episodic spikes that historically had been left tied to individual product launches and shift to a more sustained marketing presence that reinforces how the Sonos system works and why it matters. So you should see gradual compounding improvement starting right away rather than anticipate some single large brand advertising launch Super excited about the work that she's driving here. It's been a great first month for Steven Frankel: Great. So I won't be looking for a Super Bowl. Commercial, so that's good news. And and well, you you you keep talking about a which we understand and and you drop some hints about AI and where some of those fits. Could you flesh that vision out anymore? You talked a little bit about about it last quarter, but are you willing to share any more details on kinda how you see those two worlds intersecting and making life better for Sonos users. Tom Conrad: Yeah. So let's start with just systemness. You know, we really believe that the power of Sonos is that the whole is truly greater than the sum of its part. And we talk about that. What we're talking about is things like effortless multi device room behavior, radically easy control, a unified design system across hardware and software, context aware experiences that understand who you are and what you want before you even asked, ask. Kind of synchronized intelligence, things like true play and dynamic allocation of experiences across surround sound. All under the banner of a Sonos operating system that our customers understand. So, you know, we're at the at the opening stages of executing across all of those dimensions. But I think it's going to be the real differentiator as we've described for the product family going forward. As it relates to AI, I think there's a maybe three different dimensions to think about. Two in the product and one inside of our operations. The first is given the scale and breadth of our installed base and the role that we play in our customers' lives, I think we're in a really strong position to explore new interaction models with them, including conversational AI in the homes in ways that complement the experiences that people already love with Sonos and feel invited rather than tacked on. Second of all, I think artificial intelligence techniques are incredibly powerful, not just for conversations, but for anticipatory design, system features that just anticipate your needs and serve you exactly the right content and exactly the right setting with the smallest amount of input from you as a user. So in that world, AI can just make the Sonos system smarter, more personal, and even easier to use long before you even get to conversation. So the third category, of course, is how we're leveraging AI inside of And I think it's indisputable that since the last one time we were together on an earnings call, we've been through another rapid acceleration of the evolution of these AI productivity tools, particularly in the domain of software development. And we are at the leading edge of integrating those tools into our workflows And I'm really excited about the productivity gains that we're gonna build from these tools and how much it's gonna accelerate our ability to innovate on the system experiences for our customers. Steven Frankel: Great. Thank you, and I'll jump back in the queue. Operator: And our next question comes from the line of Eric Woodring with Morgan Stanley. Your line is open. Eric Woodring: Awesome, guys. Thank you for taking my questions. I have two as well. Tom, I wanted to maybe zoom out and just get your take on kind of the broader health of the of the premium home theater market amidst this kind of case economy. I understand that you guys are taking share, is what we want to see. But are there any green shoots that that you can point to or or the opposite, I guess, for that matter? And and geographically, anything that's stood out to you, obviously, America's up versus international down. Just would love to get your take a little more broadly, and then a a quick follow-up, please. Thank you so much. Tom Conrad: Sure. Yeah. Speaking specifically to home theater, as we described in our prepared remarks, we do continue to grow our share in Americas and EMEA, we have without question the best home theater products in the in the category by a wide margin. And we love what we're doing there. You know, you mentioned that the kind of k shaped macro demand that that the category is experiencing. I think that's consistent with our read of the market. Which is to say, growing demand for premium experience pulled down by diminishing demand for entry level experiences. Fortunately, our product portfolio is well positioned to take advantage of those trends, but we continue to watch it closely. And I think the you know, zooming in on home theater and it's it's quarter to quarter strengths and weaknesses, is just a good opportunity to say again that you know, we really don't think of the business going forward as category based, and and we think there's tremendous opportunity for us to differentiate Sonos itself, with an expression in home theater, but extending from that one venue in the home into all of the other spaces where people need music and and sound experiences and you know, I my ambition for the company is to disentangle us from all of these individual categories as we go forward. It's probably also a good time just to say something about the incredible power of the installer channel for us. As we talked about, we've we've released our second product in the last year, custom designed and conceived for that channel. It's a it's a business we've been building for for a couple of decades now. We have incredible relationships there. It's, you know, 22% of our business and growing, and we're we're excited to continue to partner with that channel and take advantage of of the opportunity to sort of build Sonos into the very architecture of the home. Eric Woodring: Awesome. Okay. That that's that was exactly what I was looking for and more so. Thank you, Tom. And then maybe, Sayori, just shifting over to you, obviously, really nice gross margin performance this quarter. That's probably an understatement and really nice guide. Just given the fact you're close to all-time high gross margin but you're doing this with tariff headwinds. I know you talked about the size of the tariff headwinds, believe. But can you just maybe help us bridge the gap from last December quarter's 44.7% non-GAAP gross margin to the mid-forty 7% number that you just put up in December quarter. What were the tailwinds most important to least important? And then what were the headwinds kinda most impactful to least impactful? Just added color on that would be really helpful. Thanks so much. Saori Casey: Yeah. Thank you, Eric. Yeah. No. We were very pleased with our gross margin percent results, both relative to our guidance and, you know, our expectation as well as on a year-over-year basis. Some have commonalities there. Certainly, our continued effort on reducing cost It resonates on both compares, that we're looking at. And, and then, you know, we have we also have a element of FX that is a tailwind for us right now. Now that's to say and then we as you as we talked about at the last earnings call, you know, we did increase price, in the middle of the the September as part of our price tariff mitigation efforts. And so those those are things that are tailwind. On the other hand, you know, some of it is to combat the headwinds that we have, namely the biggest impact this quarter being tariffs. And then we have product mix, you know, certainly in the holiday quarter as Tom also talked about in the prepared remarks. Had a really strong performance on 100. Is a lower price point product that tend to have lower gross margin as well. So that's a product mix headwind that we have. And, you know, last year at this time, we had launched Arc Ultra with associated channel fill, so we do have that compare as part of our headwind on a year-over-year basis. And, you know, as as we mentioned on the call, the price, mitigation or tariff mitigation, actions that we've taken, certainly, are working for us, and it's in line with what we had expected. We had come into this quarter thinking tariff will impact us on about 300 basis points. And our mitigation actions, the biggest one being pricing, had helped us mitigate nearly all of that. And then on a to a slider extent, we do have the memory headwind but that was more negligible in this quarter. But what as we said on the call, Q2 guidance range of 44% to 46% gap and 47 half non-GAAP, you know, certainly does embed that impact And as Tom also talked about earlier during the Q and A, we are doing everything we can to, mitigate the need to buy at this spot price. The market and securing our suppliers as much as we can. So those are some of the puts and takes we're looking at right now. Certainly, the the favorable impact is outpacing our unfavorable headwind that we have. Eric Woodring: Okay. Awesome. Thank you for that color, guys. Best of best of luck. Saori Casey: You, Eric. Operator: Our next question comes from the line of Brent Thill with Jefferies. Your line is open. Hi. Thank you. This is John Dion on behalf of Brent Thill. Just two questions. One maybe for Tom. You know, you've been CEO for a little over a year now, I guess. And so I wanted to see maybe if you could kinda review you know, what what are some of the biggest changes that that were made in your first year in in what are some of the the biggest initiatives you're looking for ahead for the next year? And then maybe we'll try again maybe on the geographic color in terms of America's being up versus international down. I if there's anything additional we can share there. For salary. Thank you. Tom Conrad: For remembering that that I just went through my one-year anniversary with the company. So as interim and then six months as the named CEO. It's been an incredible year for me as a person and and and for the company. Overall. You know, as you know, we spent a good chunk of last year making material progress around improving the core experience of Sonos performance, reliability, you know, just customer service experiences, honestly, just doing the hard work of of of winning back our customers as our advocates, and I'm I'm so proud of the progress that the team has made And so grateful for the patients that our customer showed us through what had been a very difficult chapter. And as I described at the top of the call, I'm just you know, incredibly excited to have that chapter behind us and now be focused on the work of of the next act for Sonos or return to growth and structural profitability. You know, you've heard me kind of say on the call that that our belief is that returning to durable growth is really about executing across multiple dimensions at once, product innovation, customer advocacy, marketing excellence, geographic expansion, capturing our place in emerging external trends. And what's exciting about these is that they're really compounding dimensions. You know, for example, as our marketing muscle develops it it it impacts positively our success in geographic expansion as customer advocacy improves makes it easier for us to launch new products into the market successfully. So really focused on on executing against those five dimensions, while, you know, returning to new product introductions in the second half of the year that will be an accelerant for us And yeah, just we've we've we've turned our we've turned our view towards the horizon and and it's exciting to be in a strategic moment for the company. Saori Casey: Just to add a a few more points specifically on the geographic color here. We we did show a slight growth for Americas know, certainly, that's our biggest, market that we serve. Notwithstanding our efforts to, focus, as Tom just mentioned, on the geographic expansion. And the the growth markets that we are expanding into is continuing to outpace the the growth of the rest of the markets that we're serving. That's continues to be our highlight here. Overall, from a product basis, you know, by geography across all of the geographic areas, we are seeing we saw strength in the plug-ins revenue or the AR 100 led growth that we're seeing ever since we have adjusted the price as part of our pricing strategy to drive more gross profit dollars, and, that is exactly what's serving for us at the moment. We did gain share in both on in both Americas and EMEA. For home theater. And lastly, you know, the our continued, expansion into some of the products that we we had the last NPI that we had launched in Q1 last year in Orc Ultra. So before those are, doing well, but we do have a difficult comp this year because there were channel fills that took place a a year ago. So that that's part of a headwind that's partially offsetting some of the strength that we're seeing. John Dion: Great. Thank you very much. Operator: And as a reminder, just star one if you would like to ask a question. And with no additional questions at this time, this will conclude our question and answer session as well as today's call. We thank you for your participation, and you may now disconnect.
Operator: Good afternoon, and welcome to Skyworks Solutions, Inc. First Quarter Fiscal Year 2026 Earnings Call. This call is being recorded. At this time, I will turn the call over to Rajvindra Gill, Vice President of Investor Relations for Skyworks Solutions, Inc. Mr. Gill, please go ahead. Rajvindra Gill: Thank you, operator. Good afternoon, everyone, and welcome to Skyworks Solutions, Inc.'s first fiscal quarter 2026 conference call. With me today for our prepared remarks is Philip Brace, our Chief Executive Officer and President, and Philip Carter, Senior Vice President and Chief Financial Officer for Skyworks Solutions, Inc. This call is being broadcast over the web and can be accessed from the Investor Relations section of the company's website at skyworksinc.com. In addition, the company's prepared remarks will be made available on our website promptly after their conclusion during the call. Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward-looking statements. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-Ks, for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. Additionally, today's discussion will include non-GAAP financial measures, consistent with our past practice. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. With that, I'll turn the call over to Philip Brace. Philip Brace: Thanks, Rajvindra, and welcome, everyone. Before turning to the quarter, I want to briefly address our previously announced combination with Corwell. We believe this transaction is highly strategic and transformative, bringing greater scale, deeper R&D, and a broader technology portfolio. Together, this combination is expected to reduce historical mobile volatility, strengthen our competitive position, enhance our broad market capabilities, and expand our TAM into dispense and aerospace, while creating a clear path to more than $500 million of synergies over time. As highlighted in our investor presentation on October 28, we believe this combination will deliver substantial financial benefits. We expect to achieve healthy gross margin through the cycles, in the 50% to 55% range, supported by significant operating leverage and enhanced earnings power. The combined company will generate robust free cash flow, underpinned by an extremely favorable capital structure with expected net leverage of approximately one at close. These advantages position us to drive long-term value for our shareholders and customers and support continued investment in innovation and growth. Since announcing the transaction on October 28, we've made solid progress. We've completed our initial regulatory filings, a shareholder vote has been scheduled, and our teams have begun integration planning. As is typical for a transaction of this scale, we expect a comprehensive regulatory review, and we are working closely with regulators around the world. We still expect the transaction to close in early calendar year 2027, subject to the receipt of required regulatory approvals, approval of both company shareholders, and the satisfaction of other customary closing conditions. I'd also like to recognize the Qorvo team for the constructive and collaborative approach brought to the integration planning process. We're off to a great start and excited about the opportunity ahead when we come together as one stronger organization. I want to emphasize that we are committed to closing the transaction and believe in the long-term value creation opportunity that the deal unlocks for our customers and shareholders. Beyond these prepared remarks, we will not be discussing the transaction, as today's call will focus on our results from the first fiscal quarter as well as our outlook for March. Turning now to Skyworks Solutions, Inc.'s performance for this quarter. We stayed focused on what we can control: operational execution, customer engagement, and disciplined investment in our product roadmap. Our strategy remains straightforward: focus on our customers, invest in our core technologies, and continue to grow broad markets. Broad markets remain a key growth engine for the company, growing faster than the corporate average. Our products are designed into high-growth areas across a wide range of end markets, including connected vehicles, enterprise infrastructure, satellite communications, data center networking, and emerging edge AI applications. This breadth supports durability and reduces reliance on any single program. Skyworks Solutions, Inc. delivered strong results, exceeding the high end of our guidance, driven by upside in mobile and broad markets. We posted revenue of $1.04 billion, delivered earnings per share of $1.54, generated $339 million of free cash flow, and paid $106 million in quarterly dividends. Revenue, gross margin, and non-GAAP EPS all came in above the midpoint of our outlook. In mobile, we outperformed expectations supported by healthy sell-through and strong execution on new product launches at our top customer. Smartphone replacement cycles, while still lengthy, are beginning to shorten. This trend is driving increased unit growth as consumers upgrade more frequently, especially with the rise of new AI-capable devices and more integrated features. While we are mindful of broader industry discussions around component pricing and availability, we have not seen an impact on demand to date. Reminder that the vast majority of our mobile revenue is tied to flagship and premium-tier devices. Channel inventory remains lean, and we continue to closely monitor customer forecasts. As we look ahead to future business at our top customer, we successfully defended key mobile sockets and gained where architecture changes created opportunities, with mixed dynamics potentially moderating some of that progress. Based on what we see today, we currently expect blended mobile content to be flat year over year. We will not be commenting on specific sockets, models, or launch timing. We remain bullish on the long-term drivers of RF content supported by accelerated replacement cycles, coupled with rising RF complexity, tied to AI-driven workloads and higher performance requirements. Broad Markets delivered its eighth consecutive quarter of growth with revenue up double digits year on year, reflecting strength across edge, IoT, data center, and automotive. In edge IoT, Wi-Fi 7 momentum continues to build, supported by bandwidth-intensive applications in the home and workplace. Wi-Fi 7's higher throughput, lower latency, and reliability position it as an important enabler as AI inference moves closer to the edge. Design win activity remains strong, backlog is healthy, and we're already engaged with customers on early Wi-Fi 8 programs, positioning us well for the next cycle. Automotive demand remains solid, driven by increased connectivity across telematics, infotainment, and software-defined vehicle architectures. Our pipeline is broad, global, and aligned with long-cycle platforms across multiple OEMs and tiers, giving us good visibility into fiscal 2026. In data center infrastructure, demand signals are improving across our customer base, supported by increasing design win activity. Timing and power management content is expanding as the ecosystem transitions to next-generation 800 gig and emerging 1.6 terabit architectures. We are seeing higher activity, particularly with cloud and networking customers that require tightening, timing accuracy, improved power performance, and better synchronization across high-bandwidth systems. Broad markets continue to expand its reach across a more diverse set of customers while consistently delivering margins above the corporate average. The demand drivers across these end markets are long-cycle and multi-year, positioning the business well as we move into fiscal 2026 and beyond. With that, let me turn the call over to Philip Carter for a discussion of last quarter's performance and outlook for 2026. Philip Carter: Thanks, Philip. Skyworks Solutions, Inc. delivered revenue of $1.035 billion, exceeding the high end of our guidance range. During the quarter, our largest customer accounted for approximately 67% of revenue, consistent with the prior quarter. Mobile represented 62% of total revenue and came in higher than our expectations, driven by healthy sell-through at our top customer. Broad markets also outperformed expectations, growing 4% sequentially and 11% year over year, driven by growth across edge IoT, data center and cloud infrastructure, and automotive. Gross profit was $482 million with a gross margin of 46.6%. Operating expenses were $230 million at the low end of our guidance range, reflecting disciplined cost control while continuing to invest in priority growth areas. Operating income was $252 million, translating to an operating margin of 24.3%. Other income was $6 million, and our effective tax rate was 10%, resulting in net income of $232 million and diluted earnings per share of $1.54, $0.14 above the midpoint of our guidance. We generated $396 million of operating cash flow, capital expenditures of $57 million, resulting in free cash flow of $339 million or a 33% free cash flow margin. We ended the quarter with approximately $1.6 billion in cash and investments, and $1 billion in debt, maintaining a strong balance sheet and ample flexibility to support our strategic and financial priorities. Looking ahead to 2026, we expect revenue to range between $875 million to $925 million. We anticipate mobile to decline approximately 20% sequentially, consistent with seasonality. We expect broad markets to be flat sequentially, representing 44% of sales, and up high single digits year over year. Gross margin is projected to be approximately 44.5% to 45.5%, reflecting seasonally lower volume. We expect operating expenses to be between $230 million and $240 million as we continue to fund key R&D initiatives while maintaining tight control over discretionary spending. Below the line, we anticipate approximately $4 million in other income, an effective tax rate of 10%, and a diluted share count of 151 million shares. At the midpoint of our revenue outlook of $900 million, this equates to expected diluted earnings per share of $1.40. With that, I'll turn it back over to Philip Brace for closing remarks. Philip Brace: Thank you, Philip. Before we wrap up, a heartfelt thank you to our employees, customers, and partners. Your dedication fuels our success and sets the stage for continued leadership and growth. Operator, let's open the line for questions. Operator: Thank you. If your question has been answered and you'd like to remove yourself from the queue, please press 11 again. Given time constraints, please limit yourselves to one question and one follow-up. Our first question comes from Harsh Kumar with Piper Sandler. Your line is open. Harsh Kumar: Yeah. Hey. First of all, congratulations, guys. We know this is a tough environment, but you guys are doing really well in mobile, specifically. Phil, I had a question for you. You mentioned things. You said you won't take specific questions on the deal, but you mentioned you will see increased scale, deeper R&D capability, broader technology suite, etcetera. Was wondering if you could hit upon what maybe specifically are color-wise what you expect to see out of this deal on these kinds of fronts. Philip Brace: Yeah. You know what I'm really excited about? Thanks for the question. You know, look. What's always impressed me is the complementary nature of our portfolios. In fact, it's pretty clear. I mean, Qorvo does a lot of the intensified of the house, which we don't really have at all. So I'm really excited about bringing those complementary technologies together. Particularly in the RF side, it should result in reduced volatility. It should increase our scale on the RF side, giving us the opportunity to innovate across the RF chain. Brings us lots of engineers that we think are highly valuable. And I just think there's just the future is super bright in how we do that. And then we bring the, you know, the combination together brings a fantastic, you know, broad market synthesis as well. So, you know, super, super bullish about that, and I hope that answered your question. Harsh Kumar: No. It does. Thank you for the color. And then as my follow-up, if I can ask you, you know, you will have a pretty broad set of auto products to address your largest customer need. I think that's the biggest customer around that you want to be playing with and, you know, you'll have kind of a pretty broad portfolio. So the question was, how do you see the combined company having the right kind of portfolio? What will you be focused on within that portfolio to address your customers' needs? Philip Brace: You know, look, I think that we bring a tremendous scale all the way from a lot of the antenna areas all the way back to the pads and a number of different critical RF technologies. And when we see the RF complexity evolving as AI workloads look more to the edge, there's more transmit capability coming down the pipe. From what we can see, having the broadest RF portfolio in the industry is going to be a really powerful opportunity for us. And then also, I think, keep in mind, it gives us an opportunity to innovate in a variety of other areas too. We talk about Wi-Fi, or some of the other areas as well. The world is connected wirelessly. There are billions of devices connected wirelessly, and I think it continues to give us a platform to invest in that for the future going forward. Operator: Thank you. Our next question comes from Karl Ackerman with BNP Paribas. Your line is open. Karl Ackerman: Yes. Thank you, gentlemen. Two, if I may. Your guide implies broad markets will grow on a year-over-year basis for, I think, at least six consecutive quarters. I think you said you eight on a sequential basis. Could you discuss you spoke a little bit about some of the design wins particularly around Wi-Fi driving demand for edge. But could you also address where you're seeing the most strength of broad markets in March? And then which areas of this business do you see that you have the most confidence in that can drive growth? Your long-term growth over the next two or three years? I have a follow-up, please. Philip Brace: Yeah. Thanks. I mean, look, you're at this mark, sir. Eighth consecutive quarter of sequential growth with double-digit year-over-year revenue expansion. So we feel really good about that. When I look at kind of underneath the covers, what you asked for, I would I guess, I would point to three major areas. Right? The first would be Wi-Fi. Right? Wi-Fi 7 adoption continues to be very strong. And there are some reasons for that. The increased bandwidth, the increased security, as really as AI moves continues to move out there to the edge, we see Wi-Fi continuing to be a major platform for that. And, you know, demand there remains robust. And, certainly, see a long, you know, push of innovation that leads out to Wi-Fi 8 and beyond. So I'm particularly excited about that one. You know, on the automotive stuff, for us, that's also been an area where we've seen good growth. And there's a lot of headlines in the news about auto markets, but we actually tend to be kind of in the sweet spot of the growth area because we're talking about vehicle-to-vehicle connectivity. We're talking about infotainment. And power isolation products, which are really kind of independent of the kind of combustion engine you use. And we've seen pretty broad-based wins across the board globally on that. So that seems to be some tailwind for us. And then finally, on the power and timing, which is really related to the data center side, I mean, we're seeing tremendous uptick in our activity, design wins, particularly as we have a really strong lead in what we call jitter attenuating clocks. Which are really important as the frequencies continue to go up to 800 gig or 1.6 terabytes. And then some of our power isolation products which really have to do with as the servers move to higher and higher voltage, you need to isolate the power that's coming in from the low voltage power of the actual silicon devices. So, I mean, I would characterize Wi-Fi, automotive, and then data center with power and timing as kind of being three tailwind things we have in our broad markets we're excited about. Karl Ackerman: Got it. Thank you for that, Phil. You know, during the prepared comments, you spoke about how you're seeing strengthening position, your 5G position in premium Android handsets, including the upcoming Galaxy S26 launch. At the same time, you spoke about how your overall content should be stable, if not maybe a little bit better than that, going forward. Having said that as kind of a backdrop, I guess, should we expect that, you know, fiscal 2025 should be the trough in content at your largest customer? And I guess more broadly, could you describe your positioning at your largest customer and whether AgenTik AI could drive higher RF content gains in its devices than in prior seller technology upgrade cycles as well? Thank you. Philip Brace: Yes. Thanks. Good question. Look, I think what I would say, look, we compete for business every single year at our large customer. I don't expect that to change. I'm pleased we defended our major sockets at all the mobile platforms. So I'm pleased we did that. I'm not satisfied that we did because I have the we have the opportunity to do even better than that. But I'm pleased we defended the sockets, and I think you know, I think some of our prepared remarks and from our largest customer suggest there's a strong tailwind with both upgrade cycles, AI demand pushing things to the edge. And we continue to see very strong demand cycles, not just on the mobile side, but pretty much broad-based right now as well. We're keeping a close eye on it just some of the commentary around component prices and things. But right now, we continue to see a very strong tailwind of unit demand. Operator: Thank you. Our next question comes from Edward Snyder with Charter Equity Research. Your line is open. Edward Snyder: Great. Thank you. A little confused, guys. Ed, we're having some difficulty hearing you. Edward Snyder: Sorry. Is that any better? Yeah. Guys. Yeah. So I'm a little confused. You mentioned that you defended your stock stock. You've got some good content gains, but you think they may offset by mix. And given what we know about basically, the mix here, I would've thought you'd have a little bit more of a tailwind in the second half of this year just from the sheer fact that you know, you've gained back some content and the mix of modems at least is favoring you over what you did last year. I thought two to I thought last year would be your trough. But and I know since CES, there's been a lot of you know, a lot of discussion about, oh, the worst is yet to come, etcetera. So maybe you can help clarify why do you think MiX is gonna offset your content gains? Philip Brace: Think, Ed, thanks for the question. I think that we've to be careful. It's difficult for us to really comment on specific models and launch timings and things like that. But I think that you know, suffice to say, some of the content varies between particular models, and it's really hard for us to predict what ones are gonna sell, when they're gonna launch, and how they're gonna do. So I think our best guess right now is our blended content should be flat. We defended our key sockets. We gained back some more architecture changes, and we think net overall could be flat. We do expect some tailwind with respect to some of the demand we're seeing. Right? I mean, it's very strong demand across the board. I'm happy that we did that. I'm not satisfied that we did. But I'm happy we did that, and we've got some more opportunities ahead. So hopefully, that we try our best to kinda answer that. That's kinda why we're projecting a blended flat. At this point. Edward Snyder: Okay. And then if I could just ask, do you have a socket in Japan? I know you're underutilized in a couple of your factories. Specifically with the filter factory in Osaka. Is that gonna improve in the second half of the year substantially, or should we expect you know, kinda status quo maybe a little bit better? Philip Brace: Yeah. Look. I think right now, it really depends on the technology base. We're not gonna talk about specific loading of specific factories. I would say that in general, in the products that are being utilized, we are definitely we are at capacity. Right? We are definitely hand to mouth from that. We are we're scrambling to meet the REIT demands. And right now, our demand exceeds our supply. And so we're continuing to work that. There are pockets of areas where, you know, we talked about example, a specific facility, and that really has to do with more technology changes than anything like that. So know, I think that our gross margin guide, if you're kinda going there, that really reflects what we have best knowledge today of balancing mix, costs, prices, and things where we wanna go. Right? It's something we keep a close eye on, and we're gonna continue to work that going forward. Operator: Thank you. Our next question comes from Timothy Arcuri with UBS. Your line is open. Timothy Arcuri: Thanks a lot. I think you have about a $1 billion left on your repo authorization. The stock has obviously come in. I think, you know, you sound super confident on these synergies and the deal, you know, closure being on track. So can you buy back stock? I think you can repo stock with Qorvo management approval. Was that right? Can you kind of talk about that? Philip Carter: Hey, Tim. Yeah. This is Philip Carter here. Yeah. So our free cash flow this quarter was $339 million, 33% margin, sitting with $1.6 billion in cash. A billion dollars in debt, we do have ample opportunity and cash to buy the stock. During the pendency period, there are some requirements but we are you know, we're constantly looking on how we can deploy our cash. We did announce the press release that we are paying a 71¢ dividend to our shareholders. But we are constantly looking at the optionality. We do have to go to the debt markets the next twelve months or so anticipation of closing this deal. So we do want to maintain some level of financial prudence as well. Timothy Arcuri: Okay. Thanks, Phil. And then there was a huge amount of focus on the earnings call for your biggest customer around, you know, memory pricing and, you know, for their margins. So it seems like maybe it's a risk that they push back on you on pricing. So you talk about that as a risk? You said content's flat, but is your price locked in with them? Because I would think that they are gonna try to you know, take everything out of all their suppliers that they can given these, you know, memory cost headwinds. Thanks. Philip Carter: Yeah. No. I think the I mean, first off, you know, when we talk about some of those wild swings in we've heard about the market, there's simply no way for any company like Skyworks Solutions, Inc. to be able to dampen that kind of volatility out there. So the short answer is no. There's always competitive pricing dynamics at our largest customer. You know? Having said that, as I mentioned, we are hand to mouth. We are scrambling for every part we can build at this point. And so, you know, we're not seeing any pressure associated with that. And, you know, I wouldn't really expect to either. Now could that change going forward? Maybe, but we're not seeing it right now. Operator: Thank you. Our next question comes from Peter Peng with JPMorgan. Your line is open. Peter Peng: Hey, guys. Thanks for taking my question. Just in terms of your the overall unit assumptions I should be thinking, think you talked about a pretty strong upgrade cycle going. At the same time, I think there's a lot of concerns about memory, and you guys historically have talked about low single-digit unit growth. Is that still the base case to assume for this year or because of some of the memory constraints that, you know, this could be more of a flat market? Maybe just you know, you can share some color on what you're seeing. Philip Brace: Well, look. I think that we're only really guiding one quarter out. But I would say, I think, consistent with what has been said publicly on prior calls, I mean, we are seeing very strong unit demand. And we're certainly seeing that. That's reflected in our numbers certainly about seasonality. And we're seeing very strong demand. So I'll leave it at that. I don't think we want to project demand going forward because we really don't know. We just take the input from the customers and go look at it there. So but we do expect to see stronger unit demand than perhaps you've seen publicly talked about before. Peter Peng: Got it. Thank you. That's very helpful. And then just on in terms of seasonality, given the, you know, potential, you know, different set of launches, and you guys have historically had a bigger footprint in certain screens. How do we think about seasonalities, you know, through, like, in the year? Is it we kinda just model based on historical seasonality or because of some of the different launch timing that, you know, we might just skew the seasonality a little bit. Philip Brace: Yeah. Obviously, we can't really talk about launch timing of our customers and what to do. I know there's been a lot of industry chatter on that, and that's not really something we are prepared to talk about nor, frankly, do we really know. Honest. It's not something they don't review their none of our customers review their particular plans with us. But I would say that, you know, as we look in the out quarters, I mean, I don't think we're kind of what I would characterize it as fairly normal. We're not seeing anything abnormal with respect to that. So I would just you know, nothing abnormal, just strong demand, and I wouldn't say there's anything not seeing anything unusual respect to that. Operator: Thank you. Our next question comes from James Schneider with Goldman Sachs. Your line is open. James Schneider: Good afternoon. Thanks for taking my question. Following on the prior comment, realizing you can't comment on your customers' product launch plans. But in principle, would what impact would seasonally more muted business cycle or product launch cycle have on the company operational, either in terms of production, factory loadings, overall gross margins or otherwise? Philip Brace: Well, gee, I you know, let me and look. Overall, I think obviously, being our large customer, right, any sort of swings in demand are impactful for us in terms of how we manage that. You know, right now, we are very constrained across the board. We're fighting hand to mouth for product and we continue to do that. I think we've done an effective job operationally managing that. I mean, having some peaks and valleys with respect to demands is not unusual for that customer as they ramp up and down through the cycles. And so you know, right now, I think that we tend to be in a situation where the demand is just very strong, and we've seen these situations before, and we're doing our best to manage them. And should signals change, then we'll deal with that accordingly. I mean, I'm not sure I can give you a better answer than that. James Schneider: That's fair enough. Thank you. And then maybe just as a quick follow-up. You talked about the sort of recovery in broad markets, I think is kind of consistent with what your peers have reported. Can you maybe talk about any sort of idiosyncratic product areas that you took as a drive sort of outsized market growth relative to the market for you this year? Philip Brace: Thank you. Yeah. I think I kinda mentioned them before. I mean, I know. Some of the areas that I'm excited about. I mean, we talked about Wi-Fi being a big driver there. We talked about being in the auto segment growing faster. The data center spiced with power and our timing products continues to be a good one. You know, longer term, you know, it doesn't that's not yet big enough to talk about, but I'm excited about what we're doing in satellite comms too. I mean, I just think we've got exposure in a number of areas. I mean, I just I try and remind everybody that I talk to. The world is connected wirelessly. We're in a very good spot for that, and some of our products that play in the data center, including timing and power, are also seeing a bit of tailwind. So, you know, I think we've got a lot of great stuff going on, and our broad markets continue to grow and continue to perform at a better and corporate average. I think that'll help that'll help us continue to get outsized earnings out in the future. Operator: Thank you. Our next question comes from Gary Mobley with Loop Capital. Your line is open. Gary Mobley: Hey, guys. Thanks for getting me in. I had just one question. In early December, you filed form S-4 in which you gave a revenue forecast specific to Skyworks Solutions, Inc.'s business out through 2030. And I believe that predates your down selection with your largest customer. Next-generation launch. So you know, given what you know today, on sort of your content in the upcoming launch, you still stand behind those revenue forecasts outlined in the S-4 filing? For 2026 and 2027. Philip Brace: Yeah. For the question. It's obviously difficult for me to, for a lot of reasons, can't specifically comment on specific filings moving back then. I just would say that I continue to be incredibly bullish about that combination going forward. I continue to believe in the strategic and financial benefits for that. We are committed to closing the transaction. Frankly, I can't wait to get it closed. Gary Mobley: Alright. Thank you. Operator: Thank you. Our next question comes from Christopher Rolland with Susquehanna. Hi, thank you for the question. This is Yasha on Christopher Rolland. And I had a question on gross margins. So maybe just looking forward a couple of quarters, are there any gross margin puts and takes we should consider just given the memory dynamics that was expressed by our largest customer? Any trends in mix, pricing, any additional color there would be helpful. Philip Carter: Yeah. So this is Carter. We don't give any guidance beyond one quarter. As we look to the next quarter guidance, we did guide margin down 160 basis points, and that's mostly due to typical seasonality, in mobile and lower volume in March. As well as a slightly higher mix of Android. We also have had three quarters in a row of exceeding the high end of our guidance range. And as a result, you know, you can imagine you're getting a little bit more input costs on expedite fees and things like that to meet our on-time delivery targets with our customers. But, yeah, other than that, I would say, you know, we're not seeing anything abnormal from typical seasonality. Yasha: Thank you. And then for Android, I believe last call, you provided a color. It was a little less than $100 million. So any update to that revenue and how should we think about seasonality here through the year? Philip Carter: Say for the current quarter, as we look at Android, it's down quarter to quarter. We are anticipating an increase from the current quarter Q1 into Q2. And so, yeah, as we look at that, it'll be actually double-digit growth from Q1 to Q2. But we do anticipate that to moderate as we go throughout the year, so we're not seeing huge Android growth throughout the year as we're very selective on the devices that we choose. Plan. Operator: Thank you. And our last question comes from Liam Pharr of BofA. Your line is open. Liam Pharr: Hi, guys. Thank you so much for taking my question. Really appreciate it. I just wanted to have a quick clarification. When you said that your content gains at your largest customer offset by mix, do you mean that you know, that offset is from the 17 becoming a greater part of the overall mix or by expected shifts between models of the same generation? Philip Brace: It's really did said it could be potentially moderate by mix because we don't really know. I mean, the issue is that we don't really know, and I don't even think the customer knows how the models are gonna sell, and that won't be clear for some time. And so I think that we're trying to give guidance one quarter at a time. We defended our key sockets. We made progress where we could. We're just making the best prediction of what we think we can, and we'll give guidance along the way as we go there. We think our content should be stable on a blended basis, and how it actually gets quarter to quarter is really gonna depend on how the models do, and we'll just continue to keep an eye on that as we go forward. Liam Pharr: Makes sense. Thank you. And then shifting to broad markets, I was wondering if you could touch on just in terms of data center progress. Is it still, you know, any any you know, is it growing faster or slower than the overall, you know, segment average? And in Wi-Fi, maybe, you know, I don't want you to touch talk too much about the deal, but in terms of how complementary those portfolios are and whether there's any for competition, you know, naturally between your two portfolios as you combine them? Philip Brace: Yeah. On the data center side, you know, one of the yes. The short answer is yes. That is growing faster than our overall broad markets. And let me give you an example of some of the power isolation products we have to put in context. Power isolation products, what they do is they provide they basically isolate the very high voltage from the actual lower voltage microcontroller. Controllers and GPUs and things. And so as you all the trends of the respect to having higher and higher voltage on the data center side, you need to have very specialty products that basically isolate those powers. Because you can imagine if you put four or 800 volt DC, a GPU, that's probably not gonna last very long. And so all of those products so we're getting lots of demand in that space. And then the timing products really around one point about 800 gig and 1.6 terabit with their low jitter jitter attenuating clocks are doing really well as well. So right now, right, those are going definitely faster than corporate average. The margins are better than the corporate average. We just wish there'd be a lot bigger. So we're continuing to work that and invest in those. Those are continuing to be core investment areas for us. You know, with respect to Wi-Fi, you asked about the combination. Right? I think that both of the products, you know, have their unique positions to do that. We'll evaluate that going forward in terms of what we wanna do. What we told the customers is, you know, we're continuing to, you know, keep our commitments to them going forward in time, and we're gonna make the best decisions on how we do that going forward. Liam Pharr: Thanks very much. Operator: Thank you. Ladies and gentlemen, that concludes today's question and answer session. I'll now turn the call back over to Mr. Brace for any closing comments. Philip Brace: Great. Thank you very much for joining the call today, and I look forward to seeing you in person at some of the upcoming conferences. Thanks again. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings, and welcome to the Emerson Electric Co. First Quarter 2026 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug Ashby, Director of Investor Relations. Thank you. You may begin. Doug Ashby: Good afternoon, and thank you for joining Emerson Electric Co.'s first quarter 2026 Earnings Conference Call. For those who do not know me, my name is Doug Ashby, and I am the Director of Investor Relations for Emerson Electric Co. Today, I am joined by Emerson Electric Co.'s President and Chief Executive Officer, Surendralal Karsanbhai, Chief Financial Officer, Michael Baughman, and Chief Operating Officer, Ram Krishnan. As always, I encourage everyone to follow along with the slide presentation, which is available on our website. Please turn to Slide two. The presentation may include forward-looking statements, which contain a degree of business risk and uncertainty. Please take time to read the Safe Harbor statement and note on the non-GAAP measures. I will now pass the call over to Emerson Electric Co.'s President and CEO, Surendralal Karsanbhai, for his opening remarks. Surendralal Karsanbhai: Thank you, Doug, and good afternoon, everyone. Thursday, February 5, marks my fifth anniversary as Chief Executive of Emerson Electric Co. Over the five years, I have found the work challenging, motivating, and rewarding. The execution of our vision to transform Emerson Electric Co. into the world's leading automation company has been incredibly gratifying. We aligned the company to important secular drivers, which will experience outsized growth well into the future. Our customer engagement teams now deliver an unequaled software-enabled technology stack to solve the industry's biggest challenges. I am surrounded by the best management team in industrial tech and by 70,000 talented, engaged colleagues all around the world. The Emerson Electric Co. management system will enable best-in-class execution led by growth, earnings, cash, and resulting in differentiated value creation. I remain ever grateful to Emerson Electric Co.'s Board of Directors, employees, and investors for their trust and support. Please turn to Slide three. In November, we hosted our first investor conference since completing our transformation. It was energizing to present Emerson Electric Co. as the global automation leader, executing on our vision to engineer the autonomous future. In addition to highlighting our technology advancements and innovation, we introduced our value creation framework, which guides how we operate the company. Beginning with organic growth, Emerson Electric Co.'s automation portfolio is aligned to powerful secular tailwinds: electrification, energy security, near-shoring, and sovereign self-sufficiency. We expect these to drive growth over the next three years and beyond. We are also delivering innovation that enables customers to unlock significant value from automation. Operational excellence is a hallmark of Emerson Electric Co., and we have plans to further expand adjusted segment EBITDA margins by 240 basis points by 2028. Importantly, we plan to return $10 billion or 70% of cumulative cash to shareholders through $6 billion of share repurchase and $4 billion of dividend payout. We remain confident in achieving our 2028 targets: the $21 billion top line, 40% incrementals that delivered a 30% adjusted segment EBITDA margin, $8 of adjusted EPS, and a 20% free cash flow margin. We believe this is a highly differentiated value creation framework, and we are excited for the future of Emerson Electric Co. Please turn to Slide four. 2026 marks the fiftieth anniversary of National Instruments, which was founded in Austin, Texas, in 1976 by James Truchard, Jeff Kodowski, and Bill Nolan. The trio was frustrated by the inefficient tools they encountered while working in a test lab at the University of Texas and believed connecting instruments to a computer could revolutionize electronic test and measurement. They developed LabVIEW while working out of Truchard's garage, and since its release in 1986, LabVIEW has redefined productivity and engineering workflows through software-defined test. Today, Emerson Electric Co.'s NI is the leader in test automation systems, and two recent developments demonstrate how Emerson Electric Co. is still driving tests forward through software. In January, our Nigel AI advisor was one of 13 products recognized as a 2025 product of the year by electronic product design and test. This UK-based trade publication focuses on electronic test validation and manufacturing, and their annual list highlights products that use innovation to achieve even greater levels of performance. Nigel provides intelligent workflows with AI-driven test design and orchestration to accelerate troubleshooting, optimize lab performance, and enhance decision-making. This award demonstrates Emerson Electric Co.'s leadership in AI-enabled test automation and reflects continued momentum as we move the industry towards autonomous test operations. Nigel.ai is purpose-built to support specific tasks engineers face throughout the different stages of the product life cycle. Today, Emerson Electric Co. released the next generation of Nigel.ai, strengthening our capabilities in AI-enabled test. These upgrades deliver step-changing performance by moving Nigel.ai from an AI assistant to an AI author, accelerating code development to make engineering workflows more efficient from design and validation through production. Processes that previously took hours can now be completed in minutes. For our customers, this means engineers spend less time navigating tasks and more time focused on improving test outcomes. This evolution marks a clear step along our roadmap towards AgenTeq AI, software increasingly enhances productivity, and we are seeing accelerated user adoption of LabVIEW since the first launch of Nigel in 2025. Please turn to Slide five. Robust demand continued in the first quarter, with underlying orders growth of 9%. Customers are deploying capital in longer cycle projects in our growth verticals, with momentum building in North America, India, and The Middle East and Africa. I will discuss more details on demand on the next slide. Emerson Electric Co.'s first quarter results reflect disciplined execution. Underlying sales met expectations and were up 2% year over year. Momentum continued in Test and Measurement, up 11% year over year, and our 20%, driven by the secular demand for power. Profitability exceeded expectations with an adjusted segment EBITDA margin of 27.7% and adjusted earnings per share of $1.46. Annual contract value of our software grew 9% year over year and ended the quarter at $1.6 billion. We remain confident in our plans for 2026, supported by a good start to the year and our proven track record of operational excellence. We are reiterating our guidance of 5.5% sales growth, 4% underlying sales growth, and an adjusted segment EBITDA margin of approximately 28%. We are also raising the bottom and midpoint of our adjusted EPS guide and now expect $6.4 to $6.55 per share. Emerson Electric Co. completed $250 million of share repurchase in the first quarter, and we are committed to our plans to return approximately $2.2 billion of capital to shareholders. Finally, I want to highlight multiple key developments in technology and innovation at Emerson Electric Co. In January, Emerson Electric Co. was named the 2026 Industrial IoT Company of the Year by IoT Breakthrough, marking the fourth time in the past five years we have received this recognition. Over 4,000 companies were nominated globally for the 2026 competition, and Emerson Electric Co. was selected for having the most complete industrial IoT technology stack. Additionally, we released DeltaV version 16, which advances our software-defined automation vision and is an integral piece of our enterprise operations platform. With flexible architecture and enterprise integration, DeltaV version 16 empowers customers to make smarter decisions by improving access and providing context to operational data to facilitate advanced analytics and AI optimization. Lastly, we strengthened our leadership position in life sciences through a strategic collaboration with Roche, underscoring how Emerson Electric Co. software dramatically improves and shortens the technology transfer process. The new DeltaV modality library enables life science customers to efficiently design, scale, and deploy new production processes with prebuilt and proven solutions that save months of development. Please turn to Slide six. Underlying orders were up 9%, marking four consecutive quarters of strong order growth. Breaking twelve-month orders are up 6%, providing the backlog to support sales in 2026 and into 2027. North America, India, and The Middle East and Africa continue to show robust demand, while we are seeing ongoing softness in Europe and China. Orders growth was most pronounced in our Software and Systems group, which was up 23% year over year. Broad-based strength in Test and Measurement drove orders growth of 20%, led by semiconductor, aerospace and defense, and the portfolio business. AI and digital transformation of manufacturing are leading customers to deploy significant capital towards greenfield and modernization projects for power generation, especially in The U.S. Orders in our Ovation business were up 74%, driven by large project wins, including behind-the-meter data centers and fleet modernizations for major utility customers. We expect growth in the mid-teens for the year. We are also seeing healthy investments in grid digitization with ACB and AspenTech's digital grid management suite up 25% year over year. Secular tailwinds are driving substantial long-cycle project activity, and Emerson Electric Co. won approximately $450 million of automation content from our project funnel in the quarter. 80% of these wins came from our growth verticals, led by power and LNG. Our funnel remains at $11.1 billion, replenished by new opportunities in our growth verticals, and I want to highlight a few projects that support our confidence in continuing to win at high rates. First, Emerson Electric Co. was chosen to automate on-site power generation for a new 1.7 gigawatt AI data center in The United States, helping to meet accelerated deployment timelines and mission-critical reliability. The project will leverage proven behind-the-meter power generation management software as part of the Ovation platform, enabling faster time to market for the customer. Emerson Electric Co.'s recently announced strategic collaboration with Prevalon Energy played an instrumental role in our selection for this project, as the collaboration brings together Emerson Electric Co.'s automation and control expertise with advanced energy storage to help data center operators improve reliance, resilience, reliability, and efficiency in increasingly power-constrained environments. Next, Emerson Electric Co. was selected for Sempra Infrastructure's Port Arthur LNG Phase two project, which will add 13 million tonnes per annum in capacity to The U.S. Gulf Coast facility. Emerson Electric Co.'s DeltaV control system and severe service control valves were chosen based upon our reputation for strong operational performance in LNG applications and our local presence and support. Lastly, Emerson Electric Co. won projects at multiple large new space customers. It will help develop, test, and validate complex communication links for their satellite-based programs to provide reliable, high-speed Internet around the world. The customers will use NI's leading test and PXI platform, which were selected due to their superior performance in reducing test times while providing best-in-class measurement accuracy. I will now turn the call over to Michael Baughman to discuss our results and 2026 guidance in more detail. Michael Baughman: Thanks, Surendralal. Please turn to Slide seven for a more in-depth look at our Q1 financial results. As a reminder, our first half financial results are adversely affected by a software contract renewal dynamic that we detailed in our November earnings call. This impacted our Q1 year-over-year sales growth by approximately one percentage point, adjusted segment EBITDA margin expansion by 70 basis points, and earnings per share growth by $0.06. For Q1, and including the one-point drag, underlying sales growth was 2% with all segments reporting growth. Growth was led by software and systems, which was up 36% without the software contract renewal dynamic, while Intelligent Devices grew 2% and Safety and Productivity was up 1%. I will provide more details on geographic and group performance on the next two slides. Price contributed three points to growth as expected. MRO for the company represented 65% of sales. Our backlog ended the quarter at $7.9 billion, up 9% year over year, and our book-to-bill was 1.13. Adjusted segment EBITDA margin of 27.7% came in above expectations. Favorable price cost and cost reductions, including synergies, outpaced inflation to benefit margin. Excluding the 70 basis point impact from the software dynamic, adjusted segment EBITDA margin was up 40 basis points. Adjusted earnings per share came in at $1.46, a 6% increase year over year. Q1 free cash flow of $202 million with a margin of 14% came in slightly better than expected, positioning us well for our expected full-year growth of approximately 10% at greater than 18% margin. Overall, Q1 was a very good start to 2026. Please turn to Slide eight for details on Q1 underlying sales by region. As expected, underlying sales were strongest in The U.S. and The Middle East and Africa, while China remained soft. The Americas were up 3%, and The U.S. remained strong, up 6% with sustained momentum in power and LNG while also benefiting from near-shoring with expansions in life sciences and semiconductor. North America's pace of business remained healthy with resilient MRO spend. Europe was up 3%, benefiting from the timing of projects in Eastern Europe, although the overall pace of business was subdued. 9% growth in The Middle East and Africa was driven by greenfield project activity. We are seeing broad-based momentum in our growth verticals, which collectively were up 14%. Power led the strength, up 17% with elevated activity across lifetime extensions, upgrades, and greenfield projects to support the unprecedented increase in electricity demand. Life Sciences also provided significant growth driven by GLP-one demand with greenfield and modernization products to support near-shoring and self-sufficiency in multiple regions. Ongoing strength in North America and The Middle East, as well as our growth verticals and sustained demand for automation, give us confidence in our full-year outlook. Please turn to Slide nine for details on sales and margin performance for our three business groups. Software and Systems underlying sales growth of 3% was led by broad-based strength in Test and Measurement, which was up 11% and helped offset a three-point drag from the software contract renewal dynamic in Q1. We saw significant growth in power, life sciences, semiconductor, and aerospace and defense. Software and Systems margin of 31.3% increased 20 basis points year over year, driven by strong profitability from Test and Measurement and the benefit of synergies offsetting a two-point headwind from the software contract renewal dynamic. Intelligent Devices underlying sales growth of 2% was led by Power, LNG, and North America MRO, offset by weakness in China. The pace of business in Europe and China was light, although Q1 growth in Europe benefited from the timing of projects. Intelligent Devices margin of 26.9% decreased by 70 basis points year over year, driven primarily by mix and headwinds from FX due to a favorable impact last year. Safety and Productivity was up 1% underlying, driven by electrical products and stable project activity in North America, while European markets remain soft. Safety and Productivity's margin of 20.9% was down 40 basis points year over year due to lower volume offset by benefits from price and cost reductions. Please turn to Slide 10, where I will bridge Q1 adjusted EPS from the prior year. Excluding the $0.06 impact of software renewals, operations delivered $0.10 of incremental EPS in Q1. Software and Systems contributed $0.08, reflecting strong operational execution, and Intelligent Devices added $0.02. Non-operating items added $0.04 from share count and tax rate benefits. Overall, adjusted EPS grew 6% year on year to $1.46. Please turn to Slide 11 for an overview of our Q2 and full-year 2026 guidance. We are reiterating our full-year guidance for sales, adjusted segment EBITDA margin, and free cash flow. We are raising the bottom and midpoint of our 2026 adjusted EPS guide and now expect $6.4 to $6.55. We still expect to return approximately $2.2 billion to shareholders through $1.2 billion in dividends and $1 billion of share repurchase, of which we completed $250 million in Q1. Turning to the second quarter, sales growth is expected to be 3% to 4% with underlying sales growth of 1% to 2%. We expect adjusted segment EBITDA margin of approximately 27% and adjusted EPS of $1.5 to $1.55. I will provide additional details on guidance in the following two slides. Please turn to Slide 12 for our 2026 group underlying sales guidance. We expect Software and Systems to be flat in Q2 and up 4% for the full year. Test and Measurement is planned to have high single-digit growth in both Q2 and the full year, while the Control Systems and Software segment is expected to be down low single digits in Q2 due to a $65 million headwind from the timing of software contract renewals. As a reminder, this accounting dynamic adversely affects GAAP revenues by $110 million in the first half and $120 million for the full year. We continue to see robust adoption of our software and expect ACV to grow 10% plus in 2026. Intelligent Devices is projected to grow 2% to 3% in Q2 and 4% for the full year, with stable MRO led by strength in North America. Second-half growth is supported by backlog phasing and the timing of project shipments. Safety and Productivity is expected to grow 1% to 2% in Q2 and 2% to 3% for the full year. Growth is driven by North American markets and electric and utility strength, but offset by continuing weakness in European markets. Overall, Emerson Electric Co. expects to grow 1% to 2% in Q2 and approximately 4% for the full year. The second-half growth acceleration to approximately 6% is supported by our strong orders momentum and lapping of the software contract renewal dynamic. Excluding the impact of software contract renewals, Emerson Electric Co.'s growth rate is expected to be 3% to 4% for Q2 and 5% for the full year. Please turn to Slide 13 for additional detail on adjusted segment EBITDA margin and EPS guidance. For Q2 2026, we expect operations to contribute around $0.05 to EPS with another $0.09 from non-operating items, primarily off FX, to offset a $0.09 impact from the software contract renewal dynamic. As a reminder, Q2 2025 adjusted EPS of $1.48 benefited from about $0.04 from the Total Energy's project that we discussed in our Q2 2025 earnings call. The lower volume from renewals in the Total Energy Energies deal impacts Emerson Electric Co.'s adjusted segment EBITDA margin by approximately 150 basis points compared to Q2 2025. We are guiding our Q2 2026 adjusted EPS at $1.5 to $1.55. For the full year, we are raising the bottom of our EPS guide by $0.05, reflecting the good performance in Q1. The renewal dynamic reduces adjusted EPS by approximately $0.05 and adjusted segment EBITDA margin by approximately 40 basis points. We still expect operations to generate about $0.50 of incremental EPS with approximately 80 basis points of margin expansion from positive price cost and the continued benefit of synergy realization from AspenTech and Test and Measurement. With that, I would like to turn the call back to the operator. Operator: Thank you. We will now be conducting a question and answer session. We also ask each person in the queue to limit themselves to only one question and one follow-up to allow everyone a chance. Our first question comes from the line of Andrew Kaplowitz with Citigroup. Please proceed with your question. Andrew Kaplowitz: Good afternoon, everyone. Hi, Andrew. Surendralal, could you break down a bit more your 9% order growth in Q1 between process and hybrid? I think you said 74% Ovation growth, which was impressive. And I think you said the mid-teens growth in Power is expected this year. But could that higher level behind-the-meter power opportunities lead to a more extended run rate of power? And then generally, would you say your process in hybrid markets settling into sort of this mid-single-digit order growth rate despite some of the concerns that we hear out there? Surendralal Karsanbhai: Yes. No, look, we were very let me start with Power, very energized with what we saw in the marketplace. It's, as you know, started to develop in 2025. But we saw certainly an acceleration in orders in the first quarter. And it's predominantly driven by two areas today, but there'll be a third that think starts to pick up steam as we go forward into the year. And the two areas are modernization of existing facilities and behind-the-meter power generated capacity of data centers. That's generally what drove the investment in the power generating capacity. Of course, on the same line, we saw modernizations of the grid and investments in our and we saw that reflected in the ACV of our DGM business. Michael Baughman: At Aspen. What we'll see I think, develop a little bit more further longer cycle, Andrew, will be new generating capacity coming in. Surendralal Karsanbhai: We see plans being put forward. We're really, right now, evergreen modernizations and behind-the-meter work. I'll also highlight in terms of the order drivers, the activity at test and measurement. Orders were up 20% in the Q And Andrew, it was broad-based. Portfolio business, semiconductor and ADT all up between twenty percent and thirty plus percent. The one offset there continues to be the Transportation segment. Which which is relatively challenged. But overall, great momentum in that business and we've seen very steady, consistent growth there. Ram, anything to add? Ram Krishnan: Yes. Just to add, I'll give you geographic color. Michael Baughman: On the 9%. Surendralal gave it to you by business. But North America was up 18%, reflecting many of the Surendralal Karsanbhai: end markets that Surendralal described Michael Baughman: certainly power, LNG, many of the t m m T and M markets in North America were very strong. Middle East was up 6% for us. Latin America was up 9%. So those fundamentally drove the spring. India was up 22%. So consistent with the commentary where we thought we had strength, we demonstrated a lot of positive momentum that should continue. Certainly, Europe was down low single digits and China was down high single digits in the quarter from an orders perspective. Surendralal Karsanbhai: Then the last thing I'll add, Andrew, just Ram Krishnan: on the funnel and the projects. It was a significant, as we highlighted, 32,000,000 of wins that came from approximately 70 project wins. Onethree of those were in power. But they had heavy participation in LNG, and in semiconductor life science and ADG as well. With each of those, representing about 15% of the wins. So lots of broad-based activity, but of course, power generating transmission and distribution really driving the numbers right now. Andrew Kaplowitz: Surendralal, that's very helpful. And then ACV growth was 9% in the quarter. Are you still talking about expected 10% plus growth for the year. As you know, there's angst regarding AI's on software. So I think you already spoke about Nigel.ai. I know you've talked about the greater vision of balanced automation. So maybe you can remind us Ram Krishnan: why AI could be complementary to growth for you guys in ACV and Michael Baughman: margin in your your software businesses? Ram Krishnan: Yes. For us, from a software perspective, first off, all of our software offerings are built on first principle models. Very, very sticky and a lot of domain knowledge built into these simulation capabilities, not just at Aspen, but also our offerings. With Ovation, DeltaV and certainly the VI suite. So the threat of AI disrupting our software business is very minimal as we see it today. And really as a counterpoint, AI capability we're building into our software should frankly accelerate the growth. So we see AI and all the AI capabilities we launched, not just with Nigel, but also the capabilities, innovation and DeltaV should be a net accelerator for software offerings, and that's really what we expect to see with continued ACV growth. Andrew Kaplowitz: Helpful, guys. Operator: Thank you. Our next question comes from the line of Nigel Coe with Wolfe Research. Please proceed with your question. Nigel Coe: Thanks. Good afternoon. Ram Krishnan: Going back to the order commentary, you obviously caught up LNG caught up Surendralal Karsanbhai: power. Ram Krishnan: Obviously, these are two very long cycle Surendralal Karsanbhai: end markets. I'm just wondering if Michael Baughman: of the orders we've seen, especially in power, are pushing beyond this year and into sort of multiyear phases. Ram Krishnan: Yes, you're absolutely right. Certainly, it's given us the confidence not just in the back half of 2026 as we see the backlog timing. And but we start to gain confidence into our 2027 as we see those orders. And that timing of those shipments. But I also suggest, Nigel, that if you look at the test and measurement business, that's there are projects in that business, but there's a lot more of the short cycle activity, particularly in the portfolio business, and in elements of semiconductor as well. Nigel Coe: Okay. And then a quick follow-up myself. Quick follow-up on the I guess, the Sensors is the new name. The Sensors margins were down, I think, 200 basis points year over year. I think you talked about FX benefits in the prior. Year quarter. Is there any impact of memory chip inflation here? Because if there's one area of Emerson Electric Co. where you might see some of this accumulation, think it might be there. So just maybe just touch on the margin weakness and then talk about the memory chip inflation as well. Michael Baughman: Nigel, it's Mike. Yes, your memory is very good. We did last year have some FX benefits that were in that segment. That we don't have this year, which drove about one point of the year over year negative comparison of about two points. The other things going on there related to mix. There was geographic mix Operator: Ladies and gentlemen, please standby with the technical difficulties. Ladies and gentlemen, thank you for your patience. We will resume. And you may continue. Ram Krishnan: Nigel, that was such a great question. They just try to get in the call on that. Okay. It's Nigel. Seriously, I think I broke the system. Michael Baughman: So Nigel, where did we drop? So we can where did we drop? Nigel Coe: Think you were talking about geographic mix, and and then I went to Michael Baughman: Did I did I did I finish the DRAM explanation on Nigel Coe: or not? Michael Baughman: No. Not nothing on DRAM. Okay. Okay. Let let let let's go back to you. Michael Baughman: Let's go back to your question, Nigel, about sensors margins. And I was commenting that you were correct about the FX impact, which was about one point of the approximately two points that the sensor margin was down on a year over year basis. There was also some mix dynamics that the prior year had a stronger North America and some backlog dynamic going on that benefited them. And then there's some other regional mix that affected profitability that sensors business had a good quarter in Europe, which was largely project based, which which had a a negative effect on the comparisons as well in the net So that was about the other point of margin decline in that business. As we look out to the full year, we expect some improvement on the 28.6% that, that business reported in the in the prior year. As for the second part of your question around the DRAM, from a profitability perspective, no impact, but I'll pass it to Ram to talk a little bit about that. So Nigel, we're obviously watching that carefully. We buy about $8 million of Ram Krishnan: DRAMs that impact many product lines, but most in control systems and software and T and M The sensors, to your specific question, less than $1 million of DRAM exposure. Of that, most of our buy is really Gen three and Gen four, DDR3 and four. Where, yes, supply chains have extended. We're watching that carefully. We don't have a lot of exposure in Gen five DDRs, which is really the AI driven constraints and inflation that we're seeing. But net net for us, the margin impact from the price inflation is something very manageable. We'll manage that within the scope of our P and L. It's really the availability that we're watching very carefully and making sure that we're addressing this with our suppliers and ensuring that we have enough availability to cover the year and beyond. Nigel Coe: That's great color. Thanks, guys. Ram Krishnan: Thank you. Operator: Our next question comes from the line of Steve Tusa with JPMorgan. Please proceed with your question. Shigusa Kotoko: Hi, this is Shigusa Kotoko on for Steve. Thanks for taking my question. Just following up on the orders, the order trends are encouraging and the backlog is up quarter over quarter too. But just there's longer cycle orders in there too, as you mentioned, earlier. And so just how should we think about the cadence of these orders translating into sales? And what businesses specifically do as expect to hit the second half that supports the full year guidance? Ram Krishnan: Yes. I mean so if you looked at the phasing of the back backlog, they're very supportive of hitting our second half sales. So these backlogs translate into the mid single digit growth, tell the percent growth that we've guided for the second half. Our trailing twelve month orders at 6% also substantiate that. Our backlog at $7.9 billion which is up 9% also phase into the second half and into the 2027. The backlog build is frankly across the board, certainly in our control systems and software business, both in power as well as our Delta V business. In Final Control, we have a balanced backlog position in our sensor business to support the second half. So the build is across the board. Operator: Thank you. Our next question comes from the line of Jeff Sprague with Vertical Research Partners. Please proceed with your question. Jeff Sprague: Thanks. Good afternoon, everyone. Well, congrats five years. Can't believe it. That's amazing. Time does fly. Sure, it only seems like four and a half to you. Right? Ram Krishnan: Just a just a couple quick ones from me. Mike, thanks for all those bridge items. One thing I was curious about, though, is just the drop in sequential margins Q1 to Q2 on what should be Michael Baughman: maybe a couple 100,000,000 higher revenues sequentially. Give us a little bit of insight on what would be driving that? Ram Krishnan: Yes, go ahead. Yes, it's Michael Baughman: primarily the impact of the software renewal dynamic even sequentially. I mean, the 65 over the 45 and the dilution driven by that is the fundamental driver. And frankly, unfavorable mix. And totality of the Jeff, that came through that was Michael Baughman: another boost to the barrier that won't that won't be there. Jeff Sprague: And thank you for that. Michael Baughman: And those software numbers have moved around a little bit, right? I think you were thinking $50 million in Q1 and it's $40 million It like Q2 went up a little bit. Think you were saying $60 million That's correct. So just, yeah. Yes, just a little bit of movement there. Could you just also just address sort of the weak verticals and do you see stabilization? I'm thinking chem probably most notably, but some of these areas that have been just under a lot of secular pressure pressure and this whole deindustrialization trend that's ongoing and Europe chemicals. Do you see any bottom there? Is that eroding your MRO activity? And I don't know if there's any other verticals to kind of kind of talk about also. Ram Krishnan: Yes. Certainly, Jeff, you hit a very important point here. We're seeing continued flat activity in Europe for the year. Certainly, are industries such as automotive packaging, but certainly chemicals. In in places like Benelux in in Germany that are still very challenged. And then our outlook on China has turned a little more bearish as we navigated another quarter. We now believe that we'll be down low single digits for the year. Based, again, on lackluster activity in particularly the chemical sector. There are some green shoots in China, of course. There's activity that Test and Measurement is seeing that's very encouraging. There's power generation activity. But a large chemical business, which we've had for and foster for many years, continues to be And we have not seen challenging and we've not seen recovery in that business in either one of those large world areas. Michael Baughman: And then certainly, the automotive segment, which is not as big as chemical for us, but certainly a meaningful part of Ram Krishnan: parts of safety and productivity and T and M is Michael Baughman: continues to remain soft in both Europe and China. Jeff Sprague: Yeah. Ram Krishnan: Yeah. Jeff Sprague: Okay. Great. Thanks for the color, guys. Good luck. Thank you. Operator: Thank you. Our next question comes from the line of Julian Mitchell from Barclays. Please proceed with your question. Julian Mitchell: Hi, Ram Krishnan: Maybe just wanted to understand kind of your own perspectives on the order strength. So I guess, first off, was Michael Baughman: it a surprise to you what those orders did or it was sort of in the plan based on what you knew of the dollar value of orders a year ago that we really see on the outside? And I said I'm asking that just because you didn't change your organic sales guide for the year. In the second quarter, we don't seem to see a sort of short cycle pull through into intelligent devices revenue growth, for example, from these orders? Ram Krishnan: Yes. I mean, I think what this now, obviously, I I I we didn't expect a Michael Baughman: plus 9%. So there were some projects from Q2 that we got into Q1. But certainly, Ram Krishnan: the last 44%, plus 4%, plus 6%, plus nine on a trailing three month plus 6% is consistent. The mid single digits is consistent with how we thought about how first half of this year will unfold. And provide the needed momentum to deliver on the second half shipments. So I wouldn't say we're necessarily surprised by the level of order activity. It's consistent with how the funnel has manifested and these growth initiatives in LNG power semis, aerospace and life science is playing out. Michael Baughman: I think you bring up a good point in intelligent devices, Julien. We've been certainly, we had a phenomenal year as we worked through backlog in that business in in 2024 and 2025. We're now at a point where we've been a little challenged over the last few quarters in the business. We'll see that accelerate in the second half. As we work our way out of it, but it will be another softer quarter in Q2, and that will be largely behind us. Julian Mitchell: Thanks very much. And then just my follow-up on the margin. So you've clarified second quarter, but second half of the year, I think you're dialing in kind of 40s type operating leverage year on year. So just wanted to make sure that that's roughly the right ballpark and when you're thinking about that, is there any risks to it around price cost for example? Or do you think that's a good kind of you're confident in it and it's a good run rate going into the following fiscal year? Michael Baughman: Yes. We feel good about that leverage. You're correct, it's the expectation for the year is in that high 30s which again is affected by by the the software renewal dynamic. But we we do feel good about that. The leverage for the quarter of 20% when you adjust for that software renewal is back up in the mid-30s. So, yeah, I think as we move forward and think about the profitability and the growth and the leverage that we should see from the growth, we we feel good about the expected leverage for the year in the back half. Ram Krishnan: And the other way to look at the leverage is obviously on a sequential basis, half two to half one will be up mid to high single digits from a growth perspective, and that should lever in the forties. So you you you can look at it year over year. You can look at it sequentially, and I think you'll calibrate that the second half margins will trend towards that 28% plus in terms of EBITDA margins. Julian Mitchell: Thank you. Operator: Our next question comes from the line of Andrew Obin with Bank of America. Please proceed with your question. Andrew Obin: Yes, good afternoon. Hi, Andrew. Hey, how are you? Just on the 3% pricing Michael Baughman: what should we be thinking about for the second half? Ram Krishnan: How should it flow? Michael Baughman: 2% approximately in the second half or about 2% for the full year. Andrew Obin: Got you. Thank you. And just going back to this 18% North America order number, it's very, very impressive. Can we just I know you've sort of talked about it, but it's just a nice acceleration and you know, I know you sort of talked about sort of pull forward and people have tried to see what's going on. But maybe can you just describe to us how did it go through the quarter? What are we seeing? Are we seeing this rate of orders sustainable? And what do you think has changed in North American economy to drive orders like this? And I appreciate that you have behind the meter. I understand that you're a number of sort of high growth industries. And there are sort of idiosyncratic stories, but 18% is just very, very impressive. Ram Krishnan: Thank you, Andrew. I'll try to give a little color and Ram can jump in as well. So look, I believe and we're seeing it reflected in the customer activity that the industrial policy of the administration is benefiting five specific sectors that just happen to be our growth verticals. Electrification and power generation data centers, investments in AI, modernization of our grid and generating capacity, near shoring impacting life sciences, and semiconductor, a robust open energy policy that enables the development of shale gas and the export of LNG to our partners. And lastly, a defense policy that continues to modernize the American military apparatus, and we benefit from that through NIH. So that industrial policy as holistically falls incredibly well in The United States and aligns to our technology stack serves incredibly well. Michael Baughman: Yes. And just to break it down, Ram Krishnan: on the 18%, a large majority of the $450 million in project wins came in North America from a power and LNG perspective. We indicated our Ovation business was up 74% in orders. A lot of it was in North America. T and M was up 20% in orders up close to 30% in North America. So the elements of LNG power semiconductors, aerospace, defense, life sciences, augmented with a strong MRO, which was up mid to mid to high single digit from an orders perspective drove the strength in North America. Now we don't expect the 18% to continue through the quarter, but I think we're very confident that high single digit growth in North America is something we would bake into the plan. Andrew Obin: Thank you for the full year. Ram Krishnan: Thank you very much. Thank you. Operator: Our next question comes from the line of Scott Davis with Melius Research. Please proceed with your question. Scott Davis: Hey, good afternoon guys. Scott, how are you? Ram Krishnan: I'm good. Scott Davis: I have to ask this question even though I'm not sure Michael Baughman: going to be able to answer it with much precision. But on the opportunity out there in Venezuela and there's to be just a lot of old aging equipment in there that needs a refresh. But not sure if you guys have any color you could provide on that opportunity or whether you're already talking to customers about potentially having some boots on the ground there or what you can do to kind of make sure you can benefit from a rebuild? Ram Krishnan: So I appreciate the question, Scott. Certainly, a subject that we've we've renewed here in the walls of our company with our teams. We have a long established history in Venezuela. And relationship with Pineda Vista that goes back for decades. We estimate to have approximately $1 billion of installed base in the country. And largely, many of our channel partners, believe it or not, are still intact in the country, although we are not we've not been transacting in Venezuela since the sanctions. Have been transacting over the last two years directly with Chevron but sub million dollars a year. So we have a plan. We We've mobilized and thought through what investments we need to put back into the country. We'll watch to and see what happens with the with the national oil laws that need to be amended to enable foreign investment. Into Venezuela. But we believe that a market and you're absolutely right, there has been that it's been underinvested, lacks talent, is right for growth. So we'll see how things develop and we'll be ready to go in there and provide technology into those installations. Michael Baughman: Just to add to that, interestingly, as we looked at it, the first area that will probably go will be power. And so they'll they'll have to work on the power situation there, and there's an opportunity there for us as well. Scott Davis: And and that's what I was gonna ask as a follow-up really is I'm thinking about traditional upstream Ram Krishnan: and perhaps Scott Davis: maybe not thinking as much about some of the other stuff including downstream or even other industries. I don't know Venezuela well enough to know if there's any infrastructure out there otherwise. But is there a wider TAM out there than perhaps just what we're talking about in oil and gas? Ram Krishnan: Yes. I think Mike's point on power generation is a valid one. But the biggest challenge the country is gonna have, Scott, is that there's been an incredible brains rain that's impacted Venezuela over the last twenty years. Lack of engineers, technical knowledge, And and a lot of that has to be reestablished. Security situation needs to be improved. And investment capability needs to be enabled by their Congress. So we're ways away, but we'll watch it very carefully. And we're at least and to be honest, much like we did in Iraq after the Gulf War, becoming prepared so that we can hit the ground running. Scott Davis: Okay. Sounds good. Thanks guys and best of luck the rest of the year. Ram Krishnan: Thanks Scott. Operator: Thank you. Our next last question will be from the line of Deane Dray with RBC Capital Markets. Please proceed with your question. Deane Dray: Thank you. Good afternoon, everyone. Thanks for fitting me in. Just a couple of quick ones. Any update on tariffs mitigation activity any color there? Ram Krishnan: Yeah. I mean, obviously, a tariff perspective, the positive news on China, Aipa tariffs there, fentanyl tariffs going from twenty to ten. Now we did get some tariffs from where, you know, countries that don't have a trade agreement with Mexico and importing into have tariffs. So that's a little bit of headwind. But net net, I and obviously, the development today, it early. But with India, has a meaningful impact. So I would say more favorability. We still haven't quantified versus we built in. I mean, we built in don't know if we've shared the number, Doug, on on the amount of tariffs we built in about a $130 million of tariffs into the plan We are seeing relief to that number, but it's early to quantify how much. But it will be a net positive for the year versus what we've baked into the plan. Got it. That's helpful. And then China's come up a couple different times I know it's not a new region of softness, but, Lyle, you mentioned it could be some green shoots. So, you know, what's the latest there? What's the opportunity? What are those green shoots you were referencing? Ram Krishnan: Yes. We've seen really good activity in the test and measurement space in a broad portfolio business. You know, we don't participate in the aerospace defense segment there. The semiconductor, where we allow to with the various sanctions and certainly in portfolio, And that business is up in the high double digits. So we feel very good about that. There are great opportunities and continue to be great opportunities in power generation. Again, there is a dynamic in China that very much aligns in The U.S. Around data center build out, AI infrastructure, and power generation needs. We're seeing new capacity come online as opposed to that wave hitting The U.S. There were 25 ethylene coal fired power plants last year. There's a bunch of nuclear work to be done. As well as behind the meter work. So that's where we see the activity. But overall, still, I continue just overall concern that we'll be in a low single digit negative growth. By the time we're set and done this year. Deane Dray: Understood. Thank you. Operator: Thank you. And ladies and gentlemen, we have we reached the end of the question and answer session. And this also concludes today's conference, and you may disconnect your line at this time. We thank you for your participation. Have a great day.
Julianne: My name is Julianne, and I will be your conference facilitator today for the Amgen Inc. Q4 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. There will be a question and answer session at the conclusion of the last speaker's prepared remarks. In order to ensure that everyone has a chance to participate, we would like to request that you limit yourself to asking one question during the Q&A session. I would now like to introduce Casey Capparelli, Vice President of Investor Relations. Mr. Capparelli, you may now begin. Casey Capparelli: Thank you, Julianne. Good afternoon, everyone, and welcome to our fourth quarter 2025 earnings call. Bob Bradway will lead the call today and be followed by a broader review of our performance by James E. Bradner, Murdo Gordon, and Peter H. Griffith. Through the course of our discussion today, we will use non-GAAP financial measures to describe our performance and have provided appropriate reconciliations within the materials that accompany this call. We will also make some forward-looking statements which are qualified by our Safe Harbor statement and please note that actual results can vary materially. Over to you, Bob. Robert A. Bradway: Okay. Thank you, Casey, and good afternoon, everyone. Thank you for joining us today. Today, we'll cover full-year results for 2025 and provide a preview of what to expect from us in 2026. Amgen Inc. delivered strong operational performance across the board in 2025, and you can see that in the breadth of our business. Note that 14 of our products achieved blockbuster status with sales of a billion dollars or more. 13 products delivered double-digit sales growth, and 18 products achieved record results for us. The strength of that broad portfolio enabled us to post double-digit growth in revenues and earnings per share for 2025. Looking to 2026, I would highlight six areas of momentum. Three of these, Repatha, Evenity, and TestSpire, all grew by more than 30% year over year in 2025. These medicines have a few important things in common. First, they're highly effective, innovative therapies that address important public health needs. Second, they're leading products in their fields. And third, while each of these products represents a multibillion-dollar global franchise already, they address areas of large unmet medical need where there are millions of patients yet to be treated. In this sense, they represent growth drivers not just for 2026, but for the rest of the decade. In rare disease, our portfolio generated more than $5 billion in sales in 2025. Here too, many of our medicines are early in their life cycle and positioned as leaders in their respective categories. Growth has been fueled by reaching new patients, expanding into additional geographies, and launching new indications. We see further opportunity ahead as we scale these therapies. Uplisna exemplifies this growth opportunity with approvals in IgG4-related disease and generalized myasthenia gravis in 2025. Our innovative oncology portfolio grew at 11% year over year in 2025, driven by our BiTE or bispecific T cell engager medicines. Particularly excited about Imdeltra, which has rapidly become the standard of care in patients with second-line or later small cell lung cancer, supported by unprecedented survival benefits. We're an industry leader in biosimilars. Our biosimilars portfolio has contributed more than $13 billion in sales since the launch of our first medicine there in 2018. With $3 billion in 2025 sales, this business is an important contributor to our organization and poised for growth with the next wave of biosimilar launches. You can appreciate the depth of our business through the lens of our research and development activities. 2026 will be a year of disciplined data generation. From a number of exciting phase II and phase III programs that will pave the way for long-term growth at Amgen Inc. Our confidence continues to build in Meritide as a differentiated treatment for obesity, type two diabetes, and obesity-related conditions. In a field featuring dozens of potential daily oral and weekly injectable medicines, Meritide stands alone as the only therapy in late-stage development to offer the paradigm-changing prospect of strong efficacy and favorable tolerability at monthly, every other month, or even quarterly dosing. In addition to Meritide, we remain excited about opaziran and what it might represent for patients with elevated Lp(a), a heritable risk factor for cardiovascular disease. We see opaziran as an opportunity to build on our leading positions in cardiometabolic disease. It shouldn't be lost on any of us that Repatha, opaziran, and Meritide together would represent a very compelling set of cardiometabolic medicines to expand our leadership in the treatment of serious chronic diseases well into the next decade. Beyond the pipeline, there's a great deal of enthusiasm about the convergence of technology and life science. And based on what we're seeing at Amgen Inc., we believe that enthusiasm for convergent innovation is well placed and will have a significant impact on how we discover, develop, and commercialize medicines. As always, I thank my Amgen Inc. colleagues around the world for supporting our mission to serve patients. And with that, let me turn over to Jay for an update in R&D. James E. Bradner: Thank you, Bob, and good afternoon, everyone. The fourth quarter capped off a year of strong disciplined execution across R&D. Throughout 2025, we advanced multiple late-stage programs, delivered five key regulatory approvals, and strengthened the evidence base supporting our marketed medicines. Taken together, these contributions demonstrate real scientific rigor and illustrate the breadth of opportunity ahead. Let me begin with Meritide, which continues to develop in meaningful and very encouraging ways. The Maritime Phase III program is rapidly advancing. With strong enthusiasm from investigators and participants. Both of our Phase III chronic weight management studies are fully enrolled and our ASCVD and heart failure outcome studies are progressing well. In parallel, we continue to expand the clinical landscape of Meritide across obesity-related conditions as we begin enrollment of our two Phase III sleep apnea studies in adults with and without positive airway pressure therapy. Altogether, we now have six global phase three studies underway with Miratide. Collectively designed to deliver a comprehensive evidence base. In addition, as we shared last month, we've completed part two of the VERITIDE Phase II chronic weight management study, We also completed the first 24 weeks of the Phase II Type II diabetes study that enrolled participants with and without obesity. Results from these two studies further increased our confidence that Meritide can represent a new paradigm in obesity, type two diabetes, and other obesity-related conditions. We believe Meritide has the potential to expand what's possible for patients. Availing an opportunity for monthly or less frequent dosing. Meritide's strong efficacy, infrequent dosing, and excellent tolerability at target dose have the potential to further enhance the patient experience and therefore treatment persistence. A major unmet need in the field. Beyond obesity and general medicine, the fourth quarter brought a landmark contribution to cardiovascular health from Repatha. In November, full results from the Phase III Vesalius CV trial were presented at the American Heart Association Scientific Sessions and simultaneously published in the New England Journal of Medicine. This study enrolled more than 12,000 patients without a prior heart attack or stroke testing the impact of Repatha for LDL-C lowering when added to optimize lipid therapy. Namely statins, with a median follow-up of approximately 4.5 years. In Vesalius CV, we're demonstrated a 25% relative risk reduction in the composite of coronary heart disease death heart attack, or ischemic stroke. And delivered a 36% reduction in heart attack. With no new safety signals observed. These data clearly demonstrate that intensive LDL-C lowering with Repatha can meaningfully reduce the risk of a first cardiovascular event reinforcing its role across the full continuum of cardiovascular risk. Turning to opasiran our potentially best-in-class small interfering RNA medicine targeting Lp(a) the fully enrolled OCEAN A outcome study continues to progress. As previously discussed, this is an event-driven study and the aggregate endpoint accrual rate remains lower than initial predictions. As the study matures, we will update on the date for primary analysis as appropriate. Our conviction in olpasiran to reduce cardiovascular risk conferred by elevated Lp(a) remains strong. Grounded in compelling genetic, and epidemiologic evidence that establish elevated Lp(a) as an independent risk factor for heart disease. Moving to rare disease, the fourth quarter was highlighted by important regulatory momentum for APLISMA. In November, the European Commission approved APLISNA for the treatment of adults with active IgG4-related disease And in December, the FDA approved Eplizna for the treatment of generalized myasthenia gravis. In adults who are anti-acetylcholine receptor or anti-MuSK antibody positive. These approvals built on strong Phase III data demonstrating durable efficacy, a steroid-sparing benefit with every six-month dosing. This research further extends the impact of CD19-directed B cell depletion across serious autoimmune diseases. More broadly in B cell depletion, where we have a number of proof of concept studies underway, we expect to initiate two pivotal studies this year. The first is for patients with autoimmune hepatitis a serious disease, characterized by persistent liver inflammation that can lead to progressive scarring, loss of liver function, ultimately liver failure. The second studies chronic inflammatory demyelinating polyneuropathy or CIDP. A disabling immune-mediated neuropathy that damages peripheral nerve myelin resulting in worsening strength, worsening sensation, and for many patients substantial impairment in daily activity. For the plasma, are targeting these diseases at their root cause, by depleting pathologic B cells that drive disease through secreted autoantibodies. Given the strong efficacy of aplism in other settings, we're excited about the potential to bring a meaningful new option to patients with these two devastating conditions. We are also advancing desodoliveb, our CD40 ligand targeting biotherapeutic with both Phase III studies in Sjogren's disease now fully enrolled and study completion expected in 2026. We're pleased today to announce positive Phase II data with daxdilimab a first-in-class plasma cycloid dendritic cell depleting monoclonal antibody targeting ILT7. For the immunoglobulin-like transcript seven protein. This study in patients with primary discoid lupus erythematosus, met both primary and key secondary endpoints with an attractive safety profile. Encouraged by these data, we are working to advance Daxilimab to the next phase of development in this setting. In inflammation, the test by our Phase III program continues to advance, with ongoing studies in chronic obstructive pulmonary disease and eosinophilic esophagitis. Where we expect study completion in the second half of this year. We recently announced the decision to terminate the role rocotinlimab development and commercialization collaboration with Kewa Kirin. With significant breadth and depth across all four therapeutic areas, we took a portfolio decision to focus resources on other late-stage programs. Rocotinlimab will return to our partners at Kewa Kirin who will assume full ownership of the program. Turning to oncology. In November, the FDA granted full approval to IMDELTRA for the treatment of adult patients with extensive-stage small cell lung cancer. With disease progression on or after platinum-based chemotherapy. This approval represents a meaningful advancement for patients facing a disease that has seen very little innovation for decades. To extend the impact of Andeltra, we are presently advancing this medicine as combination therapy in frontline extensive-stage small cell where we observed unprecedented survival in early phase clinical trials. Further, we are also advancing INVELTRA with an ongoing Phase III study of limited-stage small cell lung cancer. It's a joy to see Imdeltra, like BLINCYTO, becoming a standard of care in the management of advanced cancer. Our first-in-class STEAP1 directed bi T cell engager zalaritamab continues to advance through Phase III development in prostate cancer. Beyond prostate cancer, we have recently initiated a Phase 1b study in relapsed or refractory Ewing sarcoma. A rare malignancy with high STEP-one expression and patients in an urgent need for targeted therapy. Across indelstrom, lincyto, zalaritamab, we continue to see meaningful long-term impact from our bispecific T cell engager platform. We remain committed to bringing transformative and innovative therapies like these to patients with cancer. To close out oncology, given the previously announced results from FORTITUDE-one hundred one and FORTITUDE-one hundred two, we have decided not to pursue regulatory approval for bimirtuzumab. Our FGFR2b targeting monoclonal antibody in first-line gastric cancer. Though overall efficacy did not meet our expectations, we observed an emerging signal of putative survival benefit in a subset of biomarker-defined patients. We expect to share these findings with the scientific community in the future. As with rocotinlimab, we took a portfolio decision to focus resources on our other late-stage programs. Across biosimilars, both ABP-two zero six and ABP-two thirty four biosimilar candidates to Opdivo and Keytruda respectively have completed enrollment in each of their comparative clinical studies. Supporting continued progress of the next wave of our biosimilar portfolio. Before closing, as described in our press release, we are engaged in an ongoing dialogue with the FDA regarding TABNIO's. Our medicine for the treatment of a rare and severe disease ANCA associated vasculitis. We will update you on those discussions as necessary. Now let me finish by saying that 2025 was a year of consistent execution, real scientific progress, and disciplined decision-making. We expect 2026 to bring another year of strong execution disciplined data generation, and new scientific advances as we continue to progress our robust pipeline. I want to thank our colleagues across Amgen Inc. for their continued focus on patients, and their commitment to advancing innovative medicines for serious diseases. With a broad and deep pipeline, we are well-positioned to deliver sustained long-term growth. I'll now turn it over to Murdo for the commercial update. Murdo Gordon: Thanks very much, Jay. In 2025, we delivered 10% sales growth with 13 products achieving double-digit or better performance. 14 products exceeded $1 billion in annual sales and 18 products achieved record sales. These results underscore the strength and growth potential of our portfolio and demonstrate the disciplined execution of our teams serving patients globally. Starting with general medicine, Repatha sales grew 36% year over year in 2025 surpassing $3 billion. This performance was driven by growing urgency to treat patients in both secondary and primary prevention. Today, more than 100 million people around the world still need effective LDL cholesterol lowering. Repatha remains the first and only PCSK9 inhibitor with outcomes data for patients in both high-risk primary and secondary prevention. As Jay mentioned, the landmark VACILIA CV trial showed a reduction in the risk of first major cardiovascular by 25% in high-risk patients. These data strengthen Repatha's position as the most evidence-backed therapy in the PCSK9 class. And support this critical role in earlier and more intensive LDL cholesterol management. Given these results and our leadership in this category, we believe there is now a clear opportunity to update clinical guidelines and quality measures. We expect these changes will encourage cardiologists and primary care physicians to manage LDL cholesterol more proactively. Alongside lifestyle modification, and reduce cardiovascular risk in both primary and secondary prevention. In The U.S., we continue to improve patient access to Repatha with broad formulary coverage and the launch of Amgen Now, our new direct-to-patient program. Amgen Now offers a simplified lower-cost cash pay option for patients to access Repatha. Following a successful launch, we've announced plans to expand this program to additional medicines and we're excited to make our therapies available through Trump Rx, helping improve affordability for Americans. Evenity sales increased 34% in '25 reaching $2.1 billion in sales. EVENITY remains the only treatment that simultaneously builds new bone and reduces bone resorption. A dual mechanism that is proven to rapidly reduce fracture risk in postmenopausal women. In The U.S., Evenity sales grew 41% driven by higher volumes from both established and new prescribers. Evenity leads the bone builder segment with over 60% market share and is now growing faster than the category overall. To date, approximately 300,000 U.S. Patients have been treated with EVENITY. With a 33% increase of new patients in just one year. Increased investment has helped accelerate this growth which we expect to continue. Despite strong progress, nearly 90% of the 2 million women at very high risk of fracture remain untreated. Presenting a clear opportunity for EVENITY to drive growth and impact. Prolia delivered $4.4 billion in sales in 2025, an increase of 1% year over year. In 2026, we expect accelerated sales erosion driven by increased competition as multiple biosimilars have launched globally. Our rare disease portfolio grew 14% year over year to nearly $5.2 billion 19% in the quarter. With strong performance across the portfolio. EPLISMA sales increased 73% year over year to $655 million reflecting growing patient demand across all three approved indications. In December, Eplisna received FDA approval for the treatment of generalized myasthenia gravis marking an important milestone for patients with this chronic debilitating disease. Early physician response has been strong across both bio-naive and switch patients. Prescribers have noted the benefits of aplizumab upstream B cell mechanism targeting the root cause of the disease and it's also has demonstrated safety profile and the convenience of his twice-yearly dosing. Uptake of aplisna for use in IgG4-related disease continues to grow. Since the launch in The U.S., nearly 500 specialists, including rheumatologists, gastroenterologists, among others have prescribed Vuplisna. In addition to the more recent launches, continues to lead in NMOSD and remains the most prescribed FDA-approved Therapy In The U.S. For this condition. Supported by consistent new patient growth, and strong adherence across treatment cycles. TEPEZZA grew 3% to $1.9 billion in '25 driven by higher net selling price. Over 25,000 patients have received treatment since launch in The U.S. With growing interest from both new and returning prescribers. We continue to see increased prescribing by endocrinologists and a broadening base of specialists. In Japan, approximately 1,200 patients have been treated since launch, reflecting growing awareness of the burden of thyroid eye disease among both patients and prescribers. We plan to launch TEPEZZA in additional markets in 2026, expanding access to this important therapy globally. TADNIA sales were $459 million in 2025, an increase of 62% year over year driven by strong volume growth. More than 7,000 patients with ANCA-associated by vasculitis have now been treated with Tamios, with over 4,000 healthcare professionals prescribing the therapy since its launch in 2021. Anchor-associated vasculitis is a serious potentially life-threatening disease that can cause significant organ damage if not well controlled. And has limited therapeutic options. We remain confident that Tavneos is an important and effective medicine based on clinical data, real-world evidence, and its favorable benefit-risk profile. In inflammation, TestBio sales grew 52% year over year to nearly $1.5 billion for the full year. Taspire is well-positioned to reach more patients in The United States due to its differentiated TSLP mechanism that targets multiple inflammatory pathways driving severe uncontrolled asthma. Including in those with coexisting chronic rhinosinusitis with rhinosinusitis with nasal polyps, TestBiR substantially reduced the need for surgery in this population reinforcing its value in eosinophilic disease. TESSPIRE is now the leading therapy for new-to-brand patients amongst allergists in severe uncontrolled asthma. Fueled by strong prescriber confidence and continued expansion across respiratory specialties. Otezla sales increased 7% year over year to nearly $23 billion for 2026, We expect sales erosion driven by unfavorable pricing in The U.S., and generic launches particularly in The EU. Our innovative oncology portfolio, which includes BLINCYTO, INVELTRA, LUMICRAZ, VECTOBIX, KYPROLIS, ENDLATE, and XGEVA grew 11% year over year, generating $8.7 billion in full-year sales. Imdeltro delivered $627 million in full-year sales fueled by strong clinical conviction and rapid adoption across care settings. Over 1,600 U.S. Sites now administer IMDELTRA with the majority of doses provided in the community setting. Imdultra was granted full FDA approval in the fourth quarter, supported by compelling data from the Phase III DELPHY-three zero four trial. NCCN guidelines also recognize Imdeltra as the highest recommended therapy. And it has become the standard of care in the second-line setting. Reinforcing its leadership position in small cell lung cancer. BLINCYTO grew 28% year over year to over $1.5 billion in full-year sales. Driven by broad prescribing across both academic and community segments. BLINCYTO is widely recognized as a standard of care in combination with multi-agent chemotherapy for patients with Philadelphia chromosome-negative b cell ALL. Our biosimilar portfolio delivered another strong year with sales increasing 37% to $3 billion. Our expanding biosimilar portfolio provides meaningful top-line growth durable cash flow and broad patient access to high-quality cost-saving biologic medicines. PAV Blue, a biosimilar to EYLEA continues to gain momentum reaching $700 million in sales in 2025. Adoption continues to build among retina specialists who value the product's ready-to-use prefilled syringe format and the reliability of Amgen Inc.'s manufacturing and supply chain. We delivered strong results in 2025 with continued momentum across our priority growth brands. And we look forward to serving even more patients with Amgen Inc. products in 2026. Now I'd like to hand it over to Peter. Peter H. Griffith: Thank you, Murdo. We're pleased with our execution and performance in the fourth quarter and for the full year 2025. And we remain on track with our long-term objectives. The financial results are shown on Slides 34 to 36 of the slide deck Murdo has covered our strong revenue growth across the portfolio. For the full year, we delivered a non-GAAP operating margin of 46%. We continue to invest in advancing our pipeline with non-GAAP R&D spending increased 22% year over year for the full year to a record $7.2 billion. This reflects increased spending on an unprecedented number of opportunities in our late-stage pipeline. Including continued investments in Meritide, opaciran, zalutamide, and rare disease, In addition, we closed several business development transactions in the third and fourth quarters. Resulting in roughly $300 million in incremental R&D spending. Full-year non-GAAP other income and expense was $2.1 billion. We continued to strengthen our balance sheet. With $6 billion of debt retired in 2025. Our non-GAAP tax rate increased 1.4 percentage points year over year to 15.9% for the full year primarily due to changes in earnings mix. We generated $8.1 billion in free cash flow for the full year reflecting operational momentum across the business, and rigorous management of working capital, all while continuing to invest in innovation. We're leveraging AI across the value chain to accelerate therapeutic discovery and late-stage development. Optimize manufacturing, and improve customer engagement. Allowing us to drive productivity at speed and scale. We executed capital expenditures of $2.2 billion in 2025. Our capital expenditures reflect significant investments across The United States. Including Ohio, North Carolina, Puerto Rico, Rhode Island, and California. To support continued volume growth in our commercial brands, and to prepare for pipeline product launches including Meritat. In addition, we returned capital to shareholders through competitive dividend payments of $2.38 per share in the fourth quarter representing a 6% increase compared to 2024. Let's turn to the 2026 outlook on Slide 37. We expect our 2026 total revenues in the range of $37 billion to $38.4 billion and non-GAAP earnings per share between $21.6 to $23. Our revenue range reflects continuing strong performance from our six key growth drivers. Repatha of Entity, TESSPIRE, our rare disease, innovative oncology, and biosimilars portfolios, positioning 2026 as a springboard year for future growth. We expect this growth in 2026 to more than offset anticipated declines from increased denote biosimilar competition. Price declines for certain other products in 2026, and continued increases in 340B program utilization. As you model the 2026, consistent with historical trends, tied to the annual United States health insurance cycle we expect a seasonal headwind to sales driven by benefit plan changes, insurance reverifications, and higher patient co-pay obligations. We also expect Otezla and Enbrel to follow their historical pattern of lower sales in the first quarter relative to subsequent quarters and expect additional impact from denosumab biosimilar competition in Q1. Additionally, note that we saw roughly $250 million of inventory build in 2025, that could potentially impact first-quarter sales. For total company revenues, we expect lower mid-single-digit year-over-year growth in the first quarter. For the full year, we expect other revenue in the range of $1.6 billion to $1.8 billion reflecting our commitment to investing in the best innovation while also driving execution excellence efficiency and prioritization across the organization, we project the full-year non-GAAP operating margin as a percentage of product sales to be roughly 45% to 46%. This guidance does not include any potential business development that may occur throughout the year. We expect non-GAAP R&D expense to grow low single digits excluding the roughly $300 million of business development in 2025. We continue to execute six global Phase III clinical trials for miratide advance additional late-stage assets, and invest in the best innovation. While maintaining disciplined resource allocation. In line with lower product sales in the first quarter, we expect Q1 non-GAAP operating margin to be the lowest of the year and roughly the same as 2025. We anticipate non-GAAP other income and expense to be about $2.3 billion to $2.4 billion in 2026. We expect a non-GAAP tax rate of 16% to 17.5%. We expect share repurchases not to exceed $3 billion in 2026. We expect capital expenditures of about $2.6 billion in 2026. This is consistent with our capital allocation priority to invest in our business and scale manufacturing capacity for volume growth. Including preparing for Miratide's launch. We remain focused on delivering sustained long-term growth and creating value for patients and shareholders by doing what we said we would do, advancing innovation in areas of high unmet medical need and maintaining rigorous financial discipline. I'm grateful to work with all of our colleagues worldwide in serving patients, This concludes the financial update. And now I'll hand it back to Bob for Q&A. Robert A. Bradway: Okay. Thank you, Peter. And as I hope you all appreciate now, I think we ended '25 with our track record intact for having delivered against the objectives that we set for you at the beginning of the year. We're determined to do the same now in 2026. We're entering the year with momentum, excited about what we see ahead. Let's open up the call to questions, Julian. We'd be happy to entertain any of our callers now. Julianne: Thank you. If for any reason you would like to remove that question, please press star followed by one. Again, to ask a question, press star 1. Our first question comes from Michael Yee from UBS Financial. Please go ahead. Your line is open. Michael Yee: Hey, guys. Good afternoon, and thanks for all the color and looks like guidance is growth, for the year despite the, the biosimilars. Obviously, is top of mind for everybody and you've disclosed some information on Meritide recently. I was wondering, and to ask your view of the portfolio overall in obesity given that folks like today are disclosing combinations with monthly or monthly and then combinations and how you see this playing out given you're focused on Meritide, but not so sure about the rest of the portfolio there. Thank you. Robert A. Bradway: Okay. Thank you, Michael. We'll take a stab at answering your questions. Connection wasn't great, but I think we got most of what you were trying to ask. Jay, you want to kick off? James E. Bradner: Yeah, I'd be happy to. Thanks, Michael. Amgen Inc.'s really made for this moment. Of developing Meritide across so many different indications, a leading cardiovascular company, all a leading respiratory disease company, there are so many opportunities there for Meritide. We've been in obesity, as you know, a long while, all the way back to the leptin days. And enjoyed stable discovery leadership team since that time. Internally, we have another clinical stage asset, called AMG five thirteen. We have yet to disclose the mechanism of that medicine as progressing in phase one clinical investigation. And preclinically, we have a rather exciting set of rising programs that are both incretin based as well as non-incretin based. Of both injectable as well as oral medicines. And the aperture is always open. For innovation on the outside. I think you should expect us to be competing broadly in the field, Michael. Okay, let's move on. Next question. Julianne: Thank you, Michael. Our next question comes from Yaron Werber from TD Cowen. Please go ahead. Your line is open. Yaron Werber: Great. Thanks so much. I have a question actually about dasodilumab for primary Sjogren's syndrome. It looks like studies are now fully enrolled, and you're saying completion the second half. You're the only company with both the systemic and the symptomatic study in phase three based on the phase twos. Should we expect the data this year? And do you want to give us any color on the reliability of the Phase II into the Phase III, just given it's a tough condition? Thank you. James E. Bradner: Thanks, Yaron, and thanks for noticing about tesotali about This is a very exciting medicine in the portfolio. This is a CD40 ligand targeting biotherapeutic. And the CD40 pathway has long been postulated to be driving the inflammatory cascade in Sjogren's syndrome The challenge is only that the biology is somewhat ambiguous, and so we take a really nice and incisive approach with case of polyvaptanous disease As you noted, the two phase III's that we have open in Sjogren's syndrome will be in moderate to severe symptomatic activity. That's our population one. As well as in patients with a very high symptom burden that's population two. Sjogren's has been very challenging for drug development. But we find this hypothesis quite compelling. The second study has already completed enrollment of patients. This is the moderate to high symptom burden group with low systemic disease activity. And we expect completion of the trials later this year, and we'll inform later about our plan to communicate this information. As for reading through the reliability of phase two into phase three, there have been historic challenges here. But the performance against this SI score which is the clinically utilized as well as regulatory paradigm for approval, you know, was one of the first medicines ever to improve an STI score in that disease space. So we're confident going into Phase III and can't wait to look at the results. Julianne: Thank you, Yaron. Our next question Our next question comes from David Amsellem from Piper Sandler. Please go ahead. Your line is open. David A. Amsellem: Hey, thanks. So I had a couple of PlozNet related Can you talk about the extent to which the underlying IgG related disease population is larger than what literature has suggested historically and what that means for the underlying opportunity. And then secondly, I know it's early in gMG, but can you just can you talk about how the product is being used to date and what kind of role do you think it's going to have in the admittedly more crowded treatment armamentarium? Thanks. Robert A. Bradway: Let me tackle this in two parts. Jay, if you take the first part then maybe Murdo, you can jump in on the second. Go ahead. You know, there is in medicine, an experience where the availability of a targeted therapy a really effective therapy, can actually increase the incidence of a disease through awareness of the disease. Why take a diagnosis unless you have reason to intervene effectively? And that may in the fullness of time be the case here. Limiting a precise description of the epidemiology even over the last five to ten years, is the lack of really coherent registry data as well as appropriate coding that would allow such an analysis from electronic medical record data? And so I think it's a good question. I think it's a moving object. And we'll have better precision on that in the few years to come. Myrtle, what are your instincts? Murdo Gordon: I think that's a very clear description, Jay. I think the the availability of the ICD 10 coding as you alluded to is really about a three-year presence in the market. Right now, we estimate the diagnosed population to be in the neighborhood 35,000 And that could grow as you outlined. There are mentions in the literature of higher numbers However, we're obviously focused on those that are already diagnosed already in care, and we're trying to build that awareness that you spoke of. James. So far so good. The Plasma is doing extremely well in its uptake. In IgG4-related diseases. We see a nice breadth of prescribing across a number of different specialties that see these patients because of the end organ involvement in the inflammatory condition. And we'll continue to make sure that we do our part to improve that awareness, improve diagnosis These patients undergo a very complicated patient journey in that this disease can masquerade as many other things. But so far so good and we're happy to be able to help these patients finally get a treatment, the only one FDA approved that can help with their symptoms and obviously the long-term health outcomes particularly for their target organs. Just on Neplizumab and gMG, we're very pleased with initial uptake. As you said, Dave, it's very early in the launch, but what we're pleased about, and I I mentioned this in in my opening remarks is that roughly half of the patients who are being treated are bio-naive patients. And the other half coming from switches from other therapies As we've said before, this is a large, but still quite dissatisfied category where the current treatments have limitations whether that be dosing inconvenience, whether that be duration, of efficacy and perhaps some waning efficacy in this category. And so far what we've seen is a very strong interest in the Plasma for its mechanism. As well as for the convenience that it represents for patients. So so far so good. Excited about Aplisna overall. In the broader rare disease portfolio. Okay, thanks. Let's go to the next question. Julianne: Thank you, David. Our next question comes from Salveen Richter from Goldman Sachs. Please go ahead. Your line is open. Just follow-up here on Neplinza. Walk us through what's given you confidence here in moving forward with a Phase three study in CIDP and the opportunity in that indication? And if you could also just separately touch on Repatha and how you're thinking about potential impact from the launch of Merck's oral PCSK9 and how you're adapting your commercial strategy there? Thank you. With two ends of the spectrum there from the very rare to the very common. Robert A. Bradway: So let's do Jay, you do the first question and then Murdo, you can take a sec. James E. Bradner: Okay. I'll take Salveen. We are, as Murdo shared, very bullish about aplisna. Specifically, this unique mechanism of action that targets and depletes the CD19 pathologic B cell. These, as you surely know, CB19, the B cell compartment, is evident on mature B cells like CD20 targeted by rituximab and other medicines of that type. But also the pre B cells. The more naive B cell, the cell that expands and elaborates many of these autoantibodies. And so now seeing efficacy of aplisna in so many immunoglobulin related disorders like IgG4 related disease, like myasthenia gravis, the chance to bring it to additional autoantibody mediated immune conditions is just a great chance to help patients with these severe diseases. In some cases there are signals from CD20s that we intend to follow-up with a broader more active, and hopefully much more convenient aplisna. Autoimmune hepatitis, which I mentioned earlier, is associated with autoantibodies. You see ANA, you see anti smooth muscle, you see anti actin, you see anti LC1. And the same is true, though, to a lower proportion. With CIDP as well, where maybe five percent to ten percent of patients will have autoantibodies to what are called paranodal proteins. NF155 CNTM1, I could go on for a long time. And so this biology being driven by the compartment that a plasma targets makes for a really great chance to extend the benefits of targeting B cells in both of these conditions. Murdo? Murdo Gordon: Yeah, just the size of the opportunity here is interesting. Rough the prevalent pool in The U.S. is estimated to be about thirty five thousand maybe seven thousand to ten thousand incident new diagnosed cases per year in The U.S. So hopefully, we can develop this drug and offer some benefit for for these patients. Which is yet another steroid intensive condition and we believe that we can do better than that. So let let's let's hope for that best. Outcome in those clinical trials. On Repatha, I alluded to what our strategy is in my opening remarks. We are excited by the landmark data that were revealed at the American Heart Association last year in November. Where we can now clearly promote Repatha for the prevention of first heart attack or first stroke in a high-risk patient population and or a high-risk primary prevention population. And so that is our focus right now and we are the only PCS that has both secondary and primary prevention data in our label. The Vesalius data are being met very positively by both cardiologists and primary care physicians in particular for the primary care physician for the diabetes patient. That were enrolled in the trial who did very well. So we are focused on making sure there's high awareness of these data. Repatha enjoys great access, broadly preferred on national template formularies by PBMs and health plans around the country. And around the world. And of course, we know that there's an immense amount of trust now in the profile by prescribers. And for the millions of patients that have received treatment and are taking Repatha, there's strong acceptance that a every two-week injection to lower cholesterol to the forty-five milligrams per deciliter target dose that was achieved in the Repatha arm in Vesalius. So that patients can reduce their cardiovascular risk. So we've got a lot to talk about. We've maintained all along that there is a lot of room in this market for other therapies to come in, but they will not have the data package and profile that Repatha has established and we'll continue to remind prescribers and others about that. Okay. Let's go to the next question. Julianne: Thank you, Salveen. Our next question comes from Mohit Bansal from Wells Fargo. Please go ahead. Your line is open. Mohit Bansal: Great. Thank you very much for taking my question and congrats on all the good progress here. Maybe like, just again, the question on PCSK nine and at this point. So Murdo, can you please remind us what percentage of your prescriptions are coming from primary care at this point? And with the Vesilius data, like how do you see the primary case segment of the market evolving over time? Thank you. Murdo Gordon: Yeah, thanks Mohit. I put a number out before the Vesalius data promotion started where roughly 40% of our prescriptions were coming from patients who were considered primary prevention, patients who have not yet had an event. Where physicians were looking to lower those patients' LDL cholesterol. I would imagine that that will increase and grow over time. What we're seeing is equal interest quite frankly from cardiologists who are excited by the Vesalius data and the consistency of both the primary endpoint, the secondary endpoint the MI subgroup, quite frankly the overall incidence of death in the trial was also something that attracted attention. From specialists. So the cardiology group has seen this as an affirmation of what they were already doing and being aggressive in treating LDL cholesterol. And primary care physicians, as I mentioned, are much more intent and aligned to adding Rupatha to the optimized statin therapy that most patients are on. As for how much we don't give product specific guidance. But hopefully you can tell I am extremely excited about the momentum that we have on Repatha right now. I'm really pleased with the execution of our teams around the world. We've made incremental investments in advance of the opportunity of promoting the Vesalius data and I expect that momentum to continue. Okay. Thank you. Let's go to the next question. Julianne: Thank you, Mohit. Our next question comes from Louise Chen from Scotiabank. Please go ahead. Your line is open. Louise Chen: Hi, thanks for taking my question. I wanted to ask you about TEPEZZA and your thoughts on another potential competitor coming to market and then also where you stand with AMG seven thirty two for TED. Thank you. Robert A. Bradway: Okay, great. Maybe again we could do this in two chunks. Jay, you want to talk about the clinical piece and then Mirko talk about the commercial piece? James E. Bradner: Thanks, Louise. TEPEZZA is proving to be just a very important medicine. For the management of thyroid eye disease. We have established a very strong evidence base in both the high clinical activity score and lower clinical activity score patient populations that are quite proud of this data generation, and also the apparent impact that it's having on patients being treated today. We have an ongoing subcutaneous Phase III clinical study in moderate to severe active TED. Fully enrolled, as we have shared and we expect to complete this study in the second half of this year. So we have a really terrific medicine that's increasingly a standard of care that's helping a lot of patients and a strong data set that it sits on top of before handing off to Myrtle, I'll just quickly comment. On AMG seven thirty two. Thank you for noticing. This is an IGF-1R targeting monoclonal antibody. Also achieves subQT administration. Phase two studies enrolling, initially studied in moderate to severe and active TED. And we'll have more to say on that in the future. Murdo Gordon: Yep. Thanks, Jay. As Jay mentioned, we're expanding our treatment for patients with thyroid eye disease into the lower clinical activity score patient population who tends to be managed by different specialists than the higher clinical activity score patients. We have historically been able to drive very strong penetration with oculoplastic surgeons and general ophthalmologists we are expanding our prescribing base to include endocrinologists. We made investments at the beginning of last year and those investments are starting to return now by an increased base of endocrinologists prescribing So that's in The U.S. And we expect that we'll continue to broaden our treatment of the low clinical activity score patients while maintaining our share of the higher clinical activity score patients. But also our international launches, our launch in Japan has gone extremely well. We're seeing nice uptake there. We're seeing a very well-received product for higher clinical activities for patients, and we're in the process of launching in multiple markets around the world as we speak. So overall, TEPEZZA will be a a good growth driver for us this year. Thank you. Let's go to the next question. Julianne: Thank you, Louise. Our next question comes from Terence Flynn from Morgan Stanley. Please Terence Flynn: Hi, thanks for taking the question. I had one on the Miratide Phase III program. Appreciate all the details today, but just was wondering if you have any update in terms of how to think about the design of the Type II diabetes CVOT trial, particularly the control arm as I know that's something that you guys were debating here post the, you know, seeing some of the data from some of the competitors but just wondering how you're thinking about Control Arm in that setting. Thank you. Robert A. Bradway: Sure. Jay, you want to? James E. Bradner: Sure. Happy to share, Terrence. We're just thrilled by the opportunity to develop Miratide for patients with type two diabetes. This is really where we see a potential paradigm shift in the management of that disease. In my medical training, practice with insulin and insufficient orals and titrating dosing and here we have a medicine that can be dosed monthly We've seen efficacy and chronic weight management bimonthly. We've recently described maintenance approach using quarterly dosing. This is just a new paradigm. In management of diabetes. We've shared the major insights at JPMorgan from the phase two type two diabetes study, which is ongoing. There are additional parts to this trial. It's importantly given us an experience with low BMI patients and also seeing A1c across the dose range. And so the robust findings of this trial position us very well to start to pursue Phase III clinical investigation. The specific design of these studies control arms and the patients recruited, will be a subject for a future engagement. Okay, thank you. Let's go to the next question. Julianne: Thank you, Terrence. Our next question comes Chris Schott from JPMorgan. Please go ahead. Your line is open. Chris Schott: Great. Thanks so much. Just another merited question and just on the topic of less frequent than monthly dosing. It certainly seems like there could be a trade off here where even more infrequent dosing, you know, would obviously be a huge benefit even if it was associated with a bit less weight loss. I guess, so as you're thinking about just pushing the program beyond monthly, what profile do you think you'd need to see for that to have a role in the market? Are there minimum efficacy bars you're looking at? And just in general, is your confidence about the ability to push this beyond monthly? Thanks so much. Robert A. Bradway: Okay. That's an interesting question. Murdo, do you want to take shot at what we think we see in the marketplace and why we believe Meritide has a potential to address what is emerging as a very large unmet need in the field? Murdo Gordon: Yeah. I'll make a few comments here, Bob. Thanks for the help opportunity. I think it's pretty clear as we look at the market as it exists today that there's dissatisfaction with the weekly GLP ones. And I think you can actually see that in a fairly dramatic way with the advent of oral sema and how rapidly it's been taken up in the market that tells you that clearly patients and prescribers are looking for other opportunities. Now what I like is the opportunity that we have to deliver what has been mentioned a couple of times in this call as a paradigm-changing therapy. And that's the ability to come into a weekly market bring a monthly therapy, that can achieve similar weight loss in a very well-tolerated regimen. And then for those patients, who achieve their weight goal, for them to convert to every eight-week or every twelve-week dosing regimen to maintain that weight and or the metabolic benefits of their therapy. And I think that's a pretty compelling offering. I think that we're targeting that kind of profile and we'll have multiple ways of generating data to that effect. Robert A. Bradway: Chris, maybe we'll have Jay just address a piece as well. James E. Bradner: Yeah, Chris, thanks for the question. You don't mind, I'm going reject part of the premise of your question, this idea of less frequent dosing being an absolute tradeoff for efficacy we're not certain that we will see that. Having observed the large majority of patients maintaining weight, on low dose and on quarterly dosing, In the field of obesity they call this the defended fat mass. And the capacity to avoid weight regain is a sign that the reset of body weight has been achieved. We've seen with all medicines to date dose ranging effects on weight loss, and here we might expect to see schedule ranging effects on weight loss. Would be individualized for patients. And so I wouldn't necessarily assume that we'll see a big tradeoff with less frequent dosing of miratide. Okay. Thank you. Let's go to next question. Julianne: Thank you, Chris. Our next question comes from Umer Raffat from Evercore ISI. Please go ahead. Your line is open. Umer Raffat: Hi, guys. Thanks for taking my question. I'm really, really lost today. I'm trying to figure out what happened all of a sudden. Why did FDA decide to ask you to pull the ChemoCentryx drug? Was there some litigation or some correspondence? Like, what prompted it in the first place? And then if I dig in a little more specifically, they're saying that nine patients need to be readjudicated Is that referring to the primary endpoint on week 26 remission or the week 52 sustained remission? I asked because week 26 endpoint was not inferior anyway. So even if you readjudicate those, it's still not inferior. So I'm just really lost today. Robert A. Bradway: Okay. What's Jay, go ask Jay. You addressed the question. You may wanna just start at the high altitude, remind people what Tavneos is say a few words about the disease that it addresses. It's obviously a very small product in our portfolio relative to the other things we have going on. But it may be a medicine that's less familiar to most of our callers. James E. Bradner: Yes, sir. Thanks, Umer. And just by way of background then, ANCA-associated vasculitis is a group of very serious rare, and destructive inflammatory illnesses that targets blood vessels and can therefore damage vital organs like kidneys, lungs, skin, nerves, even heart The prior treatment paradigm for tabnios was quite toxic. Cyclophosphamide chemotherapy with azathioprine and rituximab accompanied by long-term steroid use And chronic use of steroids proved very common but also very challenging. Hyperglycemia, dystrophy, bone health, mood disorders, immune suppression, And then enter tabnios or avacopan, This is an oral complement factor five a receptor blocker, and so it blocks complement mediated destruction. We acquired Tavneos from ChemoCentryx in 2022 after it had been on the market market for a year. Based on approval. For the ADVOCATE Phase III study that you referenced as published in the New England Journal. This established the efficacy of tabnios over prednisone steroid tapering for sustained remission out to fifty-two weeks when it was added to induction therapy with at that time, standard of care rituximab. And cyclophosphamide. As we shared, the FDA requested a voluntary withdrawal on January 16. We were surprised by this. There were concerns raised about a process followed by ChemoCentryx to readjudicate primary endpoint results for nine of the three thirty-one patients. And We're in discussions with FDA and we'll answer questions as we talk with them. Okay. Let's go on to the next question. Julianne: Thank you, Umer. Our next question comes from Alex Hammond from Wolfe Research. Please go ahead. Your line is open. Alex Hammond: Hey, guys. Thanks for taking the question. So you had a strong quarter with Pav Lu. I guess, how do you kind of expect to maintain this leadership position when other manufacturers launch biosimilars in the second half of the year? I guess, essentially, can you kind of help level growth expectations for this year? Robert A. Bradway: Well, obviously, we're not giving guidance on an individual product Alexander. But Murdo, go ahead and talk a little bit about the strong performance that we've observed so far with our biosimilar to Pat. Murdo Gordon: Yes. I think what we've been able to do thus far is establish good inroads with the largest national retina retina specialist networks. And the I think what what I would say is they they tend to want to pick a product that they know allows them to manage their patients effectively. We think we've got a great device that helps them do that. We obviously are competing effectively against the innovator and given that we have a lot of biosimilar experience, we'll we'll compete effectively when others enter the market, whenever that may be. Okay. We'll take one last question as we're right up against the bottom of the thirty-minute mark here of the hour. So why don't we take one last question and then as always, Casey and his team will be around to answer questions if we didn't get to you on this call. Julian, last question. Julianne: Thank you, Alex. Our last question will come from Courtney Breen from Bernstein. Please go ahead. Your line is open. Courtney Breen: Okay, Courtney. Fantastic. Thanks so much for squeezing this in. I am going to bounce you back to Maritide and just as we think about maintenance and that kind of less frequent dosing opportunity, can you describe how you might think about the role of this product in the market? Is it only post maritide weight loss? Or how should we be thinking about that switching opportunity and the type of data that you might demonstrate for that positioning over time. Thanks so much. Robert A. Bradway: Yeah, I can imagine there's probably a lot of interest in that. Murdo, do you want to share any thoughts at this point? Murdo Gordon: Well, thanks Courtney. Obviously, we think we've got as has been said now, many times and I'll repeat it again, a product that changes the paradigm of weight loss diabetes, ASCVD, heart failure management, And we see it as both an effective product to start patients on to get to weight goal and also for patients who to receive the medical of their treatment need to be on these therapies for multiple years. This opportunity for maritide's profile to deliver a convenient, well-tolerated, efficacious regimen that could be monthly, could be every eight weeks, and could be quarterly. We think that's that's really exciting. And then, of course, as you hinted at, there may be patients out there on other therapies that want to switch to something as convenient and as well tolerated as Maritide. So the answer is all of the above. Okay. So again, thank you all for your interest. We appreciate you joining our call. I'll just reiterate, if we didn't get to you, please reach out directly to Casey and his team. In the meanwhile, I hope we've left you confident the momentum that we're carrying into 2026. Again, I would just reiterate that we're excited about the year that we have in prospect here. A year which as Peter has described, we view as a springboard to the future growth here at Amgen Inc. So excited about the hand that we have and look forward to sharing it with you during the course of the year. Thank you. Julianne: This concludes our Amgen Inc. Q4 2025 earnings conference call. You may now disconnect.
Operator: Good day, and thank you for standing by. Welcome to the InnovAge Holding Corp. Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers' presentation, there will be a question and answer session. To ask a question, please press 11 on your telephone, and wait for your name to be announced. To withdraw your question, please press 11 again. I would now like to hand the conference over to your speaker today, Ryan Kubota, Director of Investor Relations. Ryan Kubota: Good afternoon, and thank you all for joining the InnovAge Holding Corp. 2026 Fiscal Second Quarter Earnings Call. With me today is Patrick Blair, CEO, and Ben Adams, CFO. Today, after the market closed, we issued an earnings press release containing detailed information on our fiscal second quarter results. You may access the release on the Investor Relations section of our company website, Innovh.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, 02/03/2026, and have not been updated subsequent to this call. During our call, we will refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our earnings press release posted on our website. We will also make statements that are considered forward-looking, including those related to our 2026 fiscal year projections and guidance, future growth prospects and growth strategy, clinical and operational values, Medicare and Medicaid rate increases, the effects of recent legislation in federal budget cuts, enrollment and redetermination processing delays, seasonality of cost trends, the status of current and future regulatory actions, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors and other discussions included in our annual report on Form 10-K for fiscal year 2025 and any subsequent reports filed with the SEC, including our most recent quarterly report on Form 10-Q. After the completion of our prepared remarks, we will open the call for questions. I will now turn the call over to our CEO, Patrick Blair. Patrick Blair: Thank you, Ryan, and good afternoon, everyone. I'd like to start by thanking our colleagues, our participants, and their families, our government partners, and our investors for joining us today and for their continued support. We appreciate the opportunity to share an update on our fiscal 2026 second quarter results and the progress we are making against our strategic priorities. Our second quarter results reflect continued momentum across the business and disciplined execution across our clinical, operational, and financial initiatives. For the quarter, we reported total revenues of $239.7 million, center-level contribution margin of $52.8 million, Adjusted EBITDA of $22.2 million, and net income of $11.8 million. To put those results in context, we generated $39.8 million of adjusted EBITDA in the first half of the fiscal year, exceeding our full-year fiscal 2025 adjusted EBITDA of $34.5 million. Two years ago, at our Investor Day, we outlined an intermediate-term adjusted EBITDA margin target of 8% to 9% over a two to four-year horizon. This quarter, for the first time, we achieved that target, delivering an adjusted EBITDA margin of 9.2%. It's important to emphasize that this level of margin is consistent with what's required to sustainably operate a full-risk, investment-intensive, highly regulated healthcare delivery model and to continue reinvesting in our people, infrastructure, and the quality of care we provide to our participants. As we talk about the strength of our first-half results, I want to be clear about how we think about this performance and what's driving it. Over the past several years, InnovAge Holding Corp. operated from a very different financial position as we worked through operational, compliance, and organizational challenges. The progress we are seeing today reflects a deliberate effort to rebuild and strengthen the foundation of the business across every dimension: our talent, clinical model, service delivery, operational discipline, compliance capabilities, and growth engine. Importantly, financial performance is not the result of any single action or short-term lever. It's the natural outcome of delivering higher quality, more consistent care to a highly complex population, improving day-to-day utilization management, and operating with greater rigor and accountability. When the model works as intended, quality improves, outcomes improve, costs are better managed, and financial results follow. This progress also reflects our commitment to being a strong, reliable partner to our federal and state regulators. As we strengthen our financial position, we are better able to invest in our people, our centers, and our participants, and to serve more seniors in a model of care that improves quality while lowering total cost to the system. When InnovAge Holding Corp. performs well, our government partners benefit as well because more vulnerable seniors are cared for in a setting that delivers better outcomes and better value for taxpayers. We see this quarter as further evidence we are delivering on the commitments we've made to government partners, participants, and investors, and that the model is increasingly operating as designed. Let me spend a few minutes on what drove our second-quarter performance and why we exceeded expectations. First, we made meaningful progress strengthening revenue integrity, particularly around Medicaid eligibility and redeterminations. As discussed on prior calls, we encountered challenges last year that led to elevated revenue reserves and write-offs. Over the past few quarters, we've taken a comprehensive approach, investing in people, improving workflows, strengthening data and reporting, and upgrading technology. As a result, we've improved timeliness and accuracy, reduced reserves, and reinstated coverage for a number of participants where outcomes had been previously less certain. While there's more work to do, we're encouraged by the progress and the visibility we now have. Second, we continued to demonstrate strong medical cost management in an environment where many healthcare organizations are under pressure. This reflects the strength of the PACE model and the daily decisions made by our interdisciplinary teams. We saw particular strength in managing inpatient and skilled nursing utilization through proactive care coordination, earlier interventions, better length of stay management, and appropriate side of care decisions. It's about delivering the right care at the right time in the right setting. Third, we're operating our centers more efficiently as the platform matures. We've improved consistency in staffing models, scheduling, and throughput while maintaining a strong focus on quality, service, and participant experience. These gains come from standardizing best practices, better leveraging Epic, and strengthening local execution, not from one-time actions. Fourth, our SG&A performance reflects the structural work we've done to simplify the organization and improve accountability. The spans and layers work over the past year clarified roles, streamlined decision-making, and reduced unnecessary complexity. We're now seeing the benefit in a cost structure that better supports frontline care delivery. Stepping back, I want to touch briefly on the rate environment across both Medicaid and Medicare. On the Medicaid side, we're experiencing a slightly more favorable blended rate environment this fiscal year relative to our initial assumptions. This reflects state-specific dynamics and timing and is consistent with our conservative approach to forecasting, which assumes variability rather than relying on rate upside. On the Medicare side, I want to address the CMS advance notice for calendar year 2027 Medicare Advantage rates released last week. PACE is subject to the same core Medicare payment as Medicare Advantage, including county rates, risk adjustment changes, coding intensity adjustments, fee-for-service normalization, and underlying cost trends. As a result, changes to Medicare Advantage policy do affect PACE. At the same time, PACE includes unique elements, most notably the frailty adjuster based on activities of daily living, which recognizes that diagnosis-based risk adjustment alone does not fully predict costs for a highly frail population. CMS has also proposed a blended risk score for calendar year 2027 using 50% of the 2017 CMS HCC model and 50% of the proposed 2027 model, accelerating the transition relative to the prior timeline. As we look ahead, we continue to have a robust portfolio of clinical and operational value initiatives that we believe can unlock additional value across participant experience, quality, compliance, efficiency, and revenue. One key area is participant experience. We're working to more clearly define the InnovAge Holding Corp. participant experience end-to-end, from enrollment and onboarding through ongoing care, with a focus on early engagement, systematic feedback, consistent service recovery, and continuous improvement. We believe a more intentional experience will drive higher satisfaction, stronger engagement, and better retention over time. Another significant opportunity is reducing unwarranted variation in provider practice patterns. Physician decision-making sits at the center of the PACE model, influencing nearly every aspect of care delivery. While this has always been actively managed, we see an opportunity to further improve consistency and appropriateness across the platform. This work will take time and thoughtful change management, but we believe advances in AI can increasingly support physicians with peer benchmarks and evidence-based guidance, augmenting, not replacing, clinical judgment. We've also stabilized our pharmacy insourcing and are now positioned to pursue additional opportunities across pharmacy distribution, utilization management, and care coordination. With greater visibility and control, we believe pharmacy can continue to improve outcomes, efficiency, and total cost of care. Finally, we see continued opportunity to optimize center productivity, capacity, and care delivery while strengthening participant retention. We're exploring the application of advanced analytics and AI to scheduling and transportation, areas central to the PACE operating model. This work is early, but our confidence is increasing that there is meaningful value to be unlocked. Taken together, these initiatives reinforce our belief that there is still substantial opportunity ahead. The progress we've made gives us confidence, not complacency. With that context, I want to briefly touch on how our governance is evolving to support the next phase of execution and oversight. As we strengthen the operating, clinical, and compliance foundations of the company, we've continued to evolve our governance to support the next phase of execution. As part of that evolution, Tom Scully returned to the role of chairman of the board, and Pavitra Mahesh and Sean Trainor rejoined the board, effective January 28. I also want to recognize Jim Carlson for his leadership as chairman since June 2022. Jim provided steady, thoughtful guidance during a very critical period, helping InnovAge Holding Corp. navigate operational, compliance, and strategic change. We're grateful for Jim's leadership and pleased that he'll continue to serve as an independent director. Together, this governance structure strengthens oversight, reinforces alignment, and positions the company well to continue delivering for participants, regulators, and shareholders. Before turning to guidance, I want to briefly share how we think about pacing and expectations. As a full-risk, value-based care organization, quarter-to-quarter results can be influenced by timing, rate dynamics, and the maturation of initiatives. We therefore focus less on any single period and more on sustained trends across multiple quarters. With that context, the results we delivered through the first half of the fiscal year give us increased confidence in our outlook for the remainder of fiscal 2026. We believe the platform is increasingly operating as designed while still recognizing inherent variability in the model. As a result, we are raising our full-year fiscal 2026 guidance. We now expect member months between 92,900 and 95,700, total revenue between $925 million and $950 million, and adjusted EBITDA between $70 million and $75 million. To close, we're encouraged by the progress we're making and proud of how the organization is performing. These results reflect a company executing with greater consistency, accountability, and purpose in service of a highly complex senior population. We have strengthened the foundation of the business and are seeing the benefits across quality, compliance, participant experience, and financial performance. We remain grounded in the realities of a full-risk, highly regulated model and committed to managing the business with a long-term mindset. InnovAge Holding Corp. is better positioned today than at any point in recent years, not because the work is finished, but because the platform is working as designed. We're committed to executing responsibly, investing thoughtfully, and aligning the interests of participants, government partners, and shareholders. With that, I'll turn it over to Ben for more detail on the financials. Ben Adams: Thank you, Patrick. Today, I will provide some highlights from our second quarter fiscal year 2026 financial performance and insight into some of the trends we are seeing in the current quarter. Starting with census, we served approximately 8,010 participants across 20 centers as of 12/31/2025, which represents growth of 7.1% compared to 2025, and sequential quarter growth of 1.5%. We reported 23,960 member months in the second quarter, an increase of approximately 7.9% compared to 2025, and an increase of approximately 2% over 2026. Our second-quarter census growth exceeded expectations, driven primarily by our continued success in reinstating participants who had previously lost Medicaid coverage. Total revenues of $239.7 million increased 14.7% compared to $209 million in 2025, driven by an increase in member months and capitation rates. The increase in member months was primarily due to growth in our existing California, Florida, and Colorado centers. The increase in capitation rates was primarily due to an annual increase in Medicaid and Medicare capitation rates, partially offset by revenue reserve. Compared to 2026, total revenues increased 1.5% due to an increase in member months. We incurred $112 million of external provider cost during 2026, an increase of 3.8% compared to 2025. The increase was driven by the increase in member months, partially offset by a decrease in cost per participant. The decrease in cost per participant was primarily driven by a decrease in permanent nursing facility utilization and a decrease in pharmacy expense associated with the transition to in-house pharmacy services. This decrease in cost per participant was partially offset by an annual increase in assisted living and permanent nursing facility unit cost, an increase in assisted living utilization, and an increase in inpatient unit cost. Compared to 2026, external provider costs increased 2.9%. The increase was primarily driven by the increase in member months and a modest increase in cost per participant due to seasonal growth in inpatient admissions. Cost of care, excluding depreciation and amortization, was $74.9 million, an increase of 16.9% compared to 2025. The increase was due to an increase in cost per participant coupled with an increase in member months. The total increase in cost was primarily driven by a net increase in salaries, wages, and benefits due to higher wage rates and costs associated with organizational restructure, partially offset by a reduction in headcount. Higher third-party fees and shipping costs associated with in-house pharmacy services, and higher fleet costs inclusive of contract transportation. Cost of care, excluding depreciation and amortization, decreased 1.3% compared to 2026. The decrease was primarily driven by reduced headcount associated with organizational restructuring and the timing of benefits and supply expense, partially offset by higher contract transportation costs. Central level contribution margin, which we define as total revenues less external provider costs and cost of care, excluding depreciation and amortization, includes all medical and pharmacy costs, was $52.8 million in the quarter, compared to $37.1 million for 2025. As a percentage of revenue, central level contribution margin of 22% increased approximately 430 basis points in the quarter compared to 17.7% in 2025. Compared to 2026, central level contribution margin increased 2.7% from $51.4 million. As a percentage of revenue, increased 20 basis points compared to 21.8% in the same period. Sales and marketing expenses of approximately $8.1 million increased 4.9% compared to 2025, due to higher wage rates. Sales and marketing expenses increased by approximately 6.2% compared to 2026, driven by marketing spend timing. Corporate general and administrative expenses of $26.6 million decreased 5.3% compared to 2025. The decrease was primarily due to a decrease in legal and consulting fees. Corporate, general, and administrative expenses decreased 12.1% compared to 2026, primarily due to reduced headcount associated with organizational restructuring, lower contracts and consulting costs, decreased legal expenses, and the timing of software license fees. Net income was $11.8 million for the quarter, compared to a net loss of $13.5 million in 2025. We reported net income per share of 8¢, and our weighted average share count was approximately 136.4 million shares for the quarter on a fully diluted basis. Adjusted EBITDA was $22.2 million for the quarter, compared to $5.9 million in 2025, and $17.6 million in 2026. Our adjusted EBITDA margin was 9.2% for the quarter, compared to 2.8% in 2025, and 7.5% in 2026. We do not add back losses incurred by our de novo centers in the calculation of adjusted EBITDA. De novo center losses are defined as net losses related to preopening and start-up ramp through the first twenty-four months of de novo operations. For the second quarter, de novo losses were $4.7 million, primarily related to our Tampa and Orlando centers in Florida. This compares to $4 million of de novo losses in 2025 and $3.9 million of de novo losses in 2026. Turning to our balance sheet, we ended the quarter with $83.2 million in cash and cash equivalents, plus $42.8 million in short-term investments. We had $69.9 million total debt on the balance sheet, representing debt under our senior secured term loan revolving credit facility and finance leases. For the second quarter, we recorded positive cash flow from operations of $21.4 million and had $2.4 million of capital expenditures. Building on the strength we saw in 2026, I would now like to walk through our updated fiscal year 2026 guide. Based on information as of today, we are revising our fiscal year outlook from the guidance we shared in September, except for our ending census, which remains unchanged. We expect our ending census for fiscal year 2026 to be between 7,900 and 8,100 participants. In member months, to be in the range of 92,900 to 95,700. We are projecting total revenue for fiscal year 2026 in the range of $925 million to $950 million, and adjusted EBITDA in the range of $70 million to $75 million. And finally, we anticipate that de novo losses for fiscal year 2026 will be in the $11.5 to $13.5 million range. As we look toward 2026, we have increased our guidance based on the following factors. First and foremost, we are seeing continued improvement in the operations of the business each quarter, as our operational and clinical value initiatives produce results. Second, we have had success in reinstating participants who had previously lost Medicaid coverage, which reduced the impact on member months and top-line revenue relative to our original expectations. Third, Medicaid rates for the fiscal year are higher than our original estimates. And fourth, Medicare risk scores were less affected than we originally anticipated due to the phased-in implementation of risk adjustment model version 28 effective January 1. Overall, these factors contribute to improved visibility and give us more confidence in our performance for the remainder of fiscal year 2026. In closing, we remain focused on disciplined execution for the remainder of the fiscal year. We believe our updated guidance more closely reflects our stronger-than-expected performance to date in our current view of the operating environment. Operator, that concludes our prepared remarks. Please open the call for questions. Operator: Thank you. Press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. And our first question comes from Benjamin Rossi with JPMorgan. You may proceed. Benjamin Rossi: Hi. Afternoon, everyone. Thanks for taking my questions. So just on the back half EBITDA progression following the raise, in context of your year-to-date adjusted EBITDA margin coming in north of about 8%, my math here kind of suggests back half margins are coming maybe closer to a mid-seven EBITDA margin as you move forward with these restructured operating costs. Just walk through some of the variables going into those margin expectations and maybe how you're thinking about margin progression for the remainder of the year? Ben Adams: Yes. Yeah. Hey, Ben. It's Ben Adams. How are you? Yeah. What I would say is remember that the third quarter for us is always the soft quarter, and there are probably a couple things going on in there. One is when we go through the open enrollment period at the end of the year, we often have slower enrollment gains in the first couple months of the third quarter. You've seen that happen over the last several years. And I think our expectation is you'll probably see something similar like that evolve this year. The other thing I think to be mindful of is the flu season, which has been, you know, particularly bad this year. We were talking earlier about the fact that the vaccine was only partially effective against the flu. And saw a relatively high incidence of the flu going into year-end and in through January. And so our expectation is we may see a little additional pressure on that side in Q3. You know, it's all, you know, it's all preliminary at this point because the data is just coming in. But because of that, I think what you'll see is, you know, sort of the softer third quarter that we typically exhibit. And then you'll see a return to a more normalized Q4 growth rate that you've seen. So that will just play through the margins just naturally. Patrick Blair: Then I might add to that just the continued work we're doing on the Medicaid redeterminations. You know, as I shared in my prepared comments, we made a tremendous amount of progress and some aspects of that work have worked out better than expected, but it's still a work in progress. Still a continued effort to ensure that our enrollment and our enrollment applications are being processed in a timely fashion. And so I think we were also cognizant of that as we put the guidance forward. Benjamin Rossi: Great. Appreciate that. And I just I'm kinda flipping over to with the shift in v28 beginning earlier this year. I know you're only a month in. But just hoping to better understand your thinking on the impact to your maybe your raw risk scores and how that might flow through to subsequent graph scoring for some of your members. I appreciate there's a lot of variables in here with some of the changes to the HCC for conditions like dementia and CKD, and you might have the frailty score come in there. Just following the guidance raise, can you just maybe help us understand how any of the back half guidance factors, those changes flowing through? I know it's only 10% at this point, but just trying to get an idea of how that maybe impacts your rates, how that could be impacted maybe overall by rates and when that on the other set of the variables. Patrick Blair: Yeah. I mean, I'll start with more of kind of a macro view, and then let Ben talk about the flow through to risk scores. You know, I think the first point is we share more in common with, you know, the Medicare rate adjustment model than we share differences. You pointed out, you know, a couple differences. You know, but I also just remind folks that only about 45% of our total per member month premium is actually Medicare. And so for that reason, and the fact that v28 is a phase-in for PACE, it has moved from a five-year phase-in to a three-year phase-in, but still is a phase-in. So we're sort of structurally less exposed to v28, you know, when comparing to other MA plans. And when you think about the frailty adjustment, you know, that is not inconsequential. You know, as it were. It is one of the some of the beauty of the system for PACE is that it, you know, it captures the disability and functional status that wouldn't otherwise be reflected, you know, in a diagnosis alone. You know, someone can have a severe set of functional disabilities that relates to bathing, dressing, eating, you know, using the toilet, walking, without necessarily having a dramatically different diagnosis than someone that say has fewer diagnoses. So there is a real opportunity for us as it relates to the differences that exist. And, you know, there actually is a floor on that frailty adjuster of, I think it's point one two nine. So, you know, I just want to point out that we do share a lot of the same challenges that the rate notice revealed. Preliminary rate notice revealed last week. But at the same time, there are some notable differences. And I'll let Ben maybe share through how he thinks about the flow through. Ben Adams: Yeah. You know, I think that Patrick pretty much hit it. I think the one thing I would say is that when we went through and did a reforecast of the business, we factored in our latest thinking about what the impact is going to be over the next two quarters till we get to the end of our fiscal year. And we think we've kind of captured appropriately in the guidance. Benjamin Rossi: Appreciate the additional color there. Thanks. Operator: Our next question comes from Matthew Gillmor with KeyBanc. You may proceed. Matthew Gillmor: Hey, thanks. Quick question. Good afternoon. I guess I wanted to start off on the census growth that was, you know, I think a bit stronger than at least we expected, and there was some commentary around being better in terms of the work you've done on Medicaid return redeterminations and improving your processes. I thought I might just ask sort of where you're seeing more success. Is that on your side and your processes, or has there been some success in just the processes at the state level and getting approvals through? Patrick Blair: Thank you. I'll let Ben kind of clean me up here. But, you know, I think there's a couple of ways to break this apart. You can think about the processes for which we sort of have complete control of. And, you know, that involves a very sort of rigorous let's call it kind of a patient accounting system. Where we can really match someone's eligibility to the premium that we receive. And we can reconcile that and we can track that throughout the company and in some ways, think of it as sort of a workflow management process as well where we're constantly sharing data between our finance organization, our enrollment organization, and our local centers on where follow-up is needed, etcetera. I think our progress in the first half, first couple quarters of the year has been on what we control. The other part of this is at some point, we're essentially handing files off, enrollment files off to the state. And depending on the state, there can be, you know, different levels of work that's required on their end. I think going forward, I think our caution is, you know, not to be overly confident about what we've accomplished internally, but we have to be mindful of where the states are and the resource challenges they're grappling with and how do we ensure that we're being as sort of collaborative as we can, timely as we can. And producing very high-quality data that allows them to do their job very effectively. That's kinda how we break it up. I'll let Ben kind of... Ben Adams: Sure. Yeah. No. I think Patrick hit it pretty well. I guess what I'd say you may remember from our prior earnings calls that we had a number of cases at the end of the fiscal year where people had lost their Medicaid coverage. And we had assumed that there'd be some attrition in our census over the first six months of this year as that happened. As we said, I think before we ended up getting a lot more of those folks re on Medicaid than we originally anticipated. Right? So that provided us a little bit of an enrollment cushion in the first six months of the year. The other thing that's nice about it is because a lot of them got reestablished relatively early, you kind of get that compounding effect of the member months. So that gave us a little bit of a member month cushion going in. You know, we're through most of that now as of the end of the fiscal year. And now we're on what I think of as our regular glide path of enrollments. And so we're seeing gross enrollments that are doing pretty well, coming in generally in line with what we'd expect. We're probably seeing a little bit more in disenrollments than we'd like, and so we're spending a lot of time on that. But you know, as we said in the beginning of the year, there are a lot of factors that are kind of coming into play into enrollment numbers this year because of the washing through of some of the changes I talked about before. But I think we seem to be tracking okay. Matthew Gillmor: Got it. That's very helpful. And then just as a quick follow-up, how does that influence the reduction in you mentioned there's a reduction in revenue write-offs. Any sense for the magnitude of that and was there some was there any sort of one-time pickup, or is that just a better go forward you think about some of the improvement in these processes? Ben Adams: Yeah. I mean, I can tell you sort of conceptually how it all works. Which is we go through a process that's pretty rigorous on the revenue write-offs. Where we look at individual participants, where they are in the redetermination process or even the enrollment process in some cases, and we come up and we look at historical write-off patterns and then we also go through and risk score them depending on where they are in the process. And compare those two results to figure out how we actually set our revenue reserves. The good news is we built a new system we didn't have last year so we can actually do this in a much more methodical fashion than we could in the past. And that was the patient accounting system, which Patrick referenced before, which is built in Salesforce for us. It's been a great tool for us. So we can track those people going through a lot more easily than we could before. So it's a much tighter process. So when we go through and set our monthly revenue reserves, we can be much more precise in the way they play out. And we can put in what I would think of as sort of an appropriate level of conservatism. Without being, you know, overly conservative. So I think the process has worked really well for us in the last six or seven months. I think we're pleased with the way it's going. I'm not sure we'd be ready to draw any conclusions yet about how far ahead we are in revenue reserves because those patterns tend to adjust month by month. But right now, I would say we're tracking to expectations. Matthew Gillmor: Got it. Thanks a lot. Operator: Thank you. And as a reminder, to ask a question, please. And our last question comes from Jared Haase with William Blair and Company. Jared Haase: Yes. Hey, guys. Thanks for taking the questions and congrats on the results. Maybe just unpack a little bit more, and I guess this is a little bit related to the question that Matt just asked. But, you know, the comment, Patrick, that you made on participating participant experience, I'm curious if you could unpack just a little bit more, you know, some of the specific areas within that patient journey that you believe could be the most impactful? And then I guess a related question, you sort of alluded to potential improvement in patient retention. You know, I'm wondering if there's any way to contextualize just where you sit today from a retention standpoint and, you know, where that might go, as you implement some of these initiatives. Patrick Blair: You know? Yeah. Let me just maybe start with just kinda giving you the order of magnitude. And we talked about kind of voluntary disenrollment, it's about 6% annualized on an annualized basis. So, you know, just gives you a sense of kind of what we're the magnitude of sort of what we're faced with as our as the denominator, our census grows. And so where we see some of the opportunities, you might expect not unlike other service providers, we're very interested to understand how what people expect when they enroll, how does that line up to what they experience once they come to the center and experience, you know, sort of the day in a life of a PACE member. And as we dig into data like that process, it sort of covers everything from the sales process through sort of onboarding communications to onboarding them physically in the center. And we've identified there's our example where people will disenroll within a short period of time. So there could be a misalignment between what they expected and what they experienced. And so tackling that end-to-end onboarding experience really isolating the moments of that experience that matter most, and then understanding, you know, where there may be misalignment or opportunity and then sort of defining that and determining if we can't build kind of the InnovAge Holding Corp. way one single way that if you walked into any center of in the country, you'd get the exact same sales experience. You get the exact same onboarding experience, etcetera. And so you could take onboarding as a part of that. You could go further to think about, you know, grievances. In the world of PACE, grievance means something very different than a typical, say, managed care or health plan model. Grievances are kind of our eyes and ears on where participants are satisfied or dissatisfied. As we dig in, have better data, we're able to profile and trend grievances and identify specific opportunities for improvement that exist. And so using grievance data to define could be another great example. How do we create a better experience to avoid that in the future? Service recovery. If something goes bump in the night, how do we respond to it? How quickly do we respond to it? Do delays in response, can they impact disenrollment? So think about it as we're sort of analytically breaking down that entire experience all the way through with another offering. To the point that one of our participants is approached, say a Medicare Advantage offering, a special needs plan offering, how do we if we lose people there, what kind of an experience can we create so that we don't lose as many people? So it's a big opportunity for us to get our arms around it. You know? I think everything we're doing today to improve the core operations of the business better execution, better accountability. Allows us to now tackle that. And so as we look forward, to where's the potential value unlocks for the company, think participant experience is one. And this notion of, I'll call it, ordering variation. Practice pattern variation. You know, that's another where the data clearly shows us meaningful variation in ordering patterns, intensity, duration of services across clinicians, across markets. Some of that variation is clinically appropriate. Some of it's not adding value to the participant. So in terms of magnitude, that in participant experience, these are not one-time levers and it's not a small and it's not a small one. We think of it as an opportunity to create more durable multiyear opportunity within our model and we're now ready as a business to take on those bigger challenges. And so as we look forward, those are some of the opportunities we see for the company. Jared Haase: Got it. I really appreciate all the detail. That's super helpful. You know, as I think about sort of the implications of, let's say, retention and patient experience, one follow-up that comes to mind. I assume you typically see sort of MLR improve as patient cohorts mature over time. So are you kind of explicitly thinking about this as, you know, if we can drive that retention better by, you know, whatever number, 50 basis points, 100 basis points, whatever number, that that kinda directly flows to MLR by just, you know, further increasing the mix towards those more tenured? Is that fair to say? Patrick Blair: It is fair to say. It's an astute question. And, you know, Ben and team are spending a lot of time right now really trying to understand those cohorts. You know, in our model, we kind of roughly say, tenure and pace is like high school. Have freshmen, sophomores, juniors, and seniors. And we're starting to look at each of those cohorts and the resources they consume, the needs they have, and really trying to understand, you know, back to this notion of kind of elevating our consumer centricity model understanding each of those cohorts, their needs, and their contribution financially is something that we're really digging into. And so to your point, for many members, there is a period of time as they progress from a freshman to a senior, there are points in time where contribution is greater. There's also points in time where, let's say, an assisted living facility may become the most appropriate solution for that person. You might see an impact contribution. And so we're really starting to dig into that data, see some really interesting opportunities to create a much more informed participant experience that's dialed in to the needs of specific cohorts. At the same time, trying to understand how the mix of those cohorts can impact the company going forward. And that's where there's a lot of work. Ben, anything to add? Ben Adams: No. I think that encapsulated it really well. You know, the nice thing about pace rates, obviously, is they're set to basically take care of a portfolio of participants who are at all different places along their journey. Right? So as long as you maintain the right proportions in your mix, the rates work very effectively. And so as we see steady enrollment growth over periods of time, the mix is much more predictable and more closely aligns with what goes on on the rate side. Probably the only thing I'd add to the disenrollments is the interesting thing about voluntary disenrollments because they really happen in the first six months of a participant's experience with us. So when we're going through and developing programs to make sure that we minimize those voluntary disenrollments, there's really a discrete period of time. Because we know once people have been with us for six or nine months, they're sort of stable in the program and they like the program and they stay. It's during that first six months or so they're getting comfortable with the PACE program, getting used to how to use it in a slightly different set of expectations versus they had before. That's the period that we really need to focus on. And today, we've got roughly probably 10% to 12% of voluntary disenrollments over the course of the year. If we can bring that down a couple of points through a bunch of these initiatives, it's very beneficial to the health of the organization. Jared Haase: Perfect. Once again, I appreciate all the detail, and I'll go ahead and leave it there and hop back in queue. Operator: Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.
Operator: You're holding for today's conference. We are still many additional participants and the call should begin shortly. We do thank you for your patience and please continue to stand by. Please stand by. Good day. And welcome to the Key Tronic Corporation FY 2026 Q2 Investor Call. Today's conference is being recorded. After the presentation, we will begin the question and answer period. At this time, I'd like to turn the call over to Tony Voorhees. Please go ahead. Tony Voorhees: Good afternoon, everyone. I am Tony Voorhees, Chief Financial Officer of Key Tronic Corporation. I'd like to thank everyone for joining us today for our investor conference call. Joining me here at our Spokane, Washington headquarters is Brett Larsen, our president and chief executive officer. As always, I would like to remind you that during the course of this call, we might make projections or other forward-looking statements regarding future events or the company's future financial performance. Please remember that such statements are only predictions. Actual events or results may differ materially. For more information, you may review the risk factors outlined in the documents the company has filed with the SEC. Specifically, our latest 10-K and quarterly 10-Qs. Please note that on this call, we will discuss historical financial and other statistical information regarding our business and operations. Some of this information is included in today's press release. During this call, we will also reference slides that accompany our discussion. The slides can be viewed with the webcast and the link can be found on our Investor Relations website. In addition, the slides, together with the recorded version of this call, will be available on the Investor Relations section of our website. We will also discuss certain non-GAAP financial measures on this call. Additional information about these non-GAAP measures and the reconciliations to the most directly comparable GAAP measures are provided in today's press release, which is posted to the Investor Relations section of our website. For the 2026, we reported total revenue of $96,300,000 compared to $113,900,000 in the same period of fiscal 2025. Revenue for the 2026 was adversely impacted by reduced demand from a long-standing customer and the transition of an end-of-life program. However, this impact was partially offset by new program wins and an increase in demand from other long-standing customers. As in other recent quarters, we believe customers continue to face uncertainties in the global economy and volatile trade policies. In addition, we continued ramping the consigned materials program that was previously announced. For the first six months of fiscal 2026, our total revenue was $195,100,000 compared to $245,400,000 in the same period of fiscal 2025. In line with our long-term strategic plan, mitigation strategies, we proactively advanced our near-shoring and tariff to reduce costs while maintaining the diversity and flexibility of our key locations and operational capabilities. During the 2026, we initiated a wind-down of our manufacturing operations at our China-based facility. With our strategic initiatives designed to better align organizational structure and resources, including filling the capacity recently created in Vietnam, we expect to complete this wind-down in our fourth quarter, at which point we anticipate saving approximately $1,200,000 per quarter. We also continue to further reduce our workforce in Mexico. As we intend to have that facility focused on higher volume manufacturing, once these reductions are fully implemented during our third quarter, we would expect to save approximately $1,500,000 per quarter moving forward. These strategic initiatives resulted in charges for severance, inventory write-offs, and other related expenses of approximately $10,500,000 for the quarter, which had a significant adverse impact on our margins. Gross margin was 0.6% and operating margin was negative 10.7% in the 2026, compared to 6.8% and negative 1% respectively, in the same period of fiscal 2025. Excluding the charges related to the China closure and the Mexico workforce reductions, the adjusted gross margin was 7.9% for the 2026. As top-line growth returns, we anticipate margins to be strengthened by improvements in our operating efficiencies and the positive impact of our strategic cost savings initiatives. We also believe the recent cost savings initiatives have made us more competitive when quoting new program opportunities. As production volumes increase and our operational adjustments take full effect, we expect to see greater leverage on fixed costs, enhanced productivity, and a more streamlined supply chain, all contributing to stronger financial performance. The wind-down of China production severance charges and the reduction in revenue had a significant impact on our bottom line. Our net loss was $8,600,000 or $0.79 per share for the 2026, compared to a net loss of $4,900,000 or $0.46 per share for the same period of fiscal 2025. For the first six months of fiscal 2026, the net loss was $10,900,000 or $1 per share compared to $3,800,000 or $0.35 per share for the same period of fiscal 2025. Our adjusted net income was breakeven, or $0 per share for the 2026, compared to an adjusted net loss of $4,100,000 or $0.38 per share for the same period of fiscal 2025. For the first six months of fiscal 2026, the adjusted net loss was $1,100,000 or $0.10 per share, compared to an adjusted net loss of $1,300,000 or $0.12 per share for the same period of fiscal 2025. Turning to the balance sheet, our inventory for the 2026 is down $12,300,000 or by 12% from a year ago. Our current ratio was 2.0 to 1 compared to 2.8 to 1 from a year ago. At the same time, accounts receivable DSOs were at 77 days, compared to 99 days a year ago, reflecting stronger collection on receivables. Total cash flow provided by operations for the 2026 was approximately $6,300,000 as compared to $1,300,000 in the same period of fiscal 2025. Our continuing ability to generate cash from operations has allowed us to reduce our debt year over year by approximately $13,400,000. In the second quarter, capital expenditures were approximately $3,300,000 bringing year-to-date total capital expenditures through the second quarter to approximately $6,500,000. We expect CapEx for the full year to be around $8,000,000 to $10,000,000 largely spent on new innovative production equipment and automation. While we are keeping a careful eye on capital expenditures, we plan to continue to invest selectively in our production equipment, SMT equipment, and plastic molding capabilities. Utilize leasing facilities and make efficiency improvements to prepare for growth and add capacity. As we move further into fiscal 2026, we continue to face a lot of global economic uncertainties and volatile trade policies. Nevertheless, we are pleased to continue to see our new programs gradually ramping and our cost and efficiency improvements from our recent overhead reduction taking hold. We also expect to see growth in our US and Vietnam production. Have a strong pipeline of potential new business, and remain focused on improving our profitability. Over the longer term, we believe that we are increasingly well-positioned to win new programs and profitably expand our business. Due to the uncertainty of timing of new products ramps, in light of the continued macroeconomic uncertainty, we are not providing forward-looking guidance in the 2026. That's it for me. Brett? Brett Larsen: Thanks, Tony. During the 2026, we continued to provide our customers with options to better manage macroeconomic uncertainties and enhance our potential for profitable long-term growth. We are excited about the significant investments made to our US and Vietnam locations. During the quarter, we witnessed the increasing number of customer program starts in Springdale, Arkansas. Started a new production line in Corinth, Mississippi in support of a growing consignment customer. And we shipped our first batch of medical products from Da Nang, Vietnam. Due to ongoing geopolitical tensions and tariff uncertainties, we began to execute our long-term strategy to wind down manufacturing operations at our China facility and continue to rightsize our Mexico facility. Demand from a specific long-standing customer has declined in recent periods, but we believe that recently won programs more than offset the loss in revenue in future quarters. Moreover, the continued market uncertainty and shifts of tariffs have unfortunately impacted the timing and launch of new programs. But those programs continue to slowly proceed. We are doing our best to work with suppliers and with our customers on options for manufacturing their products from different locations in mitigating the impact of tariffs. Our changes made to our manufacturing footprint and reductions have enabled us to offer improved mitigation options, particularly when our customers consider the varying implications of current and future potential tariffs. As part of our long-term strategy and in recognition of the continuing geopolitical tensions, tariff uncertainties, and increasing costs associated with China-based productions, we have begun winding down our facilities there and transferring several programs to Vietnam. As part of our global strip sourcing strategy, we will continue to operate in China with a small team focused on sourcing critical components locally. Over the past eighteen months, we have also reduced our total headcount by approximately 40% in Mexico. And have begun transferring some of the programs from Mexico to the US and Vietnam. Our Mexico facility continues to offer a unique solution for tariff mitigation under the existing USMCA tariff agreement. Given the sustained trend of continued wage increases in Mexico, we have streamlined our operations, increased efficiencies, and invested in automation in order to be more cost-competitive in the market. Due to the successful cost reductions and streamlining production processes, we have recently seen an increase in the quoting volume and probability of landing new programs manufactured within our Mexico facilities. We've also seen an influx of new customer visits and audits of our Juarez campus as of late, that demonstrates we are competitive for a growing variety of quoting opportunities. Our improved cost structure in Mexico is anticipated to lead to new programs and growth over the longer term. We are very excited about the recent investments made in the US and Vietnam to build out capacity and new capabilities to meet evolving customer demand. You will recall that we opened our new technology and research and development location in Arkansas during the 2026. Our US-based production provides customers with outstanding flexibility, engineering support, and ease of communication. We expect double-digit growth in our facility in Arkansas during the latter half of this fiscal year. You also recall that we have recently doubled our manufacturing capacity in Vietnam, which now has the capability to support medical device manufacturing. Our Vietnam-based production offers the high-quality, low-cost choice that had been associated with China in the past. In coming years, we expect our Vietnam facility to play a major role in our growth. We anticipate these new facilities in the US and Vietnam will enable us to benefit from customer demand for rebalancing contract manufacturing and mitigate the severe impact and uncertainties surrounding the tariffs on goods and critical components. By the end of fiscal 2026, we expect approximately half of our manufacturing to take place in our US and Vietnam facilities. These initiatives reflect both the long-standing customer trend to nearshore as well as derisk the potential adverse impact of tariff increase and geopolitical tensions. During the 2026, we won new programs in automotive technology, pest control, and industrial equipment. As already noted, we continue to ramp our recently announced manufacturing services contract with a data processing OEM that's consigned its materials to our Corinth, Mississippi manufacturing facility. As we discussed, the consigned material model is new for us at this scale. And if successful, we'll considerably improve our profitability in coming quarters. It has the potential to grow to over $25,000,000 in annual revenue, roughly the equivalent of a $100,000,000 turnkey program. Despite the many uncertainties and disruptions in global markets, our strong pipeline of potential new business underscores the continued trend towards onshoring and the dual sourcing of contract manufacturing. We expect the global tariff wars and geopolitical tensions will continue to drive OEMs to reexamine their traditional outsourced strategies. Over time, the decision to onshore production is becoming more widely accepted as a smart long-term strategy. We believe our manufacturing footprint and cost competitiveness will allow us to take advantage of these opportunities. The combination of our flexible global footprint and our expansive design capabilities continues to be extremely effective in capturing new business. Many of our manufacturing program wins are predicated upon Key Tronic Corporation's deep and broad design services. And once we have completed the design and ramped it into production, we believe our knowledge of a program-specific design challenges makes that business extremely sticky. We anticipate a continued increase in the number and capability of our design engineers in coming quarters. We also continue to invest in vertical integration and manufacturing process knowledge, including a wide range of plastic molding, injection, flow, gas assist, multishot, as well as PCB assembly, metal forming, painting and coating, complex high-volume automated assembly, and the design, construction, and operation of complicated test equipment. We believe that this expertise will increasingly set us apart from our competitors of a similar size. While the global market uncertainties have created some delays to new product launches for us, our suppliers, and our customers, we believe geopolitical tensions and heightened concerns about tariffs and supply chains will continue to drive the favorable trend of contract manufacturing returning to North America, as well as to our expanding Vietnam facilities. We are expecting revenue growth in the coming quarters from new programs launching in the US, Mexico, and Vietnam. We move forward with a strong pipeline of potential new business, and we are anticipating significant improvements in our operating efficiencies. Over the long term, we remain very encouraged by our cost reductions made over the past few years to become more price competitive. Our increasing cash flow generated from operations, enhanced global manufacturing footprint, and the innovations from our design engineering. All of these initiatives have increased our potential for profitable growth. This concludes the formal portion of our presentation. Tony and I will now be pleased to answer your questions. Operator: Thank you. If you would like to signal with questions, please press 1 on your touch. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is 1 if you would like to signal with questions. 1. And our first question will come from Matt Dane with Titan Capital Management. Matt Dane: Great. Thank you. I was hoping to delve a little bit more. You referenced earlier in the call that can you hear me? Tony Voorhees: Yes. We can, Matt. Matt Dane: Okay. I'm sorry. I thought maybe this one was a saying they could not hear me. So wanted to circle back around like I was saying, the increased demand for existing customers. I was hoping to get a little bit more color on how significant that is. Is it across a wide variety of customers? And what do you sense is driving that increased demand? Brett Larsen: Yeah. I would say that, you know, the large part there it's predominantly two specific long-standing customers. One is product maturation, particular design. Just, you know, the fact that there's a need for a refresh of this that had a rough order of magnitude, probably about a $20,000,000 hit to our overall quarter revenue. I think the next was essentially an end-of-life program. They're looking at replacing it down the road, but that one too roughly about a $7,000,000 reduction from last year's fiscal. Of course, offsetting that, those large decreases in revenue are some of the ramping new programs. Matt Dane: Okay. So you're not really seeing a ramp from existing customers that the ramp is really coming from new programs then? Is that am I hearing you correct then? Brett Larsen: Yeah, Matt. We do have a few customers that we're seeing some increased demand on. I would say it's around a half dozen that are, you know, kind of impacting that increase from long-standing customers. Matt Dane: Okay. No. That's helpful. And then you also in the press release referenced the three new programs that you won. I was just hoping to get a rough size estimate of each and the timing of the ramp and then also where you're gonna be manufacturing each of those. Brett Larsen: Sure. I think the first, we'll start with the automotive. That one will be manufactured down in Mexico. That will rough order could be up to $5,000,000 when fully ramped. I think the pest control to $2,000,000. I think that was actually in our US facility in Vietnam, and that could be up. And then the industrial equipment is also in our US location 2 to $5,000,000. Matt Dane: Okay. No. That's helpful. And then final question I'd like to ask. You folks have referenced in the past and again on this call today, that you have a number of tariff mitigation strategies. I don't think I've ever actually delved in and tried to better understand when you say that, well, what are you actually doing behind the scenes, and what can you do to help us understand better what you're doing there? Brett Larsen: Yeah. I mean, that really gets to the core of our strategy, our long-term strategy to essentially have a lower-cost Asian facility that could eventually replace our China facility. You know, one of the biggest reasons we're winding down China is now that we've ramped Vietnam. We feel confident in the new technology and the new production equipment that we now have online. It really is ready now to essentially resolve the, you know, the China to US tariff situation and then also, you know, some of the geopolitical tension that we have. That's one piece. The other piece is that we offer either a US-made opportunity for those that would require that. But we also still offer, you know, the production down in Mexico. That currently you still can take advantage of the USMCA agreement that allows you to build things down in Mexico and bring it back up into the US and even consume it in the US under that agreement and avoid certain tariffs as well. You know, it's a complex algorithm that really we help our customers with coming up with the best solution. A lot of that is dependent on how much labor is required, where the components are currently being supplied, where could they be supplied from possibly using some more North American-centric suppliers that we have. And then basically, coming up with various price points of a total cost to our customer and saying, here's where we think it's advantageous to build your product. We feel confident based on our locations and footprint that we can offer, you know, a suite of different answers to our customers that really could mitigate tariffs regardless of where they end up. Matt Dane: Okay. Okay. And so whenever a prospective customer is coming to you looking to have you quote a new product or program, do you usually go back to them? And if they're agnostic where it comes from, do you go back to them and offer them pricing if we were to build it in Vietnam, this would be your price? US price and then a Mexico price, do they really have the full choice in spectrum and is that really how you approach it oftentimes? Brett Larsen: It really is. And that I think that's one of the unique things that we can offer as Key Tronic Corporation is we can easily quote and offer from all three of those locations that you provided. And, you know, our customer, this is what the lead time would be required. Here's what your price is. You know, here's the pros and cons from building in each of those locations and really offer that to our customer to ultimately make that decision of where they want the product built. Matt Dane: Okay. Great. That's helpful. Appreciate the answers, guys. Brett Larsen: You bet. Operator: As a reminder, if you would like to signal with questions, please press 1. And our next question will come from George Melas with MKH Management. George Melas: Great. Thank you. Let me just pick up the phone. How are you guys? Brett Larsen: Doing well, George. Thank you. George Melas: Good. Great. Just wanna review a little bit the gross margin. On an adjusted basis, it's roughly 7.9%. Which is better than a year ago, but it's down a bit sequentially. And I'm just trying to see if there's anything unusual in the quarter in the gross margin, something positive like the high level of tooling or engineering services or maybe something negative with some disruptions and the transition of the end-of-life program or other things like that. Brett Larsen: Yeah. Just to mention a few, and I'm sure Tony will fill in as well. But I think some of the negative, some of the headwind we had during the quarter was, you know, we still are transferring programs from Mississippi up into Arkansas, the new facility. And, of course, with that comes some additional costs. I'd also mention that in our second quarter, as always, we really lose out on a week of production just due to the holidays. Our, particularly in particular, our Mexican facility was closed for a full week over Christmas. And then, of course, our domestic sites are closed for at least a half a week. So you lose some production time but, you know, that helps explain some of the sequential drop in the adjusted gross margin. We really need volume. And looking forward prospectively is in order to really increase our gross margin prospectively, we need to drive sales volume and utilize some of the excess capacity that we have in each of our sites. Tony, anything you'd add? Tony Voorhees: There was just to add to that, there were some slight mix changes that negatively impacted gross margin quarter over quarter. George Melas: Potentially? And mix changes Tony, do you mean different programs or different locations? Tony Voorhees: Primarily just different programs. George Melas: Okay. Great. Okay. Maybe another question on sort of you guys redoing the expectation to be net income breakeven and the June quarter, so just two quarters away? And with interest expense sort of remaining, let's say, $2,300,000 or in that range, you need. If we think of OpEx, normalized OpEx, that roughly $7,400,000. You need a roughly 10.7 in my basic calculation. Of gross profit. And that implies both revenue growth and margin expansion, I think. Some of the margin expansion will come from the consignment program in Mississippi. But can you comment on that and how you think that you're able to both grow revenue and margin? Brett Larsen: Yeah. I think we would stick with that same. You know, we still anticipate achieving somewhere breakeven by the end of the fiscal year. You know, we mentioned a bit about that consignment program that to ramp nicely. It's definitely not to the level of revenue that we expect it to be exiting this quarter or even in their fourth quarter. There's more growth there that is required. But as we mentioned earlier, I think with that consigned program, as large as it is, you will also see some uptick in the gross margin percentage. So you'll see both. Our expectation is some additional revenue, but then also improvement in the gross margin percentage. George Melas: Okay. Any just a follow-up on that, Brett. Any particular reason for the program sort of ramping up maybe slower than you expected? Because it seems like it's a very important program for you guys. Brett Larsen: No. You know, we expected that it would be a slow grow. You know, some of that required some additional equipment. We were able to procure that. It had some lead time to it. We actually ended up installing some of that over the Christmas holiday. And then, you know, unfortunately, down in Mississippi this quarter, you know, they got hit with some bad ice storm. So we are recovering from that. I think that'll have a slight impact into our third quarter. But won't disrupt the momentum of growing that consignment model. It just may delay it by a week or two as we get through this ice storm. But we fully anticipated that that would be a slow role to get to its peak. George Melas: Okay. And then just to try to understand, in Mexico, you expect growth in Mexico. Going forward? So does that mean that Mexico has hit sort of a bottom and that you restructured Mexico into let's say, a lower service but full capability, but maybe slightly lower service, but low cost. Operation. How would you characterize that? Brett Larsen: George, I think I would kind of like what we mentioned is that we have found that we were not market competitive. We needed to increase our efficiency. We needed to invest in some automation. We really needed to be far more competitive in our pricing down in Mexico. I hope that we're at a bottom. You know, I can't don't have a crystal ball. But my expectation based off of just the recent history, just the recent visits that we've had down in Mexico and some of the quoting opportunities that we've been down selected to take it to the next round. I feel like we're more competitive in Mexico than we were. So, yeah, over the longer term, we're still expecting Mexico to grow. We don't have anticipated additional reductions in headcount other than those that we've already accrued for in our second quarter. But as you know, things change. We are looking forward to the review of the USMCA that is to occur midyear this year. And hoping that most, if not all, of that continues. As part of the trilateral agreement between us, Mexico, and Canada. You know? But things do change. But for now, yes, we based on the volume our expectation is that Mexico will grow. Of quotes and the recent visits by potential customers. George Melas: Okay. Great. And then just one quick final question for Tony. You mentioned the $1,200,000 savings per quarter once the ramp down or the wind down of the channel manufacturing operation is completed. That $1,200,000 is that the impact on cost of sales? Is it the impact on the EBIT line? How does that $1,200,000 flow through the P&L? Tony Voorhees: Well, yeah, it's a good question, George. So that $1,200,000 really is kind of taken into consideration the entire wind down of the manufacturing portion of our China operations. So it's across the board. It's up in COGS as well as certain SG&A as well and OpEx. So, you know, as we see and we expect to have that done by our fiscal year end. So at which point, is when we'd see that $1,200,000 begin to take full effect in our results. I would say the bulk of it is in cost of goods, but to Tony's point, there is also some OpEx that will be reduced based off of that wind down. George Melas: Okay. And that $1,200,000 in savings, what would be the impact on the EBIT line? Brett Larsen: I would take the $1,200,000. George Melas: But if you have some COGS, wouldn't there be some revenue attached to the COGS that so the 1.2 is a net number, basically. Brett Larsen: It is. Sorry. Yes. It is a net number. George Melas: Okay. Brett Larsen: Sorry. I know. Okay. We know now what you're asking. Sorry about that, George. George Melas: Yeah. I just had to ask three times because I couldn't find the way to do it. I'm not surprised by that. Brett Larsen: No. Thank you, George. George Melas: Great. Okay. Great. For your hard work. It seems like you're really doing a lot of stuff to make the operation better. So thank you very much. Operator: And once again, if you would like to signal with questions, please press 1. Again, that's 1 if you would like to ask questions. We'll pause for a moment. And that does conclude the question and answer session. I'll now turn the conference back over to Brett Larsen for closing remarks. Brett Larsen: Thank you again for participating in today's conference call. Tony and I look forward to speaking to you again next quarter. Thank you. Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
Operator: Greetings, and welcome to the Advanced Micro Devices, Inc. fourth quarter and full year 2025 Conference Call. At this time, all participants are in a listen-only mode. Please note that this conference is being recorded. I will now turn the conference over to Matt Ramsay, VP of Financial Strategy and IR. Thank you. You may begin. Matt Ramsay: Thank you, and welcome to Advanced Micro Devices, Inc.'s fourth quarter and 2025 full year financial results conference call. By now, you should have had the opportunity to review a copy of our earnings press release and accompanying slides. If you have not had the opportunity to review these materials, they can be found on the Investor Relations page of amd.com. Today, we will refer primarily to non-GAAP financial measures on the call. The full non-GAAP to GAAP reconciliations are available in today's press release and in the slides posted on our website. Participants in today's conference call are Dr. Lisa Su, our Chair and CEO, and Jean Hu, our Executive Vice President, CFO, and Treasurer. This is a live call and will be replayed via webcast on our website. Before we begin, I would like to note that Mark Papermaster, Executive Vice President and CTO, will present at Morgan Stanley's TMT conference on Tuesday, March 3. Today's discussions contain forward-looking statements based on our current beliefs, assumptions, and expectations, which speak only as of today and as such involve risks and uncertainties that could cause actual results to differ materially from our current expectations. Please refer to the cautionary statement in our press release for more information on factors that could cause actual results to differ materially. With that, I will hand the call to Lisa. Lisa Su: Thank you, Matt, and good afternoon to all those listening today. 2025 was a defining year for Advanced Micro Devices, Inc. With record revenue, net income, and free cash flow driven by broad-based demand for our high-performance computing and AI products. We ended the year with significant momentum, with every part of our business performing very well. We saw demand accelerate across the data center, PC gaming, and embedded markets. Launched the broadest set of leadership products in our history. Gained significant server and PC processor share, and rapidly scaled our data center AI business as Instinct and ROCm adoption increased with cloud, enterprise, and AI customers. Looking at our fourth quarter, fourth quarter revenue grew 34% year over year to $10.3 billion led by record EPYC, Ryzen, and Instinct processor sales. Net income increased 42% to a record $2.5 billion and free cash flow nearly doubled year over year to a record $2.1 billion. For the full year, revenue grew 34% to $34.6 billion and we added more than $7.6 billion of data center segment and client revenue. Turning to our fourth quarter segment results. Data Center segment revenue increased 39% year over year to a record $5.4 billion led by accelerating Instinct MI350 Series GPU deployments and server share gains. In server, adoption of fifth-gen EPYC TURN CPUs accelerated in the quarter, accounting for more than half of the total server revenue. Fourth-gen EPYC sales were also robust as our prior generation CPUs continue to deliver superior performance and TCO compared to competitive offerings across a wide range of workloads. As a result, we had record server CPU sales to both cloud and enterprise customers in the quarter, and exited the year with record share. In cloud, hyperscaler demand was very strong as North American customers expanded deployments. EPYC-powered public cloud offerings grew significantly in the quarter, with AWS, Google, and others launching more than 230 new AMD instances. Hyperscalers launched more than 500 AMD-based instances in 2025, increasing the number of EPYC Cloud instances more than 50% year over year to nearly 1,600. In the enterprise, we are seeing a meaningful shift in EPYC adoption driven by our leadership performance, expanded platform availability, broad software enablement, and increased go-to-market programs. The leading server providers now offer more than 3,000 solutions powered by fourth and fifth-gen EPYC CPUs, that are optimized for all major enterprise workloads. As a result, the number of large businesses deploying EPYC on-prem more than doubled in 2025 and we exited the year with record server sell-through. Looking ahead, server CPU demand remains very strong. Hyperscalers are expanding their infrastructure to meet growing demand for cloud services and AI. While enterprises are modernizing their data centers to ensure they have the right compute to enable new AI workflows. Against this backdrop, EPYC has become the processor of choice for the modern data center. Delivering leadership performance, efficiency, and TCO. Our next-generation Venice CPU extends our leadership across each of these metrics. Customer pull for Venice is very high with engagements underway to support large-scale cloud deployments and broad OEM platform availability when Venice launches later this year. Turning to our data center AI business, We delivered record Instinct GPU revenue in the fourth quarter led by the ramp of MI350 Series shipments. We also had some revenue from MI308 sales to customers in China. Instinct adoption broadened in the quarter. Today, eight of the top 10 AI companies use Instinct to power production workloads across a growing range of use cases. With the MI350 series, we are entering the next phase of Instinct adoption. Expanding our footprint with existing partners and adding new customers. In the fourth quarter, hyperscalers expanded MI350 series availability. Leading AI companies scaled their deployments to support additional workloads. Multiple new cloud providers launched MI350 series offerings that deliver on-demand access to Instinct infrastructure in the cloud. Turning to our AI software stack, We expanded the ROCm ecosystem in the fourth quarter, enabling customers to deploy Instinct faster and with higher performance across a broader range of workloads. Millions of large language and multimodal models run out of the box on AMD, with the leading models launching with day-zero support for Instinct GPUs. This capability highlights our rapidly expanding open-source community enablement. Including new upstream integration of AMD GPUs in VLLM, one of the most widely used inference engines. To drive Instinct adoption with industry-specific use cases, we are also adding support for domain-specific models in key verticals. As one example, in healthcare, we added ROCm support for the leading medical imaging framework to enable developers to train and deploy highly performant deep learning models on Instinct GPUs. For large businesses, we introduced our enterprise AI suite. A full-stack software platform with enterprise-grade tools, inference microservices, and solutions blueprints designed to simplify and accelerate production deployments at scale. We also announced a strategic partnership with Tata Consultancy Services to co-develop industry-specific AI solutions and help customers deploy AI across their operations. Looking ahead, customer engagements for our next-gen MI400 series and Helios platform continue expanding. In addition to our multi-generation partnership with OpenAI to deploy six gigawatts of Instinct GPUs, We are in active discussions with other customers on at-scale multi-year deployments starting with Helios and MI450 later this year. With the MI400 series, we are also expanding our portfolio to address the full range of cloud, HPC, and enterprise AI workloads. This includes MI455x and Helios for AI superclusters, MI430x for HPC and sovereign AI, and MI440x servers for enterprise customers requiring leadership training and inference performance in a compact eight-GPU solution that integrates easily into existing infrastructure. Multiple OEMs publicly announced plans to launch Helios systems in 2026, with deep engineering engagement underway to support smooth production ramps. In December, HPE announced that they will offer Helios Racks with purpose-built HPE Juniper Ethernet switches. And optimized software for high-bandwidth scale-up networking. And in January, Lenovo announced plans to offer Helios Racks. MI430x adoption also grew in the quarter. With new exascale-class supercomputers announced by Genc in France and HLRS in Germany. Looking further ahead, development of our next-generation MI500 series is well underway. MI500 is powered by our cDNA6 architecture, built on advanced two-nanometer process technology, and features high-speed HBM4e memory. We are on track to launch MI500 in 2027 and expect MI500 to deliver another major leap in AI performance to power the next wave of large-scale multimodal models. In summary, our AI business is accelerating. With the launch of MI400 series and Helios representing a major inflection point for the business as we deliver leadership performance and TCO at the chip, compute tray, and rack level. Based on the strength of our EPYC and Instinct roadmaps, we are well-positioned to grow data center segment revenue by more than 60% annually, over the next three to five years and scale our AI business to tens of billions in annual revenue in 2027. Turning to clients and gaming. Segment revenue increased 37% year over year to $3.9 billion. In client, our PC processor business performed exceptionally well. Revenue increased 34% year over year to a record $3.1 billion driven by increased demand for multiple generations of Ryzen desktop and mobile CPUs. Desktop CPU sales set a record for the fourth consecutive quarter. Ryzen CPUs topped the best-seller lists at major global retailers and e-tailers throughout the holiday period. With strong demand across all price points in every region, driving record desktop channel sell-out. In mobile, strong demand for AMD-powered notebooks drove record Ryzen PC sell-through in the quarter. That momentum extended into commercial PCs, where Ryzen adoption accelerated as we established the new long-term growth engine for our client business. Sell-through of Ryzen CPUs for commercial notebooks and desktops grew by more than 40% year over year in the fourth quarter, and we closed large wins with major telecom, financial services, aerospace, automotive, energy, and technology customers. At CES, we expanded our Ryzen portfolio with CPUs that further extend our performance leadership. Our new Ryzen AI 400 mobile processors deliver significantly faster content creation and multitasking performance than the competition. Notebooks powered by Ryzen AI 400 are already available. With the broadest lineup of AMD-based consumer and commercial AIPCs, set to launch throughout the year. We also introduced our Ryzen AI Halo platform, the world's smallest AI development system, featuring our highest-end Ryzen AI Max processor, 128 gigabytes of unified memory that can run models with up to 200 billion parameters locally. In gaming, revenue increased 50% year over year to $843 million. Semi-Custom sales increased year over year and declined sequentially as expected. For 2026, we expect semi-custom SoC annual revenue to decline by a significant double-digit percentage as we enter the seventh year of what has been a very strong console cycle. From a product standpoint, Valve is on track to begin shipping its AMD-powered steam machine early this year. And development of Microsoft's next-gen Xbox featuring an AMD semi-custom SoC is progressing well to support a launch in 2027. Gaming GPU revenue also increased year over year. With higher channel sellout driven by demand throughout the holiday sales period for our latest generation Radeon RX 9000 series GPUs. We also launched FSR4 Redstone in the quarter. Our most advanced AI-powered upscaling technology, delivering higher image quality and smoother frame rates for gamers. Turning to our embedded segment, revenue increased 3% year over year to $950 million led by strength with test and measurement and aerospace customers, and growing adoption of our embedded x86 CPUs. Channel sell-through accelerated in the quarter as end customer demand improved across several end markets led by test measurement and emulation. Design win momentum remains one of the clearest indicators of long-term growth for our embedded business, and we delivered another record year. We closed $17 billion in design wins in 2025, up nearly 20% year over year as we now won more than $50 billion of embedded designs since acquiring Xilinx. We also strengthened our embedded portfolio in the quarter. We began production of our Versal AI Edge Gen2 SoCs for low latency inference workloads. And started shipping our highest-end Spartan UltraScale plus devices for cost-optimized applications. We also launched new embedded CPUs, including our EPYC 2005 series for network security and industrial edge applications. Ryzen P100 series for in-vehicle infotainment and industrial systems, and Ryzen X100 series for physical AI and autonomous platforms. In summary, 2025 was an excellent year for Advanced Micro Devices, Inc. Marking the start of a new growth trajectory for the company. We are entering a multiyear demand super cycle for high-performance and AI computing that is creating significant growth opportunities across each of our businesses. Advanced Micro Devices, Inc. is well-positioned to capture that growth. With highly differentiated products, a proven execution engine, deep customer partnerships, and significant operational scale. And as AI reshapes the compute landscape, we have the breadth of solutions and partnerships required for end-to-end leadership. From Helios in the cloud for at-scale training and inference, to an expanded Instinct portfolio for sovereign supercomputing and enterprise AI deployment. At the same time, demand for EPYC CPUs is surging, as agentic and emerging AI workloads require high-performance CPUs to power head nodes and run parallel tasks alongside GPUs. And at the edge and in PCs where AI adoption is just beginning, our industry-leading Ryzen and embedded processors are powering real-time on-device AI. As a result, we expect significant top-line and bottom-line growth in 2026, led by increased adoption of EPYC and Instinct, continued client share gains, and a return to growth in our Embedded segment. Looking further ahead, we see a clear path to achieve the ambitious targets we laid out at our Financial Analyst Day last November, including growing revenue at greater than 35% CAGR over the next three to five years. Significantly expanding operating margins, and generating annual EPS of more than $20 in the strategic time frame driven by growth in all of our segments and the rapid scaling of our data center AI business. Lisa Su: Now I'll turn the call over to Jean to provide additional color on our fourth quarter results and full year results. Jean? Jean Hu: Thank you, Lisa, and good afternoon, everyone. I'll start with a review of our financial results and then provide our current outlook for 2026. Advanced Micro Devices, Inc. executed very well in 2025. Delivering record revenue of $34.6 billion, up 34% year over year, driven by 32% growth in our data center segment and 51% growth in our client and gaming segment. Gross margin was 52%. And we delivered record earnings per share of $4.17, up 26% year over year, continuing to invest aggressively in AI and the data center to support our long-term growth. For 2025, revenue was a record at $10.3 billion, growing 34% year over year, driven by strong growth in the data center and the client and gaming segments. Including approximately $390 million in revenue from MI308 sales to China, which was not included in our fourth quarter guidance. Revenue was up 11% sequentially, primarily driven by continued strong growth in data center from both the server and data center AI business. As well as a return to year-over-year growth in the embedded segment. Gross margin was 57%, up 290 basis points year over year. We benefited from the release of $306 million in previous page writing down MI308 inventory reserves. Excluding the inventory reserve release and the MI308 revenue from China, gross margin would have been approximately 55%, up 80 basis points year over year driven by favorable product mix. Operating expenses were $3 billion, an increase of 42% year over year as we continue to invest in R&D go-to-market activities to support our AI roadmap and the long-term growth opportunities. As well as the higher employee performance-based incentives. Operating income was a record $2.9 billion representing a 28% operating margin. Tax, interest, and other resulting in a net expense of approximately $335 million. For the fourth quarter, diluted earnings per share was a record $1.53, an increase of 40% year over year. Reflecting strong execution and operating leverage in our business model. Now turning to our reportable segment. Starting with the data center segment, revenue was a record of $5.4 billion, up 39% year over year and 24% sequentially. Driven by strong demand for EPYC processors and the continued ramp of MI350 products. Data center segment operating income was $1.8 billion or 33% of revenue compared to $1.2 billion or 30% a year ago. Reflecting higher revenue and the inventory reserve release partially offset by continued investment to support our AI hardware and software roadmaps. Client gaming segment revenue was $3.9 billion, up 37% year over year driven primarily by strong demand for our leadership AMD Ryzen processors. On a sequential basis, revenue was down 3% due to lower semi-customer revenue. The client business revenue was a record of $3.1 billion, up 34% year over year and 13% sequentially led by strong demand from both the channel and the PC OEMs. And the continued market share here. The gaming business revenue was $843 million, up 50% year over year primarily driven by higher semi-customer revenue and a strong demand for AMD Radeon GPUs. Sequentially, gaming revenue was down 35% due to lower semi-customer sales. Client gaming segment operating income was $725 million or 18% of revenue compared to $496 million or 17% a year ago. Embedded segment revenue was $950 million, up 3% year over year and 11% sequentially as demand strengthened across several end markets. Embedded segment operating income was $357 million or 38% of revenue compared to $362 million or 39% a year ago. Before I review the balance sheet and the cash flow, as a reminder, we closed the sale of ZT system manufacturing business to Sanmina in late October. The fourth quarter financial results of the ZT manufacturing business are reported separately in our financial statement as discontinued operations and that are excluded from our non-GAAP financials. Turning to the balance sheet and the cash flow. During the quarter, we generated a record $2.3 billion in cash from continuing operations. And a record of $2.1 billion in free cash flow. Inventory increased sequentially by approximately $70 million to $7.9 billion to support strong data center demand. At the end of the quarter, cash, cash equivalents, and short-term investments were $10.6 billion. For the year, we repurchased 12.4 million shares and returned $1.3 billion to shareholders. We ended the year with $9.4 billion authorization remaining in our share repurchase program. Now turning to our first quarter 2026 outlook. We expect revenue to be approximately $9.8 billion plus or minus $300 million including approximately $100 million of MI308 sales to China. At the midpoint of our guidance, revenue is expected to be up 32% year over year, driven by strong growth in our data center and the client and gaming segment. And modest growth in our embedded segment. Sequentially, we expect revenue to be down approximately 5% driven by seasonal decline in our client gaming and embedded segment partially offset by growth in our data center segment. In addition, we expect fourth quarter non-GAAP gross margin to be approximately 55%, non-GAAP operating expense to be approximately $3.05 billion. Non-GAAP other net income to be approximately $35 million, non-GAAP effective tax rate to be 13%. And diluted share count is expected to be approximately 1.65 billion shares. In closing, 2025 was an outstanding year for Advanced Micro Devices, Inc., reflecting disciplined execution across the business to deliver strong revenue growth, increase profitability, and cash generation while investing aggressively in AI and innovation to support our long-term growth strategy. Looking ahead, we are very well positioned for continued strong top-line revenue growth and earnings expansion in 2026. With a focus on driving data center AI growth, operating leverage, and delivering long-term value to shareholders. With that, I'll turn it back to Matt for the Q&A session. Matt Ramsay: Yes. Thank you very much, Jean. Operator, please go ahead and open the Q&A session. Thank you. Operator: Thank you, Matt. We will now be conducting the question and answer session. A confirmation tone will indicate that your line is in the queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And the first question comes from the line of Aaron Rakers with Wells Fargo. Please proceed with your question. Aaron Rakers: Yeah. Thanks for taking the question. Lisa, at your Analyst Day back in November, you seem to kind of endorse the high $20 billion AI revenue expectation that was out there on the street for 2027. I know today you're reaffirming the path to strong double-digit growth. So I guess my question is, can you talk a little bit about what you've seen as far as customer engagements, how those might have expanded? I think you've alluded to in the past multiple multi-gigawatt opportunities. Just any double click on what you've seen for the MI455 and Helios platform from a demand shaping perspective as we look into the back half of the year? Lisa Su: Yes. Sure, Aaron. Thanks for the question. So first of all, I think the MI450 series development is going extremely well. So we're very happy with the progress that we have. We're right on track for a second-half launch and, you know, beginning production. And as it relates to sort of the shape of the ramp and the customer engagements, I would say the customer engagements continue to proceed very well. You know, we have obviously a very strong relationship with OpenAI, and we're planning that ramp starting in the second half of the year going into 2027. That is on track. We're also working closely with a number of other customers who are very interested in ramping MI450 quickly. Just given the strength of the product. And, you know, we see that across both inference and training. And, you know, that is the opportunity that we see in front of us. So we feel very good about sort of the data center growth overall for us in '26. And then certainly going into 2027, you know, we've talked about, you know, tens of billions of dollars of data center AI revenue, and we feel very good about that. Thank you. Operator: Next question comes from the line of Tim Arcuri with UBS. Proceed with your question. Tim Arcuri: Thanks a lot. Jean, I'm wondering if you can maybe give us a little bit of detail under the hood for the March guidance. I know you basically told us that, you told us about what, embedded is gonna be up a bit year over year. You know, client sounds like it's down seasonally, which I take to be maybe down 10. Can you give us a sense maybe of the other pieces? And then also, can you give us a sense of how, you know, data center GPU is gonna ramp through the year? I know it's, you know, back half of the year, but I think people are thinking at least are somewhere in the $14 billion range this year. What investors were thinking. I don't I'm not asking you to endorse that, but you can give us a little, you know, flavor for sort of how the the rental look to be, that'd be great. Thanks. Jean Hu: Hi, Tim. Thanks for your question. We're guiding one at a time, but I can give you some color about our Q1 guide. First, it's right sequentially. We guided the decline around 5%. But data center is actually going to be up. And when you think about this, right, our CPU business seasonal actually, you know, regular seasonal pattern it's going to be down high single digit. And then in our current guide, we actually guide the CPU revenue up sequentially very nicely. Also, with the data center GPU side, we also feel really good about, you know, GPU revenue, including China, will be also up. So very nice guide for the data center overall. On the client side, we do see seasonality sequentially decline embedded and the gaming they are also have a seasonal decline. Lisa Su: Maybe, Tim, if I just give you a little bit on the full year commentary. I think the important thing, as we look at the full year, we're very bullish on the year. We're not if you look at the key themes, we're seeing very strong growth in the data center. And that's across two growth vectors. We see server CPU growth, actually very strong. I mean, we've talked about the fact that CPUs are very important as AI continues to ramp. And we've seen the CPU order book continue to strengthen. As we go through the last few quarters and especially over the last sixty days. So we see that as a strong growth driver for us. As Jean said, we see server CPU growing from Q4 into Q1 in what normally is seasonally down. And that continues throughout the year. And then on the data center AI side, it's a very important year for us. It's really an inflection point. You know, MI355 has done well, and we were pleased with the performance in Q4. And we continue to ramp that in the first half of the year. But as we get into the second half of the year, the MI450 is really an inflection point for us. So that revenue will start in the third quarter, but it will ramp significant volume in the fourth quarter as we get into 2027. So that gives you a little bit of, you know, sort of what the what the data center ramp looks like throughout the year. Tim Arcuri: Thank you. You too. Operator: And the next question comes from the line of Vivek Arya with Bank of America. Please proceed. Vivek Arya: Thank you. First, just a clarification on what you're assuming for your China MI308 sales beyond Q1? And then Lisa, specific to 2026, can your data center revenue grow at your target 60% plus growth rate. I realize that that's a multi-target, but do you think that there are enough drivers, whether it's on the server CPU side or GPU side, for you to grow at that target base even in 2026. Thank you. Lisa Su: Yeah. Sure, Vivek. So let me talk a little bit about China first because that's, I think, important for us to make sure that's clear. Look, we were pleased to have some MI308 sales in the fourth quarter. They were actually a license that was approved through, you know, work with, the administration and you know, those orders were actually from very early in 2025. And so we saw some revenue in Q4, and we're forecasting for $100 million of revenue in Q1. We are not forecasting any additional revenue from China just because it's a very dynamic situation. So given that it's a dynamic situation, we're still waiting for we've submitted licenses for the MI325. And we're continuing to work with customers in understanding, you know, sort of their customer demand we thought it prudent, not to forecast any additional revenue other than the $100 million that we called out. In the Q1 guide. Now as it relates to overall data center, you know, as I mentioned in the question to Tim, like, we're very bullish about data center. I think the combination of drivers that we have across our, you know, CPU franchise, I mean, the EPYC product line, both Turin and Genoa continue to ramp well. And in the second half of the year, we will be launching Venice which we believe actually extends our leadership. And the MI450 ramp, which is also very significant in the second half 2026. We're not, you know, obviously, guiding specifically by segment, but the long-term target of let's call it, greater than 60% is certainly possible in 2026. Vivek Arya: Thank you, Lisa. Lisa Su: Thank you. Operator: And as a reminder, if you would like to ask a question, please press 1. Ask that you limit yourself to one question and one follow-up. Thank you. The next question comes from the line of CJ Muse with Cantor. Please proceed. CJ Muse: I'm curious, on the server CPU side of the house, and given the dramatic tightness, curious your ability to source incremental capacity from TSMC and elsewhere. And I guess how long will it take for that to see wafers out and how should we think about the implications for kind of the growth throughout all of calendar 2026? And I guess as part of that, if you could speak to how we should be thinking about inflection in pricing as well, that would be very helpful. Lisa Su: Sure, CJ. So a couple of points about the server CPU market. First of all, we think the, you know, overall server CPU TAM is going to grow, let's call it, strong double digits in 2026 just given the, as we said, the relationship between CPU demand and overall AI ramp. So I think that's a positive. Relative to, you know, our ability to support that, we've been seeing this trend for the last couple of quarters. So we have increased our supply capacity capability for server CPUs. And, you know, that's one of the reasons we're able to increase our Q1 guide as it relates to the server business. And we see the ability to continue to grow that throughout the year. There's no question that demand continues to be strong. And so we're working with our supply chain partners to increase supply as well. But from what we see today, I think the overall server situation is strong. And we are increasing supply to address that. Operator: Hey, CJ, do you have a follow-up question? CJ Muse: I do. Maybe for Jean, if you could kind of touch on gross margins through the year and as you balance kind of strengthening service CPU with, you know, perhaps greater you know, GPU accelerating in the second half. Is there kind of a framework that we should be, working off of? Thanks so much. Jean Hu: Yeah. Thank you for the question. We are very pleased with our gross margin Q4 performance and the Q1 guide 55%, which actually 130 basis point up year over year while we continue to ramp our MI355 year over year very significantly I think we are benefiting from a very favorable product mix all our business. If you think about it in data center, we're ramping our new product, new generation product at Turin and the MI355. Which helps the gross margin in client. So we continue to move up the stack and also gaining momentum in our commercial business Our client on the business gross margin has been improving nicely. In addition, certainly, we see the recovery of our embedded business which is also margin accretive. So all those tailwinds we are seeing, we continue to see in next few quarters and our gross margin will be when MI450 ramp, of course, in Q4, driven largely by mix. And I think we'll give you more color when we get there. But overall, we feel really good about our gross margin progression this year. Operator: Thank you. The next question comes from the line of Joe Moore with Morgan Stanley. Please proceed. Joe Moore: Great. Thank you. On the MI455 ramp, will 100% of the business be racks? Will there be kind of an eight-way server business around that architecture? Then is the revenue recognition when you ship to the rack vendor, or is there something to understand about that? Thank you. Lisa Su: Yes, Joe. So we do have multiple variants of the MI450 series, including an eight-way, GPU form factor. But for 2026, I would say the vast majority of it is going to be RackScale solutions. And yes, we will take revenue when we ship to the rack builder. Joe Moore: Okay. Great. And then can you talk to any risk that you may have in terms of, you know, once you get silicon out, turning that into racks, any potential issues as you ramp that? I know your competitor had some last year. You said you learned from that. You know, is there anything you've done with kind of free building racks to sort of ensure you won't have those issues? Just any risk we need to understand around that. Lisa Su: Yeah. I mean, I think so. The main thing is the development is going really well. It is we're right on track with the MI450 series as well as the Helios rack development. We've done a lot of testing already both at the rack scale level as well as, you know, at the silicon level. So far, so good. We are getting the let's call it a lot of input from our customers on, you know, things to test that we can do a lot of testing in parallel. And, you know, our expectation is that we will be on track for our second-half launch. Operator: Our next question comes from the line of Stacy Rasgon with Green Research. Please proceed. Stacy Rasgon: Hi, guys. Thanks for taking my questions. First one, Lisa, I just wanted to ask you about OpEx. Like, every quarter, you guys are guiding it up, and then it's coming in even higher then you're guiding it up again. And I understand given the growth trajectory that you need to invest, but how should we think about the ramp of that OpEx and that spending number as especially as the GPU revenue starts to inflect? Do we get leverage on that, or should we be expecting the OpEx to be growing even more materially as the AI revenue starts to ramp? Lisa Su: Yes. Sure, Stacy. Thanks for the question. Look, I think in terms of OpEx, we're at a point where we have very high conviction in the roadmap that we have. And so in 2025, as the revenue increased, you know, we did lean in on OpEx and I think it was for all the right reasons. As we get into 2026 and as we see some of the significant growth that we're expecting, we should absolutely see leverage. And the way to think about it is we've always said in our long-term model, that OpEx should grow slower than revenue, and we would expect that in, you know, 2026 as well, especially as we get into the second half of the year and we see inflection in the revenue. But at this point, I think the if you look at our free cash flow generation and the overall revenue growth, I think the investment in OpEx absolutely the right thing to do. Stacy Rasgon: Thank you. For my follow-up, I actually have two sort of one-line answers I'm looking for. Just first, the $100 million in China revenue in Q1, does that also drop through at zero cost basis like we had in Q4? And is that a margin headwind? And number two, I know you don't give us the AI number, but could you just give us the annual, like, 2025 Instinct number now that we're through the year? Like, how big was it? Jean Hu: So, Stacy, let me answer your first question on the $100 million revenue in Q1. Actually, the inventory reserve reversed in Q4, which was $360 million not only associated with the Q4 revenue, China revenue, but also covers the $100 million revenue we expect to ship in Q1 to China with our MI308. So the Q1 gross margin guide is a very clean guide. Lisa Su: And Stacy, for your second question, you know, we don't guide at the business level. But, to help you with your models, I think you can if you look at the Q4 data center AI number, even if you were to back out the China number, which was, you know, let's call it, not a recurring number, you would still see growth you'll see growth from Q3 to Q4. So that should help you a little bit with your modeling. Operator: Thank you. And the next question comes from the line of Joshua Buchalter with TD Cowen. Please proceed. Joshua Buchalter: I wanted to ask about clients. So the segment pretty handily in the fourth quarter. And recognize you guys have been gaining share with Ryzen. But I think given what we've been seeing in the memory market, there's a lot of concern about inflationary costs and the potential for pull-ins. Were there any changes in your order patterns during the quarter? And maybe bigger picture, how are you thinking about client growth and the health of that market into 2026? Lisa Su: Yeah. Thanks for the question, Josh. Yeah. The client market has performed extremely well, you know, for us throughout 2025, very strong growth for us, you know, both in terms of ASP mixing up the stack as well as just unit growth. Going into 2026, we are certainly watching the development of the business. I think the PC market is an important market. Based on everything that we see today, we're probably seeing the PC TAM down a bit just given some of the inflationary pressures of the commodities pricing, including memory. The way we are modeling the year is, let's call it, second half a bit subseasonal to first half. Just given everything that we see. Even in that environment with the PC market down, we believe we can grow our PC business. And our focus areas are enterprise. That's a place where we're making very nice progress in 2025, and we expect that into 2026. And just continuing to grow, you know, sort of at the premium, you know, higher end of the market. Joshua Buchalter: Thank you for the color there. I want to ask about the Instinct family. So we've seen your big GPU competitor make a deal with the, you know, SRAM-based spatial architect provider, and then OpenAI has reportedly been linked to one as well. Could you speak to the competitive implications of that? You've done well in inferencing, I think, partly because of your leadership in HBM content. So I was wondering if you could maybe address the poll seemingly motivated by, you know, lower latency inference and how Instinct is positioned to service this if you're indeed seeing it as well. Thank you. Lisa Su: Yeah. I think, Josh, it's really, I think, the evolution that you might expect as the AI market matures, you know, what we're seeing is as inference ramps, the, you know, really the tokens per dollar or the efficiency of the inference stack becomes more and more important. As you know, with our triplet architecture, we have a lot of ability to optimize, across, you know, inference, training, and even across, you know, sort of the different stages of inference as well. So, I think I view this as, you know, very much as you go into the future, you'll see more workload-optimized products. And, you know, you can do that, you know, with GPUs as well as, you know, with other more ASIC-like architectures. I think we have the full compute stack to do all of those things. And from that standpoint, we're gonna continue to lean into inference as, you know, we view that as a significant opportunity for us in addition to ramping our training capabilities. Operator: Thank you. And the next question comes from the line of Ben Reitzes with Melius Research. Please proceed. Ben Reitzes: Yeah. Hey. Thanks. Appreciate it. Hey. Lisa, wanted to ask you about OpenAI. Know, I'm sure a lot of the volatility, you know, out there is not lost on you. Is everything on track for the second half for starting the six gigawatts and the three point five year timeline. As far as you know? And is there any other color that you'd just like to give on that relationship? And then I have a follow-up. Thank you. Lisa Su: Yeah. I mean, think, Ben, what I would say is, you know, we're very much working in partnership with OpenAI as well as our CSP partners. To deliver on MI450 series and deliver on the ramp. The ramp is, on schedule to start in the second half of the year. MI450 is doing, great. Helios is doing well. We are in, you know, let's call it deep co-development across all of those parties. And, you know, as we look forward, I think we are optimistic about the MI450 ramp for OpenAI. But I also want to remind everyone that we have a broad set of customers that are, you know, very excited about MI450 series. And so in addition, to the work that we're doing with OpenAI, there are a number of customers that we're working to ramp in that time frame as well. Ben Reitzes: Alright. I appreciate that. And, I wanted to shift to the server CPU and just talk about x86 versus ARM. You know, there's some view out there that x86 has particular edge in agents, big picture. You know, do you agree with that? And what are you seeing from customers? And in particular, you know, obviously, your big competitor is gonna be selling an ARM CPU separately now in the second half. So if there's just anything on that competitive dynamic versus ARM and what NVIDIA is doing, and your views on that, that'd be great to hear. Thanks. Lisa Su: Yeah. Ben, what I would say about the CPU market is there is a great need for high-performance CPUs right now. And, that goes towards agentic workloads. Where, you know, when you have, these AI processes or AI agents that are spinning off a lot of work, in an enterprise, they're actually going to a lot of traditional CPU tasks. And a vast majority of them are on x86 today. I think the beauty of EPYC is that we optimized, we've done workload optimization. So, you know, we have the best cloud processor out there. We have the best enterprise processor. You know, we also have, you know, some lower-cost variants for storage and other elements. And I think all of that comes into play as we think about the entirety of the AI infrastructure that needs to be put in place. I think the CPUs are gonna continue to be, you know, as important as, you know, a piece of the AI infrastructure ramp. And that's one of the things that we mentioned at our analyst day back in November. You know, it's, you know, really this multiyear CPU cycle, and we continue to see that. I think we've optimized EPYC to satisfy all of those workloads, and we're gonna continue to work with our customers to, you know, expand our EPYC footprint. Operator: And the next question comes from the line of Tom O'Malley with Barclays. Please proceed. Tom O'Malley: Hey, Lisa. How are you? I just wanted to ask you mentioned on memory earlier as a sticking point in terms of inflationary cost. Different customers do this in different ways. Different suppliers do this in different ways. But can you maybe talk about procurement of memory, when that takes place, particularly on the HBM side? Is that something that gets done a year in advance, six months in advance, Different accelerator guys have talked about different timelines. Would be curious to kinda hear when you do the procurement. Lisa Su: Yeah. I mean, given the lead times for things like, you know, HBM and wafers and these parts of the supply chain. I mean, we're working closely with our suppliers over a multiyear time frame. In terms of what we see in demand, you know, how we ramp, how we that our development is very closely tied together. So I feel very good about our supply chain capabilities. We have been planning for this ramp. So independent of the current market conditions, we've been planning for a significant ramp in our both CPU as well as our GPU business over the past, you know, couple of years. And so from that standpoint, I think we're well-positioned to grow substantially in 2026. And now we're also doing, you know, multiyear agreements that, you know, extend beyond that, given the tightness of the supply chain. Tom O'Malley: Thanks. And just as a follow-up, you've seen a variety of different things in the industry in terms of system accelerator. So KB cash offload, more discrete ASIC style compute, CPX. If you look at what your competitors are and you look at your first generation of system architecture coming out, maybe spend some time on do you see yourself following in the footsteps of some of these different type of architectural changes? Do you think that you'll go in a different direction? Anything just on the evolution your system-based architecture and then the adjoining products and or silicon within. Thank you. Lisa Su: I think, Tom, what we have is, the ability with a very flexible architecture with our triplet architecture, and then we also have a flexible platform architecture that allows us, you know, to really have, you know, different system solutions for the different requirements. I think we're very cognizant there will be different solutions, so there's no, you know, I've often said there's no one size fits all, and I'll say that again. There's no one size fits all. But that being the case, it's clear that the rack scale architecture is, is very, very good. For the, you know, highest-end applications when you're talking about, you know, inference distributed inference and training. And but we also see a with enterprise AI, to use some of these other form factors, and so we're investing across that spectrum. Operator: And the next question comes from the line of Ross Seymore with Deutsche Bank. Please proceed. Ross Seymore: Hi, thanks for letting me ask. Couple of questions. I guess my first question is back on the gross margin side of things. As you go from the MI300 to the 400 to the 500 eventually, do you see any changes in the gross margin throughout that period? In the past, you've talked about optimizing dollars more so than percentages. But just on the percentage side, it go up, down, or is there volatility as you go from one to the next? For any reason? Just wondered on the trajectory there. Jean Hu: Ross, thank you for the question. At a very high level, each generation, we actually provide much more capabilities, more memory, help our customer more. So in general, the gross margin should progress issue generation when you offer more capabilities to your customers. But, typically, when you first ramp at the beginning of ramp over generation, it tends to be lower. When you get to the scale, get to the yield, the improvement, the testing improvement, and the also overall performance improvement that you will see gross margin improving within issue generation. So it's a kind of a dynamic gross margin, but in the longer term, you should expect each generation should have a higher gross margin. Ross Seymore: Thanks for that, Jean. And then one on a small segment of your business, but it seems quite volatile and you talked a little bit about further off than you usually do with the gaming side of things. What is the magnitude down you're talking about this year? Because in 2025, you thought it was going to be flat and ended up growing 50%, which was a nice positive surprise. But now that you're talking about this year being down, then the next-gen Xbox ramping in 2027, I just hope to get some color on what you see as kind of the annual trajectory there. Jean Hu: Yeah. So Lisa can add them all. So 2026, I actually, it's the seventh year of a current product cycle. Typically, when you add this stage over the cycle, revenue tends to come down. We do expect the revenue on the semi-customer revenue side to come down significantly double-digit. For 2026. As Lisa mentioned in her prepared remarks. For the next generation? Yeah. That I think we'll Lisa Su: I mean, we'll certainly, you know, talk about that going forward. But as we ramp the new generation you would expect a reversal of that. Operator: Operator, I think we have time for one more caller on the call, please. Thank you. And our final question comes from the line of Jim Schneider with Goldman Sachs. Please proceed. Jim Schneider: Good afternoon. Thanks for taking my question. Relative to the ramp of your rack-level systems, would you expect any kind of bottleneck in terms of supply constraints in terms of the ramp as you ramp the second half of the year to potentially impact or limit the revenue growth? In other words, maybe talk about whether you expect supply to really kind of mute the growth in Q4 sequentially relative to sorry, Q3 relative to Q4. Lisa Su: Jim, we are planning this at the, you know, every component level. So I think relative to our data center AI ramp, I do not believe that we will be supply limited in terms of the ramp that we put in place. I think we have an aggressive ramp. I think it's a very doable ramp. And, as we think about the size and scale of Advanced Micro Devices, Inc., you know, clearly, our priority is ensuring that the data center ramps go very well that's both on the data center AI, you know, the GPU side, as well as on the CPU side. Jim Schneider: Thank you. And then maybe as a follow-up to the earlier question on the OpEx could you maybe address what are some of the largest investment areas you made in 2025? And then what are the largest incremental OpEx investment areas for 2026? Thank you. Jean Hu: Yeah, Jim. On the 2025 investment, the priority and the investment to the largest investment in data center AI. Our hardware roadmap, we accelerated that roadmap. We expand our software capabilities. We also acquired ZT Systems, which, added significant system-level solutions and capabilities those are the primary investment in 2025. We also invest heavily in go-to-market to really expand our go-to-market capabilities to support the revenue growth and also expand our commercial business and the business for our CPU franchise. In 2026, you should expect us to continue to invest aggressively. But as Lisa mentioned earlier, we do expect revenue to expand faster than operating expense increase to drive the earnings per share expansion. Jim Schneider: Right. Operator: Thank you, everybody, for participating on the call. Operator, I think we can go ahead and close the call now. Thank you. Good evening. Operator: Thank you. And ladies and gentlemen, that does conclude the question and answer session, and that also concludes today's teleconference. You may disconnect your lines at this time, and have a great rest of the day.
Operator: Good day, everyone, and welcome to the Mercury Systems Second Quarter Fiscal 2026 Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the company's Vice President of Investor Relations, Tyler Hojo. Please go ahead, Mr. Hojo. Tyler Hojo: Good afternoon, and thank you for joining us. With me today is our Chairman and Chief Executive Officer, William L. Ballhaus, and our Executive Vice President and CFO, David E. Farnsworth. If you have not received a copy of the earnings press release we issued earlier this afternoon, you can find it on our website at mrcy.com. The slide presentation that we will be referencing is posted on the Relations section of the website under Events and Presentations. Turning to slide two in the presentation, I'd like to remind you that today's presentation includes forward-looking statements, including information regarding Mercury's financial outlook, future plans, objectives, business prospects, and anticipated financial performance. These forward-looking statements are subject to future risks and uncertainties that could cause our actual results or performance to differ materially. All forward-looking statements should be considered in conjunction with the cautionary statements on Slide two in the earnings press release and the risk factors included in Mercury's SEC filings. I'd also like to mention that in addition to reporting financial results in accordance with generally accepted accounting principles or GAAP, during our call, we will also discuss several non-GAAP financial measures, specifically adjusted income, adjusted earnings per share, adjusted EBITDA, and free cash flow. A reconciliation of these non-GAAP metrics is included as an appendix to today's slide presentation and in the earnings press release. I'll now turn the call over to Mercury's Chairman and CEO, William L. Ballhaus. Please turn to Slide three. William L. Ballhaus: Thanks, Tyler. Good afternoon. Thank you for joining our Q2 FY 2026 earnings call. We delivered Q2 results that were ahead of our expectations, with solid year-over-year growth in backlog, revenue, and adjusted EBITDA and robust free cash flow. Our ability to accelerate progress on a number of our customers' high-priority programs once again contributed to strong results this quarter, including record first-half revenue. Today, I'll cover three topics. First, some introductory comments on our business and results. Second, an update on our four priorities: performance excellence, building a thriving growth engine, expanding margins, and driving free cash flow. And third, performance expectations for the balance of FY 2026 and longer term. Then I'll turn it over to Dave, who will walk through our financial results in more detail. Before jumping in, I'd like to thank our customers for their collaborative partnership and the trust they put in Mercury to support their most critical programs. I'd also like to thank our Mercury team for their dedication and commitment to delivering mission-critical processing at the edge. Please turn to Slide four. Our Q2 results support our expectations for robust organic growth with expanding margins and positive free cash flow. Bookings of $288 million and a 1.23 book-to-bill resulting in a record backlog approaching $1.5 billion. Revenue of $233 million with first-half revenue up 7.1% year-over-year. Adjusted EBITDA of $30 million and adjusted EBITDA margin of 12.9%, up 36.3% and 300 basis points, respectively, year-over-year. And free cash flow of $46 million, well ahead of our expectations. We ended Q3 with $335 million of cash on hand. These results reflect ongoing focus on our four priority areas with highlights that include solid execution across our broad portfolio of production and development programs, backlog growth of 8.8% year-over-year, a streamlined operating structure enabling increased positive operating leverage and significant margin expansion, and continued progress on free cash flow drivers with net working capital down $61 million year-over-year, or 12.9%. Please turn to Slide five. Starting with our four priorities and priority one, performance excellence. Where our efforts positively impacted our results primarily in two areas. First, in Q2, we recognized $4 million of net adverse EAC changes across our portfolio, which is in line with recent quarters, reflecting sound execution on our development and production programs. Second, accelerated progress across a number of programs, and generated approximately $30 million of revenue, $10 million of adjusted EBITDA, and $30 million of cash primarily planned for the third quarter. This acceleration contributed to top-line growth, adjusted EBITDA margins, and free cash flow that exceeded our expectations for Q2 and will also factor into our outlook for Q3, which I'll speak to shortly. Notably, our focus on accelerating customer deliveries led to record first-half revenue and the highest first-half point-in-time revenue since FY 2021. Beyond this solid performance across our portfolio of programs, we progressed on a number of actions in the quarter to increase capacity, add automation, and consolidate subscale sites in our ongoing efforts to drive scalability and efficiency. Notably, we continue to build out our highly automated manufacturing footprint in Phoenix, Arizona, and progressed on bringing online an additional 50,000 square feet of factory space to support ramp production for our common processing architecture programs and to allow for efficient scaling if potential market tailwinds materialize. This is just one of many actions we have taken along with prior investments across a number of critical technology developments that are driving our ability to accelerate delivery of vital capabilities to our warfighters and our allies. Please turn to Slide six. Moving on to priority two, driving organic growth. We delivered another strong quarter with $288 million of bookings, resulting in a book-to-bill of 1.23 and a record backlog approaching $1.5 billion. Q2 awards reflected a mix of franchise program extensions, competitive new design wins, and follow-on production awards across both domestic and international customers. Bookings were led by a scope expansion on a long-standing cost-plus development program supporting modernization efforts within a core missile defense platform. Extending Mercury's role through additional hardware content, and further strengthening our position as the program progresses toward future production. We also captured two key new design wins during the quarter in exciting growth markets. These included a major RF and processing subsystem, supporting a leading advanced air mobility manufacturer's development of its ground control infrastructure, as well as a new design award supporting a space-based application with a leading aerospace and defense prime. Expanding Mercury's capability set within the fast-growing space market. Importantly, these design wins represent new platform entry points and future production potential, positioning Mercury for continued growth as these programs mature. Follow-on production awards were another contributor, including incremental quantities on a key US missile franchise reflecting continued customer confidence as those programs ramp along with additional awards supporting deployed naval platforms and international land-based radar and electronic warfare applications underscoring the durability of Mercury's installed base. Finally, the quarter included approximately $20 million follow-on awards that leverage our common processing architecture and include embedded anti-tamper and cybersecurity software from our recent acquisition of StarLab, reinforcing the strategic value within the key set of capabilities. These awards are important not only because of their value and impact on our growth trajectory but also because they reflect those customers' trust in Mercury to support their most critical franchise programs with our proven capabilities and latest innovations. Beyond our backlog growth, customer conversations continue to progress on the potential for higher demand on multiple programs across our portfolio driven by increased defense budgets globally and domestic priorities like Golden Dome. Although these potential opportunities are still in early pipeline phases, I remain optimistic that they may have a positive impact on our demand environment if funding is allocated across certain program priorities to our customers over the next several quarters and beyond. Please forward to Slide seven. Now turning to priority three, expanding margins. In our efforts to progress toward our targeted adjusted EBITDA margins in the low to mid-twenty percent range, we are focused on the following drivers: backlog margin expansion as we convert lower margin backlog and add new bookings aligned with our target margin profile, ongoing initiatives to further simplify, automate, and optimize our operations, and driving organic growth to realize positive operating leverage. Q2 adjusted EBITDA margin of 12.9% was ahead of our expectations and up 300 basis points year-over-year. This margin performance was driven by the conversion of backlog previously contemplated to be delivered later in FY 2026 and higher operating leverage. Gross margin of 26% was slightly down year-over-year, driven by an increased mix of low margin backlog converted in the quarter. We expect average backlog margin to continue to increase as we convert lower margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses are down year-over-year as a result of fully realizing the impact of previously implemented actions to further simplify, streamline, and focus our operations and ongoing initiatives to drive efficiency. Please forward to Slide eight. Finally, turning to priority four, improve free cash flow. We continue to make progress on the drivers of free cash flow. And in particular, reducing net working capital, which at approximately $414 million is down $61 million year-over-year and is at the lowest level since Q1 FY 2022. Net debt is now down to $257 million, also the lowest level since '2. We believe our continuous improvement related to program execution, accelerating deliveries for our customers, demand planning, and supply chain management, will lead to continued reduction in working capital and net debt over time. In addition, we continue to expect to allocate factory capacity in FY 2026 to programs with unbilled receivable balances which will help drive free cash flow, although with little impact to revenue. Please turn to Slide nine. Looking ahead, I am optimistic about our team, our leadership position in delivering mission-critical processing at the edge, the market backdrop, and our expected ability over time to deliver results in line with our target profile of above-market top-line growth, adjusted EBITDA margins in the low to mid-twenty percent range, free cash flow conversion of 50%. We believe our strong first-half results reflect continued progress toward this target profile. With an aggregate 1.17 book-to-bill, 7.1% top-line growth, 14.3% adjusted EBITDA margins, 400 basis points of margin expansion year-over-year, and $41 million of positive free cash flow over the last two quarters. Coming out of Q2, we maintain our full-year view on FY 2026, which excludes any further accelerations within or into FY 2026 or upside bookings store plan tied to domestic priorities like Golden Dome, or increased global defense budgets. We continue to expect annual revenue growth of low single digits. Given our Q2 and first-half overperformance of approximately $30 million, we expect Q3 revenue to be down year-over-year absent any additional accelerations, followed by a ramp in Q4. We continue to expect full-year adjusted EBITDA margin approaching mid-teens. Given the accelerations into the first half, and positive impact on first-half margins, we expect Q3 adjusted EBITDA margin approaching double digits as we convert low margin backlog and realize lower operating leverage. We continue to expect Q4 adjusted EBITDA margin to be the highest of fiscal year. Finally, with respect to free cash flow, we continue to expect free cash flow to be positive for the year. As discussed, we pulled forward approximately $30 million of cash receipts into Q2, which impacts Q3, and we expect will result in free cash outflow for the quarter. In summary, with our momentum coming out of Q2 and the first half, I expect FY 2026 performance to represent another positive step toward our target profile. Additionally, I'm gaining optimism regarding the potential for tailwinds associated with increased global defense budgets, and domestic priorities like Golden Dome to materialize and upside bookings to our plan over time. I look forward to providing updated commentary as we progress through the year. With that, I'll turn it over to Dave to walk through the financial results for the quarter and I look forward to your questions. Dave? David E. Farnsworth: Thank you, Bill. Second quarter results continue to reflect solid progress toward our goal of delivering organic growth, expanding margins, and robust free cash flow. We still have work to do to reach our targeted profile but we are encouraged by the progress we have made and expect to continue this momentum going forward. With that, please turn to Slide 10, which details our second quarter results. Our bookings for the quarter were approximately $288 million with a book-to-bill of 1.23. Our record backlog of nearly $1.5 billion is up $119 million or 8.8% year-over-year. Revenues for the second quarter were $233 million, up approximately $10 million or 4.4% compared to the prior year. During the second quarter, we were again able to accelerate progress on a number of customers' high-priority programs worth approximately $30 million of revenue primarily planned for Q3. Fiscal 2026. Gross margin for the second quarter decreased approximately 130 basis points to 26% as compared to the same quarter last year. The gross margin decrease during the second quarter was primarily driven by execution on lower margin programs. As Bill previously noted, we expect to see an improvement in our gross margin performance over time as the average margin in our backlog improves, and through our continued focus to simplify, automate, and optimize our operations. We expect the average backlog margin to continue to increase as we convert lower margin backlog and bring in new bookings that we believe will be in line with our targeted margin profile. Operating expenses decreased approximately $2 million or 2.4% year-over-year. The decrease in research and development costs of approximately $6 million or 28% was driven by efficiency improvements and headcount reductions initiated in fiscal 2025 to align our team composition with our increased production mix as we previously discussed. We also saw a decrease in amortization expense of over $1 million related to various customer relationship intangibles that were fully amortized in fiscal 2025. These decreases were partially offset by an increase in restructuring and other charges of $4 million as we progress on driving scale and efficiency in our operations. Decreases in operating expenses were also partially offset by increased selling, general and administrative costs of approximately $2 million primarily related to litigation and settlement costs. GAAP net loss and loss per share in the second quarter were approximately $15 million and $0.26 respectively. As compared to GAAP net loss and loss per share of approximately $18 million and $0.30 respectively, in the same quarter last year. The improvement in year-over-year earnings is primarily a result of increased operating leverage and lower non-operating expenses. Adjusted EBITDA for the second quarter was approximately $30 million, up $8 million or 36.3% as compared to the same quarter last year. Our adjusted EBITDA during the second quarter was also partially driven by the acceleration of customer deliveries as previously mentioned by Bill. Adjusted earnings per share was $0.16 as compared to $0.07 in the prior year. The year-over-year increase was primarily related to our increase operating leverage in the current period as compared to the prior year. Free cash flow for the second quarter was an inflow of approximately $40 million as compared to $82 million in the prior year. The inflow from the current period was primarily driven by progress made in reducing our net working capital by approximately $61 million or 12.9% year-over-year. As Bill previously noted, free cash flow during the second quarter benefited from the progress we accelerated primarily from the third quarter. Slide 11 presents Mercury's balance sheet for the last five quarters. We ended the second quarter with cash and cash equivalents of $335 million sequentially driven primarily by approximately $52 million in cash provided by operations in the second quarter, which was partially offset by investments of nearly $6 million in capital expenditures and $15 million of shares repurchased and retired from our share repurchase program. Billed receivables remained relatively flat and unbilled receivables decreased by approximately $5 million year-over-year. As Bill previously noted, we continue to expect to allocate factory capacity in fiscal 2026 to programs with unbilled receivable balances which will help drive free cash flow with minimal impact to revenue. Inventory increased year-over-year by approximately $5 million. The increase was driven primarily by work in process as we bring product to its final state in support of our increased proportion of point-in-time revenue, on many of the company's production programs. Prepaid expenses and other current assets increased year-over-year by approximately $46 million primarily due to our settlement in principle on the securities class action complaint. This settlement in principle is recorded as a receivable with prepaid expenses and other current assets and a corresponding accrual was recorded in accrued expenses. Accounts payable increased year-over-year and sequentially by approximately $41 million and $8 million respectively, driven by the timing of payments to our suppliers. Accrued expenses increased approximately $3 million sequentially, primarily due to restructuring and other charges in the second quarter. Accrued compensation increased approximately $12 million sequentially primarily due to our incentive compensation plans. The amount due to our factoring facility increased sequentially by approximately $27 million primarily due to the timing of payments from our customers due back to our counterparty. Deferred revenues increased sequentially by approximately $11 million as a result of additional milestone billing events achieved during the period. Working capital decreased approximately $60 million year-over-year, or 12.7%. Working capital also decreased by nearly $44 million or 9.5% sequentially. This continues to demonstrate the progress we've made in reversing the multiyear trend of growth in working capital, resulting in a reduction of $246 million or 37.3% from the peak net working capital in Q1 fiscal 2024. Net working capital remains a primary focus area for us we believe we can continue to deliver improvement. Turning to cash flow on Slide 12. Free cash flow for the second quarter was an inflow of approximately $46 million as compared to $82 million in the prior year. We continue to expect free cash flow to be positive for the year with an outflow in the third quarter. As Bill previously noted. We believe our continuous improvement in program execution, hardware deliveries, just-in-time material, and appropriately timed payment terms will lead to continued reduction in working capital. In closing, we are pleased with the performance in the second quarter and the higher level of predictability in the business. We believe continuing to execute on our four priority focus areas will not only drive revenue growth and profitability, but will also result in further margin expansion and cash conversion. Demonstrating the long-term value creation potential of our business. With that, I'll now turn the call back over to Bill. Thanks, Dave. With that, operator, please proceed with the Q and A. Operator: Thank you, sir. Again, that is star one to ask a question. We'll take the first question today from Peter Arment from Baird. Good evening, Bill and Dave, Tyler. Nice results. Hey. Bill, can you give us a little bit of a, like, kind of a handicap? How do we think about how much is left of the lower margin backlog that you've got to kind of convert and pull through? It sounds like it's going to be still with us for Q3, but, obviously, it sounds Q4 is going be the highest margin of the year. How should we think about just kind of how that exits the system? William L. Ballhaus: I mean, it's it's the same progression that we've been talking about for several quarters now where at the end of end of FY 2024, we talked about that backlog margin, the average of backlog margin being lower than what we expected see on an ongoing basis, driven by a number of factors. And that that would need to flow through over time. And if you look at the duration of our backlog, it wasn't a four quarter period of time. Wasn't necessarily a twelve quarter period of time. Somewhere in between. So as we work our way through 2026, and through 2027, we expect to see most of the impact tied to the low margin distribution of our backlog. Start to burn through and get behind us. I think the good news on this front, you know, our our gross margin in the quarter was down. It's actually a good thing because it reflects that we are burning down that lower margin distribution in our backlog. And we continue to replace that part of our backlog. With higher margin bookings that we expect to be in line with our target profile. So no change from what we said before to continuation If anything, we made great progress this quarter in burning down the low margin distribution as well as bringing in solid bookings in the quarter. Peter Arment: Thanks for that call, Bill. Just a quick follow-up. Just when we think about the pull forward, is that something that's also tied to this low margin backlog? Or is this just you know, something that you're calling out just because I think there's some confusion about what's pull forward or what's growth, etcetera. William L. Ballhaus: Yeah. I mean, you've seen over the last several quarters that we've been successful in accelerating deliveries, and it's had an impact in us delivering results that ahead of our expectations. And that's exactly what happened again this quarter. We had about $30 million of revenue that we pulled forward It impacted EBITDA positively by about $10 million. That gives you a sense for where that backlog sits in our distribution because it basically flows through a gross margin. There's not much OpEx. There isn't any OpEx. That we had associated with it. So I would say this this quarter is just a continuation of we've been delivering over the last several quarters. Peter Arment: Appreciate the call. I'll jump back in the queue. Thanks, Bill. Thanks, Peter. Operator: Up next is Kenneth George Herbert from RBC. Kenneth George Herbert: Hi. Good afternoon. Bill, Dave, and Tyler. Hey. Maybe, Bill, I just wanna start first on the capacity you called out that you're adding in terms of the CPA. Can you level set us in terms of where you are with with capacity today on that product line, maybe from a revenue standpoint, if possible? How we should think about how much more capacity you need to continue to bring on to support, you know, the order activity and the demand pull. William L. Ballhaus: Yeah. And I wanna just a reminder that the capacity that we're bringing online in Phoenix the cost associated with that is already in our OpEx. And so the investment that we're making is a little bit of CapEx to bring additional lines, onboard. We are continuing to ramp up production in our CPA area. That has gone basically per plan. Feeling very good about how we're delivering for our customers. We continue to grow our backlog. You saw in the quarter, we had another $20 million of orders associated with CPA. And we remain confident that as time goes on and we continue to execute on our programs, so we'll continue to see increased demand over time for that product line, and that's behind bringing on the additional space. As far as you know, additional capacity and investments required beyond that, one of the nice things about where we sit right now is when we look at all of the potential tailwinds that are out there, and we talked about what's what's driving those. For us to be positioned to execute and deliver on those tailwinds, the investment profile is really incremental, and it's graceful. And we don't have to invest ahead of the demand. In order to be able to deliver on it. And for the most part, we're running at single shifts across all of our factories. And so the first step for us to increase capacity to meet tailwinds would be to add additional shifts. And now with this capacity coming online, in Phoenix later this year, we'll be in the same position with CPA that we can very efficiently meet increased demand associated with tailwinds. Just by moving to additional shifts. So I think that's a really good place for us to be. Kenneth George Herbert: Hey. I appreciate the color. And if I and I could, I just wanted to ask a question on the guidance. I mean, I think you demonstrated a pattern here to be able to outperform and and it seems like they're you know, recurring, you're able to pull revenues to the left relative to expectations. You've obviously set up here today with this call a a fairly soft fiscal third quarter within a strong fourth quarter, and I hear appreciate the seasonality but but maybe what kept you back from pushing up the guide or having a little bit more confidence in the full year numbers because you've got multiple quarters now of of being able to obviously outperform and and exceed expectations and continue to over over over deliver relative to sort of the near term setup. William L. Ballhaus: Yeah. It and it has been pretty consistent quarter over quarter for the last several quarters. And if we think about the setup, to FY 2026, coming into the year, we pulled forward about $30 million of accelerated deliveries and revenue from 2026 into 2025. Which really set the stage for our expectation for the year to be low single digit growth on top of high single digits last year. If it weren't for that pull forward, we would have been looking at mid single digit growth last year and high single digit growth this year. So it just shows how the movement between quarters can really impact the optics around growth in a period. Now as we've come through the first February, of FY 2026, we're well ahead of plan. If you look at our top line, if you look at our EBITDA, and if you look at free cash flow, all of that is ahead of plan. So our expectations for the year are the same now as they were coming into the year, What we've done is we've overperformed, and we shifted the profile to the left. Now the expectations and the commentary that we gave for Q3 is absent any further accelerations from Q4 into Q3 or any accelerations from FY 2027 into FY 2026. The reason why we're giving our commentary that way is for the most part, our ability to accelerate deliveries is largely driven by our ability to accelerate materials. So if you think about what just happened in Q2, in the last few weeks of Q2, we were able to pull in material so that we could deliver more units in Q2, and you heard that our point in time revenue in Q2 was the highest that it's been in five years. That's a reflection of us moving hardware through our factories and shipping it. In order to do that, it's based on accelerating material from our suppliers and we can't be certain that we're going to be able to accelerate until that material is house. And I don't wanna give commentary and set expectations based on things that we don't have a 100% confidence around. Now for the last several quarters, we have demonstrated the ability to exercise that muscle across our entire And every quarter, we've been able to accelerate $20 to $30 million in deliveries into the quarter. But we're not setting our expectations based on that because we're going to work through the quarter on the next set of constraints and the next set of material that we're trying to accelerate. And know, based on prior quarters, we've been able to do that, but we don't wanna set expectations assuming that that's going to happen. So hopefully that provides a little bit of clarity on that commentary. Kenneth George Herbert: Thanks, Bill. I appreciate the context. Operator: The next question comes from Sheila Kahyaoglu from Jefferies. Kyle Walters: Hi, guys. This is Kyle on for Sheila. Thanks for taking my question. On an extension of the question that Peter asked, about low margin backlog and your your response that that sort of persists through FY 2027. Know, how do we think about the puts and takes as we think about mid teen margins this year and what FY 2027 could ultimately look like if you're still still burning through some of that past backlog in in light of potentially pulling forward growth and and what you're seeing in the bookings trends? Thanks. William L. Ballhaus: Yeah. Kyle, thanks. Thanks for the question. I think just a point of clarification. You know, we we may have lower margin backlog still in our backlog as we're working our way through FY 2027. But it becomes increasingly smaller as time goes on. And so you know, as we move forward, the impact of our low margin backlog on our EBITDA margins continues to drop over time because the volume comes down. So you know, as as every quarter that progresses, we expect that impact to continue to come down. Because what we're doing is we're we're burning down that low margin backlog. It's going away, and we're replacing it with new bookings that are coming in quicker higher margins. And that's what's giving us the increase in our average backlog margin as time goes on. So, hopefully, that helps quite by the point. And build upon my and, you know, for Kyle. It it's becoming every quarter that goes by, it's a smaller percentage because of of the aggregate. Because as Bill said, we're not adding new things at low margin. You know? So so every quarter that we've had a a bit of a lower than our expected margin, that that number comes in in the backlog. That number starts coming down And when Bill said, you know, hey. You know, we expect that to some of that to go through FY 2027. You know, it's shrinking every quarter, and that getting closer and closer to nothing. As we go through. So I I I don't think people should build an expectation. That we're gonna have the same level of low margin activity every quarter as we go through 2027. We're not saying that at all. David E. Farnsworth: Yeah. As a reminder, this this isn't a situation where it looks like we have a part of our business that's consistently running at lower margins. We have legacy programs, development programs, programs where we took EAC impacts in FY 2024 and FY 2025 that have resulted in that you know, lower margin distribution in our backlog. And we're just converting that and burning it through over time, and it's not being replaced. We're replacing it with higher margin book. Kyle Walters: Understood. Very helpful. If I could just ask one follow on about the net EICs. Obviously, they're much lower than they have been in the past, but have still been a little sticky at that 4 or $5 million a quarter. Can you just talk about what your know, where we are in the in in What, you know, what inning we are in terms of kinda scrubbing that portfolio and getting more towards a a normal baseline. Thanks, guys. David E. Farnsworth: But but I did not go to the baseball questions because it was a track guy. So innings are hard for me. You know, maybe we're on the last leg of the relay race. You know? So you know, the largely, those EAC adjust adjustments or reflection as we talked about as we're going through and completing some of these programs at the very end. There are not that many programs left They're very small adjustments compared to what they were in the past. We're seeing solid positive adjustments at the same time. So you know, this quarter, it was three and a half million roughly. You know, could I see could I see and we've been asked, you know, many times, could we see that being positive in the quarter? Yeah. We could see that. You know, could it be slightly negative in the quarter? You know, it it it's within a range that that is not unexpected for us. It's consistent with what we we've considered in our outlook. You know? And you know, we keep every time we finish one of these programs, put it behind us. You know, it it lessens the the opportunity for those adjustments to happen in the future. So you know, I I guess, way, we're getting there, you know, you know, it's things that happen within the quarter as we're completing these things largely as we talk about on path on development. Programs, but they're older programs that we're just completing as we go through the final kind of qualification on these things. And I would just say very simply that we think they're kind of in a normal course range right now, and you know, we're we're confident in our ability to get to our target margin profile. With the EACs and the ZIP code that they've been running over the last several quarters. Operator: The next question today will come from Seth Seifman from JPMorgan. Seth Seifman: Nice quarter. I wanted to ask the common processing architecture in terms of ramping up. I know you sure you don't wanna give an exact number, but, you know, if we think about kind of a rough proportion of what what that comprises in in the sales mix, Is there is there any way for you to kinda speak to, a, where that is and and, b, you know, where it should be going as we think know, a year or two out. William L. Ballhaus: Well, we haven't given a we haven't the percentage of the business or the the sales mix etcetera. I will say that we have been successful over the last year in ramping up to meet our program demands. The good news is the team has been executing very well in this area since we went through and implemented our root cause corrective action in started bringing the production line back up, and we've seen the follow on orders coming. And we do see good growth potential in this part of the business. We see healthy demand. And it's an area where we're technically differentiated. And so we have you know, a lot of optimism about this part of our business and continue to to have that. Yeah. And and I think, you know, we don't talk about, you know, kind of where we are in individual programs, but I think there are programs that were know, that are fully ramped up in the production within the common processing There are other programs that are still ramping up. Seth Seifman: Okay. So there's still still runway, I I guess. Okay. And and then just when we think about you know, cash up to over $300 million, you bought back a little bit of stock in the quarter. How do we think about where that cash balance sort of should be over time And, you know, what what you guys are gonna gonna do with the the cash? David E. Farnsworth: Yeah. You know, No. Good question. I mean, we we've said and, you know, kinda still validate and think about that you know, around a $100 to $150 million is probably the you know, the right kind of balance for us. It it's higher than that as we've generated significant cash in the last year and a half. You know, that's the right level you know, over the last two or three quarters, you know, kind of you know, probably to cash was to felt like the prudent approach to was to keep cash on our books as we were going through a little bit of uncertainty around government shutdowns, not shutdowns, you know, what what was gonna happen in terms of payment You know, our emphasis is still on delevering You know, that's something we're we're looking at, obviously, as we go through the next you know, couple of quarters. William L. Ballhaus: Yeah. I'd say the priorities around delevering and continuing to drive down that debt. That that remains the focus. Seth Seifman: Okay. Great. Thanks very much. Operator: Up next we'll take a question from Michael Ciarmoli from Truist. Michael Ciarmoli: Hey, good evening, guys. Thanks for taking the Good results. Hey, Mike. Bill Bill or Dave, just I mean, looking at your top line, and I could appreciate all the commentary. You're you're you're growing slower than some of your SMidCap peers and and even some of your customers. And I think maybe you you kind of alluded to it, but can you help us with exactly how much capacity is being allocated to the unbilled and maybe tease out that drag? I mean, is it is it kind of $10 million, $15 million a quarter? Just just to try and get a sense of of kinda how much is flowing through the p and l at at no revenue recognition. But, obviously, it's it's, you know, you're you're tying up capacity executing on that. David E. Farnsworth: Yeah. Mike, that you know, we hadn't talked about that. You know? We we haven't put out, you know, this is how much revenue how much higher revenue would be if we stop doing that. You know, it's a focus of our to continue to burn down our net working capital. We we're still not where we think our net working capital should be. We still think the unbilled balances are too high. You know, certainly, there's some drag for that. We've talked about that. But but we haven't quantified it. Michael Ciarmoli: Okay. That's fair. Well, maybe we'll take that offline. Just maybe back to Ken's question as well. You know, on kind of the choke points and why you can't consistently see some of this acceleration. We're one month into the quarter, As you kind of gauge your suppliers and look at maybe potential choke points. Are are there certain items that are you know, giving you less confidence? Is it is it semiconductors? Is it is it circuit boards? Can you just maybe is it discrete components? What is sort of the items on that material list that's given you reason for pause? William L. Ballhaus: Like, lit literally every week with the teams across every program, we're going through every bill in the chair, though, line by line and looking at what does it take for us to get KIT complete. And that you know, that can vary by program. But we're literally working across all of our programs to figure out how we can accelerate kick completion so that we can move hardware through our factories. And and the reality is while we're pushing on our suppliers to close out kits, we don't know that the material will be here until the day that shows up because, literally, a supplier could tell us that the material will be here off Friday, and then on Friday, tell us that it's delayed by sixty days for one reason or another. So that's the reason why we're not incorporating any further accelerations into our outlook. But we're working it very aggressively every day across the business. And I think the good news is the last several quarters we have demonstrated that we have built the muscle in the company to do this fairly consistently. We're just not baking it into our commentary. And and I wouldn't say you know, Mike, I it as you know, something's lessening our confidence. You know, I you know, we go into the quarter, as Bill said, with, you know, hey. What would we need to do to be able to accelerate this? get it done And then we work on those constraints all quarter long to build our confidence that we can So, you know, not I I wouldn't suggest that anything's lessening our our confidence and our ability to do it. It's a pro it's a process we work Michael Ciarmoli: Okay. That's fair. Good stuff. Thanks, guys. I appreciate it. William L. Ballhaus: Thanks, Mike. Operator: Austin Moeller from Canaccord Genuity has the next question. Austin Moeller: Hi. Good afternoon. Nice quarter. You able to comment and I know it's small, but are you able to comment on the revenue impact to Mercury of the stop work order on the SCAR program, and if that were to be resumed, when you might expect, task quarters or long weeks to come in on delivering components for that? David E. Farnsworth: Yeah. Austin, we don't we don't we don't quantify individual contracts or programs. You know, we we have literally 300 different programs, and one of the strengths we have is the broadness of our portfolio and the revenue across it. There's there's no single contract that we have that approaches 10% of our revenue. And, you know, we're we're working closely with our customer here and, you know, have have thought through with them and, you know, understand where we are in terms of funding, where where they are, you know, what they're doing in terms of that stuff work. And, you know, it it's incorporated in our outlook, but it has been. There's not you know, there's nothing that we would change at this juncture. Okay. And I I understand the dynamic of the contract shift towards higher margin production contracts in the near term here. But is there a specific mix of component product types that you expect to be bridging you to your long term gross margin and EBITDA margin expectations of low to mid 20s? William L. Ballhaus: Yeah. No. Not not not specifically. You know, Bill's talked about the the production versus development mix and you know, whether eighty twenty is is there an ideal number? There probably isn't. You know? We're, you know, we're in the range kind of we expect to be in You know, the margins that we're bringing into our new bookings are consistent with our longer term model. Of of what we expect. You know? So it is across the portfolio. You know? We we feel good across the portfolio about the margin profile we're seeing in all our new bookings. Austin Moeller: Understood. Thanks for all the color there. Great. Yep. Operator: Next up is a question from Jonathan Ho, William Blair. Jonathan Ho: Hi, good afternoon. Just wanted to see if there's any additional color you can offer regarding updates to both Golden Dome and those international orders that you're perhaps getting a little bit more visibility towards? William L. Ballhaus: Yeah. You know, it it's interesting because we think about the growth drivers in our business right now, we have a number of different growth factors. I mean, obviously, at the core, it's the ramp to rate from our development programs to production. And that's largely what is the driver behind SA achieving our target profile of above market growth. Top line growth, EBITDA margins in the low to mid 20% range in free cash flow conversion of 50 plus percent. And then on top of that, which you don't really factor into that outlook, are a number of different tailwinds in the market associated with the larger US defense budget a larger percentage of that budget being allocated to the acquisition of capabilities like ours The the executive orders that we've feel like really play to our sweet spot Things like mandating the use of commercial technology, which was right in the center of our value proposition. Of course, Golden Dome, significant tailwinds there, and the growth of the international defense market. So that's kind of the landscape of growth drivers that are out there. I would say that for both Golden Dome and for international opportunities, we're having numerous conversations. They continue to progress. Across our portfolio on a large number of programs. So it's not one or two opportunities that we're tracking. There's a dozen plus programs where we're having conversations with customers around significant increases in quantities. And I would say that if any of those tailwinds were to hit that that would that would shift our expectations around our ability to hit our target profile and exceed our target profile. So still on the pipeline phases. Conversations are still progressing. And the best leading indicator that we'll have is when those conversations materialize. The bookings, and we'll keep you posted as as as those conversations progress. Jonathan Ho: Excellent. And then just in terms of your cost savings and facilities consolidation initiatives, can you give us a sense of how far along we are there and maybe some of the incremental margin opportunities that are still remaining. David E. Farnsworth: Yeah. Mean, we we've made a lot of progress as we've talked about savings that we've already recognized. And you can certainly see that when you look at the kind of the run rate we have on our OpEx now. Versus what it was two years ago, You know, we continue to you know, identify everything. You know, we continue to work on the things that make the most sense to make us more efficient you know, some of the automation Bill talking about, you know, simplifying the process. Looking at our facilities. You know, obviously, the facilities you know, take a longer time frame to recognize those kind of savings, but you know, Bill said many times this is a long term you know, life always part of your life is looking for savings. How can you do things better? So so we still see it going for a long time. You know? Bill talked about the operating leverage and how you can see as we've been able to accelerate activity, we haven't increased our expense associated with those activities. So it kinda flows right through. That's the kind of impact that we expect to keep seeing as we build the business going forward. Operator: As a reminder, everyone, it is star one if you have a question today. We'll go next to Noah Poponak with Goldman Sachs. Noah Poponak: Hey. Good evening, everyone. David E. Farnsworth: Hey, Noah. Noah Poponak: Could you level set us on the percentage of your revenue that is international? And I don't know if you could estimate or if you have the number on what's direct versus you know, eventually ends up outside of The US, but it's through a US customer. And then same question on missile and munition. Just as we all kinda recalibrate for growth rates in those two segmentations. David E. Farnsworth: Yeah. So so first, I would tell you, you know, that we don't we don't break out you know, if you're if you're asking about FMS versus you know, non FMS, we don't actually break that out. In our financials. You know? And in to a large degree, we follow our customer set. So as we're going through, we're we're working with our customers on what that breakout is. But if you look at if you look at the queue, you can see the the international and SMS revenue and for the for the second quarter, that was $38 million. So that's Percentage. Real quick. 15% range, something like that. Noah Poponak: Okay. Yep. And do you have an approximation for how much revenue you generate from the category of missiles and munitions? David E. Farnsworth: We don't we don't break that out separately. Noah Poponak: Okay. You'll be you'll be able to see in the queue the breakout between FMS and international and our domestic business. And you know, the as as we know with with our business, programs and revenue can be kind of lumpy. The international FMS business had been growing nicely. Its its growth rate is down a little bit this quarter. But, of course, that highlights that our domestic business, when you look at the first half, year over year, is up low teens, which I think speaks to some of the inherent growth of our domestic business right now, which is pretty exciting. So there's a little bit of detail that you'll see in in the queue. We we remain very bullish about the international opportunity where our backlog is And and you can close on it. We do break out sensors and effectors, but you know, to to break it into just specifically how much is missile you know, would you know, you can look at that, but it would be something we show. Understood. That is helpful. I appreciate it. Noah Poponak: Question on margins. Could you speak to even if directionally in the medium term framework, what do you expect for the gross margin and then R and D and SG and A as a percentage of revenue to walk to that EBITDA margin which I just it'd be helping to understand just given those percentages have been moving around as you've taken on your your strategy? William L. Ballhaus: Yeah. I I I don't think we've spoken to gross margin explicitly when it comes to our target margin profile. But what we said about our targeted EBITDA margins in the low to mid 20% range So basically, the elements of the bridge from where we are to get to that target range involved the backlog margin progressing the way we talked about. So burning off below margin programs and continuing to bring in new bookings in line with our target margins. And we've been doing that consistently for several quarters, and we continue marching down that path. Continuing to streamline and focus, automate, drive efficiencies into the business, And then third, positive operating leverage because we feel like we've got our OpEx in a very good place. And as we continue to grow the top line, we don't expect to see meaningful growth in our OpEx. So those three elements really provide the bridge from where we are to that you know, that targeted margin profile. Noah Poponak: Okay. That's helpful. And just one last one I had. The the step back up in restructuring to the $4 million Just curious what what you're doing there? And what it does for for the future? David E. Farnsworth: Yeah. That's what we we took an action in the quarter you know, and you can see this when you when you look in the queue. You know, that affected you know, about a 100 folks and, you know, in some facilities. So, you know, we do expect to see some lift of that as we go through the you know, get the full impact of that over the next year or so. Noah Poponak: Okay. Alright. Thank you. Operator: And, Mr. Ballhaus, it appears there are no further questions at this time. Therefore, I would like to hand the call back to you for any additional or closing remarks. William L. Ballhaus: Okay. Well, thank you very much, and thanks, everyone, for joining us for our quarterly call. And we look forward to meeting again next quarter. Thank you very much. Operator: Again, everyone, that does conclude today's conference. We would like to thank you all for your participation today. You may now disconnect.
Operator: Good afternoon, ladies and gentlemen, and welcome to the Benchmark Q4 and Fiscal Year 2025 Earnings Call and Webcast. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press 0 for the operator. This call is being recorded on 02/03/2025. I would now like to turn the conference over to Mr. Paul Mansky, Benchmark Investor Relations. Please go ahead. Paul Mansky: Thank you, Ina, and thanks, everyone, for joining us today for Benchmark's Fourth Quarter and Fiscal Year 2025 Earnings Call. With us today are Jeffrey Benck, our CEO, David Moezidis, our President, and Bryan Schumaker, our CFO. After the market closed, we issued an earnings release pertaining to our financial performance for the fourth quarter and fiscal year ending December 2025. We have prepared a presentation which we will reference on this call. Both the press release and presentation are available under the Investor section of our website at bench.com. This call is being webcast live, a replay of which will be available on our website approximately one hour after we conclude. The company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as well as in the appendix to the presentation. Please take a moment to review the forward-looking statements disclosure on Slide two of the presentation. During our call, we will discuss forward-looking information. As a reminder, any of today's remarks, which are not statements of historical fact, are forward-looking statements, which involve risks and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements. Benchmark undertakes no obligation to update any forward-looking statements. For today's call, Jeffrey will start with an overview followed by Bryan's detail of our Q4 and fiscal year 2025 results, as well as Q1 2026 guidance. We will then turn the call over to David to share his perspective on sector trends, business direction, and closing remarks. This being his last conference call as CEO, after Q&A, we'll turn the call back to Jeffrey for some parting thoughts. If you please turn to Slide four, I'll turn the call over to our CEO, Jeffrey Benck. Jeffrey Benck: Thank you, Paul. Good afternoon, and thanks to everyone for joining today's call. Before I get started, I want to thank the entire Benchmark team for their contribution to closing out 2025 on a high note. With continued progress against our strategic objectives. This culminated in fourth quarter revenue of $704 million, which was up high single digits and included double-digit growth across three of our five focus sectors: AC and C, medical, and A and D. At the same time, our fourth quarter earnings of $0.71 exceeded the high end of our guidance range provided last November. Our semi cap sector is showing nice signs of improvement heading into 2026, after a softer 2025. Despite the expected semi softness in the quarter, we still managed to deliver a gross margin of 10.6%, which was above the high end of our guidance range. This, coupled with our continued operating expense discipline, drove operating margin to 5.5%, demonstrating the leverage in our model. Again, great execution by the team across the board. Turning to the full year on slide five. 2025 revenue of $2.66 billion was in line with our prior year. However, it played out differently because instead of decelerating as in 2024, in 2025, we showed improving momentum, sequential growth, and better year-over-year performance as the year progressed. Which enabled us to deliver year-over-year growth in the second half as we expected. At the same time, we drove sequential operating margin improvement throughout the year, expanding 90 basis points from Q1 to Q4. This improvement enabled us to deliver $2.40 in earnings, representing our fifth consecutive year of bottom-line performance outpacing the top line. Regarding our 2025 business highlights on slide six, our strategy is clear. We target five core high-value markets by focusing on complex, high-mix opportunities that suit our strengths. We avoid commoditized markets and aren't pursuing an ODM approach building vanilla solutions. If you look at our business today, you'll see a very evenly balanced portfolio. Each sector represents long-term growth opportunities where we believe we can excel and differentiate. It is this focus that has led us to consistently deliver 10% or better gross margin. We are driving the same discipline in our internal operations as you see in our external go-to-market efforts. The past year demonstrated this with steady sequential progress and operating margin even with sometimes challenging end market conditions. At the same time, we've been successful with our efforts to improve working capital efficiency, driving significant cash cycle improvement throughout the year. Combining this with our growth in net income, we were able to deliver another year of positive free cash flow at the high end of our target range. We did so while continuing to invest in the business. Looking forward, and David will click down on this more in a minute, we were very pleased by the momentum in our bookings over the course of 2025. This came from both new and existing customers and included some meaningful wins in higher growth subsectors for us. Notably space, med tech, and enterprise AI. Our value proposition resonates with customers and we continue to improve our execution, making it easier to capture new business from our installed base while attracting new customers because of the unique value we offer. We are investing proactively in the business given the significant number of new wins. This includes expansion of our global precision technology footprint, specifically adding a fourth building in Penang, which is well-timed for the semi cap recovery cycle that's underway. We are also investing in production equipment in our factories around the world, aligned with the new business we have won. I'm very encouraged by the momentum we're seeing in the business across medical and AC and C. And now the semi space is poised for a strong recovery in 2026 as well. With that, I'd like to turn the call over to Bryan to discuss our fourth quarter and fiscal year 2025 results in more detail as well as provide our first quarter outlook. Bryan, over to you. Bryan Schumaker: Thank you, Jeffrey, and good afternoon, everyone. Please turn to Slide seven. Revenue in the quarter of $704 million was up 7% year over year, and toward the higher end of our prior guidance. Our non-GAAP EPS was $0.71, which exceeded our prior guidance of $0.62 to $0.68. As a reminder, our non-GAAP results exclude stock-based compensation, amortization of intangible assets, restructuring, impairment, and other items as noted in appendix one of this presentation. For Q4, our non-GAAP gross margin was 10.6%, up 50 basis points sequentially and 20 basis points year over year due to volume and mix. Non-GAAP operating margin of 5.5% was up 70 basis points sequentially and 40 basis points year over year, driven by our ability to leverage our cost basis on higher revenue. Our fourth quarter non-GAAP effective tax rate was 25.4%. Please turn to slide eight for the full year 2025 financial results. For the fiscal year, revenue of $2.66 billion was flat compared to the prior year, while non-GAAP EPS was up 5% to $2.40. For the full year, our non-GAAP gross margin was 10.2%, and non-GAAP operating margin of 4.9% was down 20 basis points year over year, primarily due to variable compensation. Our full-year non-GAAP effective tax rate was 24.8%. Please turn to slides nine and ten for our fourth quarter and full-year 2025 revenue performance by sector. Semi cap revenue decreased 8% quarter over quarter and 14% year over year. This was consistent with our expectations of a softer Q4 prior to expected improvements in 2026. For the full year, semi cap revenue grew 2%. Within industrial, although down sequentially, revenue was up 3% year over year. This was in line with our expectations for the quarter. For the full year, industrial revenue was consistent with the prior year. A and D posted another strong performance in the quarter and year, up 7% sequentially and 17% year over year. Full-year revenue growth was also well into the double digits at 19%. Meanwhile, medical continued to improve with fourth-quarter revenue up 14% quarter over quarter and 23% compared to the prior year. The improved second-half performance drove 7% growth on a full-year basis. For our final sector, full-year AC and C revenue was down in 2025, driven by a challenging first half. However, we are pleased with the return to growth in the fourth quarter with revenue up 22% sequentially and 27% year over year. We expect this momentum to continue into Q1 as we ramp previously announced AI-related wins. Please turn to slide 11 for trended non-GAAP financials. Our Q4 revenue continued the sequential improvements that we saw throughout the year, exiting at a little over $700 million, which was up 7% versus Q4 2024. At the same time, fourth-quarter gross margin of 10.6% continued our multi-quarter trend of 10% or greater performance. Coupled with expense management, this translated into sequential improvements in operating margin and EPS performance throughout the year, with fourth-quarter and full-year EPS growing greater than twice the rate of revenue growth. Please refer to slides twelve and thirteen for discussion of our balance sheet, cash flow, and working capital trends. In Q4, we generated $59 million in operating cash flow, and $48 million in free cash flow. For fiscal year 2025, we generated $85 million in free cash flow. As of December 31, we are in a net cash positive position of $111 million. Our cash balance was $322 million, a sequential increase of $36 million. As of December 31, we had $148 million outstanding on our term loan and $65 million outstanding against our revolver, from which we have $481 million available to borrow. We invested approximately $39 million in capital expenditures during the year, including $11 million in Q4. Which will require a step up in capital spending over the next few quarters. Our fourth building in Penang is expected to be completed in Q2 and begin operations in Q3. Demonstrating our ongoing commitment to return, we distributed cash dividends of $24 million and repurchased $27 million in stock during the year. At the end of the quarter, we had $123 million remaining under our existing share repurchase authorization. Our cash conversion cycle in the quarter was sixty-seven days as our working capital focus drove considerable improvements of ten days sequentially and twenty-two days year over year. Inventory days were down six days sequentially as we continued to actively manage our inventory as we grew the top line. This focus translated into inventory turns of 5.2 in the quarter. Before discussing our Q1 guidance, there are two things that I want to highlight. First, during our year-end close process, we identified and corrected immaterial errors in prior periods related to our tax calculation resulting in a cumulative understatement of income tax expense of $8.7 million. The aggregate impact of these corrections was an increase to income tax expense of $2.2 million for the fiscal year ended 12/31/2024, and an increase of income tax expense of $6.5 million two years prior to 2024. Importantly, these corrections resulted in no change to previously reported cash taxes, operating cash flow, revenue, gross and operating margin, or non-GAAP earnings per share. Consistent with GAAP guidance, prior year periods in today's release have been revised accordingly, which will also be reflected in our Form 10-K set to be published the week of February 23. Second, as we look to optimize our footprint, we recorded an $11.1 million noncash impairment on certain assets located at one of our Arizona facilities due to the end of life of a few programs. Any follow-on programs will be consolidated within our other US facilities. Please advance to slide 14. Let me now turn to our guidance for 2026. We expect revenue to be within a range of $655 to $695 million, up 7% year over year at the midpoint. We expect non-GAAP gross margin to be between 10.4% and 10.6%. With those assumptions, we would expect non-GAAP operating margin to be between 4.7% and 4.9%. We anticipate GAAP expenses to include approximately $5.4 million of stock-based compensation and $5.1 to $5.5 million of non-operating expenses including amortization, restructuring, and other charges. Our non-GAAP diluted earnings per share is expected to be in the range of $0.53 to $0.59. Interest and other expenses are expected to be approximately $4.7 million. We are undertaking initiatives aimed at structurally improving our tax rate over the long term. However, for the first quarter and full year, we anticipate that our effective tax rate will be in the range of 26% to 27%. Finally, our weighted average share count is expected to be approximately 36.3 million. With that, I would like to turn the call over to David to discuss market sector performance and outlook. David? David Moezidis: Thank you, Bryan, and hello, everyone. Let's please turn to slide 15 for a discussion of our sector outlook. As Jeffrey mentioned, we saw good revenue momentum in the back half of the year. This was driven by a number of factors. Starting with the new bookings we have secured over the last twelve to twenty-four months, which included a couple of competitive takeaways. We also benefited from improved sell-through aligning with healthier end demand across some of our sectors as channel inventory normalized. Last but not least was our focus on operational execution, which we saw in our successful launches and high marks in customer satisfaction. Let's step through the demand dynamics we're seeing by sector. Starting with semi cap. In 2025, revenue grew low single digits year over year during the semi market's longer than usual cyclical downturn. Additionally, China import restrictions added some pressure this past year. All the while, we continue to secure new wins and focus on expanding capacity, positioning us well for the upturn. On our last call, we pointed to 2026 as likely to be the demand inflection. Since that time, we have seen mounting evidence of it picking up earlier in the year. Within industrial, revenue saw improvement in the second half but was flat for the full year in 2025. This was consistent with expectations we shared with you last quarter, which called for a return to year-over-year growth in the fourth quarter. Performance in the quarter was led by improved demand in transportation, HVAC, automation, and some other minor sectors. Industrial is among the most macro-sensitive sectors we sell into. While at the same time, it represents one of the greatest opportunities for future upside for the company in terms of addressable market. It may take a little more time to fully ramp our efforts here, but with the wins we have already secured, coupled with a steady macro backdrop, we expect gradually improving performance as we progress through the year. Moving to A and D. We had another strong revenue performance for the quarter and full year in 2025. Commercial air remained stable, while defense continued to be strong consistent with the broader demand profile from this subsector. In the near to midterm, total A and D revenue growth is expected to moderate from its double-digit trajectory over the last few years due primarily to program timing within defense. However, I'm extremely pleased with our now multiple quarters of bookings momentum across a broad set of space applications, which bodes well for our future growth prospects as these programs ramp over the coming quarters. Turning to medical. This past summer, we signaled the bottom for this sector's performance based on improving demand and new program ramps. Despite the challenging first half, our back half execution drove solid revenue growth for the full year led by our medical device programs. We expect these same dynamics to hold true in 2026 with double-digit revenue growth expected for the first quarter and full year. Further out, our bookings momentum in 2025 within MedTech has positioned us well to build upon our medical sector performance. Rounding out our sectors, AC and C revenue rebounded sharply in the fourth quarter, driven by very strong performance in computing. We expect this momentum to continue into the first half of the year. We believe strongly in our liquid cooling capabilities and capacity investments. We look forward to bringing these capabilities to bear in both the AI infrastructure and next-generation supercomputer builds to come. Moving to slide 16 before turning over to Q&A. I would sum up the state of our business as follows. I'm even more encouraged today than I was when joining the company over two and a half years ago about our future. Let me tell you why. First, 2025 was a solid year of progress towards our growth objectives. We had a strong year of bookings, which was well balanced across the entire portfolio. And we are particularly encouraged by our growing opportunities in space, MedTech, and while still a little early, AI-related wins. At the same time, end markets in medical and semi cap are improving. While industrial still has some work to do, we think we're positioned for growth later in 2026. Operationally, we implemented a number of initiatives in 2025 that position us to demonstrate increasing operating leverage as revenue scales. Additionally, we see no change to our capital allocation approach. As our priorities continue to work well and remain shareholder-friendly. We will continue to support the dividend, seek to offset annual dilution through share repurchases, and invest in the business to support our growth. Finally, as we look ahead, we're very encouraged by how the year is shaping up. We remain confident in our mid-single-digit growth guidance and we believe that outlook could strengthen further in the coming weeks as we gain additional visibility from our customers. With that, I'd like to thank our customers, employees, and partners for a successful 2025 and I'm looking forward to building upon that in 2026 and beyond. Operator, we can now open the call to Q&A. Operator: Thank you. Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. And should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. And your first question comes from the line of Jim Ricchiuti from Needham and Company. Please go ahead. Jim Ricchiuti: Hi, thank you. Good afternoon. Congrats on the quarter and to you, gents, for your accomplishments at Benchmark over the years. Jeffrey Benck: Yeah. Thanks, Jim. Jim Ricchiuti: So, you know, it sounds if we, you know, from the tone, besides semi cap, you seem to be suggesting increased confidence in a couple of areas of the business. David, I think you highlighted medical, but just in general, are there areas besides semi cap, which I think we know, we've seen some real clear drivers, and I assume you're gonna hear more from your customers over the next couple of months. But what areas of the business in particular has the tone of demand changed versus, say, three months ago? David Moezidis: Hey, Jim. Good speaking with you. I would say, you know, there's really no surprise overall with regards to the performance we're seeing across the entire enterprise. We started signaling to all of you in July that we felt medical has turned a corner. We also talked about AC and C's looking like it's gonna have a strong Q4, and it did. And right now, we see that momentum continuing into the first half. Semi, we signaled in October that it looks like things are gonna pick up. And as we closed out the year and we started the new year, we certainly started seeing that. And, finally, I think industrial has been really very consistent to us. Right? It's just a steady Eddie. Sector that we see it gradually picking up as we work our way throughout the quarter. Jim Ricchiuti: Okay. Wanna just shift gears a little bit. Just talk about margins. I mean you've done a nice job delivering 10% gross margins pretty consistently, you know, even in a somewhat challenging line environment. So I'm just wondering, how we should be thinking about gross margins as the top line begins accelerating? Or do you believe that maybe the greater opportunity is gonna be driving some OpEx leverage? Bryan Schumaker: Yeah. I mean, as we look at the top margin, again, like you said, I mean, 10.6 is what we were able to deliver on the gross margin for Q4. And kind of if you look at our range for Q1 when the revenue is down slightly from Q4, I mean, we're still midpoint of 10.2 on that percentage. So feel good about how we're tracking at that level. But you're right. I mean, if you look at our operating margin and our ability to deliver on that line, I mean, that's where we see our leverage as we continue to accelerate revenue. I mean, we feel we're well positioned and able to utilize kind of our footprint and our actual SG&A. So we feel good about being able to leverage that going out into '26. David Moezidis: Seems to us know, obviously, semi is high-value business for us. So a recovery there helps. But we know, you know, when we talk about scale on the model, it's as much about as much as as we grow revenue, you know, our SG&A does not need to grow at the same rate, which, you know, drops more to the bottom line. Jim Ricchiuti: Got it. Thanks, guys. I'll jump back in the queue. Jeffrey Benck: Thanks, Jim. Take care. Operator: Thank you. And your next question comes from the line of Steven Fox from Fox Advisors. Please go ahead. Steven Fox: Hi. Good afternoon, everyone. First of all, Jeffrey, congratulations for some great accomplishments at Benchmark, especially you weren't always got the best macro cards in the world when you joined. Jeffrey Benck: Oh, that's correct. Steven Fox: In terms of some of the comments, I was wondering if you can expand on a couple of comments on end markets. First of all, you said on the industrial business, there's great upside in the TAM available to you. Can you give us some hints on what you envision sort of how that TAM expanding? And sort of a similar question on space, you mentioned new bookings in space and how that can help growth. And then I had a couple follow-ups. David Moezidis: Yeah. Sure, Steven. It's David. How are you? Steven Fox: David. David Moezidis: So let me talk about industrial first around the TAM. So as you could just appreciate, the industrial segment is an extremely, extremely broad segment with a broad set of customers out there. Globally. And that allows us to really participate in a number of different subsectors. So if you think about the subsectors you could participate in HVAC. You could participate in transportation. Agriculture is an area that we've been successful. Construction is an area that we've been successful. Just to name a few. Right? Building management and so on and so forth. There are a lot of companies out there whether it's kind of those mid-tier type companies, mid-cap players, all the way to the large big cap guys that we're all familiar with that you would think of them as large broader conglomerates. Again, both Western Europe, as well as North America. Shifting gears to space applications, you know, we've talked about this in the prior quarter. And we're excited by the bookings momentum we're seeing in that space. This is gonna contribute nicely to our A and D sector. And you know, we're just starting the early stages of some of the ramps. We expect it to really show itself in 2027. A and D has been really performing well for the last few years, double digits. And this year, we see it moderating but we see it picking right back up given the bookings momentum that we've had in the space applications. Steven Fox: Great. That's very helpful. And then, just a little more perspective I was hoping for on the gross margin. So they expanded from to ten six from, like, ten one in one quarter. And like you said, in the semi cap was not really contributing from a sales growth standpoint. So like, how many basis points was related to just mix versus just typical volume drop down? And is there anything that stood out in terms of what was positive on the mix side to help the margins? Bryan Schumaker: Yeah. There wasn't really anything I would point to on the mix. I mean, it was just kind of just the leverage of some of our plants and just overall mix, I guess, across the board. So I wouldn't point to I mean, you're right. Semi cap was down in the quarter, but I wouldn't count on that all of a sudden. Seeing that growth throughout the year and that margin expanding significantly because it's also gonna depend on AT and T. We've talked to that being at the lower end. So you just gotta balance that as you go throughout the year. But there is a bit of seasonality in Q1 that, you know, depending on where it hits in terms of the demand shift and change that, you know, you may you know, you see it. We don't get quite as much leverage on the top side. Also, if you have sectors that are you know, lower margin overall, you know, that can weigh on it as well. So it's a little bit hard for you to get there, you know, because there's a lot of dynamics at play here. Steven Fox: Understood. That's helpful. And just real quick last one. On the semi cap recovery that we're we could start baking in for internal model, like, I understand, you know, you're seeing it earlier now, but, like, any help on how what kind of slope we should be thinking about at least for now based on what you're hearing from customers? David Moezidis: Yeah. Right now, we're still working through that, Steven. As I shared, we're feeling really good about it picking up. Based on some of the forecast adjustments that we're getting from our customers. So we're going through the process of, you know, what can we pull in into the earlier quarters from the back end and how that's going to look for us. We do plan on getting that clarity in the coming weeks, and we'll be providing that update as we get it. Jeffrey Benck: It is kind of ironic that, you know, Q4 was soft, and we called it soft. Going into it. We kind of felt that some of our customers said '26 is gonna be great. But, you know, we're gonna see some softness at closing the year, and it played out. As we expected. It is great to see that snap back. I think that's a little bit where there's a little caution in. Okay. You know, it's great to see that come back, but, you know, what does this look like as you fill in the year? That's what David's talking about. Steven Fox: Understood. Thank you very much. David Moezidis: Thanks. Operator: Thank you. And your next question comes from the line of Maxwell Michaelis from Lake Street Capital. Please go ahead. Maxwell Michaelis: Hey, guys. Thanks for taking my call. Congrats on the quarter as well. Just want to go back to medical and maybe some of the program. Can you there any way you can go into a little bit more detail around some of the program wins in medical and then maybe if those the momentum continuing into 2026, if those are different style of programs, new wins, Can you just help me understand a little bit more about the programs? David Moezidis: Yeah. Yeah. So, Max, we've been winning in this space kind of two categories. Right? If we think about how we look at medical, there's categories that we're winning in around med devices. And then there's categories we're winning in life sciences. So those are the two areas that we see continued momentum. Now when we start talking about how is that gonna roll into 2027, it is really the momentum of the ramps. We're gonna be ramping, and we're accelerating the production. And we're also seeing demand pickup from our end customers, our current base customers. So when you put those two together, we're gonna have a good FY '26 in medical. And by the time we get towards the second half or later in the year, we should be fully ramped on the bookings that we had in 2025. And that's why I commented that that momentum should continue into 2027. Maxwell Michaelis: Okay. And then also another one you probably help me out with here is when we think about the ramp up in semi, I mean, are customers coming to you already and then sort of the year mid-2026, back 2026 recovery? Is that when you start to see some of these orders actually roll through, or are you guys able to just pretty much scale up as the orders come, I guess? Help me understand sort of the timeline around the ramp up, I guess, with the return of David Moezidis: Yeah, Max. I think the thing the way to think about it is depending on what the orders and what type of pull-ins we get, we could respond to it within one to three months. So certain orders were able to accelerate much quicker. And this is not something that catches us by surprise. We have been working with our customers now since last late summer of last year doing capacity planning, doing simulations, really understanding what it could look like. So in our in the October earnings call, I had signaled that it feels different this time. It feels like it's real, and 2026 is going to be the year that Semi finally comes back. And it took about sixty days for the verbal conversations to become something more meaningful. And now we're sharing that with you that it's becoming more meaningful, and we're gonna be looking at it. We're gonna see how it plays out. And the orders that are being pulled in, we're gonna be working closely with our customers to accelerate those outputs. Maxwell Michaelis: Great. Thanks for taking my questions. David Moezidis: Sure. Thanks. Nice talking to you, Max. Operator: Thank you. And our next question comes from the line of Anja Soderstrom from Sidoti. Please go ahead. Anja Soderstrom: Hi, and thank you for taking my questions and congrats on the nice quarter here. Just in aerospace and defense, you said you saw some slowdown in the defense before it picks up. David Moezidis: Yeah. Hi, Anja. How are you? So, you know, we had really strong run-in A and D for the last few years. Right? Last couple of years, it's been strong double-digit growth. And you get from time to time program timing changes, things end of life, new program awards come to play. And we're seeing that being the case as we are in 2026. That's why we're saying A and D is gonna moderate in 2026. We're not saying it's falling apart or anything negative about it. We're just saying it's gonna ease. It's gonna moderate. We're gonna see it pick back up in 2027. And as I mentioned in my commentary, our commercial air looks good. It's really more around some timing around some of the defense programs. And we're really, really bullish on the possibilities of space. Anja Soderstrom: Okay. And can you remind me your exposure to the commercial air? David Moezidis: So we work with several customers, and in commercial applications where we build products for them, and then they go ahead and integrate it into their products. And then finally, pass that product along to the likes of Airbus or Boeing, etcetera. Anja Soderstrom: Okay. Thank you. And then within the AC and C, you expect that to continue to be strong. What kind of visibility do you have there given the rather large projects you have there? David Moezidis: Yeah. So we actually expect the first half to continue to look strong. As you could appreciate, in the AI space, as our customers win, we see those wins translate into orders for us. So the visibility is good in the first half. And we're gonna continue to work with our customers and we believe that the second half could potentially fill in but we're not in a position right now to start signaling that. These are project-based opportunities, as you mentioned, Anja. And that's why waiting and letting it fill in is really important for us. Anja Soderstrom: Okay. Thank you. And then, in terms of the cash cycle days, you had a pretty nice improvement there. How should we what are you targeting there? How should we think about the 2026? Bryan Schumaker: Now as you mentioned, Anja, and thanks for the question, I mean, you look at the improvement we made in Q4 to '67, on the cash conversion cycle days. I mean, we had significant momentum again in our line. As we look to kind of ramp some of these projects, or programs, I mean, we're limiting kind of that I guess, increase you'll see or sorry. Stability is what we hope to see on that inventory days. Tracking right around that 69. I mean, we're gonna continue to drive that and hopefully get some more momentum. But, we're not counting on a significant amount there. I mean, there's other line items there we're gonna continue to drive, but I think based on the momentum and what we've done over the last year over year with twenty-two days improvement, I mean, again, we'll continue to drive it, but, I mean, don't count on a significant amount. Anja Soderstrom: Okay. Thank you. And then in terms of CapEx, I think you said you expect that to tick up a little bit. What's driving that? And is that expansion in Penang included there? Or have you spent most of that? Bryan Schumaker: No. I mean, if you think of kind of the second half of the year that we're gonna be kind of getting it operation or sorry, the first half and then into three of getting it operational. That's where you'll see some of that tick up associated with that. We also have some of the program wins as you think about, what you've been hearing here that will require some CapEx within our current footprint. So typically, we say the one and a half to 2% of CapEx for the year. This may be two to 2.5% as you think about this year just based on some of the things I've said. And, this is all investment and growth as you think about what we're doing here. David Moezidis: Yeah. It sort of goes in hand with the stronger bookings last year and then also the build-out of the fourth building in our precision technology over in Penang. Anja Soderstrom: Okay. Great. Thank you. That was all for me, and congrats Jeffrey, on the accomplishment at Benchmark. Jeffrey Benck: Yeah. Thank you, Anja. David Moezidis: Thanks, Anja. Operator: Thank you. And there are no further questions at this time. I will now hand the call back to Mr. Jeffrey Benck for any closing remarks. Jeffrey Benck: Thank you, operator. As I transition out of the CEO role at the end of this quarter, this will be my last earnings call with all of you. I just wanted to take a moment to express how incredibly proud I am of what we've achieved together over my seven years leading Benchmark. None of this would have been possible without the dedication of my executive team and the 12,000 plus talented professionals who make Benchmark their home. During my tenure, we accomplished several milestones that set new records for our company in revenue, margins, earnings, and share price. I'm deeply grateful to our investors, the analysts who have covered us, and my board for their unwavering support throughout this journey. At the end of the quarter, I'll be passing the reins to David, whose capable leadership gives me great confidence that Benchmark's momentum will not only continue but accelerate. The future is bright, and I look forward to watching this great company reach even greater heights. Thank you all, and farewell for now. Operator: And this concludes today's call. Thank you for participating. You may all disconnect.
Operator: Good day, ladies and gentlemen. And welcome to The Clorox Company Second Quarter fiscal year 2026 Earnings Release Conference Call. At this time, participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. On your touch tone pad at any time. If anyone should require assistance during the conference, time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference call, Ms. Lisah Burhan, Vice President of Investor Relations for The Clorox Company. Ms. Burhan, you may begin your conference. Lisah Burhan: Thanks, Jen. Joining me today are Chair and CEO, Linda Rendle and CFO, Luc Bellet. The following remarks include forward-looking statements that are based on management's current expectations but may differ from actual results or outcomes. In addition, these remarks refer to certain non-GAAP financial measures. Please refer to today's earnings release which identifies various factors that could affect forward-looking statements and provides information that reconciles non-GAAP financial measures to the most directly comparable GAAP measures. The risk factors section of the company's Form 10-K also includes further discussion of forward-looking statements. With that, I'll turn it over to Linda. Linda Rendle: Good afternoon, everyone, and thanks for joining us. Before we get into your questions, I want to take a moment to frame where we are in our transformation and how we're navigating a highly dynamic environment. We entered the year knowing the first half would be challenging given the volatile macroeconomic environment and the temporary impacts of our ERP implementation. While external pressures added complexity, we delivered results largely in line with our expectations. We're strengthening our foundation by advancing our digital transformation, enhancing execution, driving value from our newly modernized ERP foundation, accelerating innovation that delivers superior value to consumers. And with our planned acquisition of Gojo Industries, we're taking a decisive step to expand our leadership in health and hygiene, and unlock long-term growth opportunities. There's more work to do, but we're optimistic about our future. With that, Luc and I are happy to take your questions. Operator: Thank you, Ms. Rendle. Ladies and gentlemen, if you have a question, please press. And our first question will come from Andrea Teixeira. Andrea Teixeira: Thank you. Good afternoon, everyone. I was hoping to see if you can talk about exit of the quarter and how are you seeing I mean, obviously, you did reaffirm your guidance. How we should be thinking of the competitive environment now and the promotional environment. Thank you. Linda Rendle: Andrea. We saw, as we expected, a sequential improvement in the quarter. Which was good and consistent with what we are expecting in the back half of the year, where expect both the category and our performance to be stronger than they were in the first half. If you look at the category numbers, it was about in line with where Q1 was. If you exclude our beauty business, Q1 was flat from a category perspective. Q2 was down a tenth of a point, so about in line. Our share performance was what it was supposed to be, what we to be, not what we want it to be, but we were down in share. But, again, we saw sequential improvement as we move through the quarter. The competitive environment was largely what we expected it. To be. Competitive activity, again, is back to what we'd say pre-COVID levels are. Are pockets where it continues to be a bit more competitively intense. We've talked about Litter and Glad. Saw some pockets in home care. But nothing outside of what we are used to and able to handle, and we feel we have the right plans to address that. And then as we head into the back half of the year, we continue to category growth to be in the 0% to 1% range. We expect to have stronger share performance based on our plans. We have excellent innovation plans in the back half, strong demand plans. And we're beginning to see the fruits of that. If you look at consumption in January, there was certainly a pickup of it due in the in the January. To weather, but we are growing share in the last week. And so that's we're we're seeing the investments that we're putting in place working. I think you know, as you take a step back on the consumer, the only other thing I would note, consumer is largely what we expected it to be. We're seeing consumers continue to focus on value. We're seeing them trade up to larger sizes, down to smaller sizes. We've seen trips increase. In in the broad market basket. In our categories, we're seeing more stock up behavior, which pretty normal in our categories. And then, of course, we see consumers moving to more value-oriented channels. But I would say the consumer was largely steady as we had expected and in line with category growth. Andrea Teixeira: And if you can comment on some of your peers, Linda, that's helpful. But some of your peers had said that you know, they've seen the exit rate improving a bit. You might not be seeing that specifically because of, you know, the puts and takes on the on the ERP transition, but I understand that you've done you're mostly done in January from your prepared remarks. Just to think about how this trajectory and to think about the the third quarter of fiscal. Linda Rendle: I wanna make sure, Andrea, that I'm getting your points. I'll return to the point I made at the beginning on Q2. We did see sequential improvement in Q2. So the extra rate was stronger coming out of the quarter than it was going in. We've seen that continue into January. And, again, some of that in the end of the of the month, I think, is due to weather. But we saw our share results pick up in that as well, so feel good about our plans to address that. But I would say, you know, our expectation on the category based on that is still what it was before. It remains between zero and one. We don't see anything to indicate a trajectory change. We think it's well within that band. And, again, Q1 and Q2, were about the same category growth rate, about flat. And we expect to see zero to one in the back half. Andrea Teixeira: Great. Appreciate that. Thank you very much. Operator: Thanks. And our next question will come from Peter Grom with UBS. Peter Grom: Great. Thanks, everyone. Hope you're doing well. So maybe one housekeeping and then and one real question. So you you alluded to some shipment favorability in the quarter that I that I think is expected to come out of the third quarter. So can you maybe help frame the magnitude of the upside or maybe what we should be expecting to reverse. And then, Linda, as we think about the back half of the year and and and you kinda just spoke to this Andreas question, and I get it's only a week, but you talked about share gains in in in the most recent week. So can you just talk about your confidence that can continue? And then specifically, can you speak to when we should start to see the benefits from all the innovation that you outlined in the prepared remarks start to show through? Thanks. Luc Bellet: Hi, Peter. This is Luc. I can take your first question. Yeah. We we ended up, I think, about a point of favorability due to you know, higher than expected shipments ahead of consumption on a few different businesses. And we'll expect that it will reverse in the third quarter. Now, there are a few drivers, but I would say the main one was some higher shipments related to the final phase of our ERP implementations. And just for context, if you remember, we went live with the new ERP in July. And that was for most of operation, including audit cash, demand fulfillment, and logistics. But for manufacturing, given the large numbers of facilities, we had, we took a phased approach. And so we essentially transitioned manufacturing facilities into three phases. The first one was in July. The second one is in October, and the last one was in January. And so we had little bit higher retailer inventory prebuild as a result of that last phase. To be clear, we had expected some level of prebuild, It just ended up being higher than expected. So the good news is at least the last phase went very smoothly, and this is, you know, great to have this behind us. So that's really just quarterly noise and has no implication on the full year. Linda Rendle: I'll take your second part of your question, Peter. For our back half, it is heavily weighted towards launching innovation across all of our major brands, and we're pretty excited about the innovation we have slated. And as we talked about, I think, last year at CAGNY and have spoken about on our call since, we're excited about this back half because it introduces some new platform. As well as builds on existing and very successful platforms we've had in the company a good mix of both. Like the spending that we have, addresses what we need to to ensure we're driving trial. And to continue to expand on the platforms we have. How they'll build throughout the quarter, I think it's important to note We've begun shipping many of these innovations already But most shelf resets won't occur until the '3 or early Q4, so that's when we would expect to see a significant ramp up from innovation. And certainly, that will impact share at that time. But maybe I'll talk about a few of the innovations, you know, how we're thinking about the investments and then any I'll I'll talk about some of the early indications we've had on success and what we're looking for. I think many of you have seen we've launched a new platform in our cleaning business. Which deals with one of the most troubling things that consumers have, which is allergies. And they fight these things constantly through different avenues. They take medication. They clean more. Etcetera. But this is a proprietary technology that actually destroys the allergen, and we saw great consumer results when we did testing. That began shipping. It's very, very early, but far, we have good consumer reviews. And most importantly, we have very strong plans with retailers. They're very excited about a new platform and a new launch in this space. And, again, we would expect that to ramp up over the back Half of Q3 and early in Q4. And then from an investment perspective, we have double our typical launch size investment plan behind marketing, behind demand creation, etcetera. So feeling very excited about that. And this is one that we're launching, of course, not just to have you know, a launch in our back half of the year, but to be a platform that we can build on for many years to come. And in fact, we're already selling the second and third wave of this platform out with retailers. Taking through a few of the others, we're expanding on our Glad four flex program and adding a new technology with Leakguard in the bag. So a frustration for consumers is if a tear happens in the bag, they end up having liquids leak out. And the bottom of our bag now has an absorbent layer that absorbs that liquid and prevents leaks. And this will be in our premium line of trash bags. We're excited to continuing to offer consumers additional value in the trash segment. And particularly, again, focused on ensuring that we are innovating and giving people better experiences And this is a way that, hopefully, we can temper a little bit of the promotional activity that we've seen out there. Litter, we are fully relaunching our litter business beginning in the back half of this fiscal year and actually have a multiple year plan in place. But this first this first portion of our Litterbee launch will include new packaging, new graphics and claims, some updated items, and we're feeling good on what we've seen in early results. Some customers have have started that implementation, and early results are encouraging. That category continues to be competitive, but we feel like we have the right plan for the next six months and the next couple of years. To begin to win some of that share back that we've lost as a result of both cyber and our ERP implementation. And then, you know, other businesses, I I would call out Hidden Valley as another where price pack architecture will play a big role in the back half of the year. We think consumers trading up to larger and smaller sizes. So we're addressing that in the back half. As well as a new avocado ranch, which addresses people who are looking for nonseed oil dressings and and food items. The list goes on and on. But, Peter, I think, you know, the main takeaway here is to plans are very strong. They ramp up throughout the year. We would expect that this is a major lever for us to improve our share results. And, of course, our our sales results. We have know, investment buying all of them. We're ready to lean in if any of them start to take off. And we have the ability to do that given our strong margin position and the fact that we rebuilt that fully. But feeling terrific and excited, and we'll speak more to you about specific items when we talk to you later at CAGNY. Peter Grom: Great. Thank you so much. I'll leave it there. Operator: And we'll move next to Filippo Falorni with Citi. Filippo Falorni: Hi, good afternoon everyone. I have a follow-up on the question on pricing and promotional environment. In in Q3 in Q2, there your pricing was flattish for the total company, but had negative pricing in household. Think, Linda, you mentioned that you're expecting still a competitive environment. So should we think how should we think about pricing in the second half of the year? Do we still see a flattish for the total company, or could could it be some more price intervention? And then on gross margin, can you help us understand the puts and takes in the back half of the year? I think in this quarter, you called out higher than anticipated supply chain cost. Do we expect those to to stay elevated in the back half? And and what are the puts and takes in terms of cost saving, pricing, and commodities? Thank you. Luc Bellet: Sure. What I can do hi, Filippo. This is Luc. Let me just answer you question on gross margin and then just talk a little bit of how do we think about pricemix within the context of the outlook. And then I'll just pass it on for Linda to provide a little more perspective. On which it is externally. So on the gross you know, if you if you step back, or after excluding the the temporary impact of the peak, expanding look at that gross margin would be in the back half, and it's been contracting in the front half. And so there's a few differences when you compare the back half to the front half. Inflation is actually fairly consistent. Across quarters, so that's not really where we see some differences. But there's about, you know, three that are worth going out. First, generally, a projected cost savings run rate is a little higher in the back half than in the full time. Second, as you alluded to, we incurred incremental expenses in the front half as we stabilized and optimized service level following the RP transition. And as you can imagine, we had a lot of different type of expenses, especially on logistics that came up that. But this will start coming down in the back half and then, you know, will fully go away by, you know, by the fourth quarter. And then finally, we also expect the benefit of step up of the Glad JV termination as we talk know, to you in the past that creates about a 50 basis points of benefit. In the back half that is not in the front half. So those are the main differences. From a phasing standpoint in the back half, we expect the third quarter to be about flat. And we expect solid expansion in the fourth quarter. The main thing here to consider is that there's some timing of manufacturing expenses and cost savings. Between the two quarters. Which, you know, is bringing Q3 down and, you know, Q4 up. And we also still have some of those few incremental expenses we just talked about in the third quarter, and they kind of go away in the fourth quarter. So that's from a phasing standpoint. And so a little bit of noise by quarter, but overall, feel confident, you know, back half and full year outlook on gross margin. Now regarding maybe just a comment on price mix. As you look at full year outlook, our assumption is the same as the prior outlook, which is we expect pricemix to be a little bit of headwind you know, call it about a percent or so for the full year. So volume would grow slightly ahead of organic sense Now this might vary a bit by quarter. Right? This you know, in the second quarter, we were about flat and, you know, some other quarter might be a little worse than that. But, yeah, I think the about a point is is we still still that this is the right number for the full year. There's a few drivers here. The main one is really the continued headwind from consumer value seeking behaviors and continued channel shifting. And that's partially offset by the net revenue management initiatives that we put in place. Linda Rendle: And, Filippo, I'll just talk a bit about what we're continuing to see from competition and then your question on household and and what we're seeing out there. Largely consistent with this. We've seen elevated promotion levels this year versus last year as we but those are in line with historical category rates. And we've called out, and this particularly impacts household, that the cat litter and the trash bag categories are two where we're seeing higher promotional levels. And we're seeing that both in our Glad, Fresh Step, and Scoop Away business. I would say Kingsford is a minimal impact given that this is small quarter for Kingsford. And so we're seeing little impact there. The other thing I would call out is that we continue to see consumers trade to larger sizes in our trash bag business, and that certainly impacted Glad. This quarter as people change channels, but are also just looking to stock up and get a better price per unit. But overall, I would say both of those were generally in line with what we expected for the quarter. And we're watching them very closely. And we're, you know, disciplined about how we react when we see promotion. We're trying to do promotion that is strategic. And focused, and we're seeing the benefits of that play out in Glad. As you saw sequential improvement in that business throughout the quarter. Filippo Falorni: Great. That's helpful. Thank you. Operator: And our next will come from Javier Escalante with Evercore ISI. Javier Escalante: Hello. Good morning, good afternoon, everyone. I have a a clarification and a question, actually, a double click. The clarification is with the ERP already done, so why I would still going to see investment in digital capabilities. Or this is gonna wrap up this quarter? And if they are gonna continue, if you can explain us what is it that you are spending on that is not related to the ERP. But it still need to be separated out from, results So that's the clarification. And number two is double clicking on the household. So it is rare in Staples when you have negative volume and negative pricing at the same time. So is this because a scoop away is is driving most of the growth, and this is what solves for negative pricing. Or you are taking prices down, say, or promoting Glad and the other brands, And these they are the volume is still negative. So if you can explain that, that would be great. Thank you. Luc Bellet: Yes. Hi, Javier. How Good afternoon. Good afternoon. Yes. Sorry. Me take your question on your feet. Yes. We we're wrapping up the fundamental investments, around the digital transformation, which is really about fundamentally upgrading the digital infrastructure of the company, which included ERP and the cost suite of technologies. I think there's about 8¢ of adjustment in the third quarter and, you know, and and we'll be done on the adjustment associated with the the digit the five year digital investment road map. Now keep in mind, we've been steadily increasing our investment in technology, over the past few years, and that's in the p and l. Right? And just as we take advantage of our technology and as actually as we take advantage of the new digital infrastructure that we put in place. We expect that this will continue. This is, you know, this is generally tend to be offset by a lot of productivity savings from automations as well as from effectiveness gain. So but as far as the the onetime investment, you know, Q3 would be the last quarter we see an adjustment. Then on household, I think, you know, just at a high level, there's two things, you know, going on. One, you know, there was some loss in consumption and market share that was really volume driven. And there was also some shift to larger size, especially in back end wraps. As well as some channel shifting that are creating a headwind on on the price mix. As I mentioned, you know, we especially, it depends my business, the timing, but, you know, every business has pretty robust net revenue management plan to try to offset this. I think when you look at the total portfolio, the full year, I think we're able to do this fairly effectively. Javier Escalante: And in the promotional spending, particularly in catheter, what Surcana data shows, and I don't know whether this is reflective of reality or not, but what Sucana data suggests is that it's you that is promoting. It's not competitors. Is that the case that is is is reflective of what is the negative price mix that you have in the P and L? Thank you. Linda Rendle: Javier, what we see is the overall category merchandising is certainly higher. We see that for competitors. And it is true that we have higher promotional levels as well. And we did that in intentionally as we're building back some share. You're also seeing a significant amount of promotions scoop away from Costco, which can create noise because that's a large promotion and can significantly impact the results. And those events given a lot of people are moving to Costco, have become much more sizable. Over the last twelve months. So I think that's the combination of the two things that you're seeing. Scoop Away having a disproportionate impact on the amount of merchandising that you see for us us in Surcana, but we are seeing overall competitors raising their level of promotion as well. Which is just making an overall competitive category. Nothing different than what we had expected. But those are the two main factors that we see playing in the category. Javier Escalante: Thank you very much. Operator: Thanks, Javier. And our next question comes from Bonnie Herzog with Goldman Sachs. Bonnie Herzog: Alright. Thank you. Hi, everyone. I actually wanted to stick on household, if I may, and I just maybe asked a little differently. Organic sales, you know, remain quite pressured, you know, just up promotions behind trash and litter as you, you know, you highlighted. But you know, if I look at it that way, then I see the pressures are also I assume, negatively impacting your margins in the quarter in addition to the higher manufacturing, logistics costs you called out. When you look at the margins in the quarter, they were EBIT margins that says they were only 5.3%. So I guess, could you talk about your strategy behind trash and litter and know, how much further you're willing to promote to try and improve share? I guess, essentially, how are you balancing a return to growth with profitability? Thanks. Linda Rendle: Hi, Bonnie. Yeah. You know, we've been talking about the trash bag and litter category for a little bit time now. And certainly, both of those were impacted impacted, you know, as we talked about coming out of fiber and then certainly a change in competitive activity that we've seen, particularly in the trash bag segment. You know, we have returned to what we believe the best way to return a category to growth is, which is doubling down on our innovation plans, and we worked hard over the last eighteen months to refresh our innovation plans on both Glad and Litter, and you're going to see those come to fruition in the back half of this year. As I mentioned, we have a full relaunch of our litter business. That includes price tag architecture work, some upgrades in formulas, packaging, etcetera. And then we feel like we have a great robust innovation plan the remaining, you know, two to three years coming after that. Which really gets back to growing the category the way that we like to do and want to do, which is investing in better consumer experiences that deliver superior value. And trash, much the same. You know, we have great innovation in the back half. We have been doing some price promotion, and we've been disciplined about trying to do that because we wanna make sure that we're doing it in a way that doesn't destroy value in the category. We know people don't use more trash bags just because they are a lower price per bag. They want benefits in a trash bag that helps make their life easier at home. They don't want it to leak. They don't want it to smell. They don't want it to tear as we continue to invest in that. And that's exactly the balance Ani, you spoke about. We wanna make sure that we are balancing market share and consumption data and profitability with growing the category in a way that we think is sustainable and and what we're happy to see is our back half plan really leans into that. But we haven't been afraid to to increase some price promotion in the short term to deal with the headwinds that we've been experiencing. I think over the long term, we remain confident that we can grow these categories through good innovation work, strong demand, spending and building, continuing to drive efficiencies in that spend. And and, of course, making sure that we are doing all the great margin work that we've done for the last few years in the company and for, frankly, decades before that. To continue to fund that. And we have strong programs in both our GLAAD and our cat litter businesses internally. So overall, you know, I don't think anything changed strategically. These categories are competitive. But we do well in competitive categories. I can't say that we would say our last twelve months have been our best performance in these categories, but we feel like we have the right plans moving forward to address that. And have taken the right short term steps to ensure that we we get that balance right. Bonnie Herzog: Alright. Thank you for that color. I'll pass it on. Operator: Thanks, Bonnie. And we'll move next to Anna Lizzul with Bank of America. Anna Lizzul: Hi, good afternoon. Thank you so much for the question. Linda, I was wondering if you could comment on where you are now post the quarter versus the category growth rate in light of the improvement that you're seeing in consumption trends? And then where do you think category growth would have to be to get back to meet your longer term algorithm with your Ignite Strategy of 3% to 5% net sales growth? Thanks. Linda Rendle: Hi, Anna. Yeah. So if you we'll walk through q and q '2 again and then just what we expect in the back half and then, you know, bridge to what we expect over the longer term. So in q '1 and q '2, we saw our categories about flat so in line with what we had expected. We recall, we had expected about flat to up one. January, I would just advise, if you look at any actually, any time period beyond January, there's a lot of noise in the data. So I would not look at a one week or even four, five week category number and project from that. For example, January has significant weather related events, and that will have many impacts. One, consumer stocked up. But two, you can have, you know, challenges dealing with weather in retailer inventory, etcetera, and none of that has played out yet. So we'll see what those impacts are. And then, of course, we'd assume consumers will use that household inventory and may not might extend their purchase cycle on how much they did stock up. In advance of that. So I would warn not to look at the last two weeks as a significant change in the category trajectory, but but simply, I think, some shifting in timing given what's going on with weather. That being said, we still expect the consumer to remain under pressure. And that means we expect categories to be flat to up one in the back half of the year. We certainly hope hope we could get to the top end of that range given the plans that we have. But we'll see how that plays out and, you know, what the consumer decides to do. We just feel like we have the right plans to both support category growth and share growth within those categories. Whether that be innovation, the base distribution that we're working on with retailers, our demand spending and plans, which is very strong, we feel like we're doing everything we can to continue to support getting back to category growth. That is in line with what we've experienced in the past. And that leads me to our ignite strategy algorithm. We assume for us to get to that three to 5% range that categories have to return to what they were historically, and that's typically been about 2% to 2.5%. And then we're able to add a point of incremental growth from our pro and international business. And that gets you well within our ignite range. And, of course, we talked about the acquisition that we made of Gojo, and we would believe we believe that will be accretive to growth as well. And supportive of us getting to the growth algorithm that Ignite contemplated in the three to 5% range. We don't see that yet, obviously, this year in our categories. We're hoping now as as we continue to invest and others continue to invest in the consumer and in innovation that we'll start to see that build over time. Anna Lizzul: Great. Very helpful. Thanks so much. Operator: Thanks, Anna. And we'll move next to Kevin Grundy with BNP Paribas. Kevin Grundy: Hey. Good afternoon, everyone. Kevin. I'd like to ask you both a question on on price investment. It's topical today with the PepsiCo news, and obviously, you don't compete in their categories. But what is relevant is is the consumer under pressure the k shaped economy, etcetera, etcetera? So Pepsi is making substantial price investments, embarking on a lot of product to do it. Your categories have been weak for a while. You're not alone. Linda and Luc, of course. But, you know, we've been talking about this for a while. You be willing to take price investments off the table for your categories? Particularly where volumes have been weak for a while, whether whether this is bags or whether this is bleach. Etcetera. Because you talked about innovation, Linda. We would all collect collectively agree that's exactly how how you want to win, but but maybe it's not an either or. Maybe it's a both and like we're seeing at PepsiCo, given the unprecedented level of innovate of excuse me, of inflation that we haven't seen in four decades, a consumer that's still under pressure. Would you take that off the table? Linda Rendle: Thanks for the question, Kevin. Maybe just start with what we're seeing from the consumer, which I think is largely consistent with what you just outlined and what we've seen from some competitors as they've spoken out or people who aren't even competing in our categories. We're definitely continuing to see bifurcation of consumers. We continue to see all consumer groups under pressure, but I would note that we have seen from low income consumers some additional pressure and and making sure that we have the right value for those consumers is absolutely top of mind And that is what we're doing in the capability that we've built on RGM. To ensure that we have the right right part price pack architecture. So getting them supported with smaller sizes for consumers who only have a little bit of cash outlay, larger sizes, etcetera. And the purpose of that program is to deal with just that. And it it's more important than ever that we have that capability, and we're beginning to ramp that up. And we've had some success in a number of businesses, but we need to, frankly, expand it faster across our portfolio. That being said on on price investment, we have made some, and I think that's what you seen in some of the promotional activity that we've that we've done. We have made selective price investments in places where we're seeing the consumer be under more pressure. Certainly, trash bags is one of them. We've seen a bit more in home care, and we can to do that in a disciplined manner. But our team's looking at this all the time, and we're committed to making sure that our price gaps are where they need to be. And we do not wanna get in a place where we're losing significant household penetration with consumers or share because our price is out of whack. So you can hear my commitment to if we need to make a price reduction that is strategic, we'll do it. And the good news is we a holistic margin management capability be able to fund that if we need to do it. So again, we have made some of those investments over the last twelve months as we've noticed for you know, out of whack on a certain size or a certain price point. Be something that we'll watch very closely. The other thing I would note is in our categories, we have not seen significant trade down to private label. The last quarter, private label was up a tenth of a share point. And we didn't see any material change. Consumers still want brands. And we just need to figure out the work right way to make sure we're giving them the right price, the right pack, at the right moment, at the right retailer And I feel like our back half plans better contemplate that. But, again, Kevin, I'm not taking it off the table, but we'll do it in a disciplined way. And now with our RGM capabilities, we have even more ability to do that at scale. Kevin Grundy: K. Thank you very much. I'll pass it on. Operator: And we'll move next to Olivia Tong with Raymond James. Olivia Tong: Great. Thanks. The promotional environment has obviously been heightened for some time and doesn't seem to be abating. And as more sales go to club and e comm and larger packs sizes, can you talk about what initiatives you have or are putting in place sort of longer term to help offset know, what could I assume, be multi multiyear headwinds. And then can you also talk about what inventory levels look at look like at retail outside of club and e com post CRP? Is there any risk that as activity continues to shift outside of these channels that you run into the risk of having to deal with destocking in the next twelve months more so than your peers? Linda Rendle: Thank you. I'll take both of those, Olivia. So on the large sizes, this has been a trend on our business for quite a while. You know, we've seen consumer move to value channels, including club, but they've also been moving to dollar, and that has the opposite effect where they tend to buy smaller sizes. And we've been able to manage this for many years and would expect we'd be able to do that moving forward. And it's a little bit about to to the question that Kevin had. The RGM capabilities that we are building are going to enable us to do this faster and at scale and with more data. We did a lot of work in our ERP implementation to harmonize our data across the company, and that's giving us more real time insights that allow us to design exactly the right pack for the consumer, for the right retailer, and also at the same time, remove costs. Where we can. So we feel like we have a, you know, capability for a long time, but adding RGM gives us additional capability to address this. I think the good news is you know, you wanna be wherever wherever a consumer is. If they're in club, we wanna be there. If they're at in .com, we wanna be there. If they're buying at a small grocery store, we wanna ensure that we're there with the right price and pack. And we've been able to do that for many years and and been able to absorb and frankly fund it through our margin work. I think the one thing you should note, though, and I think that it's important for our portfolio is the the point I made on dollar and smaller sizes. There is a corresponding downward pressure on sizing as well, and that will offset some of the trade up that we're seeing to larger sizes. And that is why you're seeing, I think, the price mix that you're seeing right now for the company that some of those things are offsetting each other. And I would expect that to continue given the strength of the dollar channel and and consumers having a lot of pocket expenditures. And I think that will keep that in a reasonable range for the next couple of years, and we're well positioned as consumers continue to move to different retailers to address that as well. And then on inventory levels, and destocking, we're you know, largely, if you look across our inventory levels are where we would expect them to be in retail. There's always puts or takes here and there, but we wouldn't call out anything material that that we see at this moment that would impact our a potential destocking for us versus anyone else. Olivia Tong: Great. Thank you. Operator: Thanks, Olivia. And we'll move next to Kaumil Gajrawala with Jefferies. Kaumil Gajrawala: Hey, everyone. On ERP, it looks like, you know, the last of the big phases is complete. Can you maybe just talk about what you should be able to do now, what you see, maybe some cadence of benefits that flow through, whether they're things that are driving top line or things that are driving savings. And maybe, I think, Luc, you mentioned some of it will be automation and such. And so should there be a a different goal or a new goal on where gross margins can go now that, you know, a lot of that hard work is behind you? Luc Bellet: Hi, Kaumil. Yes. Thank you. So you're right. Like, we've you know, as I just mentioned, we're we'd be finishing the implementation And at the end of our, you know, large digital transformation investment at the '3. And by the way, the I think we have about 4¢ on EPS. I think I mentioned about But, you know, really, right now, the remainder of the year, 8¢ of adjustment in Q3. on the LP is really gonna be about stabilizing. Right? You heard us. We have been spending the last, you know, quarter or two just stabilizing and optimizing service level. We expect incremental cost of doing so to just, you know, go away by the, you know, fourth quarter. And, you know, once we're done optimizing, then we can start the optimization phase. And, really, what happened now that we have a new both data and technology infrastructure, you essentially have to re redesign the process as well as change, you know, like, the the talents and, you know, and the the different type of work that is being done around those processes. And, you know, sometimes that can happen. The redesign can actually just happen fairly, you know, in in a matter of months, and sometimes it can take a little longer. Now a lot of the benefits of optimizations will be on the supply chain. Whether it's on the manufacturing or logistics, both in the p and l and on the balance sheet. And, of course, we will also start seeing some benefit of automation in our admin. So we'll see some benefit of, of course, margin. Well as EBIT margin. And on that mean, I think we mentioned that in the past, now that we have a global data infrastructure, we're able to actually accelerate our adoption of global business services, which will create further efficiencies on the admin side. Now we do see all of those as, you know, just more, you know, inputs and initiatives to feed our pipeline of cost savings over the next few years and then just you know, contributing to our goal of expanding 25 to 50 basis points. Our goal is always been to, you know, expand EBIT margin, but, of course, we would wanna expand gross margin generally in line with that. Because gross margin is really what creates the fuel for us to reinvest in our business. Kaumil Gajrawala: Got it. Thank you. Operator: And our next question will come from Lauren Lieberman with Barclays. Lauren Lieberman: Great. Thanks. Hi, everyone. So in the reiterated guidance, you guys mentioned advertising still targeting at 11% of sales for the year. So first half came in at 11 and a half. So I think the implication is second half dollars are gonna be down, maybe, like, mid singles. So just given how much innovation you have coming, I was just curious about the timing of that. You know, if my math basically is right, but also if it is, why it would make sense to have your spending down year over year in the back half? Thanks. Luc Bellet: Yes. Lauren, so, yeah, there's a little bit of rounding. So I've just make sure not to, you know, drive to, you know, too much conclusion on the back half level. Having said that, you know, keep in mind that advertising investment are generally not something that's planned top down, but there's really planned at the SBU level, the b industry. And they're really great integrated demonstration plan, financing the investment across advertising and trade promotion. So with a clear objective, of, you know, supporting both the innovation and reinforce superiority. So, Matt, I think there's a little bit of, you know, shift but when when we look at the level of investment behind the innovations, we still know, we feel that the adequate and and quite strong. Lauren Lieberman: Okay. So does that mean that more of, I guess, in trade promotion to drive trial? On some of this innovation? Luc Bellet: Yeah. I think it's both. Yeah. That's right. Lauren Lieberman: Okay. Okay. And then I did one follow-up question on Litter. Just in the discussion of the relaunch, what you mentioned in I can't recall, the release, the prepared remarks. Discussion about innovation, there's packaging, but also some mentions on value and competitiveness, which did suggest potentially some price changes. And I just in keeping with Kevin's question, just curious on litter specifically. If there's sort of a reset on price pack architecture and pricing with this relaunch. Thanks. Linda Rendle: Yes, you read that right, Lauren. We are including price pack architecture work in the relaunch. We looked at our sizing lineup for litter, and we are making some adjustments to address changes in consumer trends, etcetera. So you will see that play through. And that will support also the innovation that we have and in making sure that consumers understand understand the tiering that we have in our litter business, you know, what value Fresh Step offers versus Scoop Away, etcetera, and, of course, versus competitors. You will absolutely see a a price pack architecture component of the back half litter plan. In addition to the other things listed. Lauren Lieberman: Okay. Great. Thank you so much. Operator: Thanks, Lauren. Our next question comes from Edward Lewis with Rothschild. Edward Lewis: Yes. Thanks very much. Hi, Linda. Interesting to hear you talk about the price investments. And I just wondered if you look at the other side of the coin, when you consider the innovation plans. Specifically, are you able to pitch these new products the kind of historic premium where we'd expect or does the current environment give you pause when you consider potential pricing levels? Linda Rendle: Hi, Ed. You know, we we do a lot of work when we are testing innovation to say what the right value mix is. So what are the benefits that we're offering that are incremental to what's offered today in any given category? You know, how differentiated are those? How strong does the brand play there? And then what price makes sense given that benefit brand mix for the consumer. And what we're finding is that it continues to be price premium and that consumers are willing to do that. For a superior product and a superior experience. So you're seeing many of our innovations launch with a price premium and we're seeing many of our price premium categories doing very well. So I'll give you a few examples. If you look at our home care business, where we we play in the full spectrum, so we understand this really well. We play in the most value oriented segments. Things like floss with the bleach. Or a dilutables business with pine fall, all the way up to much more expensive price per use like a wipe. Or even a Clorox toilet wand, which is a significant premium versus other things. And those are growing well. Know, wipes and our toilet business are tending to lead the category growth. Consumers are willing to pay for that time and ease convenience. That is a good trade off for them to make. And we see the same with pure allergen, for example. Allergy sufferers don't have great solutions today, and they're willing to pay that premium versus what they do today. In order to get that set of benefits. Think, though, correspondingly, Ed, and I think it's to the the questions that, you know, Kevin and Anna and others had. We are seeing consumers who, you know, really need to get the lowest price per use that they can, but they still want the branded player. So we also need to appeal to them. And we're doing everything we can to make sure we remove anything from our products that's not offering that value. Invest those back in the brands, get the price and sizing, right, and that matters to those consumers deeply. So I think the answer is no. We just can't lean on price premium innovation. It's It's an important component, and we see it working across all income groups. Also must get the value equation right on our core business. We're laser focused on that and have better tools than we ever have to do it. And I think both of those are the answer to growing categories and growing share. Edward Lewis: Thank you. Operator: Thanks, Ed. And we do have one further question. Yes, our next question will come from Robert Moskow with TD Cowen. Robert Moskow: Thanks for the question. I was wondering, Linda, I don't know if anyone asked this on the call about Purell, but you know, you have a lot of categories that you're trying to juggle all at once. And you know, several of them are having some some pretty significant weaknesses. And now you're adding the hand sanitizer category on top of it. What's the risk of of getting distracted as you're trying to execute on you know, on the core business. To what extent will the Purell business kind of kinda run itself, so to speak, for a few months before it's fully integrated? Thanks. Linda Rendle: Hi, Robert. Really, when we sit back and think about Purell, this is leaning into a place where we've had very strong performance in the company for many years. If you look at our health and wellness segment, at International, where a lot of our health and hygiene business resides, our pro business, those businesses have continued to perform you know, year after year, and we feel we're adding just another business with very strong tailwinds from a category perspective. Lots of upside in both b to b and retail. And, really, that combination will make the current plans that we have that we feel very are very strong and performing well even better. So we have strong confidence in our ability to do that. And I would also call out you know, they have a very strong management team, a very talented team, advanced operations. And so we feel like that was another way we could have confidence in integration that we would be able to do this seamlessly. And, of course, we are integrating in a very disciplined way to make sure that we're focused on the places where we can add value and, you know, not integrating in places where does not add value. Feel very good about that. That being said too, we are laser focused on improving the performance in the categories that are softer right now or we where we've had strong share performance. And we feel like we have made a turning point in our plans We feel you'll see that reflected in the back half plans through innovation and improved share results. And that we have our arms around those. And as you know, we've we've been a company of managing many categories and brands for a number of years. And the way that our operating model is built is built to do just that. Know, we have dedicated teams that run our businesses, so nobody who's gonna be working on the Purell integration has anything to do with cloud. Glad the Glad team will be laser focused on continuing to improve performance. As well all the other businesses and their individual business unit team. So I would just reiterate, I think, you know, this is such a strong strategic fit financial fit for the company. Adds to a very strong set of businesses that have been performing for many years We've had a four percent ten year CAGR of growth. If you look at our health and wellness business, And I have every confidence that we can integrate success and continue to double down in a place where we've delivered year after year. Robert Moskow: Okay. Thank you. Operator: Thanks, Robert. And our next question will come from Chris Carey with Wells Fargo. Chris Carey: Hey, everyone. Thank you so much for the question. Hey, Chris. The I I just I wanted to ask more logistically about the components of fiscal twenty seven. Is still correct to think about you know, taking the impact from the ERP shift this year And then adding that back effectively and in fiscal twenty seven and then assuming some underlying growth. So that that's that's number one. And then secondly, I asked this in in the in the context of if if market shares are perhaps a bit softer than expected for for longer, I realize you got some innovation coming in the second half, comps get easier, and these sorts of things. How would you think about using some of this incremental ERP, you know, get back, and investing some of that back if if if these objectives that you have for the back half maybe don't come to fruition. So really just asking about the logistics of the model and how much flexibility you think you may have to to lean in if if you if you so desire. Luc Bellet: Hey, Chris. I guess on the, know, on the RP, you're absolutely correct. Right? As you remember, we essentially shifted some sales that should have been in fiscal year twenty six to fiscal year twenty five. And so, essentially, the current shipment and sales in fiscal year twenty six are understated really relative to the underlying consumption. At the retailers. Right? And so next year, when you have, you know, normalized you know, shipment and sales, you would have a pickup. Of, you know, about three and a half point on sales and a pickup about 90¢ in in EPS. Now I would say gonna happen no matter what. And, you know, we're not seeing this as, you know, something that we we make any investment decisions. On the spend level, on our brand based on strategy and return on investment. And that's, you know, that is totally independent of the financial impact of the ERP next year. Linda Rendle: Chris, I'll just add to that. You know, maybe just taking a a step back and I think it's getting to the point that many people are asking today just on investment levels and how we're feeling at etcetera. And and you just how we think about this philosophically. We are certainly in a time and we've seen this before in different contexts, in recessions, etcetera, where the consumer is under more strain. That being said, they've been fairly resilient. You know, our categories love to see them in the two to two and a half percent growth range that we're accustomed to. They've been below that, about flat the last two quarters, but we think between zero and one. So actually fairly resilient given what what's happening. Certainly very noisy and volatile, so lots of puts and takes across weather and government shutdowns and SNAP benefits and looking at that noise, we wanna make sure that we're we're not reacting to noise, but we're reacting to what's really going on with the consumer and what's going on in our category. We believe the right and the best way to grow categories for long term value is to give people the very best experiences that we can with our brand, that those are superior to other experiences they can get in the category or alternative options. We do that by innovating. We do that by ensuring that we have the right fundamentals in place so that we get our claims right, our packaging right, all of the components that gives consumers the way to live their life at home with our products just a little bit better and easier. Save them time, Save them hard work. Make a meal taste better. Bring people around the table. We fundamentally believe that's the right way grow. And we're excited about our back half because they're very consistent with that. That being said, I don't know exactly what the consumer environment's gonna look like coming up We've made a set of assumptions. We've largely been in line for the last twelve to eighteen months. But if that were to change or innovation plans were not to be you know, do not come to fruition, we absolutely will make the right investments to grow our brand. Grow our categories, protect our shares, We always wanna get that balance right back to Bonnie's question on that and profit but we feel we have all the right tools in place to do that. The digital investment we've made and the additional capabilities we've built. As well as the pure firepower given our margin transformation and holistic margin management effort. But if we need to know, invest more on our brands, then then we absolutely can. But we feel like we're in the right place right now feel like we have a good plan. We're, you know, happy to see early very early show results in January. We expect it'll be up and down depending on the month and the and the plan. But we think we'll end this fiscal year in a different trajectory. With some momentum, and we're excited about entering fiscal year '27. As you know, we build our our innovation plans for multiple years. So we already know what we have planned for '27. We're excited about those plans. Retailers are excited about those plans. But I think, like, we have had to be and everyone in the industry has had to been, we're gonna be nimble. We're gonna watch the consumer closely, and then we will adjust if we need to to ensure that we are, you know, growing our categories and and growing our brands. I appreciate the question. Chris Carey: Okay. Great. Thanks so much. I'll leave it there. Operator: Thanks, Chris. And this concludes the question and answer session. Miss Rendle, I would now like to turn the program back to you. Linda Rendle: Thanks, Jen. As we wrap up today's call, I wanna emphasize that we are confident in the solid foundation we've built over the last few years to make Clorox a stronger, more resilient company. We're investing behind our brands, delivering innovation that delivers superior consumer value, and strengthening our portfolio in ways that position Clorox for more consistent profitable growth. We are encouraged by the momentum we see on our fiscal year twenty six back half plan. The addition of Purell and the capabilities of the Gojo team further extend that trajectory. Their leadership and innovation combined with our scale and margin management expertise positions us to create significant long term value. Thank you for joining us today, and we look forward to sharing more with you at CAGNY later this month. Operator: And this concludes today's conference call. Thank you for attending.
Operator: Hello, everyone, and welcome to the Intapp, Inc. Second Quarter Fiscal 2026 Earnings Webcast. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question and answer session. Please be advised that today's conference is being recorded. Now it is my pleasure to turn the call over to Senior Vice President of Investor Relations, David Trone. The floor is yours. David Trone: Thank you. Welcome to Intapp, Inc.'s fiscal second quarter financial results. On the call with me today are John Hall, Chairman and CEO of Intapp, Inc., and David Morton, Chief Financial Officer. During the course of this conference call, we may make forward-looking statements regarding trends, strategies, and the anticipated performance of our business, including guidance provided for our fiscal third quarter and full year 2026. These forward-looking statements are based on management's current views and expectations, and certain assumptions made as of today's date, and are subject to various risks and uncertainties, including those described in our SEC filings and other publicly available documents that are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Intapp, Inc. disclaims any obligation to update or revise any forward-looking statements except as required by law. Further, on today's call, we will discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results, including non-GAAP gross margin, non-GAAP operating expenses, non-GAAP operating income, non-GAAP diluted net income per share, and free cash flow. Our GAAP financial results, along with reconciliations of GAAP to non-GAAP financial measures, can be found in today's earnings release and its supplemental financial tables, which are available on our website and as an exhibit to the Form 8-K furnished with the SEC prior to this call, or a supplemental financial presentation, which is available on our website. With that, I'll hand the conversation over to John. John Hall: Thank you, David. Good afternoon, everyone. Thank you for joining us today as we share the results of our fiscal second quarter. I'm happy to share that once again, we've achieved strong quarterly results, supported by the addition of new clients and the expansion of client accounts around the world. Our results also reflect our ability to serve enterprise clients, a growing partner ecosystem, and demand for our AI capabilities in the highly regulated industries we serve. I'll share details on these select growth drivers on this call. In Q2, our cloud ARR grew to $434 million, up 31% year over year. Cloud now represents 81% of our total ARR of $535 million. In the quarter, we earned SaaS revenue of $102 million, up 28% year over year, and total revenue of $140 million, up 16% year over year. Now I'd like to share some highlights from our fiscal second quarter. We continue to execute our vertical AI roadmap, which is designed to increase adoption of AI in the highly regulated industries we serve. As a reminder, our industry-specific AI solutions automate rote tasks, but more importantly, they deliver actionable insights that are drawn from a firm's proprietary information and are enriched with our industry graph data model and trusted third-party sources. These advanced, tailored compliance capabilities are what set Intapp, Inc. apart and why firms continue to invest in their technology. This leads me to my first example. You may recall that last quarter, we announced a significant new release of Intapp Time, which delivers faster, easier, and more accurate timekeeping powered by major new AI features. It's proven to be a catalyst for cloud migrations, with large firms like Buchanan, Ingersoll, and Rooney and multiple AmLaw 100 clients moving their time instances to the cloud. The new time release is also drawing large firms to buy the solution for the first time, sometimes in addition to their other Intapp, Inc. solutions. Examples include CypherX Shaw and Burren Forman. Additionally, we added more than 70 new AI capabilities and enhancements to our DealCloud platform. Among their many benefits, these new advancements save users time, surface personalized actionable data insights, and support InfoSec by monitoring data access in real-time. They come together in DealCloud to boost productivity, support regulatory compliance, unlock firm intelligence, and create a competitive edge. Let's turn to our partner network. We continue to grow our expansive partner ecosystem, anchored by Microsoft and a strategic set of more than 145 curated data technology and services partners. This powerful network continues to drive growth for us and greatly influenced many of our recent logo wins. In Q2, partners were directly involved in seven of our 10 largest deals, reflecting how deeply embedded our partners are in our go-to-market motions. Microsoft, in particular, continues to be a major growth driver. More than half of our largest wins this quarter were jointly executed with Microsoft, and in several, Microsoft even contributed Azure investment dollars to help us accelerate the deals. Our growth was also powered by adding new clients, expanding within existing clients, and migrating clients to the cloud. And we continue to gain traction in newer markets across our verticals, products, and global locations. In our legal vertical, we once again saw some distinct trends across our wins. First, we had some of the largest law firms in the US turn to Intapp, Inc. for AI-powered enterprise-grade compliance solutions. These clients include several AmLaw 100 firms. For example, Roche and Gray chose our compliance solutions to modernize their intake and complex checking processes in the cloud. This transaction was completed on the Azure Marketplace, with Microsoft providing investment dollars to accelerate the deal. An AmLaw 30 firm added our compliance solutions and chose to migrate time to the cloud after attending an event and seeing them in action. And an AmLaw 75 firm chose our compliance products to automate managing access to sensitive matters across applications. Second, law firms continue to choose DealCloud to strengthen their business development operations and innovate with AI. This quarter, Ford and Harrison, and an AmLaw 100 firm, among others, moved off their legacy horizontal or bespoke systems to support more strategic new business acquisition with DealCloud. And third, evolving anti-money laundering and know-your-client regulations are fueling the modernization of intake and conflicts processes globally. A few examples of firms who have chosen our AML solutions in response this quarter include another lens-based firm, Holding Redlich in Australia, and US-based Reed Smith. In the accounting industry, the influx of PE investments and mergers has continued to create disruption and increased competition across the industry. In response, firms, no matter their investment status, are modernizing their compliance practices and extending that modernization to collaboration and business development as well. Among the firms that turned to Intapp, Inc. for AI-driven modernization this quarter, one of the largest public accounting firms in the US deepened its investment in Intapp, Inc. employee compliance to modernize personal independence processes across its global employee base. BKL and Graviton both replaced their legacy systems with Intapp, Inc. collaboration. They needed a scalable cloud-based solution that integrates seamlessly with their Microsoft tools, streamlines collaboration, and sets them up for growth. And a top UK accounting firm chose DealCloud to establish a scalable foundation for relationship management and business development as it undergoes rapid growth through M&A. In the financial services vertical, firms are continuing to replace their legacy horizontal CRMs with DealCloud for AI-powered relationship and business intelligence, especially enterprise and mid-market investment banks. For example, one of the most prestigious boutique investment banks in the world chose DealCloud for its banker advisory business after a successful pilot with its private capital advisory team. The firm sees DealCloud as a way to help its business with purpose-built AI, allowing them to unlock key deal and relationship insights more easily. Meridian Capital chose DealCloud to improve visibility and management of deal origination, active mandates, buyer outreach, and business development and forecasting. Finally, our investments in real assets, including the April 2025 acquisition of Termsheet, continue to attract new clients who are coming to Intapp, Inc. for AI-driven solutions. I'll share a few examples. Neuberger Berman moved off its legacy horizontal CRM and onto DealCloud to improve reporting, streamline workflows, reduce key person risk, and eliminate duplicative and inaccurate data. A leading mixed-use and multifamily housing developer replaced its existing system with DealCloud to improve data quality, user experience, analytics, reporting, and optimization. And Smith Douglas replaced multiple legacy systems with DealCloud, which spans all their divisions and will help them improve workflows and operations so they can deliver homes faster. In conclusion, we're proud of our strong second quarter performance, and we continue to be optimistic about our growth opportunities. As our Q2 performance has shown, we are growing by adding new capabilities and increasing our global enterprise go-to-market reach. We see continued opportunity both to add new clients across a broad TAM and to deliver greater value by expanding our existing client base. We're serving a durable end market with our subscription revenue model, industry-specific cloud platform, and applied AI and compliance capabilities. We have a great growth opportunity to drive AI cloud adoption and modernization across all the industries we serve. As always, I'd like to thank our clients, our partners, our investors, our board, and our global Intapp, Inc. team for their teamwork and dedication. Thank you all very much. Okay, David? Over to you. David Morton: Thank you, John, and thanks to everyone for joining us today. I'm pleased to share our fiscal second quarter results, which reflect continued strength in our cloud business and disciplined execution across the organization. Demand for our SaaS solutions remains strong, particularly among existing clients, driving solid growth and a higher mix of recurring revenue as we progress through our cloud transition. Our enterprise-focused go-to-market motion is working as intended. We're seeing strength both in net new logo acquisition and expansion within our installed base. As a vertical SaaS company, we have deep domain expertise and a clear understanding of the highly regulated markets we serve. Clients in these markets continue to value the application-specific capabilities we provide, from compliance workflows to applied AI, which reinforces the durability of our ARR growth. This is evident in the continued expansion of our $100,000+ ARR client base and our 124% cloud net revenue retention rate. At the same time, we continue to operate the business with a focus on margin expansion, cash generation, and capital discipline. Gross margins improved year over year, operating income increased meaningfully, and free cash flow remained strong. Combined with our share repurchase activity during the quarter, these results reflect our confidence in the long-term opportunity while maintaining a strong balance sheet. Before we get to the income statement, Cloud ARR hit $433.6 million this quarter, up 31% year over year, driven by enterprise clients deepening their relationship with Intapp, Inc., stronger co-sell activity, and growing adoption of our applied AI offerings. Turning to our fiscal second quarter results, SaaS revenue came in at $102.5 million, up 28% year over year, now representing 73% of total revenue, reflecting strong demand and a continued shift to our cloud offerings. License revenue was $25.4 million, down 9% year over year, consistent with our stated strategy and ongoing cloud migration efforts. Professional services revenue totaled $12.3 million, down 7% year over year. Our partner ecosystem continues to support cloud growth through co-sell execution, client satisfaction, and efficient implementations. Total revenue was $140.2 million, up 16% year over year, driven by strong growth in our cloud solutions. Turning to our capital allocation, as announced in August 2025, our board authorized a $150 million share repurchase program. During the second quarter, we repurchased $100 million or approximately 2.3 million shares. Combined with our first quarter activity, this authorization was fully utilized, resulting in approximately 3.4 million shares repurchased. In January 2026, our board authorized an additional $200 million share repurchase program, further reflecting our confidence in the long-term value of the business. Our partner ecosystem remains a key driver of long-term cloud growth. In Q2, we co-sold with partners on many new logo wins and participation in the Microsoft Azure marketplace, meaningfully year over year. We see this as a durable, repeatable motion, especially for supporting larger enterprise deployments. Service partner certifications rose 35% year over year, reinforcing Intapp, Inc.'s position as a growth engine within the ecosystem. Turning to margins and profitability, Q2 non-GAAP gross margin was 78.1%, up from 76.7% a year ago, driven by favorable mix and cloud efficiency gains. Non-GAAP operating expenses were $81.8 million, compared to $74.1 million in the prior year period, largely reflecting ongoing investments in our product-led growth organization and go-to-market spend. Non-GAAP operating income was $27.7 million, up from $18.9 million last year, and non-GAAP diluted EPS was $0.33. Free cash flow was $22.2 million for the quarter, and we ended Q2 with $191.2 million in cash and cash equivalents, reflecting the $100 million share repurchase. Turning to our key metrics, Cloud ARR increased 31% year over year, while total ARR grew 22%. Remaining performance obligations were $777.1 million, up 26% year over year, providing strong revenue visibility. Our enterprise-focused motion continues to show progress with 834 clients now generating at least $100,000 in ARR, up from 728 a year ago, representing 30% of our total client base. Now turning to our outlook, for 2026, we expect SaaS revenue between $105 million and $106 million, total revenue between $143.8 million and $144.8 million, non-GAAP operating income between $23.1 million and $24.1 million. This Q3 outlook includes incremental spend for targeted marketing campaigns associated with our upcoming product showcase at Intapp Amplify, as well as targeted investments to increase the rate of pace of delivery on our AI suite of offerings. Non-GAAP EPS between $0.27 and $0.29 based on approximately 83 million diluted shares. For the full fiscal year, we expect SaaS revenue between $415 million and $419 million, total revenue between $570.3 million and $574.3 million, non-GAAP operating income between $99.9 million and $103.9 million, non-GAAP EPS between $1.20 and $1.24 based on approximately 83 million diluted shares. And finally, I'd like to remind everyone of our upcoming Day in New York City, followed by our annual Intapp Amplify event, where we'll share our latest AI-powered innovations. You can find details on our investor relations website. Thank you, and I'll now turn the call back to the operator. Operator: We will now start the question and answer session. To ask a question, press 1 on your telephone keypad. Our first question comes from the line of Kevin McVeigh from UBS. Your line is live. Kevin McVeigh: In terms of how you're positioning Intapp, Inc. for just the kind of new flow out of Anthropic today? John Hall: Hey, Kevin. It's John. I just caught the tail end of that. Your voice was silent, but I think you were asking about the Anthropic news today. Kevin McVeigh: Yes. That's it. I apologize if I'm breaking up on you. John Hall: Sure. No. That's a great question. So they've released some open-source plugins for the corporate legal department. And it's a good segment of legal opportunity. They are doing things like contract review and NDA. You can look up the plugins. Just to be clear, we have never been in the category of contract review. Our strategy has been differentiated over the long development of technology in these industries because we focused on the firms in professional and financial services. Sometimes you hear people distinguish between the practice of law and the business of law, but it applies across all the types of firms that we're selling to. So we focused on the senior leadership of the firm, how to help them grow their business, how to help their people pursue fundraising for new funds or new clients or new engagements. The compliance of how the firms do business, and operate internally with all of the sophisticated information governance around managing nonpublic information, penetrating information, or other information that needs to be kept confidential in a variety of ways in these complex institutions. Profitability, how the firms actually execute that successfully or drive returns talent management. So the business of these firms has been our emphasis. And there's huge opportunity for AI in all the contract review type things. The LLMs are great at it. We're using a lot of it too. But I think from the value process of the company standpoint, purchasing a giant underserved category that was spent a long time working with the firms to grow. And we've had some great response to our offerings here, and we've really been paying attention to how the firms have the best opportunities to deploy AIoT. So you're not really in this space although it is very complementary to what we do. And the firms actually have come to us and said, can you help us with the whole compliance infrastructure for the agents and everything to help them succeed as they deploy these different use cases to be individual users of the firm. So I actually think our history and our relationship with these firms gives us a tremendous position to be a big influence over how the firms deploy AI in our own products and how they deploy AI generally. Kevin McVeigh: Very helpful. Thank you. Operator: Your next question comes from the line of Alexei Gogolev from JPMorgan. Your line is live. Bella: Hi. This is Bella on for Alexei. Just one question from us. So you announced a partnership with DecimalPoint Analytics last month. And in light of that, I wanted to ask, how do you balance utilizing third-party partnerships to advance your data strategy while also safeguarding the proprietary data that gives you a competitive advantage in the ecosystem? John Hall: Yeah. Thanks, Bella. We have a very significant investment in an ecosystem strategy that we talk about each quarter because we're bringing a whole product to each of the firms in each of the industries. And part of that is all the professionals have a very rich set of market information or press information that they're looking to bring into their environment to make better decisions about the clients or the deals that they take on and how they execute that work. So we have a strong program. You mentioned one of our important partners, we absolutely have a program of managing data for the firms, each of whom views their experience and their expertise in the particular area as their intellectual property that helps them compete. And this is actually one of the areas of information governance that we are first in the world in is to help the firms manage and safeguard their proprietary information so that they can reuse it. To win new deals competitively, serve those clients successfully, and we have a wide range of data partners that we work with to enable the firms to do that, but we're also focused on helping the firms themselves protect their data. We have some proprietary data that we enable them to use as well. But our fundamental goal is helping each firm differentiate itself using their own expertise. That's how the industry works, and we're sort of at the center of that. And I think it's one of the reasons why our compliance program has been so successful in making its way through the market. And the same is true with the AI era, by the way. The firms are going to use their proprietary knowledge and expertise and experience to differentiate themselves in how they go win new business. Bella: Got it. Very helpful. Thank you for taking the question, and congrats on the quarter. Operator: Your next question comes from the line of Parker Lane from Stifel. Your line is live. Parker Lane: Hey, guys. Good afternoon. Thanks for taking the question. John, for the customers that have been to your early AI offerings here from Intapp, Inc., Assist. What has been the primary hook or motivation point that you've seen from them to get them across the goal line and using this? Is it a desire to do more with less? Is it just drive efficiencies in their business? What are the implications for headcount amongst the customers that are using this as well? John Hall: Thanks, Parker. Yeah. The Intapp, Inc. Assist take-up has been strong. We've been excited to see how many users at many levels of the firm are interacting with Assist in our AI offerings. Part of the hook is absolutely efficiency. The firms don't want to add tons and tons of headcount if they can get some help from the AI. But a lot of it too, and I think people may miss this, is that with the right AI and AgenTex setup, you can bring a universe of information to each person, whether they're an early career business development person, or a practitioner in the middle of their career or a later stage partner, you can bring a universe of information to them. That would have been cost-prohibitive to try to assemble with a human universe of researchers for them. So, really, the firms that are deploying Assist most successfully are getting much richer, better, clearer answers in a compliant way more comprehensively to all of their people. And they're using that for competitive advantage. So there is absolutely an efficiency angle to that, but part of it is a capability that's difficult to imagine doing in a totally human-powered world. And I think this is a huge focus of the firms because they're all focused on the fact that they don't do what someone else will. And they need to have this capability to compete as the world becomes more competitive with AI powering everybody. Parker Lane: Got it. And I appreciate the answer earlier on Anthropic, you know, being focused on the practice of law versus the business of law. You know, clearly, a lot of anxiety around not what that looks like today, but the future state of these models and where they can go over the long run. Are you starting to see instances of your customers or potential prospects testing these tools themselves, trying to develop things on their own, with any level of success, or are they primarily going to some of the incumbent vendors like yourself to figure out how to fully make this pivot to an AI-first world? John Hall: Well, you know, when we first started building the company in the market, it was a self-built technology universe. All the firms could not get technology that met the unique needs, including compliance of the industry. And so they were investing in big IT departments to develop everything themselves. The whole history of the company has been working to provide them with a commercial enterprise-grade secure now AI-enabled set of capabilities to replace all those. And we've built a business doing that. It's been very successful. I think as these AI tools come out, they're absolutely encouraging people to try, and the forward-looking IT departments absolutely are experimenting with them. One of the things that we've been studying over the past two years is what are the reactions of the firms to this? Are they going to change their posture? From what they've developed over the past few years, which is to work with specialist providers who really understand the issues and can provide a supported environment, or are they gonna go back to building it on their own? I think they're going to experiment, but I don't think that that's economically the right answer. I think the right answer is to have somebody who can really provide this to them and support with them, bringing together the best practices that are being developed around the market, which is the whole point of the company. And we've got a lot of clients who are saying to us, oh, that's what you're doing? Thank God I don't have to do it myself. So I think that kind of response, you're gonna see more and more. So we actually encourage the experimentation because it gives people more of a feel for what it's gonna take to really get the valuable solutions out of this. And then we come in and say, here's what we can do for you, and it turns into a continuing growth partnership. Parker Lane: Got it. Thanks for the feedback, John. Operator: Your next question comes from the line of Koji Ikeda from Bank of America. Your line is live. George McGreen: Hi. It's George McGreen on for Koji. I appreciate you guys taking our questions today. I wanted to ask one as it relates to CRPO, and you kinda look at that metric on a two-year stack, you know, that metric actually accelerated, and you know, that's kind of in line with the sequential step up in NRR that we're seeing. So I wanted to ask over the last few months, how customer conversations sounded, and is there any change in tone, and maybe particularly as it relates to adopting AI products generally versus a few months ago? Thank you. John Hall: Yeah. Thanks, George. The conversations have continued to accelerate. You know, we announced the first versions of this generation of AI just twenty-two months ago, and then a second version in February. We have our new event coming up here in about three weeks. But people have moved from curiosity to experimentation. And now there are a few places where we're really seeing people able to articulate, here is the business value that I can achieve by deploying Assist and AI technologies in these areas in these parts of my business process. Here's the efficiency I'm getting in people. Here's the increased visibility that those people are having in their decision-making, and here's that's flowing through to create a better experience for the senior folks who are working with clients or working with investors. So I think you are seeing really positive reactions. Now you're also seeing continued experimentation all over the place. So I think in the big picture, it is still relatively early. But what we're excited about are these use cases that are coming out that are really starting to pull forward some of our sales and some monetization opportunities that we were very focused on from the very beginning. I mean, we've long felt that the way you bring a next generation of true next generation of technology out is you have to get to those early stellar apps that really make a difference that people can point to and say, of all the infinite imaginings that we could do, that's the thing that I can put money behind and buy and bring it in. And that's what we've been focused on doing. We talk about applied AI, that's really the emphasis of that strategy. Operator: Your next question comes from the line of Terry Tillman from Truist Securities. Your line is live. Connor Pastoral: Great. Good evening, Tim. Connor Pastoral on for Terry. Thank you for taking my question. Just wanted to touch on Microsoft for software. So you just you highlighted them as a major go-to-market partner over the past several years, Azure Marketplace execution, joint wins continuing in this quarter. Just kinda curious on in more of a risk-off type environment like today, does that partnership help to, I guess, de-risk the deal cycles or shorten time to close? Or is that more of an impact to visible in terms of expansion upsell as customers are live on the platform? John Hall: Yeah. Thanks, Connor. No. We're very appreciative of the ongoing strategic partnership with Microsoft. We have talked about some of the ways that we're working with them. Their sales team is aligned with ours on the firms in our target market. They actually get quota relief when we sell. So there's a lot of alignment in the field. But more recently, we've been doing more of these Azure Marketplace agreements. I mentioned a few of them on the call. And interestingly, they tend more towards the enterprise firms. So it's very consistent with our enterprise strategy. We're doing larger deals. They are shortening the sales cycle when the folks already have a Microsoft minimum Azure spend commitment in place. And we've actually won some very large business that we talked about on the call today from some firms that are brand new to us. That came to us through our introduction or relationship with Microsoft. And others that are our long-time partners who want to grow their relationship. So it's working in both growth dimensions for us. We've had folks who had those agreements with Microsoft, and it helped us move them to the cloud. So a lot of the key parts of our overall growth strategy have worked really well with that program. And as we've learned about it and the sales team has done more of it and the clients have gotten used to it and are talking to each other, it's actually growing as part of our overall go-to-market. So it's really helped us a lot. Connor Pastoral: That's helpful. Thanks, John. And just as a follow-up, looking at the macro environment, just particularly around the backdrop in financial services with the potential for M&A activity to pick up. Typically a tailwind associated with the growing deal pipeline as firms maybe look to check the box on tech enablement prior to an elevated period? Thank you. John Hall: Yes. I think so. Quite a bit of that. Banks have been doing good business with us. We emphasized on the call today some particularly large ones, in fact. We also have a lot of compliance support for firms that wanna increase their volume. There's this interesting trend happening in the accounting industry itself where private equity is coming in and changing the form of the business from partnerships to corporations and putting capital to work, and those firms are then going on an M&A program themselves, and all of those things are driving demand for upgrading and modernizing the technology infrastructure. So there's a lot of larger macro style trends or industry trends. We think we're really playing into with the strategy here. And as people do this, they wanna have an AI-forward approach to do all that. So I think we've got a great position to benefit from those trends. Operator: Your next question comes from the line of Steve Enders from Citi. Your line is live. Steve Enders: Okay. Great. Thanks for taking the questions here. I guess maybe just to start, do wanna ask a little bit about the guidance for the full year and some of the change there. I think particularly looking at the revenue side, it looks like the full beat wasn't really rolled through. And so I just wanna get a little bit clarity on maybe some if there was some revenue that kind of shifts around or if it's a reflection of customers converting more to the SaaS solution faster than expected. Yeah. Just getting any kind of clarity around some of those dynamics would be helpful to search. David Morton: Yeah. Thanks for the question, Steve. No. We continue to operate on our strategy that we articulated over two years ago at our Investor Day. You know, that being, we are cloud-first. And so, you know, clearly, that's what drives a lot of our key activity. With respect to everything else flowing through, you know, obviously, we'll have puts and takes both with services as well as licensed. That being said, you know, we continue to be successful and continue to orient more and more migrations. And so we'll talk more about how that is not only being modeled by our success vectors coming up here at Investor Day. And then even within our own services, clearly, we discussed just broader on the whole partner ecosystem, and it's always gonna be a delicate balance there as we continue to make investments as well as take that opportunity and more prone to items in and around our customer set and items that will clearly drive our cloud offerings even more so. So, you know, I don't view it as evergreen change to kind of the mix of revenue. We've always been cloud-first and the orientation of that, of which I do believe the full guide was passed through. Steve Enders: And then so Okay. Gotcha. That's helpful there. And then maybe shifting gears just on in terms of the buyback program. I guess, to see that, that re-upped here just you know, how are you kind of viewing kind of the forward cadence for those plans and putting that into place? And then guess, anything to read into, I guess, broader capital allocation and kind of the ramifications of investing in the business and other areas versus utilizing the buyback. David Morton: Yeah. We've never had a formal articulation of our capital allocation strategy. You know, that will come forward, more in earnest again at Investor Day. But just for the near term, we have been putting capital to work. We've been focused more so on antidilution measures and offsetting that. Think we've done a good job at that. And so, you know, clearly, we've got a lot of confidence not only in our ability but in the strength of our balance sheet that the board authorized an additional $200 million, and we'll put that to work to offset for dilution as well. Steve Enders: Okay. Perfect. Thanks for the questions, and looking forward to hearing more in a few weeks. Operator: Your next question comes from the line of Alex Sklar from Raymond James. Your line is live. Alex Sklar: Thank you. John, I want to start follow-up on your answer to George's question earlier, just in terms of what you're seeing on broader budgets and AI budgets, maybe within your named accounts, going to 2026. Any sense if these accounts are dedicating distinct spend to AI this year just as you're bringing more solutions to market? And then, Dave called out doing more in terms of increasing spend around delivering AI offerings. Can you just talk about how that fits into your strategy there? Thanks. John Hall: Yeah. Thanks, Alex. It varies across firms. A lot of firms do absolutely have specific AI budgets or innovation budgets that they're looking to make sure that their firms figure out how to take advantage of the change here. That's benefiting us. We've had several deals that are being funded out of AI budgets. There are also firms that are looking at their IT budgets generally and saying, how do they bring AI in to more traditional ways of budgeting and procuring, and it becomes part of the procurement process. So we've won things in that category as well. Internally, this is a huge focus for us, and it has been for several years. You know, we've tried to be both responsible and forward-leaning in investing in R&D for this generation of technology. We've brought the company through and benefited from each of the previous technology generations from on-prem to cloud to mobile and now AI. Coming up here, at our event in February with Investor Day, and our marketing event is called Intapp Amplify. This is the single largest release that we've ever done. This is the most consequential release that the company is setting up to bring to everybody, and it's been in the works for two years. Since this whole AI generation started to break. And we spent a lot of time working directly with our clients and all the folks who helped us build the company across the marketplace to really appreciate what is it that the potential of AI can do to drive success for these firms. Financially and in their business, compliance area with all the professionals, how do they become much more capable of using AI, applying it in the most successful possible way to compete? And I think there's really interesting learnings from this first couple years of experimentation, and we've integrated that all into our strategy here. And so I really could not be more excited about the February event because the early responses that we're getting from the folks on our ambassador program and our advisory board program could not be more positive about where we're headed here. Because I think these firms do have a disproportionate opportunity in how they can benefit from AI deployments. I also think for the enterprise-class firms, it's doubly complex because they have such significant work that they do for all of the world's capital markets transactions, M&A, litigations. I mean, these are serious projects that these firms execute. And we've grown up working with them, increasingly are the folks that they're turning to for AI. So I'm really excited about what's coming here, and I think the R&D investment has been fantastic and something that we're really excited to keep doing. Alex Sklar: Alright. Great. Yeah. The product philosophy is definitely picked up, so look forward to more there. Dave, just maybe a quick follow-up for you. Can you just expand on some of the drivers? NRR stepped up pretty notably this quarter. What were kind of the big one, two, three things behind that? Thanks. David Morton: Yeah. For sure. You know, secondarily, we also orient it around. You know, first and foremost, our enterprise motion is working. Some successful talk tracks about our partner ecosystem. And so if you think about how not only our lands are getting bigger, but also our expanse, because of those two motions, and so in theory, it was both upsell and cross-sell. That we're seeing good uptake. We still have a lot more room to go. Operator: Your next question comes from the line of Brian Schwartz from Oppenheimer. Your line is live. Brian Schwartz: Yeah. Hi. Thanks for taking my question this afternoon. John, wanted to ask you a question about different pricing models. Clearly, the forecasts are out there that were expected slow labor growth here, you know, on the heels of AI through the second half of the decade. I think you talked about in your comments how you're working with your customers and experimenting on different types of AI use cases and solutions. What about internally at Intapp, Inc. in terms of the pricing model? Are you experimenting at all in introducing a more consumption or value-based pricing model? Just wondering if there's any testing of that going on. And that potentially could be a new growth factor for the business in the future. John Hall: Yeah. Thanks very much, Brian. We do have today multiple pricing models in the business, just for clarity. We do have part of the business and part some of the relationships a historical per-user model, it has worked very well. And we are not fully penetrated in almost any of our firms. We have a lot of growth. That we achieve each quarter in that NRR number from getting more people onto the platform using the technology, including the AI capabilities. So platform. So that's absolutely a continued growth driver for us. But we also have today and for a long time a firm-based pricing model for enterprise agreements. It's originally started in our compliance business, but we offer it in other areas and have relationships in many other areas. Where the firm pays based on its size or other metrics that are not for users. So we just wanted folks to understand that. And then from there, so I think we've got a good relationship with firms for the contracts allow us to price to value, and historically, we've been able to do that. From there, we are very interested in what the opportunity is for consumption-based or other metric-based pricing that aligns well with the way that the clients are thinking about the value they're perceiving. I think fundamentally, you know, the software companies have always been able to price value. The mechanisms have changed over the years. But if you can get yourself in a position that they really see what it is that you're doing for them and they benefit and they wanna grow from that, they're happy to pay for it. And we benefited, you know, Bootstrap our company in this particular end market because these firms in comparison to many industries, they're very financially well off. And that's really helped us. They always pay their bills. They're very honorable folks, which I appreciate. And if we can come up with a value agreement, that they're happy with, they're happy to pay it. So we've grown the company for many years working with them, and I'm very interested in this question that you're raising because I think there is an interesting angle. As we grow and take more of the AI services into our own product. How do we monetize that and manage the financials and the economics of that? So we're very open to that, and experimenting a little bit. Brian Schwartz: Yeah. I agree. Thanks, John, for that explanation. That was really helpful. One follow-up for David. Just thinking about kind of tracking the progress of the AI SKUs in relation to the ARR growth, how do you think about the of AI? How that will play out for Intapp, Inc.? In the second half of the fiscal year, is there anything that investors that we should look to to be able to, you know, better gauge you know, how the AI products goods are doing for the business. Thanks, David. David Morton: Yeah. For sure. You know, these are things that we've been working through, obviously, not only at our annual updates, both from direct ARR or attach rates. And something that will have meaningful updates on coming forward in our upcoming investor day. So I don't wanna steal all of our thunder with that, but, obviously, the success has been far and wide for us. I'm very pleased with both the application from our go-to-market teams as well as our own internal development and the uptake, and so, more to come on that. Brian Schwartz: Sounds good. I think we'll find out pretty soon at your investor meeting this month. Today. Thanks for taking my questions. Operator: Your final question comes from the line of Kevin McVeigh from UBS. Your line is live. Kevin McVeigh: Yeah. Mine's already been answered. Thank you. Operator: There are no further questions for the question and answer session. I'd now like to turn the call back over to John Hall for final comments. John Hall: Okay. Well, we appreciate everybody's time today and the questions. We are very excited to have you all at our Investor Day event in a few weeks in February in New York City. There's a lot of opportunities to share all the things that we've been working on, and then later that day is our Intapp Amplify program where we're going to be making some pretty important announcements. So we're excited to have you. And we'll look forward to chatting with you there. And then we'll talk to you again next quarter. So thanks, everyone. We appreciate it. Operator: Thank you. And with that, we conclude our program for today. We thank you for participating, and you may now disconnect.
Operator: Good afternoon. Welcome to Aviat Networks Second Quarter Fiscal 2026 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Andrew Fredrickson, Vice President, Corporate Finance. Thank you. You may begin. Andrew Fredrickson: Thank you, and welcome to Aviat Networks Second Quarter Fiscal 2026 Results Conference Call and Webcast. You can find our press release and updated investor presentation in the IR section of our website at www.aviatnetworks.com along with a replay of today's call. With me today are Pete Smith, Aviat's President and CEO who will begin with opening remarks on the company's fiscal quarter, followed by Andy Schmidt, CFO, to review the financial results for the quarter. Pete will then provide closing remarks on Aviat's strategy and outlook followed by Q&A. As a reminder, during today's call and webcast, management may make forward-looking statements regarding Aviat's business, including, but not limited to, statements relating to fiscal guidance, financial projections, business drivers, new products and expansions, and economic activity in different regions. These and other forward-looking statements reflect the company's opinions only as of the date of this call and webcast and involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements. Additional information on factors that could cause actual results to differ materially from the statements expressed or implied on this call can be found in our most recent annual report on Form 10-Ks filed with the SEC. The company undertakes no obligation to revise or make public any revisions of these forward-looking statements in light of new information or future events. Additionally, during today's call and webcast, management will reference both GAAP and non-GAAP financial measures. Please refer to our press release, which is available on the IR section of our website at www.aviatnetworks.com, and financial tables therein which include a GAAP to non-GAAP reconciliation and other supplemental financial information. At this time, I would like to turn the call over to Aviat's President and CEO, Pete Smith. Pete? Pete Smith: Thanks, Andrew, and good afternoon. Let's review the highlights from the quarter. Highest second quarter bookings in the last ten years. Total revenues of $111.5 million, adjusted EBITDA of $11.3 million, non-GAAP EPS of $0.54, positive cash generation from operations of $23.9 million. For 2026, Aviat has increased total revenues by 5.9%, reduced our non-GAAP operating expenses by $3.7 million, increased both our GAAP and non-GAAP earnings per share by over $1, and increased adjusted EBITDA by $13.2 million. This significant improvement is in line with our expectations for the fiscal year and sets the company up well to execute the back half of fiscal 2026. I would like to thank the entire Aviat team for the focus and execution to date. Let's discuss our end markets and key developments. In private networks, Aviat remains a leader in the US and globally in providing mission-critical wireless networks. The need for reliable networks to serve public safety agencies, utilities, and other critical infrastructure providers continues to grow. Last quarter, we discussed the launch of our PISA LTE 5G router for police, fire, and emergency vehicles. This offering opens an entirely new segment for Aviat worth approximately $1.6 billion today. Here, we pursue customers with whom Aviat already has an extremely strong relationship through our private network backhaul expertise and leadership. I'm pleased to announce that we have received our first initial order and we remain engaged in several critical trials to further validate our offering. We're excited to see what opportunities this solution opens for the company. In mobile networks, Aviat remains engaged globally to expand its share of demand through new and existing customers. The 5G upgrade cycle remains ongoing in global markets, and changes in the competitive landscape are creating openings for Aviat that we hope to have future updates on in the coming quarters. In the second quarter, we also announced our initial purchase order for Aviat's multi-dwelling unit solution, providing fixed wireless access Internet for paying subscribers via a US tier one provider. This is a significant step in capturing and monetizing a new market segment that Aviat has been pursuing for several years. This order covers multiple market deployments and we are hopeful that this will be the first of many orders related to the MDU offering. We're still working with the tier one provider to determine the exact timing of the ramp related to this order as well as what the impact and timing of any future orders will look like. But Aviat is glad to be in the position to provide leading performance, service, and support to our customers. We think this is just the beginning of an exciting growth opportunity in the coming years and look forward to keeping the investor community updated once we know more about the benefits of Aviat. Let's discuss Aviat's broadband business and the broadband equity access and deployment fund or BEAD. Our policy is to keep any impact from the program out of the company's fiscal guidance until we have clarity on the timing of the program. We do still believe that this will be a calendar 2026 event, likely in the back half. The NTIA has approved over 40 state plans, which enables the states to begin funding the award winners. On this basis, fixed wireless access Internet, which tends to use wireless backhaul at a higher rate than fiber to the home offerings, is capturing on average between 10-15% of locations served by BEAD. These numbers will continue to change as all the final approvals come in, but this is a reasonable range to expect for the program as a whole. We will not yet quantify the opportunity size for Aviat, but we are encouraged that this program will have a positive impact in our fiscal 2027 based on the current plans and our estimation of timing. Before turning the call over to Andy Schmidt, Aviat's new Chief Financial Officer, I would like to provide an introduction. Andy brings to the company over twenty years of public company CFO experience. Notably, improved the finance function in several companies and has experience in the public safety space. His background and accomplishments align directly with Aviat's strategic goal of driving growth in public safety and increasing its mix of software sales. We're excited to have Andy on board. With that, I will turn it over to Andy to go through the financial results. Hey. Thanks, Pete. Andy Schmidt: I'm very excited to be at Aviat and work with you and the entire Aviat team to help drive our strategic goals as well as continue driving cost and cash optimization opportunities. Now I'll review some of our key fiscal 2026 second quarter results. Please note that our detailed financials can be found in our press release and all comparisons discussed are between 2026 and 2025 unless otherwise noted. The second quarter, we reported total revenues of $111.5 million as compared with $118.2 million for the same period last year. Importantly, revenues for the six-month period were $218.8 million, up $12.2 million or 5.9% versus the prior six-month period. North America, which comprised 47.5% of our total revenues for the quarter, was $52.9 million. International revenues made up 52.5% of total revenues, were $58.6 million for the quarter. Gross margins in the second quarter were 32.4% on a GAAP basis and 32.9% on a non-GAAP basis. This compares to 34.6% GAAP and 35.3% non-GAAP in the prior year. The change in gross margin is primarily due to regional and product mix in the quarter as compared to a year ago. For the first six months of fiscal 2026, gross margins were 32.8% on a GAAP basis and 33.4% on a non-GAAP basis. This compares to 29.4% GAAP and 30.1% non-GAAP versus the same period last year. Second quarter GAAP operating expenses were $28.8 million, down versus $32.9 million in the same year-ago period. Non-GAAP operating expenses, which exclude the impact of restructuring charges, share-based compensation, and deal costs, were $27.1 million. Second quarter operating income was $7.3 million on a GAAP basis and $9.6 million on a non-GAAP basis. This compares to $8 million GAAP and $12.6 million non-GAAP in the year-ago period. Second quarter tax provision was $2.4 million. As a reminder, as of fiscal 2025 year-end, the company has over $450 million of net operating losses or NOLs that will continue to generate shareholder value via minimal cash tax payments for the foreseeable future. Second quarter GAAP net income was $5.7 million and non-GAAP net income was $7 million, which excludes restructuring charges, share-based compensation, M&A related, and other nonrecurring expenses and the non-cash tax provision. Second quarter non-GAAP earnings per share came in at $0.54 on a fully diluted basis and GAAP earnings per share was $0.44 on a fully diluted basis. Adjusted EBITDA for the second quarter was $11.3 million or 10.1% of revenues. For the six-month year-to-date period, adjusted EBITDA was $20.4 million, a significant improvement of $13.2 million versus the same period last year. Moving on to the balance sheet. Our cash and marketable securities at the end of the second quarter were $86.5 million. Outstanding debt was $105.4 million, bringing our net debt position to $18.9 million as compared to $41.7 million in 2025. An improvement of $23 million. As Pete mentioned in his highlights, cash generated from operating activities was $23.9 million in the quarter. This brings our year-to-date cash from operating activities to $12.2 million. This positive cash outcome was created through both disciplined inventory management resulting in a $7.4 million inventory reduction and strong cash collections via accounts receivable. Note that our sequential quarter decrease of unbilled receivables by $20.1 million contributed partly to the increase in accounts receivable balance. This dynamic creates actionable cash collection opportunities for the second half of the year. We expect overall balance sheet improvements posted this quarter to continue, which will help to create positive momentum and cash generation for Aviat in the quarters ahead. With that, I'll turn the call back to Pete for some final comments. Pete? Pete Smith: Thanks, Andy. 2026 has gotten off to a good start. Our market leadership and strong bookings have put the company in a position to continue pursuing share of demand capture. Aviat also has a number of exciting organic growth opportunities developing which will serve the company well in the years ahead. We're keeping our fiscal 2026 guidance unchanged at full year revenues to be in the range of $440 million to $460 million. Full year adjusted EBITDA to be in the range of $45 to $55 million. With that, operator, let's open up for questions. Operator: Thank you. To ask a question, you will need to press 11 on your telephone and wait for your name to be announced. To withdraw your question, please press 11 again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question will come from the line of Scott Searle from Roth. Your line is open. Scott Searle: Hey. Good afternoon. Thanks for taking the questions. Nice job on the quarter. And Andy, congrats and welcome aboard. Andy Schmidt: Thanks, Scott. I appreciate the introductions. Scott Searle: So, Pete, maybe just diving in. In terms of the outlook for the second half of this year, it still implies a range of $110 million to $120 million a quarter. I'm wondering if you could talk us through some of the puts and takes. You mentioned some organic opportunities that are brewing. Also, I think in your opening remarks, you talked about not putting things into your guidance until you got some better visibility on that front. I think there was more reference probably towards BEAD than anything else, but you've had some traction now on the MDU front. I'm wondering if you could provide a little bit more color in terms of what you're expecting in the second half of this year? And what are some of the milestones that are going to dictate how this ramps up over the course of calendar '26? Pete Smith: Okay. There's three components to this or the organic opportunities that we outlined in the prepared remarks. One, BEAD. Right? And a lot of the fiber guys are, you know, saying positive things about BEAD. We would say we have the largest exposure to microwave wireless backhaul for US rural broadband. We're hearing from our customers that they're planning it. I think, you know, most, if not all, of the 54 to 56 states and territories have submitted their final proposals for BEAD. So we think that this is all positive. But we haven't put it in our guidance, thank goodness, since it's going back to the middle of the last administration, and we've been right to doing that. We are getting more and more bullish on this and we think it's going to be it's going to materialize sometime between July and December '26, that's one. Secondly, we think that this is a really good news with respect to the cellular router that we have our first PO. We're building a pipeline. We're going up against some significant competitors. We think that we have a unique value proposition and we'd like to get a few more wins under our belt before we start to highlight that. Or highlight what that could be with respect to an uplift in revenue. And then thirdly, the MDU project. And the reason we talk about the MDU project is through no fault of our own or our customer. It was discovered that we were in field trials. And it got to the shareholder base and we received a lot of questions. And right now, we are delivering gear that paying subscribers will use. And we do have a competitor and what before we start factoring this into a financial forecast, we want to make sure that the value proposition that we've proved out in trials over the past year and our initial volume production continues to satisfy the customer, watch what the competitor does, and all those things break our way, then we would revisit our forecast. I hope that's responsive to your question, Scott. Scott Searle: That's very helpful and comprehensive. Maybe Pete, just to quickly follow-up on the MDU opportunity then is there any other color in terms of the number of markets where you're running trials or deploying in currently? And then just to clarify, in terms of the guidance then, it sounds like there's probably 5G router embedded in there, but doesn't sound like BEAD's in there and maybe a small portion of MDU. Is that correct or is it something different? Pete Smith: I would say de minimis on the 5G router, zero on BEAD, and, you know, a little bit on the MDU project. Right? Because it's not material yet. And one other aspect that I didn't bring up on the BEAD is that we're seeing that fixed wireless access of the overall BEAD program is ranging between 10-15%. And that 10% to 15% usage of fixed wireless access correlates to typically to wireless backhaul rather than fiber. So that's another element of our increasing confidence in the back half of this calendar year. That BEAD will materialize. Scott Searle: Great. Very helpful. And if I could, and then I'll get back in the queue. But on the gross margin front, it sounded like there was more mix than anything, but specifically, I think in the breakdown services margins, we're under a little bit of pressure. I know that's highly project-based, so I'm wondering if there's anything else to read into that. And then given the strong free cash flow in the quarter, which I think was well above expectations, and it sounds like we're going to continue to see healthy free cash flow growth going forward. How are you thinking about a buyback or other opportunities in terms of the overall capital structure of the company? Andy Schmidt: Alright, Scott. So I'll take part one, part two, and turn part three to Pete. So gross margins, I don't look at it as services under pressure. Again, it's just ebb and flow and we had higher equipment sales in our lower cost regions. This period, which again, that's a good thing. The hardware is an enabler actually bringing future sales and services and software. So that part worked fine. In terms of the cash dynamic, this is a really great for this company. Initiatives have been put in place by Pete and Andrew Fredrickson in his acting role as CFO. That you're seeing the results of this period look at the second half of the year, we're going to continue to see some very good cash performance. Which I think is going to be really principal besides in terms of the highlights that Pete brings forward. Terms of unlocking the value in the stock. Pete Smith: Yeah. So with respect to the buyback, and Scott, I think you're taking everybody's questions. With respect to the buyback, we have a little under $6.5 million remaining on our authorization. We met with the Board earlier this week and we anticipate turning the buyback back on. Now, one thing that I've learned over the years is that we, as a company, we file we put in a ladder and, you know, we will be a buyer at certain price levels. So that's what we can disclose at this point. Scott Searle: Great. Thanks so much. Congrats on the quarter again. And Andy, great to have you on board. Andy Schmidt: Thank you. Operator: Thank you. One moment for our next question. Our next question comes from the line of Tim Savageaux from Northland Capital Markets. Your line is open. Tim Savageaux: Hey. Good afternoon. Wanted to go to the, I guess, the first thing you mentioned on the call and in the release. Which is the I think it's just best Q2 in ten years. Maybe not best quarter but it brought me back to a couple years ago. I think there's historical precedent for this. Where you updated us on the backlog actually, post '24. Given some, I think, strong booking trends then. Looks like you were up about 10% in backlog. You know, for the June fiscal year of '25. I guess and and so I'd love to get an update on that backlog metric. If it's something you might provide or and or you know, try to get a little more quantification on you know, the book to bill in the quarter. Right? Because you you called out what seems to be a pretty extraordinary number. How should we be thinking about that? Pete Smith: Yeah. So, look, this is of the project nature of our business, we you know, we are reluctant to be as specific as you would like. So I appreciate your memory or maybe Tim sometimes I wish you didn't remember so much. The last time we gave midyear backlog was after the NEC transaction so that we could be clear. So just to reiterate, our highest bookings quarters are Q2 December and June Q4. This is the highest bookings level we've had in ten years. And the reason we didn't go back further is because we couldn't find the data. And I think it sets us back up for a strong Q4 following our traditional seasonality. And our book to bill, we will say that was over one last quarter. It's over one this quarter. So things are things are trending well for you know, the out quarters. I think that's what we can say. And it was what drove the bookings was both our service providers as well as our private network business. Tim Savageaux: Okay. Great. And you mentioned service providers in in in private. Would it be fair to you know, look at the MDU as sort of a key driver of that, sort of a very chunky piece of that. That you expect to deliver over time? Or is there some other dynamics to play there? Pete Smith: So the MDU order, we're very excited about because of what possibilities it could drive over several years. It's a small part of the uptick in service provider. But if you strip that out, we're still in a pretty exciting space. And I think I think actually for the MDU order to order the MDU order is not the bit it's progress. It's not necessarily a needle mover. The time to get excited about the MDU project would be if hopefully we win the next the next order, that would make we would anticipate that would make a difference in our backlog. And we'd probably be forced to raise our guidance. Tim? Tim Savageaux: I say that a little tongue in cheek. Tim Savageaux: Okay. All in good time. Well just to finish off on this whole bookings and backlog, thing. I mean, historically, you've also seen you know, some pretty big kinda state network projects you know, come down the pipeline and also affect that number. Anything to call out there? Or is this a little more broad based, which it sort of sounds like it is? Pete Smith: Actually, this is a good question to get some insight. It's broad based. In the past, we've had one-off or two-off large state network wins. And I would say over the last six months, we haven't had any of those. So it's a broader based state network or private network wins. And I want to say this, we haven't lost any big state competitions. It's just the nature of the business and actually pretty happy that we have broad-based diverse customer wins in both the state public safety as well as utility. Tim Savageaux: Great. Very much. I'll pass it on. Operator: Thank you. And as a reminder, to ask a question that will be star one one. Once again, that's star one one for questions. Our next question will come from the line of Theodore O'Neill from Litchfield Research. Please go ahead. Theodore O'Neill: Okay. Thanks very much. Congratulations on a good on a good quarter. And welcome aboard, Andrew. Andrew Fredrickson: My yeah. Good guys. Hey. So I I wanna follow-up on the cellular router, the ruggedized cellular router business. Last quarter, Pete, you said that you had it in with customers on this because the connection with the microwave business you were doing with them. And there's some dissatisfaction with the incumbent. And they're wondering if that's if that's still going and that's still helping business for you. And, also, it just looking over the transcript or or the presentation, it looked like you mentioned they had 10 chosen customers in that area, and I was wondering if changed. Pete Smith: So the value or the competitive advantage that we have in this cellular router for first responders and public safety is we have a significant portion of US 911 networks. And then, you know, with the a year and a half ago, we before business came became part of Aviat, and with that came the cellular router. Over the last year and a half, we've reconfigured some of the the the software to make it amenable to writing in the first responder vehicle. And what So having the platform, putting the software in place, and having the channels where it's principally not the same purchasing agent, but the purchasing agent that we call on is one or two doors down from the network infrastructure. That we have a good reputation. That in terms of getting customer traction that is definitively true. We announced that we had our first small PO. And let me just I I would say that we're engaged right now with about 15 customers. And how that shows up in revenue is we have to continue to do our proof of concept and capitalize on the next time the budget cycle comes around for that particular first responder procurement. What I can say is we haven't had any any customers who said, No, this doesn't make sense. So we're excited. We want to be patient and continue to demonstrate and let the natural uptake give us a lift. I would say that where do I think that becomes material? Is sometime in fiscal year twenty seven. Theodore O'Neill: Okay. And my other question is about strength in Europe, and I was wondering if you could give us some color on where that's coming from. Pete Smith: About five quarters ago, we a new EMEA leader and he is driving tremendous discipline and key focus on private networks and the success is starting to show. Theodore O'Neill: Okay. Thanks very much. Operator: Thank you. And now I'd like to turn the callback over to Pete. Any closing remarks. Pete Smith: Well, I'd like to thank everyone for joining. We look forward to updating you in about ninety days. It's exciting times Aviat and we look forward to the future. Thanks, everyone. Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.
Operator: Greetings. Welcome to NGL Energy Partners 2026Q3 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Brad Cooper, CFO at NGL Energy Partners. You may begin. Brad Cooper: Good afternoon, and thank you to everyone for joining us on the call today. Our comments today will include plans, forecasts, and estimates that are forward-looking statements under U.S. Securities law. These comments are subject to assumptions, risks, and uncertainties that could cause actual results to differ from the forward-looking statements. Please take note of the cautionary language and risk factors provided in our presentation materials and our other public disclosure materials. We delivered another strong quarter highlighted by record water disposal volumes in Water Solutions and continued execution on our financial strategy. For the quarter, adjusted EBITDA from continuing operations was $172.5 million, up from $158 million a year ago, a 9.2% increase. On the financial strategy front, we executed on two of our priorities: reducing higher-cost preferred equity and repurchasing common units. During the quarter, we redeemed an additional 15% of the original Class D outstanding. On the common units, we repurchased 1.6 million units during the quarter and have now repurchased approximately 8.7 million units since program inception, which is almost 7% of the outstanding units at an average price of $5.70 per unit. We have almost fully exhausted the board-approved common unit repurchase plan. At current unit price levels, we are primarily focused on eliminating the Class D preferred units. With the water growth projects we have line of sight into, and the Class D preferreds, we will be targeting these two over the next fiscal year. Doug will provide prepared remarks shortly, but in early January, we eclipsed 3.5 million barrels per day of disposal volumes, which is a record for the partnership. We experienced a few days in mid-January when volumes were under 3 million barrels a day due to the extreme cold weather most of the Midwest and Southeast experienced. We do not expect this to have a material impact on our full-year guide for fiscal 2026 due to the nature of how we contract. Recall that over 1.5 million barrels per day of our water disposal volume is under MVC or CBC, which allows us to get paid on volumes even if they are not disposed of. The new contracted volumes that Mike mentioned on the previous earnings call are coming online, and we anticipate a strong close to fiscal 2026. We are still guiding our full-year EBITDA to a range of $650 to $660 million. These new contracted volumes that have recently come online set us up for a strong start to fiscal 2027, where we are still projecting to exceed $700 million of EBITDA for the first time in the history of the partnership. In 2026, the Water Solutions segment generated adjusted EBITDA of $154.5 million versus $132.7 million in the prior year third quarter, an increase of 16.5%. Again, we set a physical disposal volume record, processing 3.07 million barrels per day of physical produced water versus 2.6 million barrels per day in the prior year third quarter, an increase of 17.1%. Total volumes we were paid to dispose of, including deficiency volumes, were 3.13 million barrels per day in the third quarter, versus 2.91 million barrels per day in the prior year third quarter. So total volumes we were paid to dispose of were up approximately 7% in 2026 over 2025. Operating expenses for the quarter were $0.18 per barrel due to nonrecurring expense reductions. Crude Oil Logistics adjusted EBITDA was $15.4 million in 2026, versus $17.3 million in the prior year's third quarter. Physical volumes on the Grand Mesa pipeline averaged approximately 85,000 barrels per day, up significantly from 61,000 barrels per day in the prior year quarter. Margins for barrels on Grand Mesa were lower in 2026 compared to the prior year's third quarter due to lower oil prices as well as a reduction in volumes from committed producers with higher contracted tariffs. Liquids Logistics adjusted EBITDA was $15.2 million in 2026, versus $18.6 million in the prior year's third quarter. Strategically, we executed a significant repositioning in April 2025 with this segment. We sold our wholesale propane business and 17 NGL terminals, exited the refined products business, and wound down our biodiesel marketing business. Today's liquid platform is more focused and anchored by our Centennial butane blending business. The streamlined footprint is performing as expected for the full year. I will turn the call over to Doug White. Doug? Doug White: Thank you, Brad. As Brad mentioned earlier, we entered into several volume commitment contracts in the Delaware Basin that included a large amount of asset development. Our development team executed these projects ahead of schedule and under budget. We are happy to report the water volumes associated with these projects are flowing and have been at or above our expectations. The capital investment included the Western Express pipeline expansion of 27 miles of 24-inch pipeline, further expanding our reach into our customer footprint and providing flexibility to transport water to areas of underutilized capacity and away from areas burdened by seismicity and pore pressure constraints. I want to thank the operations team for their successful execution of these projects. In the quarter, we achieved an all-time daily record of approximately 3.3 million barrels of water, and on January 16, we received over 3.5 million barrels of water in a single day. This reflects the capacity increase from the capital investment I just mentioned. Our ability to execute large growth projects at attractive multiples over the last several years, combined with our operational capabilities, is allowing us to deliver consistent economic results. We continue to engage our producer customers with opportunities, and we are working to secure additional disposal contracts in fiscal year 2027. We continue to improve the business, and as an example, we are in our second year of development of our AI machine-based learning project, which will begin to contribute to operational efficiencies in this calendar year. We are utilizing the millions of data points collected through our SCADA system, automated electric power consumption meters, and system flow models, which are fed into our proprietary AI model. It is identifying opportunities to increase revenues and decrease expenses. We are excited to continue to grow this project over time and increase the AI impact on our business. As an update to our large-scale produced water treatment strategy in the Delaware Basin, we recently entered into an MOU with Natura Resources, a leading advanced modular nuclear reactor developer. We are pursuing a combination of nuclear power applied to thermal desalination technology in Reeves County, Texas, where our outfall for the TPDES discharge permit is located. We are progressing toward a final draft of that permit this month and expect to receive an issued permit early this year. These steps lead us closer to realizing our medium to long-term goals of large-scale disposition of produced water. I will now turn the call over to our CEO, H. Michael Krimbill. H. Michael Krimbill: Thanks, Doug, and good afternoon, everyone. I have some just brief comments. With respect to current operations, you have heard that we achieved another great quarter exhibiting continued growth. There are several takeaways worth mentioning. One, we continue to move towards a predominantly water solutions company as we grow our water footprint and shed non-water assets. Two, this effectively eliminates the seasonality of our cash flows and improves the consistency and predictability of those cash flows. And three, we already have significant growth contracted for fiscal 2027 beginning April 1. So now let's look at our capital allocation priorities first. Our capital must finance internal growth projects for our producer customers. As we discussed on the previous quarter's earnings call, our growth capital increased by over $100 million in the second and third quarters of this fiscal year as new opportunities presented themselves. And as Doug said, these projects are currently in service. Next, we focused on redeeming the Class D. As Brad said, we have redeemed about 15% of the outstanding preferreds. But importantly, our leverage has declined to the low 4.0 times area. So we will be looking to take out a significant portion of the remaining Class D's in the very near future. So stay tuned for that. Finally, we look at our common units, opportunistically to purchase and retire them at attractive prices. The board and management team have acted proactively to eliminate dilution and actually reduce the common unit count outstanding. So going back to November '24, you may remember we purchased 23.3 million long-term common unit warrants that had strike prices from $13.50 to about $17.50. We paid $6.9 million. These purchases eliminated approximately 18% of future dilution. Currently, we have reduced the outstanding, as Brad said, by nearly 7% through our board-approved unit repurchase plan. So combined, we should not lose sight. We have eliminated dilution of our common by approximately 25%. We will continue taking advantage of attractive common unit prices while balancing liquidity and leverage requirements. In closing, we believe the future of our business five to twenty-plus years from now is not dependent upon drilling more and more SWDs. That is our situation presently and in the near future. But ultimately, we must treat the produced water to a quality that can be released on the surface for irrigation, industrial, and municipal use. We are closer to that goal. The Natura agreement and the anticipated discharge permit are two of the steps in that direction. Not all of our initiatives on this journey will work, but time and technology are on our side. I think with that, we open it up for questions. Operator: Thank you. At this time, we will be conducting a question and answer session. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. Before pressing the star keys. One moment, please, while we poll for questions. And the first question today is coming from Eric Whitfield from Texas Capital. Eric Whitfield: Good afternoon, guys. Derrick Whitfield with Texas Capital. So congrats on your quarter and also on the strong operating performance of your water business. Maybe just starting there on the macro environment, given the volatility in crude prices, can you speak to the firmness of the growth projects you highlighted in 2Q and really speak to the appetite of producers to further address and commit to future water disposal needs given the volatility we are currently seeing in crude prices? H. Michael Krimbill: Yeah. Derrick, I mean, I think Mike hit on it. I mean, the projects and the capital spend that we outlined in the last call, those projects are online here at the beginning of this calendar year. Doug, you want to kind of take what you are seeing maybe into this current year and maybe through the end of next fiscal year for us? Doug White: Yeah. Eric, when we look at the projects that we have completed, you know, those came with volume commitments and those were for the long term. So those are very financially firm. You know, as we see the oil price fluctuate, even when it dipped down to, you know, the $55 range, we really did not see a big change from our customers as the consolidations happen, certainly in the Delaware Basin. We saw some more of that announced today. That consolidation has created more of a level activity level versus what it may have been, you know, a few years ago when there was a lot more private equity type of producers in the basin. But as it has matured, we are seeing our customers and our large customers just on a continuous, drilling forward and, you know, frac spreads, etcetera. The other real big driver for us is, you know, asking about what does it look like, you know, prospectively. The other big driver is there is such a large wedge of foundational volumes of produced water in the Delaware Basin that when we saw, for an example, you know, we hit that record on Friday, the sixteenth in January, that was right before the storm. We saw some people drop some frack crews or pause some frack crews. The uptick of water that happens when there is even a small slowdown is reflective positive for our business. You know, we are not active recyclers like some others are. When that recycling may slow down because it does not have, you know, a frac crew to send water to, all of that produced water has to go somewhere, and that comes to us. So we are continuing to see large opportunities for large-scale projects prospectively and expect to, you know, nail down some of those firmly in the coming months. Eric Whitfield: Terrific. And specific to Natura's release this morning, it seems the market was concerned about the near-term capital obligations for a project that might not be material for several quarters, if not years? I guess, a, how would you characterize this water treatment opportunity and volume and values? And then b, how material is the current CapEx obligation? Doug White: Yeah. Good question. So we continue to explore the alternatives to injection based on, you know, seismicity, pore pressure, increasing, you know, just being prudent operators, we have continued for several years to be looking for other alternatives to injection. You know, you might remember, you know, our very successful desalination project in Pinedale, Wyoming. You know, we have a history and experience in the side of the desal part of the business. We know it takes several factors to come together for those projects to coalesce. You know, what has happened in the past year, you know, Texas has passed the water bill. Right? A billion dollars a year of support for new water in Texas. The federal government support of production of domestically sourced critical minerals, requests from our customers. You know, our customers are paying attention. What opportunities are there for the producers, and saying, hey. We are hey, NGL. Where are you going to take my water? Something different rather than, you know, Loving or Reeves County? You know, we have addressed a lot of that in the short to medium term. You know, and some percentages of the very long term with our Andrews County out-of-base assets. But then we have to look at and say, what does it take to create large-scale desalination, which we very, very firmly believe is part of the future in the portfolio going forward. Basic requirements for that, first, have to have produced water volumes that support an economic scaled plant. We check that box. Right? Our large system. There is a reason we applied for our outfalls on our TPDES permit in a particular location in Reeves County. That is because we can deliver, you know, 800,000 barrels a day of water to that location. You need those economies of scale to have an economic project. Second is an available energy source. You have to have this energy source for the treatment plant. Or as it goes with Natura, it becomes a means of treatment itself. And very interestingly, nuclear power generation produces about 60% waste heat of its energy. We would use that waste heat to be able to do thermal desalination of our water. It is not really even about the electricity, the 40% electricity that is produced. It is really about the waste heat. We will be taking waste heat and treating wastewater to create new water for the state of Texas, use the waste off of that process, which is condensed brine or concentrated brine, which has concentrated up the minerals within that brine. And then, you know, we are working on recovery of critical minerals through that. So you put all those pieces together, that is what it takes to get there. And our MOU with Natura, we are very excited about. While it will have no CapEx demand to NGL on the nuclear side, our plan has not changed. And our CapEx forecast and demand has not changed, we are looking forward to developing the scaled treatment, and that will come over time. We will not go straight to a giant scale treatment. Our TPDES discharge permit even has caps and ceilings on the amount of water you can discharge over certain periods of years. So for us to start, you know, maybe we start with a 50,000 barrel a day plant that is able to be scaled. Most likely, we will be using natural gas to power that plant. Not a heavy CapEx demand. And then as we move forward, we sign contracts with our customers. We sign contracts with downstream users of our new water. Then we can create the economics around a larger CapEx spend to scale the project. Natura, should that, you know, come to fruition, Natura has their own economics of their own capital spend around their project. But we would put the two projects together to really create a really unique and exciting project. Eric Whitfield: Tremendously helpful. If I could just ask one more, only you piqued my interest on the AI and machine learning side. Maybe speak to the amount of value you have recovered to date and really, the amount of potential value you could recover as you see this starting to take root within the organization? Doug White: Well, I think you can see in our OpEx numbers how they continue to improve. It is very hard to simply quantify that large move that we achieved this last quarter just down to the AI project. But, certainly, the AI project is having an influence on expenses. What most do not really focus on is the impact on revenues. The more water we can move more efficiently, utilizing, increasing our utilization of our existing assets, saves us capital. We do not have to drill new wells. We do not have to build new facilities. You know, that goes straight to the bottom line. Obviously, with helping out on reducing the capital spend, we increase our low multiple returns, which is great to pay back returns. If you are looking for just a dollar amount or a percentage, right now, I do not feel comfortable saying what that is. We are seeing increases in just efficiencies to start. As you know, these machine-based products, you know, they learn from themselves and start to continue to create more and more value. So as time goes on, Eric, I think as we see true, I guess, discernible returns on that or dollars, you know, we will be able to share that down the road. Eric Whitfield: Fantastic. Great update. Operator: Thank you. And once again, it will be star one on your phone at this time. The next question is coming from Tarek Hamid from JPMorgan. Nevin Mathew: Hi. Good afternoon. This is Nevin on for Tarek. You had mentioned consolidation a little earlier. So we were just wondering if you had any conversations with Devon following the deal announcement earlier this week. And if so, were there any takeaways on potential changes to activities or volume? H. Michael Krimbill: We have been so busy with preparing for this call and running the business, Nevin, we have not had the opportunity to have those conversations with Devon. Nevin Mathew: That's understandable. Alright. Thank you. Operator: Thank you. And there are no other questions in the queue at this time. I would now like to hand the call back to Brad Cooper for closing remarks. Brad Cooper: Thanks, everyone, for joining today. We will catch up with you in June on our year-end call. Operator: Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.
Operator: Thank you for standing by. At this time, I would like to welcome everyone to today's Amcor Fiscal 2026 Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Your telephone keypad. And if you'd like to withdraw your questions, simply press 1 again. Thank you. And I would now like to turn the call over to Tracey Whitehead, Head of Investor Relations. Tracey? Tracey Whitehead: Thank you, operator, and thank you everyone for joining Amcor's fiscal 2026 second quarter earnings call. Joining the call today is Peter Konieczny, Chief Executive Officer, and Steve Scherger, Chief Financial Officer. Before I hand over, let me note a few items. On our website, amcor.com, under the investors section, you'll find today's press release and presentation, which we will discuss on this call. Please be aware that we'll also discuss non-GAAP financial measures and related reconciliations can be found in those documents on the website. Remarks will also include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation lists several that could cause future results to be different than current estimates. Reference can be made to Amcor's SEC filings including our statements on Form 10-K and 10-Q for further details. Please note that during the question and answer session, we request that you limit yourself to a single question and then rejoin the queue if you have any additional questions or follow-ups. With that, over to you, Peter. Peter Konieczny: Thank you, Tracey, and thank you to everyone joining us. I'm pleased to welcome you today to discuss our fiscal 2026 second quarter results. This is a transformative and exciting time for Amcor. Our acquisition of Berry created a global leader in consumer packaging and dispensing solutions. We're realizing the benefits of this combination and executing well, resulting in strong momentum toward achieving our fiscal 2026 commitments. With a strengthened platform and a clear growth roadmap, Amcor is well positioned to deliver significant long-term value for shareholders. Before turning to today's key messages, as always, we will start with safety on slide three. The well-being of our colleagues is a core value for Amcor, and our commitment to safety remains unwavering. For Q2, our industry-leading safety performance continued with Amcor's total recordable incident rate at 0.52. This is a modest increase compared with last year's performance which is not unusual when we acquire business. We have moved quickly to drive safety performance across our combined business, and are pleased to see this key metric improve compared to September. Additionally, 79% of all Amcor sites remained injury-free through Q2. Slide four highlights the key messages for today aligned with our near-term priorities, which have not changed. Continuing to deliver on the core business, accelerating synergy realization, and further strengthening the business through portfolio optimization actions. Each and all these near-term priorities are contributing to setting Amcor up to deliver solid and sustained volume-driven organic earnings growth over the mid to longer term. First, our financial performance in the second quarter was in line with the expectations we set out in October. Maintaining momentum toward our full-year objectives. Adjusted EPS was up 7% for the quarter, and 14% for the first half as we continue to execute well against our priorities and our market opportunities. Across our core portfolio, comparable adjusted EBIT was up 7% driven by synergy benefits and in line with the prior year excluding synergies. This reflects the successful effort of our teams to fully offset the impact of lower volumes with cost and productivity benefits. Our continued solid execution demonstrates the resilience of our business and the capability of our people. What continues to be a challenging and dynamic market environment. Second, synergies were at the upper end of our guidance range with benefits accelerating to $55 million in Q2, and totaling $93 million for the first half. The expanding synergy pipeline, combined with our proven integration track record, reinforces our confidence in delivering at least $160 million of synergies in fiscal 2026. Third, we have reaffirmed our financial guidance for the fiscal year. Updating our adjusted EPS expectations to $4.2 to $4.5 per share, to reflect the recent one-for-five reverse stock split. We remain on track to deliver double-digit EPS growth fiscal 2026 and to double free cash flow versus fiscal 2025 primarily driven by delivery of identified synergies and productivity gains. And lastly, our identified portfolio optimization actions are advancing well and at pace. In a relatively short period of time, we've made meaningful progress evaluating alternatives for our $2.5 billion of non-core businesses including the North American beverage business. We believe these focused actions will position us for stronger, more sustainable long-term growth. Turning now to slide five and financial performance for the second quarter and first half. In absolute dollar terms, the business generated strong quarterly revenue of $5.4 billion, EBITDA of $826 million, and EBIT of $603 million. This is significantly higher than the prior year as a result of the Berry acquisition. Disciplined cost management, improved productivity, accelerating synergies. Adjusted EPS has also been updated to reflect the reverse stock split. We delivered $0.86 per share for the quarter, in line with our expectations including a one-time favorable tax benefit offset by weaker performance in our non-core business portfolio, which we expect will improve in the second half. Free cash flow was $289 million for the quarter, after funding approximately $70 million of acquisition-related cash costs. And today, the Board declared a quarterly dividend of 65¢ per share, which is up over the prior year and continues our long-term commitments to annualized dividend growth. Overall, these results are aligned with our expectations eight months after a transformational acquisition and demonstrate our ability to execute against our commitments. Taking advantage of a unique opportunity to optimize the portfolio was one of the key commitments we highlighted when announcing the acquisition. As shown on Slide six, our $20 billion core portfolio represents the strongest part of the combined business. The core portfolio includes our six focus categories, namely health, beauty and wellness, protein, liquids, food service, and pet care. This is where we hold leadership positions. Where innovation drives differentiation and value, and where long-term consumer demand is most durable. These categories reflect the markets where Amcor has a distinct competitive advantage. When viewed on its own, core portfolio has a stronger financial profile and outperforms the total company across all key financial metrics. Including volumes. In the second quarter, our estimated core portfolio volume performance was approximately 100 basis points better than the total combined portfolio. Volumes for the core business were approximately 1.5% lower than the prior year similar to the first quarter with market dynamics remaining largely unchanged. Growth across our focus categories modestly outperformed the broader portfolio in both segments. Adjusted EBIT margins of approximately 12% also reflect a higher concentration of Advanced Solutions improved mix within our core portfolio and synergy benefits. Adjusted EBIT dollars were up approximately 7% largely reflecting synergy benefits. Excluding synergies, we held earnings flat with the prior year in a market with modestly declining volumes. This is a solid result achieved through a focus on the cost and productivity levers within our control. Likewise, as mentioned earlier, our portfolio optimization actions are advancing with pace. We're making strong progress exploring alternatives for the remaining $2.5 billion of non-core businesses, including encouraging discussion related to the North American beverage business. We believe these actions will ultimately ensure resources are allocated to the highest value opportunities within our core portfolio. Slide seven shows Q2 synergies continued to accelerate as expected. Resulting in $55 million of benefits in the quarter. At the upper end of our expected range and $93 million in the first half. G and A synergies reflect organizational redesign, system consolidation, and simplification efforts across corporate support functions. We remain on track and have reduced headcount by over 600 consistent with our integration roadmap. As expected, procurement synergies continue to ramp up as we consolidate spend. Harmonize specifications, and align pricing across the combined supplier base. Negotiations and agreements with our major vendors are on track, underpinning our confidence in delivering $325 million in procurement synergies by the 2028. Fiscal benefits are also flowing through as expected. Reaching approximately $10 million through the first half as we continue to execute and optimize our debt and tax structures. Additionally, we are gaining traction on operational synergies, with approximately 20 site closures or restructures approved or announced. These synergies, as expected, will primarily materialize in years two and three of our synergy realization timeline. Growth synergies have also been strong. We're gaining momentum as customers validate the value we bring through our expanded footprint and integrated product offerings to meet complete and complex packaging needs. Annualized sales revenue from business wins directly linked to our combination with Berry now exceeds $100 million a strong start to our original three-year target of $280 million. We expect delivery against these wins will commence in the 2026. Adding another example, of those we discussed last quarter, our strength in supply chain and multi-format capabilities have enabled us to support a major global pharmaceutical customer as they launch a solid oral dose GLP one therapy drug. This is an exciting win that will benefit both segments through supply of blister packaging in Europe and rigid containers in The US. Overall, our teams are executing well against our proven integration playbook. We also remain confident in our ability to deliver at least $260 million of synergies in fiscal 2026, and a total of $650 million of synergies through fiscal 2028. Before turning the call over, I'd like to take a moment to formally welcome Steve Scherger. Who joined us as Amcor's CFO nearly three months ago. Steve has spent his early days deeply engaged, meeting with our executive team immersing himself in our business, and getting a clear line of sight into our priorities and opportunities. He brings deep industry experience and a strong understanding of both. The US and global packaging markets. And we are excited to have them on board. We're fortunate to have an executive of his caliber and reputation join our leadership team, and we're confident that his insights and experience will further strengthen our ability deliver value for our customers and shareholders. In the years ahead. Steve, over to you. Steve Scherger: Thank you, Peter, for those kind words. It is an honor to be here with you and our 70,000 colleagues. In my first few months at Amcor, I've had the opportunity to meet teams from across the organization and around the world. Gaining a deeper understanding of the operational and strategic priorities that will drive and shape significant value creation for years to come. What has stood out most is Amcor's clear market leadership disciplined approach to creating value, and the exceptional quality and capabilities of the people who drive performance globally every day. This quarter, as you can see, we are sharing some additional materials and analytics with you to help provide a clear view of our underlying market trends and the exceptional global consumer packaging platform we are building. I look forward to continuing to share our strategic priorities with current and potential investors in ways that will simplify quantify our compelling value creation model. I look forward to partnering with our global leadership team as we build momentum and deliver strong results for our customers and shareholders. Let me start with the global flexible packaging solutions segment on slide eight. Sales for the segment increased 23% on a constant currency basis. Driven primarily by the Berry acquisition. On a comparable basis, volumes were down approximately 2% and were similar to what we experienced in Q1 in all regions. In the developed regions of North America and Europe, volume trends were consistent with the first quarter. Down low to mid-single digits with Europe remaining modestly more challenged than North America. Volumes across emerging markets were as expected, with low single-digit growth in Asia Pacific offset by modestly lower volumes in Latin America. By market category, volumes were higher in pet food and meat proteins. This was offset by lower volumes in other nutrition, liquids, and unconverted film and foil. Overall, our focus categories performed modestly better than the rest of the portfolio. Adjusted EBIT rose 22% on a constant currency basis, to $402 million. Driven by approximately $65 million of acquired earnings net of divestments. On a comparable constant currency basis, adjusted EBIT was up approximately 1% and adjusted EBIT margin of 12.6% reflects accelerating synergy benefits in line with our expectations. Excluding synergies, comparable earnings were broadly in line with the prior year. Our teams remained resolute in their focus on disciplined cost performance and driving productivity improvements to offset the unfavorable impact of lower volumes. Turning to Slide nine. The Global Rigid Packaging Solutions segment. Sales for the segment increased significantly on a constant currency basis. Mainly as a result of the Berry acquisition. On a comparable basis, volumes were flat with the prior year, excluding non-core businesses. This represents a sequential improvement of approximately one percent one hundred basis points driven by improved growth in emerging markets. Where volumes were up low single digits primarily in Latin America. In developed market regions, excluding non-core businesses, North America volumes were flat compared with the prior year. As expected, volumes in Europe remained somewhat challenged and were down low single digits. Similar to the flexible segment, focus categories performed better than the rest of the broader portfolio, with growth in the pet food, protein, and beauty and wellness markets. This growth offset softer volumes in the food service and health care markets. Adjusted EBIT was $228 million up over last year on a constant currency basis driven by approximately $165 million of acquired earnings net of divestments. On a constant currency comparable basis, and excluding non-core businesses, adjusted EBIT was up 15% as a result of accelerating synergy benefits. Excluding synergies, adjusted EBIT was in line with the prior year, with disciplined cost performance, offsetting modestly unfavorable mix. Adjusted EBIT margin, excluding non-core businesses, improved approximately 200 basis points and was 12%. Similar to the flexible segment. Underscoring the strength of the business we are creating with this transformational acquisition. Moving to slide 10. Free cash flow for the quarter was $289 million resulting in a first half cash outflow of $53 million in line with expectations. First half capital spending was $459 million up compared with the prior year as anticipated. We continue to expect fiscal 2026 capital spending to be in a range of $850 to $900 million. Adjusted leverage exiting the quarter was 3.6 times, consistent with the seasonal cash flow patterns. We expect stronger cash flow in Q3 and continue to expect adjusted fiscal year-end leverage to be in the 3.1 to 3.2 times range. Our commitment to an investment-grade credit rating a strong balance sheet, and a modestly growing dividend annually remains unchanged. Strong annual cash flow generation fully supports our capital allocation priorities. Turning to Slide 11 and our financial guidance. Another quarter of results in line with expectations reinforce our confidence in delivering a year of strong adjusted EPS and cash flow growth. As Peter noted earlier, we are reaffirming our full-year guidance ranges today. Adjusted EPS expectations remain unchanged. While noting the range has been updated to a range of $4 to $4.15 per share. Reflecting our recent one-for-five reverse stock split. Our expected year-over-year adjusted EPS growth of 12% to 17% is primarily driven by synergy capture, in line with our commitments and continued strong cost control. As we execute in a challenging market environment. These actions combined with the portfolio optimization steps Peter covered earlier, will position us well to deliver sustained, volume-driven organic growth over the mid to longer term. We are also reaffirming free cash flow guidance of $1.8 billion to $1.9 billion. Relative to the first half of the year, our guidance implies a step up in earnings in the second half in line with our expectations driven by three key components. First, Synergy Benefits will continue to build, Second, seasonality is typically stronger in the second half of the year. And third, performance across our non-core businesses is expected to improve. Supported by recently renegotiated customer contracts and improved operating performance compared to the prior year. Looking to the third quarter, we expect adjusted EPS to be in the range of $0.9 to $1 per share. Including realization of approximately 70 to $80 million of synergy benefits. Please also draw your attention to supplemental third quarter and updated full-year guidance metrics in the appendix section on Slide 14. Which should be helpful when updating financial models. In summary, we are executing well and delivering against our commitments as we continue to take steps to further strengthen the business and our performance. With that, I'll hand the call back to Peter to close out. Peter? Peter Konieczny: Thanks, Steve. In closing, we're making tangible progress across all three of our strategic initiatives. These actions support our long-term organic growth objectives, translating into sustainable volume-driven earnings growth over the mid to longer term. As we close out the 2020 and look ahead, we are pleased with our progress. Executing well, financial performance is in line with expectations, and we are delivering against our commitments. Demonstrating the resilience of our business in a challenging market environment. We're on track to deliver at least $260 million of synergies this fiscal year and $650 million over three years. We have reaffirmed our fiscal 2026 adjusted EPS and free cash flow guidance and portfolio actions are progressing with pace. That concludes our prepared remarks. And with that, operator, please open the line for questions. Operator: Thank you. And at this time, I would like to remind everyone, in order to ask a question, press star then the number one. In the interest of time, we'd like excuse me, we would like to remind participants to limit their questions to one and to rejoin the queue for any follow-ups. And we will pause just a moment to compile the Q and A roster. It looks like our first question today comes from the line of Ghansham Panjabi with Baird. Ghansham, please go ahead. Ghansham Panjabi: Yeah. Thanks, operator. First off, Steve, congrats to you, and, welcome back. Best wishes in your new role. I guess, you know Thanks, Ghansham. Peter, may I guess, Peter, in terms of the volumes or, Steve, for that matter, in terms of your expectation for volume for the next two quarters, which are your fiscal year '26, are you embedding just share with us in terms of what you're embedding in terms of volumes between the two segments. Have you seen any improvement in your production backlogs or any other forward indicators that you track? And just asking because some of the CPGs have reported thus far have said some you know, generally speaking, very favorable things as it relates to volumes and pivoting towards volume velocity and fiscal year '26. I'm just curious if you've seen any impact of that whatsoever. At this point. Thanks. Peter Konieczny: Yeah. Thanks, Ghansham. I'm happy to give you some color, and then maybe Steve wants to follow-up and provide some context with regards to our financial expectations. Look. Generally speaking, I'd say we're approaching the back half, not much different from what we saw in the first half. And therefore, the commentary is very much aligned with what we said in November. I'll start with the positives. I think we're making good progress on the revenue synergies. As we pointed out in our prepared comments. And we are very much focused on the core and growth initiatives that we're driving across the business. So those could potentially provide some upside. But the reality is we're operating in a market that is low single digits down, And while everybody is hoping that the environment will turn in the short term in the second half, we're approaching it very much consistent with what we've seen in the first half. What that means is we will continue to apply the same recipe in terms of focusing on cost, flexing the organization according with the volume demand that we're seeing. So you know, we do see some opportunity for improvement in the back half but we're hoping for the best and planning for something that's very much consistent with the first half. Steve? Steve Scherger: And thanks, Peter. And just to add a little bit to that, Ghansham, our guidance assumes really at the bottom half of the guidance, if you will, assumes in a market environment similar to what we've been experiencing, so similar to the one and a half percent that we were down in the quarter. So, really, the bottom half assumes consistent volume environments. And as Peter said well, the upper half would be more aligned with the possibility of more positive activity with our customers as well as the capture of revenue synergies and the work we're doing, to gain position. Ghansham Panjabi: Great. Thanks, Ghansham. Operator: And our next question comes from the line of Jakob Cakarnis with Jarden Australia. Jakob, please go ahead. Jakob Cakarnis: Thanks, operator. Evening, Peter and Steve. I just want to focus that we've got the guidance for the third quarter more on the fourth quarter and exit rates, if we could. Seasonally, it looks like your EPS historically has been about 30% of the full year in that fourth quarter. It looks like the guidance is largely congruent with that sort of shape for the result. Can you just give us outside of volumes and market performance some of the initiatives you're enacting through the fourth quarter that give you confidence around that guidance, please? Steve Scherger: Jakob, this is Steve. Maybe just try to take you through the first half, second half and then a little bit third quarter, fourth quarter. As we look first half, second half, I'll focus on EBIT improvement. Really, there's three things that will drive first half, second half EBIT improvement. One is just seasonality, little bit of what you were just talking about. We should see about $100 million of EBIT improvement first half second half just seasonally, which is would be consistent with historical expectations. Synergy growth is very important. First half second half, the at least $260 million of synergy for the year is another $100 million of improvement first half. Second half, And then I'm sure we'll talk a little bit more about our non-core businesses, the $2.5 billion of non-core. We'll see improvement first half, second half there as well, particularly given a challenging second quarter that we saw with our non-core businesses, primarily the North American beverage business, Q3 to Q4 improvement to your question that too Synergy capture will continue to accelerate Q3 to Q4. Our non-core businesses, we should see improvement Q3 to Q4 then one of the things that we'll see in Q4 specifically on a year over year basis is a year ago in Q4, we had some challenges with our North American beverage business. And we have more confidence that Q4 year over year will see improvement on that front. So just a little bit of first half, second half and third quarter fourth quarter for you. I hope that helps with the context. Jakob Cakarnis: Great. Thank you, Jakob. Operator: And our next question comes from the line of Anthony Pettinari with Citi. Anthony, please go ahead. Anthony Pettinari: Good evening. Hey, just following up on Ghansham's question in terms of the volume performance in the first half and maybe the embedded assumptions for the second half. I mean, you think in your major categories are you is your volume performance basically in line with the broader industry Do you think that you're gaining a little bit of share or conversely, are you letting go of some business that's maybe become less profitable? Peter Konieczny: Yeah. Thanks, Anthony. I think I'll have a go at this one. Me just run you through the numbers again to calibrate and, at the same time, give you a bit of color. So the overall company in the second quarter was down two and a half percent on volumes. And that would have been a performance that's very similar to the first quarter. And then when you take a really hard look, you probably see a performance that is marginally better than the first quarter. But I'd be cautious to read too much into that just because I would like to see a bit more of a trend here, and also the numbers are not that much different. So very much in line, I would say, volume performance wise with the first quarter. Now let me dive into that a little bit more, and by doing that, I'll focus on the core. The core portfolio. So now I'm talking about the $20 billion out of the $23 billion of the company. And the core portfolio really is 1.5% down. That's about a 100 basis points better than the overall business. And the delta, obviously, is made up by the non-core part of the business. But the core is 1.5% down. If I go into the segments between rigid and flexibles, Flexible's down low single digits. Rigid's flat. Again, both have been very similar to Q1. We're happy with that. Happy with the flat performance of rigid. I guess what we're seeing there is that North America is holding up. We're seeing some growth in LatAm. And You Know, We'd Like To Believe That That's A Combination Of Of Market Improvement Maybe, But Also The Efforts That We're Investing In The Business. In Order To Improve The Volume Performance Overall. So Happy With The Rigid's Performance. If I Go By Region, You Know, North America encouraging, as I said, low single digits down. A little better than Q1. Europe's a bit weaker than North America across both segments. And we're seeing growth again in the emerging markets. Low single digits, Then I'll make one more comment After we've we've been flat in Q1. which is important because we keep referencing the focus segments. Of the business, which are more than 50% of the core business. And collectively, those focus segments have have outperformed the core business overall. And we're happy with that. You know, pet care was certainly a standout example. We've seen high single digits growth. Over a couple of periods now, and there, I would say, we probably are gaining some share And meat proteins, has likewise been a category we're happy with with, low single digits growth. And that would be consistent with the efforts that we've put into the category in the past. So I think that gives you some color. Anthony Pettinari: Great. Thank you so much for the question, Anthony. Operator: And our next question comes from the line of Brook Campbell-Crawford with Baron Joey. Brook, please go ahead. Brook Campbell-Crawford: Yes. Thanks for taking my question. It was just on the second half implied earnings improvement, which you know, you've already kinda talked through there. But just with respect to the non-core portfolio, can you provide some EBIT numbers in terms of what we should expect improvement in the non-core EBIT contribution in the second half versus the first half will be super helpful. Thanks. Peter Konieczny: Yeah, Brook. Again, this is Peter. Let me provide color, and then Steve can help you out on the numbers. The non-core Business, we believe, had a tough quarter in Q2. And that was mostly driven by volumes. Sequentially, Q2 was a little weaker than Q1, particularly in the North American beverage business. I would say you know, we've been looking for explanations and signs. We've been looking at destocking activities. But in the core portfolio of our business, I wouldn't say I could see any destocking impact in the non-core business. There may have been some targeted destocking, so that may have been one of the reasons that drove the volume performance down. The other two things that I wanna tell you is operationally, we operated well. In the non-core portfolio. And that relates back to some challenges that we had in prior periods, but we exited the first quarter already saying that we were okay with that, and I can confirm that in the second quarter. Making these comments also in terms of the outlook into the second half. The thing that's changing going forward for the non-core business that we is is that we've also sat down with a number of our customers, and we have looked at the commercial terms of our contract and really in a in real partnership basis, we have been able to adjust some of those terms on a very fair basis, which will improve the business going forward. So that gives me confidence. We're operating well in the back half. That's our assumption. Commercial terms have improved. That will give us a lift. Then we'll have to see what the volume situation is like, but certainly, you know, Q2 versus Q3 I would expect a bit of a lift if I'm correct with my assumption that we did have some destocking. Steve Scherger: Yeah. Brook, this is Steve. Just to kind of add some of the facts there to what Peter was describing. As Peter mentioned, Q2 was a difficult quarter for our non-core businesses. EBIT margins in the 3% range. And that was really where we saw some of the headwinds the $30 million of year over year headwind that was in the context of our overall still growing EBIT at the company level. First half EBIT margins for our non-core business, roughly the $1.2 billion of top line in the 5% range. So that just kind of speaks to the first half. As we look to the second half, let's keep Peter mentioned, new contractual terms, better pricing, good operating environment, we should operate EBITS back in more traditional levels, which is more in the 7%, 8% range, which year first half to second half would be about a $50 million improvement in that business which is really kind of the third component we were talking earlier. Of the first half to second half improvement relative to the North American beverage business in the context of the total non-core businesses. Brook Campbell-Crawford: Alright. Thanks, Brook. Operator: And our next question comes from the line of George Staphos with Bank of America. George, please go ahead. George Staphos: Thanks very much. Hi, everyone. Steve, good to hear you. Welcome back. Peter, thanks for the details as well. I guess my question is is the following. Can you talk about, especially in your focus categories in flexible, what the exit rate on volume was where are you seeing from fiscal two q into fiscal three q, perhaps some acceleration or decline The sort of related question behind the question you know, when I look at the segment results for flexible on slide eight, you know, I know you're pleased with the synergies and certainly that's going well. But there was really not a lot of operating leverage a lot of earnings growth ex the acquisition, and I'm assuming it's the core businesses being down in volume. So if you could talk about the exit rates on your focus categories in flexible, what's doing well, what's not, and what kind of the mix effect of declining volume was in 2Q for flexibles? Thank you. Peter Konieczny: Yes. Thanks, George. Me give this a try, and then Steve can follow-up if he can add some additional value. So exit rates of the focus categories. You know, I'm not a big believer of dissecting a quarter into beginning, middle, and end and sort of talking about volume performance in a very short period of time and read too much into it. But what I can tell you is, and I made this comment, the focus categories collectively outperformed the core business in the second quarter. And the core business was 1.5% down The focus categories were anywhere between 50 and a 100 basis points better than that. So that gives you a bit of a flavor of how the focus categories performed. Now as to the performance between the six, I made a couple of comments already. I guess on the positive side, pet care, really strong and this is I went as far as saying in an earlier question that I think we are gaining share in pet care. Meat protein was up low single digits, so we like that. Dairy was a little softer. And meat and dairy together make up protein. And then if I go to health, beauty, and wellness, health care was down just a tad. You would wonder why that is, but if you look at the quarter again, short period of time, US flu season was a little weaker. That sort of is a bit of a driver. And beauty and wellness was in line. With growth in Europe, a little weaker in Asia. The rest of the focus categories are sort of in the range of low single digits down maybe food service a little more which is a reflection of the value conscious behavior of the consumer. And that sort of speaks to the mix between the different categories Steve, is there anything you wanna add? Steve Scherger: No. I think the only thing to add there, George, to your segment component of the question, I think if you look at the flex segment, the page eight, kind of the lower left, Overall, volumes were down 2% as we mentioned in the flexible segment, while EBIT was up 1%. Synergy capture in the Flexibles business this quarter was in about the $10 million range. So only 10 million of our $50 million of EBIT synergies So, actually, the EBIT on a comparable basis up roughly up roughly $5 million. Synergies plus 10 the core business actually operated pretty close to flat, just down very modestly. So I think the core we're actually very pleased with how the core business performed in a modest down volume environment. Where we really saw the positive benefits on the rigid segment in the kind of the lower left excluding the non-core businesses, which we mentioned were down $30 million on a year over year basis, was actually up 15%. And so to put that into context, it's about $35 million and 30 million of our 50 of EBIT synergy capture was in the rigid segment because given that's where the Berry business primarily is, we saw a lot of our of our G and A and a lot of our procurement synergies captured there. And there too, excluding that, the core business performed quite nicely flattish. On a in a flat volume environment. So that's just to give you a little bit the details on the segment side. George Staphos: Great. Thank you, George. Operator: And our next question comes from the line of Neeraj Shah with Goldman Sachs. Neeraj, please go ahead. Neeraj Shah: Hi, guys. Thanks for taking my question. Just double clicking on synergies. Can you give us some color on the split between G and A and procurement in the second quarter? I think skewed to G and A in the first quarter, but also how you expect that to look in the second half and how the conversations with the suppliers are progressing as well, please? Steve Scherger: Yeah. I can touch on that, and Peter can add some color there. Of the $50 million of synergy capture EBIT synergy capture for the for the quarter. It's split actually quite evenly between procurement synergies and G and A. So it was those two categories The 55 that we mentioned, the incremental five, are the financial synergies, kind of more on the on the interest and tax side. So pretty evenly split between procurement and G and A. As we look forward, we'll continue to be on path relative to procurement and G and A synergies. We're not expecting much in the form of revenue synergies in the second half of the year. That will be mostly positives that we're gonna start to see in fiscal out into 2027, so post June. We'll also start to see some of the operational synergies That's really where we've been investing for facility improvement and consolidation Those synergies will start to ramp up as we look past this year's fiscal year end. So, hopefully, that gives you a little bit of the the detail there. Peter Konieczny: Yeah. Maybe in terms of the color on the procurement side, what I can tell you is that, generally, we feel really good about the synergy ramp up and also the pipeline that supports our expectations for the back half of the year. Steve already said, you know, what what hits first is is G and A. What then comes second is procurement as you wash through the inventory. Anything on the network takes a little more time because it typically has to do with plant restructurings or closures. And the commercial side, while awarded, takes a moment for it to also come through. That's sort of the background to Steve's commentary which I fully support. On the procurement side, look. We have a number of conversations with our suppliers, obviously. About half of the total synergies that we're expecting of the six fifty are procurement related. And the compensations have gone well. And to an extent that, again, we feel very confident about our ability to deliver the synergies If procurement wouldn't perform, we couldn't get there. Just because of the weight in the portfolio. So I feel very good about that. Neeraj Shah: Great. Thank you, Neeraj. Operator: And our next question comes from the line of Jeffrey Zekauskas from JPMorgan. Jeffrey, please go ahead. Jeffrey Zekauskas: Thanks very much. Sort of a two-part question. Is the conclusion that we should draw from slide six it is it that the non-core businesses have very minimal EBIT? And secondly, on your raw material synergies, And are the raw material synergies independent of the general level of raw material values. So in other words, in a world in which oil falls in value, and we've seen polypropylene prices fall and polyethylene prices fall. Is the amount of synergy capture simply smaller And in a world in which raw material prices really rise, would it be higher or is it independent of commodity changes in value? Steve Scherger: Jeff, maybe I'll start on the non-core, and I'll just go back to what we mentioned a little bit earlier just on the margin profiles. You touched on it. Our non-core businesses, the $2.5 billion operated through the first half at about 5% EBIT margins. So think EBITDA in the just sub-ten percent range, and that was below traditional levels mostly because of a very difficult Q2, as we mentioned, down at 3%. Some of the significant volume decline that we saw there, high single digits during the quarter. We do expect that EBIT margins will return to more normalized levels for our non-core businesses in the second half, repeating, as Peter mentioned earlier, better contraction terms, better pricing, more volume commitments. And they would be in EBIT margins more in that 7% to 9% range. As we've talked before, they are below the averages for the company. And, obviously, have a different growth trajectory, which is one of the critical reasons why strategically we're committed to exiting from them. So that's just a little bit of a fact based on that front. And I'll let Peter add on the raw material side. I'd say those savings tend to be more volume driven generally with Peter. Peter Konieczny: Yeah. I just wanna provide some context here for the scale, Jeff, and break that down bit. We gotta remember that our procurement spend is about $13 billion, of which $10 billion is raw materials and $3 billion is indirects. Out of that $10 billion of the raw materials, 50% is resin based. And the balance is ink solvents, adhesives, and a number of other things. So the first thing that I'd say is you know, we tend to believe our synergies are resin based synergies. It's a lot broader than that. And we need to remind ourselves of this. Also, in terms of the scale of our procurement spend to start, Now in a world where raw material input pricing comes down, and we had this conversation several times on earlier calls, The question is, how big of an influence does scale of our operations have? Just the near volume that we're able to offer to suppliers. And it's had it's had an impact in a situation where you're struggling for volumes, big buyers that can offer volumes do and can make a difference. And we're seeing that. But if we take that plus everything else that we're doing on the procurement side, we get to the synergy expectations that we're confirming today and that we feel very comfortable with. Jeffrey Zekauskas: Alright. Thank you very much for the question. Operator: And our question comes from the line of Ramoun Lazar. Ramoun, please go ahead. By the way, with Jefferies. Ramoun Lazar: Thank you. Good evening, and good morning to all on the call. Just another one just on the volumes Peter. If you could maybe comment on how you see your customers performing in the context of the overall market? Know previously, you've called out market share losses by some of your customers. Do you think those customers have stabilized their share in the end markets and yeah, just keen to see how you're seeing that progress through the Yeah, Ramoun. I mean, you know, it's not for me to comment on the our customer performance, and that's not your question. I know that. So how can I best answer that? The first thing that I would say is we are we have always been we are particularly now after we done the acquisition, very broad. And we have a very broad exposure to a number of different customers and customer groups. So, you know, broad participation. Therefore, our performance should roughly be what the market actually offers. Right? Unless we can outperform what we're trying to outperform. And we have good reasons why we believe we can outperform. So that's one. The second thing, to the extent you know, large customers CPG type customers, have been taking price in the past on the back of a very inflationary environment. And prioritize price over volumes What I can tell you there is that you know, certainly, the conversations have moved to finding a more a better balance between price and volumes. Which also relates to promotional activities that have been, you know, spoken about. By customers, and you see that when they go to market and they talk about how they want to improve their volume performance going forward. And I think we're well positioned to support on that end. And while we haven't really made any specific assumptions in terms of improvements in the back half as we've laid out beforehand. So we're, again, seeing all that happening. We're listening very carefully. We're positioning ourselves to participate as much as we can. And to help customers on their journeys but we're sort of planning and approaching the back half at least very consistently with the first half. Ramoun Lazar: Great. Thank you, Ramoun. Operator: And our next question comes from the line of Matt Roberts with Raymond James. Matt, please go ahead. Matt Roberts: Hey, Peter. Steve, hello. And, Steve, good to hear you again. Thanks. Earlier, you noted health care and flexibles is a weak a bit weak. I believe you said low cold and flu season, although not my household. But I believe you're comping a destocking impact in the prior year quarter. So was behind that weakness? Was it confined to a certain region or maybe parse out your expectations for the second half of the year between pharma and healthcare more broadly and any mix impact we should expect from that category? Peter Konieczny: Well, listen, Matt, it's a good question. I made a couple of comments earlier. I mean, we saw health care volumes being little weaker in the second quarter. That's correct. I do not wanna read too much into that. The health care category itself is a gem, I think, in our portfolio, and I continue to say that. We need to look at the volume performance over longer periods of time. We did have a bit of a overall weaker flu season. Sorry to hear that it didn't apply to your household. But overall, in the market, apparently, in The US, that is the case. And then there could also be in this quarter a bit of phasing of volumes between quarters. So, again, not to read too much into it. And then, don't forget, we have a pretty broad exposure also in between pharma and medical in the health care piece. Which we also need to take into account. Look. I could think about other things that are positive for the health care business. I mentioned in my prepared comments that you know, we're pretty well positioned to participate there. GLP one was an example where we've made a great win, which also speaks to the ability of a combined company to win in the space. And we will continue to double down on that. Matt Roberts: Alright. Thank you so much, Matt. Operator: And our next question comes from the line of Cameron McDonald with A and P. Cameron, please go ahead. Cameron McDonald: Good morning. Peter. Can I just delve into that comment around the GLP one? And it's good to see you know, you're participating in that, which is got a long-term growth profile. How are you guys thinking about the impact on the other side of your business, particularly around ultra-high processed foods and snacks, confectionery, etcetera, you know, high calorific food consumption in an era where we have this explosion in GLP one use. And how much of that is gonna be a structural headwind for that 60% of the business that's exposed to nutrition. Peter Konieczny: Yeah. It's an excellent question, Cameron. I'm actually quite glad that you brought that up. Because it comes back over and over again, GLP one, and we're spending a bit of time on that too. Look. Let me structure my comments. I by, first of all, saying, you know, everything that makes people more healthy is a good thing. So we are we're supportive of that, and we see that trend very clearly. We're supportive of that, and we're thinking about what it means our company, how we can best respond to it. But it's a good thing. Now we do have an exposure to the health care industry as we just discussed. And, therefore, we can participate in it. Right? So that's very clearly said and clearly understood. Now your question is a little different. You say, well, turn back to all the other categories that you're supporting in food and beverage. Help me understand what the impact is there. And then look. I will go back to some standard conclusions here. Where we have you know, more unhealthy categories where we supply packaging, those will be impacted. But on the other hand, we also have other categories that are considered to be healthy. And they will increase. If you think about snacking, generally, I think that the trend of snacking is gonna go backwards. It will shift. From unhealthy to more healthy, categories. And there's examples in the market where that happens. Now the good news is that Amcor is a broad a very broad-based company with a broad participation across many categories. And therefore, what you see what we are expecting to see is that that's a shift. categories. In volumes between from unhealthy to more healthy And, therefore, were somewhat robust to that trend, and we think that we can participate well in it. Now customers that's the last comment that I may wanna make there. Of course, thinking about that very carefully. And we've seen these trends before or similar trends before and it has led to an innovation. Where customers are leading through these impacts and innovating through those impacts. To support their business and to reinvent their businesses. And this is where, again, Amcor is pretty well positioned to help our customers do that. Through our innovation capabilities and, again, the broad exposure that we have to different categories So overall, you know, I think we're pretty robust. I don't think that that creates a structural headwind for us. But we're very much aligning ourselves with the impact At this point in time, it has been very moderate. From a GLP one perspective. Cameron McDonald: Alright. Thank you so much for the question. Operator: And our next question comes from the line of Michael Roxland with Truist. Michael, please go ahead. Michael Roxland: Yeah. Thanks, Peter, Steve, Tracey for taking my questions. And, Steve, I look forward to working with you again. I just wanted to follow-up on George's question. Given that synergies seem to be more weighted to rigid, should we expect operating leverage to be relatively muted EBITDA margins to be relatively flat year on year and flexible barring recovery in volumes. Steve Scherger: Hey, Michael. It's Steve. I that if you're just purely looking at maybe the second half of this fiscal year, probably not a lot of natural movement in margins. But if you take a multiyear view, which we certainly are, relative to the synergy capture, given the revenue synergy commitments, given the operational improvement commitments, actually margin improvement on a multiyear basis could be spread across both segments quite nicely. It's more of a short-term phenomenon, I think, Michael, relative to where the synergy capture is here in fiscal 2026. Michael Roxland: Alright. Thank you, Michael. Operator: Our next question comes from the line of Keith Chau with MST Marquee. Keith, please go ahead. Keith Chau: Hi, gents. Thanks for taking my question. Peter, I just wanna go back to the comment around recently renegotiated customer contracts, and I think Steve you mentioned better contract returns, better pricing, and more volume commitment. So it sounds like, you know, clearly, all three factors are positive. I'm just wondering what's happened in the past that has meant that you've been able to get these improvements? Has it been you know, a bit of slippage in customer commitments that you're clawing back? Ultimately, I'm keen to understand how you've been able to do this and whether there is any cost associated with these renegotiated customer contracts. Thank you. Peter Konieczny: Yeah, Keith. I'll be able to take that. I don't think there's any cost associated to renegotiating the contract. Just to give you a little more color, you know, there were two angles to it. One was we were operating, particularly in the beverage side, in an environment with very low volumes. And the renegotiated outcomes have given us a bit more of line of sight of the volumes going forward and have stabilized in supported the volume outlook going forward. So that's one The other element was just simply in some of those contracts going back and covering the basis of inflation recovery. Which in some cases, you know, we have a reason to do. And that that has also been successful. So between those two things, know, we get some more inflation support and offset if you want. And then we get a better line of sight, and we're a little more confident about volume outlook going forward. Keith Chau: Alright. Thank you so much, Keith. Operator: And our next question comes from the line of Nathan Reilly with UBS. Nathan, please go ahead. Nathan Reilly: Morning, gents. Just a very quick question about your capital or CapEx budget. I think you spoke to $850 million to $900 million for the year. Can you just give us an update in terms of where you're focusing that investment, particularly with respect to some of your growth investments? Just keen to understand how that might impact volumes on medium-term basis going forward. Steve Scherger: Yes, Nathan, it's Steve. I can touch on that. We do see line of sight into the $850 million, $900 million range for the year. And as you would expect, a lot of that beyond just traditional maintenance CapEx will be in our focus market categories. And so we'll invest for growth there, as Peter was mentioning earlier, so into those markets where there's opportunity for differentiation. So I'd say we weight our CapEx on our focus market categories just broadly. Nathan Reilly: Alright. Thank you so much, Nathan. Operator: And our next question comes from the line of John Purtell with Macquarie. John, please go ahead. John Purtell: Good day, Peter and Steve. Congrats on the new role, Steve. Steve, you've obviously got a lot of experience in the packaging space and also with acquisitions. Know, I know it's early days, but I'd be interested in your perspectives on the synergy opportunity with Berry, and also how you see plastic versus other substrates and some of the dynamics there. Steve Scherger: Yeah. Thanks for that, John. And I will tell you, it has been an honor to be here for the last three months. And this is an incredibly capable global consumer packaging company. I've just been so positive in terms of just raw capabilities, the global acumen, and the very distributed nature of the product categories that we participate in, the market categories we participate in, the synergy capture momentum here is quite exceptional, and it's incredibly well done. The teams that are in place, dedicated, The tracking is outstanding. The commitment to putting money to work thoughtfully that drives synergy capture is very noteworthy, and it shows in the results. It shows in the confidence in the two six sixty. It showed in the confidence to the multiyear. Certainly, relative to substrates and the like, I spent a lot of time in fiber-based packaging, as you know, and it's a fit for purpose business. It has a fit. It has a purpose. That suits those markets well where it has specific opportunities to be utilized effectively. As you know, rigid and flexible packaging, particularly on a global scale, has a right to win and a fit for purpose that is very broad and very much aligned with the day-to-day life of the consumer. I think we're just truly uniquely positioned as a company that globally literally is in the day-to-day life of the consumer, and it's great to be here. So thank you for asking that, John. John Purtell: Great. Thank you, John. Operator: And ladies and gentlemen, John is our final caller today. We are well over our one-hour meeting duration. So at this point, I will now turn the call back over to management for closing remarks. Peter Konieczny: Yes. Thanks, operator. And look, everybody, thank you for joining us. And we're certainly looking forward to the opportunity to sit down with you over Operator: Great. Thank you so much. And ladies and gentlemen, that does conclude today's conference call. Again, thanks for joining, and you may now disconnect.
Operator: Good morning, and welcome to the Rithm Capital Fourth Quarter 2025 Conference Call. [Operator Instructions] Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Emma Holke, Deputy General Counsel. Ma'am, please go ahead. Unknown Executive: Thank you, and good morning, everyone. I would like to thank you for joining us today for Rithm Capital's Fourth Quarter and Full Year 2025 Earnings Call. Joining me today are Michael Nierenberg, Chairman, CEO and President of Rithm Capital; Nick Santoro, Chief Financial Officer of Rithm Capital; and Baron Silverstein, President of NewRez. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Capital website, www.rithmcap.com. If you've not already done so, I'd encourage you to download the presentation now. I would like to point out that certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with the SEC. In addition, we will be discussing some non-GAAP financial measures during today's call. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. With that, I will turn the call over to Michael. Michael Nierenberg: Thanks, Emma. Good morning, everyone, and thanks for joining our fourth quarter earnings call. So much to be excited about with our company. And before I get into the discussion, I want to thank our partners for all your support as well as our employees across all of our companies for all of your hard work and effort in driving excellent results for our LPs and shareholders. On today's call, I welcome Peter Brindley, one of our new partners who has been leading all leasing and other divisions at Paramount. Peter will be speaking about Paramount, which is one of our new acquisitions on the real estate side, and Baron Silverstein, who you've heard from in the past will be speaking about NewRez. As we think about 2025, it was an excellent year for the company, in which we executed for our clients by creating outsized returns for our LPs and higher earnings year-over-year for our shareholders. We grew our asset management business, both organically as well as through acquisition, including adding Crestline Asset Management and a take private, as I just pointed out of the real estate REIT name Paramount to our stable of companies. Today, we manage over $100 billion in investable assets across the firm. As I've said repeatedly, we will grow our firm prudently by creating alpha and results for our clients. While all of us in the asset management business want more assets, we will earn each and every one through performance. Financially, our company had a great year, a great fourth quarter, which I'll get into in our supplement. The diversification of our platform is paying off as we had a record fourth quarter from an EAD perspective. Book value year-over-year was higher despite paying out north of $600 million in dividends. Our Genesis business, which manufactures and originates multifamily loans and residential transitional loans had a record year, both in originations as well as in earnings. This business produced just under $5 billion in loans and earnings were up 250% from the time we acquired the company in 2022. Just for a metric, when we acquired the company in 2022, production numbers were $1.7 billion. This year, we'll cross north of $5 billion, while maintaining prudent discipline around credit. Our mortgage company, NewRez, had a great year. Year-over-year earnings grew by 13%. We continue to make significant investments in our tech stack as well as our marketing division as we work on our customer experience and our brand. During the year, we welcomed 2 new leaders to these divisions. Brian Woodring, who joined us from Rocket and Leslie Gillon, who joined us from JPMorgan, both experienced leaders in their field. We announced 2 transformative transactions on the tech side. One is Valon, which we announced this past week, which is a world-class servicing system, and Baron will speak to that, and HomeVision on the origination side. In our Asset Management division, we had a very good year. As I mentioned, we announced the acquisition of Crestline, which is a terrific credit shop with both an insurance and reinsurance business. Sculptor had a great year, both on the performance side as well as on the capital formation side with assets growing, especially the real estate division, which closed on a $4.6 billion new fund. We launched -- on the asset management side, we launched our first evergreen fund on a bank platform in the ABF space. We created SMAs on our origination business with overseas clients. We launched our first closed-end ABF fund with an initial seed from the pension of $200 million. While we are very pleased with our progress, there is so much more for us to do. On the Paramount acquisition, what that deal is, it was an opportunistic situation. We acquired 13 large office buildings in both New York and San Francisco, which 10 -- roughly 10 are core. It's a real highlight for us. Not only do we love the basis for entry, we now have a great operating company, which will help create an edge for us as we look for other opportunistic investments in the real estate space. Looking forward, we will add to the platform where we need to offer products for our LPs and shareholders. I'll now refer to the supplement, which has been posted online. I'm going to start on Page 3. As you look at Page 3, again, as I mentioned, we have over $100 billion in assets being managed by the firm. That's both balance sheet as well as in third party -- with third-party clients. The Rithm Asset Management AUM is $63 billion. The Rithm balance sheet business is $53 billion. When you look at our family of companies, Sculptor, world-class asset management business, providing credit, real estate and multi-strat investing. Crestline, large credit shop offering a vast array of credit offerings. Paramount, as I mentioned, which is the real estate company that Peter will be speaking to in a minute. And just on a side note, at some point, the Paramount name will go away because obviously, it's a little bit confusing between movie studios and other things. So we are currently working on a rebrand there. NewRez, our mortgage company, third largest servicer of mortgages in the United States and the fifth largest mortgage lender in the United States. And then Genesis, which is one of the largest residential transitional lenders in the U.S. and probably one of the hottest products when we think about from a fund formation that our clients want. As I mentioned before, we're going to earn -- we're going to grow via results, and that's the way that we -- this company was built, and that's the way that we're going to continue to maintain discipline as we go forward. Page 4, financial highlights. Earnings for 2025 earnings available for distribution, $2.35 per diluted share, which represents a 12% year-over-year growth. We had an amazing quarter in Q4, which actually shows the diversification of our platform, earning $0.74 per diluted share. Stable earnings performance when we look for the company, we've earned 25 consecutive quarters where our earnings available for distribution were greater than the common dividend paid. Dividends, we paid out well north of $6 billion in dividends since we formed the company in 2013 while at Fortress. When you look at Q4 results, GAAP net income, $53 million, $0.09 per diluted share for the quarter, 3% return on equity. When you look at EAD for Q4, $419 million in the quarter, $0.74 per diluted share or 24% return on equity. When we look back to 2025, GAAP net income for the year $567 million. Obviously, the delta between Q4 and fiscal year 2025 has to do with the MSR mark that we took in the quarter to be a little bit more conservative, and Darren will speak to that in a minute. For fiscal year 2025, from a GAAP perspective, $1.04 and a return on equity from a GAAP perspective, 8%. When you look for the full year, earnings available for distribution, when you take out the noise, the company made 1.2 -- a little under $1.3 billion, $2.35 per diluted share and a return on equity for the entire business of 19%. Book value reported at the end of 12/31 was $7 billion, which represented a $12.66 per common share. When you look back, I think the year before was about $0.10 lower. When you look at where we are market-wise, the 10-year treasury is backed up and yield towards 4.30. Mortgage rates on the other side have dropped a little bit. Book value today is probably between 12.75% and 13% -- I mean, $13. Our common stock dividend, we trade at roughly 9.2%. This was at the end of the year. And as everybody knows, we pay out $0.25 a quarter or on a fiscal year basis, $1 a share. Cash and liquidity, this is after balance sheeting the Paramount deal on balance sheet as we work to raise capital around that, both in a JV structure as well as in funds. We ended the year with $1.7 billion of cash and liquidity on balance sheet after funding everything in the business. Page 5, year-end review. As I pointed out on the asset management side, a very, very good year. Sculptor had gross inflows of $5.8 billion in 2025. AUM grew from $34 billion to $38 billion in the year. On the Rithm side, we closed different ABF products, as I mentioned, first evergreen fund, and we're out now marketing a closed-end ABF fund with an initial seed of $200 million. On the Crestline acquisition, this kind of fulfills our mission of what we think on the credit side, and I'll talk to this in a minute. But Crestline is a little bit under $20 billion in AUM. They have a ton of different LPs. They had their annual meeting last week down in Texas. I was down there meeting with a lot of clients, and everybody is super excited. One is about the partnership as we go forward. but also what -- some of the pockets that we didn't have before that we currently acquire as a result of the Crestline organization. And more importantly, the people there are just -- are terrific. So we're really excited about where we're going to go there. I mentioned Paramount. And again, Peter is going to talk to that. Class A office buildings in New York and San Francisco, super pumped about that one. As many of you know, we, at the Rithm level, not at the Sculptor level, have avoided -- not avoided, I should say, but have not made commercial real estate a primary focus. This acquisition obviously puts us where we're the fourth largest owner of office here in New York City, and we're super pumped about that. When you look to the bottom part of the page on the left side, Genesis Capital, I pointed out that. The team there has done a great job, $4.8 billion of origination in '25, record earnings, client franchise continues to expand, and we are going to lead with credit first. That is our mantra as we think about our origination businesses. NewRez, I pointed out, third largest mortgage servicer in the U.S. That does include the large banks, fifth largest mortgage lender in the U.S. servicing portfolio, $850 billion, funded volume for 2023 -- 2025, $63 billion, generated north of $1 billion in pretax income year-over-year was up 13%. And then we announced our strategic relationships or partnerships, including some equity investments on the technology side. On the investment portfolio side, we did 8 securitizations, $4 billion in UPB. We invested $9 billion in residential mortgage assets. That's through -- a lot of that through our origination businesses between non-QM, which grew a lot in the NewRez side and our residential transition loan business, which again is the Genesis business. And we also entered into a flow agreement with Upgrade to purchase up to $1 billion of home improvement loans -- and then we purchased a little bit under $600 million in 2025. From a macro standpoint, obviously, a lot of geopolitical risk everywhere in the system. The administration is extremely focused on affordability. They announced their -- the GSEs are going to purchase up to $200 billion of Agency MBS. We are not sure exactly what that amount is today. For 2026, we think they can buy upwards of $155 billion. While saying that, we think a significant amount could have already been purchased. What we did see in the quarter is the mortgage basis tightened, which means you're seeing lower mortgage rates relative to where treasury yields are. As a result of that, we should see more mortgage production. You are going to see higher levels of amortization. The higher levels of amortization should provide an opportunity for us to generate more origination gains. As we look forward, we believe the yield curve will continue to steepen. I've been pretty vocal on a number of our earnings calls. We are set up for this. We are along the front end, and we're not really short much, but if we're short anything, we would be short at the back end. We do think the yield curve will continue to steepen. Obviously, President Trump announced Kevin Warsh as the new Fed chair, and we think that will continue again to lead to a steepening yield curve. The last part I'll mention on this page as we think about this Agency MBS has done extremely well the past -- towards the end of the year. And the other space that's actually really in vogue and obviously, we made a significant investment there is on the return to office or the office buildings that we have. And again, Peter will speak to that. As we look at the power of the platform, Page 8, the asset management business will continue to grow. We don't -- just to be clear, we don't really need anything. When you look at this page, there are certain pockets that we don't have. We will -- for example, as we think about infrastructure, where we will grow, our thing and my thing has always been we're not going to grow in a sector unless we have the expertise around the house. I always like to use the example is you can't take the short stop and make him or her an offensive alignment. That just doesn't work. When we look at our business today, we have a great credit business. We have a great multi-strat business. We have a great real estate business and our ABF business should be -- should grow substantially over time. But again, we're going to grow through our existing teams, and we have great teams. I think in the asset management business, when you look all in, we have about 700 folks across the platform that includes both investment professionals as well as support team. So we're extremely well staffed and well suited for the growth in our company. But again, we do need to lead with results first. Page 9, Sculptor had a great year. I pointed out $5.8 billion in gross inflows, performance across the board, whether it be in the multi-strat fund, which is roughly $9 billion now, 15.5% gross or 11% net in '25. The credit fund through '25, and this goes back in time, 18.9% gross and 14.5% net asset management revenues in '25, up $95 million from '24. Again, we have everything we need in credit. We think we have everything we need in real estate. We'll grow in areas that we don't have the -- either the staff or the -- what I would say, the wherewithal to grow unless we think we're going to create an edge or be a market leader. When you look at the Sculptor organization, 30-year track record, greater than 70% of the clients have been with the firm for longer than a decade, and AUM is now approaching $40 billion. Crestline closed that transaction in December. I'm on Page 10, $18 billion total AUM, 700 investors across all strategies. The business has been in place for 20 years. Keith Williams, who leads the asset management business has done a great job there, continuing to grow. Offices in New York, Canada, London, Tokyo and couple that with our Sculptor partners, there's -- again, we have everything we need to continue growing and providing good value for our clients. When you look at '25, the Capital Solutions business, overall, since '22 generated a little bit south of 15% from a net IRR perspective. Direct lending, it's a little under 13% since '23 and the NAV lending business, 11%. A great brand. And again, where I think the merits or why this deal works is we bring capital. When you look at the broader organization, there are things that we didn't have that today we have, for example, direct lending, a BDC insurance, reinsurance in capital solutions. So when you think about the credit business across both Sculptor and Crestline today, I think it's something north of $40 billion. So super pumped about that. On the Paramount deal, Page 12, when we look at Paramount, how do we think about this? So what I would say is when we started was Rithm, which was formerly known as New Residential in 2013, our thesis back then was to take advantage of a dislocation in an asset class and build a company around that. At that time, the asset class that we focused on were mortgage servicing rights. So we seeded New Residential at that time with $1 billion. We went out and bought hundreds and hundreds of billions of mortgage servicing rights from the banks. And from there, that was really the beginning of New Residential. When we look at the Paramount Group, and this -- again, there will be a name change there, so it's not confusing. But when we look at this company and you think about the dislocation in office and our ability or what we have at Rithm, which is no legacy office and a very, very clean balance sheet, we thought this would be the right time and the right asset class and the right team to be able to take advantage of a dislocated sector. So again, what did we do? We went out. We bought a company for -- in competition with some of the largest office REITs here in the U.S. as well as some foreign investors. We bought a company where the going-in cap rate is 7%. Our acquisition basis is $585 a square foot. we're buying Class A office buildings in 2 gateway cities at a 40% discount to pre-COVID values. And you just can't build these buildings and the replacement cost is a 75% discount to replacement cost. One of the things that we get, and I'm going to turn over the narrative to Peter here in one second. One question we typically get when we're out there raising capital around this particular transaction is, well, who's the leadership? Paramount has 300 people, both at the building level and at corporate. when we spend time and when I spend time with Peter and you look at the expertise we have in-house at Rithm and our operating companies, there's a world-class operating company here at Paramount. We don't need anything else when we think about how this company is going to run. Obviously, we're tweaking leadership, and we have done that. And when I -- when we look at the team today, we're super excited about where we're going to go with this company, where we're going to be able to add in the office space and quite frankly, where we're going to add overall as an organization in the real estate space. So super pumped about this. We do think it's transformational for us in the commercial real estate space. With that, I'm going to turn it over to Peter, who's going to take over on Page 13. Unknown Executive: Thank you, Michael. I'll start by saying Paramount owns, manages and operates high-quality, centrally located Class A office properties in New York and San Francisco. The portfolio consists of 10 core assets totaling 9.9 million square feet, 3 noncore assets totaling 2.4 million square feet and 3 managed assets in New York totaling 600,000 square feet. The entire portfolio is approximately 13 million square feet. In 2025, we leased more than 1.7 million square feet in our core assets, up 235% from 2024 and our highest annual total on record. Approximately 62% of our 2025 leasing velocity was on vacant space and space scheduled to expire in 2025. The balance of our 2025 leasing served to derisk future lease roll. At year-end, our core portfolio leased occupancy at share was 86.9%, up 220 basis points year-over-year. Our core portfolio boasts a weighted average lease term of 8.4 years for office leases with an average in-place rent of $90 per square foot. Our tenant roster is comprised of best-in-class companies with significant industry diversification. The portfolio is largely comprised of financial services, legal, insurance, technology and media companies. Turning to our leasing results on Page 14. In New York, at year-end, our New York core portfolio's leased occupancy was 92.8% at share, up 780 basis points year-over-year. During 2025, we completed 43 deals totaling 1.3 million square feet with an average lease term of 13.8 years. Our 2025 leasing includes 5 deals greater than 100,000 square feet, a testament to the quality of our assets and the strength of our team, as Michael alluded to previously. With regard to the New York market, it just continues to gain strength. Manhattan has experienced the strongest return to office momentum in the country with visits to Manhattan office buildings nearing pre-pandemic levels. In-person work, coupled with strong earnings forecasted for U.S. companies in 2026 will power velocity going forward in New York. Return to work is no longer really a conversation. Work from home is in the rearview mirror in New York. This city has more energy than I think it's ever had, and it feels really good. In 2025, Midtown, which is predominantly where most of our assets are located, posted the highest annual total of new leasing activity since 2018. Robust leasing, little to no new development over the next few years, conversions of select buildings away from office and the ongoing reduction of available space will further improve Midtown's fundamentals going forward, and we expect will result in NER growth going forward. Turning to our San Francisco leasing results. At year-end, our San Francisco core portfolio's leased occupancy was 62.2% at share, down year-over-year, driven largely by a couple of large known move-outs at One Market Plaza and One Front Street. We're in the process of adding market-leading amenities at each of these premier buildings and look forward to updating you on our progress in subsequent quarters. During 2025, leasing activity in our San Francisco portfolio increased by 330% year-over-year as we completed 16 deals totaling 411,000 square feet with an average lease term of 8.6 years. This represents our highest annual leasing total in 5 years and reflects the ongoing recovery in San Francisco. More broadly and with regard to the market in San Francisco, 2025, San Francisco recorded approximately 9 million square feet of leasing activity, the strongest annual leasing total since 2019. This uptick in leasing activity contributed to the 310 basis point year-over-year decline in San Francisco's availability rate as tenants are increasingly reengaged in the market and in many cases, expanding their footprint. At year-end, there were approximately 8 million square feet of tenants in the market, a pipeline that exceeds pre-pandemic levels and once again, a reflection of improving market conditions in San Francisco. In 2025, San Francisco-based companies raised $134 billion of venture capital funding directed in large part to AI companies, which accounted for 143 deals totaling approximately 2 million square feet, more than 20% of San Francisco's annual leasing total in 2025. Approximately 56% of this AI demand based on deal count originated from tenants that are new to the market, further reinforcing San Francisco's growing importance as an AI hub. AI companies acknowledge the importance of the office and are becoming an increasingly large percentage of the demand profile in San Francisco. Bottom line is we remain focused on maintaining our great tenant and broker relationships, delivering market-leading hospitality, securing renewals, filling our vacant spaces and infusing best-in-class amenities in our Class A assets to enhance our market-leading offering. Michael Nierenberg: Awesome. Thanks, Peter. Just a side note on San Fran. I know when you look at the slide, it says 62% leased. What I would say in our -- as we form -- as we do our capital formation around this transaction, the amount of incoming phone calls we've had from folks that want to play the recovery, I'm not going to call the trade, the recovery investment in San Francisco has been extremely significant. And one of the things I'd also point out at Rithm, we made an early investment in the debt -- in Columbia Property Trust on the debt side. So we've had an exposure to San Francisco and have seen the growth in that in San Francisco since I think it was 2023. So we have a really good feel for that market. I do think there's going to be a ton of money made there. Peter pointed out on AI. There's been like Anthropic has gone in and just taken down a whole new building. Just one other note, and then I'll talk about Genesis. When you look at this office portfolio, one of the things that we all know today, when folks go to work in an office, they want a lifestyle. You can look what the JPMorgan folks have done at 270, like they built this amazing building. We are doing a lot of the same things when we think about amenity packages in a number of our buildings. So again, very, very excited about this investment and truly believe it's going to be a very good one for our shareholders and LPs. Just quickly for me on the Genesis side, then I'll turn it over to Baron, who will talk about NewRez. It's been a great business for us. We bought this from Goldman Sachs Merchant Bank going back to 2022. Clint Arrowsmith, who leads that organization for us has done a fantastic job growing, not only just growing the business and when you think about from an origination perspective and UPB, but sponsors and most importantly, credit matters. We see this when we look at companies all day long, delinquency trends and what you see with some folks that are truly in either whether it be an AUM race or try to grow their origination business where they shouldn't be from an overall credit standpoint. We've seen this in our careers many, many times. But when we look at the Genesis business and if you have a look at Slide 16, the team there has done just a great job. And that product is one of the hottest products in the marketplace. You'll see us expand our multifamily origination as well as our RTL origination as we go forward. With that, I'm going to turn it over to Baron, who will talk about NewRez, and we're going to open up on Page 19. Baron Silverstein: All right. Thank you, Michael. Good morning to everybody. NewRez had a great 2025, and we're really excited about where we're headed in '26. We finished the year with a total pretax income, excluding mark-to-market of approximately $1.1 billion, which is a 17% increase year-over-year and a milestone for our platform. Our fourth quarter pretax income, excluding mark-to-market, was $249 million, driven by our origination strategy and our disciplined origination strategy, our third-party servicing business and despite the impact of faster prepayment speeds, we delivered a 17% ROE on the quarter and a 20% ROE for all of 2025. For context on speeds, the composition of our servicing portfolio is deliberate and reflects a balance between third-party servicing and owned MSR. Approximately 30% of our overall portfolio is third-party high-margin fee-based servicing. 18% of the overall portfolio or 26% of the owned portfolio are Ginnie MSRs, of which approximately 1/3 were originated in the last 3 years. Regarding our quarterly MSR mark-to-market, while our high-quality owned MSR portfolio continues to perform well, we saw seasonal increases in delinquencies and advances. And the new FHA modification rule has increased immediate delinquencies to encourage long-term stability. Our mark-to-market approach has remained consistent with prior quarters and in our view, conservative. Overall, these results continue to show the power of our platform and our ability to drive consistent earnings. Turning to Slide 20 and regarding our 2026 technology strategy. Yesterday, we announced our partnership with Valon Technologies on our servicing operating system. And 2 weeks ago, we announced our partnership with HomeVision for our underwriting decision engine. These partnerships are designed to upgrade our core operating platforms with AI as a fundamental core component rather than adding AI as an afterthought to existing structures. The first phase of our HomeVision rollout has already doubled our underwriting capacity with further functionality to be delivered throughout 2026. Our partnership with Valon began in 2019 with Rithm as one of their first investors and NewRez as their first subservicing client. Michael saw the potential power of connecting NewRez with Valon to create game-changing servicing technology that will transform mortgage servicing. We expect the Valon operating system to materially improve our efficiency, benefiting all of our 4 million homeowners and our third-party clients. Both of these software partnerships include significant long-term minority equity ownerships that will continue to provide future earnings growth. Turning to Slides 20 and 21 -- 21 and 22 and providing some highlights on our originations and servicing business. Funded volume for the quarter ended at $18.8 billion, up 15% quarter-over-quarter and $63 billion for all of '25, and as Michael mentioned, positioning us as the #5 mortgage lender. The origination platform delivered fourth quarter pretax income, excluding mark-to-market of $126 million and full year pretax income of approximately $360 million, both up 31% year-over-year and 57% quarter-over-quarter. And while market competition continues to pressure gain on sale margins, we maintained pricing discipline, did not chase market share, improving our margins quarter-over-quarter. Non-agency production remains a focus with year-over-year growth of 147%, including non-QM originations, which were up 200% year-over-year. We also just launched our new crypto enhancement, where NewRez is the first major lender to recognize cryptocurrency -- cryptocurrency assets for mortgage qualifications, especially important as 20% of U.S. adults own crypto today. On the servicing side, our third-party servicing portfolio increased to $256 billion, which includes $25 billion in new third-party servicing, which offset the movement of a single low-margin agency subservicing portfolio. The onboarding of the Wells and Onity non-agency MSR portfolios beginning in March and the transition of the Valon -- to the Valon operating system will begin in 2027. I believe our business is as best positioned as it has ever been, and I look forward to sharing the next chapter of the NewRez growth story. So back to you, Mike. Michael Nierenberg: Thanks, Baron. Just a couple of notes on the mortgage company stuff. Obviously, a little bit of noise -- I shouldn't say a little bit, but some noise around our equity got hit as did some of the other kind of mortgage companies over the course of the past few days. We don't -- we're not in a race to grow origination. We're not in a race to grow AUM unless we can make money. So when you think about it, if folks are out there pricing origination through the market, it's not going to be us. So origination volumes will vary. Similarly, when you think about the MSR business, we're fully hedged against our MSR. I did point out we have a steepener on. But when we think about that, you are going to have some mark-to-market volatility in a quarter when rates move or mortgage spreads tighten. It's just the nature of the business. You take a step back and you think about that as well as some of the things we're doing around the technology side, Baron pointed out Valon. Valon is -- Valon came to us years ago. We spent some time with them. We seeded them with a portfolio of loans on the servicing side. At that point, we took an equity stake in the company. And if this thing plays out the way that we think it could and will, we believe that the sheer size of -- or the market valuation of Valon could be a substantial P&L contributor to our business from an overall market value standpoint as we go forward. When you look at tech valuations and if this company is worth $10 billion, for example, that could be worth a couple of dollars a share. So I look at this based on equity ownership. I look at this, Baron pointed out the HomeVision side, we're going to get more efficient. We are going to spend some more money on brand as we go forward. But we're not in a race to do just grow origination. We don't need to do that just to be in a battle with somebody else. And you've seen that in the wholesale channel between a couple of the different mortgage originators. I'll wrap up and then we'll go into some Q&A. Just on the investment portfolio, when you look at the power of the franchise, clearly, we're doing -- we have a great origination business. I do think our origination business and we will continue to grow in different areas that we don't have there. That will feed into not only balance sheet and earnings, it will also feed into the ABF space, which we're going to grow substantially. It is one of the single hottest products that LPs want today. They're looking for diversification away from certain credit products. When you look at valuations and you think about the absolute returns of being able to get low double-digit returns backed by real cash flow and in many cases, hard assets. It's a space that not only have that we have expertise, but we've been doing this our entire career. I pointed out earlier, we did $4 billion of securitizations. We invested $9 billion in different assets in the resi space that most of that is through our own origination, quite frankly. We did the upgrade transaction where we sourced $1 billion of home improvement loans. We're going to continue to grow there. We're going to grow our third-party business as well as we continue to expand our sourcing capabilities. So overall, before I turn it back to the operator for Q&A, the company is in very, very good shape. I do think, and I say this every earnings call, our valuation is extremely low relative to what I think we do and what we offer both our LPs and our shareholders. We're focused on making money for our LPs and shareholders first before we do anything else. That will enable us to grow. At some point, the company will get revalued. And we look forward to continuing the journey and growing the business. With that, I'll turn it back to the operator for Q&A. Operator: [Operator Instructions] Our first question today comes from Crispin Love from Piper Sandler. Crispin Love: First, just looking at your funded volumes, purchase versus refi, refi made up 40% plus for you in the quarter. I think that's the highest level for several years, at least on a percentage basis. Can you just detail that a bit? Were those competitive takeaways, recapture on your own book? A little color there would be great. And then just expectations into the first quarter, thoughts on overall volumes relative to 4Q, just given recent mortgage rate moves. Baron Silverstein: Yes. So look, we're a large correspondent buyer. So what you're seeing is a reflection of the market. You saw the rally in late summer and in September and that you saw the refi volume picked up, and you see that in speeds overall going into the fourth quarter. And that's really kind of the measurement for what you've seen for refis going up. And then just going into January, Michael referred to what we call the Trump bump. So you saw kind of spreads tighten and then you saw the pickup in production coming into the month of January. And I think you'll see that when our numbers come out at the end of the first quarter. Michael Nierenberg: And what do you think regarding -- just getting to Crispin's question, production for Q4, let's just go '26? Baron Silverstein: Our forecast for '26 is going to be up. We think we're going to be up around where the market is estimating, which I think is approximately 10%. I do think, Crispin, our internal views is that as we continue to connect with our homeowners, as we continue to deliver better and faster service for them and better tools that we will continue to basically improve and pick up market share. Michael Nierenberg: And Crispin, part of this goes back to the investments we're making on the marketing side. We speak about AI. We speak about bringing in some new talent who are going to help lead certain divisions, who are leading certain divisions. I think all that's going to help on the recapture side. So somebody doing this, we built Mr. Cooper when we were at Fortress. We know what refi recapture numbers should be. I don't think there's a real -- I mean, we could say there's a science, but you just have to be really good at it. I think we're really good at it because we have really good experience. While saying that, if you go into any kind of cycle thinking you're the best, you're going to be the loser, and we don't always think we're the best, and we're going to invest both resources capital to make sure that our refi numbers or recapture numbers, I should say, continue to go up, but the market is going to give you what the market is going to give you. Crispin Love: Great. I appreciate all that. And then, Michael, you alluded to it, but can you discuss competition in the mortgage space, definitely been a popular topic just from some competitors' results in the last few days. Gain on sale margins have been lower from a lot of others out there, but your's helding well, actually expanded. Just what's your view there? Are you seeing mortgage players being irrational in the fourth quarter and today? Michael Nierenberg: You really asking me to comment on an earnings call if mortgage players are being irrational. I don't know if anybody is being irrational. What I would say is it is a competitive business, always has been. You're going to see more origination. Certain players are -- they're more aggressive. It doesn't mean they're going to make more money. The one thing I would say about our company and when you look and Baron referred to amortization and as we look at where we are, the breadth of the company, when we were able to put up a $400 million quarter in Q4 and quite frankly, when you look at the MSR business, take a little bit of a more conservative approach, I think, Q4 because we could is something that really differentiates us. So when we look at the competition and we think about our friends in the space who just want to grow origination, we don't -- we're not -- it's not going to be us. We want to keep all our customers on our platform for sure. We're going to do that through refi and recapture. But the government has come out with some changes as well, right? I mean when you look at the Ginnie program, that's why you saw a small spike in delinquencies in the fourth quarter. We do think a lot of that, if not all of that, based on a 430 10-year note and call it a low 6 mortgage rate will reverse here in the first quarter. So we expect to see that mark-to-market actually go the other way here in the first quarter. As it relates to the broader mortgage business and originators, there are some folks that have been in, what I would say, real competition for many, many years on the origination side. That hasn't been us and it's not going to be us. So there's a lot of levers that we can pull that make our shareholders and LPs money. We'll continue to do that without getting into a race. Operator: Our next question comes from Bose George from KBW. Bose George: Just wanted to follow up on the gain on sale margin. On the retail channel specifically, there was a pretty good increase this quarter. Last quarter, you guys noted that I think it was Ginnie's streamlined refis were driving some of the decrease that you saw in 3Q. So just quarter-over-quarter, fourth quarter over third quarter, just curious how much of the improvement was mix versus kind of an apples-to-apples improvement by product type? Baron Silverstein: Yes. So it's definitely mix is always a driver, right? You saw our correspondent share, which was hovering around 70% is now, I think, 62% for the quarter as we picked up our production overall in our consumer direct channels. And then I would tell you, look, we felt like we were able to kind of maintain our margins overall. But then you also have what I would just say is from a timing perspective, some of the timing of completion accrual, but also how we basically book our MSR recapture is driving what you see is a little bit of that increases in our margins on the consumer direct channel. Bose George: Okay. Great. And then actually, on the wholesale side, you guys alluded to the competition in that market. But then when I look at your numbers, volumes are up by 1/3, your wholesale margin is up pretty meaningfully. So yes, can you just kind of tie the 2? I guess, it did not impact your performance? Baron Silverstein: Yes. So look, it's driving to our mix. Michael talks very much about us not chasing market share. So if we don't like where pricing is on, say, conventional or government product. But our focus is on non-agency, and we continue to grow on our non-agency and driving our non-agency production through wholesale. It's a really important channel to us. We're looking to basically try to expand as much as we can, but stay focused on and be disciplined on our margins. Michael Nierenberg: Yes. Just one further comment on that, Bose. When you look at the non-agency space, and I brought up the so-called ABS space in the fundraising side or on the LP side. The ABF space, asset-based finance space is the hottest thing that any asset manager is going out to talk about. Our ability to differentiate ourselves where we could actually originate these loans and service these loans gives us a real edge over a lot of competition. So you're going to continue to see, I think, the non-agency space grow. We just got to make sure that not just on us, quite frankly, as an industry, we maintain discipline around credit here. Operator: Our next question comes from Doug Harter from UBS. Douglas Harter: Can you talk about [Technical difficulty]. Baron Silverstein: Operator? Michael Nierenberg: [indiscernible] Operator. Operator: [Operator Instructions] are you able to hear me, sir? Michael Nierenberg: Yes, I think we lost our queue. Operator: Yes, sir. We're getting people back in now. While we're waiting for Doug to rejoin, I can join in Eric Hagen from BTIG. Eric Hagen: So if the expectation is that you could remain in this REIT structure for the foreseeable future, but obviously, the clear focus is on growing your asset management at the same time. How do you think that affects your capital allocation plans? And if it ever looked like you could shed your REIT status, would that maybe catalyze a change in capital allocation in any way across the segments that you guys manage? Michael Nierenberg: It's a good question. It's something that we get asked all the time. We're very focused, obviously, on our capital structure, as you know. at some point, we do need to be a C-Corp. We need to grow our asset management business a little bit more. I don't think that's going to take away from the way that we run our business where we try to drive higher earnings for our shareholders and obviously better results for our LPs. We're -- our FRE continues to grow as an organization. But like I said, we're going to lead with performance first. There'll be -- I'm sure at some point, there'll be some kind of opportunity to actually grow FRE, which at that point then probably gives us the ability to have a separately listed asset management business. We do toy with -- and I don't use the word loosely, but we think about the mortgage company and should we have a separate track mortgage company, which kind of simplifies the story a little bit. We also own or actually, we manage Rithm Property Trust, which we're exploring some capital formation around that organization as we build out more in the commercial real estate space. So there's a bunch of moving parts. The one thing I would want every analyst and everybody to understand is we're focused on performance first, which includes earnings for shareholders and LPs. When you think about the company today, we have about $8.5 billion of permanent capital. The company makes north of $1 billion in pretax, and we trade at whatever, 6x or something like that. Real asset management businesses trade anywhere from 10 to 30x. You look at the more -- the heavier balance sheet concentrated asset management firms, which trade south of there, but there's a ton of upside in our opinion to grow. But the corporate structure or the REIT space as we think about the way that we currently run is something that will change over time. That doesn't mean we're not going to have a REIT. You look at Blackstone, they got BXMT, Blackstone is a C-corp on top. So I say this every earnings call, I would expect at some point we get towards that. We're not going to be Blackstone, but there's -- the corporate structure works. Eric Hagen: Yes. Great. Great stuff. Do you guys think there are combination opportunities for Genesis to essentially apply the same playbook that you just did for Paramount, where you have this synergistic platform that you can raise capital around to support the acquisition? I mean maybe a better question is like within the various strategies that you guys do manage, where do you think you can apply that playbook where you raise capital for the asset manager, which gives you scale that you can plug into with another business that you also manage at the same time? Michael Nierenberg: Well, it's a great question. That will be at the Rithm Property Trust, where what you're going to see is we're going to originate more multifamily loans into RPT or Rithm Property Trust. That capital base will continue to grow. So when you look from a market -- from an overall equity standpoint, Rithm Property Trust, which is an externally managed vehicle where Rithm owns 1.5 and over 20 over 8, I believe it is. We will raise capital around that. That balance sheet will grow through a lot of the so-called Genesis origination as well as third-party origination. So when you think about it, it's a permanent capital vehicle. We've done this with New Residential in the past, where we -- again, we started with $1 billion of capital. It's now $8.5 billion. You look at Blackstone, they started BXMT with a small amount. They did a transformational -- a couple of transformational deals to actually grow that. We're going to do the same thing with RPT, and that will be fed by Genesis. Operator: And our next question once again is from Doug Harter from UBS. Douglas Harter: Hopefully, this works better this time. Michael Nierenberg: It does. Douglas Harter: Good, Hoping you could give us an update around the capital raising for Paramount and when -- how we should think about the magnitude and the structure of that? Michael Nierenberg: It's a little bit fluid, quite frankly. We closed Paramount at the end of December. We're exploring whether we raise -- again, we funded on a third-party balance sheet. We did a pref offering in the quarter at the Rithm level, where we raised $250 million of permanent capital in the pref market. We're in no rush, quite frankly, to turn around and just say, okay, we have to do a fund or we're going to bring in JV partners. In the real estate world, when you look at the commercial side, a lot of folks bring in partners. So we're exploring both. We're on the road thinking about what's the best structure. We do want to expand, as I pointed out, when we bought this or announced this deal, we want to expand our relationships and partnerships with LPs in the commercial real estate space. That continues to be the primary focus. I think you'll see a combination of both fundraises, permanent capital raises as well as JV related partnership. So it's fluid is what I would say. Douglas Harter: Great. And just sense as to the timing, like how we should think about the timing? Is there -- how do you think about wanting to free up the capital to redeploy versus kind of making sure you got the right structure? Michael Nierenberg: Yes. We closed the quarter with $1.7 billion of cash and liquidity. So we're not -- what I would say is we're not fussed with the capital at this point. While saying that, we -- we're a dividend payer, and we always want to -- and we always spend money. We do shop. So when you think about it from that perspective, it's now where the teams are now. The one thing I didn't mention to the group is we have a couple of key hires in the asset management business as we continue to grow that and we'll be putting out a press release here over the next week. One of them is a former partner of mine from Fortress, who will help us on the lead the asset management business along with our other partners at the different organizations. And then we hired an old -- not an old colleague, but somebody that's highly recommended that comes -- that had retired from Blackstone to help on leading the capital formation business. So we have some significant hires on the asset management side. I think you'll continue to see us grow. But like I said, the most important thing is we got to perform for LPs. Once we do that, we'll grow exponentially. Operator: [Operator Instructions] Our next question comes from Giuliano Bologna from Compass Point. Giuliano Anderes-Bologna: Congrats on the continued performance. When I think about some of the commentary you just gave on the asset management side and the C-Corp, you've obviously grown the asset manager tremendously. You obviously rolled in a few acquisitions, integrated them well over the past couple of years here. Is there a sense of scale that you want to achieve because you're obviously getting much closer to a large scale -- being a large-scale alternative asset manager within that segment? And is there a profitability target or kind of a rough threshold that you want to be at before you try to turn that into a C-corp? Michael Nierenberg: I say there's no amount that we have in mind. I think it's what the market expects. So when you look at -- even just taking a step back and when you say about scale, when we go see an LP, an LP wants to do business with fewer institutions, but want to have more products. When you think about our credit business now between Sculptor, Crestline and Rithm, we have all the products we need on credit. We have all the products we need on mortgage. We have all the products we need on ABF. We have all the products we need in commercial real estate. But I think it is more about -- it's really about the FRE and how you're going to get valued and make sure that these organizations are sizable enough so they don't trade by appointment is what I would say. So it's not like -- and I say this, we're never going to be Blackstone and we want to be who we are. We want to grow prudently, and we want to be valued with the best of the best. And that's really what we're out for. It's like how do we get valued in a different way than we currently get valued. And I think there's no set amount. I would expect over the next year, we get to that point, but I don't know what that size is going to be, Giuliano. Giuliano Anderes-Bologna: That's helpful. And then maybe going over to the mortgage side. When I think about gains on sale, I'm assuming there's probably some positive lift from some of the recapture in the consumer direct channel. Just thinking about the amount of leverage that you have on that side, especially as recapture should continue at least in the near term, do you think that should continue to be a driver of stability for your gain on sale margins on a consolidated basis? Baron Silverstein: Yes, absolutely. Michael talked about us continuing to drive our brand, connecting with our customers. right? It's -- we have 4 million customers on our platform and making sure that we stay connected as best we possibly can are going to continue to be a key driver for our business, our growth strategy and our platform overall. Operator: [Operator Instructions] And ladies and gentlemen, at this time, we do have an additional question from Bose George from KBW. Bose George: In terms of recapture expectations in the market, I mean, do you think recapture expectations embedded in some of these servicing transfers that have happened or even in the correspondent channel are potentially a bit high? Michael Nierenberg: I don't know what the expectations are from different folks. What I would say is, again, going back to my fortress days and our fortress days, we built what is now known as Mr. Cooper, along with Jay and his team, obviously. We know what recapture percentages are. I do think the world has gotten more efficient. I think with technology, it's only going to get more efficient. We alluded to the Valon partnership. We spoke about HomeVision. That is going -- those kind of things will help. And I think the mortgage industry will get more efficient -- I don't, you're only going to be as good as what the market is. It's a very competitive space. People do things that are noneconomical. That's not who we are. But while saying that, we do want to keep our customers. I can't tell you if other folks assumptions are too high or not. I think you should speak to them about that. Okay. Well, I want to thank everybody for dialing in today. We appreciate your support. We have -- I was going through my notes last night, and I looked at the amount of times I was using the word great or terrific or wonderful, and I was looking for more adjectives. And the one thing you'll get from us, we're not going to show up in a meeting or tell you that we're the best in anything that we do because if we take that approach, we're not going to be the best. But we always have things to learn while saying that we have a very, very good company, and we care first about driving results. And with that, hopefully, we get a much better result on our equity price, and we'll continue to do the same thing we've been doing for our shareholders. So thanks again. Look forward to updating you throughout the quarter and on our next call. I appreciate everybody dialing in. Operator: Ladies and gentlemen, we thank you for joining today's conference call and presentation. You may now disconnect your lines.
Operator: Good afternoon, ladies and gentlemen. Welcome to the Transcat Third Quarter Fiscal Year 2026 Financial Results Conference Call. As a reminder, today's conference is being recorded. It is now my pleasure to introduce your host for today, Mr. John Howe, Senior Director of Financial Planning and Analysis. Please go ahead, sir. John Howe: Thank you, operator, and good afternoon, everyone. We appreciate your time and your interest in Transcat. With me here on the call today is our President and CEO, Lee Rudow, and our Chief Financial Officer, Tom Barbato. We will begin the call with some prepared remarks, and then we will open the call for questions. Our earnings release crossed the wire after markets closed this afternoon. Both the earnings release and the slides that we will reference during our prepared remarks can be found on our website, transcat.com in the Investor Relations section. If you would, please refer to Slide 2. As you are aware, we may make forward-looking statements during the formal presentation and Q&A portion of this teleconference. These statements apply to future events which are subject to risks and uncertainties as well as other factors that could cause the actual results to differ materially from where we are today. These factors are outlined in the news release as well as in the documents filed by the company with the SEC. You can find those on our website where we regularly post information about the company as well as on the SEC's website at sec.gov. We undertake no obligation to publicly update or correct any of the forward-looking statements contained in this call whether as a result of new information, future events or otherwise, except as required by law. Please review our forward-looking statements in conjunction with these precautionary factors. Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We've provided reconciliations of non-GAAP to compared GAAP measures in the tables accompanying the earnings release. With that, I'll turn the call over to Lee. Lee Rudow: Okay. Thank you, John. Good morning, everyone. We appreciate you joining us on the call today. Transcat delivered strong performance across our entire business portfolio in the third quarter. Consolidated revenue was up 26% to $83.9 million, driven by double-digit revenue growth in both our distribution and service segments. Our organic service growth returned to more historic levels growing 7%. Consolidated gross profit grew 28% and gross margins expanded 60 basis points. Adjusted EBITDA grew $2.2 million or 27.2% in the quarter, to $10.1 million. Our strong third quarter financial results were driven by 4 key factors: one, strong demand for our core calibration services in the highly regulated end markets we serve, including life science, aerospace and defense and energy; two, our unique value proposition and differentiated brand; three, significant growth and positive mix change in our instrument rental channel; and four, the strong performance by both our recently acquired companies, Martin calibration and Essco calibration. The acquisitions expand Transcat's geographic footprint and technical capabilities. We're working very closely with both companies to accelerate the capture of both sales and cost synergies. I'd like to take a moment and thank our entire Transcat team for their ability to execute well and drive meaningful growth despite what continues to be an uncertain geopolitical and policy environment. They are an impressive group. Turning to our service results in the third quarter. As I mentioned, organic growth grew 7% and contributed to an overall growth in our Service segment of 29%. The quarter marked our 67th straight quarter of year-over-year growth, almost 17 years. As we anticipated and despite a fair amount of continued economic uncertainty, realization of service orders that were delayed in the first 2 quarters of our fiscal year began to trend positive in the third quarter. The trend was most evident in the highly regulated life science space and the aerospace and defense markets. Demand for Transcat services remains high, and we expect the growth momentum established in the third quarter to continue through the fourth quarter, as we close out our fiscal year. Service margins declined in the third quarter, but that is not uncommon in periods when we are onboarding elevated levels of new customers. Depending on the size and the complexity of the new business, as we've seen in the past, we would expect productivity and cost to normalize over time. Overall, the Service segment continues to have a substantial runway ahead for growth, both organically and through acquisition. So at the last 10-plus years, we've demonstrated our ability to identify, acquire, integrate and synergistically grow accretive acquisitions. This will continue to be an important element of our go-forward growth strategy. Turning to distribution in the third quarter. Distribution revenue grew 20% from high demand in both rentals and product sales. Gross margin expanded 330 basis points versus prior year, driven primarily by an increase in the mix of higher-margin rental revenue within the Distribution segment. With that, I'll turn things over to Tom for a more detailed look at our third quarter financial results. Thomas Barbato: Thanks, Lee. I'll start on Slide 4 of the earnings deck, which provides detail regarding our revenue on a consolidated basis and by segment for the third quarter of fiscal 2026. Third quarter consolidated revenue of $83.9 million was up 26% versus the prior year as both segments grew double digits. Looking at it by segment, Service revenue grew 29% with organic revenue growth of 7% and the balance of the growth the result of the Martin calibration and Essco calibration acquisitions. Turning to distribution. Revenue of $30.2 million grew 20%, driven by strong performance in both traditional product sales and rentals. Turning to Slide 5. Our consolidated gross profit for the second quarter of $25.3 million was up 28% from the prior year. Service gross profit increased 25% from the prior year. We continue to leverage higher levels of technician productivity and our differentiated value proposition. The service gross margins historically lagged as we incur start-up costs related to the onboarding of new customers. Distribution segment gross profit of $9.8 million was up 34% with 330 basis points gross margin expansion, driven by growth in the higher-margin rental channel. Turning to Slide 6. Q3 net loss of $1.1 million decreased versus prior year, driven by higher amortization expense related to both the Martin and Essco calibration acquisitions. The 2 largest in Transcat's history, as well as higher levels of interest expense and onetime charges related to the execution of the CEO succession plan. Our search committee is evaluating both internal and external candidates for our next CEO, and the process is nearing completion. In addition, we reported adjusted diluted earnings per share to normalize for the impact of upfront and ongoing acquisition-related costs as well as costs that are not directly tied to ongoing operations. Q3 adjusted diluted earnings per share was $0.26. Flipping to Slide 7, where we show our adjusted EBITDA and adjusted EBITDA margin. We use adjusted EBITDA, which is non-GAAP to gauge the performance of our business because we believe it is the best measure of our operating performance and ability to generate cash. As we continue to execute on our acquisition strategy, this metric becomes even more important to highlight as it does adjust for onetime deal-related transaction costs as well as increased levels of noncash expenses that will hit our income statement from acquisition purchase accounting. Third quarter consolidated adjusted EBITDA of $10.1 million increased 20% -- 27% from the same quarter in the prior year, with 10 basis points of margin expansion. As always, a reconciliation of adjusted EBITDA to operating income and net income can be found in the supplemental section of this presentation. Moving to Slide 8. Operating cash flow was slightly lower versus prior year as net cash from operations increased but was offset by higher capital expenditures. CapEx is in line with expectations and continues to be centered around Service segment capabilities, rental pool assets, technology and future growth projects. Slide 9 highlights our strong balance sheet. At quarter end, we had total debt of $99.9 million. $50.1 million available for borrowing under the secured revolving credit facility and a leverage ratio of 2x. The growth in adjusted EBITDA and associated margin enabled Transcat to continue a sequential reduction in our leverage ratio. We believe we are well positioned to grow both organically and through acquisition. Lastly, our 10-Q was filed today after the market closed. With that, I'll turn it back to you, Lee. Lee Rudow: Okay. Thank you, Tom. In the third quarter, we returned to more historic organic service growth levels by achieving 7% growth, and we are off to a good start in the fourth quarter as we continue to experience an increased level of customer activity, strong retention and realization of new business. For these reasons, we reaffirm our fourth quarter organic service revenue growth expectations to be in the high single-digit range. As fiscal 2026 comes to a close, we anticipate our results for the year will once again be a testament to our resilience and our differentiated business model that is anchored by recurring revenue streams, driven by both regulation and the high cost of failure. We maintain a strong and stable balance sheet that supports our demonstrated growth strategy, our ability to acquire and integrate companies that increase our geographic footprint, and colitis or just bolt on to existing infrastructure. This drives both consistent value and synergistic growth opportunities. We have a strong acquisition pipeline that will enable opportunities to expand our addressable markets and increase market share. Over the past couple of years, we've invested in leadership, technology and overall process improvement. We are well positioned for the age of AI as our data sets are much improved and already contributing to incremental business insights that make Transcat a very difficult company to compete with. We believe our investments are and will continue to drive differentiation for Transcat and foster our ability to continue to generate sustainable long-term value for our shareholders. With that, operator, we can open the line for questions. Operator: [Operator Instructions] We'll go first this afternoon to Greg Palm of Craig-Hallum. Greg. Greg Palm: Congrats on getting back to that high single-digit revenue growth in the quarter for segment, maybe starting there, it would be nice if you could just maybe sort of bucket out the various drivers that enabled you to return to that growth sounded like it was just sort of a ramp-up of everything you've been talking about, but I'm not sure if there was anything specific you wanted to highlight? Thomas Barbato: No, Greg, I mean, I think as we talked about in the past, we some of these decisions have been delayed. We had kind of coming into the quarter. We had some income paper in some cases, and we knew that those would ramp throughout the quarter. There were other deals we anticipated would come to fortune and they did. So we feel good about the performance. I think we did what we said we were going to do. And we expect, as Lee mentioned in his prepared remarks, that will continue into Q4. PAUSE. Greg Palm: Okay. And the start-up costs, which I know you've incurred in the past, so that's nothing new. But are you able to quantify how big of a headwind that was? I don't know if it was related to CBL specifically or something different? And just from a time line or what we should expect in the near term? When does all that stuff start to normalize? Or I guess when does the new business wins fall off and those just become normalized going forward? Thomas Barbato: Yes. I mean we're not talking huge dollars. I would just say you could do some simple math and look at the difference between where we were and if we were flat or slightly accretive from a margin standpoint, right? It's not huge numbers, but it's just the reality of onboarding new customers and for us, the most important thing is to make sure that as we start these new partnerships that we get off to a good start, we're doing things right. We're treating the customers writing. We're doing everything we can to start a good relationship. And there's -- in often cases, there's a reason why these customers are moving to Transcat, right? They want things done right. They want things spend with a higher level of quality and that's our focus and making sure we get off to the right start. Lee Rudow: And Greg, I would add to that. The way we view some of these large customers and really all of our customers, some of them have a real high lifetime value. And so making sure they get off to the right start is a priority for us. And sometimes, there's some costs associated with that, that just go away over a couple of quarters. And then you mentioned CBLs, we saw that in the past, right? So this is not dissimilar. Greg Palm: Okay. And then lastly, distribution was another, obviously, really strong quarter of revenue growth. Can you maybe talk to us a little bit about what you're doing there in the AI, the data center/power gen markets. And then just broadly speaking, is there a longer-term opportunity on the calibration services segment, again, longer term? Thomas Barbato: Yes. I mean I think what are we doing? I mean we're -- I think we're executing very well on the distribution side, both on the traditional equipment sales side as well as rentals. And as we've talked about also, we made a conscious effort 18 or 24 months ago to really invest fairly heavily in rentals for products used in, I'll just say the power generation, power conditioning, power management space, which aligns very well, not only with data centers, but EV charging needs and that sort of thing and it's really serving us well. I think from a product sales standpoint, we're positioned well to support those cement markets. And there absolutely are recurring calibration opportunities that are and will continue to come along with those end markets. So I think it's an area we're excited for. I mean it's -- I mean you read about it every day in the news, right? So I think the fact that we've got alignment and we're kind of going aggressively after the business is an opportunity for us. Operator: We go next now to Max Michaelis at Lake Street Capital Markets. Maxwell Michaelis: I want to go back to the service growth. Congratulations on returning to high single-digit growth at 7%. When you look at Q4 2026. Do you expect to see an acceleration things to get better from the 7%? Or should we expect to kind of be in the same sort of range. And then when we think about beyond next quarter, how has been -- how are the conversations been with customers around new business, I guess, going out into fiscal year '27? Thomas Barbato: Yes. Max, it's Tom. So I would just say that we're committed to the high single-digit guidance that we've provided for Q4, I think when you look at Q4 and you look at last year was a really strong Q4 for us as well, right? So we're kind of building off a big number, right? And we're comfortable in that high single-digit range. When we look beyond Q4, we're not giving any specific guidance at this point, but we'll just say that our pipeline -- our new business pipeline continues to be strong, and we like we're positioned and we think we've got the pipeline to support continued growth going forward. Maxwell Michaelis: Okay. That makes sense. And then I guess, maybe around M&A, what are you seeing in the space? And maybe could we expect to see sort of I guess, remind us where sort of the geographic locations you guys are looking to get into and kind of maybe where you're at and sort of the progress there. Thomas Barbato: Yes. So the gaps that we always talk about, right, at this point, there's 4. This time last year, 18 months ago, they would have been 6, right? But -- and we filled some of those holes. But Northern California is an area we want to be, Dallas, We'd love to be in the Atlanta area and then the Mid-Atlantic that kind of Baltimore areas are voiding for us. We're able to service it from other locations, but there's enough business there that we'd like to physically be there. And then there's -- when we talk about other -- there's other opportunities to follow our customers, right? And we're always looking to get that. And whether it's potentially -- we've recently expanded our presence in Ireland, right, and that's going very well for us. There could be other potential opportunities in Europe, there could be other potential opportunities as an example in North America or Central America to just make sure that we're properly servicing and we have the locations to service our existing customer base properly so. Maxwell Michaelis: Okay. And then just the last one for me is around gross margin. I know you mentioned in the last question about sort of cost isn't something you've dealt with in the past. But if we look at next quarter, and I know you're taking on a lot of new business, is some of the costs you incurred this quarter in sort of preparation for the new business in the next quarter? Are we going to see similar gross margins probably from the Service segment next quarter? Thomas Barbato: Yes. I mean I'll just say that our gross margins in Q4 are always the highest margins in the year, right? So as an example, last year, in Q4, we were at 36.2% margins. But I would say that we incurred start-up costs this quarter related to the revenue increase. I think there'll be new customers that onboard next quarter. But as we kind of said in our prepared remarks, right, I mean that will normalize. It's not -- we're not talking years out, right? We're talking normalizing over the next few quarters and seeing margin expansion. Operator: [Operator Instructions] We go next now to Ted Jackson of Northland. Edward Jackson: To reiterate, congratulations on the quarter. I got 2 or 3 questions for you. Let's -- I want to talk a little bit first about kind of the longer term. And if you think about going out a couple of years, a lot of shifts with regards to administration driven spending. So if you think about Life Sciences, which is your kind of your bread and butter, your core vertical, your favorite place to play. You look at a lot of efforts to drive pharmaceutical manufacturing in the United States. You've seen no Lilly is going to spend $30 billion to put manufacturing in Alabama, Pennsylvania, Texas, Virginia, AstraZeneca's pledged $50 billion, Amgen's talking about opening up new facilities in the Midwest and the Atlantic Seaboard. When I think -- when I hear all this kind of stuff, it seems to me that this is a really substantial amount of wind in your sales as you look out, say, 5 years and beyond. And so I mean how would an investor over the long term, think about this stuff? How do you guys think about it? And kind of handicap it. And then like maybe [ in turn ] perspective, and I know every manufacturing plant is different. But when you get into like a new plant, say, like in the Wall Street Journal last week, one of the Lilly plants was decided in terms of where it was going to be in Pennsylvania, something like that when it's built, what's the revenue opportunity for a company like Transcat when it happens? That's my first question. And actually, since there's a similar -- my second question really is the same, but just on defense. It's a little less specific. But I mean, if you look at the defense spending. I mean they're talking about $1.5 trillion of spending next year. And if you look at some of the major contractors like Lockheed and RTX and Northrop. I mean they're talking about like 30% increases in their CapEx. So maybe a discussion with regards to aerospace and defense. That's my first question. Lee Rudow: Okay. Ted, this is Lee. So I'll take a shot at this and certainly Tom can fill in. But you're spot on. It's pretty simple for us. Any onshoring of manufacturing. In the regulated business space is always going to be good for Transcat. So AstraZeneca, of course, they're on our radar. You mentioned Lilly, they're on our radar. This is good for us. And to the degree it comes true, comes to fruition. And then over the next couple of years, we'll be ready and we'll be working to gain that business, right? No question. When you look at the life cycle of a project, a capital project, it kind of starts from the building of the actual physical plant all the way through to buying equipment, commissioning equipment, validating equipment, ultimately calibrating equipment for an upstart and then calibrating equipment as time goes by on a regular basis. There's half a dozen phases. Transcat is capable of participating in most of those. Obviously, calibration is our bread and butter. We do commissioning and validation as well. And it's always on our radar to look for those opportunities. So we'll call them capital projects. So yes, we can participate. I think over time, as we expand our addressable markets, we'll be able to participate even more. But it's right down our wheelhouse for most of that work. And it is on our radar and onshoring is good. As far as defense goes, same basic story there, right? A lot of the defense contractors, like Lockheed, have their own in-house calibration labs. And so in that case, we'll do the overflow work. We could do their standards. And occasionally, we actually do the work in any particular plant. But the more defense contracting work there is, the bigger the government gets from that perspective. That's a highly regulated space, which means it's a good space for Transcat. Thomas Barbato: Yes. And I think you specifically referenced their CapEx budgets and the increases in CapEx budgets. The more equipment that's out there, that's good for Transcat, right? And the ultimate kind of brass ring for us is that recurring revenue, right? So we've got a broad offering the broadest in the industry, right, that allows us to participate in all of those aspects of a new plant being built, but the brass ring for us is clearly the recurring revenue streams, and that's the calibration work that takes place there. Edward Jackson: But like the bread and butter business that you guys operate in, I mean, you talk about it every quarter, 60-plus quarters of growth. I mean, you have been able to grow your business organically for conversation's sake, we're just call it 7%. For years, which just as your business grows 7%. When you see this kind of stuff happening, does it make you recalibrate what you think you could grow organically if it comes to pass? I mean, is there a case to be made that we get towards the end of the decade, and the organic growth rate for Transcat might tick up because you're seeing all this investment and all this has -- like there's, I don't know, like update in the Higton as these things are coming online? Lee Rudow: Well, I mean there's 2 ways I look at that. One is to say even over the past 10 years and maybe we've averaged 8% growth over the last 5, there are quarters and there have been quarters when we have double-digit growth. So it's not impossible for us to do that. And I would expect that you're going to see that at different points. We're comfortable in the high single-digit range because it just makes sense for us, and that's where we are more consistently in that range than above that. We have cores when we're not -- when we don't meet our goals. And remember also, I mean we're a bigger company today. When we started in 2011, I think we had $30 million of calibration that stays $230 million in that range. And so the number gets bigger and obviously, to grow on a larger base or larger number is a challenge too. But I think Tom and I and the entire management team when we look at our strategic planning, organic and inorganic, we're thinking to ourselves we don't see a reason why we can't get in the high single-digit range on a pretty darn consistent basis. So I think it includes all the variables that you're mentioning. Edward Jackson: Okay. And then just my final question for you is just jumping over to the CEO search. You put a charge in it. You -- could you just kind of -- is it fair to expect to see the conclusion of your efforts during this quarter? Would we -- would we have some clarity by the time you report your fourth quarter? Lee Rudow: I think that's a reasonable expectation. Edward Jackson: Okay. And then would there be -- given the charge, which was a new line item within the pro forma earnings, will we see additional onetime expenses associated with that search in the fourth quarter? Thomas Barbato: There will be some additional expenses in the fourth quarter, yes. Operator: And gentlemen, it appears we have no further questions this afternoon. I'd like to turn the conference back to you, Mr. Howe for any concluding remarks.. John Howe: Thank you all for joining us for today's call. We look forward to sharing more on our story at upcoming investor events, including facility tours, institutional investor conferences and nondeal roadshows across key cities throughout the United States in the spring of 2026. If we were unable to answer any of your questions, please reach out to our IR firm, MZ Group, who would be more than happy to assist. Thanks again for your interest. Operator: Thank you, gentlemen. Again, that will conclude today's Transcat Third Quarter Fiscal Year 2026 Financial Results call. Again, thank you so much for joining us, everyone. We wish you all a great day. Goodbye.
Operator: Greetings, and welcome to the Altigen Technologies First Quarter Fiscal '26 Results Conference Call. At this time, all participants are placed on a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions]. And please note this conference is being recorded. I will now turn the conference over to your host, Mr. Gary Stone, Chief Financial Officer for AltiGen. Sir, you may begin. Gary Stone: Thank you. Good afternoon, everyone, and welcome to Altigen Technologies earnings call for the first quarter fiscal 2026. Joining me on the call today is Jerry Fleming, Chairman and Chief Executive Officer; Joe Hamblin, President and COO; and I am Gary Stone, Chief Financial Officer. Earlier today, we issued an earnings release reporting financial results for the period ended December 31, 2025. This release can be found on our IR website at www.altigen.com. We've also arranged a replay of this call, which may be accessed by phone. This replay will be available approximately 1 hour after the call's completion and remain in effect for 90 days. The call can also be accessed from the Investor Relations section of our website. Before we begin our formal remarks, we need to remind everyone that today's call may contain forward-looking information regarding future events and the future financial performance of the company. We wish to caution you that such expectations and/or beliefs are just predictions, and actual results may differ materially due to certain risks and uncertainties that pertain to our business. We refer you to the financial disclosures filed periodically by the company with the OTCQB over-the-counter market, specifically the company's audited annual report for the fiscal year ended September 30, 2025, as well as the safe harbor statement in the press release the company issued earlier today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. Altigen assumes no obligation to revise any forward-looking information contained in today's call. In addition, during today's call, we will also be referring to certain non-GAAP financial measures, such as adjusted EBITDA. These non-GAAP measures are not superior to or a replacement for the comparable GAAP measures, but we believe these measures help investors gain a more complete understanding of our results. With that, I'll turn the call over to Altigen's CEO, Jerry Fleming, for opening remarks. Jerry? Jerry Fleming: Thank you, Gary, and hello, everyone. As Gary mentioned, earlier today, we reported our fiscal 2026, first quarter results. We delivered $3.2 million in revenue and $100,000 in net income, marking our seventh consecutive profitable quarter. Revenue declined sequentially from Q4, which is typical for our first fiscal quarter due to customer holiday schedules. We also experienced elevated churn tied to customers migrating off of our legacy platforms. This, however, was anticipated as part of our transition to our new technology platforms. We believe the majority of that churn is now behind us with only a modest residual tail remaining. I'll note here that we are evolving how we communicate with investors to provide greater clarity around our business strategy and execution. I'll be focusing on strategic direction and priorities. Gary will provide details on our financial performance and Joe will update you on our operational performance and business progress. As it relates to our business strategy, we've completely transformed our business over the course of the past 2 years, repositioning the company from a PBX provider serving the SMB market to a cloud-based customer experience solutions and services company targeting mid-market and larger enterprise customers. Just 24 months ago, we did not have the infrastructure in place to scale our business. We did not have any of the solutions that now comprise our customer experience suite and we did not have our expertise to deliver AI solutions and services. Today, those elements are all largely in place. To level set, our first priority in our business transformation was to build a scalable operating foundation. Over the past 2 years, we've modernized our internal business systems across ordering, provisioning, billing, accounting and service management and realign the organization around a cloud-first business model. As a result, we reduced annual operating expenses by 9% year-over-year, we maintained gross margins of over 60%. We increased our investments in AI development, and we remain debt-free. This has created meaningful operating leverage as our business scales. With the operational foundation in place, we turned our focus to our product strategy in support of our positioning as a leading provider of cloud-based customer experience and service solutions and services built on the Microsoft platform. To accomplish this objective, we determined that we needed to replace every Altigen legacy solution in our portfolio, PBX, Contact Center and IVR with new modern cloud solutions. This also meant that we must contemplate a clear build versus buy strategy. What we decided was that for commoditized markets, such as UCaaS and CCaaS, white labeling best-in-class platforms was the best choice as they provide superior time to market and operating efficiency. On the other hand, where we see opportunities for uniquely differentiated solutions, particularly through AI will build. This build versus buy approach enabled us to not only balance time to market and financial performance, but also to continue to deliver 60% plus gross margins, consistent profitability and a debt-free balance sheet. Regarding our buy strategy, approximately 18 months ago, we selected a white label CCaaS platform that powers CoreEngage our native Teams Contact Center solution. In addition, just over a year ago, we selected Crexendo's NetSapiens, white label UCaaS platform, which we market as MaxCloud UC. For both solutions we wrap around products and services to make them uniquely Altigen. On the build side, our investment focus is on AI-driven solutions that expand our addressable market, increase average deal sizes and improve customer retention. As such, we are nearing completion on 2 internally developed platforms. First, an AI-powered 24/7 customer self-service solution and second core insights and AI-driven customer engagement analytics platform. Both are designed to labor across our UCaaS and CCaaS deployments creating incremental high-margin recurring revenue opportunities. We expect to release customer preview versions of both platforms within the next 90 days with revenue contribution expected to begin later in fiscal 2026. Regarding our strategic product road map, our goal is to deliver an integrated Microsoft-centric cloud-based customer experience platform that supports the entire customer journey. This includes 4 key solutions: AI-powered customer self-service, UCaaS or Microsoft Teams Phone. CoreEngage, our native team's CCaaS solution and finally, Core Insights, which delivers close-to loop customer interaction analytics. On the consulting side, Altigen Consulting Services, or ACS, is also gaining traction as it relates to custom AI services. Historically, this group has been focused on developing custom business applications based on the Microsoft technology stack, which will continue to perform. But the core growth opportunity for ACS is applying agentic AI to solve real-world business problems. We're currently involved in several AI projects with a number of companies, including CTDOT. The first of which is a good example of the practical application of AI, along with the benefits it can deliver. For CTDOT, using agentic AI, we are automating a high volume of IT support tickets, significantly reducing the manual workload on their technical support teams. In this instance, an AI agent monitors all incoming tickets submitted through their Jira trouble ticketing system and independently resolves issues using its accumulated knowledge, all without human intervention. When an issue falls outside of the AI agent's current capabilities, it automatically escalates the ticket to a human technician captures the resolution and incorporates that into its knowledge base, so it can autonomously handle similar issues in the future. The result is faster resolution times, reduced support costs and the ability for technical staff to focus on higher-value work, while the AI system itself continuously improves over time. There are many other AI capabilities we can deliver, but this example should serve to demonstrate the power of AI to solve problems and improve business processes. In summary, we've completed the most difficult phase of our business transformation. We now have scalable infrastructure, a lower cost business operating structure, strong margins and a compelling AI-powered customer experience solutions portfolio. Our focus moving forward is disciplined execution, accelerating revenue growth and progressing towards sustained profitable business growth. With that, I'll now turn the call back to Gary to provide additional details on our financial results. Gary? Gary Stone: Thanks, Jerry. Okay. For our 2026 fiscal first quarter, which is October to December, we reported total revenue of $3.2 million with GAAP net income of $101,000 or $0.00 per share. That compares to the prior year's quarter revenue of $3.4 million with GAAP net income of $87,000 and also $0.00 per share, is technically, it's $0.005 per share. Total Cloud Services for the first quarter was approximately $1.4 million, down 17% from the $1.7 million last year. Meanwhile, our services and other revenue increased 7% to $1.5 million from $1.4 million in the prior year. Gross margin for the quarter was 62% compared to 63% in the same period last year. GAAP operating expenses for the first year or for the quarter totaled $1.9 million, reflecting a 9% decrease from the $2.1 million in the same period last year. Looking at our liquidity, we closed out the quarter with $2.55 million in cash and cash equivalents, down from $2.75 million last September 30, 2025. Despite positive EBITDA and positive cash flow from operations, our cash flow continue to fluctuate due to the timing of payments from some of our larger customers and the timing of our accounts payable, which for this quarter was down $400,000 compared to Q1, '25. Working capital was $2.9 million compared to the same $2.9 million in reported -- that was reported at the end of September. Our EBITDA adjusted for legal, severance and other onetime costs was $257,000 compared to $291,000 in the prior year's quarter. Now let me turn the call over to Joe for a discussion of our operating performance. Joe? Joe Hamblin: Thank you, Gary, and good afternoon, everyone. As part of our continued effort to improve transparency and investor understanding, beginning this quarter, we are providing more detailed insights into the performance of our 4 primary lines of business. Altigen Consulting Services, Max platforms, IVR and our Teams-based UCaaS platform core engaged. Our goal with this approach is to provide clear, meaningful data points that allow investors to track performance and trends and execution progress over time. So let's start with Altigen Consulting Services, which continues to be an important driver in business revenue and a strategic differentiation for us. In Q4, fiscal 2025, ACS revenues reached $1.55 million. That was a new high watermark for us. This outperformance was driven by a customer requested acceleration of the delivery of several onetime projects. In Q1 fiscal 2026, ACS revenues normalized back to the run rate of approximately $1.47 million due to the reduced holiday billings, while this was consistent with our expectations for the quarter, we do expect to see growth going forward as we bring on new customers to the platform or to the business. During the quarter, ACS also signed a new customer in the commercial power industry to deliver a custom-developed ticketing solution. Due to the security sensitive nature of this customer's operations, we are permanently restricted from publicly disclosing their identity. The first project we're doing for them is estimated at $150,000. Since the start of this initial project, the same customer has identified additional opportunities they would like us to estimate. I mentioned this because successful project delivery often leads to additional opportunities with the same customer. In addition, we currently have several other new customer engagements, many driven by AI-related requirements in various stages of discovery and estimation. Moving over to our cloud business, particularly the Max platform space. Revenue for 1Q was $3.2 million compared to $3.4 million in the same period a year ago, the decline was primarily driven by seasonal lower activities during the holiday period, along with customer churn. It's important to note that the majority of the churn, as Jerry referenced, has come from partner transitions, where several long-term partners elected to move to an alternative platforms prior to the adoption of the Crexendo NetSapien platform for Max Cloud UC. We continue to pursue targeted win-back strategies to recover as many of those partnerships as possible. At the same time, we continue to manage anticipated churn in our legacy Max business through a combination of customer migration programs of partner incentives and direct engagement strategies. To drive new growth, we recently launched a new MSP program that provides IT managed service providers with white labeled white glove UC solutions to resell into their existing customer base. On an ongoing forward basis, we will report quarterly updates on 2 key metrics customer migrations and new net customer additions. As of the end of Q1, we have over 100 customers active and billing on the Max Cloud UC platform, representing over 4,000 seats. Additionally, we have 40 contracted customers representing more than 1,700 seats that are fully configured and scheduled to go live within the next 4 months. Next, on our list of opportunities is several thousand on-premise subscriber seats that remain in our current installed base, converting these customers to cloud remain a key growth and also a modernization initiative. Moving to our IVR solutions, which are white labeled by Fiserv have produced a stable foundation of revenue streams for the past several years. We expect this to accelerate in the latter half of fiscal 2026 based on several new AI-enabled capabilities. We're adding to the platform, including conversational AI to enhance customer self-service experience, core Insights analytics, customer engagement dashboard reporting solution and core Insights AI, which provides deep business outcome analytics. Finally, turning to our Teams-based UCaaS platform, CoreEngage, where we're beginning to see signs of market momentum. Currently, 6 customers representing more than 200 users are actively billing. We have an additional contracted customers in various stages of deployment representing approximately 500 users expected to begin billing by the end of Q3 and from a pipeline perspective, CoreEngage continues to show a solid momentum with an estimated 500 additional seats currently in advanced discussions. On the strategic partnership front, in December, Fiserv approved CoreEngage as its preferred Teams Contact Center. In addition, we have agreed to a partnership under which Fiserv will recommend Microsoft Teams Phone to its customers with Altigen providing the migration services from the legacy PBX platform to Teams. Under this model, Altigen will capture both migration services revenue and ongoing monthly recurring revenue from our direct SIP trunk routing and Premier Support Services. Fiserv is currently developed with comprehensive marketing program that will include featuring Altigen solutions on their website, developing joint marketing materials, inviting Altigen to participate in 2 upcoming Fiserv user conferences and providing sales training for approximately 200 Fiserv account managers responsible for selling the Altigen solutions. Last week, we also announced a licensing and collaboration agreement with Crescendo, the leading provider of hosted unified communications as a service. This agreement allows Altigen to concentrate our delivery expertise squarely on exceeding customer expectations through a streamlined cloud communications offering that combines platform innovations with operational scale. In closing, we continue to make strong progress. Our churn levels are declining, while subscriber additions are increasing, and we expect these trends to intersect and turn positive by fiscal Q3. Going forward, we will continue to provide structured updates on each line of business, along with additional key performance indicators to help investors track our progress and execution. We welcome investor feedback on the new format as we refine how we can better communicate our results and trends. With that, I'll turn the call back over to Jerry for his concluding remarks. Jerry? Jerry Fleming: Thank you, Joe. So in closing, Altigen's customer experience strategy is at the core of our business transformation with AI at the center, we're building a scalable, differentiated business designed for sustainable growth and profitability. So with that, I'll turn the call back to the operator for questions. Operator? Operator: [Operator Instructions] We have a question from Tim Clarkson with Van Clemens Capital. Timothy Clarkson: Guys, I've been following your stock now for a couple of years and I'm intrigued with the high gross margins and the fact that good balance sheet and now you're making money. So those are all really good things. I guess the question I have is who's your typical end user? And what are the benefits that they get from this new technology? Jerry Fleming: Yes. It's a good question, Tim. And it really depends on the solutions, right? We mentioned 4 different solutions. 3 of those are out there today. So in the UCaaS world, so this might be a little bit of a long answer, but we want to make sure we give -- provide full transparency. In the UCaaS world, our users are typically SMBs, anywhere between, let's say, 10 employees and 100 employees, and those are on our Max Cloud platform. As Joe mentioned in his section, we're changing our go-to-market strategy with our UCaaS platform instead of calling on individual customers that tend in our average revenue per customer is about $300 to $500 per month, we're flipping that now because we have the infrastructure in place to do this to call on MSPs, who have their customers, who are trusted advisers to their customers. And those MSPs are worth, I should say, what their spend is typically $3,000 or $5,000 per month. So we'll still address that same SMB market, but we're going to take a different tack that should be far more profitable and contribute to our growth. If we look at our IVR solutions that Joe was talking about, those are all banks and Credit Unions and the IVR is white labeled through Fiserv. So typically, these banks and Credit Unions fall into the category of midsized organizations. And there's 1,500 of those customers today, and that number is growing and we will leverage those 1,500 customers with the new AI capabilities that we're adding to the platform. And then finally, we have our Core Engage solution, which is our integrated Contact Center for Microsoft Teams. Those customers tend to be larger, so they're mid-market to enterprise customers. And so in that regard, customers normally are in the couple of hundred users at the low end to several thousand at the high end. I think our largest customer, at least the largest customer that we're working with right now to deploy upwards of 50,000 employees. So it's a totally different market, depending on which solution that we're talking about. Timothy Clarkson: Okay. So let's go back to the banks and credit card -- Credit Unions. I was actually talking to somebody the other day, and they were complaining about how they had a fraud issue with their credit card and they're trying to get a hold of their Credit Union and they went through 2, 3 people, and they're on hold for half an hour with 1 and they had to come back and you got a new customer, and it was just kind of a nightmare. So I mean, how does -- I assume that your technology would be involved in helping mitigate those problems in executing better solutions? Jerry Fleming: Yes, absolutely. And so we have our baseline product that's been out there for a while that we're adding conversational AI capabilities, too, which will certainly improve the customer experience, our next-generation platform is going to take that a step further because not only can it respond to request, check my account balance transfer funds, it can also determine intent. So someone's got a credit card fraud issue and it can not only respond and take the customer through in an agenetic AI fashion "fill up the form" what you need to do to cancel your card, we can also, depending on the customer's orientation escalate to a live agent and get to the right person, so we're not talking to 2 or 3 people. We -- our AI can escalate to the appropriate person in the fraud department. So yes, I think with AI, we'll definitely improve that customer experience if that customer is a Fiserv customer. Timothy Clarkson: Okay. One last question. What's the big deal about moving all this stuff to the cloud? How does that benefit the end user? Jerry Fleming: More for the end user, that means -- there's actually several benefits about that. The financial benefit as they go from CapEx to OpEx. So laying out $50,000 or $100,000 for a Contact Center product, they're going to spend a few thousand dollars a month. From an infrastructure perspective, this is really huge. They don't have to spend money on their own hardware and they don't have to maintain all of the systems as, let's say, I'll call it the old days, when we sold on-premise software and somebody had to physically install the software and maintain it and apply updates, et cetera, there's a tremendous amount of manual effort going into supporting a platform that's all handled automatically by us as a cloud solution. Operator: [Operator Instructions] As we have no further questions on the line at this time. I would like to turn the call back over to Mr. Fleming for any closing remarks. Jerry Fleming: Okay. Thanks, operator, and thank you, everyone, for joining the call today. We're getting close here to turning the corner. So we look forward to updating you on our next call, which will be in April and updating you on our performance going forward as well as our operation -- all of the operational details that we gave today. So thank you very much. Operator: Thank you, ladies and gentlemen. This does conclude today's conference, and you may disconnect your lines at this time. We thank you for your participation.
Operator: Good day, and welcome to the eGain Fiscal 2026 Second Quarter Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jim Byers with PondelWilkinson Investor Relations. Please go ahead. Jim Byers: Thank you, operator, and good afternoon, everyone. Welcome to eGain's Fiscal 2026 Second Quarter Financial Results Conference Call. On the call today are eGain's Chief Executive Officer, Ashu Roy; and Chief Financial Officer, Eric Smit. Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements which convey management's expectations, beliefs, plans, and objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate, or similar expressions. Forward-looking statements are protected by safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects. Information on various factors that could affect eGain's results are detailed in the company's reports filed with the Securities and Exchange Commission. eGain is making these statements as of today, February 3, 2026, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call. In addition to GAAP results, we will also discuss certain non-GAAP financial measures such as non-GAAP operating income. The financial tables included with the earnings press release include reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. eGain's earnings press release can be found by clicking the Press Releases link on the Investor Relations page of the eGain website at egain.com. And along with the earnings release, we will post an updated investor presentation to the Investor Relations page of eGain's website. And lastly, a phone replay of this conference call will be available for 1 week. And now with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy. Ashutosh Roy: Thank you, Jim, and good afternoon, everyone. We saw good business momentum in our second quarter. Both revenue and profitability exceeded our guidance and street consensus, and we delivered strong operating cash flow. We also drove strong bookings in the quarter, including multiple Global 1000 logos and healthy expansions. Our AI Knowledge Hub momentum continues to grow with ARR from these customers up 27% year-over-year and our total AI Knowledge ARR now representing 64% of our total SaaS ARR. Finally, we saw more than 50% year-over-year increase in top-of-the-funnel AI Knowledge leads. So that's encouraging. Turning to business highlights. We saw a couple of trends worth calling out. First, 25% of our new logos in the first half of fiscal '26 were sourced by partners. This is more than a doubling of our partner-sourced new logos year-over-year. Our partner momentum is building nicely. We also saw enterprise buying bundled alongside the CX deals in the majority of cases in this quarter. This convergence of customer service and contact center buying and enterprise use case-oriented buying is accelerated by what we see as corporate AI teams and their interest in knowledge. This is a development that validates our point of view that a centralized trusted knowledge foundation is necessary for AI ROI upscale. Now let me share some booking highlights for the quarter, starting with new logos. First, we won the enterprise knowledge mandate for one of the largest business software providers in the world. Our knowledge platform will be deployed across over 100,000 users and multiple use cases across CX, employee experience, and AI experience, which now is, as we know, a huge thing. This win also presents us the opportunity to partner with this client to potentially offer our knowledge solution to their global clients, very exciting for us. Another one worth calling out is a large U.S.-based manufacturer of kitchen cabinets with over 15 brands and 6,000 employees. This company's product and policy knowledge was scattered all over, and it was making it very hard for their service teams to access accurate current answers for long-tail products. As you know, cabinets last for a long time and service questions can be for products you have sold 15 years ago. They selected our AI knowledge hub to centralize all the knowledge, drive consistency, and automate their future AI initiatives. We also signed a couple of new insurance logos during the quarter, including Achmea. This is one of Europe's largest insurance and financial services groups based in Netherlands. They serve more than 10 million customers. Achmea has been driving a strategic shift towards becoming a digital insurer with customer experience and self-service adoption as their core priorities. They recognize the need for a knowledge as a service partner, and they selected us to accelerate their digital insurance journey. Our platform now will power 21,000 users across Achmea, including customer service and contact center use cases, but not just customer service. We are also seeing good momentum with credit unions. One of them that I want to call out is Oregon Community Credit Union. They serve over 250,000 members in Oregon, Idaho, and Washington. They recognized the need to modernize their knowledge system, and they selected us, again, for our open architecture and AI capability. Yet again, in this case, eGain will be used to support all enterprise use cases, including contact center use cases where we are integrated and connected into the Genesys CCaaS platform. So this convergence that we see of starting with customer service and contact center, but then the knowledge platform being used for all enterprise use cases is a welcome one for us because we believe that while CX is the most compelling ROI proposition for knowledge, knowledge is not limited in terms of its value within customer experience use cases alone. And so applying what works in CX across the entire enterprise provides enormous benefit to businesses that are looking to accelerate their AI ambition. In terms of thought leadership, we more than ever believe that the market is aligning with our view that a trusted knowledge foundation accelerates enterprise AI ROI. This quarter, as I mentioned earlier, we saw more than 50% year-over-year increase in top-of-the-funnel marketing leads and a 23% increase in pure inbound interest year-over-year. Turning to partnerships, which is a key area for us beyond our direct go-to-market motions. Our expanding efforts in partner development are bearing fruit. Partner-sourced leads in the first half of fiscal '26 increased 80% year-over-year. On the product front, as we have mentioned before, we announced our developer-focused offering, the eGain Composer in October at our customer event in Chicago. eGain Composer now is helping us drive more product sales of the AI Knowledge Hub and attract new ecosystem partners. We are seeing growing engagement from developers, both from AI groups within enterprises as well as smaller partners who are building bespoke AI solutions for their clients, which are enterprises. As you know, Composer offers modular capabilities on our composable platform to easily build trusted solutions using our Knowledge Hub. While it's early days, we see continued and growing interest from smaller partners as well who want to use Composer to build differentiated capabilities in their own go-to-market offerings. As we execute more go-to-market programs around Composer, we intend to expand awareness amongst AI stakeholders, increase engagement, and generate early conversations across diverse use cases beyond customer experience and customer service. I'm also excited about the fact that eGain was once again noted in the right top quadrant, the leader quadrant in the Gartner Emerging MQ for generative AI knowledge apps. We were also late last year named KM World's Readers' Choice Award winner, and this came back in November of 2025. To conclude, we're executing well on our go-to-market strategies. We are seeing growing brand awareness as evidenced by increase in inbound interest in our products. We are seeing increased opportunities both in our go-to-market awareness and direct marketing activities as well as partner activities. We are seeing our product-led growth strategy delivering tangible results. And lastly, we see the market converging centered around CX and customer service, but extending beyond that to cover the entire enterprise for a centralized knowledge foundation that businesses are looking to create, which will then give them the right capability to springboard off for their AI initiatives. With that, I'll hand it over to Eric Smit, our CFO, to provide more detail on the financials. Eric? Eric Smit: Thanks, Ashu, and thanks, everyone, for joining us today. Before I begin, I want to mention that we are again using slides to support our earnings call. We believe this will provide helpful context and make it easier for you to follow our results and outlook. In addition to the webcast, you can find the slides in the Investor Relations section of our website, under the updated investor presentation. As Ashu noted, we had a strong -- had strong business momentum in the quarter with revenue and profitability exceeding our guidance and street consensus, strong year-over-year ARR growth, expanding gross and EBITDA margins, and strong cash flow from operations. Let me share more details about our Q2 financial results before discussing our outlook and guidance for Q3 and fiscal 2026. Looking at our revenue, total revenue for the second quarter was $23 million, ahead of our guidance and street consensus and up 3% year-over-year. SaaS revenue increased by 5% year-over-year and accounted for 95% of total revenue, up from 93% in Q2 last year. If we exclude the approximate $600,000 reduction per quarter from our noncore messaging products, which we are sunsetting this fiscal year, then total revenue was up 5% year-over-year and SaaS revenue was up 8% year-over-year. Looking at our non-GAAP gross profits and gross margins. Total gross margin for the quarter was 74%, up 300 basis points from 71% a year ago. SaaS gross margin for the quarter was 80%, up 200 basis points from 78% a year ago. The SaaS gross margin expansion was primarily driven by our product enhancements, which enabled more cost-efficient deployments and delivered operational efficiencies within our cloud and customer support teams. PS revenue was sequentially lower in Q2 as anticipated due to the timing of bookings that didn't close until late in the quarter as well as the impact of the government shutdown. This contributed to the negative PS margin in Q2. We have rightsized and adjusted our PS organization during Q2, and we'll see the full quarter savings benefits in Q3 onwards. As such, we expect PS gross margins to return to flat to slightly positive as we saw in Q1. Now turning to our operations. Non-GAAP operating costs for the second quarter were $14.2 million, down 3% year-over-year as we have streamlined and realigned our business operations, increasing our investments in AI product innovation while reducing spend on legacy products. Looking at our bottom line. Non-GAAP net income was $3 million or $0.11 per share on a basic and diluted basis, up from $1.3 million or $0.05 per share on a basic basis and $0.04 per share on a diluted basis in the year ago quarter. Adjusted EBITDA margin for the quarter was 14%, up from 7% in the year ago quarter. Turning to our balance sheet and cash flows. For the second quarter, we generated strong operating cash flow of $10.1 million, representing a 44% operating cash flow margin compared to $6.4 million and 29% operating cash flow margin in the year ago quarter. Our cash collections have historically been front-loaded in the fiscal year due to the timing of large deals and renewals. Our balance sheet remains very strong and with a healthy level of cash and no debt. Total cash and cash equivalents at the end of the quarter were $83.1 million, up from $62.9 million as of June 30, 2025. During the company -- during the quarter, the company did not repurchase any shares of common stock. And as of the end of Q2, we still have $19.7 million remaining available under the company's current authorized buyback program. Now turning to our customer metrics. I've broken out our AI Knowledge ARR metrics from the total metrics to highlight the momentum of our AI Knowledge business. SaaS ARR for AI Knowledge customers increased 27% year-over-year, while SaaS ARR for all of our customers increased 7% year-over-year. Excluding the noncore messaging products, which we are sunsetting this fiscal year, SaaS ARR for all customers increased 11% year-over-year. Turning to our net retention rates. LTM dollar-based SaaS net retention for AI Knowledge customers was 116%, up from 99% a year ago, while net retention for all customers was 101%, up from 89% a year ago. Our LTM dollar-based SaaS net expansion rate was 119% for our AI Knowledge customers and 108% for all customers. Looking at our remaining performance obligations, total RPO increased 15% year-over-year, and our short-term RPO of $53 million was up 4% year-over-year. Now turning to our guidance. For the third quarter of fiscal 2026, we expect total revenue of between $22.2 million to $22.7 million, and as a reminder, the fewer number of days in Q3 has an approximately $400,000 negative impact on revenue for the quarter when compared to Q2. Turning to the bottom line for Q3. We expect GAAP net income of $1 million to $1.5 million or $0.04 to $0.05 per share, which includes stock-based compensation expense of approximately $800,000. We expect non-GAAP net income of $1.8 million to $2.3 million or $0.06 to $0.08 per share and adjusted EBITDA of $2.6 million to $3.1 million or a margin of 12% to 14%. Looking at our full year ending June 30, 2026, we expect total revenue to be between $90.5 million and $92 million, representing a return to growth for the year. This remains unchanged from our initial guidance provided last quarter. We now expect GAAP net income of $4.5 million to $6 million or $0.16 to $0.21 per share. This includes stock-based compensation expense of approximately $2.9 million, also includes warrant expense of approximately $1.4 million. Our non-GAAP net income of $8.8 million to $10.3 million or $0.31 to $0.36 per share and adjusted EBITDA of $10.9 million to $12.4 million or a margin of 12% to 13%. Looking at weighted average shares outstanding, we now expect approximately 28.3 million shares for Q3 and 28 million for fiscal 2026. So in conclusion, we delivered revenue and profitability that exceeded our guidance. Our AI Knowledge ARR growth continues to gain momentum, increasing 27% this quarter and now accounts for 64% of total SaaS ARR. We're executing well on our go-to-market strategies and seeing positive results, and we are well positioned to capture market leadership in AI-driven knowledge automation and to drive sustainable revenue growth and increased profitability going forward. Lastly, on the Investor Relations calendar, tomorrow, we will be hosting virtual meetings with institutional investors throughout the day as part of the Oppenheimer Emerging Growth Conference. We hope to see some of you virtually. And next month, we will be at the Annual ROTH Conference on March 23. We'll provide more details as we get closer to the date and hope to see some of you there in person. This concludes our prepared remarks. Operator, we will now open the call for questions. Operator: [Operator Instructions] The first question comes from Jeff Van Rhee with Craig-Hallum. Jeff Van Rhee: A couple of questions for me. First, congrats on the large software deal, and I'd love to hear a bit more about that deal, the cycle, the competitive landscape, what you're replacing? Ashutosh Roy: Sure. This is Ashu here, Jeff. Yes. So let's go in order. So the first thing was it was a fairly long sales cycle. We've been at it for, I would say, seriously for about 1.5 years, but we've been talking to them maybe a few months before that, went through the whole RFP process. And eventually they selected us. So that was one. The second was in terms of what we were replacing, they didn't have an enterprise-wide knowledge platform up until then, but they did have other competitors for AI search in some of their functional groups, but they didn't have an enterprise-wide knowledge solution up until then. Jeff Van Rhee: Got it. And then, Eric, just on the numbers front, just so I'm thinking about this right, the March quarter versus the December quarter is a clean sequential compare. We've had the full run here of the large JPMorgan deal. And then if I recall, the messaging was going to sunset in tranches. And I think you had said that was Q1 '27. Just trying to validate if I've got all that right. Eric Smit: Yes, that's correct. The -- just to be clear, on the noncore messaging, we had 50% of it reduced in the Q2 quarter and then the balance will be reducing in the first quarter of '27. Jeff Van Rhee: Yes. Okay. All right. Got it. And then on the partner side, I mean, obviously, having some real good impact. Can you just narrow that down? Is that concentrated within a small basket? Are there any particular partners that are driving the strength on the partner-driven lead gen? Ashutosh Roy: Yes. The ones that seem to be working, 2 areas that seem to be quite promising. One is small boutique kind of knowledge consulting shops, which have existing clients, and they are looking to kind of refresh the platform for the clients and some of the legacy knowledge vendors who these boutique SI shops have worked with. So that's one area where we are seeing good momentum. And the second area we're seeing some early but very promising momentum is just pure contact center knowledge deals through sort of the TSD kind of networks. Jeff Van Rhee: And congrats on the cash flow, guys. Great cash flow there. Operator: The next question comes from Richard Baldry with ROTH Capital. Richard Baldry: Sort of an esoteric question, but there seems to be a stable developing that people can use AI and sort of instantly create software companies. So could you talk a little bit about the challenges to replicating a system of record class software platform that a vibe coding session clearly couldn't replicate. So you've been building this for a decade plus. I'd like to just put a pin in that myth, sort of one company at a time. So if you can talk about sort of the barriers to and the moats around what you've built, I think that would be helpful. Ashutosh Roy: Yes. That's a tough one, Richard, but I'll try to take a crack at it because the fact is that you're right, basic programming and even complex programming, given appropriate constraints and very good prompting and kind of co-coding, if you will, with very good programmers -- human programmers on the other side is accelerating the phase of software creation, which we typically call coding and development, right? So that part is definitely true and we are taking advantage of it just as anyone else is. The parts that I think are still seem more work, though I wouldn't ever say that it's not solvable because the trajectory seems to be quite interesting, is architecture, understanding of use cases, understanding things that are nonfunctional in nature in terms of reliability, scalability, performance, and so on. And then putting it all together. What I'm trying to say is I think the barriers are definitely coming down for everyone, right, whether it's a 1-person shop or whether it's a 500-person shop like eGain or it's a 300,000-person shop like Google. And the focus and the use case understanding and the ability to put things together that have proven track record are going to be the differentiators really. Richard Baldry: And then think about internally then, how much do you think you can use the tools internally to either speed up your own future development and/or lower your cost to deliver the service? And maybe a broader way to think about it is in a pre-generative AI world, do you think your profitability would be higher? Or is it higher in a post-world because you can lower some of your internal costs? Ashutosh Roy: I think assuming that pricing holds, we would definitely be more profitable, right? But I do suspect that there's going to be pressure on pricing over time for all of us, not just eGain. Everyone is going to feel the pricing pressure. And so I feel like there is a big opportunity to become the enterprise knowledge fabric. Yes, we're starting from the vantage point of customer service and customer experience. But as I mentioned, a big majority of our deals now are starting in CX. And in the first purchase itself, they end up including enterprise use case. So I think that it's a land grab really at this point. And so we are focused on this knowledge piece and we hope to grab more land than others and then play the game as well as anyone else from there on. Richard Baldry: Got it. And maybe last for me. The cash pile start building up pretty fast. Any thoughts on the best way to efficiently deploy that in the current environment? Eric Smit: No. I think as we've said before, I think we will keep focusing on our internal investments to drive the top line growth. I think we'll continue to -- on that momentum, I think we're obviously benefiting from the AI innovations that are sort of helping us save some of those money even as we're spending it on R&D and ramping up the teams in Sunnyvale. I think some of those cost savings are resulting in those improved profits in the short term. But I think we certainly continue to see that as a primary focus. We obviously still have the share buyback in place. So we'll see whether that's an appropriate vehicle. And then finally, opportunistically looking at inorganic options. Again, this is not something that's a primary focus. But of course, we will continue to evaluate those as they come in as we look forward. Richard Baldry: And maybe one last one for me. How are you thinking about hiring plans? You're sort of midway through the year executing against the plan. When you look forward, whether that's pipeline-driven, opportunity-driven, do you think hiring will be concentrated in sales and marketing? Do you think there's a flat period for some like development while you adopt the new tools that are getting you higher throughputs there? Just how do we think about that as you head into the second half? Ashutosh Roy: So we've been, as Eric mentioned, Rich, we've been investing pretty smartly and actively in hiring new talent in product over the last year, right, in locally in the Bay Area. And that has proven -- that's borne fruit. We're very happy with that. Now at the same time, we have been reducing from some of the other sort of distributed teams that we had, thanks to automation that we are driving in the business. So the net impact doesn't seem like much is happening, but there's a lot of reallocation going into much more high-end engineering and technology talent on the product side, both in product management as well as engineering and architecture and AI. Then moving to marketing, we -- as you know, we brought in a new marketing head. He's brought in a couple of new people now. And I think marketing is going to see a lot of increased activity and investment for us in the second half of this fiscal year, right? And then finally, sales, which while we are very happy with the pipeline, I still think that given the way we are product-led now, our sales motions are kind of different. They're much more expert-led, much more specialist-led, especially in large organizations where there's very early contact with tech and AI folks. And so the composer proposition is resonating very well, and we are investing in that group, right? So that's kind of where we are now as it scales, which I believe it will, then we will add more sort of systematic sales muscle and headcount to meet the demand. Operator: The next question comes from Erik Suppiger with B. Riley Securities. Erik Suppiger: Congrats on a real solid quarter there. One, I just want to be clear, is the deployment at JPMorgan, is that fully rolled out? Or is that still in process? And then two, you had talked about some additional areas for opportunities across the enterprise. Can you discuss what are some of the logical kind of low-hanging fruit once you move past CX? Ashutosh Roy: Sure. So first on the JPMC question, we are not fully rolled out as planned. We are halfway there and we expect to be fully rolled out later this year as planned. So that's good. The second question in terms of other use cases, we are currently working on a few, Erik. I think maybe this is a good time for me to mention that we pulled up our Europe-based customer event, which normally we would do in June. Now we're doing it in May this year. And so we'll have our eGain Solve customer event in London on May 6 and 7. And those are the 2 events, one in Chicago, one in London, where we bring out our new products and capabilities. And so I would say we look forward to sharing more in that forum as to what are the other use cases we are looking to roll out. But you can logically think of the other use cases. But to me, the first expansion is going to be concentric around broadly customer operations as opposed to just customer service and from there on into other enterprise-facing areas. Erik Suppiger: Okay. And then just in terms of some of the wins that you had, are most of those greenfield wins? Or are you displacing anybody's solutions? Ashutosh Roy: I would say that in more cases than not, we are replacing some tactical solution or some big solution that has just run out of gas in terms of new innovation or AI readiness. That's one of the things we are seeing a lot of is existing AM solutions in CX areas that just don't seem to be investing in modernizing and making it sort of AI ready, if you will. And our knowledge automation capabilities are -- and composer capability. These 2 things are super attractive to businesses that are looking to drive sort of their AI projects with trusted content feeding into those systems. That seems to be one of the big trigger points. Erik Suppiger: Are customers using CRM platforms for that and they're finding that they're insufficient? Or what is it that they're trying to use for that? Ashutosh Roy: I say there are 3 things, right? One is they just have a whole bunch of SharePoint and they have tried to rag kind of retrieval augmented generation on top of lots of SharePoint repositories to try to deliver the right content to AI systems on the front end. And they just run out of gas trying to make it work. That's one. I'm giving you some archetypes here. So the second is they have knowledge sitting in salesforce, and they just run out of patience waiting for salesforce to deliver to what the commitments have been. Let's just say that. And the third is they have tactical or point knowledge management solutions that have not kept pace with the AI expectations that these businesses have. Those are the 3, I'd say, most popular ones. Operator: Since there are no more questions, this concludes the question-and-answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead. Eric Smit: Well, thanks, everyone, for taking the time today. We look forward to providing you the update when we do our Q3 results. Ashutosh Roy: Thanks. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Thank you for standing by. My name is Matt, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Super Micro Computer, Inc. Q2 Fiscal Year '26 Financial Results Call. With us today are Charles Liang, Founder, President and Chief Executive Officer; David Weigand, CFO; and Michael Staiger, Senior Vice President of Corporate Development. [Operator Instructions] Over to you, Michael. Michael Staiger: Thank you. Good afternoon, and thank you for attending Super Micro's call to discuss financial results for the second quarter and full year fiscal 2026, which ended December 31, 2025. With me today, as you know, is Charles Liang, Founder, Chairman, Chief Executive Officer; and David Weigand, Chief Financial Officer. By now, you should have received a copy of the press release from the company that was distributed at the close of regular trading and is available on the company's website. As a reminder, during today's call, the company will refer to a presentation that is available to participants in the IR section of the company's website under Events and Presentations tab. We've also published management scripted commentary on our website. Please note that some of the information you'll hear during the discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business outlook, including guidance for the third quarter of fiscal 2026 and full fiscal year 2026. These statements and other comments are based on management's current expectations and assumptions and involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. You can learn more about these risks and uncertainties in the press release we issued earlier this afternoon, our most recent 10-K filing for fiscal 2025 and other SEC filings. All these documents are available on the IR page of Super Micro's website. We assume no obligation to update any forward-looking statements. Most of today's presentation will refer to non-GAAP financial results and business outlook. For an explanation of our non-GAAP financial measures, please refer to accompanying presentation or to our press release published earlier today. The non-GAAP measures are presented as we believe that they provide investors with the means of evaluating and understanding the companies management -- management evaluates the company's operating performance. These non-GAAP measures should not be considered in isolation from, as substitutes for or superior to financial measures prepared in accordance with U.S. GAAP. In addition, a reconciliation of GAAP to non-GAAP results is contained in today's press release and in the supplemental information attached to today's presentation. At the end of today's prepared remarks, we will have a Q&A session for sell-side analysts. Our third quarter fiscal 2026 quiet period ends at the close -- or begins at the close of business Friday, March 13, 2026. And for now, I will turn the call over to Charles. Charles Liang: Thank you, Michael, and thank you all for joining today's call. Super Micro delivered a strong fiscal Q2 as AI infrastructure demand continues to accelerate across every major customer segment. For the quarter, we achieved a record TWD $12.68 billion in revenue, including $1.5 billion before the former type of account last quarter, representing 123% year-over-year growth. This strong performance reflects the sustained momentum of our AI solutions and Rack Scale Systems as customers build out next-generation AI factories. Super Micro has been developing some of the largest and most complex AI cluster ever built, highlighting our unmatched capability in large-scale manufacturing on-site deployment and integration. Most notably, our data center building block solution or DCBBS has started to gain some key customers' preference as they look for quicker time-to-deployment, TTD and quicker time-to-online TTO. This predesign, prevalidate infrastructure building blocks, not only speed up customers' data center builds, but they also save cost with better workload optimization and with minimal power and water consumption. DCBBS will significantly help us gain market share in large, medium and small AI infrastructure deployments. With GP300 [indiscernible] platforms, we are also preparing for upcoming NVIDIA, Vera Rubin and AMD Helios solutions for the second half this year. While we continuously growing AI factory build-out customer and product mix are shifting -- shift more to large model builder who had pricing leverage pressuring gross margin. In Q2, especially the expedite transportation costs ongoing component shortage and their volatile pricing among with tariffs and impact our short-term gross margin. As such, I would like to take a moment to highlight our key strategies to address this and efficiently strengthen our long-term profitability. First and foremost, Super Micro undergoes its fourth phase of product evolution with DCBBS as its key focus. As these data center [ deploy ] scale, DCBBS is and will become an increasingly important part of our value. In the first half of fiscal year '26, DCBBS solutions accounted for 4% of our profit. We expect this part of our profit to grow and meaningfully contribute to the second half of fiscal '26, and we see that growth accelerate to at least double-digit contribution by end of calendar 2026 [indiscernible] GPU, CPU life cycle. DCBBS becomes critical helpful to the value of our server and storage products by enhancing the data center infrastructure time to delivery and time to online, reducing power and water consumption and cost efficiently simplifying data center management and maintenance. In just about 1 year, our DCBBS product lines grew from more than -- grew to more than 10 key subsystems, including CDU, [ LR2A ] heat exchanger, chilled doors, power shelves, battery backup, water tower, dry-towers, high-speed switching, data center management software and service. We are expanding this product line to include more new category such as transformer, next-generation power generators, device for energy backup and grid power replacement, further strengthening customer value, accelerating deployment and supporting long-term profit margin improving for Super Micro. Other than developing DCBBS for better value and portability, we are also sharpening our focus on traditional enterprise, cloud and edge IoT customers to further diversify revenue with higher margin. In addition, we have introduced our X14 and H14 [indiscernible] solutions, featuring preconfigured systems that ship directly from our factory, enabling rapid deployment, optimized for specific AI cloud storage and telco edge workloads. These servers are ready to power immediately and reinforce Super Micro's core value time-to-market advantage for enterprise customer, channel partner and SMB end users. We are also driving meaningful cost improvement through enhanced design for manufacturing, DFM and quality-driven engineering. We have introduced more modularized subsystem and expanded automation across our facilities. These efforts increase yield rate, reduce the work and enable us to bring new platform to volume production even faster and with higher quality. As product cycle shorten and technical complexity increase, these design for manufacturing advancement are essential for scale, efficiency and long-term margin improvement. While executing these DFM initiatives, we are also continuing to expand our global manufacturing footprint aggressively and strategically. Our Silicon Valley facility remains the cornerstone of our U.S. operation, delivering faster time to market, strong security and higher quality integration. Internationally, new production site in Taiwan, Malaysia and Netherlands and so the Middle East are ramping to increase capacity support regional solving AI requirement and most importantly, optimize our overall cost structure. In summary, as the only company with more than 32 years of robust server and storage focus, Super Micro is quickly evolving into a leading AI platform and data center infrastructure total solution provider. Strong Q2 performance, rapid expansion of DCBBS product line, deeper and more customer engagement and the global capacity investment position us well for long-term growth, while near-term margin pressure from customer mix, tariff, international facility expansion and key component shortage like memory and storage shortage. Our focus on enterprise business design for manufacturing improvement and the faster-growing DCBBS portfolio all help us gain new customers, support higher growth and net margin going forward. Lastly, based on our broad customer back order forecast and commitment, we believe demand for AI and IT infrastructure remain unprecedentedly strong. Our DCBBS solution is exactly what customers need to build out their AI and cloud much faster, greener and lower total cost. With that in mind, I'm confident to guide at least $12.3 billion for Q3 and up our full year revenue guidance back to at least $40 billion. I look forward to sharing our progress with you next quarter. Thank you. Now I will turn it over to David. David Weigand: Thank you, Charles. We achieved record Q2 fiscal year '26 revenue of $12.7 billion, up 123% year-over-year and up 153% quarter-over-quarter compared to our guidance of $10 billion to $11 billion. Q2 revenue included approximately $1.5 billion in delayed Q1 shipments due to customer readiness. Growth was driven this quarter by the rapid ramp and deployment of our Rack Scale AI solutions. Despite supply chain challenges in the industry, our global manufacturing team executed well in delivering record revenue. Order strength remains strong from global large data center and enterprise customers. AI GPU platforms, which represent over 90% of Q2 revenue continue to be the key growth driver. During Q2, the enterprise channel revenue segment totaled $2 billion, representing about 16% of revenue versus 31% in the prior quarter. That's up 42% year-over-year and up 29% quarter-over-quarter. The OEM appliance and large data center segment revenue was $10.7 billion, representing approximately 84% of Q2 revenue versus 68% in the last quarter. This was up 151% year-over-year and up 210% quarter-over-quarter. For Q2 FY '26, one large data center customer represented approximately 63% of total revenue. By geography, the U.S. represented 86% of Q2 revenue, Asia 9%; Europe, 3%; and the rest of the world, 2%. On a year-over-year basis, U.S. revenue increased 184%. Asia grew 53%, Europe decreased 63% and the rest of the world increased 77%. On a quarter-over-quarter basis, U.S. revenue increased 496%, Asia decreased 49%, Europe decreased 51% and the rest of the world increased 53%. The Q2 non-GAAP gross margin was 6.4% versus 9.5% in Q1. Gross margins were impacted by customer and product mix as well as higher freight, production and expedite costs as we began to ship new platforms on a large scale. We had significant operating leverage during the quarter with total non-GAAP operating expenses representing 1.9% of revenue versus 4.1% last quarter. Q2 GAAP operating expenses were $324 million, up 14% quarter-over-quarter and up 8% year-over-year. On a non-GAAP basis, operating expenses were $241 million, which was up 18% quarter-over-quarter and up 6% year-over-year. Operating expenses were up quarter-over-quarter, largely due to higher sales expenses. Non-GAAP operating margin for Q2 was 4.5% compared to 5.4% in Q1. Other income and expense for Q2 totaled a net income of $26 million, reflecting $51 million in interest income on higher cash balances, partially offset by $25 million in interest expense primarily related to our convertible notes. The tax provision for Q2 was $99 million on a GAAP basis and $122 million on a non-GAAP basis, resulting in a GAAP tax rate of 19.8% and a non-GAAP tax rate of 20.6%. Q2 GAAP EPS was $0.60 compared to guidance of $0.37 to $0.45 and non-GAAP diluted EPS was $0.69 versus guidance of $0.46 to $0.54 due to higher revenue and operating leverage. The GAAP fully diluted share count increased sequentially from 663 million in Q1 to 673 million in Q2, and the non-GAAP share count increased from 677 million to [ 688 ] million over the same period. Cash flow used in operations for Q2 was $24 million compared to $918 million used in the prior quarter. On a quarter-over-quarter basis, Q2 operating cash flow reflected higher net income, offset by higher accounts receivable and inventory levels and aided by higher accounts payables. Q2 closing inventory was $10.6 billion, up from $5.7 billion in Q1 as we prepared for continuing strength in Q3 shipments. CapEx for Q2 totaled $21 million, resulting in negative free cash flow of $45 million for the quarter. During the December quarter, we expanded our access to working capital to fund growth, executing a $2 billion cash flow-based secured revolving credit facility in the U.S. In January, we also closed an approximately $1.8 billion secured Taiwan revolving debt facility. At quarter end, our cash position totaled $4.1 billion, while bank and convertible note debt was $4.9 billion, resulting in a net debt position of $787 million compared to a net debt position of $579 million in the prior quarter. Turning to the balance sheet and working capital metrics. The cash conversion cycle significantly improved from 123 days in Q1 to 54 days in Q2. Days of inventory decreased by 42 days to 63 days versus 105 days in the prior quarter. Days sales outstanding increased by 6 days to 49 days versus 43 days in Q1, while days payables outstanding increased by 32 days to 58 days versus 26 days in Q1. Turning to the outlook for Q3 FY '26. We expect net sales to be at least $12.3 billion. GAAP diluted net income per share of at least $0.52 and non-GAAP diluted net income per share of at least $0.60. We expect gross margins to be up 30 basis points relative to Q2 FY '26 levels. GAAP operating expenses are expected to be around $354 million, which include approximately $74 million in stock-based compensation expenses that are excluded from non-GAAP operating expenses. The outlook for Q3 of fiscal year 2026 fully diluted GAAP EPS includes approximately $62 million in expected stock-based compensation expenses, net of the tax effects of $19 million, which are excluded from non-GAAP diluted net income per common share. We expect other income and expenses, including interest expense to result in a net expense of approximately $22 million. The company's projections for Q3 FY '26 GAAP and non-GAAP diluted net income per common share assume a tax rate of 19.6%, a non-GAAP tax rate of 20.2% and a fully diluted share count of 684 million for GAAP and 699 million shares for non-GAAP. Capital expenditures for Q3 are expected to be in the range of $70 million to $90 million. For full fiscal year 2026, we expect at least $40 billion in net sales. Michael, we're now ready for Q&A. Michael Staiger: Great. Matthew, can you roll the queue? Operator: [Operator Instructions] First question is from the line of Ananda Baruah with Loop Capital. Ananda Baruah: Yes, congrats on the solid results here relative to the guide. Just -- I want to just ask about margins. And I have a few day questions they want to ask you here, but they're all margin related. I guess the first is with regards to -- you mentioned, I think, 90 days ago that December quarter, you expect it to be the sort of the low watermark quarter in gross margins, and you're guiding for Q-over-Q improvement for the March quarter. Do you still think that things progress expansive from here, Charles, you made some comments around customer mix. It's been a headwind. Do you think it continues to improve? And I have 2 quick follow-ups, Dave, just margin related after that. Charles Liang: Yes. Thank you for the question. Yes, the customer mix, we are improving quarter after quarter. Now we have many more large-scale customer, I would like to say. So that will improve our profitability. The other factor is -- last quarter, I mean, December quarter, the GP300 was a little bit new to us. So a lot of expedite transportation cost. And now, I mean, product is getting mature. So those expedite transportation costs will be dramatically reduced and tariff impact also improving. And -- so overall, especially DCBBS also increasing for our -- for our gross margin. So I believe our gross margin will start to improve quarter after quarter. Ananda Baruah: Charles, that's great context. Really appreciate it. And actually, Charles, one of my 2 clarifications here is from something you said in your prepared remarks, you said higher net margin. And so I guess you just clarified you expect gross margin to go up. Maybe this is a Charles or Dave question. Dave, you mentioned OpEx leverage. The OpEx as a percentage of sales was really attractive this quarter. It's like 1.5% -- I guess, less than 2%. But should we expect -- I think it's the second quarter in a row, you drove OpEx leverage last quarter, this September quarter for the first time in a while. But now you have this really attractive -- the most attractive OpEx as a percentage of revenue in a while. So are you -- is the company entering a period of not only gross margin expansion, but OpEx dollar leverage as well structurally? And that's it for me guys. Charles Liang: Yes, exactly. I mean economical scale will help us to improve the cost -- our cost, right? So that will impact our gross margin and especially our operation margin. And again, DCBBS [indiscernible] Super Micro for more business in service, in software, in overall infrastructure service to customer. So all those factors are positive to our margin improvement. Operator: Next question is from the line of Samik Chatterjee with JPMorgan. Unknown Analyst: This is MP on behalf of Samik Chatterjee. I just wanted to double-click on your full year guidance. You said $40 billion for FY '26. If I back into the implied 4Q number, that implies significant quarter-over-quarter moderation. So is that just conservatism being embedded into the full year outlook? Or like do you see definite indications from your order trends that 4Q will imply sequential moderation? And I have a follow-up as well. Charles Liang: Yes. I believe we say minimum $40 billion is a relatively conservative number. So our business indeed will continue to grow, especially our DCBBS that attract a lot of customers who want to build a data center quicker, less power consumption, less cost -- I mean, better cost and also more reliable and easy for management. So we are getting more and more customers come to us. Unknown Analyst: And for my follow-up, I wanted to ask about DCBBS. You highlighted it being 4% of profits in first half. Can you please help us understand like the contribution in terms of revenues? And then you also said it will increase to double-digit contribution by end of calendar year. So how does that translate to overall gross margin trajectory? Charles Liang: Yes. Thank you. I mean, as you know, DCBBS is still a new product line to us. We officially introduced that product about 6 months ago. So in the first 2 quarters, I mean, September quarter plus December quarter, indeed, it is our first 2 quarters. So the revenue is still relatively small, but because the profit is much better. So overall, it contributed about 4% to our overall profit in last 6 months. And looking forward, it will continue to grow very quickly. So we are very happy to see more and more customers like DCBBS to speed up their data center build-out with EDR for management, EDL for maintenance and our profit will continue to grow because of DCBBS especially. Operator: Next question is from the line of Asiya Merchant with Citi. Asiya Merchant: Good results here relative to the guide. I just had 2 quick ones. One, just there's a lot of discussion about component availability, supply constraints. If you could just talk to us about your guide and relative to that, is that minimum $40 billion guide a constraining number -- given the supply constraints? In other words, if supply wasn't an issue, could that number be greater? And then just on customer concentration, I think the commentary suggested that some of the geos did decline on a year-on-year basis as well as on a quarter-on-quarter basis. So again, relative to the guide, how should we think about the ramp of DCBBS across those various geographies for the back half of this fiscal year and into -- through calendar '26? Charles Liang: Yes, you are right. We already consider component price keeping growing. So with that, that's why we try to be conservative kind of commit to $40 billion. If the cost -- if the shortage situation improve quickly, for sure, our [indiscernible] revenue will be more than that. And as to DCBBS is globally almost every region, customer like DCBBS because it helps them easier to build a data center. It's kind of like a one-stop shop. We provide not just computing node, I mean storage node, switch node and disk cooling subsystem including battery cell, including some energy backup. So it kind of makes customers' job to build a data center much easier. So the impact is global. We see global-wide more and more customers like our DCBBS solution, and we are aggressively preparing to grow the support. Operator: Next question is from the line of Katherine Murphy with Goldman Sachs. Katherine Murphy: To ask another question on the new DCBBS disclosure. Encouraging to hear that growing to double-digit share of profit by the end of calendar '26. Can you talk about the investments that you need to make here to expand the capabilities? I know Charles, you mentioned some in the prepared remarks as well as your go-to-market offering to have this increased penetration of DCBBS? And then I have a quick follow-up as well. Charles Liang: Yes. Indeed, we started to develop our DCBBS pretty much about 12 months ago. So we already consistently invested in that area. And so far, we have about 10 items, including the CDU, including chilled door, including the power shelf, battery backup, water tower, management software. So we have about 10 items available now, and we will introduce another 3 to 5 items in the next few months or next few quarters. So the data center building block solution will be getting more complete, and that's why it will be easier for customers to build a data center. It's not just easier, quicker to build their data center, but also make their data center modularized. So it's easier for management, easier for maintenance and easier for scale up. Katherine Murphy: Great. And just on the margin profile of DCBBS, could you remind us what you've said in the past about what that looks like relative to the sales that you typically have towards your large Neo cloud and GPU as a Service customers? Charles Liang: It's for sure, gross margin -- net margin are much higher for DCBBS because it's so unique. And again, we are the first company to build predesigned, prevalidated, pre-optimized data center solution for customers. So the margin is much better, for sure, more than 20%. And we are happy to make the product line really strong, really complete as soon as possible. Operator: The next question is from the line of Ruplu Bhattacharya with Bank of America. Ruplu Bhattacharya: For the first one, I'll ask a follow-up on margins. David, you mentioned expedite costs, component cost increases, shortages. And I think last quarter, you talked about increased investments in engineering support and services to help new customers. Can you help us size all of these things? How much did they impact gross margins in the December quarter? And what's baked into guidance as impact from these things in the March quarter? And I have a follow-up. David Weigand: Yes. We don't break those things out, Ruplu, but we can just say that the costs were up in each of those areas. So in other words, higher transportation and expedite in order to move things around and get things delivered to the customer faster. But we have -- I can tell you that over the past year, we've had increases as we have ramped up the new technologies and prepared for mass shipments. Ruplu Bhattacharya: Okay. As a follow-up, can I ask, I think -- or Charles talked about component shortages and you're being a little conservative on the guide. Are component shortages, like which areas are they in? And then component cost increases, are they actually impacting data center demand, either on the AI side or on the regular non-GPU server side? A component cost increases a real factor? And if I can sneak one more in, this DCBBS product that you have, can we infer anything about the type of customers who are buying that? Like if you're thinking that you're going to sell more, it's going to be more -- a bigger percent of your sales. Does that mean that the customer mix is also changing? Do enterprise customers use more of these? Or what type of customer likes to use more of the DCBBS packaged solution? Charles Liang: Thank you for your question. Indeed, the key component shortage at this time is the main reason because the AI and the large data center demand are growing. So the shortage because the demand is getting so strong, not because of production capacity is reduced. So that's a good sign. So basically, it's because the industry are growing, and we are part of the major growing company. So that's why I believe the impact to us, yes, the cost will be impact, but won't hurt us too much. That's first question. And second, I mean, DCBBS, who need the DCBBS, I would like to say all the people like to build a data center. Doesn't matter they are large scale, middle-sized scale or small scale because our DCBBS just simply provide more choice for customers to go for one-stop shop or buy everything from everywhere by themselves. And obviously, one-stop shop save their time, make sure when they put the things together, it works. And quickly, when you put things together, it work and optimize. That's why it's optimized not just time to delivery, but time to online. Customers use our DCBBS, their data center can go for online, go for operation quickly. So I would like to say global people need DCBBS kind of building block solution. Operator: The next question is from the line of Nehal Chokshi with Northland. Nehal Chokshi: Congrats on the strong results and guidance. A little bit of different question here. So look, Super Micro brought DLC to the market one generation faster than when it became part of NVIDIA reference architecture. It's now apparent that Super Micro has brought to the market one generation faster, dry cooling towers, which is related to higher inlet temperatures as part of Blueprint reference design. My question is that do you expect Super Micro to continue to bring to the market one generation faster the power efficiency advantages before NVIDIA makes it part of their reference architecture? Is it going to be part of Super Micro's branding? Charles Liang: Yes. As you know, NVIDIA is a very strong company, and we work with them very closely. And, however, because of our strong engineering background, our big engineering team. So before we are able to make our total solution one generation or 6 months earlier than others. Now and in the future, I believe we will be still able to bring a total solution to market earlier than others, especially help customers build a data center, build their cloud -- AI cloud, time to online quicker than others, if not 6 months earlier, at least 3 months or 4 months earlier. And that's still a big help. So I'm very confident that our future growth should be still very strong. Nehal Chokshi: Great. And then for my follow-up question, your 10% customer, -- was that the primary driver of the upside that you saw in the quarter? Do you expect them to remain a 10-plus percent customer in the March quarter? How should they traject? And then you also did sign Datavault, a pretty big contract with Datavault 6 or 9 months ago. Is that starting to ramp in as well? Charles Liang: Basically, because our foundation is getting much stronger than before ever, especially our kind of total solution, data center building block total solution is strong. So we are gaining broadly good customer from the older territory. So more than 10% or not is hard to say because now our revenue will grow very fast. Very soon, I hope I can say we have more than $50 billion or $60 billion revenue, not to pay, but hopefully very soon. So more and more large customer is working with us. So that's a very exciting condition. Operator: Next question is from the line of Quinn Bolton with Needham & Company. Quinn Bolton: Let me add congratulations on the nice outlook. I guess, Charles, David, you had a 63% customer in the December quarter. As you look at sort of the second half of fiscal '26, do you expect revenue to diversify significantly? Or do you think that, that large customer continues to be pretty concentrated in the March and the June quarters? And then I've got a follow-up. Charles Liang: Sometimes it's not easy to predict because customers sometimes shift their schedule of pull in or push out. So -- but overall, we are very happy that now we have many more large-scale customers. So the customer is more diversified and overall revenue will grow quickly. And at the same time, DCBBS and [ software ] grow our value. So overall, we are on a very healthy track now. Quinn Bolton: Got it. So understanding that the customers can push and pull out, right now, the forecast shows increasing diversification over the next couple of quarters. Charles Liang: Yes. I mean because of growth still very fast, that's why now we are focused on more about how to kind of maybe -- what should I say, kind of how to grab more money to grow even faster, right? So if we have more cash for sure we can grow even faster. But even if we do not grab more money, I guess, because of more diversified customer base and also more higher-value system, more higher value to solution. So that will help us grow business. Quinn Bolton: Understood. And my follow-on, Charles, in your prepared comments, you mentioned the upcoming platform transition to Vera Rubin and the Helios system from AMD. I'm just wondering, have you guys started to get orders for those systems for delivery in the second half? Or is it too early to start to get orders for those systems? Charles Liang: Yes, we have a lot of highly interested customers, some already engaged, and we hope we can deliver as soon as possible. But still, it depends on our partner, depends on when their Vera Rubin or AMD solution will be ready. So we are working very closely with them. Once they are available, we like to deliver to customers quickly. And yes, today, we already have some good commitment from customers. Operator: Next question is from the line of John Tanwanteng with CJS Securities. Jonathan Tanwanteng: Congrats on the nice quarter and outlook there. I just wanted to ask a little bit more about the big versus smaller customer mix that you're expecting in the future and the pipeline that you see. Are you expecting smaller customers to become a greater percentage of sales? Or is it the opposite? And the reason I ask that is because these bigger customers seem to have that pricing leverage you mentioned. If you could have any color there, that would be helpful. Charles Liang: Yes. Thank you for the question. Yes, we understand we need more customer, especially a more diversified customer base, enterprise. So we are very aggressively growing enterprise midsized or even kind of enterprise customers as well. So I mean, our customer diversified is a very important direction to us now. So I guess [indiscernible] large customer and lots of kind of high number of enterprise accounts. Jonathan Tanwanteng: Okay. Got it. And then just on the Vera Rubin question, and I guess the migration to the 800-volt data center. I was wondering if there's any opportunity for you to drive greater differentiation in this next cycle upgrade compared to the past couple. Is there anything about the whole platform and data center architecture that gives you more or less opportunity compared to the last cycle of Blackwell and Hopper? Charles Liang: Yes. I mean that's why I say NVIDIA provides a very good solution. And based on that, we optimize the whole data center building block solution for our customers and aim to help them build the data center quicker and more reliable, easy for management and [ lower cost ] including energy consumption, including energy backup and maybe too early to say, including energy kind of grid power replacement. So we have a complete plan for the whole solution, but some other systems are still too early to say too much at this moment. Operator: Next question is from the line of Mark Newman with Bernstein. Mark Newman: Congrats on a great quarter and great outlook. Just curious, if you just take a step back, I mean, what's changed? You've got a big step-up here in sales, gross margins down quite a lot, but you're guiding forward for solid sales to continue. So is this just a reflection of a tougher pricing environment and Super Micro having to react to tougher pricing environment and thus winning back more share? Or is this just catching up to -- as you referred to the previous quarter -- previous couple of quarters, you mentioned about a few orders getting pushed out. So is this just catch-up of the orders? Or is this a reflection of a more aggressive pricing strategy? And I guess, importantly, for me, like trying to think about forward estimates going forward, I mean you guided for the short term, but how do we think about gross margins longer term? Is this -- this kind of range here to stay? Or are we looking at getting back to -- into the high single-digit, low double-digit range gross margin like you were before? Charles Liang: Thank you. As an engineering company, we, for sure, have some choice. We can continue to grow larger account aggressively or spend more effort to develop technology, the product and to grow more enterprise account. So we are doing both ways basically. And -- so the gross margin -- net margin ratio, we are expecting to grow to a double digit as soon as possible. David, you may add something. David Weigand: Sure. We think that we've established ourselves with a number of deployments that we've made as being really the premier provider of the most current technologies that are available in the market. And we think with those strong installations, we've broadened our reach into the market. And so we think that we're trying to target both, as Charles mentioned, both large-scale and smaller scale customers and mid-tier customers. But we want to serve all the customer bases that are out there and that are attracted to our products with -- and bring them the very best technologies. We think ultimately, that drives the margins, yes. Operator: The next question is from the line of Brandon Nispel with KeyCorp. Brandon Nispel: Just I think a couple of quick clarification questions. One for David. David, you raised some new capital this quarter. Maybe just help us understand how you're thinking about working capital for the rest of this year. And then other income came in about $50 million above your guide. Really what drove that? And then just one quick follow-up question. David Weigand: Sure. The other income was just -- was higher interest income that we had because our cash reserves had grown. And so we were earning good interest income. However, that was quickly taken up by the fact that, as I mentioned last quarter, we had well in excess of $13 billion of orders for purchase orders for delivery. And so we immediately had to use that. That's why our accounts receivable, our inventory went up. And so we took in not only 2 different $2 billion or $2 billion and $1.8 billion credit facilities. We also set up an accounts receivable factoring. So we have access to over $5 billion of additional capital. And if we continue to have growth, then -- we have access to additional capital in the marketplace. But right now, we think that for the current outlook, we have adequate capital to meet our needs. And when I say current, I mean [indiscernible] the coming quarters. Brandon Nispel: Got it. Just on the factoring, the securitization facility, did you utilize that at all this quarter? And then on the 63% customer, was that a previous 10% customer? David Weigand: So to the first question, we did not use it during the December quarter, but we have subsequently. To your second question, Super Micro has -- does most of its business with repeat customers. So I'll just leave it at that. Charles Liang: But at the same time, we add a lot of... David Weigand: We've added a lot of new logos at the same time. That's right. And it's because of those successful customers. Brandon Nispel: Okay. But we don't know if the 63% customer is new to the 10% customer mix or if it's a previous 10% customer. Is that right? David Weigand: Yes. I'll just refer you to the 10-Ks and Qs on that. Yes. By the way, I do want to clarify one thing in my narrative regarding the fully diluted share count. So the GAAP fully diluted share count increased sequentially from 663 million to 694 million shares. So -- and then the non-GAAP share count increased from 677 million to 709 million. So there was just a -- I noticed a typo on there. So please forgive the correction. Michael Staiger: All right. Thank you, everyone, for joining. I just want to just inform you that we had heard there were some technical difficulties with the webcast provider. A replay will be provided after the call, so you can catch up on that. Thank you for joining today. Operator: That concludes the conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, and welcome to the Enphase Energy's Fourth Quarter 2025 Financial Results. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Zach Freedman. Please go ahead, sir. Zachary Freedman: Good afternoon, and thank you for joining us on today's conference call to discuss Enphase Energy's Fourth Quarter 2025 results. On today's call are Badri Kothandaraman, our President and Chief Executive Officer; Mandy Yang, our Chief Financial Officer; and Raghu Belur, our Chief Products Officer. After the market closed today, Enphase issued a press release announcing the results for its fourth quarter ended December 31, 2025. During this conference call, Enphase management will make forward-looking statements, including, but not limited to, statements related to our expected future financial performance, market trends, the capabilities of our technology and products and the benefits to homeowners and installers; our operations, including manufacturing, customer service and supply and demand, anticipated growth in existing and new markets, including the TPO market, the timing of new product introductions and enhancements to existing products and regulatory tax, tariff and supply chain matters. These forward-looking statements involve significant risks and uncertainties, and our actual results and the timing of events could differ materially from these expectations. For a more complete discussion of the risks and uncertainties, please see our most recent Form 10-K and 10-Qs filed with the SEC. We caution you not to place any undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in expectations. Also, please note that financial measures used on this call are expressed on a non-GAAP basis, unless otherwise noted, and have been adjusted to exclude certain charges. We have provided a reconciliation of these non-GAAP financial measures to GAAP financial measures in our earnings release furnished with the SEC on Form 8-K, which can also be found in the Investor Relations section of our website. Now I'd like to introduce Badri Kothandaraman, our President and Chief Executive Officer. Badri? Badrinarayanan Kothandaraman: Good afternoon, and thanks for joining us today to discuss our fourth quarter 2025 financial results. We had a good quarter. We reported quarterly revenue of $343.3 million, shipped 1.55 million microinverters and 150-megawatt hours of batteries and generated free cash flow of $37.8 million. Our Q4 revenue included $2.3 million of safe harbor revenue. U.S. consumers pulled forward purchases ahead of the Section 25D tax credit deadline, helping us exit 2025 with a lean channel. For Q4, we delivered 46% gross margin, above the high end of our guidance range, 23% operating expenses and 23% operating income, all as a percentage of revenue on a non-GAAP basis. Mandy will go into our financials later in the call. Our global customer service NPS was 79% in Q4 compared to 77% in Q3. Average call week time was 1.6 minutes. We piloted an AI assistant in the Enphase app in Q4 and plan to roll it out in Q1 to help customers manage their systems intuitively. We also plan to pilot an AI assistant for installers in Q1 to help them manage their fleet and identify upgrade opportunities. Let's talk about operations. In Q4, we shipped approximately 1.31 million microinverters from our Texas and South Carolina manufacturing facilities and booked associated Section 45X production tax credits. These domestically made microinverters help residential lease and PPA providers as well as commercial asset owners qualify for the 10% domestic content ITC adder. In Q4, we shipped 51.1 megawatt hours of IQ batteries from our Texas manufacturing facility, meeting applicable domestic content requirements and helping lease PPA customers qualify for ITC bonuses. We continue to differentiate through our ability to deliver domestic content and meet PUC requirements as regulatory standards tighten. Also, we expect to receive our first non-China battery cells in Q1 and remain on track to scale non-China cell supply into battery production in the first half of 2026. Let's now cover the regions. Our U.S. and international revenue mix for Q4 was 89% and 11%, respectively. In the U.S., our revenue decreased 13% in Q4 compared to Q3, primarily due to safe harbor revenue of $20.3 million compared to $70.9 million in Q3. The overall sell-through of our products increased 21% in Q4 compared to Q3 to the highest level in more than 2 years. The strong demand trends that we saw at the beginning of Q4 continued till the end of the year, driven by increased solar and battery installations ahead of the expiring Section 25D tax credit. In Europe, our revenue decreased by 29% in Q4 compared to Q3, while our sell-through decreased by 23%. The overall business environment across the region is still challenging. We are staying disciplined in managing the channel and focusing on targeted growth areas for 2026. I will provide some additional color on the key markets in Europe. In the Netherlands, solar demand remained soft in Q4, but we are making steady progress towards a large battery retrofit opportunity driven by structural changes in the market. Rising solar export penalties and the planned phaseout of net metering by the end of 2026 are shifting economics decisively towards self-consumption, strengthening the case for batteries. With an installed base of approximately 475,000 Enphase residential solar systems, we estimate a total opportunity of roughly $2 billion for batteries. We are seeing early traction from targeted homeowner outreach, including homeowner events and direct marketing and are expanding partnerships with retail energy providers that offer compelling VPP economics. With continued rollout of software capabilities like Power Match and the launch of our fifth generation battery later this year, we believe we are very well positioned to lead the battery transition in Netherlands. In France, reduction in feed-in tariffs are shifting residential solar economics towards self-consumption, increasing the interest in batteries, particularly for new installations. With approximately 375,000 Enphase residential solar systems installed in France, the retrofit opportunity is more modest than in the Netherlands due to fixed energy contracts, but overall battery adoption is still gaining traction. New business models, including battery leasing are emerging, and we expect the battery demand in France to build steadily through the year, supported by anticipated increases in utility rates and evolving dynamic tariffs. Across Europe, competition remains intense and pricing pressure is high as installers adapt to a tougher demand environment. We are responding by controlling costs within our current products and aligning pricing to market realities, including our microinverter price reductions, which we implemented across Europe in November. At the same time, we are investing in next-generation products very strongly, both IQ9 microinverters and our fifth-generation battery platform. We expect to deliver structural cost improvements in these products, which enable attractive pricing and sustain healthy gross margins. Our focus remains on supporting our installers and competing effectively as the market evolves. In Australia, we see a meaningful battery growth opportunity supported by a mature rooftop solar base and accelerating customer interest in self-consumption, resilience and VPP. The market is installing larger, more capable storage systems to take advantage of current incentives and installers are increasingly asking for solutions that are simple to size, expand and commission. With our fifth generation system expected later this year, we believe our stackable, scalable AC-coupled architecture is well aligned with what installers want and what homeowners increasingly value, flexible capacity today with the ability to add more over time. Let's now discuss Q1 outlook. During last quarter's call, we shared a view of Q1 revenue to be around $250 million. Today, we are providing Q1 revenue guidance of $270 million to $300 million. We are approximately 90% booked to the midpoint of our revenue guidance. We continue to believe Q1 marks the low point for underlying demand with improvement expected through 2026, particularly in the second half. Installer sentiment is also improving as higher utility rates strengthen the customer value proposition, including in several Northeast and Midwest markets that have seen double-digit residential electricity price increases over the last year. The feedback on prepaid lease offerings is also encouraging, giving installers yet another effective tool to drive solar and battery adoption this year. Let's talk about financing. Enphase is well positioned to support all major TPOs today. In Q4, we announced 2 TPO orders totaling $123 million, including $55 million under the 5% safe harbor method and $68 million under the physical work test method. We collaborate with TPOs on tax equity support, domestic content and FEOC compliant offerings, O&M services through Enphase Care and an integrated workflow through Solar Graph for design, proposal and permitting, while also partnering on innovative financing structures. We continue to see prepaid leases as an attractive option, which give homeowners a lower upfront cost today and the option to own the system after 5 years. In this structure, the TPO owns the system initially and claims the 4080 tax credit, then share that value with the homeowner through a prepaid lease or low monthly payments when paired with the loan. The result is a lower effective cost for the homeowner and economics that look much closer to what customers were used to when the 30% Section 25D tax credit was available. We are supporting a TPO-led prepaid lease program that is being field tested with the loan partner as well as a distribution partner. The program, which uses Enphase equipment is currently in pilot across 4 states with approximately 40 installers. We expect a broader rollout to happen upon completing the pilot successfully and validating the customer experience, installer execution and financing performance at scale. We expect to share more as the program matures in the coming months. Let's cover products, starting with IQ batteries. Our fourth generation IQ battery Tense continues to ramp in the U.S., delivering a smaller footprint, higher energy density and a simpler installation process enabled by the IQ meter collar. The collar is now approved by 52 U.S. utilities and growing, serving approximately 30 million customer accounts. We believe this represents the broadest utility approval footprint of any major battery provider today. In California, the meter collar is approved by all 3 major investor-owned utilities. We also launched Power Match in Q4, a software-enabled technology that dynamically matches the IQ battery output to real-time home demand, increasing usable energy, extending battery life and improving performance by up to 40%. Unlike hybrid systems that push all power through a single large inverter, PowerMatch activates only the microinverters that are needed, reducing the losses at low power consumption, so customers get more usable energy from the same battery capacity. Let's now cover our fifth generation battery. We are making significant progress on this battery. It is built from stackable 5-kilowatt hour modular blocks and will scale up to 20-kilowatt hours in the U.S. and up to 30 kilowatt hours in other regions. The design targets roughly 50% higher energy density than the fourth generation battery at about 40% lower cost. When paired with PowerMatch, we believe this platform will offer a compelling combination of performance, flexibility and value for installers and homeowners. We expect to start pilots in the third quarter of 2026 and start shipping in the fourth quarter. We are making strong progress in partnering with retail energy providers and VPP operators across the globe that are seeking flexible distributed capacity. Through these programs, homeowners can earn attractive incentives from their energy provider for installing and enrolling Enphase batteries. In Q4, we added several programs, the notable being a home battery leasing program with GMP in Vermont and eligibility under San Diego Community Power Solar Battery Savings program. These partnerships can drive meaningful battery volumes, and we are targeting many more additional VPP partnerships this year. Let's come to microinverters. In December, we began shipping the IQ9 3P commercial microinverter built on our GaN-based power conversion architecture. IQ9 is a major step forward for Enphase, expanding us into 480-volt 3-phase commercial systems in the U.S. for the first time and represents an approximately $400 million total addressable market. The demand is encouraging with more than 50,000 microinverters ordered for Q1 and early feedback confirms the market need for reliability, FEOC compliance and domestic content that IQ9 delivers. We expect to introduce IQ9 for the global residential markets in the first quarter of 2026 and the higher-powered 548-watt version for both residential and commercial markets in the third quarter. More broadly, our IQ, our GaN-based microinverter platform gives us a step change in speed, efficiency and controllability, capabilities that matter as the grid and large electrified loads increasingly demand fast response times and load shaping. We are increasing our R&D investments in these areas to extend our core capabilities to address these demanding use cases. More to come here as we make progress. Let's cover EV charging. In December, we began shipping our new IQ EV charger 2 to customers across the U.S. This charger supports a fast Level 2 charging up to 19.2 kilowatts on 240-volt service and up to 22.1 kilowatts where 277 volts is available. It also works as a stand-alone charger or fully integrated with Enphase solar and battery systems. The charger is also available in Europe, Australia, New Zealand and Canada with additional availability planned for 2026. Let me share an update on our IQ bidirectional EV charger built on our GaN power platform, engineered to work seamlessly with modern 800-volt DC EV architectures. It is a concrete example of our ability to move power efficiently between grid-facing AC and 800-volt DC backbone and to do so bidirectionally with tight control and protection. We continue to target initial availability in the fourth quarter of 2026, starting with limited deployments as we complete required certifications, utility coordination and vehicle compatibility validation. The product is compelling because it pairs simply with the IQ meter collar in the U.S. and a backup switch in Europe to enable a streamlined configuration for seamless home backup, which is V2H and VPP participation, which is V2G. We are also in active discussions with multiple auto OEMs on partnerships, and we'll share more as those discussions mature. Let's cover Solar Graph, our all-in-one design and proposal platform built for installers. We continue to deliver meaningful upgrades, including fully customizable proposals with in-line editing, battery-only proposals and racking integration to generate a complete bill of materials. We are also expanding AI capabilities, including One Touch design and automation and light and integration to help installers reduce operational overhead. Looking ahead, we are adding support for commercial system designs to align with our expanding commercial products. Solar graph remains a core installer enablement tool, especially as TPO integration accelerates. Let me conclude. We are executing well through a challenging period and our focus on innovation, quality and customer service continues to support healthy margins and good market share in U.S. residential solar. We are now extending these strengths into commercial solar, where we believe we can build a meaningful business. We expect the underlying demand to stabilize from current levels with improvements developing as several tailwinds build. Rising electricity costs are making energy affordability a priority for households. New financing options are expanding how consumers can buy solar and easing interest rates can further improve affordability. In 2026, we are continuing to evolve from a single product and end market company into a broader technology platform that can apply our power electronics and energy management strength to significantly larger markets. The transition began 5 years ago with our entry into residential batteries and is now accelerating with our expansion into commercial solar and our planned entry into commercial batteries by directional EV charging and additional adjacencies in the year ahead. As the world's power needs grow, larger and more complex, we believe Enphase brings a differentiated best-in-class power management foundation to meet them. We remain laser-focused on the near-term revenue levers that we can control. number one, accelerating IQ battery density growth; number two, scaling IQ9 GaN microinverters to expand our 480-volt 3-phase commercial footprint; number three, unlocking battery retrofits across Netherlands and France. Number four, ramping IQ EV charger 2 while preparing for bidirectional EV charging later in 2026. number five, launching our fifth-generation residential battery along with IQ9 microinverters to materially lower system costs and strengthen solar economics. With that, I will turn the call over to Mandy for her review of our financials. Mandy? Mandy Yang: Thanks, Badri, and good afternoon, everyone. I will provide more details related to our fourth quarter of 2025 financial results as well as our business outlook for the first quarter of 2026. We have provided reconciliations of these non-GAAP to GAAP financial measures in our earnings release posted today, which can also be found in the IR section of our website. Total revenue for Q4 was $343.3 million. We shipped approximately 682.6 megawatt DCO microinverters and 150.1 megawatt hours of IQ batteries in the quarter. Q4 revenue included $20.3 million of safe harbor revenue. As a reminder, we define safe harbor revenue as any sales net to customers who plan to install their inventory over more than a year. Non-GAAP gross margin for Q4 was 46.1% compared to 49.2% in Q3. GAAP gross margin was 44.3% for Q4 compared to 47.8% in Q3. Reciprocal tariffs impacted our gross margins by 5.1% in Q4. Non-GAAP operating expenses were $78.8 million for Q4 compared to $78.5 million for Q3. GAAP operating expenses were $129.6 million for Q4 compared to $130.1 million for Q3. GAAP operating expenses for Q4 included $48.6 million of stock-based compensation expenses and $2.9 million of acquisition-related amortization, offset by $600,000 of restructuring and asset impairment benefit. On a non-GAAP basis, income from operations for Q4 was $79.4 million compared to $123.4 million for Q3. On a GAAP basis, income from operations was $22.4 million for Q4 compared to $66.2 million for Q3. On a non-GAAP basis, net income for Q4 was $93.4 million compared to $117.3 million for Q3. This resulted in non-GAAP diluted earnings per share of $0.71 for Q4 compared to $0.90 for Q3. GAAP net income for Q4 was $38.7 million compared to $66.6 million for Q3. This resulted in GAAP diluted earnings per share of $0.29 for Q4 compared to $0.50 for Q3. We exited Q4 with a total cash, cash equivalents and marketable securities balance of $1.51 billion compared to $1.48 billion at the end of Q3. The 5-year convertible notes we raised in 2021 are coming due on March 1, 2026, and we expect to settle the principal amount of $632.5 million at maturity with our cash on hand. As of December 31, 2025, we have approximately $337 million of production tax credit or PTC receivable on our balance sheet, net of income taxes payable. $109 million is related to U.S. NAND microinverters shipped to customers in 2024 and $228 million is for shipments made in 2025. As we elected direct pay for 2024, the net PTC will be refunded by the IRS through our completed 2024 tax return. We have limited visibility to when we will receive 2024's $109 million refund from the IRS due to its extended processing time lines. We are evaluating our options to get paid sooner for our 2025 PTC. As part of our anti-dilution plan, we spent approximately $1.4 million by withholding shares to cover taxes for employee stock vesting in Q4 that reduced the diluted shares by 41,767 shares. We did not repurchase our common stock in the quarter because we are prioritizing the most disciplined use of our cash, including preparing for the $632.5 million of debt maturing next month and preserving flexibility for strategic investments and potential acquisition opportunities. We have approximately $269 million remaining under our share repurchase authorization, and we remain confident in our long-term business outlook. In Q4, we generated $47.6 million in cash flow from operations and $37.8 million in free cash flow. Capital expenditure was $9.7 million for Q4 compared to $8 million for Q3. This increase was primarily due to continued investment in our U.S. manufacturing and R&D equipment. Now let's discuss our outlook for the first quarter of 2026. We expect our revenue for Q1 to be within a range of $270 million to $300 million, which includes shipments of 120-megawatt hours of IQ batteries. The revenue guidance includes approximately $35 million of safe harbor revenue. We expect GAAP gross margin to be within a range of 40% to 43%, including approximately 5 percentage points of reciprocal tariff impact. We expect non-GAAP gross margin to be within the range of 42% to 45%, including the reciprocal tariff impact. Non-GAAP gross margin excludes stock-based compensation expense and acquisition-related amortization. We expect our GAAP operating expenses to be within a range of $137 million to $141 million, including approximately $60 million estimated for stock-based compensation expense, acquisition-related expenses and amortization and restructuring and asset impairment charges. We expect our non-GAAP operating expenses to be within a range of $77 million to $81 million. As part of our efforts to better align our workforce and cost structure with Enphase's business needs, strategic priorities and ongoing commitment to profitable growth, we recently reduced headcount by around 6%. We expect to reduce our non-GAAP operating expenses to be in the range of $70 million to $75 million a quarter starting from the third quarter of 2026. In closing, we managed well with our financial discipline through a difficult global environment in 2025. We maintained profitability and strong gross margins. In addition, in 2025, we generated approximately $95.9 million of free cash flow and approximately $228 million of net PTC receivable. We exited the year with $1.51 billion in cash, cash equivalents and marketable securities while repurchasing 2.3 million shares of our common stock for approximately $130 million. With that, I'll open the line for questions. Operator: [Operator Instructions] And the first question will come from Phil Shen with ROTH Capital Partners. Philip Shen: First one is on the cadence for the year. I know you don't guide for other quarters, but I was wondering if you could give us a little bit of color on what Q2 might look like. You talked about Q1 being the low point. And so should we expect Q2 to be flat or up or slightly down? And then from a margin standpoint, would you expect a little bit of expansion in Q2 or kind of similar levels to Q1? Badrinarayanan Kothandaraman: Right. We expect Q2 to be up, but it's too early for us to talk about it. And like what I said in the prepared remarks, there are a few things which are -- which we believe as tailwinds for us. And there are a few things that Enphase is specifically doing. So the tailwinds are, you can see the utility rates. So the utility rates are going up everywhere in the U.S. And we see a lot of increases in the Northeast and the Midwest. So I think that is going to be a definite tailwind for us. new financing options such as the prepaid leases are starting to sprout up not just the ones that we are involved in, but in general. So I think that would be an opportunity to essentially replace the loan demand, the loan TAM prior to the 25D expiration, the tax credit expiration. And then the last one is although interest rates didn't come down in the recent announcement, I think we will see some easing interest rates through the year. And I think that will further improve affordability. So those are 3 strong tailwinds that we see. They should get better as the year progresses. What are we doing? We are just not sitting and watching. We are doing a few things like what I listed accelerating IQ battery 10C. Now we are approved at all 3 IOUs in California. So there is no barrier for the meter color. We are approved at 52 utilities. So -- and we expect to add 50 more utilities in 2026 overall. So that's going quite well. Also, 70% of our U.S. battery shipments are now the IQ battery 10C. We also expect the prepaid leases to help accelerate our battery volumes. In addition, we expect FEOC and domestic content to be a good value proposition that Enphase can offer, which should also increase -- increase the volume sequentially through the year. So that's on the batteries. We are very excited about the IQ9 product, the IQ9N product. IQ 9 product addresses the 480 volts commercial market, which we have not played in before. We just started shipping the product in December. We already have a backlog of more than 50,000 microinverters for Q1. And I think there, we expect to grow from strength to strength. It's a new market. Of course, there's going to be a cycle of learning, but I think we bring some things unique like reliability, quality and domestic content, VR compliance, all of those we bring. So that's very exciting. The third one, unlocking the battery retrofits across Netherlands and France, big deal. We are doing something we have never done before. We are organizing homeowner events in Netherlands. We are organizing 2 homeowner events every week. And so we are talking about 100 homeowner events for the year. Every homeowner events will generate preorders. While it's too early for us to share those details, we believe it will meaningfully change our battery demand in Netherlands. So we are extremely excited about that one. Same deal in France. Although in France, the -- it is not like -- in Netherlands, the energy contracts aren't fixed for a very long time. They change every 1 to 3 years. But in France, they are fixed. So the retrofit opportunity isn't as compelling as Netherlands, but still people would like to own batteries for resilience and new installations, certainly, self-consumption is required because the feed-in tariffs have dropped off a lot. So we are very excited there as well, both the opportunity to sell to our installed base as well as new installations, new business models. So that's number three. Number four is we just introduced our latest and greatest IQ EV charger into the U.S. It's a state-of-the-art one. It's a beautiful looking product. It's doing quite well in Europe. We expect it to do very well in the U.S. But the real exciting thing there is the bidirectional charger. The bidirectional charger it's a demonstration of how powerful the inverter architecture is. We interface to 800-volt DC on the cost side and then to home AC using the same single-stage power conversion that Enphase is known for. So just with our bidirectional charger, which has got the inverters in it, grid forming inverters in it, plus the meter color, that is enough to do both V2H and V2G. So we are excited about that one, which will come about in production in Q4. And the last one, we are already going to preparing ourselves to launch IQ9 residential microinverters in the first quarter in a few weeks from now, both U.S. as well as international. Then we expect to introduce our fifth generation battery. Fifth generation battery will have the energy density close to about 100 watt hour per liter, which is best-in-class. The cost of that battery will be 40% down compared to the fourth generation battery. Therefore, it will allow us to basically reduce our end pricing for the consumer, which is necessary as battery adoption increases and yet maintain our gross margins in line with the corporate gross margin. So those 5 levers are all entirely in our control, and we plan to make full use of them in addition to the 3 tailwinds I talked about. Philip Shen: Great, Badri. I had a quick follow-up on the you said Q2, I think you meant revenue would be up, but you don't know or can't quantify how much. Just want to understand if that's versus the $285 million from Q1 with safe harbor? Or is it versus the $250 million without safe harbor? Badrinarayanan Kothandaraman: We usually make the comments regarding -- with respect to the core revenue. But we also expect -- although we can never forecast safe harbor, we also expect healthy safe harbor in the second quarter because it's natural. The reason is TPO partners are going to formulate plans for '28, meaning 2028, 2029, 2030. So there is going to be some safe harbor activity happening in both Q2 and we'll have the time to ship it through Q3, I believe. So... Philip Shen: Great. And as for my follow-up here, in terms of the data center market and the 800-volt architecture and what you guys might be able to do for that. I know it's super early, but just -- in so far as you can kind of comment on how you could address that market, what the timing might be, that would be fantastic. But if you can't talk about it, I get it. Just want to see if we might be able to get some color. Badrinarayanan Kothandaraman: Sure. We are very aware of the industry's trend going towards 800-volt DC for the data center. Where that actually intersects our expertise is that -- is in front end power conversion, specifically how medium voltage AC, and we are talking about 13.8 kV and 34.5 kV AC can be efficiently converted controlled and managed into 800-volt DC before the power reaches the AI rack. So having said that, we are evaluating multiple next-generation power conversion architectures as part of our long-term R&D. But we are not in a position to discuss any specific products or time lines today. Operator: The next question will come from Brian Lee with Goldman Sachs. Brian Lee: First one I had was just on margins, maybe for Mandy, maybe for Badri. I think the 5% reciprocal tariff impact, it seems to be stabilizing and peaking here. I think last year, you talked about fully offsetting it by 2Q of 2026. So any updates there on the ability to offset the tariff impact? Is that still a 2Q target? Maybe if you can kind of quantify magnitude and cadence for us off this 5% level that you're still guiding to for Q1? And then I have a follow-up. Badrinarayanan Kothandaraman: Right. So Brian, if you remember, the last time, what happened was the tariff, meaning approximately, let's say, 3 to 4 quarters ago, that was a tariff specifically with respect to China. And at that time, what we said is we are going to make plans to move into non-China manufacturing, which we are on track to do. And we would be able to avoid any significant tariffs by doing that. However, the situation now has changed. And every country now has got a tariff, including -- that is what is called as a reciprocal tariff. I have -- if I go to Malaysia, there is a tariff. If I go to Vietnam, there is a tariff, Everywhere there is tariff. And for us, the 5% tariff, just to give you more color, it is distributed across 2% of the impact is on microinverters, 2% is on batteries, 1% is on accessories. Why? For example, on microinverters, we will have to bring in raw materials into the U.S. in order to make our microinverters into the U.S. -- in the U.S. So therefore, those get hit. So therefore, the -- there is no safe place, which has got no tariff. For us, what we believe to answer your question because that's still a valid question, what are you going to -- how are you going to offset that 5% reciprocal tariff? For us, the answer is in innovation. The answer is in IQ9. The answer is in the fifth generation battery. Those are -- IQ9, for example, is despite the power going up by 10%, we are able to maintain a smaller form factor. And we expect to take advantage of that in terms of higher gross margins with IQ9. As you can imagine, higher power products that produce higher power get more production tax credit, $0.11 a watt. So naturally, we expect to make higher gross margins there. Then in addition, on the batteries, that's where the big lever for us. We are rapidly getting close to releasing our fifth generation battery. The fifth-generation battery uses very compact cells. These are prismatic cells. And therefore, we essentially are able to reduce that entire form factor of the full battery by a very significant amount. And we are able to do a stackable battery. Ours will be unique. It will be an AC-coupled stackable battery. Energy density, like what I said, 50% higher than our current battery fourth generation. Cost structure will be 40% lower. This will enable us to make good gross margins and overcome that 5% reciprocal tariff. Brian Lee: And the follow-up would be on one of the specific products here. You talked a lot about the IQ9 commercial inverter, the $400 million TAM. If my math is right, it seems like the bookings activity, Badri, you mentioned maybe you're tracking the $5 million to $10 million right out of the gate for that new product. One, is that right? And then two, kind of how do you see yourself scaling up this year against that $400 million TAM? Is this tens of millions of dollars of revenue by the second half of the year? Badrinarayanan Kothandaraman: Yes, you're approximately right. It is between $5 million and $10 million for the first quarter. And you should think about it the following way. I think what we are -- this product is -- it offers a compelling value proposition in terms of quality, reliability, FEOC compliance, domestic content. Customers haven't had such a choice before. So we are getting a lot of good traction. And what we have shown in the residential market is that over the long term, high quality, high serviceability wins. And we, therefore, expect to demonstrate the same in this small commercial market. And we expect over a 3-year time frame to get into the similar market share as what we have on the residential. Operator: The next question will come from Praneeth Satish with Wells Fargo. Praneeth Satish: I guess just maybe on the prepaid lease product, assuming the pilot performs well that you're doing, can you share any more details in terms of the time line of when you would expand into additional states? And would it happen gradually or more of kind of a larger push? And can you get your coverage potentially nationwide by the end of 2026? And then just on prepaid leases in general, for the other prepaid lease offerings that are being -- that are out there, how do you think about your market share with those programs, I guess, relative to your traditional cash and loan channels? Badrinarayanan Kothandaraman: Yes. I think those are good questions, but we are in very early stages right now. We are in pilots right now. We are, as I said, operational in 4 states. and we have over 40 installers. We are starting to get reasonable originations. But what we want to do is to test out the entire cycle. That's why it's called as a pilot. And when we test out the entire cycle, then the kinks will be obvious to us, and then we can either expand rapidly or take a measured step going forward. Our desire is to do it sooner rather than later. And let me actually leave it at that right now. Praneeth Satish: That's fine. And maybe shifting gears, if you can give us an update in terms of IQ 10C battery sales, how that's shaping into Q1. Looking at the market share data, it did seem like it kind of ticked up a little bit in December. Has that momentum kind of carried over into Q1? And then what's been the feedback from installers in California now that the meter car is approved with all of the utilities? Do you think you can get your -- I think your market share is roughly around 15%, plus or minus. Do you think you can get that back up over 20% with the fourth gen battery? Or do you think it's really the fifth gen battery where you start to see a lot of market share recapture? Badrinarayanan Kothandaraman: Yes. The -- I think the fourth-gen battery will do its bit because it's got a very nice form factor. It's -- the meter collar is now approved in 52 utilities. California IOUs, all of them are now taking the meter collar. We had the last one come through in late part of Q4. So all of the barriers essentially are now removed. Installers, you asked me for installer feedback. We do roundtables with installers almost every week. Installers like the product. They like the installation. They like the commissioning times, which are under an hour. That's not to say that there are no problems at all. There are a few which we are rapidly taking care of. There's a couple of things that we are doing is we are releasing third-party solar compatibility for IQ Battery 10C, which we expect that battery to be used with non-Enphase PV installations, too. So that will be a big deal. It's in very high demand by our installers. So we think that will increase our share more. In addition, like what I said, we'll start to see the effect of FEOC and domestic content. The December uptick was probably related to 25D. So I wouldn't read that much into it, although we'd like to take some credit for it. Yes. And -- so we do expect progress with the fourth generation. On the fifth generation, yes, we do expect to definitely take a lot of share there, too. In addition, simply because the battery will come with much more compelling economics. Even with all of the tariffs in place, I will be able to make good gross margins as well as offer excellent consumer pricing. So we're excited about the fifth generation battery. Operator: The next question will come from Colin Rusch with Oppenheimer. Colin Rusch: Can you talk about where battery inventories are right now in the channel, particularly in Europe as you look at some of the demand that's growing in both the Netherlands and France and even in Australia, I just want to get a sense of how lean the channel is and if there's some product that needs to move through before you start growing in the second quarter? Badrinarayanan Kothandaraman: In general, I would say our -- we are very happy where we ended the channel in both the U.S. as well as outside the U.S. Our -- in the past, I've told you what we considered normal is 8 to 10 weeks. And in the U.S., the channel is actually much more leaner. That means it's better than 8 to 10 weeks. While going forward, if you account for the demand reduction in 2026 versus 2025, I would say forward-looking weeks on hand is in the normal range. So there isn't anything bloated in the channel. We are doing a good job. Channel management is ingrained in our DNA right now. We don't expect that to be a problem. Colin Rusch: And then just thinking about VPPs and some of the capabilities of your system. Can you talk about some of your functionality around reactive power, voltage management and your ability to serve some of those ancillary services markets that may be differentiated versus some of your peers? Raghuveer Belur: Yes. This is Raghu. Yes, I think we look at it very broadly. We look at not just the battery as being the only flexible resource that's available. You can think about -- as we look at the EV charger today, that's a flex resource. As we think about bidirectional EV charging, that's again a flex resource. Solar itself is also can be considered as a flex resource. Our view is much broader than just simply thinking about one element of it. So every product that we release, every new product that we release, we think about it in the context of its participation in VPP. So we make sure that we have best-in-class APIs available so people can then exercise all of those resources and because they are value-generating resources, they can actually help with the homeowners' ROI. So all of the grid services that you mentioned, which is reactive power voltage support or just capacity, resource adequacy, all of these functions are organically built into all of the products that we built because we expect they'll all be flexed as we see the VPP market evolving. So -- and so far, while the focus has been around batteries, our VPP participation has been very strong with a number of partners. We mentioned 2 of them in our prepared remarks with the San Diego Community Power as well as Green Mountain Power. Those were the 2 examples that we provided, but it's much broader than that. So we are pretty excited about all the work that we have done with our VPP. We -- it's a metric that we track very closely in terms of availability of our VPP APIs, how well our servers are working in order to service the demand. This is U.S., whereas what we are seeing is all of the VPP work that we are also doing in Europe with particularly in the Netherlands where we are providing capacity imbalance, dynamic tariffs, others where they are trading our batteries into the market, in some cases, as often as a few seconds. So we see this as a very critical evolution of the business in general because as you think about data center demand really overwhelming the grid, I think behind the meter resources will play a pretty big role in helping alleviate some of that pressure. And so aggregating all of these resources and participating in the market is very key, and we have seen that trend, and we are on top of it and really driving our products to make sure that it's best-in-class with regards to participation in the market. Operator: The next question will come from Eric Stine with Craig Hallum. Eric Stine: Just wondering if we can talk about safe harbor a little bit. So just the sort of confirm $63 million in the order and some of that coming in Q1, you've included that in your guide. So I guess, a similar amount in Q2. You did mention that you think that you could recognize some revenue in Q3 for the out years. I mean, curious, do you -- is there a magnitude, any indications you're getting from your partners what those orders might look as you start to think about as you called it in '28 and '29 for safe harbor? Badrinarayanan Kothandaraman: No, it's too early for us to forecast any safe harbor orders. We don't really know right now. And they usually -- based upon the deadline that we see, TPO partners have until approximately July 1 week to finalize their plans. And so we do expect a lot of frenzy activity in Q2. We did -- what we announced, we announced basically or 2 transactions that we announced. One was, I think, in the 50s and another was in the 60s. And so one was physical work test and the other was a 5% safe harbor. We even expect some of those customers to do repeat safe harbor orders. But right now, it's too early for us to tell. Eric Stine: No, understood. I appreciate that. And then I know you talked about share on the storage side, but just curious as you think about the year, it seems that this would be a trough like you're thinking it is for the overall business. What type of linearity or what trends do you see in storage based on timing of some of the product introductions, et cetera? Badrinarayanan Kothandaraman: Yes. In general, storage should be very positive because the tax credits are going to be valid for a much longer time. So batteries are in favor, I think, until 2030 or 2031, I forget. So storage market is going to definitely take off. You can see that almost every state -- my prediction, and this is only my prediction is in the next coming years, every state will start to adopt battery storage. Solar plus storage will become the norm because at some point, uncontrollable export of solar is not desired. So California is ahead. We all didn't like NEM 3 initially because of the way it was implemented. But the concept of NEM 3 is right. And in fact, California is a solar plus battery market with 100% attach now. It's got good economics, 6 to 8 years of payback. So my prediction is every state in the next 10 years will become solar plus storage. So storage is going to boom. It is going to actually -- batteries will pull solar. It's going to become the reverse. It is already like that in Europe. If you go look at Europe, you look at Germany, the attach rate is 80%. You look at Italy, the attach rate is also in the similar range. You look at Netherlands, that's now going to start to move in that direction. You look at France, the feed-in tariffs are -- have dropped a lot. So there is solar plus storage will become the norm. So controllability, VPPs, self-consumption, those are what -- they are going to drive the economics. And they're all in the direction of reducing the utility bill for the homeowner. So Yes. Is there something you want to share, Raghu, on that? Raghuveer Belur: No, I think you're seeing that even happening with NEM 3, where it's even beyond self-consumption, you're starting to see things where you -- there's a pricing signal that you get. And based on the pricing signal, you charge or discharge your battery, you export to the grid because you get compensated for it. In Europe, they do that as day ahead pricing. It's -- and I think you'll see that things such as VPP, day-ahead pricing, dynamic tariffs, et cetera, are really going to be very compelling economics for the homeowner to adopt battery. And that's how you saw California evolve in that direction. And I agree that it's going to happen even maybe faster than 10 years that you'll see traditional NEM will slowly sunset. Operator: The next question will come from Julien Dumoulin-Smith with Jefferies. Julien Dumoulin-Smith: Badri and team, nicely done on the continued progress here. Just wanted to come back to a couple of things that were mentioned. First off, when do you think batteries go to the corporate average here? I mean you just made -- you gave us a little backtrack about the outlook here. How do you think about margins evolving there and normalizing upwards? And again, I get that can be by product here in the evolution. And then separately, can you talk back again about the market evolution here as it pertains to prepaid lease adoption? And ultimately, as you say, this is essentially offsetting the impacts of 25D going away. Can you talk about the cadence of that happening, both your own PPL piece of it? And then separately, your commentary about essentially offsetting 25D, is that market-wide? And how do you think that playing out just time line-wise? Badrinarayanan Kothandaraman: Yes. On the batteries and gross margins, especially with the tariffs now, the gross margins on batteries are slightly below corporate average. And what we'd like to do is to bring it above. And that's what I extensively talked about. It is -- today, we are -- I mean, we have 45% tariff on the cell packs that we get from China. And that is a tough number to work with in terms of margins. Plus, we have tariffs on other raw materials that are coming into the U.S. So we get hit many ways. We have recognized that the best way for us to counter that is with innovation. So that's why I talked extensively about the fifth generation battery. Our cost structure will be radically different. So even with these tariffs, I can comfortably make even above corporate gross margins on my batteries. We are not stopping there. We are already thinking about our sixth generation battery. So we'll share more as soon as the fifth generation battery is out. So it's going to be a nice cadence for us. We have got to be -- I mean, we've got to bring out approximately every generation of battery -- every generation in 18 months, that's what we'd like to do. So next question. On the PPL time line, I mean -- it's early for us to share any time lines given that we are in the process of pilots. But the dream is that it is to replace the pre-25D loan TAM with prepaid lease. And there is still several things that have to be ironed out, that's what the pilots are doing. Operational issues, ease of doing business, customer and consumer confidence, installer performance, financing. All of those, we are trying to solve with the pilots. And we are running in 4 states. So far, the installers -- installer feedback is very positive. They like the extra -- they like this prepaid lease as a tool that helps them counter the TAM loss due to loan. So we like what we see so far. I think in the next 3 to 6 months, we will know everything. And we are confident that we'll be able to expand through a lot more states in that time frame. Julien Dumoulin-Smith: And your comment assumes you gain market share? Or is that more about just the market overall? Badrinarayanan Kothandaraman: We do expect to gain market share. Operator: The next question will come from Moses Sutton with BNP Paribas. Moses Sutton: Badri, how many well-capitalized prepaid lease competitor programs are you seeing out there? And by competitor, I mean that is a broader good thing as it would help stimulate the market, as Julien was noting. And then also on the IQ9 residential, do you have -- do you expect a significantly slower uptake relative to the IQ7 to IQ8, considering its benefits rely on the larger panel format and the market is averaging still smaller panel sizes and they have to like sort of grow into the larger panels? Badrinarayanan Kothandaraman: Good question. On the prepaid lease, it is still early days. We see -- I don't know the details personally about the remaining players, but I've heard their names. I've heard that some of them do a good job, but time will tell. On IQ9 -- and IQ9 addresses one more thing. It not only addresses higher power, 427 watts. It also addresses panels that operate at 16 amperes. So if you look at it in Europe, Europe is already starting to operate at 16 amperes right now. So IQ8 had the capability to go up to 14 amperes, and IQ9 will extend that capability to 16 and even 18 amperes. The [ IQ9S ] product that will be coming in the third quarter will extend it up to 18 amperes. So we believe Europe will be the first to ramp, along with Australia and the international. U.S. is a little behind in terms of panel tech there. And so we expect in the U.S., IQ9 to ramp a little more slowly. However, in the commercial space, IQ9 is the only option. IQ9, 480 volts. There, the panels are at 595 watts to 640 watts. So there, IQ9 is the only option. And there, we are going not only the 427 watts can service the 480-volt market, the 548 that we will be introducing in the second or third quarter, that will also help a lot, including safe harbor. Moses Sutton: Very helpful. And maybe if I could squeeze 1 in on the Netherlands. Is there a potential for actually material predemand ahead of the loss of the grandfather -- of the net metering? Basically, most assume that, that story kicks off next year, but are you seeing that there's a significant amount of customers that don't want to see a gap in their solar systems' value next year, so they want to self-consume early and therefore, they have to move this year? Badrinarayanan Kothandaraman: Yes, there is -- yes, yes to that. I'll tell you why. First of all, if they have batteries now, they won't have to pay a penalty, one. Also, there is a nuance to it. There are several customers whose energy contracts will be expiring right now because they all have limited 1- to 3-year contract. So when they are going to sign a new contract for the next 2 years, they are going to know the full picture. The utility is going to give them the full picture of how the next 2 years are going to be. And in order for them to really get low rates, the only option they will have is to buy a battery. So I think the education is happening now. Just to elaborate a little more on what we are doing and I'm not sure whether you heard my comments before, we are -- we have not done this before at Enphase. We are holding homeowner events. Every homeowner event is attended by approximately 200 to 300 people. And let's say, from a family, 2 people show up, so approximately 150 families. And they basically get education. And there is a lot of interest in ordering batteries. Preorders are usually quite high from such an event. Of course, 10 events is not representative of what is going to happen in the year. We plan to hold at least 100 events in 2026. And we plan to basically quantify, every event should generate an average, let's say, x kilowatt hours. Or let's say, something like 0.5 megawatt hours per event or 1 megawatt hour per event. And so that's how we are thinking. We are thinking that the first step that we have to do is to -- is actually education. So in that process, we are helping our installers. We are starting to do that. It's getting fantastic reception. In fact, our partners are also coming to our distributors. I'm now happy that we are doing an organic thing for lead generation instead of depending on only the installers. And the installers are happy because they are getting leads that they didn't plan on before. So yes. Operator: The next question will come from Vikram Bagri with Citi. Vikram Bagri: Good evening, everyone. Badri, you mentioned TPO partners have until July 4 to safe harbor. Could you share what the lead time to safe harbor is that you've seen recently? I imagine a month or more to safe harbor, which would mean TPOs have less time to decide than the deadline. And then wondering when should we expect the frenzy to begin based on that lead time? Related to that, based on what you've seen, is the safe harboring so far being done by the TPO partners? Is that being done expecting growth in forward years? Even all the drivers that you've mentioned rates, electricity price increases, policies, et cetera, or the TPO partners are conservatively to safe harbor in current volumes or multiple years so far? Badrinarayanan Kothandaraman: A question for the TPOs, which we cannot answer everything for them, but I'll just give you my opinion based on what we are seeing. For example, if they do the 5% method, let's say they got their order in December, let's say, the last week of December 2025. We would have approximately 105 days from that date to ship that product. That's how it works. And they still get all of the benefits because they place the order within the year -- within the end of the year. And they have to prepay us with the 5% method. With the physical work test, it is similar, but there is a nuance in terms of custom component, et cetera, which you already know. The question on consumers taking into account future demand increases, I don't know. It is hard for them to take that into account, not -- no one really knows. So it's a real question for them. My thought right now is I don't think that is happening. But that's just my guess. Vikram Bagri: And as a follow-up, a quick housekeeping question on inventory. You mentioned healthy inventory exiting fourth quarter. Is that trailing 13 or 52 weeks? I ask it because looking back, the inventory, the channel may be normal, but accounting for a drop in revenues in first quarter, it seems like the channel could be higher than like 10 weeks of inventory that you typically sort of like, keep. Is the inventory comment made on first quarter revenues, excluding safe harbor or the inventory comment is backward -- looking backward, looking 13 or 52 weeks? Badrinarayanan Kothandaraman: Yes. If you calculate the inventory in terms of backward looking, then we are very, very lean. If you calculate the inventory based on forward-looking demand, we are normal. That's the way you should look at it. Operator: The next question will come from Christine Cho with Barclays. Christine Cho: Last quarter, you kind of said that you anticipated sell-through in 4Q to be 350 to 400. Just curious if you can sort of confirm that you landed there? And then if you would be able to give us the split between MIs and storage? And then also if you could give sort of that split for what you're expecting for 1Q ex the safe harbor revenue? Badrinarayanan Kothandaraman: Yes. The -- we landed right at the midpoint there, between 350 and 375 -- I mean, 350 and 400 sell-through. So that's good. And then just on the split up, in fact, our sell-through on batteries was higher, was 27%. And the sell-through on microinverters was I think approximately... Raghuveer Belur: 21. Badrinarayanan Kothandaraman: Around 20-ish percent, basically. Christine Cho: I'm sorry, those percentages are up quarter-over-quarter? Badrinarayanan Kothandaraman: Yes, 27% up. The sell-through in Q4 in the U.S., 27% up on batteries with respect to Q3. And sell-through of microinverters in the U.S., up approximately 20% with respect to Q3. Christine Cho: And then the split for 1Q? Badrinarayanan Kothandaraman: Split for 1Q, we do not know. Right now. Christine Cho: But what about your sell-through expectations for 1Q? Just given... Badrinarayanan Kothandaraman: We are not going to break that out right now. Christine Cho: And just sort of on the prepaid leases, I guess, when we do -- like with the deadline for safe harbor coming up, are you getting a sense of, at least with your partners, if they're leaning towards 5% or physical work test? And I guess why -- do you have any sense of why they wouldn't lean more towards physical work test, just given it's easier on the balance sheet? Badrinarayanan Kothandaraman: That's right. I mean, I asked the same question, too, but it depends upon how comfortable they are with respect to they and their tax partners are. So yes, I mean, the physical work test, if gives them a legally good mechanism to take care of themselves for '28, '29, '30. But what we are seeing is we are seeing a mix of both. We are seeing -- in some cases, we are seeing some TPO partners adopt a mix that is -- they do a portion, physical work test. They do a portion, 5% safe harbor. Some TPO partners only rely on physical work test. It's a mix. There is no general trend. We are capable of providing either way, whatever the TPO wants, we are here to provide that. There was a misconception that Enphase cannot do physical work test, not true. We do physical work test, and we are engaged with the multiple TPO providers on that. Operator: [Operator Instructions] The next question will come from Chris Dendrinos with RBC Capital Markets. Christopher Dendrinos: I wanted to follow up on the commentary about trimming some price in Europe in response to the competitive dynamic there. Can you maybe just comment on the demand impact from that? Are you seeing, I guess, any type of benefit there? Badrinarayanan Kothandaraman: We expect to see some benefit there. We reduced the list prices at distributors by approximately 20% on our microinverters. Christopher Dendrinos: And then maybe as you think about the U.S., I mean, is that a consideration in the U.S. to potentially cut price as well? And I apologize, I know this gets asked every quarter. Badrinarayanan Kothandaraman: Yes. I mean, it is -- we are always looking at it. And right now is the best time for us to help our installers. So we are always looking at it. We do an installer roundtable every week. We are carefully evaluating it. And when we think it is appropriate, we will do that, and we will inform you. Operator: The next question will come from Maheep Mandloi with Mizuho. Maheep Mandloi: You talked about access to non-China battery supplier. Can you just talk about like the pricing environment you're seeing over there? A little more supply coming. Are we seeing costs come down over there, or it seems kind of stable for the next year or 2 there? Badrinarayanan Kothandaraman: Yes. In general, I think the battery suppliers are having some pressure on their costs. So I would say we aren't seeing huge price decreases. They are kind of flat. When we move from China to non-China, we would expect about anywhere about 20% increase in the cell pack pricing to us, 20% to 25%. So for example, if there is a 45% tariff on product from China and there's 0% from a non-China country, it would make sense. So that's what we took into account. And we are working with the battery cell suppliers that will enable us in the non-China market or in the non-China battery manufacturing. We expect to start ramping that in the second quarter. Operator: [Operator Instructions] The next question will come from Gus Richard with Northland. Auguste Richard: Inventory on the balance sheet was up $99 million sequentially quite a bit. Days of inventory went up quite a bit. And I'm just wondering if you could walk me through why that happened? Badrinarayanan Kothandaraman: Yes. The -- what we did was we basically -- in order to ensure FEOC compliance, we took ownership of the inventory from our contract manufacturer. And so everything was clean. And so we did that in the fourth quarter. That factory exists for us. We are managing the factory. And we -- it was a little high, like what you state, $100 million more, but we expect to continuously bring that down. Our operations head and me, we are laser focused on inventory, and we have clear plans to get that down. Auguste Richard: And then on the fourth generation battery, I understand that the tare loss is relatively high as what it is with your competitors. I'm just wondering if you're going to address that in the Gen 5 battery? And is that a concern with your customers? Badrinarayanan Kothandaraman: It is a general concern with all batteries. And the tare loss is something important. Just for the benefit of everybody, a tare loss is how much of power the circuitry inside the battery consumes, not what is supplied or not what is provided to the loads in the home. So it is -- a tare loss is wasted energy is what we call it, is unusable energy. So we recognize that we have introduced a new feature called PowerMatch. PowerMatch is a technology -- software-enabled technology that dynamically matches the output of the battery to real-time home demand. What does that mean is only whatever microinverters are necessary to be on are on. The rest of the microinverters are switched off. So battery life improves, usable energy improves. If you contrast it -- compare and contrast towards hybrid inverters or hybrid systems, hybrid systems have a single large inverter. So especially when the customer is operating with very low consumption, that burns a lot of unnecessary power or wastes a lot of power. While in the case of an Enphase battery, PowerMatch basically activates only the microinverters that are necessary. For example, if the home is consuming 500 watts, we are not going to burn a 10-kilowatt inverter. We are only going to turn on, let's say, a kilowatt worth of inverter that we have. And the rest of the inverters are going to be off. Similarly, if there are multiple batteries which are not required to be on, they will all be off. So PowerMatch helps in reducing losses at low loads. And we have found approximately a 40% improvement compared to competition. So we issued a press release, I think late in Q4, very nice video on PowerMatch that explains exactly how it works. And PowerMatch will -- is a big integral part of the first generation battery as well. And the microinverter architecture has got an intrinsic advantage here. Raghuveer Belur: If I may, the modularity is not just for rightsizing the battery to a home. You can now use that leverage the modularity to rightsize how much power you're using in real time. . So it's an incredible advantage that a decentralized or a distributed architecture like what Enphase has brings to the table to make sure that your delivery of power is very -- done very efficiently. You're not wasting power because you have a tare loss and a large inverter just running all the time, even though the demand of the house may be 1/10 of what the capacity of that large inverter is. Operator: [Operator Instructions] And we have one more question with Dimple Gosai with Bank of America. Dimple Gosai: One question as it relates to the prepaid leases. What is the attach rate for batteries in your opinion? And how does that kind of compare to the cash and loan channels? And just as a follow-up, what kind of changes the attach rate most? Do you think it's more about like payment structure or the system sizing or maybe even the utility tariff design. Any views on that? Badrinarayanan Kothandaraman: Sorry, it's just too early for us to answer. But I mean, the obvious answer in California, it's -- we expect it to be 100% attached in California. We don't have enough for a presentation or enough statistics from other states to tell you meaningfully. So hopefully, in another 3 months, we'll be able to share a lot more. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Badri Kothandaraman for any closing remarks. Badrinarayanan Kothandaraman: Thank you for joining us today and for your continued support of Enphase. We look forward to speaking with you again next quarter. Bye. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.