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Operator: Good afternoon, and welcome to the Ethan Allen Interiors Inc. Fiscal 2026 Second Quarter Analyst Conference 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. It's now my pleasure to introduce you to our host, Matthew J. McNulty, Senior Vice President, Chief Financial Officer, and Treasurer. Thank you. You may begin. Matthew J. McNulty: Thank you, operator. Good afternoon, and thank you all for joining us today to discuss Ethan Allen Interiors Inc.'s fiscal 2026 second quarter results. With me today is Farooq Kathwari, our Chairman, President, and CEO. Mr. Kathwari will open and close our prepared remarks, while I will speak to our financial performance midway through. After our prepared remarks, we will then open the call up for your questions. Before I begin, I'd like to remind the audience that this call is being webcast live under the news and events tab within our Investor Relations website. A replay of the transcript of today's call will also be made available on our Investor Relations website. There you will find a copy of today's press release which contains reconciliations of the non-GAAP financial measures referred to on this call and in the press release. Our comments today may include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. The most significant risk factors that could affect our future results are described in our most recent quarterly report on Form 10-Q. Please refer to our SEC filings for a complete review of those risks. The company assumes no obligation to update or revise any forward-looking matters discussed during this call. With that, I'm pleased to now turn the call over to Mr. Kathwari. Farooq Kathwari: Well, thank you, Matt. And thank you for joining our second quarter ending December 31, 2025, earnings call. The second quarter results were strongly impacted by the government shutdown resulting in lower consumer confidence, lower traffic to our design centers, and lower orders at retail, especially from the U.S. government contract. Also impacted by a very strong previous year comparison. The good news is that we have started the third quarter with stronger traffic and positive written sales in January, as we mentioned in our press release. During the last few years, we have made major changes to our vertically integrated structure, including our retail network, manufacturing, marketing, logistics, and are positioned well. After Matt provides a brief overview of our second quarter financial results, I will provide more details of our business initiatives to grow our business, and then we'll open up for any questions or comments. Matt, please proceed. Matthew J. McNulty: Thank you, Mr. Kathwari. Our financial performance in the just completed second quarter was highlighted by a robust balance sheet and strong margins despite a challenging environment. Our consolidated net sales of $149.9 million benefited from a higher starting retail backlog, a higher average ticket price, incremental clearance sales, and fewer returns. These increases were offset by fewer contract sales and lower demand. Retail written orders declined 17.9%, while wholesaler orders were 19.3% lower than a year ago, with both metrics declining sequentially throughout the quarter as our prior year comparables got tougher. Our demand trends reflect the combination of macroeconomic challenges and a difficult prior year comparison, as well as an 11% decline in design center traffic. With that said, we are pleased to see positive written order growth in January. We ended the quarter with a wholesale backlog of $49.8 million. A lower volume of contract orders combined with improved customer lead times helped reduce our backlog. Our consolidated gross margin was 60.9%, up 60 basis points from a year ago due to a change in sales mix, reduced headcount, a higher average ticket price, and lower inbound freight, partially offset by increased promotional activity, incremental tariffs, and elevated clearance sales. Our adjusted operating income was $13.5 million with an operating margin of 9%. For historical context, the adjusted operating margin during the pre-pandemic 2019 second quarter was 5.4%, or 360 basis points lower than it is today. Our current year operating margin was impacted by cost deleveraging from lower sales combined with delivering out orders with higher promotions, additional marketing, higher occupancy costs from new design centers, increased employee benefit costs, as well as incremental tariffs. These increases were partially offset by a disciplined approach to controlling operating expenses, including reduced headcount. At quarter end, we had 3,149 total associates, a decrease of 5.1% from a year ago. Adjusted diluted EPS was $0.44. Our effective tax rate was 25.3%, which varies from the 21% federal statutory rate primarily due to state taxes. Now turning to our liquidity. We ended the quarter with a robust balance sheet, including total cash investments of $179.3 million with no debt. Our liquidity position remains strong, although we generated an operating cash flow deficit of $1.8 million during the quarter due to changes in working capital, including lower customer deposits, and the timing of our biweekly payroll. In November, we paid a regular quarterly cash dividend of $10 million or $0.39 per share. Also, as just announced in our earnings release, our Board declared a regular quarterly cash dividend of $0.39 per share, which will be paid in February. We are pleased to continue to pay cash dividends while maintaining a strong cash position. Before closing, I'd like to spend a few moments on tariffs. We are exposed to tariffs assessed on raw materials and finished goods we import into the U.S. Recently enacted Section 232 tariffs made effective in mid-October resulted in manufacturing of both upholstered and wood products being subject to a 25% tariff. Our non-U.S. manufactured case goods are currently subject to a 10% tariff that is partially reduced based on the consumption of U.S.-sourced materials. With regards to imports, our exposure is primarily concentrated on imported case goods from Indonesia, select fabrics from Asia, and imported accents consisting of lighting and area rugs. To help offset some of the tariff impact, we worked with our vendors on cost sharing, performed additional sourcing diversification, and recently pushed through selective retail price increases which averaged 5%. These carefully measured price increases applied strategically across select SKUs rather than broadly. We will continue to review pricing and will respond quickly and thoughtfully as conditions evolve. We believe our North American manufacturing, which represents approximately 75% of the furniture we sell, provides us with a strategic advantage by controlling more aspects of the production process within North America. We believe we can mitigate some of our tariff exposure. As I conclude my prepared remarks, we are pleased that our disciplined investments and strong expense management are helping to build a fundamentally stronger company. We delivered another strong quarter and enter the 2026 calendar year with a debt-free balance sheet, strong liquidity, and a proven ability to provide clients with custom furniture and complementary design services. With that, I will now turn the call back over to Mr. Kathwari. Farooq Kathwari: Thank you, Matt. I'm pleased to share our initiatives to help us grow our business as we move forward. Our key focus remains to continue to strengthen our unique vertically integrated structure, including continued strengthening of product programs. Our design centers have started to receive our new products introduced in the fall of last year. Our products continue to be developed under the umbrella of classics with a modern perspective. About 75% of our furniture is made in our manufacturing workshops in North America, and all products are custom made on receipt of orders. This is possible because of our North American manufacturing and provides a strong competitive advantage. Strengthening our marketing programs in our second quarter, we continue to utilize various mediums including direct mail and digital advertising. We increased our advertising by 25%, mostly in digital mediums. While we did not get the full benefit in our second quarter of this increased marketing spend due to the economic slowdown, we feel it will benefit us in the future. Our retail network today operates 172 design centers in North America. The design centers reflect the reduction of the size due to strong interior design talent and digital technology. Continued strengthening of manufacturing, as I mentioned, about 75% of our furniture is made in our North American facilities. The combination of strong talent and technology is key to our productivity. Again, I repeat, that all our manufacturing in North America is based on custom-made furniture. You know, twenty years back, 80% was in stock that we sold furniture, especially what we call case goods. Strengthening our national and retail logistics continues to be a very important initiative. We deliver our products to our clients all across North America at one delivered price with what we call white cloud service. Very unique. If a customer is in Seattle, or in Florida, or in Texas, it's exactly the same delivered price and it took us a long time to do this, and it reflects the investments we have made to have a very strong logistics network. And again, very, very important, focus on continued strengthening of talent combined with technology is key to the future. With this, happy to take any questions. Operator: Thank you. And with that, we will now be conducting a question and answer session. Our first question comes from the line of Taylor Zick with KeyBanc Capital Markets. Please proceed with your question. Taylor Zick: Yes. Hello, Farooq. How are you? Farooq Kathwari: Hi, Taylor. I'm doing well. How are you doing? Taylor Zick: Good. I just wanted to ask about the retail written orders during the quarter. You noted that the monthly trends decelerated during the quarter just due to difficult comparisons. But as you kind of look through that, have any sense of what the underlying trends were during the second quarter? Farooq Kathwari: Yes, I can, Matt can give you the exact numbers of the retail. I mean, from our retail business in the quarter was somewhat impacted. But Matt, what are the numbers? Matthew J. McNulty: Yes. Each sequential month during Q2 decreased by a higher percentage. We don't typically disclose the breakdown on a month-to-month basis. But it did lend to an average decrease of 18%. But started out stronger in October and it decelerated more so. For the government shutdown combined with the prior year comparison, if you recall, November, December last year were very strong. So it was a difficult prior year comparison. If we go back two years, the fiscal 2024, that calendar year '23, we're only down very low single digits. Compared to this past to a year ago, it's much higher. Taylor Zick: Got it. Yes. And certainly good to see the positive written comps here in January. That's great. And Farooq, maybe for my second question, can you touch a bit on the contract side of the business? You have obviously cited the government shutdown as sort of a headwind here, but since the government has reopened, have you seen any improvement in the orders? Or do those remain relatively soft? Farooq Kathwari: Well, during the last quarter, the orders stopped. That, of course, had a major impact on our results last quarter because of the fact that, you know, the government's being closed. They were not sending any orders. The good news is the orders are coming in, and they are coming in reasonably high, but not as strong as, you know, last year because it is now taking the government, all the embassies all over the world, a little time to get back on. So, yes, we are seeing new orders. It's a little bit lower than last year. But every week, it's growing. Taylor Zick: Understood. And then maybe one last question before I turn it over to others. The company continues to put up very strong gross margins here despite the difficult environment and tariffs and all that. So should we think about the sustainability of these margins as we look to 3Q and 4Q ahead? Farooq Kathwari: I think we have a good opportunity of maintaining them. Because of the fact that a lot of work has been done at all levels. In terms of combining great talent and technology. That has really impacted all elements, especially our retail network, in our manufacturing, our logistics. So I believe that, obviously, the volumes have an important factor, but we have an opportunity of maintaining them. Taylor Zick: Great. Thanks so much. Matthew J. McNulty: Alright. Thanks. Taylor Zick: Thank you. Operator: And our next question comes from the line of Cristina Fernandez with Telsey Advisory Group. Please proceed with your question. Cristina Fernandez: Hi, good afternoon. Hi, Farooq. Hi, Matt. I appreciate all the color on the tariffs, Matt, that you gave. I wanted to see if you could give more detail as far as I guess, what the total impact is. And you mentioned that you were mitigating some of it. So I want to see if you can give some color on what the mitigated amount is and how should we think about that impact as we move forward? Do you think with the price increase and some of the changes you've made, you can mitigate the cost or we're going to see some impact flowing through the cost base? Farooq Kathwari: Yeah. Go ahead, Matt. Sure. Yeah. I'm happy to answer that one. So Matthew J. McNulty: there are a couple of strategies we took. It's really a three-pronged approach to trying to mitigate some of the tariff impact. One is vendor cost sharing or partner cost sharing, reaching out to partners to help negotiate and sharing some of the cost. That we did over the last several months and was very successful. Another strategy that we've employed is supplier sourcing diversification. Trying to source from other countries, which we've done to some extent. And then the third prong is really the retail price increases, which I've mentioned we pushed through a select about a blended average of 5% in October this past quarter. Increase. Those did help mitigate some of the tariff impact. It did not do all of it. Now price increases were late in October, but late from a delivered a lot of those orders did not get delivered out fully. In the quarter. So we'll see a little bit more of a benefit from price increases moving forward. With that said, there will still be some more headwinds. You mentioned the Section 232 tariffs that came into play mid-October. That so we hadn't really experienced a full quarter worth of those. That's probably the largest. That's about 40% of our overall tariff exposure is there. And then the IEEPA tariffs, which are currently under review by the Supreme Court, is about 40% and the remainder is Section 301 tariffs. I would say all in, we're still seeing a headwind. We don't disclose the actual percentage of the headwind. Overall, but I think the steps we've taken will help mitigate a significant amount of that plus our current structure of being 75% in North America does help mitigate it naturally that way. Farooq Kathwari: Yes, Cristina. And also, of course, I mean, we are not counting on it. But the U.S. Supreme Court has still not decided on the validity of the IEEPA tariffs. And it's, you know, it's possible that it goes away and which will impact 40% of our exposure if they take it down completely. An annual savings of approximately $8 million. But, again, I said, we are hoping that happens, but our plans are to keep them on the side while making all changes that we can to maintain strong margins. Cristina Fernandez: Thank you for that color. I had a question on the January trend relative to the second quarter, what would you attribute it? Do you think it's marketing? I mean, promotion seemed pretty similar to last year. What would you attribute the improved trend? Farooq Kathwari: I think the most important one is that the consumers came back. I think in the last quarter, with all the uncertainty, government shutdowns, all were scared. People were not coming in. What we've seen in January, people are coming back. Now the good news is because of our structure, because of our interior design network, we have most likely the strongest interior design network. They have maintained good contacts with their clients. And what we've seen is our traffic has increased. People are coming back. Again, you know, there's still some concerns. But the concerns we had in the last quarter about all the uncertainty in the marketplace. That created issues. We see in January, you know, our government shutdown was not there. Somewhat of a better consumer attitude. So people also the people are designers, worked with clients. And as in last quarter, the ones who did not close, they are closing the business now. Cristina Fernandez: And the last question I had was on marketing. The 25% increase, I mean, do you expect that level to continue as we move through the year? And where are you mostly seeing the benefit of this marketing? Is it better traffic? Is it new customer acquisition? How are you measuring the efficiency of that marketing spend? Farooq Kathwari: Now that's a very important issue. Now if we knew that the government shutdown and all of those were going to take place, we would not have increased our marketing by 25%. That's what we did. But the reason, it is mostly on digital marketing. This is a digital marketing is where clients today, you know, it used to be that our designers had to spend a tremendous amount of time working with the clients physically. Today, consumers and our clients and our designers are able to work virtually with the amount of technology that we have. So all this was to help bring more people through our virtual advertising and also help them close business. And that we'll continue to do. But having said this, we are going to reduce some of our advertising expense in some other mediums. Look at ten years back, we spent a lot of money on national advertising. Then we in the last year or so, we spent a fair amount of money sending magazines, digital magazines, and print magazines. One of the things we do we looked at was the impact of our digital magazine where we're spending close to, I think, close to $18 million a month decided that we'll take it down to $9 to $10 million and still make an impact and especially spending this more money on the digital marketing will help us. So those are the areas where we are looking at. Cristina Fernandez: Thank you. Alright. Operator: Thank you. And with that, there are no further questions at this time. I would like to turn the floor back over to Farooq Kathwari for any closing remarks. Farooq Kathwari: Well, thank you for joining. I would say that we are stronger today. We have spent a fair amount of time. First, we've got, you know, as you know, every week, I get about 40 reports. They don't all report to me. But they have to write on five things. First is talent. What have they done to improve talent? The good news is we've got strong talent, have less people. But strong talent. As I said, our headcount today is, what, 30 less than what was only five or six years back. Now that is due to high talent, and it's also due to technology. So we're going to continue to have technology as tremendously important. Second, third thing is marketing. And marketing, again, is tremendously important, but the means of marketing are constantly changing. And this also reflected what we did last quarter in terms of spending more money on digital mediums. We'll continue to do that. And service is critical. That's our fourth tremendously important area. And the services provided by interior designers, services provided by our logistic teams. As I said, that we today deliver our products at one price nationally. To a consumer with service. And then finally, social responsibility is tremendously important. We'll continue to do that. So thanks very much for joining. And look forward to our continued discussions next quarter. Operator: Thank you. And with that, ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day. Farooq Kathwari: Okay. Thank you.
Operator: Greetings, and welcome to the Century Communities Fourth Quarter and Full Year 2025 Earnings Conference Call. At this time, all lines are in a 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. Please note that this conference call is being recorded. I will now turn the conference over to Tyler Langton, Senior Vice President of Investor Relations for Century Communities. Thank you. You may begin. Tyler Langton: Good afternoon. Thank you for joining us today for Century Communities earnings conference call for the fourth quarter and full year 2025. Before the call begins, I would like to remind everyone that certain statements made during this call may constitute forward-looking statements. These statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described or implied by the forward-looking statements. Certain of these risks and uncertainties can be found under the heading Risk Factors in the company's latest 10-K, as supplemented by our latest 10-Q and other SEC filings. We undertake no duty to update our forward-looking statements. Additionally, certain non-GAAP financial measures will be discussed on this conference call. The company's presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Hosting the call today are Dale Francescon, Executive Chairman, Rob Francescon, Chief Executive Officer and President, and Scott Dixon, Chief Financial Officer. Following today's prepared remarks, we'll open up the line for questions. With that, I'll turn the call over to Dale. Dale Francescon: Thank you, Tyler, and good afternoon, everyone. We are pleased with our accomplishments and results in what was a challenging year for the new home market. We closed the year by exceeding our recent guidance across most financial and operating metrics, including the delivery of 3,435 residential units comprised of 3,030 new homes, 105 previously leased rental homes, and 300 multifamily units delivered through our Century Living business, bringing our full year residential units delivered to 10,792. During the year, we repurchased over 7% of our shares outstanding at the beginning of the year, invested $1.2 billion in land acquisition and development to continue to position Century for future growth, and ended the year with a record book value per share of $89, all while reducing our net leverage to 26% and generating cash flow from operations of over $150 million. Our fourth quarter deliveries of 3,030 new homes benefited from our focus on increasing sales pace, particularly in older higher-cost communities and communities in closeout, through the continued use of price and financing incentives. As a result, our fourth quarter net orders of 2,702 homes set a company record, increasing 13% sequentially versus an average historical sequential decline of 6%. Our team's accomplishments for the full year 2025 included reducing our direct construction costs on starts by an average of $13,000 per home, and cycle times by thirteen days to a new company record of 114 calendar days, with our faster build times allowing us to reduce our finished spec inventory by nearly 30%. We decreased our SG&A excluding commissions and advertising by 5% year over year and maintained customer satisfaction scores and mortgage capture rates at all-time highs. As we look into 2026 and the years ahead, Century is well-positioned for future growth. Given our land spend over the past several years, assuming improved market conditions, we have the ability to grow our deliveries by 10% annually in 2026 and 2027 based solely on our existing lot count as of 2025. That said, we will remain disciplined if slower market conditions persist and will not look to grow either our lot pipeline or deliveries for the sake of growth alone, as our more traditional land option strategy gives us significant flexibility in adjusting the timing and terms of land takedowns given the limited capital we have at risk. We leaned into share repurchases in 2025 given our valuation levels, and our strong balance sheet is supportive of continued flexibility in our capital allocations in 2026 without limiting our ability to quickly ramp growth when the market rebounds. We expect any interest rate relief, improvement in consumer confidence, or governmental support for homebuyers to unlock buyer demand, which Century is well-positioned to meet, and we continue to believe there is meaningful pent-up demand for affordable new homes. For 2025, Newsweek named Century as one of America's most trustworthy companies for the third consecutive year, while Century was designated as one of US News and World Reports' best companies to work for. These recognitions are a testament to the commitment of our team members and trade partners that allow us to achieve our mission of consistently delivering a home for every dream. And we want to thank them for their efforts. I'll now turn the call over to Rob to discuss our strategy, operations, and land position in more detail. Rob Francescon: Thank you, Dale, and good afternoon, everyone. Starting with sales, our net new contracts of 2,702 homes was a fourth-quarter company record and represented an increase of 10% versus the prior year and 13% on a sequential basis, a significant improvement over our historic average fourth-quarter sequential decline of approximately 6%. The strength in our orders was primarily driven by improved absorption rates, which averaged 2.9 homes per community in the fourth quarter, an increase of 12% year over year and 16% sequentially. While we focused more on pace versus price for older, higher-cost communities, and communities in closeout in the fourth quarter, we plan to take a more balanced approach between pace and price as we enter 2026. While our sales pace thus far in 2026 has been slower than the same period in 2025, we are encouraged by slightly stronger traffic trends on a year-over-year basis as we look forward to the upcoming traditionally strong selling months of the year. Our incentives on closing homes increased in the fourth quarter by 200 basis points and averaged roughly 1,300 basis points, driven by our fourth-quarter pace strategy, as well as the general market dynamics as we compete with other builders for year-end closings. As a reminder, since the beginning of 2024, our incentives have ranged from 600 basis points to the high point of 1,300 basis points this quarter. And so we have ample leverage once improved market conditions enable us to meaningfully pull back on incentives. As we look to resume our more balanced approach to pace, we currently expect incentives on closed homes in 2026 to improve by up to 50 basis points from fourth-quarter 2025 levels. In the fourth quarter, adjustable-rate mortgages accounted for roughly 25% of the mortgages that we originated, up from nearly 20% in the third quarter and less than 5% in the first quarter. Receptivity of our buyers to ARMs has been increasing, and we are encouraged that there is room for further adoption of ARMs going forward, which could help partially address the market's affordability challenges. While incentives have clearly weighed on our margins, our operations continue to perform extremely well. Our direct construction costs on the homes we delivered in the fourth quarter declined by 4% on a sequential basis. Our cycle times in the fourth quarter averaged 114 calendar days, down 10% from 127 days in the year-ago quarter. Given our record cycle times and advantageous direct construction costs, we are well-positioned to take advantage of any favorable market conditions during the spring selling season and accelerate our starts from the 29 homes we started in the fourth quarter. Our 2025 average community count increased by 13% to 318 communities, while our year-end community count ended at 305. While we have been expecting modest growth in our ending community count this year, we closed a greater number of communities than initially expected, with that trend especially pronounced in the second half of the fourth quarter, given our increased sales pace. For 2026, we expect our average community count to increase in the low to mid-single-digit percentage range on a year-over-year basis. Before turning the call over to Scott, I wanted to provide some additional details on our land position that is supportive of our growth while also having an attractive risk and cost profile. We ended the fourth quarter with roughly 61,000 owned and controlled lots and spent approximately $1.2 billion on land acquisition and development in 2025, nearly matching the 2024 levels of $1.3 billion. In 2026, we currently expect our land acquisition and development expense to be roughly flat with 2025 levels. We have the ability to reduce this number if market conditions warrant without impacting our near-term growth prospects or accelerate if market conditions improve given the strength of our balance sheet. More specifically on the topic of growth, given our land spend over the past several years, we have the ability to grow our deliveries, assuming improved market conditions, by 10% annually in both 2026 and 2027 based solely on our existing lot count, both owned and auctioned as of 2025. I think it is also important to note that we generated positive cash flow from operations of $126 million in 2024 and $153 million in 2025, even with this level of land spend, further supporting Century's ability to self-fund future growth. In addition to providing attractive future growth, our land position also has an attractive cost basis. In the fourth quarter, our finished lot costs were roughly flat on a sequential basis, and we expect our average finished lot costs for 2026 to only be 2% to 3% higher than fourth-quarter 2025 levels. The attractive growth profile and cost position of our land is also underpinned by a traditional land option strategy that is both flexible and reduces risk with minimal exposure to land banking. The flexibility of our option agreements allowed us to adjust terms in many cases and achieve lower prices in some cases over the course of 2025. As a result, we have much more control over the pace at which we start homes rather than having fixed takedown schedules and higher interest costs influence our pace. Additionally, our current option lot count of 26,000 is secured by nonrefundable deposits that total just $74 million. In addition to having significant flexibility with our land position, a large portion of our land is also close to monetization, which further reduces the risk profile of our land. Specifically, 43% of our total owned land inventory at the end of the fourth quarter was in finished lots, with another 32% in land under development. Going forward with our land investments, we remain focused on deepening our share in our existing markets to drive improved margins and returns. We are pleased with our performance in both the fourth quarter and for the full year. We meaningfully reduced our cycle times and direct costs and controlled our fixed G&A. We derisked our land inventory where necessary while preserving the ability of our land position to drive meaningful growth at attractive costs in the years ahead. I'll now turn the call over to Scott to discuss our financial results in more detail. Scott Dixon: Thank you, Rob. In the fourth quarter, pretax income was $47 million, and net income was $36 million, or $1.21 per diluted share. Adjusted net income was $47 million, or $1.59 per diluted share. Home sales revenues for the fourth quarter were $1.1 billion, up 16% on a sequential basis. Our deliveries of 3,030 new homes increased by 22% on a sequential basis, while our average sales price of $367,000 decreased by 5% on a quarter-over-quarter basis, with a decrease in our ASP largely driven by increased incentive levels. For 2026, we expect our deliveries to range from 2,100 to 2,300 homes, which should represent the low point for the year as we expect our community count to increase over the course of 2026. Our total revenues in the fourth quarter also benefited from the sale of a 300-unit multifamily community within our Century Living segment for $97 million. In the fourth quarter, GAAP homebuilding gross margin was 15.4%, which was negatively impacted by 100 basis points of inventory impairment and 10 basis points of purchase price accounting from our two acquisitions in 2024. The $10.9 million impairment charge this quarter related to several closeout communities. Adjusted homebuilding gross margin in the fourth quarter was 18.3%. For the first quarter of 2026, we expect the most significant driver of our adjusted homebuilding gross margin to continue to be incentives needed to generate an acceptable sales pace. SG&A as a percent of home sales revenue was 12.2% in the fourth quarter and benefited from ongoing cost reduction efforts. Assuming the midpoint of our full-year 2026 home sales revenue guidance, we expect SG&A as a percent of home sales revenue to be roughly 13% for the full year 2026, with SG&A as a percentage of home sales revenue of 14.5% for the first quarter. Revenues from financial services were $25 million in the fourth quarter, and the business generated pretax income of $8 million, benefiting from higher volumes in the quarter. We currently anticipate the contribution margin from financial services in 2026 to be similar to 2025 levels. Our mortgage capture rate of 84% in both the fourth quarter of 2025 and the full year 2025 represents quarterly and annual records. Our tax rate was 23.5% in 2025 and 24.1% for the full year, and we expect our full-year tax rate for 2026 to be in a range of 25% to 26%. Our fourth-quarter 2025 net homebuilding debt to net capital ratio improved to 25.9% compared to third-quarter 2025 levels of 31.4%. Our homebuilding debt to capital ratio also improved to 29.1% in the fourth quarter compared to third-quarter 2025 levels of 34.5%. We ended the quarter with $2.6 billion in stockholders' equity and $1.1 billion of liquidity. In 2025, we generated cash flow from operations of $153 million, which follows the $126 million we generated in 2024, even as we continue to invest in land to support our future growth. During the quarter, we maintained our quarterly cash dividend of $0.29 per share and repurchased 334,000 shares of our common stock for $20 million at an average share price of $59.9 or a 33% discount to our company record book value per share of $89.21 as of the end of the fourth quarter. For the full year 2025, we repurchased 2.3 million shares or 7% of our shares outstanding at the beginning of the year at an average price of $63.32 or a 29% discount to our book value. During the year, we returned a record $178 million to shareholders through dividends and share repurchases. Turning to guidance, assuming no significant changes to the current economic environment, we currently expect our full-year 2026 new home deliveries to be in the range of 10,011 homes and our home sales revenues to be in the range of $3.6 billion to $4.1 billion. Our current guidance reflects an increase in our average open communities in the mid-single-digit percentage range and similar per community absorption levels as in 2025. Given our current lot and community count, we do have the ability to drive our deliveries above the high end of our guidance if absorption rates and overall market conditions are supportive of that growth. In closing, given our investments in land over the past several years, we are well-positioned for growth when the market rebounds. We are also well-situated to navigate the current market given our flexible land strategy and success in reducing our direct costs and fixed G&A expenses, which has allowed us to generate solid levels of cash flow, invest in the business, and opportunistically repurchase shares at what we view as very attractive levels. With that, I'll open the line for questions. Operator? Operator: Ladies and gentlemen, we will now begin the question and answer session. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from the line of Andrew Azzi from JPMorgan. Andrew Azzi: Hi, guys. Thank you for taking my question. Appreciate it. So wanted to kind of dial in on and clarify maybe some of the comments you made. You gave a lot of great color. I mean, I believe you guys were intimating maybe the spring selling season might look a little bit stronger year over year. I mean, I'd love to kind of dive into that and just kind of what you're seeing from the consumer and how the consumer is behaving alongside kind of, you know, potentially reduced incentives. Scott Dixon: Yeah. So, Andrew, so far in January, our sales pace, as we mentioned, has actually been slower versus the year-ago period. However, the order activity has improved sequentially over the first three weeks of January. And when we look at our potential leads, they have actually gone up as well. So and those take some time to anywhere from fifteen to forty-five days depending on the situation. So we're hopeful that that will start picking up. You know, and as you know, last year, spring selling season, while everyone was very hopeful that we were gonna have a great spring selling season, it did not mature, and it did not turn out that way. So we're hopeful this year that that's gonna be the case. There's obviously a lot of publicity and PR out there on a variety of fronts right now on housing. And so we're hopeful that that will be tailwinds for us going into the spring sign and it will be better. Andrew Azzi: Okay. And are those kind of efforts by the administration kind of baked into your guidance, or would that just kind of be additional help? Or is it kind of towards the high end of the range? How are you guys thinking about these kinds of actions? Scott Dixon: That would be additional help. At this point. Andrew Azzi: Got it. And maybe I'd sneak in one more. I mean, the community count, you know, it looks like you're getting some low to mid-single digits. I mean, how do we think about how that looks quarter to quarter? Is it a steady year-over-year increase, or is it more lumpy than that? Scott Dixon: Yeah. Andrew, this is Scott. So, you know, from a community count perspective, you know, certainly, our average community count this year was up to 318. We did have a little bit of a dip as we close out the year just as we really move through, pretty focused on our closeout in communities as well as older specs. So we would anticipate that, really to continue to grow, throughout the year, especially kind of in the middle and back half of the year from an average community count perspective. Andrew Azzi: That's helpful. Thank you for all the color, guys. Operator: Your next question comes from the line of Jay McCanless from Citizens JMP. Your line is now open. Jay McCanless: Hey, guys. Thank you for taking my questions. I guess the first one maybe drilling down on the gross margin a little bit. Do you think that it's going to be in line to maybe a little worse than the fourth quarter? Is that what I'm hearing? Scott Dixon: Jay, this is Scott. I'll take that one and great to have you and congrats on your new role, obviously. Dale Francescon: Yeah. Congratulations, Jay. Jay McCanless: Thank you, guys. Appreciate it. Scott Dixon: Just some good, you know, commentary from a gross margin perspective, really. Really, what you're seeing come through the fourth-quarter margins is an intentionality on our perspective to really focus on some close-up communities. And really move some units. We ended up from a sales pace over 2,700 units which is a 16% increase quarter over quarter from pace. So we were pretty focused on the incentives side of the lever here in the first quarter. And, really, we've been taking a more balanced approach all in, and I think you'll see us revert back to that as we get into next year. Obviously, we'll see where the spring selling season is at and where the consumer is at. But I think as we get into the first quarter, that's reflective in the commentary that we do think you'll see a slight pullback of about 50 basis points from our current incentive levels in Q4. Jay McCanless: Okay. I guess the second question I had is, you know, you talked about sounds like traffic's a little bit better, but order pace is a little slower. Are there any geographic standouts in terms of better versus worse? Scott Dixon: Yeah. Jay, this is Scott. I can jump in. You know, I don't know that I would call out any specific one of our, you know, regions or markets so far this year that has performed, really outside of some of the trends that we were working through all of last year. Certainly, we're excited about, you know, a little bit of increased traffic. We have seen some of the headlines as we got a little bit closer to 6% on the mortgage rate, you know, drive a lot more traffic. And that's something that we're certainly excited to see play itself out. In spring selling season, I think, unfortunately, being so early here in January and January being a much more muted month, we need a few more weeks really to get back underneath us before we have a good feel for where each region is at and where the spring selling season is building towards. Jay McCanless: Understood. And then just a housekeeping question. Can you remind us how much you have left on the stock repurchase authorization? Scott Dixon: Yeah. We have around 1.5 million shares underneath the stock repurchase program. Jay McCanless: Okay. Great. Thanks, guys. Appreciate it. Scott Dixon: Yep. Absolutely. Thanks, Jay. Operator: Your next question comes from the line of Natalie Kulzicker from Zelman and Associates. Natalie Kulzicker: Hey. Good afternoon. Thank you for taking my question. So if I'm not mistaken, you said that SG&A as a share of sales is going to be 14.5% in 1Q 2026. Is that correct? Scott Dixon: That's correct. 14.5% in Q1 2026. Natalie Kulzicker: Okay. So that's a little higher than the run rate that you've been going at. So I'm just trying to figure out what would cause the spike, especially given that, you know, community count growth was much higher last year. So could you maybe, like, talk to the moving pieces of that? Scott Dixon: Sure. You know, for the full year, we're really looking at, you know, 2025 and 2026 at the moment to be pretty flat from an SG&A as a percentage of revenue perspective. So this year, we ended 12.9. We're really looking somewhere around similar levels next year, which is, you know, the initial guide here is 13. As we look into Q1 specifically, there's a handful of factors within that piece. The first is Q1 is typically our lowest closing quarter of the year. And, therefore, from a percentage is certainly one of our highest. Additionally, as you know, we can kind of look at where our ASP is at in backlog and the implied guide. Those two items really factor into 14.5% for Q1. Natalie Kulzicker: Okay. Thank you. And I guess my next question is you said that order activity is trending kind of lower year over year for three weeks of Jan. So I'm just curious how confident are you in your ability to dial back incentives more, you know, as you head to the spring and, you know, if things don't if things are still tracking, down year over year. Scott Dixon: Well, again, we're gonna have to see how that plays out. And again, as I mentioned last year, we were very hopeful as all the other builders were that it was going to be a great spring selling in 2025. That did not materialize this year again for some of the reasons that I previously stated that we think it will be better this year. But again, we're just gonna have to wait and see. And when we say we're behind pace, I mean, we're not that far behind pace. But as we sit here today, we, you know, that is an accurate statement, of course. Natalie Kulzicker: Got it. Thank you. Operator: Your next question comes from the line of Alex Rygiel from Texas Capital. Your line is now open. Alex Rygiel: Thank you, and I appreciate the, and all the information you provided on this call. It's very helpful. First question, it sounds like, obviously, the fourth quarter, that's margin headwind from higher incentives on closeouts. But was there any pressure from the sale of the Century Living units? Scott Dixon: Alex, specifically, the sale of the Century Living units is not included in the gross margin. Nor are they included in the incentive commentary that we provided. Alex Rygiel: Helpful. And then as it relates to your teaser interest rate on your website of 3.75%, are you finding that that's sort of that magical number that is really causing buyers to take action? Scott Dixon: You know, Alex, there's a handful of different things going on on the mortgage side from the product perspective. When you step back and look all in at the average rate that we originated our mortgages at this year and our financial services segment has an 84% capture rate. So it's certainly the vast majority of our consumers. We're kind of in the 5.25% to 5.5% range all in. We certainly will move product or solve certain equations for our buyer, and you will see teaser rates below four, especially on our ARM product. You also will see, you know, a very popular product is, you know, a 4.875% thirty-year fixed. It's certainly another product that will certainly help solve some of the affordability equations for our consumer. But all in, we're pretty consistent over the last, you know, four or five quarters that we're originating our mortgages somewhere around in that 5.25% to 5.5% range. Alex Rygiel: And then more broadly, as we enter the spring selling season, how do you see sort of the industry's level of spec inventory developing right now? Dale Francescon: I think as we look at, you know, last year and, you know, we were no different as we pushed pace over price. We entered the year with less specs than we did year over year. As we entered January '25. And when we look at it, I think people have generally done the same thing vis a vis not getting ahead of themselves on starts or all of that. But the positive side of that is that can be ramped up very quickly if the market is there because cycle times have dropped for us and other builders. Ours is at 114 calendar days and other builders are somewhat similar depending on the product type. So, with that, new product can be created fairly quickly. Alex Rygiel: Very helpful. Thank you. Scott Dixon: Absolutely. Operator: Star one. We will now turn back the line over to Rob for some brief closing remarks. Please go ahead. Rob Francescon: To everyone on the call, thank you for your time today and interest in Century Communities. To our team members, thank you for your hard work and dedication to Century, and your unwavering commitment to our valued homebuyers. Operator: Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Greetings and welcome to the Adtalem Global Education Inc. Second Quarter 2026 Earnings. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jay Spitzer, VP of IR. Thank you, Jay. You may begin. Jay Spitzer: Good afternoon, and welcome to our earnings call for the second quarter fiscal year 2026 results. On the call with me today are Stephen W. Beard, Chairman and Chief Executive Officer of Adtalem Global Education Inc., and Robert J. Phelan, Chief Financial Officer. Before I hand you over to Stephen, I will, as usual, take you through legal safe harbor and cautionary declarations. Certain statements and projections of future results made in this presentation constitute forward-looking statements that are based on current market, competitive, and regulatory expectations and are subject to risks and uncertainties that could cause actual results to vary materially. We undertake no obligation to update publicly any forward-looking statement after this presentation, whether as a result of new information, future events, changing assumptions, or otherwise. Please see our latest Form 10-K and Form 10-Q for discussions of risk factors as it relates to forward-looking statements. In today's presentation, we use certain non-GAAP financial measures, and we refer you to the appendix of the presentation materials available on our Investor Relations website for reconciliations to the most directly comparable GAAP financial measures and related information. You will find a link to the webcast on our Investor Relations website at investors.adtalem.com. After this call, the presentation webcast will be archived on the website for thirty days. I will now hand you over to Stephen. Thanks, Jay. Good afternoon, everyone, and thank you for joining us. Stephen W. Beard: This quarter marks our tenth consecutive quarter of enrollment growth. We remain on track to achieve our full-year revenue guidance of 6% to 8.5% growth, and we are raising our adjusted earnings per share guidance to 17% to 20% growth. As we enter 2026, we continue to execute against our strategic roadmap. Our strong second-quarter results reflect that execution. The momentum we have built over the last several years is proving sustainable, demonstrating the power of our differentiated business model. Our consistent performance, strong balance sheet, and robust cash generation power a value-creating capital allocation philosophy. This quarter, we deployed $165 million to share repurchases, and we have approximately $728 million remaining on our current authorization. We will continue to take a disciplined, returns-focused approach to capital allocation. Our focus on students and investments in modern innovative learning continue to yield strong academic, operational, and financial outcomes. Walden has achieved record total enrollment. More than 52,000 students now generate industry-leading scale and operating leverage. Chamberlain expanded its reach as the national leader in nursing, growing enrollment by 6,000 students in just three years to reach a record of 40,000 students. Ross Vet continues to graduate more veterinarians than any other school, and AUC and Ross Vet together graduate twice as many physicians as any MD-granting school in the United States. Simply put, we have established the quality and scale to be a trusted leader in healthcare talent development and an essential component in tackling America's healthcare workforce shortage. Now let me zoom out. We all read the headlines. The healthcare workforce crisis is not easing. It is intensifying. America's healthcare system begins 2026 substantially understaffed, with workforce gaps expected to deepen. The challenge exists everywhere but is particularly acute in rural communities and underserved urban areas where continuity of care and access are already fragile. The stakes for the entire healthcare system could not be higher. Tackling a crisis of this magnitude requires workforce infrastructure that operates at a different scale than traditional academic institutions. And that is precisely where our opportunity lies. At our Investor Day on February 24, we will lay out our multiyear growth framework, including capacity expansion plans and new revenue streams, that position us to meet these societal needs while delivering sustainable earnings growth. Now let me walk through our second-quarter performance. Total enrollment grew over 6% to 97,000 students. Revenue grew 12% to $503 million. We delivered further efficiencies as adjusted EBITDA grew to $155 million. Our solid profitability, together with disciplined capital allocation, has yielded adjusted earnings per share of $2.43, an increase of 34% versus last year. Growth with purpose remains our durable operational framework yielding clear academic, operational, and financial returns. Our strategy to optimize existing capacity has yielded record or near-record enrollments at Walden and Chamberlain and has positioned the MedVet segment for sustainable growth. More importantly, we believe the success of Growth With Purpose has earned us the permission to expand our leading position and invest in solutions that address US healthcare workforce shortages while sustainably growing earnings for years to come. With that context, let me turn to our segment results. At Chamberlain, we are confident in our trajectory. Q3 total enrollment will remain soft, and recent improvements work their way through the student journey, but the real proof point is the fall enrollment cycle. Let me explain why we like what we are seeing. Chamberlain's fundamentals remain exceptionally strong. Over the past two years, Chamberlain added 5,600 new students and grew revenue by $155 million, a 27% increase. We hit record enrollment nine months ago. This quarter's negative 1% total enrollment and the relatively flat growth we expect over the balance of the year represents a temporary pause in that trajectory, not a reversal of it. Over the last three years, we successfully launched new campuses in Atlanta and Kansas City, relocated our Phoenix campus, and built our national online BSN program to more than 4,200 students across 38 states in just four years. Together, these moves have maintained or grown our market-leading positions. We are number one in BSN, number three in RN to BSN, number one in masters, number one in the doctoral category. This is a testament to the performance and scale foundation that sets Chamberlain apart. Last quarter, I identified two execution gaps: marketing effectiveness and enrollment funnel conversion. We moved swiftly to address both, and early indications are encouraging. Application volumes for both prelicensure and postlicensure nursing programs are up double digits during the second quarter, running ahead of where we were at this point last year. On marketing, we optimized spend, improved our website, and streamlined scholarship offerings so students can research programs with a clearer picture of net cost of attendance. And our focus on a more seamless prospective student experience has increased funnel conversion. We are moving forward with precision and operational accountability. But here is what matters. We expect this application momentum will translate into new enrollment growth and position us well heading into the critical fall cycle. At Walden, we delivered our tenth consecutive quarter of enrollment growth, up 13% in the second quarter. As a result, we achieved record total enrollments of 52,400 students. Similar to prior quarters, Walden's digital learning platform and flexible offerings continue to demonstrate strength as we innovate and deliver an increasingly seamless experience for working adults. Building on this momentum, we launched several new programs heading into this academic year. Programs such as the master in applied behavioral analysis and the master's degree in clinical psychology are attracting working professionals who want to make meaningful societal contributions. Overall, our new programs have already enrolled more than 1,002 students in less than one year, with additional programs in the development pipeline that we expect to roll out soon. Last quarter, I highlighted that we streamlined our professional doctoral programs, creating a more seamless student experience with a simplified tuition structure. Building on that, we recently launched the Walden University PhD completion program, designed for doctoral students who left their original program before finishing their dissertation. We are now providing a channel for them to reach the finish line and earn their degree with us. These enhancements showcase our commitment to drive meaningful impact for thousands of students. Turning to our medical and veterinary segment. The second quarter is an enrollment period, but we are seeing momentum in leading enrollment indicators. At our medical schools, we are executing on two fronts: creating innovative pathways that expand access and remove barriers to the MD program, and driving operational excellence in our enrollment funnel. This sets us on a sustainable trajectory of enrollment growth. Leveraging technology and artificial intelligence in our basic sciences curriculum enables a higher precision learning environment. Combined with our capstone program, this has yielded enhanced student outcomes through increases to our USMLE step one pass rates. Ross Vet continues to operate at near capacity, maintaining its position as a leader in veterinary education, with a one-of-a-kind experiential learning model. And Ross Vet has also increased its NAVLE pass rate. In closing, let me come back to where I began. As America's largest healthcare educator, we are uniquely well-positioned to address substantial and growing healthcare workforce shortages at scale. Our combination of program breadth, geographic reach, and proven outcomes is unparalleled. Finally, I want to acknowledge the unwavering commitment of our 10,000 colleagues, 97,000 students, and 385,000 alumni. They make all of this possible. And with that, I'll turn the call over to Robert J. Phelan, our CFO. Robert J. Phelan: Thank you, Stephen, and hello, everyone. Halfway through fiscal year 2026, we are executing against our growth with purpose strategy, putting us on track to meet our full-year financial goals. Importantly, we continue to enhance our financial foundation and increase our level of profitability by generating efficiencies through scale and operational excellence. This, in turn, is delivering significant cash flow and a more flexible balance sheet. Our robust financial performance is also allowing us to deploy capital in a balanced fashion, whether through share repurchases, debt repayment, or through investments in high ROI additional growth opportunities, including bringing new capacity to market and providing innovative student-facing technology. Taken together, we continue to build strategic momentum that supports long-term value creation. I'll now review the financial results and key drivers for our second quarter. Later in my remarks, I'll discuss our expectations and assumptions for the remainder of fiscal year 2026. Starting with the top line, revenue in the second quarter increased by 12.4% to $503.4 million, driven by all three segments. Walden continues to be a source of strength and, in particular, was aided by a one-week academic calendar shift from the third quarter into the second quarter this fiscal year, resulting in an incremental $18 million in revenue recognized in Q2 rather than in Q3. Excluding the one-week shift, revenue was up 8.4% versus last year for Adtalem. Consolidated adjusted EBITDA came in at $154.9 million, up 23.9% compared to the prior year. This growth was led by Walden, which again includes the incremental week, with MedVet contributing partially offset by Chamberlain. Adjusted EBITDA margin of 30.8% expanded 290 basis points from last year. Excluding the incremental one-week consolidated adjusted EBITDA margin was up 30 basis points year over year. Adjusted operating income was $126.1 million, up 24.3% compared to the prior year, as revenue growth and efficiencies generated operational leverage, which was partially offset by investments in our strategic growth initiatives. We continue to balance our strategic growth investments with a more efficient, integrated, and scaled operational foundation. Adjusted net income for the quarter was $87.9 million, up 26.7% compared to last year, attributed to adjusted operating income growth, lower interest expense resulting from our actions to reduce outstanding debt and our borrowing costs, and partially offset by a higher provision for income taxes. Adjusted earnings per share was $2.43, or a 34.3% increase compared with the prior year. We repurchased 1.7 million shares of our common stock at an average price of $95 within the quarter, resulting in an average diluted shares outstanding of 36.2 million, or approximately 2.2 million lower than last year. This completed our prior $150 million authorization, and we subsequently announced a new $750 million board authorization through December 2028, which has $728 million available as of December 31. Our strong operational and financial discipline, coupled with our high cash conversion rate, resulted in a trailing twelve months operating cash flow generation of $428 million, up $146 million from the comparable year-over-year last twelve-month period. Our strong cash flow and healthy balance sheet is affording us the ability to deploy capital, to invest in the long-term profitable growth of our business, as well as return capital back to our owners. We believe these actions have and will continue to increase long-term intrinsic value for the benefit of our shareholders. Next, I'll discuss the second-quarter financial highlights by segment. Chamberlain reported second-quarter revenue of $183.8 million, an increase of 1.6% compared with the prior year, driven by pricing optimization. Total student enrollment during the quarter declined by 1% as growth in pre-licensure programs was offset by declines in post-licensure programs. Our pre-licensure BSN programs have grown for fourteen consecutive quarters as investments to grow our BSN online offering are yielding promising returns. Post-licensure nursing was lower from declines in the RN to BSN program, partially offset by growth in our master's programs. As Stephen noted, Chamberlain applications during the quarter improved significantly, an encouraging trend that we expect to position us well for future enrollment. Adjusted EBITDA for Chamberlain decreased by 14% to $45.2 million for the quarter, adjusted EBITDA margin of 24.6% was lower compared to the prior year as we make investments focusing on bringing new capacity to market and continue to invest in our students to support enrollment growth and academic outcomes. Turning to Walden, second-quarter revenue of $217.6 million, an increase of 27% versus the prior year, was driven primarily by strong growth in enrollments aided by the aforementioned one additional week of revenue during the second quarter. Excluding the additional $18 million from the one-week shift, Walden revenue was up 16.5% versus last year. Total student enrollment was up 13% compared to the prior year, the tenth consecutive quarter of growth. This was driven by robust enrollment growth across all degree levels, particularly in master's and undergraduate, and continued high persistence rates. Growth in our healthcare programs was led by both social and behavioral health and nursing. Our non-healthcare programs also grew in the quarter. Adjusted EBITDA increased by 66.5% to $86.7 million. Adjusted EBITDA margin expanded by 940 basis points versus the prior year, to 39.8%. Excluding the one-week revenue shift, Walden's adjusted EBITDA margin expanded approximately 400 basis points as our operational excellence generated efficiencies and leverage that outpaced increased brand and student-facing digital investments, and additional student support commensurate with the high level of new enrollment. For the medical and veterinary segment, second-quarter revenue was $102 million, an increase of 6.9% versus the prior year. As Stephen mentioned, there is no change in the student enrollment for the second quarter compared with the first quarter given term starts. Adjusted EBITDA increased by 17.6% versus the prior year to $31.4 million. Adjusted EBITDA margin increased 280 basis points versus the prior year to 30.8% as we remain focused on operating our institutions efficiently while making long-term growth investments that leverage our existing capacity, creating new enrollment pathways, and delivering academic outcomes. Based on the year-to-date performance and our expectations for the balance of the year, we are maintaining our annual revenue guidance as we continue to grow our business on top of strong enrollment levels. Revenue is expected in the range of $1.9 to $1.94 billion, or approximately 6% to 8.5% growth year over year. As I mentioned earlier in my remarks, we had a one-week shift in the academic calendar resulting in Walden recording one additional week of revenue in the second quarter and one less week in the third quarter. The $18 million shift between the quarters benefited the second quarter while it will reduce the third quarter but overall, has no net impact on our annual performance. In addition, the revenue guidance also continues to reflect our prior comments related to enrollment and revenue growth being higher in the first half of the year as we lap double-digit comps from last year, particularly the strong comps from last third quarter. Our reiterated revenue guidance contemplates Chamberlain's top-line impact, and while operational improvements are resulting in application volumes growing year over year in the second quarter at Chamberlain, the financial impact is not immediate. But we do expect application growth to translate to future quarters' new enrollment growth. And finally, strength in Walden's top line is anticipated to continue to deliver robust growth. We are raising our adjusted EPS guidance from the previous range of $7.60 to $7.90 or growth of 14% to 18.5% to a range of $7.80 to $8.00 or growth of 17% to 20%. At the midpoint, our adjusted EPS range is increasing by $0.15. The increase in adjusted EPS guidance contemplates our continued commitment to expanding our fiscal year 2026 adjusted EBITDA margin by approximately 100 basis points. We expect quarter-to-quarter margins will fluctuate with a higher level of targeted investments being made in the third quarter and less investment in the fourth quarter. Further, the one-week Walden revenue shift into the second quarter will have a pronounced impact on our third-quarter margin profile. The raised adjusted EPS guidance also incorporates our capital allocation actions and continued strong cash flow generation. And we continue to anticipate an effective tax rate to be higher than fiscal year 2025. Overall, we will continue to execute on expanding access, delivering positive student outcomes, deploying capital to meet the healthcare education market's growing demand, maximizing long-term value, and ultimately generating high returns for all stakeholders. As Stephen noted, I look forward to discussing our longer-term targets at our upcoming Investor Day. And with that, I'll now turn the call over to the operator for Q&A. Operator: Thank you. We will now be conducting a question and answer session. Thank you. Our first question comes from the line of Jeffrey Marc Silber with BMO Capital Markets. Please proceed. Jeffrey Marc Silber: Thank you so much. I'm actually going to start with Walden. I'll let some other folks focus on Chamberlain. Even excluding the calendar shift, the Walden numbers continue to impress. Can we just double-click on that? What exactly is going on? Where are you seeing the growth? Do you think you're taking share from other schools in this market? Stephen W. Beard: Yes. So, the Walden growth is consistent across the board, but we see it most pronounced in the areas that we've consistently been most excited about. That's in the behavioral sciences programs and also in the nursing program and the MSN credential. To a lesser extent, you know, we're seeing great returns on our investments in the education programs at Walden. As we increasingly look to expand that institute, undergraduate enrollments, we're having great traction there as well. So really pleased with the balanced growth across the program mix at Walden. Jeffrey Marc Silber: Okay. And then maybe shifting to one of the regulatory issues. We're expecting some changes in the loan caps this July. I know you had announced an earlier partnership with Sallie Mae. Can we get an update in terms of what's going on there? Stephen W. Beard: Yeah. We're working with Sallie Mae on definitive documentation for that partnership. Sallie Mae has also been working to pull together the syndicate of capital sources that will actually provide the loan dollars. But we continue to be excited about that partnership and what it means for the entire portfolio, including the medical and veterinary segment. We're obviously expecting to have to utilize supplemental lending sources the most. So more to come on that, but we continue to move at pace with them, and we'll be excited to announce definitive documentation once it's complete. Jeffrey Marc Silber: Okay. Great. I'll jump back in the queue. Thanks. Operator: Thank you. Our next question comes from the line of Jack Garner Slevin with Jefferies. Please proceed. Jack Garner Slevin: Hey, guys. Congrats on the quarter and thanks for taking the question. I am going to decide to dig in on Chamberlain a little bit. So if we just look, you know, really encouraging sign on the double-digit growth. I guess the immediate question becomes sort of if you could remind us of what that typical lead time is, and I'm hearing the emphasis in the fall cycle, but maybe just walking a little more detail on sort of, you know, what exactly is going right as you're, you know, you've enacted some of those changes you called out last quarter and then whether or not that sort of, you know, lags through the second half and then see the rebound or, you know, sort of an inflection around the fall cycle tracks to what you typically would expect? Thanks. Stephen W. Beard: Happy to speak to it. As we said before, we identified a couple of gaps: marketing effectiveness and enrollment funnel conversion. We took a number of steps to address processes on both dimensions. And as you'll note, we also took a number of steps to make changes in personnel across the Chamberlain organization. We feel really good about the implications of those moves. As I said in the prepared remarks, some of the leading indicators of enrollment have been really positive. Application volumes up for both pre-licensure and post-licensure nursing programs. You have to remember that fall cycle is the biggest cycle of the Chamberlain fiscal year. And it creates a big hole to dig out of. But we are confident in the trajectory of the recovery. So while we expect the total enrollment story on a quarter-over-quarter basis to be flat over the balance of the fiscal year, we do expect as we approach that fall enrollment cycle to be in a position to go back to a positive total enrollment year over year and get back to a total enrollment trajectory consistent with what we've enjoyed in the last few cycles. So we think we have the situation well in hand. We feel good about the early signals we're seeing, and we're confident that we exit the fiscal year moving towards a positive total enrollment growth in Chamberlain, with the benefit of a robust trajectory in pre-licensure and a return to form in post-licensure nursing. Jack Garner Slevin: Got it. Okay. Really helpful, Stephen. One more for me here. You know, I guess, running some quick numbers. The last few years, you've seen roughly $60 million of improvement in revenues second half versus first half. Obviously, you have the Walden callout, right, on the timing of that one-week impact. But even adjusting for that, it looks like the high end of the guide at about $45 million. Guess I'd just be curious to sort of describe what the scenario would play out that would see you sort of meet or exceed the high end of that guide? Is it simply Chamberlain coming in a little ahead or really, you know, where you could envision that upside potentially coming from if it were to materialize? Thanks. Stephen W. Beard: Yeah. I think it would come from a quicker than anticipated return to form at Chamberlain and potentially some additional acceleration in the trajectory at the MedVet segment. We think we're moving at sort of an optimal clip at Walden, so it would come from the other two segments. Jack Garner Slevin: Okay. Got it. Super helpful. Congrats again on the quarter and looking forward to seeing you at Investor Day. Thank you. I appreciate it. Operator: Thank you. There are no further questions at this time. I'd like to pass the call back over to Stephen for any closing remarks. Stephen W. Beard: Yes, I want to do two things. First, thank all of our colleagues across the Adtalem Global Education Inc. portfolio for all of their incredible work over the course of the last quarter. We've come back from the break in the calendar year to hit the ground running aggressively. I also just want to put out a plug for our upcoming Investor Day on February 24. We've got a lot of news that we're prepared to share. We're really excited about it. We look forward to having you all participate virtually or in person. Thank you so much. Operator: Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Travis Axelrod: Good afternoon, everyone, and welcome to Tesla's fourth quarter 2025 Q&A webcast. My name is Travis Axelrod of Investor Relations. I am joined today by Elon Musk, Vaibhav Taneja, and a number of other executives. Our Q4 results were announced at about 3 PM Central time in the update deck we published at the same link as this webcast. During this call, we will discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC. During the question and answer portion of today's call, please limit yourself to one question and one follow-up. Please use the raise hand button to join the question queue. Before we jump into Q&A, Elon has some opening remarks. Elon? Elon Musk: Thanks, Travis. So I have updated the Tesla mission to amazing abundance, and this is intended to send a message of optimism about the future. I think we are most likely headed to an exciting, amazing era of abundance. I think with the advent or continued growth of AI and robotics, I think we actually are headed to a future of universal income, not universal basic income, but universal high income. There is going to be a lot of change along the way, but that is what I see as the most likely outcome. So I think it makes sense to update Tesla's mission to reflect that goal. Obviously, along that way, we are going to keep improving safety, driving down the cost of goods, and getting people access to anything they need without compromise. Making sure that the environment is great, nature is great, and people can have whatever they want, which seems like probably the best future. Open to other ideas, but that sounds like the best future you could possibly imagine. I guess it would be that everyone can have whatever they want, including amazing medical care, but we still keep the beauty of nature and Earth. I think that's probably the best outcome. We are seeing the first steps along that way this year for Tesla, post major steps. As we increase vehicle autonomy and begin to produce Optimus robots at scale, we are making very big investments. This is going to be a very big CapEx year, as we will get into. That is deliberate because we are making big investments for an epic future. I think all these investments make a lot of sense. We will continue to make sure that when we do spend capital, it is spent very efficiently. But it's a lot of things, major investments in batteries and the entire supply chain of batteries. We are also going to be significant manufacturers of solar cells, and we are making massive investments in AI chips. I think these all make a ton of strategic sense. I guess I have one, not exactly bad news, but it's time to bring the Model S and X programs to an end with an honorable discharge. We are really moving into a future that is based on autonomy. If you are interested in buying a Model S and X, now would be the time to order it because we expect to wind down S and X production next quarter. We will obviously continue to support the Model S and X programs for as long as people have the vehicles. But we are going to take the Model S and X production space at our Fremont factory and convert that into an Optimus factory with a long-term goal of having a million units a year of Optimus robots in the current SX space in Fremont. That is slightly sad, but it is time to bring the SX programs to an end and shift to an autonomous future. As my profile picture on X for a few months there, the future is autonomous. With respect to self-driving and robotaxi, people are obviously following with very close attention the progress of FSD, and you can experience it for yourself. If you have a Tesla, you notice with every software update, the car gets better and better at autonomy. We were able to do our first rides with no safety monitor in the car in Austin. These are paid rides, randomly selected paid rides with no safety monitor. I think maybe as of yesterday or so, we actually do not even have a chase car or anything like that. These are just cars with no people in them and no one following the car in Austin. We are obviously being very cautious about this because we want to have no injuries or serious accidents along the way. I think it makes sense to be very cautious. You will see the amount of autonomy increase dramatically, I think, every month, essentially. There will also be an opportunity, something we have talked about for a long time, for existing owners of Teslas to add or subtract their cars to the fleet, kind of like how Airbnb works where you can add or subtract your house to the Airbnb inventory. I think probably the value of the Tesla, the sort of partial people adding or subtracting the car to Tesla's autonomous fleet, is probably a little underweighted by a lot of people because we have millions of cars with AI4 that can do this. It might potentially provide an opportunity for a lot of customers to earn more lending their car to the fleet than their lease cost to Tesla. Which is kind of like you get paid to own a Tesla. It's quite a good scenario. We expect to have fully autonomous vehicles in probably somewhere between a quarter and half of the United States by the end of the year, pending regulatory approval. A big factor would be if there's some kind of federal preemption for autonomous vehicles. In the absence of that, you have to go on a city-by-city or state-by-state basis. Nonetheless, even if it is city-by-city, state-by-state, we expect to be in dozens of major cities by the end of the year. With respect to energy, the Tesla energy team has done incredible work. The growth rate on that work is continuing to be very strong. We are building more manufacturing capacity and expect that energy will have very high growth for as far into the future as we can imagine. The solar opportunity is underestimated. We think the best way to add significant capability to the grid is solar and batteries on Earth and solar in space. That's why we are going to work towards getting 100 gigawatts a year of solar cell production integrating across the entire supply chain from raw materials all the way to finished solar panels. Maybe a bit more about Optimus. We will probably unveil Optimus 3 in a few months. I think it's going to be quite surprising to people. It's an incredibly capable robot. As I mentioned, we are replacing the SX line in Fremont with a million unit per year line of Optimus. Now because it is a completely new supply chain, there's really nothing from the existing supply chains that exist in Optimus. Everything is designed from physics first principles. That means the normal S curve of manufacturing ramp will be longer for Optimus than it is for products that have at least some portion of an existing supply chain. When everything's new, the production rate will be proportionate to the least lucky, least confident part of the entire supply chain. If there's 10,000 things that need to go right, it only takes one to be slow to lag that. It will be a stretched-out S curve. I'm confident that we'll get to a million units a year in Fremont of Optimus 3. This Optimus really will be a general-purpose robot that can learn by observing human behavior. You can demonstrate a task or verbally describe a task or show it a task. Even show it a video, it will be able to do that task. It's going to be a very capable robot. I think long-term Optimus will have a very significant impact on the US GDP. It will actually move the needle on US GDP significantly. In conclusion, there are still obviously many who doubt our ambitions for creating amazing abundance. We are confident it can be done, and we are making the right moves technologically to ensure that it does. Tesla has obviously never been a company to shy away from solving the hardest problems. I think that's kind of how you build value in a company is you solve hard problems. I don't know how you create value by solving easy problems. There's a lot of hard problems that the Tesla team is going to solve, but it's an incredibly talented, hardworking team. I'd like to thank everyone at Tesla for their incredible hard work. It's an honor to work with such a talented group. Thank you to everyone who is supporting this mission. The future is more exciting than you can imagine. Travis Axelrod: Fantastic. Thank you so much, Elon. Next, we have some remarks from Vaibhav. Go ahead. Vaibhav Taneja: Thanks, Travis. Q4 2025 was an interesting quarter in a couple of respects. On the autos front, while in Q3, we saw a surge in US demand before the higher consumer credit cliff, pulling in some demand from Q4. In other parts of the world, we saw an increase in demand leading to record deliveries in smaller countries like Malaysia, Norway, Poland, Saudi Arabia, and Taiwan. While continued strength in the rest of APAC and EMEA. We therefore ended 2025 with a bigger backlog than in recent years. Note that none of these countries have the latest version of FSD available yet. On the storage front, we hit yet another record in terms of deployments. I would like to thank our customers and Tesla for continuing this momentum. On the automotive margins front, automotive margins, excluding credits, improved sequentially from 15.4% to 17.9%. Automotive gross profit was flat sequentially despite 16% lower deliveries, primarily due to regional mix as we had proportionately more deliveries in APAC and EMEA. As we look to 2026, with the progress that has been made with autonomy, our focus is on ramping production at all our factories. Our biggest constraint globally continues to be on the battery pack front. While our teams have been creative in trying to resolve the situation by now putting 4,680 cells in nonstructural packs, we continue to iterate improving things from here on. FSD adoption continued to improve in the quarter, reaching nearly 1,100,000 paid customers globally. Of these, nearly 70% were upfront purchases. It is important to note that beginning this quarter, we are transitioning fully to a subscription-based model for FSD. Therefore, net additions to this figure will primarily be via subscription model and, in the short term, will impact automotive margins. On the energy front, we achieved yet another record in terms of gross profit for the quarter and ended the year with nearly $12.8 billion in revenue, a 26.6% year-over-year growth. This was the result of high deployments in all regions and continued strength in demand for both MegaPack and Powerwall. As we look at 2026, our backlog remains strong, well-diversified globally, and we expect increasing deployments with the launch of MegaPack 3 and Mega Block. However, we expect margin compression from the increased low-cost competition impacts to market from policy uncertainty, and the cost of tariffs. Services and others margin declined from 10.5% to 8.8% primarily from higher employee-related costs for service centers as we start preparing for the ramp in activity from the growth in the fleet size. We did see an improvement in margin from our supercharging business, which is included within services and other. Additionally, note that our robotaxi business-related costs, while not material, are also included within this. Given that we're still in the early phase of our fleet deployment, are still doing a lot of validation testing. The revenue and cost per mile metrics are not meaningful to discuss at the moment. On total gross margin front, we ended the quarter with over 20.1%, something which we haven't achieved for over the last two years. This improvement came despite the impact of lower fixed cost absorption and the impact of tariffs, which were in excess of operating expenses increased sequentially $500 million in Q4, primarily from increased stock-based compensation for employees and as we started recording charges on for one operation Maestro under our 2025 CA performance award. That was deemed to be probable over the work term. Additionally, our spend on AI-related initiatives and new products like CyberCab, Semi, Optimus, and MegaPack, etcetera, continues to be at elevated levels and we expect this trend to continue for the full year 2026. Net income was negatively impacted from mark-to-market charges on a Bitcoin holding, which depreciated 23% as compared to the last quarter, and the impact of unfavorable impact of FX, primarily from our large intercompany borrowings. On the free cash flow front, we ended up at $1.4 billion. We did end up CapEx being slightly below our previous guidance of $9 billion. But like, as Elon already mentioned, this year is going to be a huge investment year from a CapEx perspective. At the moment, we are expecting that CapEx would be in excess of $20 billion. We will be paying for six factories, namely the refinery, LFP factories, CyberCab, Semi, a new mega factory, the Optimus factory. On top of it, we'll also be spending money for building our AI compute infrastructure and we'll continue investing in our existing factories to build more capacity. And then, you know, also the related infrastructure along with it. We'll also further expand our fleet of robotaxi and Optimus. While this may seem a lot, we believe this is the right strategy to position the company for the next era. We'll make such investments, as Elon mentioned, in a very capital-efficient manner. Note that this does not include potential investments in solar cell manufacturing or our tariff fab as we are still in the early phase and we plan to provide an update in future quarters. Starting not the next chapter, but a new book on the progression of this company. 2026 would be when all of this began. While at times it feels daunting, it is going to be the most exciting change in Tesla's history and we could not have even dreamed of embarking on this journey without the support of our customers and our investors. For again showing the confidence in us, let's get ready for a future of amazing abundance. Thanks. Travis Axelrod: Great. Thank you very much, Vaibhav. Now we're going to head over to investor questions. As always, we will start with questions from say.com. The first question is, today there are approximately 90 million cars sold globally each year. Does Tesla have a view, based on its robotaxi ambition, what this number will be in five or ten years? And how does this impact Tesla's EV strategy to have more models? Elon Musk: Yeah. Thanks, Travis. As Elon said, the future is autonomous. Lars Moravy: Obviously, autonomy and CyberCab are going to change the global market size and mix quite significantly. I think that's quite obvious. General transportation is going to be better served by autonomy as it will be safer and cheaper. Over 90% of vehicle miles traveled are with two or fewer passengers now. That is why we designed CyberCab that way. In this new autonomous market, we at Tesla have the advantage of efficiency, cost, and manufacturing at scale that really no one else has. We've built that over the last decades. We believe that the segment we are creating will grow millions year over year. Elon Musk: Just to add to what Lars said there. The point that Lars made, which is that 90% of miles driven are with one or two passengers or one or two occupants, essentially, is a very important one. Because that implies that the CyberCab, which is a dedicated two-seater dedicated robo taxi, it's a little confusing with the terms robo taxi and CyberCab. Sorry about the confusion. In fact, in some states, we're not allowed to use the word cab or taxi, so it's going to get even more strange. It's going to be like CyberVehicle or something CyberCar. But the CyberCab, which is a specific model that we're making, does not have a steering wheel or pedals. So this is clearly, there's no fallback mechanism here. It's like this car either drives itself or it does not drive. We expect to start production in April. As always, it's just an S curve of the production rate is an S curve, so it starts off very slowly and then grows exponentially, then you hit the linear, and then ultimately it asymptotes at whatever your target volume is. We would expect over time to make far more CyberCabs than all of our other vehicles combined. Given that 90% of distance driven or distance being distance traveled exactly, no longer driving, is one or two people. I think it's like 80% is just one. It would mean that long-term CyberCab would make several times more CyberCabs per year than all of our other vehicles combined. Travis Axelrod: Great. Thank you so much. Next question, a bit related. Are there still plans to launch new models to address different price segments and vehicle types which could materially expand the TAM for Tesla? Lars Moravy: Yeah. To further on what we were just talking about, we've launched our least expensive models ever over the last few months and are continuing to expand those models globally. Over the last decade, we have continually brought down the cost of our vehicles without sacrificing range, performance, or premium-ness. We'll continue to do that, as Vaibhav said, investing in our factories, but these are all trade-offs of where we spend our time or money. To Elon's point just now, CyberCab coming, we are aiming to bring that Tesla premium ride experience to our largest market yet. It could be five or ten times our current levels of production. This new autonomous market, you have to start thinking about us as moving to providing transportation as a service more than the total addressable market for the purchased vehicles alone. Of course, we do have plans to have robotaxis in various shapes and sizes, but obviously, CyberCab will be the grand majority of that volume. Elon Musk: Yeah. The vast majority of miles traveled will be autonomous in the future. I would say probably less than I'm just guessing, but probably less than 5% of miles driven will be where somebody's actually driving the car themselves in the future, maybe as low as 1%. Travis Axelrod: Great. The next question is, historically, Tesla has spoken about gross margin per model. Are there standalone gross margin targets for the current models excluding the benefits for FSD sales? Vaibhav Taneja: You know, we've talked about this with the previous two questions, but transportation, as we know, is changing. I think we cannot keep applying the same framework from a car sales model to the future, what we are trying to do. So it has to be looked at more holistically. In autonomy, software will be the driver for growth from now. As we aim to maximize the global fleet, we have been laser-focused on COGS from our side to make sure because that is something which we manage. So we will keep focusing on that. But I think we need to look at it from a different dimension. Elon Musk: Yeah. Like, this CyberCab, the whole design of CyberCab was to optimize the fully considered cost per mile of autonomous driving. It's a different design problem than if you're trying to design cars for people who will be driving versus being driven. So CyberCab is, like I said, super optimized for minimum cost per mile and also for a much higher duty cycle. You would expect CyberCab to be used probably fifty or sixty hours a week instead of the ten or eleven hours a week that a driven vehicle is used. Typically, people might drive their car for an hour and a half a day on average, so it's like ten hours a week out of a hundred and sixty-eight. But I think an autonomous vehicle is likely to be used probably five times as often. Which means that you need to design the vehicle for much more wear and tear per unit time and much more resilience. It's more like a commercial truck that's in continuous operation or close to continuous operation. That is how you design an autonomous vehicle. We will have larger vehicles in the CyberCab in the future that are designed for full autonomy. We've actually shown pictures of this and in fact have shown prototypes. So this is not exactly a secret. In fact, we've given people rides in them. We're not keeping this hiding this light under a bushel here. We're literally saying what we're gonna do and have said what we're gonna do for a while. I really think long-term, the only vehicles that we'll make will be autonomous vehicles with the exception of the next generation Roadster which we're hoping to debut in April. Hopefully, it's gonna be something out of this world. Travis Axelrod: Fantastic. The next question we unfortunately have to skip because it's not related to Tesla. We would like to remind folks who use the say platform to please focus these questions on Tesla. With that in mind, we're going to move on to the next question. Which is what is the current bottleneck to increased Robotaxi deployment and personal use unsupervised FSD? Is it the safety and performance of the most recent models or is it people to monitor the robotaxis in car, or remotely? Or is there some other blocker? Ashok, if you want to kick off on this one. Ashok Elluswamy: Yeah. We have scaled the robotaxis service that's available to customers over the last year. In order to just learn these scaling problems without having to wait for unsupervised. Let's get two goals. One is to learn as much as possible with the safety monitors. Secondly, be laser-focused with the engineering team to solve the unsupervised FSD problem. I think we did both. By the end of last year, we had a long tail of issues that we were able to churn through, and then in the last couple of weeks, we started unsupervised robotaxis service to public customers in Austin. I think some customers took rides last week and also service continues today without any real cars, something like that. Separately, we did scale the fleet size in the Bay Area and in Austin. Through that, we learned issues with charging and other issues that we would have seen once we scale the unsupervised fleet. Both are happening in parallel. A variant of the software that's used for the robotaxis service was shipped to customers with v14 and customers saw a huge jump in performance. A lot of happy feedback from customers. Since then, we have improved the software significantly as well. Customers will continue to see with their own software releases that the software is so good that they're screaming to remove the trial monitoring software. Because they're bored inside the car too much. Lars Moravy: Adding to that a little bit with what Ashok said about learning about our charging and service needs. We're using our vast network of charging and service centers that really only Tesla has in this space to jump-start our infrastructure build-out needs. Get ahead of robotaxi autonomous vehicle demand. We expect that because of this network, we are the only company capable of scaling at the rate that is needed for the tsunami of autonomy that has come. Travis Axelrod: Great. Moving on to the next question. After the unveil of the Cybertruck, Elon stated that if it didn't sell well, Tesla would build a more conventional-looking pickup. How practical would it be to create this new design on the Cybertruck architecture, and could it be conveniently built on the existing production lines? Lars Moravy: Actually, in its segment, CyberTruck can be a leader and is selling more than any other electric truck out there. Our competition continues to pull back. But to the question itself, from a line standpoint, we always design our lines to be super flexible. We've built 3 and Y on the same line. We built S and X on the same line still. Showing that we can do that. The Cybertruck line was designed in the same way and is one of our most fully ready for autonomy platforms. Elon Musk: But yeah. We will transition the Cybertruck line to just a fully autonomous line. There's obviously a market there for cargo delivery, like you say, localized cargo delivery within a city, within a few hundred miles, something like that. There's a lot of cargo that needs to move locally within a city, and an autonomous Cybertruck could be very useful for that. Travis Axelrod: Great. Moving on to the next question. Regarding Optimus, could you share the current number of units deployed in Tesla and actively performing production tasks? What specific roles or operations are they handling and how has their integration impacted efficiency or output? Elon Musk: Yeah. I mean, we're still very much at the early stages of Optimus. It's still in the R&D phase. We have had Optimus do some basic tasks in the factory. But as we iterate on new versions of Optimus, we deprecate the old versions. So it's not in usage in our factories in a material way. It's more so that the robot can learn. We wouldn't expect to have any kind of significant Optimus production volume until probably the end of this year. Ashok Elluswamy: Great. Optimus Gen 3 is an awesome robot that minimizes any differences, but it looks like a human. People could be easily confused that it's a human. This helps our strategy for the AI too because you can learn how humans do these tasks, and it's very easy to teach the robot in the same way. As opposed to previous robots. Elon Musk: Yeah. I mean, I guess one thing I should say, like, there's a lot of news of various companies announcing layoffs and whatnot. But at our Tesla factory in Fremont, we actually expect to increase headcount over time. And to significantly increase output from our factories. We don't have any layoff plans. We expect to actually increase headcount. Travis Axelrod: Great. The next question similar to the other autonomy questions but slightly different, when is FSD going to be 100% unsupervised? Elon Musk: Well, it is 100% unsupervised. I mean, we obviously have cars operating with no one in them and no safety monitor and no follow car or anything like that in Austin right now. For customers, we're being just very cautious with the rollout. With each successive version as we prove it out and we make sure that there are no unique issues in particular cities. Because sometimes you get some very difficult intersections. It'll be an intersection where a lot of humans have accidents, by the way. There are some pretty nutty intersections where a lot of humans make mistakes and have accidents in various cities. We want to make sure that FSD can handle those unusual intersections. Like, if you take LA, for example, where Wilshire and Santa Monica combined is like, there's about 20 traffic lights. People are constantly having accidents there. You want to make sure that FSD can handle things in a particular city. We're actually just being paranoid about safety. But with each successful release of FSD, we will reduce the amount of driver monitoring that's needed proportionate to the safety of the FSD build. Travis Axelrod: Great. As it relates to Robotaxi, what has surprised you about the rollout so far? We've talked about what's constrained the fleet expansion to date, but it appears there are 200 vehicles based on public tracking. Is that something that we can confirm? Ashok Elluswamy: I wouldn't say there's anything that really surprised us because we are a large fleet. We had all the metrics. There was some sort of surprise. It was just continued work. To grind down on the long tail of issues, and that's what enabled us to launch the unsupervised service in Austin. Elon Musk: Yeah. In terms of taxi vehicles carrying paid customers, I think we're well over 500 at this point between the Bay Area and Austin. Ashok Elluswamy: There's a varying amount of vehicles depending on the load, but you can have more vehicles during peak times and then fewer vehicles in the off hours. Elon Musk: This will probably double every month type of thing. It's on an exponential curve. Vaibhav Taneja: One other thing people forget is that we've been deliberate on all this in the sense that we have the supporting infrastructure already in place, whether it's service centers, charging. Yes, we'll have to augment as the fleet grows depending upon the density of where the demand is and whatnot. But it's not something we just stumbled upon and we're starting to. We've been at it for years. Not every city is designed the same way. Same thing. Our infrastructure is also not the same in every city. But you have to give us credit that it's been a journey. Like Lars said, if there's some company which can do it, already been at it, so we should be able to deliver much better. Travis Axelrod: Great. The next question is about chase cars, which we already covered. So moving on to the last question. Elon, you've been spending significant personal time on Tesla's chip design. What was the forcing function behind this increased involvement? Do you think external chip sales will represent a significant portion of Tesla's valuation by the end of the decade? Elon Musk: Well, I tend to spend time on whatever the most critical issue is for the company. Completing the AI5 chip design and having it be a great chip is arguably the number one most critical thing to get done, which is why I'm spending more time on that than currently anything else at Tesla. I spend pretty much every Saturday on this, and a chunk of every Tuesday. If I'm spending my Saturdays on something, it's going to be something pretty important. I do think AI5 will be a very good chip. I feel quite confident about the design at this point. AI6, which will follow that, aspirationally would follow that in under a year. It will be yet another big leap beyond AI5. I feel pretty good about our chip strategy right now. In terms of selling it outside of Tesla, we first need to make sure we have enough chips for our vehicle production, all of our Optimus production. We will actually use the AI5 chips in our data centers. We already use the AI4 chips in our data centers. When we do training, it's a combination of the AI4 chips and NVIDIA hardware. Primarily that we do training with. By the end of the decade, things are changing so fast that it's hard to imagine what happens at the end of the decade. When I look ahead at what's the limiting factor for Tesla growth if you go, say, three or four years out, I think it actually is chip production. Is there enough AI logic and enough memory, enough RAM for volume? Right now, I see that as being the thing that probably limits our growth in three or four years. Which implies that we're not selling chips outside of Tesla. Because we need them. In fact, I think it's going to make sense. This is definitely going to be a controversial thing, but I think Tesla needs to build a TerraFab. I mentioned this at the shareholder meeting. Even when you look at the output of the best-case output of all of our key suppliers, and I'd say even they're beyond suppliers are like strategic partners like Samsung, TSMC, and Micron. We say, like, what's the most you could possibly make? Then it's not enough. I think in order to remove the constraint, the probable constraint in three or four years, we're going to have to build a Tesla TerraFab, a very big fab that includes logic, memory, and packaging. Domestically. That's actually also going to be very important to ensure that we are protected against any geopolitical risks. I think people may be underweighting some of the geopolitical risks that are going to be a major factor in a few years. A lot of people will say, like, that's crazy. Fabs are really hard. I'm like, yes. I know fabs are really hard. I don't think they're easy. But we do hard things. We do a lot of hard things. We didn't used to have car factories. Or we didn't used to have battery cell factories or lithium refineries or MegaPack factories or all these other things. We figured it out. I think if we don't do the Tesla TerraFab, we're going to be limited by supplier output of chips. I think maybe memory is an even bigger limiter than AI logic. For example, we have chip supply deals with TSMC in Arizona and Samsung in Texas, but currently, there are no advanced memory fabs at scale in the United States. There are zero, literally zero. Hopefully, Micron will have something going in a few years because they are headquartered in Idaho, where they make a lot of potato chips. We don't really need to make computer chips too. We're with our strategic partners on the chip front, memory and logic. I think we gotta also try our hand at building a large-scale fab that integrates logic memory and packaging. If we don't do that, we're just going to be fundamentally limited by the supply chain. Especially if there's some geo if in a worst-case geopolitical situation, it would be quite a severe situation. I think we quite frankly, it'd be crazy not to try out the TerraFab. We'll have a bigger announcement on this in the future. Travis Axelrod: Awesome. With that, we're going to move on to analyst questions. The first analyst is Emmanuel from Wolfe Research. Emmanuel, please feel free to unmute yourself. Emmanuel Rosner: Great. Thank you so much. It's Emmanuel Rosner from Wolfe Research. My first question is on CapEx. You signal a pretty large increase to over $20 billion for this year. Was hoping to better understand where the investments are going. Any way to dimension for us which of the product line or technologies account for the bulk of the increase? Also, do you view this as one-time in nature for 2026? Or how much of this is an ongoing level of high spending for a number of years? Finally, still on that level of spending, you're going to be burning cash. Should we think about cash balance or any other way to finance this? Vaibhav Taneja: Yeah. So, Emmanuel, I tried to put this in my opening remarks too, but I'll try and go a little bit deeper. There's about six factories which we are starting production in this year. So there's a lot of cash CapEx which is going into that. Then as we are trying to scale Optimus, we need a lot more compute. We're putting more money towards compute as well. And then for training. Training. Yeah. We're also going to be spending money to expand the capacity at our existing factories. On top of it, just keep in mind that none of these numbers which I shared of $20 billion factors and anything to do with the solar fab or the semiconductor chip fab. Those would be, as Elon had mentioned, would come later on. Your second part of your question was, is this one-off or would we expect more? I think we're getting into this investment phase because we have big aspirations. You look at it, some of these aspirations are I call them infrastructure play. Especially if you have to do a chip fab and we have to do a solar cell manufacturing fab. Those are infrastructure plays. That funding takes a little bit longer. Your third part of your question was, how are we going to fund it? Initially, obviously, we have over $44 billion of cash and investments on the books. So we'll use our internal resources, but there are ways where we can fund it especially when we look at the robotaxi fleet because anytime you have a consistent stream of cash flow, you can go and get money from the banks. We have had conversations with banks about it. That is something how we're going to do it. On the infrastructure play side, like I said, we don't have a number yet. But given that it's an infrastructure play, it's a longer tail, we will have to look at a little bit more in terms of how we fund it. Whether it's through more debt or other means. Travis Axelrod: Great. Our next question comes from Andrew from Morgan Stanley. Andrew, please feel free to unmute yourself. Andrew: Great. Thanks so much for taking the question. I just want to start on the DXAI investment that you guys announced today. You talked about there being some collaboration between the companies. So just hoping to get more information or you're hoping you could shed more light on what that looks like and maybe how the work AI is doing can be leveraged at Tesla and vice versa. Vaibhav Taneja: Yeah. I mean, if you looked at the disclosure, which we also put in there, we do talk about this is literally furtherance of our master plan four. Even today, if you look at Tesla vehicles, we are using Grok in there. As we look at things whether we can do it ourselves, yes, there are a lot of things which we can do ourselves. But if there are things which XAI can help accelerate our progress, then why should we not do that? That is the reason why we've gone ahead with such an investment because this is part of the strategic initiative because as it is, if you remember, I talked about how many things which we are doing ourselves. If there are ways and means we can find efficient ways for others to help us, XAI literally fits into that mold. That's why we went ahead with it. Elon Musk: We just had a lot of investors ask us to do this. There was a lot of investor but Tesla shareholders said, like, we should invest in XAI. So that's like we're just doing what shareholders would ask us to do pretty much. But Grok will be, I think, very helpful in, say, maximizing the efficiency of the management of a large autonomous fleet. If you've got an autonomous fleet that's in the future, 10 million vehicles or tens of millions of vehicles, then optimizing the efficient use of that fleet, Grok will be way better than any heuristic solution. Or manually managed solution. If you set up managing, say, a large team of Optimus robots to build a factory or build a refinery, you know, and say a rare hypothetical like a this is a hypothetical example. A rare earth ore refinery. Which we do desperately need in America. Then you'd say, well, what's going to organize the Optimus robots to build that ore refinery? You kind of need an orchestra conductor. So then Grok would be kind of the orchestra conductor. For the Optimus robots to build the hypothetically, an it might not be hypothetical in the future. I'm just saying it's not currently on our plans. But we do need a lot more ore refining capacity in the US. So then what's going to manage, let's say, a thousand Optimus robots? Travis Axelrod: You're on mute right now, so I'm not sure if you're trying to ask a follow-up question. Andrew: Ready. Travis Axelrod: We're going to move on to the next question, which is coming from Dan Levi at Barclays. Dan, please feel free. Dan Levi: Great. Thank you. Elon, you talked about some of the constraints on memory. Given the very tight supply, are there any near-term constraints on procuring memory? If there are, to what extent could you look at modifying the functionality similar to what you did in '21 when we saw shortages on MCUs and maybe how are you thinking about bridging in the next few years? Elon Musk: Well, at Tesla, the Tesla AI is very compute efficient and very memory efficient. I think one of the metrics I want you to consider for any given AI model is the intelligence per gigabyte. Especially when you're constrained on RAM. Having an AI that has very high intelligence density per gigabyte, you can say, like, for a given number of gigabytes, how much functionality can you get out of it? I actually think Tesla is ahead of the rest of the world in intelligence density of AI by an order of magnitude or more. This is going to sound like a pretty bold statement, but I kind of know what the intelligence efficiency of the big models are like Grok. The honest and a bunch of the other models. Tesla's AI is, in terms of memory efficiency, I think more than an order of magnitude better. So that puts us in a pretty good position, actually, for scaling. We do think that there's we do have a solution for logic and memory for, let's say, the next roughly three years. But if you start going beyond three years, and we look at the scaling plans, and how many fabs are getting built, especially if you factor in geopolitical uncertainty, there's always risk that maybe those chips don't arrive that people were expecting to arrive. That's why I think we need to have more fab capacity in the US. Just in case. Chips don't stop arriving for any reason. This is really existential for Tesla because if Optimus is completely useless without an AI chip. It's not like at least the cars we can put steering wheels and pedals in. Or retrofit them if need be. But Optimus is just a mannequin without, it's like the Tin Man or whatever The Wizard of Oz. But even worse, at least the Tin Man could walk. Optimus won't even be able to just sit there without an AI chip. We've got a good solution for a significant scale through for the next roughly three years. Beyond that, we will be supplier limited and so we've got to figure out some game plan to not be supplier limited. Travis Axelrod: Great. Our next question is going to come from George at Canaccord. George, please feel free to unmute yourself. George Gianarikas: Hi, everyone. Thank you for taking my question. There's been a surge of startups, particularly from China entering the humanoid market. I'm wondering what the long-term competitive advantages that keep Tesla ahead are and how based on what you've seen will Optimus fundamentally differ from these competitors? Thank you. Elon Musk: Well, I do think that by far, the biggest competition for humanoid robots will be from China. China is incredibly good at scaling manufacturing. Actually quite good at AI as you can see from the open-source, not the open-source, but the sort of I guess, some of them are open, actually. But, basically, the models that China's distributing for free are actually quite good and they keep getting better. China is very good at AI, very good at manufacturing, and will definitely be the toughest competition for Tesla. To the best of our knowledge, we don't see any significant competitors outside of China. But China will definitely be tough competition. There's no two ways about it. I always think people sort of outside of China kind of underestimate China. China's next level. We think Optimus will be much more capable than any robot that we are aware of under development in China. We think we'll be ahead in terms of the real-world intelligence, the electromechanical dexterity, especially the hand design, which is by far the hardest thing in the robot. In fact, I'd say there's really three hard things about humanoid robots. Building an incredible hand that has the same degrees of freedom and dexterity as a human hand is an incredibly difficult engineering challenge. Then there's the real-world AI and scaling production. Those are the three hardest problems by far for humanoid robots. I think Tesla is the only company that actually has all three of those components. Travis Axelrod: Great. Our last question is going to come from Colin at Oppenheimer. Colin, please feel free to unmute yourself. Colin Langan: Thanks so much. You talked a lot about the CapEx spend, but this is an incredibly ambitious technology development program that you're talking about. Can you talk a little bit about the R&D spend and how you're thinking about the synergies of the different components, particularly on the hardware side? If you think about batteries into and the memory and the efficiency of the system, and what sort of advantages you think you'll end up getting out of some of these purpose-built devices that you'll end up integrating into multiple end markets? Elon Musk: Well, really, all we're trying to do is make sure that we can scale to a very high volume with autonomous vehicles, with humanoid robots. And that we address geopolitical risk. Which I think there are so many companies out there that are asleep with the switch with regard to geopolitical risk. They're like or they just have their head in the sand and hope nothing bad will happen. I'm way more paranoid than that. Always think of Andy Grove's famous statement, only the paranoid survive. Why did he come up with that statement at Intel? Let's think. I think there's a lot of wisdom in that statement. We're going to be paranoid. Make sure that we can continue to build batteries and robots and AI chips no matter what happens. Companies that don't do that, a bunch of them will cease to exist. Vaibhav Taneja: Yeah. Remember, all this comes out of necessity. It's not that we want to do it. It's just we have no choice. Elon Musk: Yeah. We're building the most advanced lithium refinery in the world, by the way. It's not just like, our lithium refinery in Corpus Christi is not just a copy of what others have done. It's an entirely new process that is fundamentally more efficient and more advanced than anything else in the world. The same is true of our cathode refinery here in Austin. We wish others would build this. Can other people please, for the love of God, help? In the name of all that is holy, can others please build this stuff? It's not the first time you host. Exactly. Vaibhav Taneja: This is not the first time you've said something like this. Elon Musk: Why do we have to build these things? Why can others not also please build these things? It's very hard to build these things. We build them out of desperation. Not because nobody else is building lithium refineries and cathode refineries. We're pretty much the not just the largest, but also the only lithium refinery and cathode refinery in America. We're making moves to make sure that no matter what happens, Tesla will prosper. Travis Axelrod: Great. Unfortunately, that's all the time we have for Q&A today. We really appreciate everyone's questions, and we look forward to talking to you next quarter. Thank you very much, and goodbye. Vaibhav Taneja: Alright. Cool.
Krista: Afternoon. My name is Krista and I will be your conference operator today. At this time, I would like to welcome everyone to the Meta Fourth Quarter and Full Year 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be an opportunity to ask questions. And this call will be recorded. Thank you very much. Kenneth J. Dorell, Meta's Director of Investor Relations. You may begin. Kenneth J. Dorell: Thank you. Good afternoon, and welcome to Meta Platforms' Fourth Quarter and Full Year 2025 Earnings Conference Call. Joining me today to discuss our results are Mark Elliot Zuckerberg, CEO, and Susan Li, CFO. Our remarks today will include forward-looking statements which are based on assumptions as of today. Actual results may differ materially as a result of various factors, including those set forth in today's earnings press release, and in our quarterly report on Form 10-Q filed with the SEC. We undertake no obligation to update any forward-looking statements. Performed very well, thanks to record-breaking holiday demand and AI-driven performance gains. Mark Elliot Zuckerberg: We are now seeing a major AI acceleration. I expect 2026 to be a year where this wave accelerates even further on several fronts. We're starting to see agents really work. This will unlock the ability to build completely new products and transform how we work. In '25, we rebuilt the foundations of our AI program. Over the coming months, we're going to start shipping our new models and products. I expect our first models will be good, but more importantly, we'll show the rapid trajectory that we're on. And then I expect us to steadily push the frontier over the course of the year as we continue to release new models. I'm very excited about the products that we're building. Our vision is building personal superintelligence. We're starting to see the promise of AI that understands our personal context, including our history, our interests, our content, and our relationships. A lot of what makes agents valuable is the unique context that they can see. And we believe that Meta will be able to provide a uniquely personal experience. We're also working on merging LLMs with the recommendation systems that power Facebook, Instagram, Threads, and our ad system. Our world-class recommendation systems are already driving meaningful growth across our apps and ads business, but we think that the current systems are primitive compared to what will be possible soon. Today, our systems help people stay in touch with friends, understand the world, and find interesting and entertaining content. But soon, we'll be able to understand people's unique personal goals and tailor feeds to show each person content that helps them improve their lives in the ways that they want. This also has implications for commerce. Our ads today help businesses find just the right very specific people who are interested in their products. New agentic shopping tools will allow people to find just the right very specific set of products from the businesses in our catalog. We're focused on making these experiences work across both our feeds and across business messaging, significantly increasing the capabilities of WhatsApp over time. New kinds of content will soon be possible as well. People want to express themselves and experience the world in the most immersive and interactive way possible. We started with text and then moved to photos when we got phones with cameras. Then moved to video when mobile networks got fast enough. Soon, we'll see an explosion of new media formats that are more immersive and interactive, only possible because of advances in AI. Our feeds will become more interactive overall. Today, our apps feel like algorithms that recommend content. Soon, you'll open our apps, and you'll have an AI that understands you and also happens to be able to show you great content or even generate great personalized content for you. Glasses are the ultimate incarnation of this vision. They're going to be able to see what you see, hear what you hear, talk to you, and help you as you go about your day. And even show you information or generate custom UI right there in your vision. Sales of our glasses more than tripled last year, and we think that they're some of the fastest-growing consumer electronics in history. Billions of people wear glasses or contacts for vision correction, and I think that we're at a moment similar to when smartphones arrived. It was clearly only a matter of time until all those flip phones became smartphones. It's hard to imagine a world in several years where most glasses that people wear aren't AI glasses. For Reality Labs, we are directing most of our investment towards glasses and wearables going forward, while focusing on making Horizon a massive success on mobile and making VR a profitable ecosystem over the coming years. I expect Reality Labs losses this year to be similar to last year, and this will likely be the peak as we start to gradually reduce our losses going forward while continuing to execute on our vision. As we plan for the future, we will continue to invest very significantly in infrastructure to train leading models and deliver personal superintelligence to billions of people and businesses around the world. I recently announced MetaCompute with the belief that being the most efficient at how we engineer, invest, and partner to build our infrastructure will become a strategic advantage. Dina Powell McCormick also joined us as president and vice chairman. She will lead our efforts to partner with governments, sovereigns, and strategic capital partners to expand our long-term capacity, including ensuring positive economic impact in the communities that we operate in around the world. An important part of MetaCompute will be making long-term investments in silicon and energy. We will continue working with key partners while advancing our own silicon program. We're architecting our systems so that we can be flexible in the systems that we use, and we expect the cost per gigawatt to decrease significantly over time through optimizing both our technology and supply chain. The last thing that I want to mention is that I think that 2026 is going to be the year that AI starts to dramatically change the way that we work. As we navigate this, our North Star is building the best place for individuals to make a massive impact. So to do this, we're investing in AI-native tooling so individuals at Meta can get more done. We're elevating individual contributors and flattening teams. We're starting to see projects that used to require big teams now be accomplished by a single very talented person. I want to make sure that as many of these very talented people as possible choose Meta as the place that they can make the greatest impact. To deliver personalized products to billions of people around the world. And if we do this, then I think that we're going to get a lot more done, and I think it's going to be a lot more fun. Alright. That's everything I wanted to cover. This is going to be a big year for delivering personal superintelligence, accelerating our business, building infrastructure for the future, and shaping how our company will work going forward. As always, I am grateful for all of the hard work of our teams and to all of you for being on this journey with us. And now here's Susan. Susan Li: Thanks, Mark, and good afternoon, everyone. Let's begin with our segment results. All comparisons are on a year-over-year basis unless otherwise noted. Our community across the family of apps continues to grow. We estimate more than 3.5 billion people used at least one of our family of apps on a daily basis in December. Q4 total family of apps revenue was $58.9 billion, up 25% year over year. Q4 family of apps ad revenue was $58.1 billion, up 24% or 23% on a constant currency basis. In Q4, the total number of ad impressions served across our services increased 18%. Impression growth was healthy across all regions, driven primarily by engagement and user growth and to a lesser degree ad load optimizations. The average price per ad increased 6% year over year, benefiting from increased advertiser demand largely driven by improved ad performance. Family of apps other revenue was $801 million, up 54%, driven by WhatsApp paid revenue growth as well as MetaVerified subscriptions. Within our Reality Labs segment, Q4 revenue was $955 million, down 12% year over year. As we noted on the last call, the year-over-year decline in Reality Labs revenue is due to us lapping the introduction of Quest 3s in 2024 as well as retail partners procuring Quest headsets during the year. Added this year. Particularly AI talent. Legal expense growth was due to both lapping legal accrual reversals in '24 and charges recorded in Q4 2025. Infrastructure expense growth was driven by higher depreciation, cloud spend, and other operating expenses. We ended Q4 with over 78,800 employees, up 6% year over year, driven by hiring in priority areas of infrastructure, Meta Superintelligence were $22.1 billion, driven by investments in data centers, servers, and network infrastructure. Free cash flow was $14.1 billion. We ended the quarter with $81.6 billion in cash and marketable securities and $58.7 billion in debt. Turning now to the business performance. There are two primary factors that drive our revenue performance. Our ability to deliver engaging experiences for our community, our effectiveness at monetizing that engagement over time. Product efforts on both feed and video surfaces. The optimizations we made in Q4 drove a 7% lift in views of organic feed and video posts on Facebook. Resulting in the largest quarterly revenue impact from Facebook product launches in the past two years. We're continuing to increase the freshness and originality of content recommendations as well. On Facebook, our systems are surfacing over 25% more reels published that day than the prior quarter. On Instagram, we grew the prevalence of original content in the US by 10 percentage points in Q4 with 75% of recommendations now coming from original posts. Threads is also seeing strong momentum again, benefiting from recommendation improvements. The optimizations we made in Q4 drove a 20% lift in Threads time spent. Turning to 2026, we see a lot of opportunity to drive additional gains. This includes scaling the complexity and amount of training data we use in our models, while continuing to make our systems more responsive to people's real-time interests. We're also focused on incorporating LLMs to understand content more deeply across our platform, which will enable more personalized recommendations. Another big area of investment this year is developing the generation of our recommendation systems. We have several big bets on this front, including building new model architectures from the ground up that will work on top of LLMs, leveraging the world knowledge and reasoning capabilities of an LLM to better infer people's interests. Beyond improvements to our recommendation systems, we expect to use the models developed by Meta Superintelligence Labs to deliver compelling and differentiated AI products. One area we're already seeing promise is with AI dubbing of videos into local languages. We are now supporting nine different languages with hundreds of millions of people watching AI-translated videos every day. This is already driving incremental time spent on Instagram, and we plan to launch support for more languages over the course of this year. We are also seeing strong traction with our media creation tools. Nearly 10% of the reels people view each day are now created in our Edits app, almost tripling from last quarter. Within Meta AI, the number of daily actives generating media tripled year over year in Q4. This year we expect to advance the capabilities of our underlying media generation models and ship new features to further enhance the product experience. Another area we're focused on for Meta AI is personalization. We're seeing in our early testing that personalized responses drive higher levels of engagement. And we expect to significantly advance the personalization of Meta AI this year. This dovetails with our investments in content understanding, which will enable our systems to develop a deeper understanding of each person's interests and preferences while also identifying the most relevant content across our platform to pull into responses. Turning to the second driver of our revenue performance, increasing monetization efficiency. The first part of this work is optimizing the level of ads within organic engagement. Load increases. We also continue to make progress on bringing ads to our newer services. Within Threads, we're beginning to expand ads to all remaining countries this month, including the UK, European Union, and Brazil. On WhatsApp, we expect to complete the rollout of ads and status throughout the year with the level of ads remaining low in the near term while we follow our standard approach of optimizing ad formats and performance before ramping inventory. Moving to the second part of increasing monetization efficiency, improving performance for the businesses who use our tools. We're seeing very strong results from the ad performance investments we made throughout 2025 with year-over-year conversion growth accelerating through the fourth quarter. We expect the set of investments we're making in 2026 will enable us to drive further gains as we continue to integrate AI across all layers of the marketing and customer engagement funnel. The first area is our ad system, where we're continuing to scale the data complexity and compute we use in our future ranking models to deliver performance gains. As we scale up our foundational ads models like GEM, we are also developing more advanced models to use downstream of them at runtime for ads inference. In Q4, we launched a new runtime model across Instagram feed stories, reels, resulting in a 3% increase in conversion rates in Q4. We continue to progress on our model unification efforts under Lattice as well. After seeing strong success with the consolidation of Facebook feed and video models in 2025, in Q4, we consolidated models for Facebook stories and other surfaces into the overall Facebook model. This, along with a series of back-end improvements, drove a 12% increase in ad quality. And in 2026, we expect to consolidate more models than we had in the prior two years as we continue to evolve our systems towards running a smaller number of highly capable models. Moving to the next area, ads products. Continue investing in ways to help businesses leverage AI to reduce the friction of setting up and optimizing an ad campaign. In Q4, we started testing our Meta AI business assistant with advertisers, which helps with tasks like campaign optimization and account support. In the coming months, we'll make it available to more advertisers so each business has an AI assistant they can chat with that remembers their business's goals and provides personalized recommendations on how to improve performance. Another area we're deploying AI to improve performance is ad creative. The work I'll cover is business messaging, where we're seeing strong momentum across our portfolio of solutions. Click-to-message ads revenue growth accelerated in Q4 with the US up more than 50% year over year, driven by strong adoption of our website-to-message ads, which direct people to a business's website for more information before choosing to launch a chat. Paid messaging within WhatsApp continues to scale as well, crossing a $2 billion annual run rate in Q4. Finally, we're seeing good early traction with our business AIs in Mexico and the Philippines, with over 1 million weekly conversations between people and business AIs now happening on our messaging platforms. This year, we will expand the availability of our business AIs to more markets, while also extending their capabilities so they not only answer questions on topics like product availability but can help people get things done right within WhatsApp. We speak a lot about how AI is improving our products, but I'd like to take a moment to give an update on how it's changing the way we work. Mark mentioned our focus on making Meta a place where individuals can have significant impact. A big focus of this is to enable the adoption and advancement of our AI coding tools where we're seeing strong momentum. Since the beginning of 2025, we've seen a 30% increase in output per engineer, but the majority of that growth coming from the adoption of agentic coding, which saw a big jump in Q4. We're seeing even stronger gains with power users of AI coding tools, whose output has increased 80% year over year. We expect this growth to accelerate through the next half. Next, I would like to discuss our approach to capital allocation. We have significant opportunities to improve our core business in 2026. We plan to continue to prioritize investing in the business to support these opportunities recommendation training workloads. In addition to the inference workloads it currently runs. More broadly, as we invest in infrastructure to meet our business needs, we continue to prioritize maintaining long-term flexibility so we can adapt to how the market develops. We're doing so in several ways, including changing how we develop data center sites, establishing strategic partnerships, contracting cloud capacity, and establishing new ownership structures for some of our large data center sites. We have a strong net cash balance and expect our business will continue to generate sufficient cash to fund our infrastructure investments in 2026, which is reflected in our expectations. Nonetheless, we will continue to look for opportunities to periodically supplement our strong operating cash flow with prudent amounts of cost-efficient external financing, which may lead us to eventually maintain a positive net debt balance. Moving to our financial outlook. We expect our first quarter 2026 total revenue to be in the range of $53.5 billion to $56.5 billion. Our guidance assumes foreign currency is an approximately 4% tailwind to year-over-year total revenue growth based on current exchange rates. Turning to the expense and CapEx outlooks. Expect full-year 2026 total expenses to be in the range of $162 to $169 billion. The majority of expense growth will be driven by infrastructure costs, which includes third-party cloud spend, higher depreciation, and higher infrastructure operating expenses. The second largest contributor to total expense growth is compensation driven by investments in technical talent. This includes 2026 hires to support our priority areas, particularly AI, as well as a full year of expenses from 2025 hires. At a segment level, we expect expense growth to be driven by the family of apps with Reality Labs operating losses remaining similar to 2025 levels. Anticipate 2026 capital expenditures, including principal payments on finance leases, to be in the range of $115 to $135 billion with year-over-year growth driven by increased investment to support our Meta Superintelligence Labs efforts and core business. Despite the meaningful step-up in infrastructure investment, in 2026, we expect to deliver operating income that is above 2025 operating income. Absent any changes to our tax landscape, we expect our full-year 2026 tax rate to be 13% to 16%. Finally, we recently aligned with the European Commission on further changes to our less personalized ads offering, which we will begin rolling out this quarter. However, we continue to monitor legal and regulatory headwinds in the EU and the US that could significantly impact our business and financial results. For example, we continue to see scrutiny on youth-related issues and have a number of trials scheduled for this year in the US, which may ultimately result in a material loss. In closing, 2025 was another strong year for our company. The investments we've made to improve our business are continuing to drive strong growth, and we have an exciting roadmap this year to deliver new experiences and services for our global community. As always, thank you to our teams for their hard work and commitment to our mission. With that, Krista, let's open up the call for questions. Krista: Thank you. We will now open the lines for the question and answer session. Please pick up your handset before asking your question to ensure clarity. If you are streaming today's call, please mute your computer speakers. And your first question comes from the line of Brian Thomas Nowak with Morgan Stanley. Please go ahead. Brian Thomas Nowak: Thanks for taking my questions. I have one for Mark, one for Susan. Mark, one is a long-term question. As you think about ramping all this investment, and the personal intelligence opportunity, the MetaCompute opportunity, can you walk us through a little bit how you think about the largest revenue or ROI long-term opportunities you're trying to unlock with those over the next, call it, three, five, ten years through all the investment? And then, Susan, a little more near term, more like 2026. I think the guide is the fastest growth you've had in almost five years. I know you have a lot of improvements on recommendations and monetization efficiency. But can you just sort of help us a little bit understand two or three of the biggest drivers of this inflection you're seeing on revenue in '26? Mark Elliot Zuckerberg: Yeah. I guess I can start with the first one. Although, I have to say upfront that I think my answers to a lot of your questions on this particular call may be somewhat unfulfilling because we're in this interesting period where we've been rebuilding our AI effort. And we're six months into that. And I'm happy with how it's going. But we are going to be rolling out our initial set of models and products and businesses around that over the coming months. And will have a lot more to share on all of those fronts at that point. So I'm happy to offer kind of a high-level view of some of the stuff, but I apologize in advance that not much of this is going to be particularly detailed, but it will be exciting as we roll it out. I think the theme on the business, I mean, this is and, effectiveness of the core business, both for people who use it organically and there's going to be, you know, several for businesses. So I think that will have a compounding effect. And then many, I think, new business opportunities that come up. I mean, we have been working on Meta AI for a while. I think you're starting to see the way that products like that get monetized across the industry when we get that to a scale and depth that we want. We think that there are going to be opportunities both in terms of subscriptions and advertising and all of the different things that you see on that. And I mean, yeah, I think, you know, there's a number of things on shopping and commerce I'm quite excited about that I alluded to in the comments upfront. And as the models launch and we demonstrate some of the capabilities, both in the first set of models and over the year. I think the models are going to get a lot better too. We'll be able to have different products paired with those that I think will facilitate different businesses for, you know, businesses who use us and our platforms as well as direct consumer businesses. I guess it's probably also worth flagging because I didn't I don't think we either of us mentioned the Manus acquisition in the upfront comments. I mean, that is going to is a good example of you do have a significant number of businesses that already pay a subscription to basically use their tool to accelerate their business results. And integrating that kind of thing into our ads and business manager, so that way we can just offer more integrated solutions for the many, many millions of businesses that use and rely on our platforms is going to be really powerful, both for accelerating their results using the existing products that we have and, I think, adding new lines as well. So, you know, a somewhat high-level answer and I think the picture will become clearer and I think more exciting if we do our jobs well over the course of the year. Susan Li: Brian, on your second question, there's obviously a range of outcomes captured in the Q1 2026 revenue outlook. It overall reflects our expectation for a strong quarter of growth. The range embeds an outlook for accelerated growth, and that's really underpinned by the strong demand that we saw through the end of Q4 and continuing into the start of 2026. Now I will say we also expect foreign currency to be a four-point benefit to year-over-year growth, so that is a three-point larger tailwind than it was in Q4 2025. As we lap the strengthening of the US dollar a year ago. But overall, you know, we see that advertisers are responding to ad performance improvements that we made. They're driving strong conversion growth. We've made a lot of these investments over the course of 2025, including advances to our ads ranking and delivery systems, the more effective redistribution of ad load, new features and ad products, like Advantage Plus, better measurement, and just a lot of great work. That has helped to drive the continued performance of our ads. Krista: Your next question comes from the line of Eric James Sheridan with Goldman Sachs. Please go ahead. Eric James Sheridan: Thanks so much for taking the question. Maybe two, if I could. In prior periods, you've talked about being capacity constrained internally and not having enough compute to sort of achieve the goals you have on a platform and a product standpoint. I want to know if we get any update on currently how you think about your own internal needs for compute against that roadmap? And the second part of the question would be, as we continue to see the ads business sort of scale, especially in terms of dollar growth year on year? Have we yet seen the full first-order effects of scaling the business against applying more compute to it? Or how should investors think about the directional relationship between applying more compute and rate of change in terms of outcomes on the monetization side? Thank you. Susan Li: On your first question, we do continue to be capacity constrained. Our teams have done a great job ramping up our infrastructure through the course of seeing our infrastructure efficiency in several ways, including by optimizing workloads, improving infrastructure utilization, diversifying our chip supply, and just investing in efficiency improvements as part of our core technology development efforts in areas like content and ads ranking. So that was your first question. The second question about how the ads business scales. I think we don't I don't have an extremely precise answer to this question. What I'd say is, you know, one of the ways that we are working to drive ads performance improvements is by improving our larger scale models. Along with our lighter weight ones that we use for ads inference at runtime. You know, we don't typically use our larger model architectures like GEM for inference because their size and complexity would make it too cost prohibitive. So the way that we drive performance from those models is by using them to transfer knowledge to smaller lightweight models used at runtime. But I would say that we think that there is room for our larger models to benefit from having more compute. And I think as we scale up the compute available to those models, and the foundational models in different areas that power the different stages of ads ranking and recommendation, you know, we expect that we will see gains coming from that. Krista: Your next question comes from the line of Mark Elliott Shmulik with Bernstein. Please go ahead. Mark Elliott Shmulik: Yes. Thanks for taking the questions. I think the first question was asking about when do I expect the product impact to be. I mean, we're going to roll out products over the course of the year. I think the important thing is we're not just launching one thing, and we're building a lot of things. I think AI is going to enable a lot of new experiences. I outlined thematically a bunch of these in the upfront comments around personal AI, around LLMs, combining with the recommendation systems. I think that's a somewhat longer-term research project that I think will yield dividends over a long period of time, but we're already definitely seeing optimizations of the recommendation systems as we're including more of the AI research improvements and advances into that. The content is going to improve. There are going to be new formats. There are going to be improvements on the glasses. There are all these different things as well as several things that we think are new that we're going to try that are not just extensions of the current things that we're doing. So yeah, I mean, I would expect that we'll roll these out over the course of the year and that, you know, sometimes it takes a few iterations for things to really hit and reach the kind of product market fit that you need. But I think we have enough time, hopefully, to, you know, we're starting off early enough in the year that I would expect that we'll see some successes by the end of the year on this as well as on the work side. What we were talking about is I think it's very hard for anyone exactly to predict what the shape of, you know, how organizations working is going to feel, but I just think the fact that agents are really starting to work now is quite profound. And I think it is going to allow we're already starting to see the people who adopt them are just being significantly more productive. And there's a big delta between the people who do it and do it well, and the people who don't. And I think that's going to just be a very profound dynamic for I think, across the whole sector and probably the whole economy going forward in terms of the productivity and efficiency with which we can run these companies. Which I think, you know, my hope is that we can use that to just get a lot more done than we were able to before. And I'm most focused on making sure that Meta is a great company to have a big impact. Right? You'll be able to use these kind of agentic tools anywhere, but you will only be able to come and ship things to billions of people if you join a company like Meta nor that many companies like Meta. So I think if we make it so that we can harness these kind of tools, I think that you we should over some period of time start to see a real acceleration in the amount of output that we could have. Now how to predict exactly the time frame for adopting that, somewhat hard. Right? I'm not going to predict a specific quarter or something like that. But the trend seems like unmistakably, like, this is going to happen. And that to me is something that is very exciting and like I said in my comments upfront, also, like, honestly, kind of fun. Right? If you just makes it more fun to be able to build a lot of things. And, you know, that's what we're here to do. Susan Li: Mark, on your second question, I want to make sure and clarify something. So I think in the question you had said that operating income growth in '26 would be higher than '25, and I want to make sure my comments were super clear. In 2026, we expect to deliver operating income above 2025 operating income. So this is comparing absolute dollars, not over year growth. So to give some context on that, you know, we are going into 2026 with strong revenue growth at the start of course, we are just a few weeks in, set against, you know, a healthy macro backdrop. So, obviously, hard to extrapolate the current trends to the full year, and, you know, there are many moving variables in the current landscape. We're really taking advantage of the current business strength to reinvest a lot of the revenue into what we see as very attractive investment opportunities in AI infrastructure and talent. It's hard to assess, you know, what all of those investment opportunities will be over the course of the year as we continue to work through our capacity options. And, of course, it remains a very competitive hiring market but we'd like to invest aggressively where we can. We continue to use our framework that we shared, at this point several years ago of growing consolidated operating profit over time to guide those investments. And based on where our plans are rolling up today, again, in '26, we expect to deliver more operating income than we did in 2025. Krista: Please go ahead. Your next question comes from the line of Douglas Till Anmuth with JPMorgan. Douglas Till Anmuth: Thanks so much for taking the questions. One for Mark and one for Susan. Mark, could you just provide more detail on the progress of the MSL team several months in? And more on your view on the path to a frontier model this year. And then, Susan, I know you expect to grow operating income in '26. Do you also expect to have positive free cash flow? Just how should we think about the current and any future JVs for data center and compute build out? Thanks. Mark Elliot Zuckerberg: I'm not sure I have anything else to add. On the current progress on this. I mean, that's why I said upfront that I think this is somewhat of an unfulfilling time to be answering some of these questions. We're about six months in to building MSL. I'm very pleased with the quality of the team. I think we have the most talent-dense research effort in the industry, and some of the early indicators look positive. But, look, this is going to this is a long-term effort. Right? We're not here to do this to ship like, one model or one product. We're doing a lot of models over time and a lot of different products. And I want to make sure that the work can speak for itself and also that, you know, we all internalize that this is a journey that we're on and the first set of things that we put out, I think, are going to be more about showing the trajectory that we're on. Rather than being a single moment in time. So yeah, I'm quite optimistic, but don't have anything else particularly concrete to share. Susan Li: Doug, on the first part of your question, you know, we are making very significant investments in infrastructure capacity this year to support our AI efforts. And we believe we're in a strong position to support them with the cash generation of our business this year. And, you know, at the same time, we'll continue to explore different paths as we build out our infrastructure capacity that help us provide, you know, that help provide us the long-term flexibility and option value that we look for as we support our future capacity needs against the backdrop of a very wide range of possible capacity demand over the years to come. So we don't have anything additional to announce at this point. You know, we are looking at, you know, all of the different opportunities to stand up, to stand up capacity. Across kind of the different time frames that we need them. Krista: Your next question comes from the line of Justin Post with Bank of America. Please go ahead. Justin Post: Great. A couple, maybe one for Mark and one for Susan. It just seems like you're going to have a tremendous amount of capacity. How do you think about expanding your opportunities beyond ads? Things like subscriptions or licensing cloud models. Just with all the interesting things you're building. I don't expect any product announcements. But can you do things beyond ads? And then for Susan, it's really interesting to see the acceleration even ex FX and advertising. I'm just wondering if you're seeing a general acceleration in e-commerce activity. Where do you think the dollars are coming from? And is the entire Internet ecosystem accelerating? I'm just wondering your thoughts on that. Mark Elliot Zuckerberg: So, yes, we are focused on things beyond ads. I think the numbers make it so that for the next couple of years, ads are going to be by far the important driver of growth in our business. So that's why as we're working on this, we have a balance of new things that we're trying to do while also investing very heavily in making sure that all of the work that we're doing in AI improves both the quality and business performance of the core apps and businesses that we run there. But yeah. I mean, we'll have more to share on that. But, I mean, all these things, even if they scale very quickly, are going to take some time to be meaningful at the scale of what the ads business is and while we're doing that, we're just very focused on also delivering more value to businesses and more quality in the apps that we run ads at. Susan Li: Justin, on your second question, we saw healthy year-over-year growth across all verticals in Q4 with the exception of politics as we lap the US presidential election last year. The online commerce vertical was the largest contributor to year-over-year growth. That was followed by professional services and technology. So in online commerce, year-over-year growth was strong. It was actually relatively consistent with Q3 levels, and that was broad-based across averages, regions, and sizes. In general, we saw that the demand leading up to the holiday shopping period that sustained through Cyber Five and into the end of the year, you know, was very healthy for us. Professional services, in this category, we saw strong broad-based growth with nice contributions from lead generation ads. Due to product improvements we've made, including from Advantage Plus lead campaigns that we fully rolled out at the start of Q4. And, you know, the tech vertical continues to be strong for us too, again, broad-based across advertiser regions and sizes. So in general, I would say it was very healthy, broadly driven growth. Krista: Your next question comes from the line of Ross Sandler with Barclays. Please go ahead. Ross Sandler: Yeah. Mark, you mentioned bringing Horizon World into mobile. We haven't heard much from the Horizon World squad on these calls. So interesting that that's making it in. It seems like the combo of AI and what you guys have built with Horizon might open up the door to a bunch of new potential areas in gaming or new forms of kind of communication. So could you just elaborate on what the plan is there? Thank you. Mark Elliot Zuckerberg: Yeah. So let me talk about the basic theme here. One core idea that I've talked about on some of these calls over the years is that people always want to express themselves and experience the world in whatever the richest format is that they can. So I talked about this upfront today. It's when we started, a lot of this was text. Right? That was kind of the best we could do. Then we all got phones. They had cameras. Like, a lot of this medium, visual, but with photos, we went through a period where the mobile networks were kind of weak and every time you wanted to watch a video, it would buffer. And once that got worked out, now the majority of the content is video. And one of the core ideas that we have had for a while is that that is not the end of the line. Right? Video will continue to be here for a long time. It's going to continue growing. It's not going away. But there are going to be more immersive and interactive formats. Right. And you can engage in it and there are 3D versions of that, and there are 2D versions of that. And Horizon, I think, fits very well with the kind of immersive 3D version of that. But there's definitely a version of the future where, you know, any video that you see, you can, like, tap on and jump into it and, like, engage and, like, and be kind of, like, experience it in a more meaningful way. And I think that the investments that we've done in both a lot of the virtual reality software and Horizon as well as a number of other areas around the company, are actually going to pair well with these AI advances to be able to bring some of those experiences to hundreds of millions and billions of people through mobile. So anyway, that's the thing that I'm quite excited about, but it's just sort of one flavor of a theme that I think is going to be very interesting. I think there are going to be lots of different types of interactive and immersive content that become possible. And I think Horizon is going to be one very interesting example that I'm quite excited to see how this unfolds. Krista: Your next question comes from the line of Ronald Victor Josey with Citi. Please go ahead. Ronald Victor Josey: Great. Thanks for taking the question. I wanted to drill down maybe, Susan, on your comments around ranking recommendation model changes. You know, clearly, lots of tailwinds here given the results from GEMS and Dramadel Lattice, consolidation of models, etcetera. So can you help us understand a little bit more just about the roadmap and where we stand within ranking recommendation model changes? There's a thesis out there that maybe we're, you know, there's a limiting factor or maybe we're waiting on newer models, but any insights there would be very helpful as we think about the next as the future going forward. Thank you. Susan Li: Yeah. Thanks for the question, Ron. You know, we have I'm just sorting out if your question was more specific to ads or if it was more specific to kind of the engagement side, but I'll try to talk a little bit about both. So on the sort of core engagement piece, you know, we launched several ranking improvements in Q4 on Facebook and Instagram that drove incremental engagement. And there isn't really one single launch, you know, that is driving most of the gains. It's, you know, multiple optimizations to our recommendation systems that are helping us make more accurate predictions about what will be interesting to each person. And I talked a little bit about some of these, the specific instantiations on both Facebook and on Instagram. And we see, you know, a lot of headroom to improve recommendations in 2026, which we expect will drive additional engagement growth on both apps. First, we plan on to continue scaling up our models and increase the amount of data we use, including a longer history of content interactions. To further improve the overall quality of recommendations. We're also going to start validating the use of ads signals and organic content recommendations as we continue to work towards having a more shared platform for organic and ads recommendations over time. Second, we're going to continue to make recommendations even more to what a person is engaging with during their session so the recommendations we surface are more relevant to what they're interested in at that moment. And finally, we will work on more deeply incorporating LLMs into our existing recommendation systems given their capability to more deeply understand content. And so this will, I think, in particular, be useful for content that has been more recently posted since there's engagement data to base recommendations off of. On the ad side, again, we have we've talked about a lot of the sort of model work in the ads world across Andromeda and Lattice and GEM. I'll touch maybe specifically on GEM in Q4. We extended GEM to cover Facebook reels. Now it covers all major surfaces across Facebook and Instagram. We also doubled the size of the GPU cluster we used to train it. In 2026, we're expecting to meaningfully scale up GEM training to an even larger cluster, increasing the complexity of the model, expanding the data that we train it on, leveraging new sequence learning architecture that we had begun deploying in Q4. And we're also going to further how we transfer the learnings from our GEM foundation models to the runtime models that we're using. So, you know, there is a lot more headroom, I think, across many, many components of the stack. This is the first time we have found a recommendation model architecture that can scale with similar efficiency as LLMs. And, you know, we're hoping that this will unlock the ability for us to significantly scale up the size of our ranking models while preserving an attractive ROI. Krista: Your next question will come from the line of Kenneth Gawrelski with Wells Fargo. Please go ahead. Kenneth Gawrelski: Thank you very much. Two, if I may, please. First, for Mark, how critical is it for Meta to have a leading general-purpose model or is there a sufficient capability in a model that really excels at specific use cases? Maybe similar to what you see at Anthropic in coding today. If we'd love to if you could opine on that. And then second, maybe I just want to push again maybe on this last question, Susan. On the visibility you have. You talked about the improvements you're making in '26 on the models. The fine-tuning of the core, both in engagement and ad relevance. Could you talk about are you seeing any signs of diminishing returns to those investments? And do you think do you have visibility beyond '26 into further opportunities there? Thank you. Mark Elliot Zuckerberg: I think the question was around how important is it for us to have a general model. You know, the way that I think about Meta is we're a deep technology company. Some people think about us as we build these apps and experiences, but the thing that allows us to build all these things is that we build and control the underlying technology that allows us to integrate and design the experiences that we want and not just be constrained to what others in the ecosystem are building or us to build. So I think that this is a really fundamental thing where my guess is that Frontier AI for many reasons, some competitive, some safety-oriented, are not going to always be available through an API to everyone. So I think, like, it's very important, I think, to be able to have the capability to build the experiences that you want if you want to be one of the major companies in the world that helps to shape the future of these products. So that, I think, is it's going to be, I think, important from a business perspective, and I think it's just important from, like, a creative and mission perspective to be able to actually design and build the experiences that we believe that we should be building for people. But yeah, I mean, I think it's quite important. Otherwise, we wouldn't be so focused on this. We're clearly extremely focused on this. Susan Li: On your second question, you know, interestingly, a year ago on this call, I think I talked about the set of investments we were making in 2025. As part of our 2025 budgeting process. Across our ads performance and organic engagement initiatives. You know, and those investments low the levels in Q1, for a few reasons. First, we would expect that currency tailwinds will dissipate later in the year based on current rates. Second, we'll be lapping stronger periods of growth later in the year that benefited from our 2025 ad performance investments and the strong macro landscape. And finally, we expect there could be some headwinds from our introduction of the revised, less personalized ads offering in the EU that begins rolling out later in Q1. But, again, similar to '25, we feel good about the process by which we identified opportunities with attractive ROIs and funded them as part of our budget to support, you know, key initiatives across our ranking and recommendation systems and to increase the capacity efficiency of our models, all of which are key to sort of driving growth for us. Krista: Your next question comes from the line of Mark Stephen Mahaney with Evercore. Please go ahead. Mark Stephen Mahaney: Okay. Two questions, please. Meta AI, any update on what you're seeing there in terms of engagement and usage and do you think you're just starting to be able to apply improvements to that specific functionality? And then just real quickly on share repurchase Susan, I don't think you bought any stock back in the quarter. It's been a while, maybe a year since you haven't bought anything back. You talked about capital allocation a little bit into the year. It didn't sound like you're going to be buying back stock anytime soon, but just do want to clarify that. Thanks a lot. Susan Li: Yes. I'm happy to take both of those. So Meta AI, the quick update there is, you know, it's now available in over 200 markets. The largest daily active user markets for Meta AI align with our app where aligned with where our app are also very popular, though the apps people engage most with Meta AI differ, in some places, you know, it's primarily WhatsApp driven, for example. India or Indonesia. In the US, Facebook is a stronger driver of engagement. And in general, we see a lot of opportunity to make it easier for people to accomplish the task that they already come to our services for every day. And if we do that well, then the way people use our products will continue to expand. So we're focused on making Meta AI the most personalized assistant while tapping into the vast amount of, you know, information, trends, content from our platform to offer differentiated insights. And think we have a very strong track record in building highly personalized experiences and we're bringing just other uses of cache. Great. Kenneth J. Dorell: Think we will wrap it here. Thank you everyone for joining us today. We look forward to speaking with you again soon. Krista: This concludes today's conference call. Thank you for your participation and you may now disconnect.
Operator: Hello, and thank you for standing by. Welcome to SEI Fourth Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the call over to Bradley Burke, Head of Investor Relations. You may begin. Bradley Burke: Thank you, and welcome, everyone. We appreciate you joining us today for SEI's fourth quarter 2025 earnings call. On the call, we have Ryan Hicke, SEI's Chief Executive Officer, Sean Denham, Chief Financial Officer and Chief Operating Officer, and members of our executive management team, including Michael Lane, Phil McCabe, Mike Peterson, Sneha Shaw, Sanjay Sharma, and Amy Slawinski. Before we begin, I'd like to point out that our earnings press release and the presentation accompanying today's call can be found under the Investor Relations section of our website at seic.com. This call is being webcast live, and a replay will be available on the Events and webcast page of our website. With that, I'll now turn the call over to Ryan. Ryan? Ryan Hicke: Thank you, Brad, and good afternoon, everyone. I'm pleased to report that SEI ended the year with an exceptional quarter, capping off one of the strongest years in our 58-year history. Earnings per share totaled $1.38 for the quarter. After accounting for some of the noisier items that Sean will walk through, Q4 represents our highest ever quarterly earnings performance. What's most exciting is that these results were impressively broad-based, driven by revenue growth and margin expansion across almost all business segments. This was a total SEI effort, not driven by a single business or a one-off event. It's a testament to the power of our integrated approach and the relentless from teams across the globe. We also sprinted to the finish line with our sales events posting a total of $44 million, one of our highest ever quarterly results and capping off our strongest year ever for sales events. Notably, private banking delivered a standout performance, posting $28 million in net sales events. As we discussed on our last earnings call, we were confident in the strength of our private banking pipeline. I'm pleased to report that we're doing exactly what we said we would, translating that pipeline into meaningful results. This quarter's success is the result of disciplined execution against the clear strategy. My expectation is that the sales momentum we generated in Q4 will carry into 2026. And it's not just banking. Asset management is building traction, and IMS continues to benefit from structural demand for outsourcing, especially amongst large alternative managers. We've been signaling for several quarters that we're working with some of the largest global alternative asset managers, including first-time outsourcers. And I expect we'll have some meaningful development to announce by the April earnings call. During the quarter, we also achieved a major milestone with the first close of our Stratos partnership. Stratos brings a proven adviser and client-centric model that's a strong cultural fit with SEI. It also gives us deeper insight into the needs of end clients, strengthening our appreciation of how advisers and intermediaries run their businesses. We're already seeing tangible benefits, including greater awareness of SEI across the RIA and broker-dealer channels, and renewed inbound interest in our capabilities. Our focus now is on integrating our technology and investment management strengths into Stratos' platform and continuing to learn from their team as we scale together. This is a long-term strategic partnership, and we're focused on adding value in ways that support rather than disrupt their impressive organic growth. Stepping back from the numbers, it's important to focus on what's driving SEI's success. These outcomes are rooted in deliberate choices and a deep understanding of where our strengths align with the most attractive opportunities in the industry. Specifically, the growing demand for outsourcing, especially from alternative managers, and the continued convergence of public and private markets, as well as the enduring demand for advice from end clients. These themes are intensifying, and we have leaned into these secular tailwinds with intentional investment over the last several years, and these are translating into repeatable performance. For example, we commercialized our private banking professional services data cloud and SaaS offering, strengthening client retention, and unlocking new growth opportunities. We added new leadership and talent across the organization, driving sharper execution, infusing fresh ideas, and increasing accountability. We laid the foundation for our global capability center, which we expect will help us scale operations more efficiently as we continue to grow. And through the Stratos partnership, we expanded our reach in the adviser channel, positioning SEI to capture new flows and deliver greater client value. As we look to 2026, we intend to double down on what's working. We're accelerating investment management product launches in ETFs, SMAs, models, and select alternative products where we have an edge. These launches build on our early traction, including more than $1 billion of net inflows in two ETFs this year for SEI. We're continuing to evolve the operating model of our IMS business, transitioning from fund-by-fund operations to platform-level services, with shared tooling, workflow automation, and data services. So we can onboard and expand with large investment managers more efficiently. We are leveraging automation and AI to lower unit cost and expand access to our solutions, supporting entry into underserved segments while maintaining client experience at scale. For instance, in the fourth quarter, we made a strategic investment in the band, an AI-native operating system for client onboarding. It's a great example of SEI's commitment to creating a more connected, scalable, and intelligent experience across our platforms. And as always, we'll pursue these priorities with discipline, holding ourselves accountable for maximizing the enterprise value of SEI. You've heard us be ultra-transparent for the last several quarters and at our Investor Day about our strategy and how we're running the company differently. The team is in place. Our priorities are clear. And 2026 is about focus and execution on the road map we've laid out together. Against that backdrop, our job in 2026 is actually simple. Go execute. With that, Sean will take us through the quarterly results in more depth. Sean? Sean Denham: Thank you, Ryan. Starting with slide four. And to reiterate Ryan's commentary, SEI had an outstanding fourth quarter both including and excluding unusual items impacting results, which collectively reduced EPS by approximately $0.08. Those items included $20 million of elevated corporate overhead expense related to severance and M&A fees incurred in the quarter. This was partially offset by a $3 million tax benefit from purchased energy credits and a $3 million revenue accrual true-up benefit captured within IMS. We always have accrual adjustments based on actuals versus estimates, but in the fourth quarter, that adjustment was more pronounced than normal. We also had some items that, while not unusual, did go our way in the quarter. Notably, LSV performance fees that were more than $3 million above the prior year at SEI's share and the $4 million gain on VIEs attributable to the LSV hedge fund seed investment we discussed last quarter. Also, while Stratos formally closed in the fourth quarter, we only own the business for a few weeks, and many of the planned adviser roll-ups were finalized in early January. Given this timing, Stratos' financial impact was not meaningful to fourth quarter results. We will provide a fuller and more substantive update next quarter. On a GAAP basis, EPS increased 16% year over year and 6% sequentially. And excluding unusual items from the current and prior periods, EPS would have been at an all-time record, exceeding the prior record achieved in Q4 of last year. Overall, 2025 represents an excellent year for SEI, with double-digit earnings growth and more than a full percentage point of operating margin expansion. Slide five summarizes performance by business segment. Like Ryan mentioned, strong Q4 performance was broad-based with positive contributions from each business segment, both revenue and operating profit, when measured against both the prior year and prior quarter. Private banking revenue benefited from recent professional services wins, which convert into revenue more quickly than we've historically reported as recurring sales events. Margins also increased due to cost leverage on revenue growth, and the fact that these new professional services wins are overall margin accretive. IMS benefited from a $3 million revenue accrual true-up I mentioned earlier. Even excluding this benefit, revenue and margins increased meaningfully from both the prior year and prior quarter, driven by recent wins coming online and a modest contribution from market appreciation in our traditional business. Our two asset management segments realized sequential growth, which was driven by market appreciation and healthy flows in our advisers business, which offset the impact of client losses in the institutional segment and the continued pressure on mutual fund outflows across the asset management industry. Our integrated cash program is reflected in both the prior year and prior quarter comparison. In the fourth quarter, this program contributed $21 billion to revenue, matching the levels achieved in the prior quarter and prior year. Slide six illustrates our consolidated margin, which as we've discussed with this group before, is something we are increasingly focused on as a management more so than the individual margins achieved in a single business segment, certainly in any given quarter. Consolidated operating margins were weighed down by severance and M&A costs captured in corporate overhead. Excluding these costs, consolidated operating margins significantly increased on both a year-over-year and sequential basis. Turning to sales events on slide seven. Private banking led the quarter with $28 million of net sales. Results were driven by two significant new mandates. In the largest of these, SEI will provide SWP software as a service implementation services, and ongoing enterprise-wide professional services. This represents our second SWP SaaS client, demonstrating the underlying demand for our SaaS delivery model. This engagement began with advisory work on strategy and system design, and the expanded award reflects the client's decision to have SEI manage the full program. This underscores an emerging trend in private banking. We are increasingly partnering with clients in an advisory capacity, which may lead to larger and longer-duration professional services engagements. While we're very pleased with this momentum, I would also remind you that these large engagements can create variability in quarterly sales results, and the fourth quarter represents a strong outcome that should not be extrapolated as a run rate. IMS realized net sales events of $20 million, with just over two-thirds coming from U.S.-based alternative managers and with no single win accounting for a significant percentage of the total. Our adviser segment net add A key highlight was positive flow into SEI managed net events were flattish in Q4. ETFs from off-platform investors. We talked about the strategic opportunity to distribute SEI investment products through third-party models, and the fourth quarter showed encouraging early progress on that initiative, offsetting the continued pressure from mutual fund outflows. Negative institutional segment sales events primarily reflect client losses in the UK. During the quarter, we continued to streamline leadership and reset the cost structure to position this business for improved economics. Turning to our asset performance on slide eight. SEI achieved both AUM and AUA growth both sequentially and year over year. AUA growth of 3% was supported by strong win momentum and to a lesser extent market appreciation. AUM growth of 2% is attributable to market appreciation, which offset modest outflows in the quarter, primarily in the institutional business. With that said, focusing only on AUM growth understates meaningful progress, especially within advisers. Over the past year, we moved further upmarket, increasing the average size of advisers we're winning. And we're beginning to see early success selling the full SEI ecosystem, such as our tax management and overlay capabilities, which drove an additional $2 billion of net new assets on the platform. As a result, advisers delivered their best net inflow year in over a decade, signaling tangible progress behind our upmarket strategy and broader ecosystem approach. LSV assets under management increased 3.5% versus Q3 due to strong underlying fund performance and market appreciation, which offset $3 billion of net outflows in the fourth quarter. Underlying LSV performance remained solid, as evidenced by the $22 million of performance fees in Q4 or $8 million at SEI's share. Turning to capital allocation on slide nine. During the fourth quarter, we repurchased $101 million of shares, bringing full share repurchases to $616 million, representing nearly 6% of total shares outstanding from 2024. We also completed the largest component of the Stratos acquisition entirely with balance sheet cash, ending the year with $400 million of cash and no debt. We remain committed to returning 90% to 100% of free cash flow to shareholders in the form of both dividends and share repurchases. Before concluding, I want to spend a minute talking about our forward expectations. SEI has never provided earnings guidance, and that is a practice we intend to continue. However, there are a handful of items to keep in mind, especially towards the beginning of 2026. Some of these items are normal seasonality. Performance fees from LSV are typically highest in Q4 and lowest in Q1. The first quarter has two fewer days than the fourth quarter. The gains on our LSV investment are unlikely to repeat at Q4 levels. And we implement annual compensation increases effective January 1. Most of this impact is below the line, not operating income. Beyond these lumpier items, we are also advancing the accelerated investments Ryan discussed. We are hiring to support our strong pipeline and major wins across business lines. And we expect depreciation and amortization to step up next quarter due to placing certain large investments into service. We recognize that these investments must be balanced through thoughtful resource reallocation and ongoing cost efficiency efforts. As part of this discipline, we implemented a targeted reduction in force in December, affecting approximately 3% of our global workforce. This action, which drove the severance charges I referenced earlier, reflects our commitment to ensuring that the cost of future-focused investments is supported by a more efficient and scalable operating model. These actions support what we communicated during our Investor Day regarding our goal of long-term double-digit earnings growth and consistent margin expansion. Stepping back, the fourth quarter capped an outstanding year for SEI, one marked by broad-based financial strength, record sales performance, and meaningful strategic progress across the enterprise. As Ryan highlighted, we are excited about the opportunities ahead and believe SEI is exceptionally well-positioned entering 2026. We look forward to building on this progress and continue to deliver long-term value for our clients, employees, and shareholders. With that, operator, please open the line for questions. Operator: Then 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. Our first question comes from the line of Crispin Love with Piper Sandler. Your line is open. Crispin Love: Thanks. Good afternoon, everyone. First, more than two-thirds of your sales events came from Alts in the quarter. Can you just give a little more color there? Was that primarily from new wins or expanding relationships with current clients? And then you also made a comment, Ryan, I think early in your comments about momentum in sales and do you expect positive announcements during April earnings or something like that? Is that related to any specific activity so far in 2026 or just good visibility? Ryan Hicke: So I'll answer the first one or your second one first, Chris. And happy New Year, man. Yes. We like what we see on the sales momentum front, which is consistent with previous quarters, but we thought we would call out because there's been conversations that we talked about last year about some opportunities we have with just some with a couple larger organizations that predominantly have insourced. We make good progress there, so we expect to have some more tangible update on the April earnings call about that. That's specific in the IMS business. I'll kick to Phil on your first question. I believe, Crispin, your question was specifically about two-thirds of the sales events in IMS. Yeah. Just where is that coming from? Is it new wins, is it expanding relationships within your current sales client? Phil McCabe: Sure. Hi, Chris. This is Phil. I'll start by saying for the quarter, it was about $20 million, normally a little bit seasonably low, in Q4. Nothing was necessarily that notable to call out. It was a combination of new business and cross-sales around the globe. What I'd say is the pipeline's really strong. We're looking forward to a great 2026. And as far as the larger wins are concerned, we're gonna cover that a lot more with the Q1 results. And as Ryan said, we have a great track record with these large enterprise clients moving to outsourcing. And some of these deals are household names, and it's gonna take a lot of work to get them in through the pipeline. So and executed and into the run rate. So a lot of that depends on how much invest capital we get. And we're actively working on defining the magnitude and the scope. Crispin Love: Great. Thank you, Phil, on that. And then just also on sales events in the quarter, fairly wide gap between the net recurring and nonrecurring. Can you discuss some of the drivers there? Is that due to the professional services aspect that you mentioned, Sean, or anything else to call out? Ryan Hicke: Absolutely, Chris. But I mean, it's definitely driven by the continued growth of the professional service new strategy that Sanjay has deployed. And I think as we try to call out here, some of these, we believe, have come a more of a repeatable or longer tail element to them, but we continue to characterize them under the one-time professional services kind of banner, if you will. A lot of those are with existing clients and also some new names. But, Sanjay, you wanna expand a little bit on that? Sanjay Sharma: Yeah. Sure. So if you look at the professional services, you could look at in two different buckets. And now services which we are providing before even the client they're engaging with us through SWP for our platforms. So we have started engaging with our prospects and clients way earlier. In advisory capacity. And that is a reflection of our fourth quarter results as well. The second part is that since we are engaging at that early stages, we are able to influence the overall strategy. We are able to define that north star for the clients in terms of, okay, how their overall technology landscape is going to change how their operating model is going to change, and then we are participating in that journey, how that the trial transformation can make happen. And that's the reflection of our of the overall professional services strategy. And that is reflected in our fourth quarter results. Ryan Hicke: And I think what's really important, Crispin, is from a value proposition perspective, we're really seeing a distinct transition in the market. When you look at Phil's market, where we historically maybe have been characterized as ops for the fund, we have really evolved more into a platform for the firm from our clients' perspective. And Sanjay's business maybe traditionally was investment processing and technology for the fiduciary business, they're now being seen more as a technology and platform partner in the C-suite of these organizations. We're really excited about the expansion, not just of our sales capabilities, but the expansion of SEI's footprint in the mind of the buyer and the client in these organizations with these changes. Crispin Love: Great. Thank you. Appreciate that, and I appreciate taking my questions. Operator: Please stand by for our next question. Our next question comes from the line of Alex Bond with KBW. Your line is open. Natalie Nall: Hi. This is Natalie Nall on for Alex Bond, and thank you for taking my question. On the Private Bank segment, the margin there stepped up sequentially on a stronger sales quarter, but thinking about the margin in the context of professional services offering, can the margin for the segment maybe stay in the high teens range on the back stronger professional services? Or is the step up this quarter somewhat episodic we should anticipate a return closer to the mid-teens? Near term with upside potential if professional services sales are strong. Phil McCabe: Yeah. So thanks for your question. I think if you look over the last probably, eight quarters or so, you've seen steady increase in the margins in PV. We would expect margins to be in that area. They've been choppy over the last couple quarters. Sometimes they're a little lower. Sometimes they go a little higher depending on the mix. How much professional service is in there. Professional services margins typically are higher than our platform. The SWP services and our operating revenue as well. So you know, we don't really give too much guidance around future margins, but I think you can expect it to be within spitting distance of that range. Natalie Nall: Okay. Perfect. And maybe if you could also provide any color on the larger two mandate wins called out for the private bank segment. Sanjay Sharma: Yes. Sure. I can talk about that. This is Sanjay here. So as I mentioned that now we are engaging with our prospects and as early as before even they're issuing RFPs sometimes. And in that process, we are helping them to define their overall transformation agenda. And then we are helping them to how to achieve that. So with these two, prospects, we started working almost eighteen plus months ago. And in that process, we engaged with them in advisory capacity, created the overall blueprint for transformation. So this win is a good combination of our core platform, SE and capabilities, and professional services. Ryan Hicke: And I think what's great as well, Alex, to add some color, you know, one is a pretty meaningfully sized regional and community bank in The US, and the other, would consider to be a large kind of private wealth manager. Both were outsourcers on competitive platforms and really see the overall value, not just in SWP, but as Sean and Sanjay mentioned. Around kind of the broader suite of capabilities for the long term for their strategic growth. Sanjay Sharma: And, Alan, if I could add another point. One of these out of these two, one of the large client we signed is our second software as a service client. Great point. And that reflects our focus and attention to that strategy as well. Natalie Nall: Great. Thanks for the additional color. Operator: Thank you. Please standby for our next question. Our next question comes from the line of Jeff Smith with William Blair. Line is open. Jeff Smith: Hi, good afternoon. How much were the underlying expenses down from the workforce reductions? It sounds like those changes were made sort of late in the quarter. So just wondering how we should think about kind of the run rate impact by segment going forward? Sean Denham: Yeah. I will this is Sean. I would say that the, you know, you could think about the decrease, in compensation related to the RIF at a relatively equal amount of compensation increases and raises for the year. So, typically, we'll have you know, you can go back and look kind of at the history but as consistent level of raises starting in January you can kinda think about the reduction in the compensation to, for the most part, match those raises. Jeff Smith: Okay. So kind of flattish. Okay. And then in the IMS, business, it looks like the margin was around 40% if you adjust for that revenue accrual true-up. And I think you've been guiding to that even, you know, 39% or even less. You've been investing in that business. So I was curious is that just from kind of a strong operating leverage in the quarter? And is 40% sort of the right run rate to think about? Going forward there? Phil McCabe: Okay. I'll take it, Jeff. We did have that revenue accrual true-up, which was a little bit over $3 million. We also had a couple other one-times for conversion fees and professional services. And some other one-times, probably about $2 million. So that total was about $5 million or so. Without that $5 million, we'd be right in the 5% quarter over quarter growth rate. In addition, it was relatively strong just from converting new business. Sean, is there anything you would add? Sean Denham: I would add you know, we've alluded to some Q1 opportunities for us that we'll talk about further in April. We are continuing to hire up in anticipation of those. So, you know, if you're thinking about run rate on margins specifically in IMS, we as we said in prior quarters, we are continuing to make investments inside IMS and our other business units and continuing to hire in anticipation specifically in private banking and IMS. So you know, so whether margins continue at that rate, you know, I would expect certain expenses to start hitting a little more in Q1. Jeff Smith: Okay. Great. Thank you. Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Conal Schmidt with Morgan Stanley. Your line is open. Conal Schmidt: Thanks for taking my question. So on Stratos, how should we think about the run rate impact of the acquisition to the Investment Advisors segment once it gets fully consolidated. At the moment, we can only see NCI related to it for a little bit less than a third of a quarter. And then on that topic, when would you expect to have an updated timeline related to, like, the plan resegmentation that we heard about at Investor Day? Sean Denham: Yeah. So thanks for the question. So we're not gonna give guidance on the run rate into 2026 around Stratos. I can give a little color on Q4. So we had about $5 million in revenue related, which would fit in the adviser segment. We had just about under $1 million of operating income, which included nearly $2 million of amortization expense on the acquired intangibles. That's a 100% share since we consolidate there's about $300,000 of NCI for the 42.5% that we don't own. And, again, we'll have more information in Q1 as we have a full quarter under our belt. Conal Schmidt: Got it. And then just sticking with Stratos on the go forward strategy, like, during the integration phase, is it still continuing to pursue acquisitions? Are those paused during the integration? Sean Denham: No. In fact, in early January, we had so part of the strategy was, as you know, acquiring additional entities, providing capital to Stratos to roll them up. So nothing has changed from that plan that we spoke about previously. In early January, Stratos completed the acquiring additional interest in some of the entities. That they had minority interest in. And, there will also be some additional acquisitions that were planned as part of the kind of diligence process and expectation as we acquired them. Conal Schmidt: Got it. Thank you for taking my question. Operator: Our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Your line is open. Patrick O'Shaughnessy: Hi. Good afternoon. Coming back to the topic of those two big nonrecurring sales events and private banks in the quarter, from a modeling perspective, how do we think about the revenue recognition impact of those sales events over the coming quarters? Ryan Hicke: Just real quick, Patrick. The two wins we were talking about are recurring. So the two firms that Sanjay and I were referencing with some color, they're traditional, you know, recurring revenue SWP wins. The rest were professional services. Some of those extensions from those existing firms and some of those existing clients and non-SWP clients. So just wanna make sure you were clear on that. Patrick O'Shaughnessy: Gotcha. Appreciate the clarification. Okay. And your question is how up the professional services backlog? Sanjay Sharma: Yeah. So, you know, $23 million sales event quarter. We think about that hitting in the next two quarters? Is it next eight? Like, is there a general, like, time frame you guys have in mind that that is gonna be realized? Sanjay Sharma: See, that's not the I like about professional services. That's something we can start realizing immediately. And so these complex projects they run over twelve months, eighteen months, that's how these associated professional services are spread as well. And many of them, they will continue after going live as well. Patrick O'Shaughnessy: Helpful. Thank you. And then in institutional investors, you mentioned that the negative sales event in the quarter was tied to some UK client losses. Just curious, like how strategically important is The UK market to that business? Michael Lane: Yeah. The institutional business in The UK is a fraction of the overall OCIO and institutional business. It's important to us, and we're continuing to grow that with the addition of Sanjay taking on the role he has on the international side of the business. So we continue to grow that business, and it's an important part of our business. Some of the movement in that is also where we added additional assets into SEI products within some of those. But the way that we credit those, it doesn't actually show up in revenue. So there's some transaction activity that took place in that, in that setting that end of the business in the institutional space within The UK as well. But, strategically, we do believe that the institutional business is a growth business for us, and we have made quite a few changes, including with Sean's notes on the RIF in December. We made quite a few changes, in terms of the leadership of the institutional business. And we now have put that in the hands of Kevin Matthews who has a long successful track record in that space. And so he, along with the rest of the team, we are working on an improved operating model and strategy, that we are starting today. Patrick O'Shaughnessy: Very helpful. Thank you. Operator: Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to CEO, Ryan Hicke, for closing remarks. Ryan Hicke: Thank you, and thank you, everybody, for the great questions and your continued engagement with SEI. We're really excited about the path ahead. Look forward to speaking with you again next quarter. And quickly, a little sidebar, Paul Carter is in the room. As many people will know, Paul is a long-time executive of SEI who will be retiring in February after thirty glorious years at the company. Paul, Phil McCabe, and I actually all joined the executive committee about ten years ago today at the same time. Paul has been a great friend, a great leader, but an ambassador to our clients and our employees for the brand of what SEI stands for. So you'll hear some clapping in the room here while we close the call and congratulate Paul. Operator: Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.
Operator: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Houlihan Lokey's Third Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note that this conference call is being recorded today, 01/28/2026. I will now turn the call over to the company. Christopher Crain: Thank you, operator, and hello, everyone. By now, everyone should have access to our third quarter fiscal year 2026 earnings release, which can be found on the Houlihan Lokey website at www.hl.com in the Investor Relations section. Before we begin our formal remarks, we need to remind everyone that the discussion today will include forward-looking statements. These forward-looking statements, which are usually identified by the use of words such as will, expect, anticipate, should, or other similar phrases, are not guarantees of future performance. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect, and therefore, you should exercise caution when interpreting and relying on them. We refer all of you to our recent SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition. We encourage investors to review our regulatory filings, including the Form 10-Q for the quarter ended 12/31/2025, when it is filed with the SEC. During today's call, we will discuss non-GAAP financial measures, which we believe can be useful in evaluating the company's financial performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. A reconciliation of these measures to the most directly comparable GAAP measures is available in our earnings release and our investor presentation on the hl.com website. Hosting the call today, we have Scott Adelson, Houlihan Lokey's Chief Executive Officer, and Lindsey Alley, Chief Financial Officer. They will provide some opening remarks, and then we will open the call to questions. With that, I'll turn the call over to Scott. Scott Adelson: Thank you, Christopher. Welcome, everyone, to our third quarter fiscal 2026 earnings call. We ended the quarter with revenues of $717 million and adjusted earnings per share of $1.94. Revenues were up 13%, and adjusted earnings per share were up 18% compared to the same period last year. We are pleased with our results for the quarter as well as our performance year to date. We continue to benefit from improving investor sentiment, partially fueled by stronger company performance and expectations of declining interest rates, both of which should continue to further the M&A recovery. As a result, private equity activity has accelerated with an increasing number of portfolio companies choosing to explore liquidity. Looking at each of our businesses, Corporate Finance produced $474 million of revenue for the quarter, representing a 12% increase over last year's third quarter. Both average fee and new business activity continue to move upward. We enter our last fiscal quarter with positive inflection in the activity levels that increase our optimism for fiscal year 2027. While we have anticipated and reported consistent progress in corporate finance throughout the year, our current visibility into both deal activity and backlog gives us more confidence in fiscal 2027 compared to our assessment a quarter ago. Financial restructuring produced $156 million of revenue for the third quarter, a 19% increase versus the same period last year. We performed better than anticipated during the quarter due to accelerated transaction timelines that moved several of our deals forward into the third quarter. Accordingly, we expect our third quarter restructuring results to be stronger than our fourth quarter, reversing our typical seasonal pattern. Looking ahead to fiscal 2027, we expect restructuring to face some revenue pressures as it adjusts to an improving market environment. That said, recent geopolitical events introduce a new variable that could potentially drive restructuring activity levels higher. Financial and valuation advisory produced $87 million of revenue for the third quarter, a 6% increase versus the third quarter last year. Like corporate finance, this business continues to benefit from an improving M&A climate and continued strong capital markets, with solid new business generation heading into our fourth quarter. We hired six new managing directors in the third quarter, and in early January, we closed the acquisition of the real estate advisory business of Mellon Capital, bolstering our capital solutions capabilities. We gained 11 new colleagues between Munich and London, and our new partners are off to a great start. In addition, last week, we announced an agreement for a controlling interest in O'Dare Partners, a prominent French corporate finance firm. The deal will significantly enhance our footprint in France to around 80 colleagues, making it one of our largest offices in Europe. This transaction is expected to close in our fourth quarter. We are thrilled with these transactions, which reflect our commitment to build our capabilities in the right places at the right time and, most importantly, with the right partners. Our culture grows even stronger when we welcome new colleagues with the same vision and commitment to our client's success. These two deals continue to strengthen our business in Europe, which, as we have said before, has the potential to be the size of our US corporate finance business. Finally, as we look back at 2025, we are honored once again to be the number one most active M&A investment bank in the world and also once again, the number one most active financial restructuring investment bank in the world. We congratulate our colleagues around the globe for the dedication that produced these distinctions. As we look beyond our fiscal fourth quarter, our outlook for the future is positive. The expansion of our workforce across geography, industry, and product will continue. Our relentless focus on independent, high-quality advice to our clients will continue, and our drive to create value for our shareholders will continue. We thank our employees for their commitment and our shareholders for their support. And with that, I will turn it over to Lindsey. Lindsey Alley: Thank you, Scott. Revenues in Corporate Finance were $474 million for the quarter, up 12% compared to the same period last year. It closed 177 transactions this quarter, up from 170 in the same period last year, and our average transaction fee on closed deals increased. Financial Restructuring revenues were $156 million for the quarter, a 19% increase versus the same period last year. We closed 41 transactions this quarter, consistent with the same quarter last year, and our average transaction fee on closed deals increased. We benefited from the closing of several transactions that were expected to close in our fiscal fourth quarter, resulting in our second strongest third quarter ever. As a result, we expect that our fourth quarter will look more like the first two quarters of our fiscal year and won't have the same typical seasonality associated with that quarter. For Financial and Valuation Advisory, revenues were $87 million for the quarter, a 6% increase from the same period last year. We had 1,103 fee events during the quarter compared to 1,015 in the same period last year, a 10% increase. Turning to expenses, our adjusted compensation expenses were $441 million for the quarter, versus $390 million for the same period last year. Our only adjustment was $18 million for deferred retention payments related to certain acquisitions. Our adjusted compensation expense ratio for the third quarter in both fiscal 2026 and 2025 was 61.5%. We expect to maintain our long-term target of 61.5% for the adjusted compensation expense ratio for the balance of the year. Our adjusted non-compensation expense ratio for the third quarter was 13.1%, consistent with the same period last year. For the quarter, we adjusted out of non-compensation expenses $2.2 million in integration and acquisition-related costs, $1.3 million in non-cash acquisition-related amortization, and $600,000 pertaining to professional fees associated with streamlining our global organizational structure, also referred to as Project Solo. Looking at year-to-date performance, our adjusted non-compensation expenses increased 11% versus the same year-to-date period last year. We expect the fiscal fourth quarter year-over-year growth in adjusted non-compensation expenses to be consistent with what we have experienced year-to-date. Our adjusted effective tax rate for the third quarter was 30.6% compared to 33.3% for the same quarter last year. The decrease was primarily a result of decreased state taxes and decreased non-deductible expenses. For the quarter, we adjusted out of our effective tax rate the effects of non-deductible acquisition-related costs. We expect the French transaction to close in the next couple of weeks. This transaction is structured as a combination between our French operations and Audem and will result in Houlihan Lokey owning 51% of the combined business and the previous shareholders of Adera owning 49%. As with many business combinations, we have created mechanisms that allow us to increase our ownership over time and under certain circumstances. Turning to the balance sheet, we ended the quarter with approximately $1.2 billion of cash and investments. Also in our third quarter, we repurchased approximately 418,000 shares as part of our share repurchase. We will continue to evaluate balance sheet flexibility for acquisitions versus excess cash for share repurchases. With that, operator, we can open the line for questions. Operator: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, At this time, we will pause for just a moment to assemble our roster. And the first question today will come from Brennan Hawken with BMO Capital Markets. Please go ahead. Brennan Hawken: Hey. Good afternoon, Scott. Good afternoon, Lindsey. Hope you guys are doing well. Would love to drill down on the outlook for restructuring. So loud and clear on the seasonality not gonna see the more typical strength in the fiscal fourth quarter. But more importantly, you know, the outlook, you guys have been early on in saying the activity was slowing. As the capital markets activity and Corp Fin has improved. Sounds like that remains the case. Can you maybe help us bridge the gap in between increasing concerns around the private credit markets, you know, the press attention, on some of those issues recently, and then the outlook for the restructuring activity as well? Scott Adelson: Yeah. Happy to do that. If you look at structurally what we've been saying is that the market is getting better for M&A. Capital is very plentiful. Interest rates are likely declining. And you put those all together, you're likely to see declining activity levels in restructuring. Just structural. Don't disagree with you that there are always, all over the world, pockets of opportunities, whether that is in industries, whether that's in geographies, whether that is due to geopolitical events, that creates opportunity for restructuring. The visibility of that in what we're talking about it's not clear enough that it is showing up in consistent new opportunities. I don't disagree with you at all. That there is a very good chance that a number of those elements that we just discussed, some of them will occur, whether it be a sector or geography. That will cause new opportunities to arise. Brennan Hawken: Okay. Got it. Thanks for that. And then, corporate finance. So the revenues picked up a bit quarter over quarter, but not as much as we typically see in the December quarter. So curious about the expectations for the end of the fiscal year on the corporate finance side. I believe your commentary on not the lack of the seasonality was focused on restructuring. So I just wanna make sure I heard that right. And then it also sounds like the outlook is improving for next fiscal year. Know, could you maybe help us understand, what if there's, a comparable period that we should think about when we're considering the magnitude of potential growth that seems to be shaping up here as we think about next fiscal year? Scott Adelson: So, yes, you heard that correctly, though, that was in relation to restructuring, not the corporate finance. Corporate finance is continuing to get stronger and stronger as I said in my prepared statements, the M&A activity is absolutely increasing. And even more so on the private equity side than we have seen in recent history, and we expect that to continue and have good visibility that that is gonna continue for a while. And, yeah, I mean, respect to Q4, corporate finance has seen quite solid growth year to date. That's probably not a bad proxy for Q4, and I'd say that as Scott said, you know, the activity levels, which are revenues six months from now, nine months from now, continue to give us comfort in our fiscal 2027 estimates and how everyone's thinking about the business. Brennan Hawken: Great. Thanks so much for taking my questions. Scott Adelson: Always our pleasure. Operator: The next question will come from James Yaro with Goldman Sachs. Please go ahead. James Yaro: Thanks, and thanks for taking the questions and good afternoon. Just quickly, Hey, guys. Just quickly on corporate finance, I just want to dig in a little bit on the US versus non-US outlook. And I obviously, I understand that you have a little bit more idiosyncratic growth in Europe given, you know, for example, the two acquisitions you just announced, and, you know, scaling from a lower base there. But maybe you could just talk a little bit about compare and contrast the growth potential of those two regions. Scott Adelson: Yeah. Happiness. Right? Obviously, the US continues to be both for us and for the market overall, the largest region. And that therefore, is still the most important market. Having said that, in our European business, is growing incredibly well. We really believe we are offering a truly differentiated product in Europe, and the market is rewarding us for that. And we continue to feel very good about the traction that we're getting in Europe. James Yaro: Great. And so maybe tying that in with the acquisitions, you know, I'd just love to get your sense if you take a step back on just you know, the overall strategy for Europe and how these two acquisitions fit into completing the mosaic for your European business. Scott Adelson: Yeah. Happy to do that. I mean, I think that, obviously, we have had a presence in France for a period of time. But it was a very relatively small business relative to a number of other countries in Europe. And at the same time, it's one of the most important markets in Europe. It's not lost on us that it is the headquarters of a couple of our sizable competitors. And we had to wait until it was we found the right partners to really aggressively grow that business, and we feel incredibly good with the decision we've made. And I'd say that the acquisition of France obviously brings or the combination of France brings revenues along with it, but it also lifts kind of all the boats in Europe. I mean, it being underweighted in that country had an impact across The UK and Europe for us. And I'd say that now that we have a solution, everyone is gonna benefit from it in the Houlihan Lokey umbrella in EMEA. I agree with that completely. And then on the other side, within capital solutions is we have said before, we're probably underweighted on the real estate side. And this is an effort to really continue to grow that underweighting on the real estate side. As always standard way reduce the underweighting would be the better way to say that. No double negatives. James Yaro: Okay. That's perfect. As always, super clear and helpful. Thank you so much. Scott Adelson: Great. Thanks, James. Operator: Next question will come from Devin Ryan with Citizens. Please go ahead. Devin Ryan: Great. Hi, Scott. Hi, Lindsey. How are you? Scott Adelson: Hey, Devin. Thanks, Evan. Wanna ask a question just on sponsor engagement, and nice to hear, you know, some of the improvement you're seeing. And this would be good to get a little bit of better sense of kind of the rate of change that you're seeing with sponsors. And obviously, a lot of pressure, I think, on sponsors to return capital. Obviously, still record dry powder to deploy. So are you seeing kind of a steady build there? Or is it something maybe better than that given kind of those pressures? And is it broad-based across verticals? Or is it targeted to certain verticals? Just love a little more context on kind of the trajectory that you're seeing there. Scott Adelson: Yeah. Happy to do that. I mean, what we've been saying for a while is it's been getting better quarter by quarter, and that has been very consistent with some bumps along the road usually due to external factors, geopolitical mostly, that have caused that. And, really, for the last couple of quarters, we've really been saying it's been picking up quite a bit, and it's really been after the beginning of the year picked continuing to pick up even more. And so it's at an accelerating rate is what it feels like for new opportunities. And we've said this to individuals on, you know, either investor calls or analyst calls. But you know, there's a couple of major inflection points during the calendar year in the middle market. One of them is after Labor Day, and one of them is after New Year's. And both of those periods of time were quite solid and strong for us and probably exceeded expectations. And I think that's a little bit why you're hearing the commentary that we're saying when we talk about activity levels increasing. And in terms of your question of sectors, it is really broad and across sectors. And I would say that if anything, it's the sectors that under from an increased standpoint, the ones that had underperformed have come back even stronger, but it is very much across the board. Devin Ryan: Got it. Okay. I appreciate that. And then just wanna come back to, kind of a follow-up of some of the discussion you were just having in those questions. As we kind of think about some of the investments the firm has made over the past five, six years. I mean, you've obviously built out quite a bit outside The U.S, a lot of kind of sector-specific M&A. Beefing up capital solutions. So kind of the capabilities are broader, they're deeper. When you think about kind of the white space at the firm today, where do you still see the biggest opportunities? Like, if I look at a heat map from external data, which I know is not perfect, it looks like maybe there's a little bit of room in health care and energy just example. But would love to hear from you kinda where you feel like there's still you know, nice white space and where you could just maybe add a little bit of resource and get, you know, some nice network effects on that. Scott Adelson: Yeah. I mean, I am a very strong believer that it is everywhere. We have so much opportunity. I know that you want me to be more specific than that. But it is in every sector, we have really, really meaningful room to grow. And we talk about it. We have around 200 subsectors today. And that is not built out all over the world even remotely. And it is also not 200 is nowhere near saturation of subsectors. So that's just on the industry side. And then, obviously, on the product side, you're seeing us continue to build out with the example of what we've done in Germany and The UK and that capital solutions will continue to have build out in capability as well around the world. And then, obviously, we have our other product lines as well, and we have geographies. I mean, there is a tremendous amount of white space out there. Our map, our page is quite white. Devin Ryan: Okay. Well, good to hear. Thanks so much, guys. Appreciate it. Scott Adelson: Thanks. Operator: The next question will come from Brendan O'Brien with Wolfe Research. Please go ahead. Brendan O'Brien: Good afternoon, and thanks for taking my questions. Just want to start. I just want to follow-up on the restructuring outlook. I know there's some uncertainty still, but just given the longer lead time for the business, you should have a pretty good baseline for how revenues will track at least early next year. So I was just hoping you can put some guardrails around how we should be thinking about the magnitude of decline in this business potentially, just given it does tend to see higher highs, higher floors as you continue to progress through time. Scott Adelson: Yeah. I mean, I'd say we do have decent visibility looking forward in restructuring. We don't generally share that information, but I think that, you know, it's kind of like anything else. With respect to cyclicality. They're going to be ebbs and flows. We didn't know sitting here before the last peak what it was gonna look like, and we don't know what the next couple years is gonna look but we're in a net period. Having said that, I'd say that we still believe that there are we that is a true global business for us. It is highly diversified. And at any point, whether it's a geography, an industry, or a specific product, could trigger restructuring growth. And so quite comfortable with our position in restructuring over the next ten to twenty years. We're just in a net period right now. And what the sort of ebb looks like, I think, is anyone's guess. But I don't we're certainly not sitting here concerned about the magnitude of the decline. We don't think about it that way. Brendan O'Brien: Helpful color. Thank you for taking the question. And I guess for my follow-up, just want to touch on capital return. I understand your preference for, you know, maintaining enough cash to do acquisitions as you executed this quarter. But just given revenue should only accelerate from here and you already have a fair strong cash position at least for you paying out these deals. I just wanna get an update to how you're thinking about capital management at this juncture, and also if we can get an update on what your acquisition pipeline looks like at the moment. Lindsey Alley: So I'll let Scott handle the acquisition pipeline. I think with respect to capital deployment, it really hasn't changed. We have as I think everyone knows, for the last couple of quarters, have started to repurchase some shares. I think we will continue so long as the economy continues to perform well we will continue to take a look at whether or not it makes sense to repurchase shares going forward. In relatively smaller increments. And the reason we do it that way is because our pipeline, which Scott will talk about, is quite strong, and we wanna be to remain flexible in terms of being able to do acquisitions for cash. And so you know, said before, our strong preference is to put money to work, excess cash to work through strategic acquisitions that make sense for us. Followed by dividends and share repurchases. And that really hasn't changed for us. And Scott will talk a little bit about the pipeline. Scott Adelson: Happy to do that. As I said before, we've been very fortunate. Our pipeline is very strong. I think these two deals are an indication, but they're backed up by a number of other opportunities that are coming through the pipe, and I wish probably even more than all of you do that I could time them all perfectly to roll quarter by quarter. I don't get the right to do that. But they are lined up and fair to say we have more than we have planned to do over time. Brendan O'Brien: Great. Thank you for taking my questions. Scott Adelson: Our pleasure. Operator: The next question will come from Ryan Kenny with Morgan Stanley. Please go ahead. Ryan Kenny: Hi, thanks for taking my questions. Wondering if you could give some more color on the non-comp expenses. It looks like IT and communication spend and professional fees have been a bit elevated. So anything that we should think about in terms of puts and takes in non-comp in the quarter and as we look forward into fiscal 2027? Lindsey Alley: I'd say no puts and takes specifically in the quarter to mention. Just a little bit higher than certainly the first couple of quarters in terms of growth. I'd say for Q4, you know, the year-to-date growth for non-comp is probably a decent to what the Q4 is gonna look like. Probably a little bit higher than expected in terms of rent, particularly in Europe and particularly around the acquisitions. You're seeing a little bit of that. But other than that, not much to mention. And I say year-to-date, as a proxy for Q4 growth is probably how I think about it. Ryan Kenny: Got it. Thanks. Then And then twenty fiscal twenty seven, you know, same as I've mentioned before, kinda high single digits. Which is kinda how we're how we're thinking about non-comp. Ryan Kenny: Alright. Great. And then, you announced the DataBank product in November. Can you give more color on what the strategy is with DataBank? And is it something that you're charging for? And how should we expect that, in general, your data strategy evolve over time? Scott Adelson: Yeah. I mean, I would love to spend the next hour talking about that. Lindsey would remind me. That this is a small part of our business. But it is a it certainly is an important indicator of what's to come. And I think the fact that we have a tremendous amount of what we perceive to be very valuable data and the marketplace seems to be indicating that as well. It's super early days for us right now that where some of that is available to some existing clients. There is a technological front end to making it available and things like that for other people that is in the works. But, as I have stated many times before, the ability to monetize some of our proprietary data is something that is certainly top of mind to us. Ryan Kenny: Thank you. Operator: The next question will come from Alexander Bond with KBW. Please go ahead. Alexander Bond: Just wanted to drill down on corporate finance business a little bit more. So it sounds like the outlook for fiscal 2027 remains upbeat, which is great. But just curious if you've seen activity levels impacted at all really by recent geopolitical happenings or I guess a heightened sense of geopolitical uncertainty over the last couple weeks or clients really been willing to look through these issues and are now maybe just more accustomed to higher uncertainty levels. So any color there would be great. Scott Adelson: Yeah. Happy to do that. And I think that ties well to what Lindsey was talking about after the kind of inflection points that most recently again, at the beginning of the year. It really is we recognize there noise, right, that around the world, and the people's willingness and ability to just look through that noise and just get on with business is stronger than it has ever been. Alexander Bond: Got it. That makes sense. And maybe just moving over to capital solutions. You know, you've touched on continuing to build out a few of the teams within the group as an area of focus for you recently. It'd be great if you can just go into maybe a little bit more detail there and maybe comment on what inning you think might be in terms of the build-out for the Capital Solutions group more broadly. Scott Adelson: We are still in very early innings on capital solutions. I mean, pick your innings. We're using a baseball analogy, but third inning, fourth inning, I mean, very early. And that business is growing really nice on call with the one ahead of it before this. And the demand is really in terms of where it's coming from, it is literally all over the map. From the traditional business to the secondaries to directs, even primary. So it is on all fronts at this point. Alexander Bond: Got it. Great. Thank you both. Operator: The next question will come from Nathan Stein with Deutsche Bank. Please go ahead. Nathan Stein: Hey, everyone. Good evening. One of your larger peers suggested on their earnings call a couple weeks ago or in the third inning of the broader capital market cycle. So this comment constitutes more than just advisory revenues, but I think that caught some folks by surprise. Just because it still seems rather early. Wanted to address wanted to ask you guys your thoughts on that and what inning UCS being in for the broader call it? Advisory cycle. Scott Adelson: Well, when you say advisory cycle, it means different things to different people. Right? Because we are bull bear Business makes it mix makes that it when you just say advisory, I'm not I think M&A. Yeah. If you're talking about M&A. Yeah. Sorry. Nathan Stein: Mean talking about M&A M&A specific M&A specifically. Within the corporate finance. Got it. Scott Adelson: I do agree with that. I mean, we I agree it's very early innings. I mean, third inning is as good a number. I mean, I don't think we're in the first. We're definitely not in the fifth or sixth. So, yeah, third, fourth, something like that. Third, actually, third feels even better now that I think about it. Third, feels early. There is an enormous amount of pent-up demand. I mean, it's not Yeah. And for Okay. All of that yeah, that everybody has talked about and read about and everybody's backlogs that have been on hold, that still exists. It has been picking up. But here is still a tremendous amount of pent-up demand. Out there. And following up on that, if when I was looking at 2025 calendar year, industry M&A data It shows, call it, the middle market and below size deals. Stable, down slightly, up slightly, you know, versus the year before. So, really, just could consistent with the broader messaging of almost everyone who's just very excited about the upper middle market space and below. Katie, I just wanted to I guess, gauge how you guys are thinking about like, anything you guys can do to kinda capitalize on what could be like, a really strong next couple years in terms of in terms of you know, just being well, anyway, I think I'm just asking, like, do you guys agree with that statement? And how prepared do you feel for the cyclical rebound? Scott Adelson: Yeah. I do agree with this statement, and I do think that, many of the things that we have done positioning ourselves to be continue to be even better to take advantage of it, and that is why we continue to take share that marketplace and have for quite a while and intend to for quite a while to the best of our ability. And that is through this continuing subsector just knowing more about sectors, and doing more deals in sectors giving us more knowledge than other people, but the growth in our capital solutions group being able to provide a broader array of services and helping people evaluate how they wanna seek liquidity. I mean, the global reach continues to expand. So that we are able to that much better be able to service our clients. I mean, the list goes on and on. But I'm sorry to sound just like a pitch on it. But the reality of the matter is that those are all things we are constantly working on. So, yes, we do. We're well-positioned for it. Lindsey Alley: And I would add that, you know, it's not lost on us that large cap M&A has come out faster and more aggressively than middle market M&A. And, frankly, we don't for us, we don't think about it that way. We are going to grow with the markets but the sizzle is market share. We believe we continue to take market share in the middle market every single year regardless of whether the market is up or the market is down. We don't think we think it's increasingly harder to compete with our business model and the size of our platform. And that's the story. It's not what the M&A markets are doing and whether they're up or whether they're down. And it doesn't matter what the large cap of space doing and whether it's up or whether it's down. I mean, I think we are quite focused on the area that we've been focused on for decades. And come rain or storm, we are going to continue to take market share, and that story is not gonna end. And just a reminder, that large cap is 1% of the volume. Right? I mean, it's ninety-eight to 99% of all the M&A volume around the world is with that. Nathan Stein: Hello? This Nathan, your line may be muted. Nathan Stein: No. That's all bad. The are my two questions. I appreciate it. Thanks, guys. Scott Adelson: Thanks, guys. Thanks. Appreciate it. Operator: This will conclude our question and answer session. I would like to turn the conference back over to Scott Adelson for any closing remarks. Scott Adelson: I want to thank you all for participating in our third quarter fiscal 2026 earnings call. We look forward to updating everyone on our progress when we discuss our fourth quarter and full year results for the fiscal 2026 this spring. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Operator: Good day, and welcome to the Lam Research Corporation December 2025 Earnings Conference Call. All participants will be in listen-only mode. To withdraw your question, please press star then 2. Please note that this event is being recorded. I would now like to turn the conference over to Ram Ganesh, Vice President of Investor Relations. Please go ahead. Ram Ganesh: Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment and review our financial results for the December 2025 quarter and our outlook for the March 2026 quarter. The press release detailing our financial results was distributed a little after 1 PM Pacific time. The release can also be found on the Investor Relations section of the company's website along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties, reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3 PM Pacific time. A replay of this call will be made available later this afternoon on our website. And with that, I'll hand the call over to Tim. Tim Archer: Thank you, Ram, and good afternoon, everyone. We ended calendar year 2025 on a strong note, delivering December quarter revenues ahead of the midpoint of our guidance. Gross margins, operating margins, and EPS all exceeded the high end of the range. Our performance demonstrates continued strong execution in an accelerating semiconductor demand environment. At our Investor Day event last year, we outlined our tremendous opportunity to expand our market and gain share at every successive technology node. Vertical scaling of device and packaging architectures is driving higher deposition and etch intensity and moving the market to our strengths. The vision we shared was to more than double Lam's revenue and profit over the next five years. Today, we are well on our way. With the industry ramping capacity and adopting new technologies to meet the demands of the AI transformation, Lam's deposition and etch capabilities are proving to be key enablers in the transition to gate-all-around transistors, backside power deposition, high-performance materials, and 3D advanced packaging. We prepared for this moment by launching an array of new products and advanced services targeted at broadening our exposure across DRAM, leading-edge foundry logic, and NAND. We've also invested in expanding our manufacturing and R&D footprint to increase operational velocity in response to strong customer demand. In 2025, we achieved record revenues of more than $20 billion and expanded our served available market or SAM share of WFE into the mid-thirties percent range. This marks solid progress for our multiyear goal of being in the high thirties. Our ship share of WFE grew by well over one percentage point, year on year. And our CSBG business hit key milestones with the size of our installed base topping 100,000 chambers and revenue growing faster than the increase in installed base units. We are proud of these accomplishments, but there's even more to come. The AI transformation is driving industry spending higher. In 2025, WFE came in close to $110 billion. Our initial 2026 view is for WFE to be in the $135 billion range. With the growth in spending remaining constrained by a shortage of available clean room space. Chipmakers have been public about their efforts to alleviate constraints, but they've also commented on sold-out conditions persisting, indicating the magnitude of the challenge. We expect WFE this year to be weighted to the second half with robust growth in investments across all three device segments, led by DRAM and leading-edge foundry logic. All indications are we are still in the early stages of the AI build-out. End markets are signaling a strong appetite for greater compute and storage capabilities at both the device and package level. In foundry logic, customers are accelerating migration to nodes employing gate-all-around. If you recall, we previously said that the transition to gate-all-around equates to roughly $1 billion in incremental Lam Sam for every 100,000 wafer starts per month of capacity. Given the 3D nature of gate-all-around structures, we are well-positioned with our deposition and etch portfolio to gain share within this segment. In addition, customers are integrating more functionality with advanced packaging. We previously estimated advanced packaging would make up a mid-single-digit percentage of overall foundry logic equipment spend. As additional devices, including those for mobile applications, adopt more complex packaging schemes, we see this number moving higher. In high bandwidth memory or HBM, advanced packaging is critical for the transition to HVM four and four e. And stacking of up to 16 layers. Lam is in an excellent position given our market leadership in electroplating, and TSC etch. We expect our overall advanced packaging business to grow more than 40% in 2026, outperforming our view of WFE growth in this space. Finally, in NAND, demand is growing faster than previously expected. As new use cases for high-capacity SSDs emerge. Non-volatile context memory layers enable large-scale AI inference have the potential to add incremental growth in NAND bit demand. For every two to three million accelerators sold, we estimate an incremental one-point increase in overall NAND bit demand growth. WRAM has the industry's largest installed base of NAND systems and is well-positioned to outperform as the NAND market inflects higher. Against this backdrop of strong semiconductor demand, accelerated technology transitions, we are seeing increased momentum for our newly launched products. Aqara, our latest generation conductor etch system, has doubled its installed base over the past year. With production tool of record wins for EUV, and high aspect ratio etch applications, in advanced DRAM and foundry logic. Critical dimensions in foundry logic are shrinking by roughly 10 to 20% node to node. Similarly, in DRAM, aspect ratios are increasing with each node, and process complexity is set to grow even more with future moves to four f squared and 3D DRAM. Consequently, multiple customers have chosen Aqara for its unmatched ability to etch the smallest dimensions and very high aspect ratios while maintaining profile control and reducing variability across the wafer. Is achieved through new innovations including our direct drive solid state power delivery hardware, and tempo plasma pulsing. In next-generation gate-all-around devices, we expect the number of applications using Acara to grow by roughly two times. Including wins for critical front-end silicon etch applications. In DRAM, we already have wins with the car for the one c node that are set to ramp this year. And expect growing momentum as the applications using a car expand nearly three times in a subsequent one d node. As we look out over a multiyear period, the unprecedented AI ramp demands greater speed and agility across the ecosystem. Our customers are moving faster at every stage of process development and manufacturing so we have increased the velocity of our execution across the board. We are strengthening our supply base automating logistics, ramping high volume manufacturing. Over the last four years, we have nearly doubled our overall manufacturing capacity. And in 2025, we launched state-of-the-art automated warehouses that enable greater production efficiency. These investments have proved critical in a fast-ramping market environment. And we're set to expand our footprint further to meet the demand we see over the next several years. Our product sales and support teams are also executing to the accelerated pace of customer demand. Over the course of 2025, Lam was recognized with nearly 40 supplier awards, highlighting in many cases our fast tool installations, and outstanding production ramp support. Looking forward, we see Lam's equipment intelligence solutions and Dextro cobots leading the way to the autonomous fab. With predictive and automated maintenance and precise global fleet matching. Dextro continued to gain momentum in 2025, expanding to cover six different LAM tool types. And finally, in an environment where inflections are more complex, and innovation timelines are compressing, we have transformed our R&D capabilities to help us stay ahead. We are utilizing Velocity Labs, located close to our customers to screen new materials, new hardware, and new process regime. At a rate not previously possible. We are also leveraging Lam's digital twin capabilities to shorten product development cycles and converge on next-generation tool and process solutions with greater efficiency. Wrapping up, the growth we envisioned for Lam at our investor event one year ago is materializing faster than we anticipated. We are making progress against our SAM expansion share gains, and profitability objectives. And with the demand environment continuing to accelerate, we are elevating our focus on scaling the company delivering for customers, and outperforming in the AI era. Thank you. And here's Doug. Doug Bettinger: Great. Thank you, Tim. Good afternoon, everyone. Thank you for joining our call today. During what I know is a super busy earnings season. Before I get into the details, I'd like to say that we were quite pleased with the strong execution across the company in calendar year 2025. Which translated into record top and bottom line financial performance. In calendar year 2025, revenue was a record coming in at $20.6 billion which is up 27% year over year. CSBG revenue also reached a record of $7.2 billion. Gross margin was 49.9%, the highest result as a combined company for the full year since the Novelis merger back in 2012. Gross profit increased 31% year over year to $10.3 billion. We also had record operating margin 34.1% and operating profit dollars of $7 billion which was up 41% year over year. Diluted earnings per share were $4.89 which was up 49% year over year. Looking at it, we delivered leverage from the top to the bottom of the P&L, in 2025. Let me turn to the December results. Our revenue was above the midpoint of guidance. While gross margin, operating margin and earnings per share all exceeded the high end of our guided range. Revenue for the December was a record coming in at $5.34 billion. This marked our tenth consecutive quarter of revenue growth. The deferred revenue balance at quarter end came in at $2.25 billion down sequentially due to an approximately $500 million reduction in those customer advanced down payments. From a market segment perspective, Foundry accounted for 59% of our systems revenue in the December slightly down sequentially but up from 35% in the December 2024 period, This underscores the success of our strategic focus and execution in foundry. Foundry strength came from investments at the leading edge, addition to mature node spending that we saw in China. Memory was 34% of systems revenue, in line with prior quarter. Within memory, we generated record DRAM revenue, for 23% of systems revenue which was up from 16% in the September. Investments in high bandwidth memory continued to remain strong, driven by movement to HBM3e and four. We also saw traditional node migrations to the 1B and 1C nodes enabling the transition to DDR five. Nonvolatile memory contributed 11% of our systems revenue, down from 18% in September. This trajectory was in line with our expectations customer plans coming into the year. Despite the quarterly decline, NAND revenues grew strongly for Lam what was a first half weighted calendar year 2025. As we enter 2026, we see solid end market demand as customers prepare for the next stage of AI driven growth in NAND. And finally, the 7% of systems revenue in the December. Slightly up sequentially. Let's turn to the regional breakdown of our total revenue China came in at 35%, which was a decrease from the prior quarter level of 43% but slightly higher than our original expectations. This was due to updates in the affiliate rule and the resulting timing of shipments from that. The next largest geographic concentrations were Taiwan coming in at 20%, up sequentially from 19%, and Korea at 20%, up sequentially from 15%. Customer support business group generated approximately $2 billion in revenue for the December. Up 12% sequentially on an increase in Reliant systems. We were 14% higher than the same period in 2024 primarily on growth in spares. CSPG obviously remains a key part of our growth strategy with our expanding installed base, and innovation in advanced services. NAND spending enabled record upgrade revenue in 2025, up more than 90% year over year. In the thirteen years since we brought Lambda Novella together, I'd like to remind everybody that CSBG has grown every year except for one. Let's look at profitability. Gross margin in the December 49.7%. Which exceeded the high end of our guided range on better than expected customer mix. Sequentially, gross margin was about one percentage point lower reflecting a customer mix that was less favorable than what we saw in September. Operating expenses for December came in at $827 million which was roughly flat sequentially. R&D accounted for 68% of the total operating expenses. We continue investing to maintain our leadership with a differentiated product portfolio for our customers with innovations like Bantex, Acara, Halo, and Dextro. The December operating margin was 34.3%, exceeding the high end of our guidance. The non-GAAP tax rate for the quarter came in at 13.2%, generally in line with our expectations. We continue to see the tax rate in the low to mid teens for calendar 2026. Other income and expense for the December was approximately $10 million in income, compared with $8 million in income in the September. Slight fluctuation in OI and E was primarily the result of gains in our venture portfolios partly offset by lower interest income. As we've talked about in the past, you should expect to see variability in OI and E quarter to quarter. The capital return in the December, we allocated approximately $1.4 billion towards share buybacks through open market share repurchases. Our average buyback price in the quarter was approximately $154 per share. In calendar year 2025, we repurchased approximately 39 million shares at an average price of $104 per share. We also paid $328 million in dividends in the quarter. In calendar year 2025, we returned 85% of our free cash flow. Our plans remain to return at least 85% of free cash flow to our shareholders over time. The December diluted earnings per share were $1.27 which came in above the guidance range. The diluted share count was 1.26 billion shares, was a reduction from the September and consistent with our guidance. We have $5.1 billion remaining on our Board authorized share repurchase plan. Let me pivot to the balance sheet. Cash and cash equivalents totaled $6.2 billion at the end of the December, a decrease from $6.7 billion at the end of the September. The reduction of cash is attributed to capital return as well as CapEx spending. As we look ahead, our strong cash position and continued free cash flow enable us flexibility to potentially simply repay the $750 million March 2026 notes when they mature. Day sales outstanding was fifty-nine days in the December, a decrease from sixty-two days in the September. Inventory turns improved to 2.7 times from 2.6 times in the prior quarter and up from 1.5 times a little over two years ago. As a company, we remain focused on utilization, and we were pleased by the sustained progress we continue to make. Our noncash expenses in the December included approximately $89 million for equity compensation, $91 million for depreciation, and $13 million in amortization. Capital expenditures for the December was $261 million which was up $76 million from the September. Spending was driven by investments, in manufacturing capacity R&D and lab infrastructure that supports our technology road map and customer needs, We also purchased a new building in Arizona to support the growing industry footprint there. This capital spending remains consistent with our global strategy of expanding capabilities close to where our customers are. Looking forward, we continue to expect capital expenditure to be in the 4% to 5% of revenue range. We ended the December with approximately 19,700 regular full-time employees which was an increase of approximately 300 people from the prior quarter. Headcount increases were primarily within field organization to support customer growth. As well as in R&D to support our long-term product road map. Let's turn to our non-GAAP guidance for the March 2026 quarter. We're expecting revenue of $5.7 billion plus or minus $300 million. We're expecting gross margin of 49%, plus or minus one percentage point. We're expecting to see slight headwinds from customer mix. For forecasting, operating margins of 34% plus or minus one percentage point. See the normal seasonal uptick in operating expenses in the March. And finally, we're forecasting earnings per share of $1.35 plus or minus $0.10 based on a share count of approximately 1.26 billion shares. So let me wrap up. We delivered a record year in 2025, reflecting strong and broad-based strength across our product portfolio. As we look into 2026, we expect meaningful year-over-year growth, supported by sustained demand in AI-driven markets and continued investment in capacity. We agree with the prevailing view much of the market will be undersupplied in 2026 due to clean room space constraints. In line with that, we see 2026 as a second half weighted year. With our strong balance sheet, and expanding installed base and the strength of our product portfolio, we remain confident in Lam's ability to continue to outperform and deliver long-term value for our customers and shareholders. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions. Operator: Thank you. We will now begin the question and answer session. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. As a reminder, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our first question comes from Tim Arcuri with UBS. Please go ahead. Tim Arcuri: Thanks a lot. Doug, I had a question about WFE this year. So you said we're gonna be constrained because of this fab, you know, readiness. Is it possible to say how much? I know you're guiding, you know, WFE to a 135 this year. I mean, if we use semiconductor revenue and you assume sort of a normal WFE in number, seems like could get to, like, a 150. So maybe the constraints are costing the industry, like, $15 billion. Is it possible to give a number in terms of how much the constraints are kind of costing in terms of, you know, WFE this year so we can kinda pro forma that out? Doug Bettinger: Tim, I knew somebody was gonna ask that question. I should have anticipated it was gonna be you. Listen. It's hard for us to put a number on it, and I'm gonna decline to do that as we sit here right now. And the reason, Tim, is plans are somewhat fluid, if we're honest. Meaning, people are trying to figure out how to get a little more clean room space, how to bring facilities online and bump things up a little bit. So I'm not we're not gonna put a number on it. But I think it's safe to say, and Tim can comment on this, as well. Yeah. I think it sets up for '27 to also be a pretty good year as we think through this. I mean, the industry seems to be sold out for most of what it's supplying. Everybody's talking about these multiyear agreements that they're working on. And I think that's largely a reflection of the fact that demand is very strong, and there's just not enough clean room out there. Tim Archer: Yeah. I don't have much to add, Tim, other than to say that clearly, you've seen a large number of fab announcements. I mean, those fab announcements are capacity in '27, '28, and beyond. And so I think there's a view that the constraints this year are gonna continue even out until many of those new fabs open up. And so I think we've given you a view that we think WFE is as Doug said, you know, we're working on productivity improvements to get a little extra output for customers. That's how we support them. But fundamentally, it's a pretty big challenge. Thanks a lot, Doug. And then you're guiding gross margin down a bit on up revenue. Sounds like it's Yeah. Predominantly related to China. So China was thirty-five percent in December. Is it gonna come down? Like, is that the reason why the gross market is coming down? And if so, like, what mix do you think China will be for March? Doug Bettinger: Yeah. I'm not gonna give you a hard number, Tim. But, yes, it's customer mix. It's going to be less rich in the March quarter. And I'll also remind that this isn't the fixed cost business for us. So as volume goes up and down, component that just benefits from revenue growing isn't that big. The mix component of both product as well as customer is important item. So you're latched onto the right thing, Tim. Tim Arcuri: Okay. Thank you. Operator: The next question comes from C.J. Muse with Cantor Fitzgerald. Please go ahead. C.J. Muse: Yeah. Good afternoon. Thank you for taking the question. I guess to follow-up on that last question, Doug, could you speak a bit about the work you're doing with the supply chain, bringing on ramping Malaysia, and how we should think about that in the context of gross margins as revenues ramp in the '26 and beyond? Doug Bettinger: Yeah. C.J., I mean, we've been talking for a while about CapEx growing as a result of expanding manufacturing capability. Tim specifically talked about it doubling over the last four, five years. So it's been an item that we've been clearly very focused on. We're ramping globally, and you're right that Malaysia location is our biggest location as we sit here today, and we're trying to get more out of that in addition to everywhere that we are. But the mix component, C.J., is gonna be more important than any at least in the near term, less than just volume ramping. C.J. Muse: Great. Thanks. And then maybe a follow-up question. On CSBG. I would think your customers are trying to get every bit that they can out. And so the uplift that you saw in the December, and I assume continued strength into March, is that something that will sustain throughout the whole calendar year? And should drive, you know, better than kind of that 12% growth CAGR? Or does that take a pause at some point as to transition focus on greenfield investments? Tim Archer: Yes, C.J. I'll let Doug speak to this specific numbers. But I think that what you should keep in mind is the CSBG, a lot of our growth of course, is driven by customers' near-term actions and what we need to do to help them get maximum amount of output from the tools they have. A lot of the growth really is we're transforming our service business to be much more oriented towards the use of equipment intelligence for predictive maintenance, as a way of getting more output from tools. And also implementation of Dextro cobots for our automated maintenance. And both of those things, not only will drive top-line growth, but also margin profitability improvement just given the efficiency with which we deliver those services. And so I think there's a number of moving pieces that are all positive for CSBG. Doug Bettinger: Yeah. And I would just add, C.J. You know, we were pleased to see the chamber account number up. Obviously, we knew that was coming, and we're happy to share it with you. So that's a mass aspect of what we're continuing to take advantage of going forward. It's very consistent, though, with what we articulated at that Investor Day back I guess, almost a year ago. And so I would still want you thinking about CSBG growing the same way we described it back then, which is kinda high single digit, maybe low double digit. We had a very strong December. It was primarily the result of Reliant Systems. That piece might be a little bit lumpy. It always is. But, again, CSPG is gonna just gonna keep chugging along. C.J. Muse: Thank you. Doug Bettinger: Thanks, C.J. Operator: The next question comes from Atif Malik with Citi. Please go ahead. Atif Malik: Hi. Thank you for taking my question. The first one for Tim. Tim, on the DRAM market, when do you see the volume adoption of 4F from 6F2? And can you talk about your SAM market share when you moved to four S Square? I know you called out Akara in your prepared remarks. Tim Archer: Yeah. So I think Forest I mean, obviously, there's still some questions as to exact timing and, you know, customers have talked about it being something towards the end of the decade, probably for full volume production. But, clearly, we're engaged today with customers looking at the technical needs you know, we called out Acara, Aqara is very well suited to the types of high aspect ratio, very small features that exist in four f squared as well as, you know, other devices we've talked about, whether it's a future gate all around or even as foundry logic moves to CFET. And so you know, Aqara is a it's a sort of a foundational tool for us in terms of capabilities that are gonna be important for all of transitions. But really should think about, you know, those kinds of technology transitions occurring after probably after this next big wave of fab openings. But, again, back to the constraint question, you know, in some ways, if this turns out to be, as we believe, a multiyear build out of fabs, The fabs that come towards the end of that will be the fabs that benefit from the SAM expansion and share gain that we're gonna see coming from these new products that we've talked about. So, anyway, I think four f squared is probably on the back end of that. But there's a lot in between that will also, drive our business. Atif Malik: Great. And then, Doug, on the NAND I know the memory dynamics were in line with your expectations in the December, but NAND was down sequentially and DRAM up. You see the NAND makers slowing down technology migrations as they focus more on in terms of like minting money given how the supply shortages are materializing. And when you see NAND new capacity additions coming on? Doug Bettinger: Gotcha. No. I listen. NAND played out exactly as we saw it as the year began in 2025. And as we sit here looking in 2026, it will be a growth year for NAND. There's no question about that in our minds. I think what I observed the memory doing, at least to the extent that they have both NAND and DRAM right now anyway, is prioritizing DRAM over NAND a little bit because profitability there is somewhat better. I think y'all understand that and know that. But that doesn't mean that people aren't focused on demand. In fact, one of our largest customers announced a new fab that's gonna be dedicated pretty well, not dedicated, but heavily emphasizing NAND capacity. And so that's on the come line. We see that happening, as we get into 26 growth. That is happening. We're still sticking by. We think upgrades happen, before real capacity additions, but you're gonna you're gonna see a combination of both. And that 40 billion that we've been talking about likely happens quicker than what we originally expected a year ago. So, anyway, we we we feel quite good about where NAND is trying to Tim Archer: Thank you. Doug Bettinger: Thanks, Adam. Operator: The next question comes from Vivek Arya with Bank of America Securities. Please go ahead. Vivek Arya: Thanks for taking my questions. So you're guiding WSE up 23%. I think last year you said you gained a point of share. Do you expect to maintain or gain share this year, Tim? What what are kind of the puts and takes around the different markets? And then specifically, what are you assuming for China contribution overall for WFE and what that means for Lam? In calendar '26. Tim Archer: Yeah. Let me let me take the first part of it. I mean, I think what's important to remember from the longer-term plan we laid out at last year's Investor Day and things I said on the call today we expect to gain share and expand our SAM at every successive technology node. And so to your point, do we plan to sustain or increase share? The answer is we plan to increase our share of WFE again this year. And what needs to take place is technology transitions need to keep occurring. And what we're seeing in the environment today is those are accelerating. That's a way for customers to get more output and more output of the types of devices that are strongly demanded by the AI environment. At the same time, those technology transitions are driving higher deposition and etch intensity which is pretty much our entire business. And so, from that perspective, that's a real positive for us. And then we've talked about the success of our new products. I mean, we have we have refreshed our conductor etch, product line. We've previously refreshed our dielectric etch line It's launched Moly. Dry resistance is gaining traction. We're strong in advanced packaging. Backside power is still to come, and it's gonna be a driver for us. And so think we have confidence that whatever the WFE is, if it's technology driven as it looks like it will be, we will continue to expand SAM, create gain share of the fee. Now as far as China goes, I think that we are looking at China being more kind of flattish year on year. And therefore, as the rest of the technology driven part of the business grows, becoming a smaller percentage of our overall revenue. Got it. And for my follow-up I think in the past, you have given this 40 billion or so addressable opportunity to upgrade the installed base to higher layer accounts. I'm curious, where are we now at, you know, worse that 40 billion number? How much more to go? And given this, emerging role of NAN or this enhanced role of NAN, I should say, in AI inference, is there a new number versus that 40 billion number that you had before? Thank you. Tim Archer: Yeah. I think we might wait until a little later in the year to refresh that number, but you know, we've said a few times now, the specific wording we used at Investor Day was 40 billion over several years. We've now I think almost every earnings call said, that seems to be happening faster than expected. And today, I reiterated that, which was know, NAND is moving faster than we expected on the upgrade path. And I think we'll we'll we'll come out and look As Doug just mentioned, we're starting to see know, more interest in investing in NAND capacity. But it trades off. I mean, when you have clean room space, everybody has to make a decision as where to use that today. But I think that as we move forward, and we see the growth from AI inference and other use cases, NAND is gonna take its place in the AI data infrastructure and memory infrastructure, and I think you'll see, see growth there. So executing to the customer demand today faster than we had previously expected. And anticipate more to come. Thank you, dear. Vivek Arya: Thanks, Derek. Operator: The next question comes from Srini Pajjuri with RBC Capital. Please go ahead. Srini Pajjuri: Thank you. Tim, I wanna go back to the previous question. The one point of WFE share that you gained, maybe if you could help us understand if it is coming primarily in foundry and logic or if you're seeing that across the board. Because foundry and logic is where you I think, made the most progress in the last couple of years. And then Doug said you expect year on year growth to be meaningful this year. Just given your WFE expectation for 22% growth, should I I guess, should we model 22% plus growth on the top line? For the year? Tim Archer: Yes. So let me take the first one. Share gains came from a combination of both NAND and foundry logic. And, again, it's know, you might think already we have very high share of NAND, but as technology transition occurs and layer count increases, we have an opportunity still to gain share of some of the new applications required to enable those higher layer accounts. And so, we gain share in NAM a lot of our focus we talked about over the last number of years has been to launch products that allow us to gain share at the gate all around nodes, more advanced foundry logic, and the transitions that are coming there. And, also, in advanced DRAM, we saw this year, some of those foundry logic share gains coming through, in the numbers that you can see. So I'd say those primarily NAND and foundry logic this year. And then sorry, the second question can you just repeat the second question? What was the second question, Shini? Srini Pajjuri: Yeah. So I guess my second question was about, you know, your expectation for the current year. I know you said it's going to be second half weighted. Yeah. Tim Archer: Yeah. No. No. We, you know, your comment was basically, will we out WFE that we just, talked about? I guess that's that's the message we're trying to deliver is we're gonna we're gonna expand SAM, gain share, and we're gonna outperform WFE this year as our current view. Srini Pajjuri: Okay. Got it. Thanks for that. And then one quickly on the op margin, Doug, I think at the Analyst Day, gave us the guidance for 34% to 35 at roughly 25 to 27 billion and you're already there. I think you're you're, you know, around 23 billion run rate if I look at your March guidance. So I guess my question is, as we go through the next few quarters, how should we think about the op margin fall through? I know you're guiding OpEx a little bit a little bit of growth here, but just want to understand how we should model OpEx going forward. Doug Bettinger: Yes, Srini, thanks for the question. Yes. No, we're pretty pleased with how we performed. Clearly, we're ahead of the model. Right? I mean, that model had, you know, is 28 kind of model, and we're run rating least on a percentage basis what the model suggests we're gonna be able to do. Ram and I and Tim were debating a little bit. We probably later in the year need come out and give you an update on that model and I think we'll do that. Lots have changed in the last year or so. So, stay tuned for that. I think as we think about this year, frankly, this is a management team that prides its itself on being able to to deliver leverage, through to the bottom line. We really did a great job with it last year, which is why I went through all the kinda demonstration of what we did last year. We will be focused on delivering leverage as we go through this year as well. And like I said, we'll give you an update to that longer-term model probably later in the year. Tim Archer: Thanks, Srini. Doug Bettinger: Thanks, Srini. Operator: The next question comes from Jim Schneider with Goldman Sachs. Please go ahead. Jim Schneider: Relative to your prior comments on NAND, understand there's a little bit more prioritization toward DRAM right now. But when do you expect that your customers are gonna sort of pivot from NAND upgrades to more greenfield NAND capacity additions. We saw some announcements from at least one of your customers recently on that So I'm curious about when you expect to sort of see that upgrade business turn into greenfield business. Could that be by before the end of 2026, or is it more of a 2027 event or maybe even later? Thank you. Tim Archer: Yeah. It's a great question. I think that what we're the way we view it right now is that because of the clean room space constraints, it's probably again, part of that multiyear build out 2728. When clean room space is sufficiently available, such that they can invest in additional man capacity. In a big way. So that's that's probably our view right now. In the meantime, I we talked about the acceleration of the technology transitions. You do get big growth. You get more capacity of the higher performing bits that are in in strong demand at AI. And so I think that those are the decisions that that people are making today is move ahead as quickly as possible with many of the key technology transitions. And so we're busy doing upgrades, and and that's where our focus is right now. But greenfield will come eventually, and you've seen some of those initial announcements. I think that's encouraging for all of us. Jim Schneider: That's very clear. Thanks. And then maybe just as a follow on, I think we all can see the trends by foundry, DRAM and NAND. They're in play right now. And in terms of level of growth rate, But as we head into 2027 or the 2026, do you see, you know, the potential rank order of those growth rates sort of changing amongst those categories? Doug Bettinger: Oh, man. Jim, that's a great question going into '27. We just, for the first time, give you a '26 number. You're you're asking '27. Listen. In '26, we're confident everything is growing. It's unequivocal. And we're also very clear when we look. Everything is constrained, frankly. Right? You're hearing it from every one of our To kinda when they talk about things, and they're they're talking about these multiyear agreements. deliver the visibility into next year. Foundry and Logic has grown a lot this year. DRAM's grown a lot this year. NAND is growing a little bit less, but still growing, pretty well this year. The end of the day, though, when you look at these system architectures, all this stuff needs to fit together. And you saw one of the big accelerator, guys talking about this at CES, like, hey. You know, the we need this NAND stuff showing up. It that's happening, clearly. So into '27, I think we're gonna see another year where everything is growing. I'm not to rank order it quite yet, Jim, though. Tim Archer: I think as we move through this year, though, we, we already know, I would say, have better visibility into the following year than I think I can ever remember. And that's simply because know, customers know that they're building these fabs. They're announcing them They're signaling to their customers they're gonna have that capacity available. And so, clearly, we're having discussions at this point on what what tools are gonna be needed, what technology nodes are gonna be running in those fabs, and they wanna make sure that they can secure the capacity so that that fab can be started up and producing as quickly as possible. And so those discussions on those fabs are clearly out into 2027. And but I think in terms of exactly how those decisions get made through this year and know, once you have clean room space, it it you know, in some cases can, as we just talked about, they can trade off sometimes a little bit of, clean room space to use for DRAM or or for NAND or for what we've seen in a few cases is for advanced packaging. You know, I talked about the tremendous growth in advanced packaging and the importance that it's the role that it's playing. And so you know, we've been seeing that. So I guess we'd have to see the year continue to evolve and how the market's kinda where the where the demand is the shortest. But we would anticipate, as we said, robust investment across all device segments And I think that continues on into 2027 across all three segments. Jim Schneider: Thank you. Doug Bettinger: Thanks, Jim. Operator: The next question comes from Krish Sankar with Cowen and Company. Please go ahead. Krish Sankar: Yes. Hi, thanks for taking my question and congrats on the good results and guide. Doug, my first question is, I understand that you spoke about the global manufacturing footprint. Doubled over the last four years. Just wondering, as your customers ramp up more onshore manufacturing, would it lead to you increasing shipments from your US specialties in California and Oregon rather than Malaysia some of your products. If so, what would be the margin implications? Doug Bettinger: Yeah. Chris, listen. We have a global manufacturing Right? We've got factories in Oregon, California, Ohio, Malaysia, Taiwan, Korea, Austria. I think I didn't miss anything there. We have some level of flexibility given enough time to move things around if we really need to do that. And as customers tell us what they need and where they need it, we may adjust things Right now, I think we feel pretty good about how we've got things set up, though. Krish Sankar: Got it. Got it. Thanks for that. And then, Tim, I just had a follow-up for you, like, a technical question. Master, you had really good traction in ALD Moly. Are customers moving away from single wafer ALD to batch ALD for Moly? And if so, how would that impact LAN? Tim Archer: No. I mean, well, at this point, if we look we we had said previously that in kind of the order of adoption, NAND would be first to adopt, Moly, and we're seeing that. Followed by foundry logic and then and then ultimately by DRAM. What we can say right now is that the customers that have committed to production of mal using Mali in NAND have gone with LAN's tools. We have a very strong position there And I think the value of that is we talked in the past is means that throughout this this first production ramps with ALD, Moly, we are building an installed base. We're maturing the tool We're getting process learning. Know, custom you know, competitors aren't gonna give up. This is an it's an incredibly important market and a big inflection that we've talked about. We feel really good about our single, you know, we call it single wafer Moly, but, if you look at the tool itself, it has multiple stations inside of one chamber in order to give ourselves, high productivity. So you know, that's a production tool of choice today for the industry. And, we intend to continue to keep it that way. Krish Sankar: Got it. Thanks a lot, Ken. Doug Bettinger: Thanks, Krish. Operator: The next question comes from Harlan Sur with JPMorgan. Please go ahead. Harlan Sur: Good afternoon and great job on the quarterly execution. You know, just as many of your customers have been surprised by the sudden rise in compute and storage demand, and therefore, requirements for more GPUs, XPUs, CPUs, and the associated memory and storage they they obviously got caught somewhat flat footed in terms of sort of near to midterm capacity to support that demand curve, right, as you guys outlined. Is the stronger velocity of demand having a similar impact to your manufacturing capability and ability to procure the necessary components and subsystems and any bottlenecks that you have in your supply chain? Tim Archer: Well, it isn't without a lot of hard work. But, you know, one good news is is you know, we we did a lot of fact finding post the COVID pandemic and supply shortages that occurred you know, in our own systems at that time. And we made a lot of improvements. And Doug just talked about the global nature of our manufacturing facilities. Spanning from The US and Europe and and all through Asia. And we looked at the same thing with respect to our supply chain. And I would say today, compared to when we had those shortages, we have we have built a much stronger, broader deeper supply chain And so you know, I don't wanna sell short the hard work of our supply chain guys today to meet all these expedited pull in requests from customers. It's very hard work. But today, would say we're not we're not the big constraint, for any of the devices. Compared to clean and space being a constraint to the industry. And so as the industry continues to go, we need to keep working to, again, expand our capacity, as I said, make our own operations faster. That's why we've done things like automating our warehouses to make the rate at which we can feed those parts from the time they're received from the supplier into the manufacturing that much quicker and more efficient. And so we're just continually working on what what I would do is our operational velocity. And so that we're not the constraint. Harlan Sur: I appreciate that. Then for my second question, you know, one of the significant obviously, and incremental drivers of your business among many, has been advanced packaging and HBM You guys did about a billion dollars plus in advanced revenues. I think it was in calendar '24 You're anticipating strong 40% -plus growth this year. But can you guys quantify how much advanced packaging grew for the team in calendar '25? And then of that 40% growth this year, is that being more driven by 2.5 gs three and a half d advanced packaging or HBM? Doug Bettinger: Yeah, Harlan. We didn't quantify 2025 in packaging except to tell you it grew nicely and I think we're going to kind of leave it at that. Tim gave you the 40% this year. So we're super excited about what's going on there. And I'll let Tim talk about the technology. Tim Archer: Yeah. It's we we've lumped it together. I mean, it is it is strength in in HP Clearly, there's strong demand there. But, also, I talked about more complex packaging. Schemes across advanced foundry logic. And that's that's an important driver for us as well. Now the great thing about our advanced packaging capabilities is you know, they are they're they're used in in in the advanced packaging of of all device types. And so, you know, it's things like copper plating. It's things like etch. Dielectric gap fills, And so really fundamental technologies to to the success. So we Thank you. See that as a really important business, and we've talked about the fact that know, we continue to invest in in new technologies in that space. Thank you. Doug Bettinger: Thanks, Harlan. Operator: The next question comes from Stacy Rasgon with Bernstein Research. Please go ahead. Stacy Rasgon: Hi, guys. Thanks for taking my questions. For my first one, Doug, you clearly said it's a second half loaded year, which is fine. What does that imply for the first half of the calendar year? Like, is is March quarter the trough Do you think things are kinda flattish at the March level until we get that second half inflection? Just how are thinking about shape of the year? Doug Bettinger: Yeah. Know, Sage, it's a great question. I frankly, as I sit here right now, I think we're gonna see growth every quarter. From the previous quarter. I'm not gonna give you a precise number. We feel good about that March quarter. I think June probably grows from that. September from that. And it ends up being a second half weighted year both from a WP standpoint and from our revenue. Stacy Rasgon: I guess to get there, would you need an inflection in that growth rate in the second half? I guess some of it compares, which makes it easier. But are you thinking there's an inflection? Do you think the growth is steady? Or Doug Bettinger: I think it's reasonably steady. I mean, the part of this is gonna get modulated by, okay, how much cleaner space is available at each customer? And I think that, you know, they're trying to figure out still and so are we. Which is why I'm not giving you a more specificity. It will be second half weighted, but like I said, I think you'll see growth quarter by quarter as we go through '26. Tim Archer: Stacy, I guess the only thing I would add is I was just gonna add that, you know, my comment about basically every customer is asking for pull ins, and so there's some element of you know, whether whether or not we can accelerate some small portion in, you know, into the first half of the year. We would still see growth in the second because, obviously, that probably means things start pulling in from the first half of next year as well. We're in an accelerating environment of both demand and also timing requests. Know? And so know, I think that back to the question that was asked about constraints, I think we need to see through the year how those play out as to know, kind of how how we how much we can do. Stacy Rasgon: Got it. Thank you. That that's helpful. And for my second question, wanted to ask about China. So, Doug, I think you said you expected China to be flattish year over year. Was that a market statement, or was that a Lam revenue statement? And the percentage should go go down. I guess it was I don't what it was, 36% or something in calendar '25. You had talked previously about, like, a 30% threshold. Do you think it gets to that 30%, or you think it's just down but doesn't quite get there? Doug Bettinger: Yeah, Stacy. The comment, in fact, we made it was we think WFE in China is flattish. 25 to 26, and everything else is gonna grow. So as a percent of the total, it's gonna be down We didn't give a precise number. Whether it's in the low thirties or high twenties, that's plus or minus probably where it is. And part of it will be modulated by how much growth comes from outside of China. It's a numerator, denominator thing as well, obviously. Stacy Rasgon: Yeah. I got it. I got it. Thank you so much. Appreciate it. Doug Bettinger: Thanks, Stacy. Operator: The next question comes from Blayne Curtis with Jefferies. Please go ahead. Blayne Curtis: Hey, guys. Thanks for squeezing me in. A couple of questions. Maybe just just, Doug, I wanted to just understand the strength in Reliant, you know, with China down. Is that multinational? I just feel just curious where you're seeing that demand. I know you said it's lumpy. I just was curious why it was up so much. Tim Archer: It was multinational and it was China. It was a little bit of both. Of them, Blaine. Blayne Curtis: Got you. Thanks. And then just on the NAND front, you know, you obviously, the demand is very strong. You talked about the upgrades. Happening earlier. Does that fit in the camp of also second half weighted? I mean, it's not waiting clean room space. I'm just kinda curious the shape of NAND with here. Doug Bettinger: Probably, it's a little bit second half weighted, Blaine. Blayne Curtis: Okay. Thank you. Doug Bettinger: Thanks, Clark. Operator: The next question comes from Melissa Weathers with Deutsche Bank. Please go ahead. Melissa Weathers: Hi. Thank you. I wanted to go back to the NAND side and touch on something that Tim mentioned in his prepared remarks on the expanding applications for NAND in the data center. And, Doug, you kind of alluded to some of the CES announcements as well. So the right interpretation that those applications in the data center have expanded versus what you guys had been thinking? Because you guys have been talking about in NAND in the data center for several quarters now. Is that the right way to think about it? And then what could this mean for like, your Molly ALD, your 300 layer type devices and expanding sure you could get there. Tim Archer: Yeah. Sure. I think we characterize it as a new use case. So I don't think we saw this particular use case coming, which is related to the AI inference and kind of the expansion of TD cache and such. I think our previous estimates have been more kind of on more traditional storage for using enterprise SSDs. And so yeah, this is this is an expansion and kind of presents a bit longer-term growth opportunity NAND. And so therefore, it would be beyond the kind of projections that we would have given back at Investor Day a year ago. For the they'll look for NAND long term. Melissa Weathers: Great. Thank you. And then a quick question on the inventory side of things. Doug, I just wanted to check-in and see how you're thinking about parts availability and your build your ability to scale production in line with demand. Can you help us a framework to think about how you're thinking about inventories on a days or dollars basis? Doug Bettinger: Yeah, Melissa. No. It's a great question. Listen. If we're right about how things play out here, it's very likely that we're gonna need to build some inventory in total dollar terms as we go through the year, right? When business grows, you got to stuff ready for that growing business. So I think that's clearly going to happen. We will remain focused on asset utilization and efficiencies and hopefully be able to drive turns up a little bit from here. But we definitely are gonna need to build some inventory in advance of a growing top line. So we'll be working on all of that and listen. Tim Archer: Thank you. Doug Bettinger: Thanks, Melissa. Operator: The next question comes from Joe Quatrochi with Wells Fargo. Please go ahead. Joe Quatrochi: Hey. Thanks for taking the questions. Maybe just a follow-up on that. Is there any area of your supply chain where you're pushing suppliers maybe that that could be a potential area of shortage? Or do you feel like there's available capacity to continue to kinda support growth you're talking about? Tim Archer: Well, I think that we don't have any line of sight to significant problems at this point. I made the comment a couple times. It's clearly a lot of work given the accelerated nature of the demand and the high levels of demand. And customer requests for pull ins you know, well within our normal lead times. But at this point, you know, we're working across our global supply chain to ensure that we can meet the demand. Joe Quatrochi: Okay. And maybe as a follow-up, China now expect to be flattish. Is that a reflection of just the affiliate rule impacts reentering kinda WFE across the company base or in terms of just your peers. Or is there, like, a change in the underlying demand that you're seeing as well in trying Doug Bettinger: probably a little bit of affiliate real. But frankly, it's there's a broad-based set of customers I think it's Joe, spending in China that have nothing to do with the affiliate rule. So it's the mosaic of everything that's going on there. It's very broad. Tim Archer: Thank you. Doug Bettinger: Thanks, Joe. Operator, we will do one more question. Operator: Okay. Our next question comes from Vijay Rakesh with Mizuho. Please go ahead. Vijay Rakesh: Oh, thanks. Thanks for speaking in. Hi, Tim and Doug. Just a quick question on the Foundry side. And I think China was down, I guess. You mentioned affiliate rule, but your Foundry is growing almost 100% plus. Year on year. Just wondering as you look at 2627 with some of leading edge found this accelerating, how you see that road map? Tim Archer: Yeah. Well, I guess, speaking to what it would look like from a road map perspective is, you know, each technology node, we said the opportunity for Lam from an etch and depth intensity perspective and how our tools you know, like the Aqara and others fit into that. Our opportunities get bigger. As you move forward, you start seeing things that again, we'd anticipate you know, future nodes is stuck twenty-seven, twenty-eight. Know, introduction of things like backside power. Again, more use of advanced packaging across more of the leading edge foundry space. All of those things are good for us from both the SAM and the share perspective. So that's a from a product perspective, it's a very good picture for us. Vijay Rakesh: Got it. And then on the DRAM side, I know you mentioned briefly HBM four with 16 layers. Obviously, that's a nice step up from where HBM is now. Can you talk to what that does for your, you know, WFE the content and the growth there on the DRAM HPM side? Thanks. Tim Archer: Yeah. I mean, just in general terms, I mean, what happens is you end up going to next-generation HBM dies become bigger. And that's generally what is creating the majority of the problem relative to when we talk about clean room space constraints, you get you need more clean room space and more tooling per fit that comes out of the fab. So, therefore, that was what we're trying to communicate is obviously, the performance improves. But the space required and the equipment required, increases. Doug Bettinger: Yeah. Appreciate everybody's questions today. That concludes Vijay Rakesh: Got it. Thank you. You, Vijay. Doug Bettinger: our call for today. We'll look forward to seeing everybody as we do the conference circuit and get out on the road. So thank you for your time today. Operator: Thank you, everyone. The conference has now concluded. You may now disconnect.
Operator: Greetings, and welcome to the Microsoft Corporation Fiscal Year 2026 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jonathan Neilson, Vice President of Investor Relations. Please go ahead. Jonathan Neilson: Good afternoon, and thank you for joining us today. On the call with me are Satya Nadella, Chairman and Chief Executive Officer; Amy Hood, Chief Financial Officer; Alice Jolla, Chief Accounting Officer; and Keith Dolliver, Corporate Secretary and Deputy General Counsel. On the Microsoft Corporation Investor Relations website, you can find our earnings press release and financial summary slide deck, which is intended to supplement our prepared remarks during today's call and provides the reconciliation of differences between GAAP and non-GAAP financial measures. More detailed outlook slides will be available on the Microsoft Corporation Investor Relations website when we provide Outlook commentary on today's call. On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for, or superior to, the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid in further understanding the company's second quarter performance in addition to the impact these items and events have on the financial results. All growth comparisons we make on the call today relate to the corresponding period of last year unless otherwise noted. We will also provide growth rates in constant currency when available, as a framework for assessing how our underlying businesses performed, excluding the effect of foreign currency rate fluctuations. Where growth rates are the same in constant currency, we will refer to the growth rate only. We will post our prepared remarks to our website immediately following the call until the complete transcript is available. Today's call is being webcast live and recorded. If you ask a question, it will be included in our live transmission in the transcript and in any future use of the recording. You can replay the call and view the transcript on the Microsoft Corporation Investor Relations website. During this call, we will be making forward-looking statements, predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's earnings press release, in the comments made during this conference call, in the Risk Factors section of our Form 10-K, Forms 10-Q, and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statement. With that, I'll turn the call over to Satya. Thank you very much, Jonathan. This quarter, Satya Nadella: the Microsoft Cloud surpassed $50 billion in revenue for the first time, up 26% year over year, reflecting the strength of our platform and accelerating demand. We are in the beginning phases of AI diffusion and its broad GDP impact. TAM will grow substantially across every layer of the tech stack as this diffusion accelerates and spreads. In fact, even in this early innings, we have built an AI business that is larger than some of our biggest franchises that took decades to build. Today, I'll focus my remarks across the three layers of our stack: Cloud and Token Factory, agent platform, and high-value agentic experiences. When it comes to our cloud and token factory, the key to long-term competitiveness is shaping our infrastructure to support new high-scale workloads. We are building this infrastructure out for the heterogeneous and distributed nature of these workloads, ensuring the right fit with the geographic and segment-specific needs for all customers, including the long tail. The key metric we are optimizing for is tokens per watt per dollar, which comes down to increasing utilization and decreasing TCO using silicon systems and software. A good example of this is the 50% increase in throughput we were able to achieve in one of our highest volume workloads, OpenAI inferencing, powering our co-pilots. And another example was the unlocking of new capabilities and efficiencies for our Fairwater data centers. In this instance, we connect both Atlanta and Wisconsin sites through an AI WAN to build a first-of-kind AI super factory. Fairwater's two-story design and liquid cooling allow us to run higher GPU density and thereby improve both performance and latencies for high-scale training. All up, we added nearly one gigawatt of total capacity this quarter alone. At the silicon layer, we have NVIDIA and AMD and our own Maya chips delivering the best all-up fleet performance, cost, and supply across multiple generations of hardware. Earlier this week, we brought online our Maya 200 accelerator. Maya 200 delivers 10 plus flops at FP4 precision with over 30% improved TCO compared to the latest generation hardware in our fleet. We will be scaling this starting with inferencing and synthetic data gen for our superintelligence team as well as doing inferencing for Copilot and Foundry. And given AI workloads are not just about AI accelerators, but also consume large amounts of compute, we are pleased with the progress we are making on the CPU side as well. Cobalt 200 is another big leap forward delivering over 50% higher performance compared to our first custom-built processor for cloud-native workloads. Sovereignty is increasingly top of mind for customers, and we are expanding our solutions and global footprint to match. We announced DC investments in seven countries this quarter alone supporting local data residency needs. And we offer the most comprehensive set of sovereignty solutions across public, private, and national partner clouds so customers can choose the right approach for each workload with the local control they require. Next, I want to talk about the agent platform. Like in every platform shift, all software is being rewritten. A new app platform is being born. You can think of agents as the new apps. And to build, deploy, and manage agents, customers will need a model catalog, tuning services, harness for orchestration, services for context engineering, AI safety, management observability, and security. It starts with having broad model choice. Our customers expect to use multiple models as part of any workload that they can fine-tune and based on cost, latency, and performance requirements. And we offer the broadest selection of models of any hyperscaler. This quarter, we added support for GPT-5.0.2 as well as Claude 4.5. Already over 1,500 customers have used both Anthropic and OpenAI models on Foundry. We are seeing increasing demand for region-specific models, including and Cohere as more customers look for Sovereign AI choices. And we continue to invest in our first-party models, which are optimized to address the highest value customer scenarios, such as coding, and security. As part of Foundry, we also give customers the ability to customize and fine-tune models. Increasingly, customers want to be able to capture the tacit knowledge they possess inside of model weights as their core IP. This is probably the most important sovereign consideration for firms as AI diffuses more broadly across our GDP in every firm needs to protect their enterprise value. For agents to be effective, they need to be grounded in enterprise data and knowledge. That means connecting their agents to systems of record and operational data, analytical data, as well as semi-structured and unstructured production and communications data. And this is what we are doing with our unified IQ layer spanning fabric foundry, and data powering Microsoft 365. In the world of context engineering, foundry knowledge and fabric are gaining momentum. Foundry knowledge delivers better context with automated source routing and advanced agentic retrieval while respecting user permissions. And Fabric brings together end-to-end operations real-time, and analytical data. Two years since it became broadly available, Fabrik's annual revenue run rate is now over $2 billion with over 31,000 customers, and it continues to be the fastest-growing analytics platform on the market with revenue up 60% year over year. All up, the number of customers spending $1 million plus per quarter on foundry grew nearly 80% driven by strong growth in every industry. And over 250 customers are on track to process over 1 trillion tokens on Foundry this year. There are many great examples of customers using all of this capability on Foundry to build their own agentic systems. Alaska Airlines is creating natural language flight search. BMW is speeding up design cycles. Land O'Lakes is enabling precision farming for co-op members and Symphony AI. Is addressing bottlenecks in the CPG industry. And of course, Foundry remains a powerful on-ramp for the entire cloud. The vast majority of Foundry customers use additional Azure solutions like developer services, app services, databases as they scale. Beyond fabric and foundry, we're also addressing agent building by knowledge workers with Copilot Studio and AgentBuilder. Over 80% of the Fortune 500 have active agents built using these low-code, no-code tools. As agents proliferate, every customer will need new ways to deploy, manage, and protect them. We believe this creates a major new category and significant growth opportunity for us. This quarter, we introduced Agent 365, which makes it easy for organizations to extend their existing governance, identity, security, and management to agents. That means the same controls they already use across Microsoft 365 and Azure now extend to agents they build and deploy on our cloud or any other cloud. And partners like Adobe, Databricks, Genspaw, Glean, NVIDIA, SAP, ServiceNow, and Workday are already integrating agent 365. We are the first provider to offer this type of agent control plane across clouds. Now let's turn to the high-value agentic experiences we are building. AI experiences are intent-driven and are beginning to work at task scope. We are entering an age of macro delegation and micro steering across domains. Intelligence using multiple models is built into multiple form factors. You see this in chat, in new agent inbox, apps, coworker scaffoldings, agent workflows embedded in applications and IDEs that are used every day, or even in our command line with file system access and skills. That's the approach we are taking with our first-party family of copilot spanning key domains. In consumer, for example, Copilot experiences span chat, news, feed, search, creation, browsing, shopping, and integrations into the operating system, and it's gaining momentum. Daily users of our Copilot app increased nearly 3x year over year. And with Copilot Checkout, we have partnered with PayPal Shopify, and Stripe so customers can make purchases directly within the app. With Microsoft 365 Copilot, we are focused on organization-wide productivity. WorkIQ takes the data underneath Microsoft 365 and creates the most valuable stateful agent for every organization. It delivers powerful reasoning capabilities over people, their roles, their artifacts, their communications, and their history and memory all within an organization's security boundary. Microsoft 365 Copilot's accuracy and powered by WorkIQ is unmatched, delivering faster and more accurate work grounded results than competition. And we have seen our biggest quarter-over-quarter improvement in response quality to date. This has driven record usage intensity with the average number of conversations per user doubling year over year. Microsoft 365 Copilot also is becoming a true daily habit with daily active users increasing 10x year over year. We're also seeing strong momentum with Researcher Agent, which supports both OpenAI and Claude, as well as Agent Mode in Excel, PowerPoint, and Word. All up, it was a record quarter for Microsoft 365 Copilot seat ads up over 160% year over year. We saw accelerating seat growth quarter over quarter and now have 15 million paid Microsoft 365 Copilot seats and multiples more enterprise chat users. And we are seeing larger commercial deployments. The number of customers with over 35,000 seats tripled year over year. Fiserv, ING, NAST, University of Kentucky, University of Manchester, US Department of Interior, and Westpac all purchased over 35,000 seats. Publicis alone purchased over 95,000 seats for nearly all its employees. We are also taking share in Dynamics 365 with built-in agents across the entire suite. A great example of this is how Weesa is turning customer conversations data into knowledge articles with our knowledge management agent in Dynamics, and how Sandrik is using our sales qualification agent to automate lead qualification across tens and thousands of potential customers. In coding, we are seeing strong growth across all paid GitHub Copilot. Copilot Pro Plus subs for individual devs increased 77% quarter over quarter, and all up now, we have 4.7 million paid Copilot subscribers, up 75% year over year. Siemens, for example, is going all in on GitHub, adopting the full platform to increase developer productivity after a successful Copilot rollout to 30,000 plus developers. GitHub AgentHQ is the organizing layer for all coding agents like Anthropic, OpenAI, Google, Cognition, and xAI in the context of customers' GitHub repos. With Copilot CLI and Versus Code, we offer developers the full spectrum of form factors and models they need for AI-first coding workflows. And when you add WorkIQ as a skill or an MCP to our developer workflow, it's a game changer. Surfacing more context like emails, meetings, docs, projects, messages, and more. You can simply ask the agent to plan and execute changes to your code base based on an update to a spec in SharePoint or using the transcript of your last engineering and design meeting in Teams. And we're going beyond that with GitHub Copilot SDK. Developers can now embed the same runtime behind Copilot CLI, multimodal, multistep planning tools MCP integration, OAuth streaming directly into their applications. In security, we added a dozen new and updated security Copilot agents across Defender, Entra, Intune, and Purview. For example, iCertus' SOC team used Security Copilot Agent to reduce manual triage time by 75%, which is a real game changer in an industrial facing a severe talent shortage. To make it easier for security teams to onboard, we are rolling out security Copilot to all our E5 customers, and our security solutions are also becoming essential to manage organizations' AI deployments. 24 billion copilot interactions were audited by Purview this quarter, up 9x year over year. Finally, I want to talk about two additional high-impact agentic experiences. First, in health care, Dragon Corp. Pilot is the leader in its category, helping over 100,000 medical providers automate their workflows. Mount Sinai Health is now moving to a system-wide Dragon Copilot deployment providers after a successful trial with its primary care physicians. All up, we helped document 21 million patient encounters this quarter, up 3x year over year. And second, when it comes to science and engineering, companies like Unilever and Consumer Goods and Synopsys and EDA are using Microsoft Discovery to orchestrate specialized agents for R and D end to end. They're able to reason over scientific literature and internal knowledge formulate hypotheses, spin up simulations, and continuously iterate to drive new discoveries. Beyond AI, we continue to invest in all our core franchises and meet the needs of our customers and partners, and we are seeing strong progress. For example, when it comes to cloud migrations, our new SQL Server has over 2x the IaaS adoption of the previous version. In security, we now have 1.6 million security customers, including over a million who use four or more of our workloads. Windows reached a big milestone, 1 billion Windows 11 users, up over 45% year over year. And we had share gains this quarter across Windows, Edge, and Bing, double-digit member growth in LinkedIn with 30% growth in paid video ads. And in gaming, we are committed to delivering great games across Xbox, PC, cloud, and every other device, and we saw record PC players and paid streaming hours on Xbox. In closing, we feel very good about how we are delivering for customers today and building the full stack to capture the opportunity ahead. With that, let me turn it over to Amy to walk through our financial results and outlook, and I look forward to rejoining for your questions. Amy Hood: Thank you, Satya, and good afternoon, everyone. With growing demand for our offerings and focused execution by our sales teams, we again exceeded expectations across revenue, operating income, and earnings per share while investing to fuel long-term growth. This quarter, revenue was $81.3 billion, up 17% in constant currency. Gross margin dollars increased 16% in constant currency, while operating income increased 21% in constant currency. Earnings per share was $4.14, an increase of 24% in constant currency when adjusted for the impact from our investment in OpenAI. And FX increased reported results slightly less than expected particularly in intelligent cloud revenue. Company gross margin percentage was 68%, down slightly year over year, primarily driven by continued investments in AI infrastructure and growing AI product usage that was partially offset by ongoing efficiency gains, particularly in Azure and Microsoft 365 commercial cloud as well as sales mix shift to higher margin businesses. Operating expenses increased 5% in constant currency, driven by R and D investments in compute capacity and AI talent as well as impairment charges in our gaming business. Operating margins increased year over year to 47% ahead of expectations. As a reminder, we still account for investment in OpenAI under the equity method. And as a result of OpenAI's recapitalization, we now record gains or losses based on our share of the change in their net assets on their balance sheet as opposed to our share of their operating profit or losses from their income statement. Therefore, we recorded a gain which drove other income and expense to $10 billion in our GAAP results. When adjusted for the OpenAI impact, other income and expense was slightly negative and lower than expected driven by net losses on investments. Capital expenditures were $37.5 billion in this quarter, roughly two-thirds of our CapEx, was on short-lived assets, primarily GPUs and CPUs. Our customer demand continues to exceed our supply. Therefore, we must balance the need to have our incoming supply better meet growing Azure demand with expanding first-party AI usage across services like Microsoft 365 Copilot and GitHub Copilot, increasing allocations to R and D teams to accelerate product innovation, and continued replacement of end-of-life server and networking equipment. The remaining spend was for long-lived assets that will support monetization for the next fifteen years and beyond. This quarter, total finance leases were $6.7 billion and were primarily for large data center sites. And cash paid for PP and E was $29.9 billion. Cash flow from operations was $35.8 billion, up 60% driven by strong cloud billings and collections. And free cash flow was $5.9 billion and decreased sequentially, reflecting the higher cash capital expenditures from a lower mix of finance leases. And finally, we returned $12.7 billion to shareholders through dividend and share repurchases an increase of 32% year over year. Now to our commercial results. Commercial bookings increased 23% in constant currency driven by the previously large Azure commitment from OpenAI, reflects multiyear demand needs as well as the previously announced Anthropic commitment from November, and healthy growth across our core annuity sales motions. Commercial remaining performance obligation, continues to be reported net of reserves, increased to $625 billion. And was up 10% year over year with a weighted average duration of approximately two and a half years. Roughly 25% will be recognized in revenue in the next twelve months, up 39% year over year. The remaining portion recognized beyond the twelve months increased 56%. Approximately 45% of our commercial RPO balance is from OpenAI. The significant remaining balance grew 28% and reflects ongoing broad customer demand across the portfolio. Microsoft Cloud revenue was $51.5 billion grew 26% in constant currency. Microsoft Cloud gross margin percentage was slightly better than expected at 67% and down year over year due to continued investments in AI, that were partially offset by ongoing efficiency gains noted earlier. Now to our segment results. Revenue from productivity and business processes was $34.1 billion and grew 16% in constant currency. Microsoft 365 commercial cloud revenue increased 17% in constant currency with consistent execution in the core business and increasing contribution from strong copilot results. ARPU growth was again led by E5 and Microsoft 365 copilot. And paid Microsoft 365 commercial seats grew 6% year over year to over 450 million. With installed base expansion across all customer segments though primarily in our small and medium business and frontline worker offerings. Microsoft 365 commercial products revenue increased 13% in constant currency ahead of expectations due to higher than expected office 2024 transactional purchasing. Microsoft 365 consumer cloud revenue increased 29% in constant currency, again driven by ARPU growth. Microsoft 365 consumer subscriptions grew 6%. LinkedIn revenue increased 11% in constant currency, driven by marketing solutions. Dynamics 365 revenue increased 19% constant currency with continued growth across all workloads. Segment gross margin dollars increased 17% in constant currency, and gross margin percentage increased again driven by efficiency gains at Microsoft 365 commercial cloud, that were partially offset by continued investments in AI. Including the impact of growing Copilot usage. Operating expenses increased 5% in constant currency, and operating income increased 22% in constant currency. Operating margins increased year over year to 60%. Driven by improved operating leverage as well as the higher gross margins noted earlier. Next, intelligent cloud segment. Revenue was $32.9 billion and grew 29% in constant currency. In Azure and other cloud services, revenue grew 39% in constant currency, slightly ahead of expectations with ongoing efficiency gains across our fungible fleet enabling us to reallocate some capacity to Azure that was monetized in the quarter. As mentioned earlier, continue to see strong demand across workloads, customer segments, and geographic regions, and demand continues to exceed available supply. In our on-premises server business, revenue increased 21% in constant currency ahead of expectations driven by demand for our hybrid solutions including a benefit from the launch of SQL Server 2025. As well as higher transactional purchasing ahead of memory price increases. Segment gross margin dollars increased 20% in constant currency. Gross margin percentage decreased year over year driven by continued investments in AI and sales mix shift to Azure, partially offset by efficiency gains in Azure. Operating expenses increased 3% in constant currency, and operating income grew 28% in constant currency. Operating margins were 42%. Down slightly year over year as increased investments in AI were mostly offset by improved operating leverage. Now to more personal computing. Revenue was $14.3 billion and declined 3%. Windows OEM and devices revenue increased 1% and was relatively unchanged in constant currency. Windows OEM grew 5% with strong execution as well as a continued benefit from Windows 10 end of support. Results were ahead of expectations as inventory levels remained elevated with increased purchasing ahead of memory price increases. Search and news advertising revenue ex TAC increased 9% in constant currency, slightly below expectations driven by some execution challenges. As expected, the sequential growth rate moderated as the benefit from third-party partnerships normalized. And in gaming, revenue decreased 9% in constant currency. Xbox content and services revenue decreased 6% in constant currency, and was below expectations driven by first-party content with impact across the platform. Segment gross margin dollars increased 2% in constant currency, and gross margin percentage increased year over year driven by sales mix shift to higher margin businesses. Operating expenses increased 5% in constant currency driven by the impairment charges in our gaming business noted earlier, as well as R and D investments in compute capacity and AI talent. Operating income decreased 3% in constant currency, and operating margins were relatively unchanged year over year at 27%. As higher operating expenses were mostly offset by higher gross margins. Now moving to our Q3 outlook, which unless specifically noted otherwise, is on a US dollar basis. Based on current rates, we expect FX to increase total revenue growth by three points. Within the segments, we expect FX to increase revenue growth by four points in productivity and business processes and two points in intelligent cloud and more personal computing. We expect FX to increase COGS, and operating expense growth by two points. As a reminder, this impact is due to the exchange rates a year ago. Starting with the total company. We expect revenue of $80.65 to $81.75 billion or growth of 15 to 17% with continued strong growth across our commercial businesses. Partially offset by our consumer businesses. We expect COGS of $26.65 to $26.85 billion, growth of 22 to 23%, and operating expense of $17.8 to $17.9 billion or growth of 10 to 11% driven by continued investment in R and D, AI compute capacity, and talent. Against a low prior year comparable. Operating margins should be down slightly year over year. Excluding any impact from our investments in OpenAI, other income and expense is expected to be roughly $700 million driven by a fair market gain in our equity portfolio and interest income partially offset by interest expense which includes the interest payments related to data center leases. And we expect our adjusted Q3 effective tax rate to be approximately 19%. Next, we expect capital expenditures to decrease on a sequential basis due to a normal variability from cloud infrastructure build-outs and the timing of delivery of finance leases. As we work to close the gap between demand and supply, we expect the mix of short-lived assets to remain similar to Q2. Now our commercial business. In commercial bookings, we expect healthy growth in the core business on a growing expiry base when adjusted for the OpenAI contracts in the prior year. As a reminder, the significant OpenAI contract signed in Q2 represents multiyear demand needs from them, which will result in some quarterly volatility in both bookings and RPO growth rates going forward. Microsoft cloud gross margin percentage should be roughly 65% down year over year driven by continued investments in AI. Now to segment guidance. In productivity and business processes, we expect revenue of $34.25 to $34.55 billion or growth of 14 to 15%. In Microsoft 365 commercial cloud, we expect revenue growth be between 13-14% in constant currency with continued stability in year over year growth rates on a large and expanding base. Accelerating copilot momentum, and ongoing E5 adoption will again drive ARPU growth. Microsoft 365 commercial products revenue should decline in the low single digits down sequentially assuming office 2024 transactional purchasing trends normalize. As a reminder, Microsoft 365 commercial products include components that can be variable due to in-period revenue recognition dynamics. Microsoft 365 consumer cloud revenue growth should be in the mid to high 20% range driven by growth at ARPU as well as continued subscription volume. For LinkedIn, we expect revenue growth to be in the low double digits. And in Dynamics 365, we expect revenue growth to be in the high teens with continued growth across all workloads. For intelligent cloud, we expect revenue of $34.1 to $34.4 billion or growth of 27 to 29%. In Azure, we expect Q3 revenue growth to be between 37-38% in constant currency against a prior year comparable that included. As mentioned earlier, demand continues to exceed supply. Significantly accelerating growth rates in both Q3 and Q4. And we will need to continue to balance the incoming supply we can allocate here against other priorities. As a reminder, there can be quarterly variability in year-on-year growth rates depending on timing of capacity delivery. And when it comes online, as well as from in-period revenue recognition depending on the mix of contracts. In our on-premises server business, we expect revenue to decline in the low single digits as growth rate normalize. Following the launch of SQL Server 2025, though increased memory pricing could create additional volatility in transactional purchasing. In more personal computing, we expect revenue to be $12.3 to $12.8 billion. Windows OEM and devices revenue should decline in the low teens. Growth rates will be impacted as the benefit from Windows 10 and support normalizes, and as elevated inventory levels come down through the quarter. Therefore, Windows OEM revenue should decline roughly 10%. The range of potential outcomes remains wider than normal, in part due to the potential impact on the PC market from increased memory pricing. Search and news advertising ex TAC revenue growth should be in the high single digits. Even as we work to improve execution, we expect continued share gains across Bing and Edge with growth driven by volume. And we expect sequential growth moderation as the contribution from third-party partnerships continues to normalize. And Xbox content and services, we expect revenue decline in the mid-single digits against a prior year comparable that benefited from strong content performance, partially offset by growth in Xbox Game Pass. And hardware revenue should decline year over year. Now some additional thoughts on the rest of the fiscal year and beyond. First, FX. Based on current rates, we expect FX to increase Q4 total revenue and COGS growth by less than one point with no impact to operating expense growth. Within the segments, we expect FX to increase revenue growth by roughly one point in productivity and business processes and more personal computing and less than one point in intelligent cloud. With the strong work delivered in H1 to prioritize investment in key growth areas and the favorable impact from a higher mix of revenue in our Windows OEM and commercial on-prem businesses we now expect FY '26 operating margins to be up slightly. We mentioned the potential impact on Windows OEM and on-premises server markets, from increased memory pricing earlier. In addition, rising memory prices would impact capital expenditures, though the impact on Microsoft cloud gross margins will build more gradually. As these assets depreciate over six years. In closing, we delivered strong top-line growth in H1, and are investing across every layer of the stack to continue to deliver high-value solutions and tools to our customers. With that, let's go to Q and A, Jonathan. Thanks, Amy. Jonathan Neilson: We'll now move over to Q and A. Out of respect to others on the call, we request that participants please only ask one question. Operator, can you please repeat your instructions? Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, And our first question comes from the line of Keith Weiss with Morgan Stanley. Please proceed. Keith Weiss: Excellent. Thank you guys for taking the question. I'm looking at a Microsoft Corporation print where earnings is growing 24% year on year. Which is a spectacular result. Great execution on your part. Top line growing well, margins expanding. But I'm looking at after-hours trading, the stock is still down. And I think one of the core issues that is weighing on investors is CapEx is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected. And I think that fundamentally comes down to a concern on the ROI on this CapEx spend over time. So I was hoping you guys could help us fill in some of the blanks a little bit in terms of how should we think about capacity expansion and what that can yield in terms of Azure growth going forward. More to the point, how should we think about the ROI on this investment as it comes to fruition? Thanks, guys. Amy Hood: Thanks, Keith. And I let me start, and Satya can add, some broader comments, I'm sure. I think the first thing, I think you really asked a very direct correlation, that I do think many investors are doing, which is between the CapEx spend and seeing an Azure revenue number. And, you know, we tried last quarter, and I think, again, this quarter to talk more specifically about all the places that the CapEx spend, especially the short-lived CapEx spend across CPU and GPU and where that'll show up. Sometimes I think it's probably better to think about the Azure guidance that we give as an allocated capacity guide about what we can deliver in Azure revenue. Because as we spend the capital and put GPUs specifically, it applies to but GPUs more specifically, we're really making long-term decisions. And the first thing we're doing is solving for the increased usage in sales and the accelerating pace of Microsoft 365 Copilot as well as GitHub Copilot are first-party apps. Then we make sure we're investing in the long-term nature of R and D and product innovation. And much of the acceleration that I think you seen from us in products over the past bit is coming because we are allocating GPUs and capacity to many of the talented AI people we've been hiring over the past years. Then when you end up is that you end up with the remainder going towards serving the Azure capacity that continues to grow in terms of demand. And a way to think about it, because I think I get asked this question sometimes, is if I had taken the GPUs that just came online in Q1 and Q2, in terms of GPUs and allocated them all to Azure, the KPI would have been over 40. And I think the most important thing to realize is that this is about investing in all the layers of the stack that benefit customers. And I think that's hopefully helpful in terms of thinking about capital growth. It shows in every piece. It shows in revenue growth across the business. And shows, as OpEx growth as we invest in our people. Satya Nadella: Yeah. I think you Amy, covered it. But, basically, as an investor, I think when you think about our capital and you think about the GM profile of our portfolio, you should obviously think about Azure. But you should think about Microsoft 365 Copilot. And you should think about GitHub Copilot. You should think about Dragon Copilot, Security Copilot. All of those have a GMP profile and a lifetime value. I mean, you think about it, acquiring an Azure customer is super important to us, but so is acquiring a Microsoft 365 or a GitHub or a Dragon Copilot, which are all, by the way, incremental business and TAMs for us. And so we don't wanna maximize just one business of ours. We wanna be able to allocate capacity while we're sort of supply constrained in a way that allows to essentially build the best LTV portfolio. That's on one side. And the other one that Amy mentioned is also R and D. I mean, you gotta think about compute is also R and D, and that's sort of the second element of it. And so we are using all of that obviously, to optimize for the long term. Keith Weiss: Excellent. Thank you. Thanks, Keith. Operator, next question please. Operator: The next question comes from the line of Mark Moerdler with Bernstein Research. Please proceed. Mark Moerdler: Thank you very much for taking my question. And congrats on the quarter. Of the other questions we believe investors want to understand is how to think about your line of sight from hardware CapEx investment to revenue and margins. You capitalize servers over six years, but the average duration of your RPO is two and a half years, up from two years last quarter. How do investors get comfortable that since this is a lot of this CapEx is AI centric, that you'll be able to capture sufficient revenue over the six-year use life of the hardware to deliver solid revenue and gross profit dollars growth. Hopefully, one similar to the CPU revenue. Thank you. Amy Hood: Thanks, Mark. Let me start with at a high level, and, Satya can add as well. I think, when you think about, average duration, I think what you're getting to is and we need to remember is that average duration is a combination of a broad set of contract arrangements that we have. A lot of them around things like Microsoft 365 or our biz app portfolio are shorter dated. Right? Three-year contracts And so they have, quite frankly, a short duration. The majority then that's remaining are Azure contracts. It's are longer duration. You saw that this quarter when you saw the extension of that duration from around two years to two and a half. And the way to think about that is you know, the majority of the capital that we're spending today and a lot of the GP that we're buying, are already contracted for most of their useful life. And so a way to think about that is, you know, much of that risk that I think your pointing to isn't there. Because they're already sold for the entirety of their useful life. And so part of it exists because you have this short shorter dated RPO because of some of the Microsoft 365 stuff. If you look at the Azure, only RPO, it's a little bit more extended. A lot of that is CPU basis. It's not just GPU. And on the GPU contracts, that we've talked about, including for some of our largest customers, Those are sold for the entire useful life of the GPU, and so there's not the risk to which I think you may be referring. Hopefully, that's helpful. Satya Nadella: Yeah. And just one other thing I would add to it is in addition to sort of what Amy mentioned, which is it's already contracted for the useful life, is we do use soft to continuously run even the latest models on the fleet that is aging, if you will. So that's sort of what gives us that duration. And so at the end of the day, we wanna have that's why we even think about aging the fleet constantly. Right? So it's not about buying a whole lot of gear one year. It's about each year you write the Moore's Law, you add, you use software, and then you optimize across all of it. Amy Hood: Mark, maybe to state this in case it's not obvious, is that as you go through the useful life, actually, you get more and more and more efficient. At delivery. So where you've sold the entirety of its life, the margins actually improved with time. And so I think that may be a good reminder to people as we see that obviously in the CPU fleet all the time. Mark Moerdler: That's a great answer. I really appreciate it, and thank you. Jonathan Neilson: Thanks, Mark. Operator, next question, please. Operator: The next question comes from the line of Brent Thill with Jefferies. Please proceed. Brent Thill: Thanks, Amy. On 45% of the backlog being related to OpenAI, I'm just curious if you can comment. There's obviously concern about about the the durability and I know maybe there's not much you can say in this, but I think everyone's concerned about exposure and if you could maybe talk through your perspective and what both you and Satya are seeing? Amy Hood: I think maybe I would have thought about the question quite differently, Brent. The first thing to focus on is the reason we talked about that number is because 55% or roughly $350 billion is related to the breadth of our portfolio, a breadth of customers, across solutions, across Azure, across industries, across geographies, That is a significant RPO balance, larger than most peers. More diversified than most peers. And frankly, I think we have super high confidence in it. You think about that portion, alone growing 28%, it's really impressive work on the breadth as well as the adoption curve that we're seeing, which is I think what I get asked most frequently. It's grown by segment, by industry, and by geo. And so it's very consistent. And so then if you're asking about how do I fill up OpenAI and the contract and the health, listen. It's a great partnership. We continue to be their provider of scale. We're excited to do that. We sit under one of the most successful businesses built and we continue to feel quite good about that. It's allowed us to remain a leader in terms of what we're building and being on the cutting edge of app innovation. Jonathan Neilson: Thanks, Brent. Operator, next question please. Operator: The next question comes from the line of Karl Keirstead with UBS. Please proceed. Karl Keirstead: Okay. Thank you very much. Okay, Amy, regardless of how you allocate the capacity between first party and third party Can you comment qualitatively on the amount of capacity that that's coming on I think the one gigawatt added in the December was extraordinary and hints that the capacity adds are accelerating. But I think a lot of investors have their eyes on Fairwater Atlanta, Fairwater, Wisconsin, and would love some comments about the magnitude of the capacity ads regardless of how they're allocated in the coming quarters. Thank you. Amy Hood: Yeah, Carl. I think we've we've said a couple of things. We're working as hard as we can to add capacity as quickly as we can. You've mentioned specific sites like Atlanta or Wisconsin. Those are multiyear deliveries, so I wouldn't focus necessarily on specific locations. The real thing we've got to do, and we're working incredibly hard doing it, is adding capacity globally. A lot of that will be added in The United States. To locations you've mentioned, but it also needs to be added across the globe to meet the customer demand that we're seeing and the increased usage. Though we'll continue to add both long-lived infrastructure. The way to think about that is we need to make sure we've got power and land and facilities available. And we'll continue to put GPUs and CPUs in them when they're done as quickly as we can. And then finally, we'll try to make sure we can get as efficient as we possibly can on the pace at which we do that. And how we operate them so that they can have the highest possible utility. And so I think it's not really about two places, Carl. I would definitely abstract away from that. Those are multiyear delivery time lines. But, really, we just need to get it done every location where we're currently in a build or or starting to do that. We're working as quickly as we can. Karl Keirstead: Okay. Got it. Thank you. Jonathan Neilson: Thanks, Carl. Operator, next question, please. Operator: The next question comes from the line of Mark Murphy with JPMorgan. Please proceed. Mark Murphy: Thank you so much. Sacha, the 200 accelerator for inference looked quite remarkable, especially in comparison to TPUs and Tranium and Blackwell, which have just been around a lot longer. Could you put that accomplishment in perspective in terms of how much of a core competency you think silicon might become for Microsoft Corporation and Amy. Are there any ramifications worth mentioning there in terms of supporting your gross margin profile for inference costs going forward? Satya Nadella: Yeah. No. Thanks for the question. So couple of things. One is we've been at this in a variety of different forms. For a long, long time in terms of building our own silicon. So, we're very, very thrilled about the progress with Maya 200. Especially when we think about running a GPT-5.0.2 and the performance we're able to get in the gems at FP4, just proves the point that when you have a new workload, a new shape of a workload, you can start innovating end to end between the model and the silicon. The entire system is not even about just silicon, the way the networking works, at rack scale that's optimized, with memory for this particular workload. And the other thing is we're round tripping and working very closely with our own superintelligence team, with all of our models. As you can imagine, whatever we build, will be all optimized for Maya. So if you're great about it. And I think the way to think about All Up is we're in such early innings. I mean, even just look at the amount of silicon innovation and systems innovation Even since December, I think the new thing is everybody's talking about low latency in Right? And so one of the things we wanna make sure is we're not locked into any one thing. If anything, we we have great partnership with NVIDIA, with AMD. They are in a way We are innovating. We want a fleet at any given point in time to have access to the best TCO. And it's not a one generation game. I think a lot of folks just talk about who's ahead. It's just remember, you have to be ahead all for all time to come. And that means you really wanna think about you know, having a lot of innovation that happens out there to be in your fleet so that your fleet is fundamentally advantaged at the TCO level. So that's kinda how I look at it, which is we are excited about Maya. We're excited about Cobalt. We're excited about our DPU, our next So we have a lot of systems capability. That means we can vertically integrate. And because we can vertically integrate doesn't mean we just only vertically integrate. And so we wanna be able to have the flexibility here, and that's what you see us do. Jonathan Neilson: Thanks, Mark. Operator, next question please. Operator: The next question comes from the line of Brad Zelnick with Deutsche Bank. Please proceed. Brad Zelnick: Great. Thank you very much. Satya, we heard a lot about frontier transformations from Judson and Ignite. And we've seen customers realize breakthrough benefits when they adopt the Microsoft Corporation AI stack. Can you help frame for us the momentum in enterprises embarking on these journeys and any expectation for how much their spend with Microsoft Corporation can expand in becoming frontier firms. Thanks. Satya Nadella: Yeah. Thank you for that. So I think one of the things that we are seeing is the adoption across the three major suites of ours. Right? So if you take Microsoft 365, you take what's happening with security and you take GitHub. In fact, it's it's fascinating. I mean, you know, these three things had effectively compounding effects for our customers in the past. Like something like Entra as an identity system, or Defender as the protection system, across all three was sort of super helpful. But to what now you're seeing is something like WorkIQ. Right? So, I mean, just to give you a flavor for it, the most important database underneath for any company that uses Microsoft Corporation today is the data underneath Microsoft 365. And the reason is because it has all this tacit information. Right? Who are your people? What are their relationships? What are the projects they're working on? What are their artifacts? Their communications. So that's a super important asset for any business process, business workflow context. In fact, the scenario I even had in my transcript around you can now take WorkIQ as an MCP server and, you know, get a repo and say, hey. Please look at my design meetings for the last month in Teams. And tell me if my repo reflects it. I mean, that's a pretty high level way to think about how what is happening previously perhaps with our tools business and our GitHub business are suddenly now being transformative. Right? That agent black pay plane is really transforming companies in some sense. Right? That I think, the most magical thing, which is you deploy these things, and suddenly, the agents are helping you coordinate, bring more leverage to your enterprise. Then on top of it, of course, there is the transformation, which is what businesses are doing. How we think about customer service? How should we think about marketing? How should we think about finance? How should we think about that and build our own agents? That's where all the services in fabric and foundry and, of course, we get up tooling is helping them, or even the low code, no code I had some stats on how much that's being used. But one of the more exciting things for me is these new agents systems, Microsoft 365 Copilot, GitHub Copilot, security Copilot, all coming together to compound the benefits of all the and all the deployment, I think, is probably the most transformative effect right now. Jonathan Neilson: Thanks, Brad. Operator, we have time for one last question. Operator: And the last question will come from the line of Raimo Lenschow with Barclays. Please proceed. Raimo Lenschow: Perfect. Thanks for squeezing me in. Last few quarters, we talked besides the GPU side, we talked about CPU as well on the on the other side and you had some operational changes at the January. Can you speak what you saw there and maybe put it more in a bigger picture in terms of clients realizing that their move to the cloud is important if they want to deliver proper AI So what are we seeing in terms of of cloud transitions? Thank you. Satya Nadella: I I didn't quite we sorry, Ryan. You were asking about the SNC CPU side, or can you just repeat the question, please? Yeah. Raimo Lenschow: Yeah. Yeah. Sorry. So I was I was wondering about the CPU side of Azure because we had some operational changes there. And, you know, we we also hear from the field a lot that people are realizing they need to be in the cloud if you want to do proper AI and that's kind of driving momentum. Thank you. Yeah. I think I I think I get it. So first of all, I I I had mentioned when you think about AI workloads, you shouldn't think of AI workloads as just AI accelerator compute. Right? Because in some sense, it it take any agent. The agent will then spawn through tools used, maybe a container, which runs obviously on compute. In fact, whenever we think about even the building out of the fleet, we think of in ratios. Even for a training job, by way, an AI training job requires a bunch of compute and a bunch of storage very close to compute. And so, therefore, I mean, same thing in inferencing as well. So in inferencing with agent mode, would require you to essentially provision a computer, or computing resources to the agent. So not they they don't need GPUs. They're running on GPUs, but they need computers, which are compute and storage. So that's what's happening even in the new world. The other thing you mentioned is the cloud migrations are still going on. In fact, one of the stats I had was SQL our latest SQL Server growing as an IaaS service in Azure. And so, that's one of the reasons why we have to think about our commercial cloud and keep it balanced with the rest of our AI cloud because when clients bring their workloads and bring new workloads, they need all of these infrastructure elements in the region in which they're deploying. Raimo Lenschow: Yep. Okay. Perfect. Thank you. Jonathan Neilson: Thanks, Raimo. That wraps up the Q and A portion of today's earnings call. Thank you for joining us today, and we look forward to speaking with you all soon. Thank you all. Thank you. Operator: Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a great night.
Operator: Good afternoon, ladies and gentlemen, and welcome to the C.H. Robinson Fourth Quarter 2025 Conference Call. At this time, all participants are in a listen-only mode. Following the company's prepared remarks, we will open the line for a live question and answer session. Please press 0. As a reminder, this conference is being recorded. Wednesday, 01/28/2026. I would now like to turn the conference over to Charles Ives, Senior Director of Investor Relations. Thank you, operator, and good afternoon, everyone. Charles Ives: On the call with me today is David Bozeman, our President and Chief Executive Officer, Michael Castagnetto, our President of North American Surface Transportation, Arun Rajan, our Chief Strategy and Innovation Officer, and Damon Lee, our Chief Financial Officer. I'd like to remind you that our remarks today contain forward-looking statements. Slide two in today's presentation lists factors that could cause our actual results to differ from management's expectations. Our earnings presentation slides are supplemental to our earnings release and can be found in the Investors section of our website at investor.chrobinson.com. Today's remarks also contain non-GAAP measures. Reconciliations of those measures to GAAP measures are included in the presentation. With that, I'll turn the call over to David Bozeman. David Bozeman: Thank you, Charles. Good afternoon, everyone. Thank you for joining us today. Over the past year, we've consistently said that we're not immune to macroeconomic conditions, but that we are managing them better than we have in the past. The fourth quarter certainly provided a challenging macro environment, with weak global freight demand, rising spot costs in trucking, and falling ocean rates all providing headwinds to our business. The cash freight shipment index declined year over year for the thirteenth consecutive quarter and was the lowest Q4 reading since the financial crisis of 2009. Spot market cost for truckload capacity spiked during the last five weeks of the quarter due to a seasonal decline in capacity, three winter storms, and incremental pressure from the cumulative enforcement of various commercial driver regulations. International freight continues to be impacted by global trade policies, which caused previous front-loading, a dislocation of shipments, and a more pronounced decline in demand after the Q3 peak season. Combined with excess vessel capacity, this caused ocean rates to decline substantially versus a year ago, consistent with the expectations that we laid out at our investor day in December 2024. And we are not impervious to these volume and rate dynamics. However, we've consistently focused on controlling what we can control, which is providing differentiated service and solutions to our customers and carriers, executing with discipline, and continuously improving our business model and our cost to serve. This focus and the strength of our lean AI, which is the combination of our lean operating model, industry-leading technology, and the best logisticians, has enabled us to consistently outperform over the last two years. And we did it again in Q4. In NAST, we grew our total volume by 1% and our truckload volume by approximately 3% on a year-over-year basis, compared to a 7.6% year-over-year decline in the CAS freight shipment index. This reflects another quarter of demonstrable market share growth. This was accomplished while mitigating some of the market pressure on gross profits through strong revenue management practices and by improving our cost of hire advantage. These disciplines enabled us to improve our NAST AGP margin by 20 basis points on a year-over-year basis, despite the pressure on spot market costs from a decline in available capacity. In Global Forwarding, we expanded gross margins by 120 basis points year over year through improved revenue management discipline. We also continue to evolve our Global Forwarding business to a more cohesive, centralized model with standardized and lean AI-enabled processes. We continue to improve our productivity and cost to serve across the enterprise, resulting in a double-digit productivity increase in NAST for the full year and a high single-digit productivity increase in Global Forwarding. As we continue to purposely engineer our work to drive higher automation, a lower cost to serve, and improve customer outcomes, all of this is aimed at building the best model for demonstrable outgrowth while continuing to have industry-leading operating margins. I'm proud of our employees for navigating difficult market conditions with discipline and ingenuity and for embracing the culture shift that has fundamentally changed this company. Changing the culture of a company is hard work. We've shifted to a culture of solving problems with speed, and the implementation of a lean operating model has contributed greatly to this change. We certainly encountered challenges along the way, but how we solve them now is different, and it's not easy for others to replicate. With the discipline and tools that we've armed our people with, we solve challenges with a lean mindset, with experimentation, and with urgency. As we've said consistently over the past year, we are not waiting for a market recovery to improve our financial results, and the strategies that our team is executing are built to be effective in any market environment. With our strong balance sheet and cash flow generation, we are comfortable operating in an environment that is lower for longer. We're also highly confident in our ability to continue executing on all of our strategic initiatives, including further increasing our operating leverage when freight demand eventually inflects. Our model with an industry-leading cost to serve is highly scalable, and we expect it will improve further as we continue to harness the evolving power of AI to drive automation across the quote-to-cash life cycle of a load. While we made considerable progress, we're still in the early innings of our lean AI journey. Lean AI is our unique disciplined approach to AI innovation that is transforming supply chains. It combines the principles of our Robinson operating model rooted in lean methodology with the power of custom-built AI and the expertise of our people to maximize value, minimize waste, and drive better outcomes for customers and carriers. As a result, we are building an ever-expanding fleet of AI agents that continues to not only improve our productivity and operational performance by automating manual tasks that free up our industry-leading talent to focus on more strategic, higher-value work, but they're also directly enhancing the service and value we deliver to our customers and contributing to our market share gains. In other words, we are using our trusted domain expertise to build technology that delivers on our customer promise and drives higher value for all of our stakeholders. We are the trusted provider that customers look to for cutting-edge innovation, differentiated solutions, and best-in-class service. And while we're pleased with the results we've delivered in the last two years, we are still in the early stages of our transformation. Significant runway exists as we continue to deepen the lean mindset and scale custom-built AI agents across the enterprise. I'll turn it over to Michael now to provide more details on our NAST results. Michael Castagnetto: Thanks, David, and good afternoon, everyone. In Q4, the macro conditions that David mentioned provided another opportunity for us to test our lean disciplines, our revenue management practices, and our ability to widen our cost of capacity advantage versus the market. While we continue to identify opportunities for further improvement, the expertise and discipline of our team and the resilience of the Robinson operating model once again demonstrated what we can do in a difficult freight environment. For the eleventh consecutive quarter, the team delivered market share growth in Q4. With the freight recession exceeding three years, the CAS freight shipment index declined on a year-over-year basis for the thirteenth consecutive quarter in Q4 and was down 7.6%. In contrast, our combined truckload and LTL volume delivered positive growth of approximately 1% year over year. Truckload volume rose approximately 3% year over year, and LTL volume increased approximately one-half a percent year over year, reflecting market share gains in both modes. One of the keys to our consistent market share gains has been volume growth in some key verticals that we've specifically targeted. During Q4, we delivered double-digit year-over-year volume growth in both the retail and automotive verticals. These results reflect the execution of our strategic focus and our expanded capabilities that directly support these segments and evolving customer needs, such as our leading drop trailer and cross-border capabilities. Over the course of 2025, we augmented our value-added solutions in these areas, including the introduction of our drop trailer asset management system and cross-border freight consolidation while expanding our warehousing and cross-docking space at the US-Mexico border. These solutions are designed to address real customer pain points while simplifying complexity, reducing costs, and delivering consistent high-quality service across the supply chain. In our greater than $3 billion LTL business, where we move more LTL freight than any other 3PL in North America, we delivered year-over-year volume growth for the eighth consecutive quarter, reflecting consistent outperformance versus the broader LTL market. Through our deep, long-standing relationships with LTL carriers and our proven ability to manage service variability among the carriers to deliver a consistently high level of service to our customers, they continue to turn to us to simplify the complexities of LTL freight and to reduce their costs. One example of how we're applying our lean AI to simplify complexity is with AI agents that we launched in 2025 to address a widespread shipper pain point of missed LTL pickups. These new AI agents are tracking down missed pickups and using advanced reasoning to determine how to keep freight moving. They're also collecting and analyzing previously unavailable data that LTL carriers are now using to improve their technology, scheduling, and operations. As a result, shippers' freight moves up to a day faster, and return trips to pick up missed freight have been reduced by 42%. Additionally, 95% of our checks on missed LTL pickups are now automated, saving over 350 hours of outsourced manual work a day. This is another example of Robinson only deploying AI agents that can deliver tangible business results. As Arun and Damon like to say, there's no hobby AI at Robinson. As I mentioned earlier, Q4 also provided another opportunity to test our revenue management practices and our ability to widen our cost of capacity advantage versus the market. That opportunity arose due to a five-week stretch of capacity disruptions caused by a seasonal decline in capacity, three consecutive winter storms, and incremental pressure from the cumulative enforcement of various commercial driver regulations. As a result, the dry van load-to-truck ratio increased to approximately 10 to 1 versus 6 to 1 during the comparable period in 2024, and spot market costs for truckload capacity spiked. Our team of freight experts once again responded to the spot rate inflection, supported by our lean operating model disciplines and our cost and price discovery tools, to widen our cost of hire advantage during the quarter and to capture higher margin loads in the spot market to somewhat offset the margin pressure on our contractual portfolio. Despite the tougher conditions and the higher mix of contractual volume, these efforts enabled us to hold our truckload AGP per mile flat year over year and to deliver improvement in our NAST gross margin. Our ability to deliver these results continues to give us confidence in our ability to handle a sustained spot rate inflection better than we have in the past, resulting in a gross margin squeeze that we expect to be shorter in duration and shallower in impact than historically. Our team continues to actively assess the market and optimize for the most effective combination of volume and margin to enhance earnings performance. With strategic agility built into our model, we have the flexibility to pivot toward volume or margin as market dynamics evolve, making disciplined, data-driven adjustments in real-time, all while staying focused on long-term value creation. We're also making smarter use of our proprietary digital capabilities and getting actionable data and AI-powered tools into the hands of our freight experts faster, enabling them to make better decisions and to capture the optimal freight for us. These digital capabilities also enabled us to continue delivering double-digit productivity increases in NAST in 2025. Since 2022, we have delivered a more than 40% increase in shipments per person per day, and this is measured across the entirety of our NAST organization. This enhanced efficiency is not only lowering our industry-leading cost to serve, but it is also elevating the customer experience by enabling faster, more reliable service. And while shifts in market dynamics and regulatory changes continue to occur, we remain confident in the strength and reliability of our carrier network. Our diversified carrier base and thorough vetting give us a high degree of comfort in our ability to navigate these changes without disruption and to maintain a high level of service quality for our customers. Looking ahead to Q1, it is typically a seasonally weaker quarter compared to Q4, and then the market usually shows seasonal growth in Q2 and Q3. For Q1, the ten-year average of the CAS freight shipment index reflects a 2.3% sequential volume decline from Q4. The spot rate trend in Q1 is historically a near mirror image of Q4, with rates ramping up in Q4 and then trending back down to preholiday levels by the end of Q1 or early Q2 as capacity returns after the holidays and demand enters a softer period. The timing, frequency, and severity of winter storms during Q1 usually impact the pace and magnitudes of those trends. There is less elasticity in the supply of capacity, and market events now cause more dramatic changes in spot rates. And the cost pressures that we experienced in December have carried into January. As David said in his opening comments, we'll remain focused on what we can control regardless of market conditions, and we will continue to deliver industry-leading solutions and flexibility that only a scaled broker can provide to customers and carriers. Our people and their unmatched expertise enable us to deliver exceptional service and greater value, and they are relentlessly driving improved results. I'm proud of our 2025 results and proud of our team that continues to learn and improve. With much more runway for improvement in front of us, we're still in the early innings of our transformation journey. With that, I'll turn it over to Arun to provide an update on the innovation we're delivering to strengthen our customer and carrier experience and improve our gross margin and operating leverage. Arun Rajan: Thanks, Michael, and good afternoon, everyone. As David and Michael mentioned, we continue to scale several innovations to better serve our customers and widen our competitive moat, including our fleet of secure proprietary custom-built AI agents across the extensive processes within our quote-to-cash life cycle of an order. One component of C.H. Robinson's culture that enables us to widen our moat is our builder culture, which has existed at Robinson for many years and resulted in the company's proprietary transportation management system and extensive application stack that sits on top of it. This builder culture has honed the company's skills around the fundamentals of engineering, data science, infrastructure, security, and privacy, and we have an in-house team of more than 450 engineers and data scientists that effectively and efficiently build fit-for-purpose AI agents. Builder culture is in contrast to a buy-and-integrate culture where companies end up cobbling software and systems together. Companies with a strong builder culture, such as the tech companies that I came from, Travelocity, Zappos, and Amazon, had a strategy of owning the technology and building it. And this is our strategy as well. Once we've invested a fixed cost to build software or an AI agent, the marginal cost per transaction is very low, and now a highly scalable model has been created. As we scale our AI solutions, the primary incremental cost is just the cost of AI tokens versus paying by the transaction to a software-as-a-service provider, and the cost per token has declined significantly due to the tremendous competition in this space. So owning the technology and engineering it in such a way that we have a scalable model is a critical component to widening our moat. Our build model is also important from a speed of implementation perspective. If a company is using multiple third-party providers to create and implement AI agents, they are beholden to that external provider who doesn't know the business as well. With our builder culture, we're leveraging the vast domain expertise of our in-house team that has engineered our technology landscape and has a deep understanding of our industry. We own and control the code, and we own the application layer because we are building our own AI agents. We therefore have more control over the implementation process and the speed of integrating those agents into our proprietary technology landscape. That faster speed to ideate, build, operationalize, and scale our AI agents is a differentiator and is showing up in our outperformance. The difference at Robinson is our industry-leading technology is combined with our lean AI operating model, and we expect that our in-house team with deep domain expertise will enable us to sustainably build and implement our proprietary AI innovations in a disciplined, cost-effective way that maximizes the return on our tech investments. Our fleet of AI agents is growing quickly as we continue to pioneer new ways to automate manual tasks and supercharge our industry-leading freight experts to solve for complexity and deliver high-quality service to our customers and carriers. We continue to leverage and scale the use of Eugenic AI to power new capabilities that are backed by our unmatched data and scale, and we are continuing to disrupt from within. Agentic.ai's advanced reasoning capabilities are allowing us to unlock previously tracked value in unstructured data such as phone calls, emails, and tribal knowledge through its ability to understand context and make real-time decisions. However, unlike linear rules-based automation, AgenTik AI operates with a degree of autonomy and unpredictability, making its progress nonlinear and requiring ongoing human-in-the-loop oversight as it advances through cycles of progress and retrenchment. Our Lean AI process of discovering, learning, and building, where missteps and resulting learnings are milestones, is not only necessary but is the best path to uncover what truly works. Continued improvements of our service, the cost-efficient AI task agents that listen, learn, and act all day, every day, enable us to deliver fast, accurate, and personalized service at scale and in any market. All of these innovations are delivering on three items that are key to our strategy. The first is providing a superior customer and carrier experience to elevate our service offering and drive market share growth. The second is responding more surgically and faster than ever to dynamic market conditions by performing more frequent algorithmic price and cost discovery, which along with our operating model rigor and our revenue management practices, is contributing to the gross margin improvement that we're delivering. And finally, the growing automation of our quote-to-cash life cycle enables us to decouple headcount growth from volume growth and to create greater operating leverage and operating margin expansion. As David said, all of our strategies are aimed at building the best model for demonstrable outgrowth while continuing to have industry-leading operating margins. As technology continues to evolve, we will continue to disrupt from within to stay at the forefront of the evolution and to further widen our competitive moat. With that, I'll turn the call over to Damon for a review of our fourth-quarter results. Damon Lee: Thanks, Arun, and good afternoon, everyone. As you have heard, we delivered another quarter of disciplined execution as we further advanced our focused strategic initiatives aimed at market share growth, continued optimization of adjusted gross profit or AGP, disciplined cost management, and further productivity gains, all supported by our lean AI operating model. The macro environment continued to provide significant headwinds in Q4. Our Q4 total revenue and AGP declined approximately 7% and 4% year over year, respectively. The AGP decline was driven by a 13% year-over-year decline in Global Forwarding's AGP, which was primarily due to a significant drop in ocean rates driven by a market imbalance from declining demand and growing vessel capacity. The February 2025 sale of our Europe Surface Transportation business also contributed to the decrease in AGP and was partially offset by a 2% increase in NAST AGP. On a monthly basis compared to Q4 of last year, our total company AGP per business day was down 5% in October, up 6% in November, and down 12% in December. This was primarily driven by lower ocean rates, which caused Q4 ocean AGP per shipment to decline 15.2% year over year, and this was most pronounced in December. In the face of those headwinds, we continued our track record of outperformance. Turning to expenses, Q4 personnel expenses were $337 million, including $15.2 million of restructuring charges related to workforce reductions. Excluding restructuring charges in 2025 and 2024, our Q4 personnel expenses were $321.8 million, down $28.8 million or 8.2% due to our continued productivity and cost optimization efforts and the divestiture of our Europe Surface Transportation business. Our average headcount was down 12.9% year over year in Q4 and was down 3.8% sequentially, illustrating how we continue to decouple headcount growth from volume growth and optimize our organizational structure. Our Q4 SG&A expenses totaled $138.7 million. Excluding $900,000 of other restructuring charges in 2025 and a $3.1 million net benefit in 2024 primarily related to the divestiture of our Europe Surface Transportation business, SG&A expenses were down $11.8 million or 7.9% year over year due to cost optimization efforts. As a result of our efforts to grow market share, improve gross margins, and increase our productivity and operating leverage, we expanded our operating margin, excluding restructuring costs, by 320 basis points year over year. And despite the considerably tougher macro conditions for truck brokerage, NAST expanded their operating margin, excluding restructuring costs, by 310 basis points year over year. This is the lean AI strategy at work, and we remain confident in the 2026 operating income target that we updated last quarter. Turning to our 2026 annual operating expense guidance, we expect 2026 personnel expenses to be in the guidance range of $1.25 billion to $1.35 billion. This includes an expectation that we will generate double-digit productivity improvements in both NAST and Global Forwarding in 2026 as we continue to implement AgenTeq AI across our quote-to-cash life cycle of an order. As we shared last quarter, along with our updated 2026 operating income target, these productivity improvements are expected to be over-indexed to 2026. On a quarterly basis, it's important to note that our Q1 personnel expenses are expected to increase sequentially due to the employer portion of FICA taxes resetting to a higher level until employees' annual FICA wage limits are met. This impact is estimated to be approximately $15 million in Q1 versus Q4, after which the quarterly FICA taxes and personnel expenses are expected to decline. We expect 2026 SG&A expenses to be $540 million to $590 million, including depreciation and amortization of $95 to $105 million for the year. Although most of our SG&A expenses are subject to inflation, we expect continued cost improvements to partially offset the inflationary impact. Shifting back to Q4, our effective tax rate for the quarter was 18.1%, resulting in a full-year tax rate of 18.7%. For 2026, we expect the full-year tax rate to be in the range of 18% to 20%. As a reminder, our tax rate historically is lower in Q1 from stock-based compensation deliveries that occur in the quarter. As a result, we expect our Q1 tax rate to be below 15%. Our capital expenditures were $15.7 million during the quarter, bringing our 2025 total to $70.5 million. For 2026, we expect our full-year capital expenditures to be $75 to $85 million. Turning to cash and our balance sheet, we generated $305.4 million in cash from operations in Q4, and we ended Q4 with approximately $1.49 billion of liquidity. This included $1.33 billion of committed funding under our credit facilities and a cash balance of $161 million. Our net debt to EBITDA leverage at the end of Q4 was 1.03 times, down from 1.17 times at the end of Q3. This financial strength is a key differentiator in our industry, giving us the ability to continue investing through the bottom of the freight cycle to further enhance our capabilities and to return capital to our shareholders. While our capital allocation strategy remains grounded in maintaining an investment-grade credit rating, our financial strength and improved leverage ratio enabled us to return approximately $207.7 million of cash to shareholders in Q4 through $133.3 million of share repurchases and $74.3 million of dividends. Through the disciplined execution of our strategy, with our lean operating model and AI innovation at its core, Q4's results further validate the lean AI transformation underway at C.H. Robinson. I have been part of significant transformations in my career, most recently at General Electric. What we're doing at Robinson is carving a similar path, and I'm extremely proud of the progress we have made. And as we've said, we are still in the early innings of our transformation. We are excited about the significant runway that remains in executing our lean AI strategy and in our ability to deliver sustainable, profitable growth and long-term value for all of our stakeholders. With that, I'll turn the call back to David for his final comments. David Bozeman: Thanks, Damon. As you've heard in our prepared remarks today, we've made significant progress in 2025 on the transformation of C.H. Robinson into the global leader in lean AI supply chains. Our differentiating lean AI gives us a unique opportunity to create new ways to solve complex challenges at scale, helping our customers build supply chains that are smarter, faster, and more resilient in a world where disruption is constant and agility is essential. With today's geopolitical landscape, there are a lot of unknowns and potential volatility that will be out of our control. But what is in our control is our ability to discover, learn, innovate, and solve problems. And that is where the lean operating model is so important to our success. As lean disciplines continue to be deployed more broadly across our organization, our teams are becoming increasingly equipped to identify root causes of problems, implement countermeasures, and drive meaningful improvements. That's how we've consistently delivered our outperformance for the last two years and how we're positioned to continue doing so regardless of market conditions or cycle. And as we lead our industry and stay on offense with our lean AI strategy, we've never been more excited about the future. Our technology is lifting manual, repetitive work off our people's plates, freeing them up to use their expertise to do more strategic work, to reach more customers, to garner more wallet share, and to move up the value stack by leveraging our growing capabilities to provide better outcomes and more value for our customers and carriers. Our technology is improving our gross margins by allowing us to better align capacity and pricing to the specific needs of our customers and to specific market conditions. These superior dynamic costing and pricing capabilities will be even more important when we officially see a turn in overall freight demand. And our technology is augmenting our evergreen productivity initiatives and improving our industry-leading cost to serve. I want to thank our people for their relentless efforts throughout 2025 to provide exceptional service to our customers and carriers, for embracing the Robinson operating model, and continuing to execute with discipline. We've reinvigorated a winning culture, and we're getting our swagger back. But we're nowhere near done. We are the new disruptor. We will continue to lead with purpose and move with urgency, and we expect to drive sustainable outperformance across market cycles. You've heard us say that we expect the next two years to be more exciting than the last two years, and the last two years have been pretty damn exciting. That concludes our prepared remarks. I'll turn it back to the operator now for the Q&A portion of the call. Operator: Thank you. As a reminder, to ask a question, please press 1 on your telephone keypad. The first question comes from Thomas Wadewitz with UBS. You may proceed with your question. Thomas Wadewitz: Yeah. Great. Thank you, and congratulations on the results against a pretty tough market backdrop. I wanted to, I think from Damon, maybe I wanted to see if you could give a little more perspective on the first quarter. I think the progression through by month with AGP growth showed more pressure in December. I guess that's unsurprising you commented on Ocean. And obviously, spot rates up in truck. But how should we think about the kind of net revenue growth in or adjusted gross profit growth in the first quarter and just to shape that a little better? And then I wanted to give you one other. We, you know, I think we're pretty optimistic about what you can do in kind of 2027. I know that's looking out a lot further, but if you look at ways to get a stronger market for truckload pricing and volume growth, do you think you can kind of overshoot meaningfully on that operating margin target in NAST? I mean, if you get, can you get to a mid-forties number against a strong backdrop? Is that something where you really want to kind of, you know, just not let it get too high and do a lot more on the volume side? So I guess two different time frames, but thank you for the time. Damon Lee: Yep. Thanks for the thanks for the question and the comments, Thomas. So look, as it relates to progression from Q4 to Q1, I mean, as you noted, I mean, December was a challenging month for the market, and certainly, you know, we weren't immune to those pressures. You know, what I would say as you think about December going into Q1 is certainly December was heavily impacted by Global Forwarding and the ocean rate normalization that we've been talking about for quite a while. We gave our 2026 operating target update, if you remember back in Q3, you know, and we called it out on our waterfall, we mentioned that ocean rates were continuing to normalize. And we expect that to continue into Q1 as well as we've highlighted as part of our path to $6 EPS with no market growth. So certainly, Q3 was a heavy normalization quarter that continued into Q4. Our path to $6 EPS with no market growth. So certainly, Q3 was a heavy normalization quarter that continued into Q4. 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So certainly, Q3 was a heavy normalization quarter that continued into Q4. Our path to $6 EPS with no market growth. So certainly, Q3 was a heavy normalization quarter that continued into Q4. Our path to $6 EPS with no market growth. So certainly, Q3 was a heavy normalization quarter that continued into Q4. Our path to $6 EPS with no market growth. So certainly, Q3 was a heavy normalization quarter that continued into Q4. Our path to $6 EPS with no market growth. So certainly, Q3 was a heavy normalization quarter that continued into Q4. Our path to $6 EPS with no market growth. So certainly, Q3 was a heavy normalization quarter that continued into Q4. Our path to $6 EPS with no market growth. So certainly, Q3 was a heavy normalization quarter that continued into Q4. Our path to $6 EPS with no market growth. So certainlyDamon Lee: Q4 ended a little challenging, you saw the results we delivered. So we feel confident we'll continue to over-deliver and execute our strategy in Q1. As it relates to your broader question around the future, specifically 2027, we won't go quite as far as giving guidance there. I will remind the audience here that we've talked a lot about optionality as it relates to our margins going forward. We're going to make the right decisions for Robinson and the right decisions for our investors. In many cases, converting that margin to demonstrable market share could be the right decision for the company and for our shareholders. What I would say is we're still on a really good trajectory to get to those mid-cycle margins that we laid out for NAST and Global Forwarding, with 40% being the margin target for NAST at mid-cycle. Still on a very good trajectory to get to that target. But once we get beyond that target, we'll make an earnings growth and a quality of earnings growth decision on whether we continue to expand margins at that point or whether we reinvest that into the marketable growth. Thanks for the question, Thomas. Thomas Wadewitz: Great. Thank you. Operator: The next question comes from Bascome Majors with Susquehanna. You may proceed with your question. Bascome Majors: Thanks for taking my questions. Just to follow up on that last point about 2027. You talked a little bit longer-term strategically about the balance of volume and margin expansion. You talked a little bit in the prepared remarks tactically about tweaking price intra-day and making the right decision minute by minute. How do you think somewhere between that, how does it feel in '26 right now, the balance of margin expansion and you potentially seeking more share growth on that bridge to a world where you might consistently have margins above your mid-cycle level? Thank you. Damon Lee: Yeah. Thanks for the question, Bascome. What I would say is that I'll just start again with the option. We want to make the right decision for what I consider quality earnings growth. We're experimenting with that every day, every week, every month. Today, in 2025 and now coming into 2026. Certainly, we're making revenue management decisions multiple times an hour, hundreds of times a day on that right balance between volume and margins. It really does come down to the trade-off. Once we get to what we consider is our threshold for quality of earnings, which we've set out already, 40% for NAST at mid-cycle and 30% for Global Forwarding. We feel like that is a fair and it's typically been acknowledged by the market that those are the thresholds we'd expect you guys to be able to get to. We've set our targets in a similar range. But we believe beyond that point, we really don't have anything left to prove on a quality of earnings perspective. We'll make the decision beyond that point on what is the right decision for earnings growth. In many cases, that will be supercharging the outgrowth of the market that you've seen us do today. So if you take Q4 where truckload outgrowth over the CAS index was over a thousand basis points, we think we can certainly beat that mark when we get to a point of investing margin into profitable growth for our businesses. It's all about optionality. It's all about quality earnings growth as we go through '26 and '27 and beyond. We do believe it's important to establish those quality of earnings thresholds that I've mentioned. But beyond that, we'll make the right decisions for the company and our shareholders on a high quality of earnings growth that we think will be difficult to compete with in the industry. David Bozeman: Hey, Bascome. And I think that was well said by Damon. The other thing is that we often say is that we're just going to be disciplined and measured in how we're going about this with the right economics and we're not stopping that. That's just how we've done it, and that's how we're going to continue to do it. Bascome Majors: Thank you both. Operator: The next question comes from Brandon O'Grincey with Barclays. You may proceed with your question. Brandon O'Grincey: Hey. We get this response a lot like, okay. What is C.H. Robinson doing, and why can't other competitors just copy it? And I think especially for transportation folks, investors, you don't need to fully understand what a lean operating model means, the way you guys are very targeted in deploying AI. So I don't know. Maybe if you or Arun could dig into that. Appreciate it. David Bozeman: Yeah. We can do that. First of all, good for the question, Brandon. Certainly, we don't have the real estate to go really, really deep to answer that question. So I'll kind of give you the highlights. And then when we hit the road, we can go out of the sky much deeper. Essentially, three key things that we're driving the company with. Number one, it's our people. We start there. That's why customers do business with us. Really, the best logisticians in the world. Two, it's our technology, which we think is industry-leading. It is internally built and it's a competitive advantage for us. And then three is our lean operating model, which is the motor that brings all of this together and what has been the change for the company as we've gone through this transformation. Essentially, it drives a rhythm and a cadence and drives accountability but also innovation and speed in a company and quite frankly, in an industry that is not the norm. When we talk about making changes at breakneck speed, like Damon talked about, that's really going to inputs versus outputs. It's allowed us to use our data and make it intelligent. It really makes that a competitive advantage. We think it deepens the moat and widens the moat when we operate at that pace and scale for what we're calling lean AI. A number of things we can go deeper on, but those are the three things. But I'll have Arun just touch on how then that supercharges that technology. That's really been a game changer for us. Arun Rajan: Yep. So just adding to Dave's comments on the technology side, I talked about our builder culture. We're a company that builds software. We have an engineering culture. We build software. So there's a couple of things that are super important in that. When the operating model connects our strategy, our technology, and then we build towards that, we have this massive advantage. By being a builder culture, we don't rely on third-party software vendors as an example to get our work done. Obviously, we depend on Microsoft as a hyperscaler. But in terms of not having to buy software from third parties and cobble them together, which I've seen other companies do, and that is expensive, and it takes a long time. The builder culture is also driven by domain. Our engineers have been at this company for a long time, and they understand this industry really well. So in terms of speed that both Dave and Damon just talked about, we get incredible speed with this builder culture and this domain knowledge that sits in-house. Then that gets compounded with the accumulation of our data that we've got in terms of our pricing and costing capabilities. Put all that together and you get this advantage. Finally, AI and agentic AI, back to our builder culture, the fact that our engineers can implement it versus having to hire Accenture to come and do the work is a big differentiator. We don't need a consultant to come in and do the work. We trained our engineers internally to go after these opportunities. Everything connects back to our strategy and our financials, which as we discussed at Investor Day, that's how it plays out. David Bozeman: And, Brandon, just putting a period on that, we do have the experience within the team now on doing lean transformations. You ask what's the difference. It's not easy to do this. It takes discipline. You have to be measured. You really have to lead from the top to do this. That is something that this industry has not really done, but we don't own that. We didn't create AI. We didn't create lean. We didn't do any of that, but we do execute, I think, at a high level with that, and there's a long way for us to go. So a lot more from what you've seen so far. Brandon O'Grincey: Thank you both. Operator: The next question comes from Jonathan Chappell with Evercore ISI. You may proceed with your question. Jonathan Chappell: Thank you. Good afternoon. Michael, Brandon covered one of the bigger long-term questions we get shifting to one of the shorter-term ones. I think there's a lot of confusion about how this cycle could be different for a broker. You mentioned in your commentary shorter and probably less painful margin squeeze at the early part of the cycle. But I guess if there's any way to give any tangible evidence or any way to kind of explain why it would be shorter and maybe less painful this time around. Either using some examples from what you've implemented in the last two years or anything else that could help us put a pin on it. Michael Castagnetto: Yeah, Jonathan. Thanks for the question. I'd start with maybe playing off a little bit where Arun just finished, is taking that data and technology and putting it in our people's hands. We've talked about that for the last couple of quarters that we're getting information into our people's hands quicker, more accurately, and more often. That's really showed up in Q4 in our cost of hire advantage and how we performed versus the market in what was a difficult period. As we said, we weren't immune to the squeeze, but we do think we handled it better than the market. But we also think we handled it better than we probably would have handled it ourselves, whether it was a quarter ago, a year ago, etc. When you think about an actual market inflection, which we've all been trying to predict as an industry for the better part of three and a half years now, we still even saw in Q4, and we saw this through CAS, there wasn't a material demand change during the quarter. We're still having to go take share intelligently, as Damon said, on the right freight with the right combination of service for our customers and the freight that fits us. The real question is in the inflection is what does the demand signal look like? We believe with a true demand signal where we start to see additional freight enter the marketplace, our ability through cost of hire advantage and then to match the right freight to the right carrier to service our customers' needs, we believe we'll be able to manage that squeeze. We've said multiple times, we aren't going to be immune from it. We will feel that squeeze when it happens. We have a high expectation that we will manage it quicker, we will address it faster and more intelligently, and that we'll get to the other side of that squeeze, which historically, for us, is a good place to get to the other side of that squeeze and demand is starting to grow as an industry. Jonathan Chappell: Okay. Thank you. Operator: The next question comes from Reade Fei with Stephens. You may proceed with your question. Reade Fei: Hey, guys. Thanks for taking my question. Obviously, you've made strides here with the technology that you've been implementing and the headcount reduction that you've continued to make. This seems different from the old C.H. Robinson where maybe these heads would need to come back with volumes. But how do you balance this headcount reduction without compromising the human touch that we know some shippers and carriers prefer from their broker and avoid maybe losing some of that volume as we make these headcount reductions? Any thoughts there would be helpful. David Bozeman: Hey, Reade. This is David. Just real quick. Thanks for the question. I'm going to start, but we need to double-click on what you're hearing so the guys will jump in. I'll just start with, you know, the way we look at that is we don't start and have headcount. You know, there's not a headcount KPI at Robinson. That's just not the way that we operate the business. Because we engineer the business, and again, the output might be a shift in our headcount because, again, we are shifting to more customer focus. That order-to-cash process, which has a lot of friction, a lot of entry-level headcount on that, we're automating that. And for some of that, we're not backfilling, and that's something that we're shifting out of. But we just don't look at it in the traditional fashion of cutting at a percent for a headcount. That's just not how we operate the business. I just wanted to set that structure up first, and then we can double-click on where I think you're getting at in your question. Damon Lee: Yeah, Reade. I'll add a little color, and then, ultimately, let Michael wrap this up since we've had significant benefit in our NAST business to date. I think just to pivot from what David was saying there, if you think about how we've generated the productivity that we've generated, how we've generated the results we have, we have fundamentally changed the processes. This isn't asking people to work harder. This isn't hoping that we can do something when volume returns. A process which used to be a heavy human touch process before is now a light human touch process today. The process itself has fundamentally changed. The technology allows us to scale at a very large magnitude. It's really not even a question of if we add headcount back to these processes when volume returns. The question is that there's no reason to. The process has fundamentally changed where it no longer requires human scale when the volume returns. So I would say think about it in terms of a process through our lean model and our technology that is just fundamentally different than it was pre the journey that Robinson's on. Take the example we give often around our request for freight quote operation. Previously, we were only getting to 60% of those requests. Today, we get to 100%. Previously, it was taking a cycle time of seventeen to twenty minutes. Today, it takes less than thirty-two seconds. That process has fundamentally changed. So if today we're doing 600,000 requests for freight quotes and it goes to 6,000,000, we don't have to add anyone back to the process to manage that inflection in volume because the technology can absorb that scale. That process is fundamentally changed. That's just one example. Think about that across the 30 agents plus that we've operationalized at scale at Robinson. I think that'll just give you a little bit of the color on why it's different. It's not about working harder or asking people to work harder. The processes themselves have fundamentally changed. Therefore, the human input that would have been required four, five, six years ago when an inflection may happen is just no longer required today. Michael, add some color there. Michael Castagnetto: Yeah. So, Reade, the one thing I will agree with you on, though, is the importance of relationships in our business and connecting with customers and connecting with them where we deliver the highest value. Our focus has been to increase and improve the customer-facing roles and experience, our carrier roles and experience. We were very public about our reinvestment into SMB and adding folks in that space. We do believe there continue to be more opportunities for us to take away tasks that are not maybe driving the higher value or higher return for our customers as we work to provide supply chain solutions. We had a press release just this week on our LTL missed pickup agent. We said in the release, 350 hours a day of human work that was done just to follow up on missed pickups. That's an example of we won't have to have humans doing that in the future. But it's not really a high-value concept in terms of do we need somebody doing that role? The relationship is now our people will get that information more accurately. They're going to get it quicker, and they're going to be able to call their customers and talk to them about a solution to a pickup that maybe was missed and what are we going to do about it, how do we fix this for the next time. So really think it's a great question, but I think there's a really good blend going on between meeting what you described and how we're accomplishing it. Reade Fei: Awesome. Thanks for the color. Operator: The next question comes from Scott Group with Wolfe Research. You may proceed with your question. Scott Group: So when you guys talk about demonstrable market share growth, is this sort of high single-digit spread versus CAS what you have in mind? Or do you think that spread should be bigger over time? And then maybe just, Damon, just one, like, numbers question. If I take the fourth quarter personnel expense and annualize it, you sort of get, like, a little bit below the midpoint of your guide for personnel expense. So it doesn't feel like the guide has double-digit productivity savings in there. So I don't know. Any thoughts on that? Thank you. Damon Lee: Yeah. So, Scott, thanks for the questions. I'll take the personnel expense one first, and then we can answer the first question second. On personnel expenses, I think, certainly, as we define productivity as shipments per person per day, it's certainly different math than the dollars of personnel cost. If you think about personnel cost, it includes not only the salaries of our people but it also includes benefit costs, which are typically inflationary. The one thing we're really proud of is the success that we've realized the last eighteen to twenty-four months. Our people have been a huge portion of that success. We've been rewarding our people. We did so in '25. We'll continue to do so as the performance warrants that. Part of that math between double-digit productivity gains and what you're seeing on the percentage on personnel expense is really some of those items that aren't tied directly to headcount per se. It is benefit cost. It is rewarding our employees for the great job that they're doing. But make no mistake. We're committed to our double-digit productivity. One other item there is just our $6 target is based on no market growth. But we do have growth built into our plan next year. No market growth. But certainly, we do have outgrowth built into our plan. When we talk about productivity, it is a combination of what I would call traditional productivity and cost avoidance. Certainly, that cost avoidance won't show up as part of that double-digit math, but it'll show up as operating leverage as we deliver that outgrowth above a zero market assumption. If you take everything that I just went through there, that's the rationale why the math is going to always be different between a shipments per person per day productivity number that we've pegged at double digits for 2026 versus the dollars you would calculate on personnel expenses. But make no mistake. We're committed to our double-digit productivity. We're committed to the continuous improvement that we've talked about now for eighteen plus months. We're committed with high confidence to the $6 EPS target that we updated in our Q3 earnings call again, with a very high confidence. All of that together, hopefully, that gives you a little clarity and color. But all of it together, we feel really good about where we're going. A high degree of confidence committed to our $6 EPS target with no market growth. David Bozeman: Yeah. I think at the end, you had the question about a demonstrable call out. Michael, you could jump in here, but essentially, we look at it. If you look at the CASS index and how we're performing in, you know, between 800 and 1,000 basis points different, we think that that is starting to be demonstrable differences across the board on performance and proud of the team for doing that in very, very tough conditions that we're not immune from. So that's some of the color that we feel. But, Michael, anything to add then? Michael Castagnetto: Yeah. I'll just jump in one point, and I'll give it to Michael. Scott, the way we think about demonstrable is, I mean, look. Certainly, our relative comparison to CASS is a data point for us to know how we're performing versus the overall market. But when we talk about demonstrable, it is really about taking market share within this industry. If you think about where our share is today, there's no cap on where that share can go tomorrow. When we talk about demonstrable, I wouldn't limit it to just a certain outperformance of CASS. Because I think that relative performance is going to be very dependent on that market for that specific time period to that specific quarter. But our commitment is to take demonstrable market share as we move into the future. That optionality that I talked about, which we're not even really putting in play today. We are, but it's below the 40% threshold. That optionality we talk about at investing future margins into even more demonstrable outgrowth. That's what really gets us excited. Everything we're doing today on productivity, everything we're doing today on revenue management, all of that is setting the stage for taking demonstrable market share in the future. We're already doing that today. We feel like we could do that at another level in the future. Michael Castagnetto: Yeah. I think, Damon, you covered it. The only thing I'd add is we're very cognizant of outperformance within the conditions of the current business that's the right return for our customers, our carriers, and our shareholders. We really do expect to outperform the market. Absolutely. The level of that outperformance will be driven by that combination of what's the right mix for those three stakeholders at that time. David Bozeman: That's right. As supported by our strategy. Scott, if you remember, our strategy is to outgrow our end markets and expand our operating margins. So what Michael just walked through was there's always going to be some level of governor on our outgrowth. We don't want that freight. We only want good freight. Certainly, we use our margins to dictate that decision. Operator: Our last question comes from Richa Harnane with Deutsche Bank. You may proceed with your question. Richa Harnane: This is Ralphie. There are questions and this now concludes our question and answer session. I would like to turn the call back over to Charles for closing comments. Charles Ives: All right. It looks like we're up on time. So thank you, everyone, for joining us today. That does conclude our call. We'll talk to you again in the coming days. Thanks. A good evening. Thank you.
Operator: Good afternoon, and welcome to Landstar System Inc. Fourth Quarter Earnings Release Conference call. [Operator Instructions]. Today's call is being recorded. [Operator Instructions] Joining today from Landstar are: Frank Lonegro, President and CEO; Jim Applegate, Vice President and Chief Corporate Sales, Strategy and Specialized right officer; Jim Todd, Vice President and CFO and Matt Dannegger, Vice President and Chief Field Sales Officer; and Matt Miller, Vice President and Chief Safety and Operations Officer. Now I'd like to turn the call over to Mr. Jim Todd. Sir, you may begin. Thank you. James Todd: Thanks, Elmer. Good afternoon, and welcome to Landstar's 2025 Fourth Quarter Earnings Conference Call. Before we begin, let me read the following statement. Following is the safe harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made during this conference call that are not based on historical facts are forward-looking statements. During this conference call, we may make statements that contain forward-looking information that relates to Landstar's business objectives, plans, strategies and expectations. Such information is by nature subject to uncertainties and risks, including, but not limited to, the operational, financial and legal risks detailed in Landstar's Form 10-K for the 2024 fiscal year described in the section Risk Factors Landstar's Form 10-Q for the 20,251st quarter and our other SEC filings from time to time. These risks and uncertainties could cause results or events to differ materially from historical results or those anticipated. Investors should not place undue reliance on such forward-looking information, and Landstar undertakes no obligation to publicly update or revise any forward-looking information. I'll now pass it to Lance, our CEO, Frank Lonegro, for his opening remarks. Robert Brasher: Thanks, J.T., and good afternoon, everyone. I'd like to thank our BCOs and agents and all of the Landstar employees who support them every day. The capability, resiliency and level of commitment exhibited day in and day out by our network of independent business owners is unique in the freight transportation industry -- their adaptability and dedication to safety, security and service for our customers is truly impressive. They are exceptional business leaders and key to driving the continued success of Landstar's business model. Before we jump into fourth quarter results, I'd like to take a few minutes to provide a brief reflection on my first 2 years leading this great organization. Despite the unprecedented freight recession continuing longer than many of us had expected. We achieved some significant accomplishments over the past 2 years. We created our key priorities, what we call the 5 points of the start to guide our business, accelerating the model, executing on our growth strategy, managing risk, leveraging our financial strength and enhancing our support. The one at the top of the star is accelerating the model, which is all about our agents and BCOs and -- when they are strong and growing and equipped with the tools and support they need to succeed, the Landstar model really shines, we doubled down on the company's strategic growth initiatives with 2 of those heavy haul and U.S.-Mexico cross-border, representing approximately 20% of our business. While the cross-border business has been impacted by geopolitics, we are more than ready to leverage our new cross-border leadership as well as our strong agent presence and market position when the environment improves. On the heavy haul side with new leadership and strong agent focus, not to mention our ability to do the hard things well, Landstar's heavy haul set a new revenue record of $569 million during the 2025 fiscal year, approximately 14% above 2024s record-setting year. We're continuing to build the leadership team of the future with our executives and VPs, what we call our top 60 with nearly half of that team new to their role, new to their responsibilities or new to the company. That group is collectively focused and incented to drive Landstar's growth and profitability and to maintain our industry-leading transportation and logistics business premised on 3 key elements: safety, security and service. We've reduced the time it takes to become a Landstar BCO while maintaining our highly stringent qualification standards. Huge thanks go to Matt Miller for his efforts here. This year, we will also implement a redesigned BCO onboarding and training program to ensure the delivery of relevant, high-quality instruction and to support Landstar BCOs and upholding the highest standards of service for our customers. We're leaning into the future in deploying technology and specifically AI to benefit our agents, BCOs and Landstar employees. It's all about enhancing our support for the Landstar network. You'll hear more this afternoon about our AI strategy and specific initiatives like the contact center, our path to deploying an ERP and AI-enhanced tools focused on pricing, BCO retention, trailer requests and credit approvals. You'll also hear about our new web portal featuring embedded agentic AI that was built specifically for the needs of Landstar freight agents and that we believe is unique in the industry. As we continue our efforts to find new ways to embed AI in our business, I'm pleased to report that approximately 50% of our IT CapEx budget for 2026 is dedicated to AI enablement and solutions. And importantly, we've continued Landstar's rich tradition of strong capital returns to our shareholders. Over the last 2 years, Landstar returned approximately $261 million to shareholders in the form of share repurchases and another $245 million in cash dividends, we remain committed to our capital return program while continuing to invest capital to improve and grow our business and making our network of entrepreneurs as successful as possible. We've been busy these last 2 years. We're excited about the future, and we look forward to sharing more with you down the road. Turning back to the 2025 fourth quarter results, the challenging demand conditions experienced in the Truckload freight environment over the past 3 years continued during the 20,254th quarter. Volatile federal trade policy and lingering inflation concerns continue to generate supply chain uncertainty. Nevertheless, the Landstar team of independent business owners and employees performed well. Truck transportation revenue in the fourth quarter was nearly flat year-over-year as the slight decrease in total revenue was primarily attributable to decreased ocean revenue. Moreover, as previously disclosed, we are in the process of selling Landstar Metro, the company's Mexican logistics subsidiary. Excluding the revenue contribution from Landstar Metro, for both 2025 and 2024 fourth quarters as well as approximately $16 million in reported revenue during the 2024 fourth quarter that was associated with the previously disclosed agent fraud matter total revenue decreased approximately 1% year-over-year in the 2025 fourth quarter. As disclosed in our prerelease 8-K filed with the SEC on January 21, and the 2025 fourth quarter financial results were negatively impacted by several discrete items impacting insurance and claims expense. First, the company recorded pretax charges of $11 million or $0.24 per share related to 2 separate tragic vehicular accidents involving BCOs leased on with subsidiaries of the company. Second, the company recorded a pretax charge of $5.7 million or $0.13 per share. in connection with the court entry of a judgment in January 2026 that Landstar intends to appeal and which related to a trial that ended in August 2025 relating to an accident that occurred in fiscal 2022. Third, the company recorded a $5.3 million pretax charge or $0.12 per share related to an increase in the company's actuarially determined claim reserves. JT will cover these items in greater detail during his prepared remarks. Nevertheless, we are encouraged by several positive signs. One consistent highlight is the continued strength in the unsided platform equipment business, which posted another strong quarter with an 11% year-over-year revenue increase driven by the performance of Landstar's heavy haul service offering. We generated approximately $170 million of heavy haul revenue during the 2025 fourth quarter or a 23% increase over the 2024 fourth quarter. This achievement reflected a 16% increase in heavy haul revenue per load and a 7% increase in heavy oil volume. Our focus continues to be on accelerating our business model and executing on our strategic growth initiatives, we are continuing to invest in the foundational work that will put Landstar in a great position to leverage the freight environment as it turns our way. We are also focused on our commitment to continuous improvement in the level of service and support we provide to our customers, agents, BCOs and carriers each and every day. Turning to Slide 5. The freight environment in the 2025 fourth quarter was characterized by relatively soft demand from a seasonal perspective, the impact of accumulated inflation remains a drag on the amount of truckload freight generated in relation to consumer spending while the industrial economy remains soft as evidenced by an ISM index below 50 for the entire 2025 fourth quarter. We are pleased to see sequential outperformance by our overall truck revenue per load compared to pre-pandemic normal seasonal patterns despite fiscal October underperforming pre-pandemic seasonal trends. As noted in the press release, we were encouraged to see our overall truck revenue per load increased approximately 6% from fiscal October to fiscal December and appreciate everything the U.S. DOT is doing to support the American trucker. Considering that backdrop, Landstar's revenue performance was admirable in the 20,254th quarter with the number of loads hauled via truck down approximately 1% and almost entirely offset by approximately 1% increase in truck revenue per load compared to the 2024 fourth quarter 2025. Our balance sheet continues to be very strong. And our capital allocation priorities are unchanged. And we will continue to patiently and opportunistically execute on our existing buyback authority to benefit our long-term stockholders. As noted in the slide deck, during 2025, we deployed approximately $180 million of capital toward buybacks and and repurchased approximately 1.3 million shares of our common stock. And yesterday afternoon, our Board declared a $0.40 quarterly dividend payable on March 11 to shareholders of record as of the close of business on February 18. We -- we continue to invest through the cycle in leading technology and AI solutions for the benefit of our network of independent business owners and have allocated a significant amount of capital this year towards refreshing our fleet of trailing equipment with a particular focus on investment in new van equipment. At this stage of the call, I would normally hand it off to JT but we felt it was important to provide analysts and investors with an update on our AI-related activities. I'll now pass the call to Jim Applegate for a discussion of in-flight and planned AI-related initiatives going on at Landstar. Jim? James Applegate: Great. Thank you, Frank. Since 2016, Landstar has been executing a digital transformation strategy to ensure our network of agents and BCOs remains highly competitive in an increasingly technology-driven freight environment. Our goal from the outset was not simply modernization, but enablement, delivering tools that help automate the agent office, simplify the experience in operating as a Landstar business capacity owners and scale the efficiency and effectiveness of our entrepreneurs. Those early efforts branded is Landstar 2020 included the rollout of a new transportation management system, advanced pricing and capacity tools, agent analytics, BCO retention capabilities, mobile applications and trailer management. Landstar 2020 was never viewed as an endpoint. It is the foundation of a long-term commitment to building and deploying industry-leading technology across our entire ecosystem. As we move beyond 2020, that commitment expanded, we invested further into digital capabilities within our corporate operation and the support we provide in the network, including the rollout of modern contact center technology and significant upgrades to our financial, settlements and back office systems. These investments strengthen the overall connectivity and support provided to our entrepreneurial network. What truly differentiates Landstar's technology strategy is how it's conceived and deployed. Our approach is not driven by top-down mandates designed solely to reduce costs. Instead, it's built through close collaboration with our agents and BCOs with a clear focus on enabling growth. By aligning technology investments with the needs of our entrepreneurs, we're able to deliver tools that are adopted and leverage to drive growth and deliver wins in the highly competitive transportation sector. Our agency model growth is often constrained by resources. Without technology, a new agent may reach a couple of million dollars in revenue before needing to add headcount. This is a difficult decision, given the financial risk involved. Our objective has been to deploy technology to fundamentally change that equation. By automating workflows and improving office efficiency, we have helped agents to embrace our tools to significantly increase their revenue base without adding resources. The same philosophy applies to our BCOs by eliminating manual and administrative friction, we enable them to be more productive, all more freight and better serve our agent customers. The end result is a differentiated value proposition for customers, a combination of advanced, purpose-built technology and highly motivated professionals with a direct economic stake in delivering freight safely, securely and with exceptional service. Artificial intelligence represents the next major acceleration of this strategy. The pace of innovation and breadth of potential applications are unprecedented, and we view AI as a powerful enabler of our entrepreneurial ecosystem. Importantly, our AI strategy is evolutionary, not experimental. We're building on the strong digital foundation we already have in place. Today, machine learning is embedded within our pricing and BCL retention tools, allowing them to continuously improve as we scale the available data. Our new contact center platform leverages AI to enhance the knowledge base of the service representatives, analyze sentiment, automate routine tasks, summarize interactions and free our teams to focus on higher-value problem solving. We've embedded AI into our Landstar agent portal, improving access to information, providing actionable business insights and enabling better, faster decision-making. We've also deployed an AI-powered fraud detection solution that analyzes behavioral patterns, documentation, invoice images and shipment characteristics to identify high-risk freight and reduce shipment losses. Looking ahead, beginning in the first quarter of 2026, our AI task force will work with transportation-focused agentic AI start-ups and established technology partners to accelerate AI applications across the ship of life cycle and within agent offices. These efforts are focused on driving efficiency, improving decision-making and further unlocking growth across our network. As technology continues to evolve, Landstar intends to remain at the forefront. We see AI as a strategic enhancement to the competitive advantage of the Landstar business model and the resiliency and capability of our strong network of entrepreneurs. Entering this new era, we believe AI represents another meaningful opportunity to strengthen the safety security and service we provide to our customers every day on every load. Back to you, Frank. Frank Lonegro: Thanks, Jim. Turning to Slide 10 and looking at our network, the scale systems and support inherent and the Landstar model helped to drive the operating results generated during the 2025 fourth quarter. JT will get into the details on revenue, loadings and rate per load in a few minutes. As noted during previous earnings calls, Landstar's Safety First culture is a crucial component of our continued success. Our safety performance is a direct result of the professionalism of the thousands of Landstar BCOs operating safely every day. and the agents and employees who work to reinforce the critical importance of safety at Landstar. I'm proud to report an accident frequency rate of 0.59 DOT reportable accidents per million miles during 2025, and well below the last available national average DOT reportable frequency released from the FMCSA for 2021 and slightly better than the company's trailing 5-year average of $0.61. This long run average is an impressive operating metric that speaks to the strength, skill, talent and dedication of our BCOs and provide the point of differentiation. Our agents are able to highlight in discussions with our freight customers. We remain committed to driving a best-in-class safety culture. I'd also like to take a moment to recognize Landstar's $457 million agents based on our 2025 fiscal results. Importantly, retention within the million-dollar agent network continues to be extremely high. Turning to Slide 11. On a year-over-year basis, BCO truck count decreased approximately 4% compared to the end of the 2024 fourth quarter and approximately 1% sequentially and BCO turnover continues to be influenced by a persistent relatively low rate for load environment, combined with the significant increase in the cost to maintain and operate a truck today compared to before the pandemic. Directionally, we are pleased to see our trailing 12-month turnover rate dropped from 34.5% as of fiscal year-end 2024 to 31.4% at the end of the 2025 fourth quarter. Through the first 4 weeks of the 2026 first fiscal quarter, the number of trucks provided by BCO independent contractors is down fractionally, consistent with typical first quarter seasonality and I will now pass the call back to JT to walk you through the 20,254th quarter financials in more detail. James Todd: Thanks, Frank. Turning to Slide 13. As Frank mentioned earlier, overall, truck revenue per load was up approximately 1% in the 2025 fourth quarter compared to the 2024 fourth quarter primarily attributable to a 7.5% increase in revenue per load on loads hauled by unsided platform equipment and a 2% increase in revenue per load on less than truckload loadings partially offset by a 3.4% decrease in van revenue per load and a 4.2% decrease in revenue per load on other truck transportation loadings. On a sequential basis, truck revenue per load increased 1.5% in the 2025 fourth quarter versus the 20,253rd quarter outperforming typical pre-pandemic normal seasonality increase of approximately 1% despite a relatively soft start out of the gate with fiscal October underperforming normal seasonality. In comparison to overall truck revenue per load, we consider revenue per mile on loads hauled by BCO trucks a pure reflection of market pricing as it excludes fuel surcharges billed to customers that are paid 100% to the BCO. In the 2025 fourth quarter, both revenue per mile and unsided platform equipment hauled by BCOs and revenue per mile on van equipment hauled by BCOs were 1% below the 20,244th quarter. Delving deeper into seasonal trends, revenue per mile on loads hauled by BCOs on unsided platform equipment declined 2% from September to October, was flat from October to November and increased 4% from November to December. The September to October decline underperformed prepandemic seasonal trends, while the October to November approximately equal and the November to December increase, both outperformed pre-pandemic historical trends. Revenue per mile on van equipment hauled by BCO sequentially decreased 1% from September to October and an additional 1% from October to November. Underperforming pre-pandemic historical trends. However, in what we hope was a possible inflection point, revenue per mile on van equipment hauled by BCOs increased 3% from November to December, slightly above pre-pandemic historical trends. It should be noted that month-to-month seasonal trends on unsided platform equipment are generally more volatile compared to that of band equipment. This relative volatility is often due to the mix between heavy specialized loads and standard flatbed volume -- as Frank alluded to, we've been pleased with the recent performance in our heavy haul service offering. Heavy haul revenue was up an impressive 23% year-over-year in the fourth quarter, significantly outperforming core truckload revenue. Heavy haul loadings were up approximately 7% year-over-year and revenue per heavy haul load increased 16% year-over-year. This represented a mixed tailwind to our unsided platform revenue per load as heavy haul revenue as a percentage of the category increased from approximately 38% during the 20,244th quarter to approximately 42% in the 2025 fourth quarter. Non-truck transportation service revenue in the 2025 fourth quarter was 28% or $30 million below the 2024 fourth quarter. Excluding approximately $16 million in revenue reported during the 2024 fourth quarter that was associated with the previously disclosed agent fraud matter, transportation service revenue in the 2025 fourth quarter decreased by approximately $14 million or 15% compared to the 2024 fourth quarter. Turning to Slide 14. We've provided revenue share by commodity and year-over-year change in revenue by commodity. Transportation & Logistics segment revenue was down 2.9% year-over-year on a 2% decrease in revenue per load and a 1% decrease in loads compared to the 2024 fourth quarter. Within our largest commodity category, consumer durables, revenue decreased approximately 2% year-over-year on a 3% decrease in volume, partially offset by a 1% increase in revenue per load. Aggregate revenue across our top 5 commodity categories, which collectively make up about 71% of our transportation revenue increased approximately 2% compared to the 2024 fourth quarter. While Slide 14 displays revenue share by commodity, we thought it would also be helpful to include some color on volume performance within our top 5 commodity categories. From the 2024 fourth quarter to 2025 fourth quarter total loadings of machinery increased 6%. Automotive equipment and parts decreased 5%. Building products decreased 11% and hazmat decreased 3%. Additionally, substitute line haul loading is 1 of the strongest performers for us during the pandemic and 1 which vary significantly based on consumer demand, increased 3% from the 2024 fourth quarter. As we've mentioned many times before, Landstar is a truck capacity provider to other trucking companies, 3PLs and truck brokers. During periods of tight truck capacity, those other freight transportation providers reach out to Landstar to provide truck capacity more often than during times of more readily available truck capacity. The amount of freight hauled by Landstar on behalf of other truck transportation companies is reflected in almost all of our commodity groupings, including our substitute line all service offering. Overall, revenue hauled on behalf of other truck transportation companies in the 2025 fourth quarter was 15% below the 2024 fourth quarter, an indicator that capacity is reasonably accessible in the marketplace. Revenue hauled on behalf of other truck transportation companies was 11% and 13% of transportation revenue in the 2025 and 20,244th quarters, respectively. Even with the ups and downs in various customer categories, our business remains highly diversified with over 20,000 customers, none of which contributed over 8% of our revenue in the 2025 fiscal year. Turning to Slide 15 and the 2025 fourth quarter, gross profit was $85.6 million compared to gross profit of $109.4 million in the 2024 fourth quarter. Gross profit margin was 7.3% of revenue in the 2025 fourth quarter as compared to gross profit margin of 9% in the corresponding period of 2024. In 2025, fourth quarter, variable contribution was $166 million compared to $166.5 million in 2024 fourth quarter. variable contribution margin was 14.1% of revenue in the 2025 fourth quarter and 13.8% in the 20,244th quarter. Turn to Slide 16. Operating income declined as a percentage of gross profit, primarily due to the impact of highly elevated insurance and claim costs in the 2025 fourth quarter the impact of the company's fixed cost infrastructure, principally certain components of selling, general and administrative costs in comparison to a smaller gross profit base. Operating income declined as a percentage of variable contribution primarily due to the impact of the highly elevated insurance and claim costs in the 2025 fourth quarter and the impact of the company's fixed cost infrastructure, while the variable contribution basis were essentially equal. Other operating costs were $14.6 million in both the 2025 and 2024, fourth quarters. Insurance and claim costs were $56.1 million in the 2025 fourth quarter compared to $30.1 million in 2024 and Total insurance and claim costs were 12.3% of BCO revenue in the 2025 fourth quarter as compared to 6.7% in the 2024 fourth quarter, the increase in insurance and claim costs as compared to 2024 was primarily attributable to on $11 million of costs related to 2 separate tragic vehicular accidents involving BCO independent contractors leased on with subsidiaries of the company, each of which occurred during the 2025 fourth quarter. Two, a $5.7 million -- $5.7 million pretax charge associated with a broker liability judgment entered on January 13, 2026, where a trial court in El Paso, Texas, found Landstar Ranger responsible for 100% of the $22.8 million of total damages awarded rather than the 15% a portion to Landstar by the jury during the summer of 2025. Landstar disagrees with the judgment and plans to vigorously appeal this matter. And three, the impact of a $5.3 million increase in actuarially determined IBNR reserves relating specifically to loss exposure in excess of $1 million per claim. During the 2025 and 2024 fourth quarters, insurance and claim costs included $9.2 million and $2.2 million of net unfavorable adjustment to prior year claim estimates, respectively. Importantly, $5.7 million of the $9.2 million of prior year development reported in the 20,254th quarter was attributable to the El Paso broker liability judgment entered during January 2026. The Selling, general and administrative costs were $56.2 million in the 2025 fourth quarter compared to in the 2024 fourth quarter. The increase in selling, general and administrative costs were primarily attributable to an increased provision for incentive compensation, increased stock-based compensation expense and increased wages, partially offset by a decreased provision for customer bad debt. The provision for incentive compensation was $700,000 during the 2025 fourth quarter compared to a reversal of $200,000 during the 2024 fourth quarter. Stock-based compensation expense was approximately $800,000 during the 20,254th quarter as compared to a $100,000 reversal of previously recorded stock-based compensation costs during the 2024 fourth quarter. We continue to manage SG&A in part by closely managing headcount at Landstar. Our total number of employees based in the United States and Canada is down approximately 45% since the beginning of 2025. Depreciation and amortization was $10.5 million in the 2025 fourth quarter compared to $12.7 million in 2024. This decrease was primarily due to decreased depreciation on software applications and decreased depreciation on trailing equipment. The company recorded an additional $2.1 million or $0.05 per share as a noncash impairment charge during the 2025 fourth quarter relating to the ongoing sales process of Landstar Metro. The effective income tax rate was 18.3% in 2025 fourth quarter compared to an effective income tax rate of 21.4% in the 2024 fourth quarter. The decrease in the effective income tax rate was primarily due to the favorable resolution of certain state tax matters during the 2025 fourth quarter. Turning to Slide 17 and looking at our balance sheet. We ended the quarter with cash and short-term investments of $452 million. Cash flow from operations for 2025 was $225 million and cash capital expenditures were $10 million. The company continues to return significant amounts of capital back to stockholders with $125 million of dividends paid and approximately $180 million of share repurchases during fiscal 2025. The strength of our balance sheet is a testament to the cash-generating capabilities that Landstar model. Back to you, Frank. Frank Lonegro: Thanks, JT. Given the highly fluid freight transportation backdrop and an uncertain political and macroeconomic environment, as well as challenging industry trends with respect to insurance and claim costs, the company will be providing first quarter revenue commentary rather than formal guidance. Turning to Slide 19. The number of loads hauled via truck in January was approximately 1% below January 2025 on a dispatch basis, while revenue per load in January was approximately 4% above January 2025 on a processed basis. As a result, we view truck revenue per load in January as modestly outperforming normal seasonality, while January truck volumes are trending essentially in line with normal seasonality. Looking at historical seasonality from Q4 to Q1, pre-pandemic patterns would normally yield a 4% decrease in both -- the number of loads hauled via truck and truck revenue per load yielding a top line that typically decreases by a mid-single digit to a high single-digit percentage. As just noted, though, fiscal January truck revenue per load outperformed normal seasonality, while truck volumes trended essentially in line. It should be noted that we faced a challenging year-over-year truck volume comparison during the first quarter as 2025 first quarter truck volumes exceeded the immediately preceding fourth quarter truck volumes for the first time in 15 years, with tariff pull-forward behavior likely driving the strength. Moving through the first quarter. Historically, truck revenue per load sequentially declined approximately 1.5% from fiscal January to fiscal February before improving approximately 1.8% from fiscal February to fiscal March, we estimate that in the event fiscal February and fiscal March truck revenue per load outperformed normal seasonality, in line with the outperformance we experienced in fiscal January, the sequential revenue change experienced during the 2026 first quarter could be down low single digits versus the fourth quarter of 2025. With respect to variable contribution margin, the company typically experiences a 40 to 60 basis point expansion in variable contribution margin from the fourth quarter to the first quarter, typically driven by increased BCO mix However, I would note, we had a very strong BCO utilization in the fourth quarter of 2025 at plus 8% year-over-year. In addition, winter storm activity experienced in January could have a negative impact to first quarter 2026 BCO utilization, resulting in a first quarter 2026 VCM performance that does not necessarily follow normal seasonal patterns. With that, Elmer, we'd like to open the line for questions. Operator: [Operator Instructions] Our first question is from Jason Seidl from TD Cowen. Jason Seidl: Maybe sticking on that last comment, in terms of maybe a sequential decline in utilization for your BCOs, where are you standing right now with the big storm that just swept through the country? Unknown Executive: Yes, that's a good question. And look, that's off to the BCOs who are out there and doing it safely every day. We certainly have had folks with a little bit of equipment challenges and also some customers who aren't open to either allow us to pick up or to allow us to deliver. JT can get into the very specifics on the the day-to-day loading challenges that we've had. Typically, if you look back at his again, JT will get into more detail, we generally recover that. So we're kind of early to mid-quarter. So the hope is that we'll be able to recover it. But this is a fairly with swap of weather that impacts geographically all throughout the country. So let me let JT maybe just chime in on the specifics there because we are watching it very closely, as you would expect. James Todd: Yes. No, absolutely. Jason. So I would estimate the storm impact to the fourth week of fiscal January and the first week of fiscal February, probably 5,000 to 6,000 knockdown impacted dispatch loads. But to Frank's point, unlike a dedicated carrier contract carrier, if a plan is shut down and they're not producing and you're not picking up your 15 loads a day, that freight is gone. In our business, we tend to gap back up when the weather eventually clears. So we'll continue to keep an eye on it. Frank Lonegro: But I do think, to the point you made on BCO utilization, and I'll also get Matt Miller to chime in here in a second. We've had a nice run of BCO utilization even with the the count coming down some in the fourth quarter and as expected in the first quarter. So the folks are out there responding to the demand. And obviously, we're pushing folks to load BCOs as much as possible, and those guys do a really good job on the 3 things that are really important to customers. meaning safety, security and service, but maybe Matt a little bit on the BCO utilization. Matthew Miller: Sure. No, we're definitely encouraged by the utilization we saw in the fourth quarter. When you look at the fourth quarter compared to prior year, we were up 8% compared to fourth quarter of '24. And that compares to the third quarter '25, we were up 6% compared to the third quarter of '24. So that trajectory was absolutely something we were encouraged by. Jason Seidl: I appreciate the commentary. If I could slip 1 more in. On the AI stuff, obviously, 1 of your competitors out there,.Robinson has been talking a lot about AI and really showing some results to the bottom line. Where are you guys in AI helping you get more bids out there in the marketplace in general? Frank Lonegro: Yes. I mean I think the AI for us is a little bit different than Robinson for a couple of different reasons. Obviously, we've got a different business mix. We also have a different model with essentially all of their folks inside the building and the majority of the folks who support Landstar are not W-2s, which is why you heard Jim Applegate talk about here's what we're doing for the network, which would include the agents in the BCOs. And then obviously, on the inside, what we're doing for Landstar employees to help support the network. I think where you're going to see the benefit for us is not going to be on the cost line given the fact that we have of the employee base that Robinson does. So I really did say 10% of. So they have 10x more employees than we do. So they're certainly going to see it in the cost line. But what we're doing and going to do is enable the agent offices, the Landstar independent agents to go out there and be able to work smarter and to work faster. And to one of the points that Jim Applegate raised to not have to add employees until much later in their growth trajectory, which obviously allows them to grow faster. But I mean let Jim, you pick up on that? James Applegate: Yes. No, I think I didn't bring great explanation around the strategy. I think the specific question was around bids at the very end of that comment. We operate in a much different model, specifically in the spot market as it relates to pricing. And we've been kind of underway, and I mentioned in my opening comments in 2016, pricing was one of the first things that we hit, and we built a big machine learning model with our pricing tools they just give our agents just a wealth of information. And really, the keys for us winning in the spot market is just making sure that we give our agents the confidence, right, to go out there and price the business and to do it quickly. So they got to assess a ton of information depending on the types of customers that they're trying to serve in a very short time period. And the winner in that game is the one that can do it quickly and confidently. So we'll continue to invest into that. AI is going to help that. We're doing a lot specifically around our complex freight segments around permitting, routing really being able to kind of hone down our pricing down where our agents kind of feel that they have the right information and they can support that and back that up with the capacity that they're out there looking forward within the industry. So I feel like our model is a little bit different when you start hearing about some of the kind of numbers that CH is putting out there, I will tell you the investment in growth that we're giving for our agents, a lot has to do with pricing. A lot has to do with the matching of different capacity, getting utilization for our BCOs up and just being able to kind of operate within that spot market. And I think we're ahead of the game there, and we'll continue to invest there when we find opportunities to utilize more data sources. May I should open that up for us. Operator: Our next 1 is from Jordan Alliger from Goldman Sachs. Paul Stoddard: This is Paul Stoddard on for Jordan Alliger. I guess 1 of the questions I have is just with the BCO count. We see that it came down in the fourth quarter. I mean, typically, you tend to see that come down a little bit, I believe, into the first quarter as well. I guess I'm just curious, what are you guys thinking about when it comes to the first quarter? And do you guys think that you can hold on to those BCOs, especially if rates are starting to come up. Frank Lonegro: Yes. I think the case for us, as we've talked about many times before, when the rate environment sustainably improves, we generally see an uptick. Obviously, seasonality plays a part of it. We -- I'd say at least half of the time in the fourth quarter, we see a downtick in the BCO count. We almost always see a downtick in the first quarter, so we would expect some seasonality. We're only down fractionally in the first month or so of the quarter. So I'd say the trend relative to the prior year feels pretty good so far in the first quarter. What's interesting, and I'll let Matt Miller talk more about it because he's living it every day. The additions are still coming in better than expected. So I feel good about the model and the attraction of BCOs to the model. We just got to make sure that the retention keeps up with us. Matthew Miller: Sure. Appreciate that, Frank. And Paul, I appreciate the question. So net truck count declined 104 trucks in the quarter. When we compare that to the fourth quarter of last year, we were down $184. So some improvement on a quarter fourth quarter 2024 compared to to fourth quarter of 2025. The gross truck adds were up 8.9% to Frank's point compared to the fourth quarter of 2024. And the gross truck cancels are down 5.1% compared to the fourth quarter of 2024. And this marks our eighth consecutive quarter of turnover improvement where we hit the high water mark back in the fourth quarter of 2023 at 41% and followed by 2024's fourth quarter at 34.5% and then finished this year at 31.4%, approaching our longer-term average of 29%. And turnover over a longer period of time. And really, our emphasis is on controlling what we can control. We can't control rates -- we cannot control rate and rate really hasn't been too big a friend to us of late. But our emphasis is on what we can control. And so we're focusing heavily on recruiting and qualifications and how we get those folks in the door and how we get them in the door when they express interest in coming to the Landstar to the time that they can be out there on the road hauling loads. And so over the course of 2025, we've made significant improvements by focusing on people, by focusing on process and focusing on technology, driving efficiencies into that process without sacrificing safety. That's something we're not going to sacrifice. However, meaningful progress on driving down the time that it takes to get in the door ready to haul your first load and at the same time, improving the conversion rate on those folks expressing interest to come in the door hitting a higher bogey when it comes to that conversion rate. What we're we're intending to do in 2026 is drive that onboarding experience further by refreshing our orientation and our ongoing education really setting up the BCOs for success within the network once they're out there on the road. Frank Lonegro: So Paul, if rate helps us a little bit this year and the things that Matt is working on, combined with some of the AI things that Jim Applegate talked about, we're certainly expecting to grow the fleet in 2026. Paul Stoddard: That's great. And if I could follow up I guess when I -- how I understand is that the BCO trucks tend to have a higher variable contribution margin. So as we start to see more trucks coming in, could we see that margin improve throughout the year? James Todd: Yes, Paul. Certainly, can. To your point, the BCO business tends to be round numbers over several cycles, about 2.5x more lucrative on the VCM line. But remember that we've got cost in between BCM and operating income with trailers and insurance and claims costs, et cetera, et cetera. So to the extent you get growth in the fleet count in '26 and some spot rate improvement, that will absolutely be supportive of VCM and a high degree of drop-down operating leverage rising rate environment. The flip to that, Paul, is when demand comes back, so think about the second quarter, historically, you get a 7% to 8% sequential lift in loadings I'd love for Miller to grow the BCO count 7% to 8% in the quarter, but typically, that volume growth would get picked up by third-party trucks, which will somewhat -- it's positive variable contribution dollars, but it will work against us a little bit from a variable contribution margin, if that makes sense. Operator: Our next one is from Bascome Majors from Susquehanna. Bascome Majors: Just to put a period on the BCO discussion, has utilization been a leading indicator in your own analysis of fleet growth? Or is it really just rate that drives that historically? James Todd: Bascome, we certainly see utilization tend to pick up when rates go up. The only thing I would say to caveat that is in fourth quarters historically, if BCOs are having a good year, they tend to take a little holiday time in the fourth quarter. So the utilization acceleration that Miller talked about from plus 6% year-over-year in the third quarter to plus 8% was a positive surprise for us. But yes, longer term, rising rates tend to drive higher utilization. Bascome Majors: And Jim, why don't we have you, can you walk us through some of your expense sort of views in a little more detail at any kind of pacing or cadence, things that we should be considering? James Todd: Yes. No, happy to, Bas. And the big one, as you're aware, if we kind of reset here in 2026 as we start a new year, a new calendar year and rebuild the variable compensation programs, incentive comp and stock comp comping off 2025 where we had about $10 million in the P&L for that. We've got a hypothetical $12 million headwind if we hit plan right on the nose in 2026. If we don't hit plan in 2026, that cash comp headwind doesn't come back in, but I would still expect probably $2 million to $3 million headwind on stock-based compensation as a tranche, for which we didn't have any compensation recorded and '25 falls off and a new equity tranche comes on board in '26. We will very much endeavor Bascome, as you're aware, to offset as much of that as possible. We've got a big van trailing equipment refresh on the books for -- so while that could have about a $750,000 impact on the depreciation line, we typically will ring the register nicely on gains on disposal of used trailers to offset that. And then also, as you'd imagine, maintenance and tires on a brand-new trailer versus a 7- or 8-year old trailer that we'll be replacing, you typically get $2,000 to $3,000 a trailer, a good guy on the maintenance line. So those are kind of the big ones. Clearly, on the insurance line, which is hard to predict, 90 days to 90 days, we had an elevated experience in the fourth quarter, and the cargo claim environment continues to be tough. We'll work to combat that and hopefully have some tailwinds year-over-year and 26% on the insurance line. Operator: Our next one is from Stephanie Moore from Jefferies. Stephanie Benjamin Moore: Maybe it would be helpful if you could talk a little bit about what you're seeing in the current environment. You noted some better than seasonal trends to start January any green shoots that you're seeing in specific end markets or any other supply commentary that would suggest the above seasonal performance. Unknown Executive: Thanks, Stephanie. I think if you look at the DOT -- U.S. DOT and everything that they've done, I think the cumulative effect of all of those things, which you would know as English language proficiency, nondomiciled CDL, the CDL schools that are otherwise known as CD mills, some of the ELD providers coming out of the network. I mean I think the cumulative effect of all of those have hit at a point in time during the year, where you generally see a little bit of either seasonal demand or a little pullback in capacity given the holidays. So I think if you looked at the the DAT rates in December relative to November. On the van side, you saw a pretty significant uptick. It was flattish on the flatbed side, our business mix is a little bit different there. But we saw a sequential improvement month-over-month in the quarter. And so far, as JP mentioned, when you look at how we're trending in January, that seems to have a little bit of sustainability to us. We haven't had that type of sustainability in a while. But we do think it is largely supply side driven across your fingers hope is that we get the impact of tax refunds and bonus depreciation and some of the fiscal policies as well as a lower monetary rate environment, like all of those things combined, plus all the announcements of of investments in the U.S. infrastructure made by both domestic and foreign companies. When that unlocks, there's a lot of freight that comes along with it. Have we seen that yet? No, but there certainly is the prospect for those things to unlock freight. And that would be helpful. If you look at what was sort of the goods and the bads of the fourth quarter, and JT help me a little bit on this one, but the data center ecosystem continued to provide real benefits for us that obviously helped us both on the band but predominantly on the platform in the heavy haul side machinery, some of the hazmat mat business units were up. Energy was up, but then you look at the flip side, the building products, if you exclude the data center business was a challenge given where the housing economy is. The automotive side for the interest rate environment and then some of the cross-border subline haul peak type things were also down. We have a bit of a barbell set of commodities there. Some are doing really well and others aren't doing as well. But when the things that I mentioned earlier that could stimulate demand happen, especially in a lower rate environment, the -- I'll say, the hypothetical bull case is certainly out there. We just got to see some of that transition from hypothetical to reality. Stephanie Benjamin Moore: Absolutely. And then maybe just a follow-up. I think we're all very aware of the hypothetical bull case, and we've been waiting for it for some time now. But let's just say that bull case doesn't materialize this year and maybe that gets pushed into 2027 for whatever reason, what is the strategy or business plan for 2026 if we still see these mining less on the supply side, but the demand just doesn't come through? Frank Lonegro: Yes. I think if the supply dynamics still stay there, I think we'll continue to see a little bit of rate positivity on a year-over-year basis. I think that our strategies I talked about heavy haul, I talked about cross-border, but I would also mention hazmat and cold chain and some of the other things that we're working on. We're going to continue to double down in those areas, and we're going to make sure that we have the agents focused on those areas that we have the BCOs helping in those areas and moving that type of freight. So I wouldn't count against this in 2026. We're going to do everything we possibly can to win in the marketplace in areas that we think we have a competitive advantage. You heard me talk about doing the hard things well. I mean that's -- that's a Landstar keynote. We do that type of stuff really, really well, and we've got a really good track record of being able to sell safety, security and service. And that's what our agents go out there to the customers with every single day. Otherwise, you're having a conversation around rate and that doesn't help anybody. Operator: Our next one is from Bruce Chan from Stifel. Andrew Baxter Cox: It's Andrew Cox on for Bruce. I just wanted to get some more information and discuss what may be the challenge is, if there are any to disseminating new technologies, particularly the AI tools you guys are building out through the centralized agent network. You guys spoke that it's a different model than CH. I just wanted to see if you guys are coming up against any incremental challenges in training or in data safety or if there's any additional cost there. And then not -- if there's another way to frame this, if there's any data or anecdotes of maybe some early adopting agents of the tools? Just trying to understand what the opportunity is here and how quickly it could come to life. Frank Lonegro: Yes. No, really, really good set of questions. We've done a bunch of agents segmentation work over the last couple of years, which gives us a sense of whether it's the size of the agents or the types of businesses that they do, the split between how much spot and how much contract they do, things like that. So we have a pretty good handle of where some tools would apply to everyone. Pricing would be an example of that one who doesn't want to have good information around what the market price is, and others are going to be a little bit more segmented to it. One of the unique things is we can't force adoption of tools. We can certainly provide them. And obviously, the agent uptake of that is something that we're going to be accountable for ourselves. And most agents, if they believe it will provide them a competitive advantage in the marketplace. They're going to want to use those tools. So I feel pretty good about that one. There are tools that are also fraud-related and BCO related and and things like that. So I think the tools that we're providing, the first layer is going to be applicable to all and then there are going to be some other ones that are going to be a little bit more tailored to folks who have certain types of businesses relative to others. And then obviously, we got all of the work that we're doing inside the building. The data sources, I mean, one thing we have is a lot of data. When you have 2 million transactions a year over a long period of time, you have plenty of data points to be able to figure out trends. We'll also access data sources outside the company to educate those tools. And as you know, AI is all about getting smarter as it learns more and more from future data. So I think we're well positioned on the data front. And we're working with some pretty neat folks in the AI ecosystem that are going to be able to help us understand what others are doing and what the opportunities are that maybe your ideas from outside the building rather than just the ones that we have inside the building. Jim? James Todd: Yes, I think it's a great question, right? And I think it goes back to -- this is something that we're not new at, right? We've been doing this since 2016 and going through this digital process. I will tell you the entrepreneurial model does have challenges -- but at the end of the day, there is no better resource that you have that an entrepreneur that's armed with all these technology tools that can adjust, pivot and really utilize them the right way to service the customer. And again, it goes back to that safety security and service, these tools that we're building really allow those agents to do that. I will say we're seeing success. We've got different groups. We've got our AI task force that I talked about. We've got certain instances where we've automated data entry, off a bill [indiscernible] where we can shoot that information right back to customers, and we're doing that for agents today. We're doing some intelligent load matching. We're optimizing some of our BCOs for some of our larger BCO accounts. When I talked about pricing tools and some of the things that we're doing with pricing tools and adding some of that stuff back in tracking. We're investigating some things with agents today over on the tracking side and analytics as well, too. So as we go through this, as AI comes about we've got resources, we've got beta agents. We've got a process in place to make sure that as we're identifying opportunities. We've got a team of people that can really develop those opportunities, work with vendors and do it safely and do it in a way that we can really have a meaningful impact across the organization. So the muscle is there. Now we've got this great new opportunity with AI that we can actually use the muscles that we've built as we've gone through this digital transformation strategy. And just kind of leverage more tools on top of it. So I think it's really exciting to think about all these different areas that we can really impact our agents and really what they're going to do with those tools. It's going to be a neat thing to see. So we're excited about it. We see there's a big opportunity. Unknown Executive: I'll leave you with 1 final thought. We have an annual agent pickups. We're doing all the agents together virtually, and we talked to them about what the plans are for this year and obviously get some feedback from them. And we ask them in advance, what are the key topics you want to hear from us and the largest by far topic that they wanted to hear was what are we doing on the technology and the AI side. So the poll is definitely there. And obviously, through all the work that you heard Jim Applegate talk about we are ready, willing and able to fulfill that need and have some pretty neat things on the deck for this year. Operator: Our next one is from Chris Wetherbee from Wells Fargo. Unknown Analyst: It's Rob on for Chris. We're seeing the BCO productivity kind of achieve levels where historically, it's kind of peaked out at in the quarter. Maybe could you talk a little bit more about are all your AI initiatives can get us above and beyond where we've historically peaked out from the BCO productivity and thoughts about where that can go. Frank Lonegro: Yes. I would give you 2 thoughts on that 1 and then let others chime in. Can the AI tools help? If it helps match a BCO to a load more quickly, it has them out of route fewer miles to get the next load. Of course, it can impact BCO productivity. At the same time, we sell, what we say, is freedom and opportunity for the BCO. So there will be some. Again, the average number of loads really belies the truth. You've got people who haul many more loads than the average on the BCO side and some who haul less than that. The mix of the business obviously plays into that as well. given some loads are longer haul than others. So some loads are not long haul, but require a lot of prep work, and therefore, it may take you 2 or 3 days to reach destination rather than 1 or 2 days. So all of those factors play into that. But Matt, commentary or? Matthew Miller: Yes. I would just really echo what you said, Frank, I think the tools that we're building allow for the BCO to become more efficient, being able to do paperwork more rapidly having to spend time in a truck stop where they otherwise would have to do scanning and e-mailing things back and forth. -- the tools allow for more effective load selection. So providing those tools to allow for them to optimize load opportunities. But again, to Frank's point, we sell that freedom. We sell, you get to haul what you want when you want, where you want. And so that freedom and opportunity that is there is available to them, but certainly, the tools allow for them to become more efficient in their daily lives. James Todd: And Rob, just real quick on historical perspective. It's certainly true that this is the highest BCO utilization year at Landstar in the last 7 years. But if you go back a little further, trailing 15-year average on BCO loads per year, is actually 92.1%, and we finished a little bit better than that at 92.4%. If you look back to '18 and '17, we were at 94% and 96%, respectively. And then similar '14 and '13, we were 95% and 94%. So if we get the efficiencies that Miller is talking about, plus a good tailwind in rate environment, I think you can get another 1, 2 or 3 loads a year out. Unknown Analyst: That's really helpful. Shifting gears a little bit to the $1 million agents, that's stepped down a decent amount in '25 off of flattish revenue and flattish loads. What was the big driver of that? And are there a bunch of agents that are just below the $1 million mark in '25. Frank Lonegro: Good question. I'm glad you're watching it. We're watching it just as closely. So yes, nothing to be concerned about there. Obviously, some agents grow and some agents don't depending on the environment and some of the business mix that I was talking about earlier. So nothing to be concerned about, but JT will give you the numbers here. James Todd: Yes, Rob, I'm starting to think you've got my office bug. But no, we had all kidding aside. We had 37 agents, Rob, they just fail below $1 million, they're still with us. So that's a 37 count reduction. Then we had $4 million agents that were acquired during 2025 by other million-dollar agents. Our $1 million age of turnover was just over 1% in 2025. So right in line, maybe a little slightly better than long run history. Operator: At this time, I show no further questions. I'd like to turn the call back over to you sir, for closing remarks. Thank you. Frank Lonegro: Thank you, Elmar. In closing, while the demand for freight transportation services remains challenging, including an unfavorable impact on dispatch loadings at the end of fiscal January, likely driven by winter storm activity, we believe we have seen some positive signals we were encouraged by the pricing improvement we experienced from fiscal October to fiscal December and with a choppy industrial economic backdrop, we were extremely pleased with a 23% year-over-year increase in our heavy haul service offering. We also believe the potential impact of various federal regulatory developments could provide some positive lift to our BCO business, in particular, and regardless of the economic environment, the resiliency of the Landstar variable cost business model continues to generate significant free cash flow. Landstar has always been a cyclical growth company, and we are well positioned to navigate the coming months as we continue to look forward to higher highs when freight demand turns our way. Thank you for joining us this afternoon. We look forward to speaking with you again on our 2026 first quarter earnings conference call in late April. Thank you. Operator: Thank you for joining the conference call today. Have a good evening. Please disconnect your lines at this time. Thank you.
Operator: Good evening, and welcome to Raymond James Financial's Fiscal First Quarter 2026 Earnings Call. This call is being recorded and will be available for replay for 30 days on the company's Investor Relations website. I'm Christy Wa, Senior Vice President of Investor Relations. Thank you for joining us. With me on the call today are Chief Executive Officer, Paul Shoukry; and Chief Financial Officer, Jonathan Oorlog. The presentation being reviewed today is available on our Investor Relations website. Following the prepared remarks, the operator will open the line for questions. Calling your attention to Slide 2. Please note that certain statements made during this call may constitute forward-looking statements. These statements include, but are not limited to, information concerning future strategic objectives, business prospects, financial results, industry or market conditions, anticipated timing and benefits of our acquisitions and our level of success in integrating acquired businesses, anticipated results of litigation and regulatory developments and general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as may, will, could, should and would as well as any other statements that necessarily depends on future events are intended to identify forward-looking statements. Please note that there can be no assurance that actual results will not differ materially from those expressed in these statements. We urge you to consider the risks described in our most recent Form 10-K and subsequent Forms 10-Q and Forms 8-K, which are available on our website. Now I'm happy to turn the call over to CEO, Paul Shoukry. Paul? Paul Shoukry: Thank you, Christy. Good evening, and thank you for joining us. Before we begin, we recognize that difficult weather conditions are impacting many of you and communities across the U.S. Our thoughts are with everyone affected, and we appreciate the dedication of our teams as they continue to clients during this time. Our focus on being the absolute best firm for financial professionals and their clients has contributed to strong results this quarter. The strength and consistency of our client-first culture alongside a robust technology and products platform, coupled with our strong balance sheet, continues to appeal to financial advisers. This is reflected in our solid recruiting momentum and net asset annualized growth of 8% this quarter. We continue to deploy capital with a focus on the long term as demonstrated by our robust organic growth, continued investments in our technology and platform, our consistent deployment through dividends, our recently announced acquisitions as well as share repurchases. In the fiscal first quarter, we recruited financial advisers to our domestic independent contractor and employee channels, with trailing 12-month production totaling $96 million and approximately $13 billion of client assets at their previous firms, a strong result for a quarter that typically experiences a seasonal slowdown. Over the past 12 months, we recruited financial advisers with trailing 12-month production totaling nearly $460 million and over $63 billion of client assets -- including assets recruited into our RIA and custody service division, we recruited total client assets over the past 12 months of more than $69 billion across all of our platforms. Our optimism about future growth is fueled by our robust adviser recruiting pipeline and strong levels of commitments to join in the coming quarters. We offer a unique combination of an adviser and client-focused culture, coupled with leading technology and solutions. This value proposition, coupled with our strong balance sheet and commitment to independence is proving to be a differentiator for advisers evaluating alternatives. In order to continue retaining and attracting the best advisers, we continue making investments in our platform and offerings. For example, our private wealth adviser program and expanded alternative investments platform supports advisers and focus on high net worth clients. We continue to make investments and implement solutions to automate and streamline processes that provide advisers with incremental time to invest in their client relationships. Highlighting this is our newly launched proprietary digital AI operations agent named RA, which builds on our service-focused long-term AI strategy. The firm's suite of AI-based tools and technologies is focused on empowering financial advisers and professionals across the firm by applying artificial intelligence to enhance service models in secure, scalable applications. Capital Markets results declined this quarter, primarily driven by lower M&A and advisory revenues and also lower debt underwriting and affordable housing investment revenues on a sequential basis. Given the very strong M&A results in both the year ago and sequential periods, this quarter faced tough comparables. Even so, we entered the second quarter with a robust pipeline that continues to reflect the potential resulting from the strategic investments we have made in this segment over the past few years. We are confident we are well positioned with motivated buyers and sellers, along with deep expertise across the industries we cover. We remain committed to opportunistically enhancing the platform by broadening and deepening its capabilities, whether through strategic hiring or acquisitions as evidenced by the announced acquisition of the boutique Investment Bank Greens Labs during the quarter, which we anticipate closing later in the year. In the Asset Management segment, net inflows into managed fee-based programs in the Private Client Group were strong during the quarter, annualizing at nearly 10% and reflects the complementary impact of being able to offer high-quality investment alternatives to our financial advisers as well as growth resulting from our successful recruiting efforts. In the Bank segment, loans ended the quarter at a record $53.4 billion, primarily reflecting outstanding 28% annual growth in securities-based lending balances and 10% growth in this quarter alone, yet another synergistic impact from our growing private client business as we are able to deploy our strong balance sheet in support of clients. Importantly, the credit quality of the loan portfolio remains strong. Turning to capital deployment. We continue to deploy capital with a focus on the long term as evidenced by our robust organic growth, continued investments in our technology and platform and recently announced acquisitions. In January, we announced the acquisition of Clark Capital Management, a leading asset management firm specializing in wealth-focused solutions to financial advisers and their clients with expertise across the growing segment of model portfolios and SMA and UMA wrappers. With over $46 billion in combined discretionary assets under management and nondiscretionary assets, Clark Capital is recognized as a high-growth firm in the industry and has a track record of strong inflows. We are excited to welcome Clark Capital into the Raymond James family where it will maintain its independence in brands going forward. We believe their services and capabilities further strengthen Raymond James Investment Management's existing investment and wealth planning offerings. This announced acquisition, along with that of Green'sledge, demonstrates our steadfast pursuit of acquisitions that are a strong cultural fit, a good strategic fit and valuations that generate attractive returns for our shareholders. As we continue to pursue both organic and inorganic growth opportunities, we also maintain our share repurchase program to effectively manage capital levels. This quarter, we repurchased $400 million of common stock at an average share price of $162. We ended the quarter with a Tier 1 leverage ratio of 12.7%. Now I'll turn the call over to Butch Orlog to review our financial results in detail. But? Thank you, Paul. Jonathan Oorlog: I'll begin on Slide 6. The firm reported record net revenues of $3.7 billion for the fiscal first quarter. Net income available to common shareholders was $562 million with earnings per diluted share of $2.79. Excluding expenses related to acquisitions, adjusted net income available to common shareholders equaled $577 million, resulting in adjusted earnings per diluted share of $2.86. Our pretax margin for the quarter was 19.5% and adjusted pretax margin was 20%. We generated annualized return on common equity of 18% and annualized adjusted return on tangible common equity of 21.4%. Solid results for the quarter, particularly given our conservative capital base. Turning to Slide 7. Private Client Group generated pretax income of $439 million on record quarterly net revenues of $2.77 billion. Results were driven by higher PCG assets under administration compared to the previous year, resulting from the impact of market appreciation, retention and the consistent addition of net new assets. Pretax income declined 5% year-over-year, primarily due to the impact on the segment of interest rate reductions, which reduced our noncompensable revenues. Interest rates have declined 125 basis points since early November 2024. Our Capital Markets segment generated quarterly net revenues of $380 million and a pretax income of $9 million. Segment net revenues declined year-over-year and sequentially due to the factors Paul already mentioned. The Asset Management segment generated record pretax income of $143 million on record net revenues of $326 million. Results were largely attributable to higher financial assets under management compared to the prior year quarter due to the market appreciation over the 12-month period and strong net inflows in the PCG fee-based accounts. The bank segment generated net revenues of $487 and record pretax income of $173 million. On a sequential basis, the bank segment net interest income grew 6%, primarily driven by strong loan growth fueled by securities-based loans and lower funding costs, driven by the decline in short-term rates and a favorable mix shift in deposits. Turning to consolidated revenues on Slide 8. Asset management and related administrative fees of nearly $2 billion grew 15% over prior year and 6% over the preceding quarter. Record PCG fee-based assets equaled $1.04 trillion at quarter end, up 19% year-over-year and 3% over the preceding quarter. As we look ahead, we expect fiscal second quarter 2026 asset management and related administrative fees to be higher by approximately 1% over the first quarter level, driven by the impact of 2 fewer billing days in our second quarter, which partially offsets the impact of the 3% increase in PCG assets and fee-based accounts at quarter end. Moving to Slide 9. Clients' domestic cash sweep and enhanced savings program balances ended the quarter at $58. 1 billion, up 3% over the preceding quarter and representing 3.7% of domestic PCG client assets. Based on January activity to date, domestic cash sweep and enhanced savings program balances have declined as a result of the collection of record quarterly fee billing of $1.8 billion and with further decline due to client reinvestment activity. Turning to Slide 10. Combined net interest income and RJBDP fees from third-party bank grew 2% over the prior quarter to $667 million. Net interest margin in the bank segment increased 10 basis points to 2.81% for the quarter, driven by the factors I previously mentioned. The average yield on RJBDP balances with third-party banks decreased 15 basis points to 2.76% primarily due to the impact of the Fed interest rate cuts since mid-September 2025. Based on current interest rates, including the full impact of the October and December rate cuts and assuming unchanged quarter-end balances, net of the $1.8 billion fiscal second quarter fee billing collections, we would expect the aggregate of NII and RJBDP [Audio Gap] the second quarter to be down from the first quarter level. The decline due to 2 fewer interest earning days in the second quarter impact of the recent Fed rate cuts are partially set by the higher interest-earning asset balances as of the beginning of the quarter. Keep in mind, there are many variables which could influence actual results, including any interest rate actions during the upcoming quarter and factors affecting our balance sheet, including changes in our loan and deposit balances. Turning to consolidated expense on Slide 11. Compensation expense was $2.45 billion and the total compensation ratio for the quarter was 65.6%, excluding acquisition-related compensation expenses, the adjusted compensation ratio was 65.4%. Commencing this quarter, we presented recruiting and retention-related compensation expense in the PCG segment for each reporting period to aid the understanding of the impact of such costs on our business. These costs have increased as a direct result of our strong recruiting successes and reflect a component of the execution of our highest capital deployment priority of investing in organic growth. Non-compensation expenses of $557 million increased 8% over the year-ago quarter, but decreased 7% sequentially. For the fiscal year, we expect noncompensation expenses, excluding the bank loan loss provision for credit losses, unexpected legal and regulatory items and non-GAAP adjustments presented on the non-GAAP financial measures to be approximately $2.3 billion, representing about 8% growth over the same adjusted non compensation metric for the prior year. Importantly, we will continue to invest to support growth across our businesses while maintaining discipline over controllable expenses. The majority of the projected increase reflects our continued investment in leading technology supporting our financial advisers as well as our expectations for overall growth in our businesses. This projection, therefore, includes, for example, incremental recruiting-related and transition support costs, which are driven by continued successful recruiting, higher subadvise fees which grow as fee-based client assets increase and FDIC insurance premium, which grows as the bank's segment balance sheet increases. Slide 12 presents the pretax margin trends for the past 5 quarters. The achievement of our 20% adjusted pretax margin target this quarter despite the headwinds we experienced a lower interest-related and investment banking revenues, highlights stability and strength of our diversified businesses to consistently generate strong margins. On Slide 13, at quarter end, our total assets were $88.8 billion, a 1% sequential increase, resulting primarily from loan growth, partially offset by lower corporate cash balances, which declined primarily due to corporate share actions as well as seasonal funding obligations, record bank loans of $53.4 billion grew 13% over the year-ago quarter and 4% sequentially with that loan growth largely in support of our clients. Securities-based loans and residential mortgages represent 60% of our total loan book, reflecting approximately 40% and 20% of the total, respectively. We continue to have strong levels of liquidity and capital. Our day of corporate cash at the parent ended the quarter at approximately $3.3 billion, providing liquidity of $2.1 billion, well above our $1.2 billion target. Our capital levels provide significant flexibility to continue being opportunistic in our pursuit of strategic acquisitions and to invest in organic growth. With a Tier 1 leverage ratio of 12.7% and and a total capital ratio of 24.3%, we remain well above regulatory requirements with approximately $2.4 billion of excess capital capacity to deploy before reaching our targeted Tier 1 capital ratio of 10%. The effective tax rate for the quarter was 22.7%, reflecting a seasonal tax benefit arising from share-based compensation that settled during the quarter. Looking ahead, we continue to estimate our tax rates for fiscal 2026 to be approximately 24% to 25%. Slide 14 provides a summary of our capital actions over the past 5 quarters through the combination of common dividends paid and share repurchases, we returned $511 million of capital to shareholders during the quarter. In January, the firm opportunistically redeemed all of [indiscernible] shares of Series B preferred stock for an aggregate redemption value of $81 million. which reduces Tier 1 capital in the fiscal second quarter. Taking this capital action into consideration, we expect to target approximately $400 million of common share repurchases again in the fiscal second quarter. Over the past 12 months, we have repurchased $1.45 billion of common shares and including dividends paid, we have returned nearly $1.87 billion of capital to common shareholders, reflecting a combined return of 89% of our earnings. We maintain our long-term commitment to operating our businesses at capital levels consistent with established targets. I'll now turn the call back to Paul for his final remarks. Paul Shoukry: Thank you, Butch. In summary, we are off to a strong start in fiscal 2026, and I believe we are very well positioned entering the second quarter with record client assets and strong competitive positioning across all of our businesses. Financial adviser recruiting activity remains strong, and the investment banking pipeline is robust. Near term, there are headwinds with lower interest rates and seasonal impacts typical in the second fiscal quarter with fewer billing days in the quarter and payroll taxes resetting at the beginning of the calendar year. However, that doesn't distract us from our focus on generating long-term sustainable growth. While in some ways, there's more competition in our space. We are confident that our established approach and focus on the power of personal is setting us apart in our industry more than ever. We are focused on the long term and providing a tail platform for advisers, bankers and associates with a foundation of deeply personal relationships. We attract and retain financial advisers with our unique culture leading service and robust platform. We value independents to foster an environment where our advisers can provide objective advice to their clients. We are focused on sustainable growth and quality over quantity. We strive to maintain a strong balance sheet with strong levels of capital and liquidity and a conservative amount of leverage. We are confident our long-standing approach will continue to endure in both good times and more challenging times and help us deliver on our vision of being the absolute best firm for financial professionals and their clients. So I want to thank our advisers, bankers and associates for the great service and advice they provide to their clients and delivering our firm's mission to help clients achieve their financial objectives. That concludes our prepared remarks. Operator, will you please open the line with the questions. Operator: [Operator Instructions] We'll go first to Michael Cho from JPMorgan. Y. Cho: I just want to start on net new assets. It's been seen a pretty nice acceleration over the last several quarters at 8% this quarter. I mean, are there areas that saw any particular strength this quarter. And if you look back maybe over the last 4 quarters, what segment or tweaks in Raymond James' approach? Do you think it's been supporting that acceleration and how would you frame that pipeline today relative to the past couple of quarters? Paul Shoukry: Thanks, Michael. Yes, $31 billion of net new assets in the quarter would be our second best quarter ever, just to put that in perspective. So as I've been messaging last few quarters here, the recruiting activity is robust. It's broad-based across our affiliation options, maybe more heavily tilted in the last 6 months on the independent contractor side of the business. But really what's resonating now is what's really always resonated. We've kind of consistently been a leading destination for financial advisers in the industry. And more importantly, the retention of our existing advisers remains very strong. Yes, there are more competitive pressures now with private equity backed roll-ups and that sort of thing. But really retention of our existing advisers, the adviser satisfaction is the highest it's been since I think 2014 and really having a platform where advisers feel like there's a culture that really respects the independents and their book ownership, the book ownership they have of their clients. And coupling that with the platform, the technology, we've been investing close to $1.1 billion this year. the AI to support that, to help them save time, to help them make better decisions, to help them be more efficient in their operations with their clients and then the products. And so having the culture and the products as a platform and the technology is really differentiating us more than ever. And the power personal, the value proposition that we released with our annual report of several weeks ago, is increasingly differentiating as well. Other firms are talking about IRRs and exit periods in 3 to 5 years or funnels and all sorts of impersonal things. And what we're doing in that world -- of what I'd call noisy competition is really doubling and tripling down on what we've always done, which is really focusing on the personal relationships with financial advisers and giving them tools and resources to strengthen the personal relationships that they have with their clients. And that's really resonating with advisers, both our existing advisers and prospective advisers, which is driving our consistently leading recruiting activity. Y. Cho: Great. Paul. If I could just quickly follow up on a modeling question, just on expenses. Sorry if I missed it -- was there anything to call out in terms of comp expense or comp ratio during the quarter. And now I know it's typically builds seasonally from here. I think Paul, you mentioned the payroll taxes. But how should we think about kind of modeling in terms of comp ratio, whether in the fiscal second quarter or even fiscal '26? Paul Shoukry: I mean the comp ratio target that we laid out on the last analyst Investor Day was 65% or better. And really, this quarter, it was impacted by revenue mix. So Private Client Group business with the independent channel, which has a higher payout. Some firms break that out of compensation. We included in compensation drives a higher mix of compensation relative to the capital markets business, which, for us, largely due to timing of the investment banking pipeline, we still feel very good about. But this quarter, it was a weaker quarter. And so due to the revenue mix, also with lower interest on short-term rates, When you look at those mixes of revenue, it ended up being slightly above 65%, but really at 65.4% for the quarter, with lower rates in a very tough quarter for capital markets, again, due to timing. We're really pleased with that results. Operator: The next question will come from Ben Budish from Barclays. Benjamin Budish: Maybe just following up on Michael's first question there on NNAs -- really solid quarter, but it does seem like from what we're hearing from competitors from a lot of the kind of media, the media coverage that the competitive intensity is picking up quite a bit, whether it's manifesting in more incentives, more aggressive retaining of existing advisers. Just curious, is that something you're seeing? How are you thinking about responding? Is it the sort of environment where this quarter -- was there anything unusual? Or do you think that kind of growth is sustainable over the next at least coming quarters? Just would be great to get your thoughts there. Paul Shoukry: Thanks, Ben, and welcome to being 1 of our covering analysts [indiscernible] just starting this morning. So yes, I mean the environment though is competitive, I think in the last 5 years, the biggest change has been -- the entry of these private equity roll-ups. And we've talked a lot, as you know, in the past around that dynamic. I think this is going to be a really important year for those type of firms. A lot of them have thought liquidity events and haven't been able to achieve them at the multiples that I think they were targeting. And so -- and a lot more will come out, I think, in the next year or 2. And that will dictate whether or not they can still afford to pay what they have been paying, which has actually been increasing over the last couple of years. But I call that short-term noise, short-term impact. We obviously had to deal with that from a competitive perspective. But the advisers we're recruiting are not looking for a 3- to 5-year destination. They're looking for a much longer -- 3- to 5-year destination with another liquidity event that's going to cause other sorts of disruption for them and their clients. We are kind of a long-term stable play for advisers and their clients. We're looking for advisers who are really looking for a platform in a home for them, their teams and their clients where they're not going to have to have another disruption in 3 to 5 years. They want -- they're looking at our balance sheet to see how much tangible equity we have, how much leverage we have, how much cash flow we have in capital because they want a platform in a home that can remain independent. And we're absolutely committed to remaining independent because, again, they don't want to have to make a change again in 3 to 5 years. So while the competition has increased in the industry -- for us, our differentiation, we feel like we have, in some ways, less competition than ever because we're focused on the long term. We're focused on the power of personal, the personal relationships, and we're able to invest $1 billion in technology. A lot of our competitors who also are focused on personal relationships and that have similar cultures, their technology investment, for example, is a fraction of ours. And that's hard to remain competitive when you can't invest in AI and the tools that you need to help advisers develop more efficiency in their businesses with their clients. Benjamin Budish: All very helpful. Maybe for my follow-up, just curious if you could unpack a little bit more the near-term outlook on the capital market side -- sounds like you're still confident on the pipeline. Obviously, the revenues can swing quite a bit from quarter-to-quarter. So anything you can share from a modeling perspective how we should think about the very near term, we're about 1/3 of the way through Q1. Anything you can share would be helpful. Paul Shoukry: The pipeline remains very strong. There are a lot of pent-up demand in terms of buyers and sellers, buyers with capital, dry powder to deploy and sellers. Again, the majority of our M&A activities driven by financial sponsors, either on the buy and/or on the sell side. And there's a lot of holdings and funds that are well beyond their original holding period. And so there's a lot of pent-up demand. There's a lot of -- we're signing a lot of engagement letters and we feel good about the demand. But you can never predict timing. And so -- we don't try to guess on when they will close or if they will close if the market conditions have to be conducive and there have to be buyers and sellers that meet on price and terms. Operator: Next up is Craig Siegenthaler from Bank of America. Craig Siegenthaler: Good evening, Paul. just a big congrats on the 8%. But there actually has been a wide range to recent quarters. We saw 2% a couple of quarters ago. 8% this past quarter. So I was wondering if you can comment on the sustainability of the 8%? And in your view as maybe the midpoint, something like 5% to 6% a better go-forward run rate to model. Paul Shoukry: Yes. I mean 8% did benefit from not only the really strong retention results, recruiting results, but also there's year-end -- calendar year-end dynamics, which help all firms in the industry with dividends and interest payments and those sorts of -- but with that being said, we're confident that based on our pipelines now and our retention that I spoke about earlier, that we can continue to be a leading grower in wealth management, which we have been on a pretty consistent basis. And doing it in a way that we feel sustainable. We're really focused on quality over quantity. And so we've been really growing assets by bringing on higher quality teams that are focused on higher net worth clients. And so that will -- and that enables us to keep a high touch service model and really reinforce the value proposition of Power personal. Craig Siegenthaler: And then given the stronger recurring that we've seen and we're seeing the results today, but also elevated competition. Could we see the PCG comp ratio creep up in 2026? Or does the 5- to 10-year smoothing really protect the operating margins if recruiting NNAs remain robust. Paul Shoukry: Yes. I mean there's a lot of investment that goes into recruiting. The reason we broke out the retention and transition assistance related expense for the first time this quarter because in the last 12 months, we recruited advisers who had $460 at their prior firm. That's equivalent to a pretty decent sized acquisition in our space, especially when you look at what is remaining out there. And we'd much rather recurit 1 by 1 where we know the advisers are a good cultural fit and 100% of what we pay in transition assistance is going to retention versus the seller. And if we did do with acquisitions, that type of expense would typically be non-GAAP. So we wanted to at least break it out for you to see because that is a part of the expense. But so as we pay recruiters and we have to pay for account transfer fees and other things that support that growth. But again, organic growth is the #1 capital priority in terms of capital deployment. So we'll continue to invest in that organic growth. We are confident that generates the best long-term returns for our shareholders and then growing the top line gives more opportunities for everyone and allows us to reinvest in the platform overall. Operator: Brennan Hawken from BMO Capital Markets has the next question. Brennan Hawken: Curious -- totally hear you on how robust the capital markets pipelines are the need for the sponsors to engage and absolutely hear you there. So it sounds like you guys are setting up for solid revenue growth as we come into the coming year. Is that fair? Or do you think that it's going to take a little bit longer to come to market, the sort of revenue translation there has been -- a bit long in the tooth, so to speak. And then when you eventually do get some revenue, how should we be thinking about operating leverage on revenue growth. Is there a [indiscernible] an algorithm we can and just think about when we're confirming that we're teeing up our forecast correctly. Paul Shoukry: Yes. No, I mean we had a really strong quarter in investment banking just last quarter. So if you look at Capital Markets last quarter, it was over $500 million in revenues, and we certainly don't think that's a ceiling, but you saw how that impacted the operating leverage relative to this quarter. I think the pretax margin last quarter was around 17.5% in that segment. So there's a lot of operating leverage with higher levels of revenue in capital markets. We are optimistic about the pipeline. And we would be disappointed for the rest of the year if the revenue in the Capital Markets segment doesn't improve meaningfully above the $380 million level that it's achieved this quarter. Brennan Hawken: Okay. Got it. And then a lot of questions around the outlook for crude and whatnot. The certainly a robust net new asset growth this quarter sort of following up on Craig's question around -- because it has been volatile, it moves around. And also in the marketplace, there's a couple of deals out there that have been very much in focus, which could cause some maybe movement to be a bit more elevated. Did you see that -- did that impact you guys were you guys able capitalize on some of that movement? And how long do you expect such disruption could create opportunity for you? Paul Shoukry: Yes. I mean I hate to speak on any specific M&A or transactions. We have a lot of friendly competitors, and they're doing good jobs keeping the advisers through those transactions. So what I would speak to is just the broad-based strength. It's not 1 firm that we're seeing success from. There's a lot of different firms. Advisers are coming from wires, regionals, other independents. And again, that value proposition -- we have the largest addressable market across our affiliation options, from employees, independent contractors to the RIA custody, and we have critical mass and decades of experience in all of them. It's not a new venture for us -- it's not something that we're testing out or trying out or seeing how it will work. And so that value proposition, the cultural fit, the platform that I talked about, the multiple affiliation options, it's appealing to advisers from a lot of different firms. Operator: Next, we'll hear from Bill Kat from TD Cowen. William Katz: Just coming back to the M&A, I hear you on organic growth, and it seems like the pipeline there is quite good. Just wondering if you could unpack maybe the Clark transaction a little bit, how to think about the accretion to that -- and then how should we be thinking about where you might be interested in terms of incremental inorganic opportunities given such a strong balance sheet and maybe trying to understand the path back to a 10% Tier 1 leverage ratio. Paul Shoukry: Thanks, Bill. Yes, Clark Capital is really a perfect representation of our M&A priorities. And that's first and foremost firm that has a good cultural fit. The Card family, who started the firm and the team, the entire team there -- our client-focused long-term focus and exactly approach the business in a very similar way that we approach it with our values and our culture. And then as a strategic fit in terms of their focus on treating advisers like clients. We're going to maintain the independence that Clark has both in terms of brand and the way they interface with their clients, not our clients, but clients. And so the cultural fit, the strategic fit and then the financials have to make sense for both us and for the sellers. And so that was the case here as well. And so we are very excited, their high organic growth, differentiated product, but really, really deep personal relationships with their clients, which is what was so appealing about hard capital. And those are the type of deals we're going to look at across all of our businesses. It's firms that have good cultural fit, strategic fit and makes financial sense for us and for the sellers. And so -- we're very active. We have an active corporate development apparatus. We have a lot of capital, and we're confident with our ability to integrate. And so we're going to continue to look for deals that make sense. So we're not going to force deals just to do deals. They have to make sense for our shareholders over the long term. William Katz: Okay. And just as a follow-up, maybe just a 2 part, so I apologize for squeezing it in. Can you talk a little bit about the path to support the interest-earning asset growth from here? And how you sort of see the interplay of the sort of liquidity on the third party versus maybe cash coming in to doing net new assets. And then if you could just review what you said in terms of the January numbers, the way it was phrased. I wasn't quite quick clear. If you were down 1.8% for the quarter or down something less than that inclusive of billings and activity. If you could just clarify, that would be helpful. Paul Shoukry: Yes. So Bill, in terms of the stand currently in January, our total combined program we sweep and ESP balances are down $2.6 billion, which includes the $1.8 billion fee billing, which have already come out of the account as we indicated. And what we're seeing for that difference is a strong client reinvestment of their balance for the rest of it. The breakdown between suite program and ESP balance of that $2.6 billion is we've seen $2.1 billion of that in the suite program and about $500 million of that in the ESP program since the quarter end balance. So yes, we're continuing to see, like others that have reported a shift of the mix of bigger percentage declines in the enhanced saving program balances as rates come down, clients are -- those high-yield savings rates are less appealing, especially relative to the market. So we're seeing more investment in the market versus higher-yielding alternatives at least over the last couple of quarters as rates started really coming down, which lowers the weighted average mix or the weighted average cost of deposit between suites and enhanced savings. To answer your question about ongoing long-term growth, I mean, you saw securities-based loans grow close to $2 billion this quarter alone. And so the growth is attractive. That's the flip side of the lower rates that floating rate loans become more attractive, and you saw that this past quarter as well. And we'll fund it with the diversified funding sources that we have, both the sweep cash, we have third party cash that we can redeploy. But also, we have diversified deposit gathering apparatus, particularly at TriState Capital Bank. And so we'll look at all of those levers to fund future growth going forward. Operator: The next question is from Steven Chubak from Wolfe Research. Steven Chubak: So I wanted to drill down into the M&A results and the outlook recognizing that pipeline strength you cited also acknowledge 1 quarter does not a trend make. But if I compare for the calendar year, full year '25 versus '24 advisory results. The gap between you and peers was quite substantial. I think you guys were down 20%. Peers big and small, were both up about 20. And I was hoping you could just speak to any do factors that might have weighed disproportionately on your results, whether it's a function of client or sector mix. And just bigger picture, in the past, you talked about this $1 billion target in M&A fees based on your current scale? Do you still view that as a credible target? And what actions are you taking to help narrow that gap? Paul Shoukry: Yes. I mean we're adding a lot of MDs and have added have been adding a lot of MDs and high-quality MDs in investment banking across various sectors over the last several years. So in terms of comparisons, really it's hard to compare apples-to-apples. Like you mentioned the bigger firms. Last year was a better year for public company M&A [indiscernible] bracket M&A. And that's, as you know, not a space that we really compete or play in. So when you compare mid-market growth-oriented firms to the public company firms for the year overall last year, a public company M&A, the bolts-bracket M&A definitely led the way in the recovery. And that's not atypical if you look at history, where both on the way up and on the way down, it seems like public company M&A sort of leads the way. And in every firm, even on the regional side or the growth of oriented size has different strengths in sectors, the depository sector, some firms have long-standing, deep businesses and depositories, for example, which has really seen a pickup in the new administration proving deals. And you kind of have to go sector by sector. But we feel very confident with our expertise -- with the sectors that we are very good in in our pipelines. And so I hate to compare things quarter-to-quarter. There's some quarters we do a lot better, and we tell you, don't overindex that because it's timing. And I would tell you in this type of quarter we're doing worse than, I would say, don't overindex that either. Investment banking is not a recurring revenue business, as you know, as like the Private Client Group businesses. So you really do have to look at long-term trends. And if you look at our long-term trend and growth of investment banking over the last 5 to 7 years, which we'll highlight again at our Analyst Investor Day, it's been very strong and attractive relative to our peers. Steven Chubak: And Paul, you just squeeze into, let's call them, more tite modeling questions. Noncomps have grown double digit the last 3 years, 8% guide is encouraging, reflects the moderation in growth. Just given the commitment to investing, do you feel like you can continue to hold the line and then the cost curve on non comps. And I'll just mention the other 1 now. The M&A growth is impressive. The AUM growth admittedly lagged our expectations given strong organic flows and market appreciation. I was hoping you could speak to why that better NNA flow rate didn't necessarily translate into a strong AUM conversion, which I know can happen from time to time. Paul Shoukry: Yes. Let me take the last part of the question first, and then I'll have Butch touch on your first part of the question on the cost curve. But it is a good question around AUA because I was comparing our overall AUA and flows to some of the others that have reported. And I think really where you see that relationship makes sense is if you look at our fee-based assets. And the fee-based assets were up 19%, which if you compare it to the other firms that are reported and their net new assets, you would see the relationship that you're expecting. So I would kind of look at that as a proxy fee-based assets versus overall firm-wide AUA. And I'll have Butch talk about the noncomp trajectory? Unknown Executive: Yes. So with respect to noncomp expenses, technology and our continued investments and our leading technology and support of financial advisers just continues to be an area of emphasis. So as we continue to manage those noncomp expense levels, we're going to continue to invest in that technology. it sort of makes us -- it's part of our unique culture and our unique value proposition at Raymond James. And so we have to balance continued growth in that expense against continuing to achieve that key objective. So the majority of that increase year-over-year is for technology. And as a growth company, we still have other expense elements that vary directly with our successful growth, both in terms of NNA. We mentioned the recruiting expenses and the incremental expenses that come with successful NNA. But we also -- as we grow our balance sheet, and we also have a growth expenses that come with growth in the balance sheet. So as we think about the objective, we remain committed to creating -- increasing and improving our operating leverage over time. We believe we have -- continue to have the scale do that. And so we're focused on our operating margin and continuing to pursue opportunities to grow that operating margin over the long term. Steven Chubak: Great color and thanks for accommodating the additional questions. Operator: We will take the next question today from Alex Blostein from Goldman Sachs. Unknown Analyst: This is Michael on for Alex. Maybe back to the non-comp growth that you guys are laying out for '26. So you mentioned this year will include further investments in tech and support of recruiting efforts as well. Can you maybe elaborate on what specifically is going into that growth this year? And I'll stop there. Paul Shoukry: I mean, if you look just at our investment in cybersecurity, the growth of AI investments and the development that we're doing with applications across all of our businesses, the infrastructure investment, there's a lot that goes into it. And that's why I was saying earlier, just harder and harder for smaller firms to remain independent and competitive without being able to invest $1 billion a year in technology. We recruited advisers from another great firm culturally and they came over -- 6 months later, they said, "We didn't realize it until we made the move over, but we were basically on a prompt at our prior firm. And they're just not able to necessarily keep up with the technology -- and it's nothing inherently wrong with the other fund, but just you have to have scale and critical mass to make those investments. And so as Butch said, we're going to continue focusing on technology. I do think long term, especially with AI, we will find more efficiencies in the cost structure as we deploy AI and automation. We're not going to dimension that or even put a time table on that now because it's still early innings. But we're starting to see some great benefits already. I mean we just launched Ray. We had a press release that came out Ray AI sort for kind of Raymond James a play on that. But it's natural language, sort of Q&A model, if you will, that uses generative AI that -- to answer questions for advisers and their sales systems and their teams -- that way, they don't even have to call in. And that's going to create efficiencies for them. That's going to allow our service people to spend their time on higher-value problems and solutions and opportunities. So again, we're not even in the first innings of those opportunities going forward. But it's important that we have the critical mass and the expertise to make the investments to take advantage of those opportunities over the medium term and long term. Unknown Analyst: That's helpful. Maybe 1 modeling question. On when you guys originally increased the kind of cadence of the share repurchases, I think the original range was $400 million to $500 million a quarter. It seems the past couple of quarters has been closer to like $350 to $400 million range, including the target for the fiscal second. Can you kind of walk through the rationale? Is that because you guys are allocating capital to other things. Is the target going to remain [ 4% to 5%]? Or is 400 a better run rate for the rest of the year? Paul Shoukry: Yes. So as you noted, we did repurchase $400 million this most recent quarter, which was within the guidelines, the guidance that we had provided. And we have indicated an expectation that we'll repurchase at $400 million levels, what we're targeting for this current quarter. And keep in mind that we just had another capital deployment action this quarter where we redeemed $80 million of preferred equity, that has the same effect on Tier 1 capital as the share repurchase doesn't have the same EPS effect as a share repurchase. So I would say we're deployed in capital actions this quarter, targeting $480 million of activity. And going forward, we remain committed to that 400 to 500 quarterly level going forward as we continue to monitor our Tier 1 leverage ratio until such time that we've deployed it in our other priorities. Operator: The next question will come from Jim Mitchell, Seaport Global Securities. James Mitchell: Just on the deposit mix, you had ESP balances down $1 billion quarter-over-quarter, another $500 million so far. Is that just demand driven? Or are you actively looking to shrink those deposits and just trying to think through the trajectory of those balances and the mix going forward. Paul Shoukry: No, Jim, it really on demand driven because it's kind of just had a 100% deposit beta. So we haven't been accelerating that to change the demand. I think the -- and if you look at the outflows, outflows have been pretty consistent. It's really the inflows that have decelerated as rates have started coming in, and I think more clients are funds are getting invested into the markets. So I think that's consistent with what you've seen with other firms and their higher-yielding savings products. It's just that rates are coming in, as you would expect, the demand for placing cash there is declining. James Mitchell: Right. Okay. That's fair. And so when we kind of put it all together with kind of the thoughts on mix from here -- deposit mix from here, the forward curve and your pretty significant loan growth that's picking up at lower rates. So how do you think about the combination of NII and RJBDP fees as we go forward for the rest of the year. Paul Shoukry: Yes. I mean, I would say it really kind of depends on the rate trajectory from here. So any were the market's pricing in anywhere from 0 to 2 rate cuts, the lower the rates. I mean, we have good deposit beta on the balances that we have, which provides resiliency on both the NIM and the B2P yield. But in terms of the balances in ESP, I still think clients are price sensitive to what they're earning on their cash balances even if rates were to be cut a couple more times. It's just a real difficult question to answer is to what extent does that sensitivity decrease as rates go down. And we really don't know the answer to that, but we would be guessing, but that's what we would have to monitor going forward. Operator: Our next question comes from Michael Siperco Morgan Stanley. Michael Cyprys: I just wanted to ask about the all platform that you've been investing across. I was hoping you could elaborate on -- how you've been expanding that platform where that stands today relative to where you'd like that to be? And what steps can we expect from Raymond James over the next 12 to 24 months with respect to the old platform? Paul Shoukry: I mean, with our platform, we -- we have a very similar approach that I described with growing the number of advisers that we have and it's an approach of quality over quantity. We don't want to have every product under the sun just because it might make a headline or a new story, then there might be some interest that comes in. We've got to make sure, one, there's critical mass of interest and demand but most importantly, that the product is well diligent from both an operational and an investment perspective and well supported on an ongoing basis, which requires ongoing servicing. And that really to do it well, we really want to make sure that there's critical mass in the products that we do offer. So we're being deliberate on it. We invest a lot in education. We're not -- we've seen other firms in the industry use alternative investments as sort of a tool to make it harder for advisers to leave from 1 firm to the other because they kind of create friction when advisers want to move and/or as a profit driver. That's not how we look at any product. First of all, all advisers are free agents and they want to leave on good standing, we'll help them move to another firm. And we don't want to try to sell any products to them that makes that harder for them and their clients. And secondly, I think it's problematic long term when you start looking at products and profit drivers versus what's most importantly, good clients long term. And so we invest a lot in education and making sure advisers help their clients understand the impact of investing in private equity? And what portion -- what is the appropriate amount of allocation of private equity, given the individual clients' liquidity needs. So which is different amongst every client, which is why it's so important for the adviser to understand their clients' risk tolerance or liquidity needs, where they are in their investment process. And so we have a balanced approach when it comes to offering any product, but particularly private equity because it is on a relative basis, less liquid than the more traditional investments. And it becomes even less liquid when you need the cash typically if you look at history. So we just want to have a balanced approach and a long-term approach there. Michael Cyprys: Great. And then just a follow-up question on AI. You spoke about automating processes, the launching AI operations agent Ray. I was hoping you could speak to your aspirations there. How you see this ramping in terms of usage and adoption compared to where adoption is today for Ray, what sort of ROI do you anticipate? And then just more broadly, where is there scope to launch additional agents and how you're thinking about potential for an agented workforce at Raymond James. Paul Shoukry: It's a great question. I mean I spent a lot of time with our technology leadership asking the same thing. Really, we don't know yet. It's early. It's first inning of opportunities here and deployment. We already have over 10,000 associates that are using AI on a regular basis in 1 way, shape or form. So the penetration has been pretty significant. I think we've -- over 3 million lines of code are written a month using AI with oversight from the technologist in the group. So we are using AI to a pretty significant extent already, but I still think it's early innings. And the opportunities to expand that as these tools get smarter and more efficient is significant. Operator: The next question comes from Devin Ryan from Citizens Bank. Devin Ryan: Thanks, everyone. I think we're probably covered everything here. Just 1 maybe to dig in on the securities-based loan growth. I mean it's just been really off the chart. And so I'm just curious, as we think about kind of the next year here, I get the piece around rates are coming down and that's helpful. But it seems like there's probably a lot of education going on there. And so I'd love to just get a sense of kind of some of the other drivers -- and then just capacity because that's a really nice area for you guys, and we seem like kind of the remixing element of that is quite positive. So I just want to get a sense of like how much more room there is to go in terms of penetration of your customers. Paul Shoukry: Yes. No. As you said, it's been -- the growth has been phenomenal. Lower rates have certainly helped that growth. But as you point out, education technology, the tools to tap into the securities-based lending product has been significant as well. And also recruiting has driven growth. A lot of the advisers were recruited coming with substantial SBL balances to their clients. So it's really all of the above approach, and we're optimistic long term about SBL continuing to used by clients because it's a great product for clients relative to other borrowing solutions out there that's much more flexible, for example, than in a home equity loan. And so there's other substitutes out there that are much more mature that people have much higher awareness of. And as they learn about security-based loans, there's a lot of clients that are interested in it. Operator: Our final question today comes from Dan Fannon from Jefferies. Daniel Fannon: Paul, I was just hoping to get some context around the industry and how you're thinking about adviser movement here in 2026 and how that might differ from, say, last year. Paul Shoukry: I think it's going to be -- based on our pipelines, we're optimistic about lease movement to Raymond James, I can't speak to movement to other firms, but we're pretty optimistic about the adviser movement to Raymond James. We're still viewed as a destination of choice. We're still viewed as a leading grower in the wealth space. So we're optimistic about it. And it's still early in the calendar year. So we'll see what happens. I think it depends on some of these roll-ups. What happens with them, if anything, over the next year, that will be a potential catalyst as well. So we don't try to time things, whether we recruit an adviser this year, next year or 5 years from now, We're making decisions over the next 5 to 10 years. So we just want to make sure that we reinforce the unique culture that we have, the power personal, the personal relationships we're building and the client first, long-term culture and values that we have as an organization and invest in the platform to make sure that we're competitive along all dimensions, technology and product and support and making sure that adviser satisfaction and client satisfaction are very high -- we won the J.D. Power award for the most trusted in our industry. Trust is critical in our space as well. And so -- and then we know that if we preserve that special combination of facets that make Raymond James so attractive, then we will continue to recruit advisers and retain our existing advisers with a high level of satisfaction that they have. And frankly, I could care less whether that happens this year or next year or 5 years from now. It's a marathon, not a sprint, and we -- that's why when I hear other firms talk about , we think next quarter, we're going to lean into recruiting and put a little bit more money into it. It's like that's not sustainable long-term recruiting. It's a long-term process that requires a lot of investments. And if you dial up recruiting quarter-by-quarter or dial down quarter-by-quarter, then you're not going to get the quality advisers that you want. You're going to get the advisers out of moving or not moving for the highest check, and that's not who we're targeting. We have to have a competitive check. But we want the advisers who want to be here over the long term to make more money and be satisfied here over the rest of their careers, Unknown Executive: I think we answered all your questions, trying to interrupt, but I think we answered all your questions. I really appreciate your time on behalf of the Raymond James leadership ship team. We do not take your time or interest in Raymond James for granted and stay warm over the next several days here and look forward to seeing and talking to all of you soon. Operator: Once again, everyone, that does conclude today's conference. We would like to thank you for participation. You may now disconnect.
Operator: Good day, ladies and gentlemen, and welcome to the Sands Fourth Quarter 2025 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to Mr. Daniel Briggs, Senior Vice President of Investor Relations at Sands. Sir, the floor is yours. Daniel Briggs: Thank you. Joining the call today are Rob Goldstein, our Chairman and CEO; Patrick Dumont, our President and Chief Operating Officer; Dr. Wilfred Wong, Executive Vice President, Sands China; and Grant Chum, CEO and President of Sands China and EVP of Asia operations. Today's conference call will contain forward-looking statements. We will be making those statements under the safe harbor provision of federal securities laws. The language on forward-looking statements included in our press release also applies to our comments made on the call. The company's actual results may differ materially from the results reflected in those forward-looking statements. In addition, we will discuss non-GAAP measures. Reconciliations to the most comparable GAAP financial measures are included in our press release. We have posted an earnings presentation on our website. We will refer to that presentation during the call. Finally, for the Q&A session, we ask those with interest to please post 1 question and 1 follow on so we might allow everyone with interest the opportunity to participate. This presentation is being recorded. I'll now turn the call over to Rob. Robert Goldstein: Thank you, Dan, and good afternoon. Thank you for joining us. Marina Bay Sands delivered EBITDA of $806 million, simply the greatest quarter in the history of casino hotels. We see $2.9 billion of EBITDA this year. Mass gaming and [ spot win ] exceeded $951 million this quarter, which is up 118% in Q4 in 2019, up 27% in Q4 last year. Of course, we are delighted with the results, we look forward to more this year. This is an extraordinary market we have built a product to maximize the opportunity. The question is how much further can we go in the next 2 years. There's has never been a building to my knowledge to deliver these types of results. Macao delivered $608 million of EBITDA for the quarter, and we are disappointed with that EBITDA number. However, mass market revenue did exceeded 25% this quarter of share, up 23.6% in the first quarter of 2025. Macao market is driven by the premium segment which is a highly competitive market. There may be a day when base mass recovers, and we will excel when that day comes, but until then, we will continue to focus on our ability to make the assets work harder to achieve $700 million per quarter. The team is in the right place, and we will deliver better results in 2026. So let's hear it from Patrick. Patrick Dumont: Thanks, Rob. Macao EBITDA was $608 million. If we had held as expected in our rolling program, our EBITDA would have been lower by $26 million. When adjusted for higher-than-expected hold of the rolling segment, our EBITDA margin for the Macao portfolio of properties would have been 28.9%, down 390 basis points compared to the fourth quarter of 2024. We are focused on delivering revenue and cash flow growth across the portfolio. Margin at the Venetian was 32.3%, while margin at the Londoner was 28.8%. We expect growth in EBITDA as revenue to grow. We will use our scale and product advantages together with targeted incentives to better address every market segment. We see opportunity in every segment at every property in the portfolio. In Singapore, Marina Bay Sands EBITDA for the quarter was $806 million at a margin of 50.3%. If we had held as expected in our rolling program, our EBITDA would have been lower by $45 million. The record financial results at MBS reflect the impact of high-quality investment in market-leading product, world-class service and the growth in high-value tourism. Turning to our program to return capital to shareholders. We repurchased $500 million of LVS stock during the quarter. We also paid our recurring quarterly dividend of $0.25 per share. We believe repurchases of LVS equity through our share repurchase program will be meaningfully accretive to the company and its shareholders over the long term. During the fourth quarter, we purchased $66 million of SCL stock, increasing the company's ownership percentage of SCL to 74.8% as of December 31, 2025. We continue to see value in both names. We look forward to continuing to utilize the company's share repurchase program to increase returns to shareholders. Thanks again for joining the call today. Now let's take questions. Operator: [Operator Instructions] The first question today is coming from Dan Politzer from JPMorgan. Daniel Politzer: And Rob, congrats on the storied career at Las Vegas Sands. We'll definitely miss hearing your honest assessment of what's going on in the markets across the world. First, on Singapore -- yes. Another, obviously, a real strong quarter here. I mean the VIP rolling chip volume acceleration was notable. You saw obviously an acceleration across the board on the gaming side. I mean, where -- what particularly is driving that? I mean I know this is the third quarter we're seeing it, but maybe now you have a better pause on what's going on and what's specifically driving that? And are there any additional programming elements or OpEx endeavors that you feel like you need to put in place to further sustain this going forward? Robert Goldstein: I think you're seeing, Dan, the property is extraordinary. The offerings are great, and we have a lot of fantastic customers in Asia. I don't think it's a different story. It's the same story. Just more and more people coming into that property, 1 experiencing and coming away very happy. And the volumes across the border, extraordinary. As I referenced, the greatest building history of casino hotels made of any operating building. Nothing way different, just more of the same, more people showing up with, got lots of money to gamble, lots of appetite. We're very fortunate. It's a very strong customer base across the region. So nothing really different now. Patrick Dumont: Yes, I just want to comment on the last part of your question. There's really nothing that we have to do from an OpEx side, except to continue to improve our service models and our programs there. We're continuing to invest in Singapore. We continue to do some renovations. While the suites are done in the casino area is mostly done, I think we're going to tie to adjust our amenity set and continue to invest in our service there. But from our standpoint, I think where we are and where we need to be, but we'll continue to look to improve as we can. Daniel Politzer: Got it. And then just pivoting to Macao as we try to unpack these numbers. On a hold-adjusted basis, EBITDA margin is down quarter-over-quarter. I mean, how much of this is just the OpEx environment, if there's any other one-offs in the quarter to highlight? I mean, given that we're a few quarters in now to the promotional strategy that you undertook. I mean, where do you feel like it's not really resonating? What strategy do you have in place that you feel like you can start to gain traction there? Kwan Chum: Yes. Thanks, Dan, for the question. Yes, first of all, I think the marketing strategies, leveraging the Londoner Grand ramp-up since May, I think we're moving in the right direction in terms of customer growth, in terms of revenue growth across all the segments. But obviously, Macao right now is driven by the premium segments, both in rolling and non-rolling. And that's where we are getting most of our growth. So in terms of the sequential decline in operating margin, firstly, we have higher reinvestment. But on a sequential basis, that's mostly driven by the segment mix change. So we have more rolling business as a proportion of our total gaming. And within non-rolling is dominated by the super high end on the premium mass. So that's the first factor. Secondly, OpEx was higher, yes. We invested more on event costs and we had higher payroll as we looked primarily as a result of us increasing our operating table hour capacity. And lastly, against prior quarter but also against prior year, the non-rolling home percentage was lower by about 140 basis points. So that obviously impacts ourselves as well. Operator: The next question will be from Lizzie Dove from Goldman Sachs. Elizabeth Dove: And I'll echo my congrats to Rob. You'll definitely be missed. Sticking with Macao, I mean, you've talked in the past about the path long term to getting back to that, somewhere in that $2.7 billion, $2.8 billion kind of range for EBITDA. Curious, kind of tracking on an annualized basis, a little below that right now. How do you think about the pacing to get back there and kind of time line and what needs to happen? Patrick Dumont: So I think, first off, I think we've made a lot of changes over the last couple of quarters, both on our approach to the customer, how we think about service levels we've invested in personnel. We've had additional table hours, which you heard Grant just mentioned. I think we're really focused on both growing revenue and EBITDA. And so I think we've made some great progress this quarter. If you look at some of our top line numbers, we've definitely grown, and we've had success in both rolling and non-rolling at [ thoughts ] as well when you look at year-over-year comps. I think for us, we're sort of working through some of the changes that we've made. And I think the trajectory is heading in the right direction. And I think we've made a lot of important changes. And I think we're in a position to do better over time. And while this quarter may not have produced the results that we want on an EBITDA basis, we see growth, we see better market positioning. We see revenue share growth, but we're heading in the right direction. Elizabeth Dove: Got it. Makes sense. And then you've had so much success in Singapore with side bets and kind of just making gambling more diversified over there. I know you've talked about kind of introducing more of that in Macao. Can you maybe share an update of how far you are in terms of rolling that out in Macao, anything that's kind of different structurally or with the customer base that maybe makes it more or less appealing? And how we should kind of think about structural hold there long term? Kwan Chum: Thank you for the question. I think in Macao, we have been continuously rolling out additional wager options on the baccarat layouts. And we've been having progressively more success in attracting volume against those side wagers. The level of participation in the side wagers is not as high as Singapore, but it is on an increasing trend. And we'll continue to innovate in terms of offering more fun and interesting side wager options in the traditional game of baccarat and also other games as well in terms of additional wager options. So that will continue. But we are seeing a rising interest in these side wagers, but it's just not as high a level as what you see in Marina Bay Sands. Operator: The next question will be from Trey Bowers from Wells Fargo. Raymond Bowers: Great to catch up. Could you guys just talk to what you're seeing in the promotional environment in Macao? Has that changed dramatically in the near term? And what's the expectation as we make our way through '26? Patrick Dumont: So I think the market definitely has become more promotional over time. You heard Grant mention that it's much more premium-focused, and that goes hand-in-hand with that segment. That being said, we're being very competitive. And I think we're seeing the results related to our positioning as we look to be more promotional and as we add the right service levels to ensure that we can take care of these customers in a way that allows them to keep coming back. Grant, I don't know if there's anything you want to add? Kwan Chum: Yes. I think the promotional environment remains intense. And especially in the premium segments, which is really driving the growth in the market. That said, I think we are at a more stable level now in the current quarter, and we can see that progressively in the fourth quarter. But of course, things can change anytime as competitive dynamics change. But at this point in time, I think we are stabilizing at the current levels, at least for our portfolio. And actually, we're hoping to find some headroom to optimize on the reinvestment front into 2026. Raymond Bowers: Great. Then just back to MBS, given the exit rate of where you were in Q4, if we apply seasonal levels of kind of sequential growth to the market, we come up with some pretty big numbers on the top and bottom line in the market. Is there anything to call out that you would just put out there as a put or a take against that as we kind of build our models for the next 12 months? Robert Goldstein: I don't think it's seasonal. I think this is just a building that defines the seasonality of most markets. I think it's more about the right customers showing up, events, et cetera. I don't think that people are dealing with that driven by the seasonality of the market. I think it's just a very, very -- it's the best product in the market, obviously, in one of the best parts of the world. People want to be there if you get the right people to show up. I think it's December, July, it doesn't matter as much as used to in places like Macao or Las Vegas. It's less seasonally driven, I think, and more driven by the building itself in a strong market. So I don't think seasonality figures in. I wouldn't model it based on that. Operator: And the next question is coming from Robin Farley from UBS. Robin Farley: Rob, I just want to add my congratulations and best wishes. I don't even want to say how long I've know anybody, you'll be missed. Robert Goldstein: [indiscernible]. Robin Farley: That will be between us. So I guess 1 question is, any early signs of kind of Chinese New Year levels for demand in Macao, anything you're seeing at this point? Patrick Dumont: I do want to point out that we're going to stay consistent. We're not really going to talk about current quarter. But I will tell you that if you look at the growth in the Macao market overall, it's been very encouraging. So if you look at liquidity in the market, you look at the type of players that are coming in, the value of those patrons, it is premium focused, but it's very encouraging. And I think it's good for the market overall and good for the trajectory of our business and the market. Robin Farley: Okay. Great. And then maybe just a follow-up on Singapore. And Rob, I hear your comments about defining seasonality and kind of -- it seems like every quarter has done better than one would have expected. But maybe so that expectation don't get to -- I mean, is there anything you would say that is like a gating issue or sort of a natural point at which maybe it wouldn't even be reasonable to think that the building could do more early? Where do you see [indiscernible]? Robert Goldstein: We've proved to be very bad in forecasting this. I think last year, I said $2.5 billion is our goal, and people kind of thought that was very ambitious. It proved to be very unambitious. So I think I have a real hard time engaging it because what you now have is this plethora of facts on favor. You have a really great place to visit in Singapore, a wonderful government supporting us. We have a building that a different level was we opened it many years ago, service levels, et cetera, and suite product. It's just the best thing in that region, I think, and people just keep coming to it, and we are pleasantly surprised at the amount of customers, the diversity of the geographic locations they come from. It's got diversity, it's got new customers shift all the time. And any time we think, well, we lost these 4 customers for a reason, 12 more show up. And I think that's the strength of Macao -- Singapore. And I don't think we should pretend to have any great handicapping skills. Can it go to [ 3.2, 3.3, 3.4 ]? I just don't know. I mean, we've had 3 successive quarters that keep getting better and better. It feels like it's sustainable. It feels great. But I think it'll be bullish about to forecast the future and kind of go to [ 3.1 or 3.2 ] as it goes back to [ 2.7, 2.8 ]. I don't know. But I think we've now passed the point of disbelief, realize this is a real building that has real potential to keep growing if the economy stays strong and we continue to deliver a great quality of product. I have a lot of belief in its future. I don't think it's going to fall apart at all. And how much stronger does it get? I don't want to forecast. I can't -- I just can't know. I don't know how to figure out -- more people keep showing up from all over Asia wanting to gamble at Marina Bay Sands. The answer has been thus far this year, absolutely, yes. Operator: The next question will be from Brandt Montour from Barclays. Brandt Montour: The first one is on Macao. The rolling chip volume number is obviously very strong. VIP isn't something that you historically focused on or at least it wasn't a huge part of your mix. But given mix did weigh on the quarter, EBITDA and margins and flow through, the question would be, do you -- has there been any shift in strategy in terms of your relative focus on the VIP part of the business? And is that something we should consider more thoughtfully going forward? Kwan Chum: Brandt, thanks for the question. I think first of all, we have said we are committed strategically to grow in every single segment in Macao that's available to us. And secondly, the growth of the market is currently primarily driven by the premium segments, and that applies both to the rolling segment and the nonrolling. So this quarter, yes, you can see that we've had a pretty significant, terrific increase in our rolling volumes up 60% against prior year, and we're outgrowing a fast-growing market. And I think that reflects a few strategies that we put in place. Number one, we've adjusted some of our commercial programs in that segment. Number two, we've been very successful in attracting the foreign play out of the rest of the Asian markets in the rolling segment, and that's given us a good boost in the volumes. And number three, partly reflecting the strong market in that super high-end segment. We've also been successful in that super VIP rolling segment this quarter as well. So all of these factors contributed to the very strong rolling segment growth. And yes, it's much lower margin than the other segments, but it's still a profitable segment on an absolute gross dollars basis. And of course, our primary focus right now is to grow EBITDA. And of course, if we take advantage of where the market is growing, the rolling segment is definitely a segment that we'll be concentrating on to take advantage of the market growth. Brandt Montour: And the second question would be on Macao and Singapore. The -- there are some concerns out there that World Cup could have some level of impact, folks staying home to watch the games and not traveling as much during that tournament. When you guys look back at your historical performance in prior World Cups, do you see anything that would suggest traffic or the higher end not coming during that term for either Macao or Singapore? Robert Goldstein: I don't believe it matters at all. You watch a telephone, they can I don't think it matters at all. I really -- that's been overblown in the past and overrated. There was a time we got over was coming in to World Cup changed the world for 30 minutes. I just don't think in size of our business is the scale, it matters all that much. You guys feel differently, but I think it's -- I wouldn't -- it's not critical. Operator: The next question will be from George Choi from Citigroup. George Choi: And congratulations, Rob, for your criteria. Firstly, on Marina Bay Sands. At [indiscernible], it looks like MBS generated enough master yard to trigger the higher mass gaming tax rate. Can you confirm if that is right? And is that the reason why we see a slight sequential decline in EBITDA margin given the reported GGR? Patrick Dumont: George, you're very good. I have to hand it to you. We hit the higher tax rate in July. And in the fourth quarter, there was about $44 million of impact. George Choi: Okay. That's good. And encouraging. And secondly, given the CapEx schedule that you guys have for the next few years on Marina Bay Sands, are you guys interested in any other investment opportunities perhaps in Japan? Patrick Dumont: Sorry, are you asking about Marina Bay Sands or Japan? George Choi: I'm just thinking, obviously, you guys have -- just kind of spent a lot of money on Marina Bay Sands. With that in mind, would you be interested in any other opportunities around the region? Patrick Dumont: Yes. I think we're constantly looking at new development opportunities in markets where we think we can do what we do well. And so if Japan were ever to present an investment opportunity that works for us, we'd consider it. But right now, we're really focused on investing on our existing properties, building IR2. We're very excited about that opportunity. That's going to be a step functional growth, we hope. And so you can see the impact that we've had in our investment programs in Marina Bay Sands and the change we have there, and we feel like we're on our way in Macao. So we're very focused on the assets that we have. And if something comes up, we're definitely interested. Operator: The next question will be from Shaun Kelley from Bank of America. Shaun Kelley: Rob, it's been a privilege to work with you for nearly 20 years, which is hard to believe, and congratulations just on everything you've done for the industry. You'll be missed. Maybe just kind of pivoting or kind of 1 directly for Grant, specifically on Macao. Grant, just kind of wondering as some of the initiatives you've worked on, I think we think about some specific things going back 6 to 9 months ago, like adjusting cash comp mix and maybe some more direct cash player rebates in the market, which peers were already doing. Are all those things kind of where you want them to be right now? And have they been stable for a little while? Or are you still tweaking those things at the edges and finding what the right customer balance is for the mix that you're seeing in the market today? Kwan Chum: Yes. Thanks, Shaun, for the question. I think we've been heading in the right direction for some time. And I think we are happy with where we are. You're right, there's been a number of initiatives that we've set out to implement since 6 months ago. I think the sales and marketing programs that were put in place, the product launch that we had in the ground and also some of the adjustments that we made in the rolling segment, those are all feeding through to a higher revenue capture and higher market share. The reinvestment environment, as I described earlier, it's still intense. And also, it's subject to month-by-month change. But at this moment, seeing what we saw in Q4, I think we're reaching a level where yes, I think there is some stability in terms of the way we see our promotional intensity. And we actually hope to be able to optimize some of that across the different segments into 2026. So 2026, I think, is going to be a year where we sustain our revenue growth against the market and then hopefully convert more of that into EBITDA. Shaun Kelley: Great. And maybe just as my follow-up, kind of on the operating expense side of the equation. Could you just talk a little bit about both kind of when traditionally you see some of those annual escalators or market-wide increases you'd see particularly on the labor cost front. Are those primarily in 4Q? Or do they kind of come in more in 1Q? I'm not sure of the timing. And then specifically for the 4Q, did you -- was there any direct impact or a tangible impact from the NBA activities in the market? We know that was probably a big success for Macao broadly, but just wondering if whether it's marketing or operating expenses attached to that could have had an impact on margins? Kwan Chum: Yes. Sure, I referenced that we have higher event costs for fourth quarter, and NBA was the biggest event that we conducted both across the quarter and actually ever in the history of the company. And it was, as you say, tremendously successful. I think the brand projection, I think the stakeholder engagement, the way we're able to bring in new business partners through the NBA China Games Week. And of course, the entertainment we provided to our customers and community stakeholders, I think all of those things, we are absolutely delighted by. And of course, it has a cost impact. But we are very happy that we are continuing with this event in a multiyear partnership with the NBA, and we look forward to doing the event even better in 2026. In terms of the OpEx question, your first point, I think, refers to just general wage inflation, if I'm right, and understand your question. Generally, that those wage adjustments occur in March for us and will occur again in 2026 in March with some wage inflation that we put in place for our frontline staff. Operator: The next question will be from Stephen Grambling from Morgan Stanley. Stephen Grambling: Rob, thanks for all the insights and stories. Given the reinvestment that you all are just mentioning through 2026 in Macao, how does this influence any strategy around renovations or reinvestment into other properties? Patrick Dumont: So I think we're very focused on upgrading our property portfolio, particularly at the high end. We've had some very strong success in the Londoner. Londoner Grand opened earlier in the year, and we're already seeing very strong adoption and strong productivity out of the higher-end suite that we've created there. And of course, we have the Londoner Suites. We have the Londoner Court, which is 1 of our core luxury products. And so as we look around our asset base, we think we have the opportunity to add more amenities, to add better room product and better service over time. So this is part of our ongoing investment cycle in Macao and something that you'll see us do over the coming quarters. Stephen Grambling: And then maybe a quick follow-up on capital allocation. You mentioned spiking buyback and buying the stock in Hong Kong as well as the U.S. Does this eventually shift back to dividends as we get through this reinvestment cycle? Or what -- is this more of a permanent kind of shift towards buyback relative to dividend in, I would say, both entities? Patrick Dumont: I think if you look at the SCL level, just given the market dynamics and I think preferences at the Board level for SCL, hopefully, over time, you'll see the Board there approve dividend increases. And I think that's been the goal. As cash flows continue to grow, the dividend there would increase over time. And we think that's very beneficial to shareholders, including Las Vegas Sands. I think at the Las Vegas Sands level, you see us be very consistent in the way that we repurchased shares. We've done over the last couple of years. I think we'd like to have that continue. We do think the dividend is fundamental to return to capital story. We do look at payout ratios and consider them and look at the flexibility that our cash flows provide to us, given that we do like the idea of investing in new growth opportunities. And we think that the flexibility as well as the accretion from share repurchases is kind of a balance that we like. And so you should see us heading forward in this general direction. And we've been pretty aggressive in the way that we buy back shares previously, and we're going to be positioned to do well with our future cash flows to do the same. So we're excited about it. Operator: The next question will be from David Katz from Jefferies. David Katz: Good afternoon, everybody. Rob, thanks for everything, all the best. I wanted to just focus on Singapore for a minute. There has been a considerable amount of CapEx put in there in a variety of different places. I wanted to just go a little deeper and figure out and understand. Are all of the capital investments that we've been talked about, I know the rooms, gaming floor restaurants, amenities, maybe lobby. Are those all completed and activated at this point? And just thinking about how the property ramps from here continues to strength. Patrick Dumont: So they're not all done. So we still have work to do in other parts of the property gaming floor, yes, rooms, yes. Some public spaces, some mall lobby and SkyParks will have work to be done. So it's not fully completed. And so our goal is to continue to improve the experiences that we offer. The vast majority are done. And so you see the results, and you see how our patrons enjoy the changes that we've made. But over time, we're going to look to improve the property and continue to invest in it to continue to have it being the best in the world. That's our goal. David Katz: Understood. And if I may, as my follow-up, specifically with respect to the lobby, should we be contemplating any disruption as we go through, say, the next couple of years whenever you get to that? Patrick Dumont: No. Operator: The next question will be from Joe Stauff from [ SIG ]. Joseph Stauff: Grant, I just wanted to follow up on some of your comments about that you've -- in Macao, you think you've reached a level of stability regarding investment and the right promo mix. Is that -- could you -- just curious as to why you think that? Is that just a function of you're seeing some of the right KPIs inflecting because of that? Is it because you don't necessarily see a competitive response relative to your higher investment? I was wondering if you could broaden out that answer a little bit more. Kwan Chum: Yes, thanks for the question. No, we can only observe from what we see in the recent months. And I think my comment simply attests to the fact that during the fourth quarter, as we progressed, we see some stabilization in the degree of promotional incentives that we're having to escalate to. I think part of it is we caught up with the market since May, and that was a progressive process. And I think in the fourth quarter, we start seeing, I think, on a stable basis, a higher level of market share and higher level of patronage across all the segments, in particular, in the segments where the market is growing the fastest, which is in the premium segments. And then we also see that dynamic apply to the rolling segment as well. So I think the evidence from the fourth quarter is -- is -- I think, offers good comfort. However, the market changes day to day, minute by minute, so we will have to observe how competitive dynamics evolve in 2026. And one of the key drivers of how dynamics may change is obviously the level of market revenue growth, which is always tough to forecast. So I hope that gives you more color or explanation for my previous comment. Operator: The next question will be from Steve Wieczynski from Stifel. Steven Wieczynski: Congratulations, Rob, I'll add that in real quick. So Patrick, probably for you. If we think about the drop in the Macao margins, which was, I think, about 390 basis points or somewhere in that range, wondering how we should think about margins for the rest of the year, maybe how you guys are thinking about margins for the rest of the year? I'm not looking for guidance, so to speak, but just -- if we don't have visibility into that base mass business and we continue to see this shift towards rolling play and even the high end of non-rolling, should we consider the margins we saw in the fourth quarter a pretty good run rate, at least for the foreseeable future? Patrick Dumont: Yes. I think the way we think about it is that we sort of think about this business as a low 30s margin business, low 30% margin business, just given the mix of play and who's coming to the buildings, the promotional activity necessary to support the patrons. If the base mass comes back in some way, like it existed prepandemic, that's a very high-margin business, and our margin structure can change positively if we overweight towards the IP play, which is a lower-margin business, the margin may be a little bit tighter. But we'd like to believe this is a low 30s margin business and go from there. But I think right now, we're really focused on growing revenue, growing EBITDA and the long-term health of how we grow. And we also believe that our investment over time that we talked about earlier will allow us to attract high-value patrons and position us well for future growth. And we're focused on all those things. Steven Wieczynski: Okay. And then second question probably for Grant. Grant, wondering if you think about that base mass business, which hasn't really returned or improved? One maybe get your updated thoughts in terms of what you attribute that to? Or what factors do you think are kind of continue to hold that segment of the market back? Kwan Chum: Steve, thanks for the question. I think when you see the sequential change in the quarter, obviously, base mass did not really grow, whereas premium mass did. I think what you're seeing is that the lower-end segments, the spend per head has been on a declining trend versus pre-COVID. As to why that is the case, we can speculate different reasons. But I think the most helpful comment we can make on that is simply to observe that, yes, I think since COVID and even in the last few quarters where GGR has accelerated, the base mass, particularly looking at revenue spend per customer in those lower value segments really has been quite stagnant. And of course, you guys might be in a better position to speculate on drivers from the economy to other factors. But we can just tell you what we're seeing on the ground in terms of premium mass versus base mass. And you can see those numbers very clearly in the size that provides. Operator: And the next question will be from John DeCree from CBRE. John DeCree: And Rob, I'll pile on the gratitude, and congratulations as well. My question, Grant, also related to that base mass customer, if I could build on maybe Steve's question. And so spend per head is down, but are you seeing comparable levels of property visitation from that customer? And is there anything you guys have tried to do to stimulate higher spend? Obviously, the premium segment is quite competitive with player reinvestment, but is there anything you can do to maybe help get that customer to open up the wallet a little bit more? Kwan Chum: Sure. We can and we are. I think property visitation across Sands China remains very strong. I think we actually slightly exceeded 2019 in 2025, approaching 100 million visitations in the whole year, but that's where we can also see the lower spend per visitation because it hasn't fed through into the base mass revenues to the extent that you would have expected given this level of property visitation. I think what we have been doing and what we can continue to do is to leverage the assets that we have for that base mass and mid-tier across the retail malls that we have across the entertainment calendar that we provide. And obviously, all of the attractions that we can offer as the most diverse, an extensive integrated resort in Macao. And we're doing all of those things, including, I think, really pushing hard on the event calendar as well as introduce new nongaming loyalty programs into the market, particularly for the retail mall business. And we're seeing good take-up and good success in some of those initiatives. However, when we come back to the base mass gaming, that level of base mass gaming is just not growing as fast as the premium segments. Operator: Thank you. That concludes today's Q&A session. I would now like to hand the call over to Patrick Dumont for closing remarks. Patrick Dumont: One final item today before we complete the call. I would like to mention that Rob is going to be serving in a new role as Senior Adviser to the company for the next 2 years. On behalf of the company's Board of Directors, the senior leadership team, all of our team members, I want to use this opportunity to thank Rob for 30 years of extraordinary contributions to the company and for all of his leadership. Rob served in many important leadership roles for LVS. He's also been a strong and vocal advocate for the gaming industry as a whole. There are not many individuals who have even more of this industry than he has. Rob has hired, led and mentor numerous people over the years. Many of these people serve in leadership roles in the industry or elsewhere because Rob Goldstein took the time to invest in them and their careers. Finally, I want to recognize and thank Rob for his steadfast commitment to the Adelson family. Rob and [ Sheldon ] had a wonderful friendship and achieved so much together. On behalf of Dr. Adelson and the family, thank you, Rob, for everything you've given this company. Your contributions to this industry and this company are too many to list, but they will always be recognized and appreciated. So in closing, I would like to thank you, and I would like our entire team to look forward to working with you in your new role. Thank you, Rob. Robert Goldstein: Thank you, Patrick. Promise better margins in Macao. Stay the course. Thank you very much. Very kind. Thank you for all your kind comments. I appreciate it, and we will improve in Macao and continue to strive for better results. Thank you. Operator: Thank you. And this does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.
Operator: Good day, ladies and gentlemen, and welcome to the Levi Strauss & Co. Fourth Quarter Fiscal Year End Earnings Conference Call for the period ending November 30, 2025. All parties will be in a listen-only mode until the question and answer session, at which time instructions will follow. This conference call is being recorded and may not be reproduced in whole or in part without written permission from the company. This conference call is being broadcast over the Internet, and a replay of the webcast will be accessible for one quarter on the company's website levistrauss.com. I would now like to turn the call over to Aida Orphan, Vice President of Investor Relations at Levi Strauss & Co. Aida Orphan: Thank you for joining us on the call today to discuss the results for our fourth quarter and fiscal year end. Joining me on today's call are Michelle Gass, our President and CEO, and Harmit Singh, our Chief Financial and Growth Officer. We'd like to remind you that we will be making forward-looking statements based on current expectations, and those statements are subject to certain risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are detailed in our reports filed with the SEC. We assume no obligation to update any of these forward-looking statements. Additionally, during this call, we will discuss certain non-GAAP financial measures, which are not intended to be a substitute for our GAAP results. Definitions of these measures and reconciliations to their most comparable GAAP measure are included in our earnings release available on the IR section of our investors.levistrauss.com. Please note that Michelle and Harmit will be referencing organic net revenues or constant currency numbers unless otherwise noted, and information provided is on continuing operations. Finally, this call is being webcast on our IR website, and a replay of this call will be available on the website shortly. Today's call is scheduled for one hour, so please limit yourself to one question at a time to allow others to have their questions addressed. And now I'd like to turn over the call to Michelle. Michelle Gass: Thank you, and welcome, everyone, to today's call. The fourth quarter punctuated a strong year defined by progress against our strategy, accelerating brand momentum, and solid financial performance. Over the past two years, we've taken bold steps on our journey to become a DTC-first head-to-toe denim lifestyle retailer. We've made deliberate strategic choices to maximize the potential of the Levi's brand, narrow our focus by exiting non-core businesses, and vigorously pursue our highest return growth opportunities. We are becoming a more consumer-focused DTC-centric lifestyle company, which has led to faster growth and higher profitability. These efforts led to strong full-year financial results. In 2025, we delivered organic net revenue growth of 7%, which was broad-based across all facets of our business. Here are a few key highlights for the year. As a reminder, all numbers Harmit and I will reference are on an organic basis. First, the Levi's brand grew 7%. Levi's strengthened its standing as the number one denim brand in the world and today holds more market share than the next two global competitors combined. Second, we took a big step forward in our evolution to becoming a true lifestyle apparel brand by bringing to market our most robust head-to-toe product pipeline to date. This drove growth across channels and meaningfully increased our total addressable market. Third, we accelerated our DTC transformation, growing 11%, which now comprises approximately half of our total business. Importantly, we saw significant DTC margin expansion in 2025, as we delivered high single-digit comp growth for the year and a more efficient operating structure in both stores and e-commerce. Fourth, our wholesale channel continued to deliver more stable growth, ending the year up 4%, fueled by our expanded lifestyle assortment as well as new distribution. Fifth, our growth in women's continued to accelerate, up 11% for the year, with both tops and bottoms delivering double-digit growth in addition to 5% growth in men's. And while we drove significant top-line growth, we also delivered our highest ever gross margin as well as adjusted EBIT margin expansion. Now turning to details of the fourth quarter. Total company revenues increased 5% on top of 8% growth last year. And this momentum continued through the holidays, with 7% growth during the November holiday season, reflecting strength across both DTC and wholesale channels. This marked our highest revenue for the holiday period in at least a decade. First, I will walk you through the progress made against our brand-led strategy, which centers around how we're amplifying the power of the Levi's brand through an innovative and fresh product pipeline and culturally relevant marketing. The Levi's brand grew 4%, driven by strength in men's and even in Q4, higher growth in women's. Growth in men's and women's continues to be driven by both our core as well as the newness we've introduced throughout our assortment. A testament to the strength of the brand, in 2025, we cemented our number one position in men's, women's, and in our key youth demographic of 18 to 30-year-olds in the US. These share gains are supported by strong brand heat, reflected by higher social media engagement and meaningful gains in brand equity versus last year. In Q4, we continue to fuel our global brand momentum while strengthening our relevance in local markets. We unveiled a number of unique collaborations. Examples of these include a premium collection with FarBor and a limited edition footwear launch with Nike and Japanese streetwear icon, Nego. We celebrated our final chapter of the reimagined campaign with Beyonce, and launched our global campaign targeted at men featuring Shabuzy, and Maddie Mathison. And we also reinforced our long-standing link to music culture by celebrating a full decade as an official sponsor of Corona Capital, Mexico's largest music festival. Putting the brand front and center in our second largest market. Moving to product. Our evolution into denim lifestyle is resonating, and the Levi's brand is gaining even more share of the closet as our tops business continues to accelerate. The tops reset we initiated a few years ago, bringing in new internal talent, new vendors, and enhanced capabilities is paying off today. In Q4, tops grew double digits, driving nearly half of our revenue growth and meaningfully higher AURs versus last year. Strength was broad-based, reflecting growth across men's and women's which was driven by strong demand in our elevated assortment of sweaters, wovens, and outerwear. Tops will continue to be instrumental to our denim lifestyle strategy. And while we're pleased about our progress to date, we are just getting started as a destination for the tops category. Within our bottoms business, we are showcasing our most diversified portfolio yet with everything from our core icon to our innovative fashion fits and non-denim bottoms, all delivering growth. While skinny and straight fits remain popular, loose and baggy styles continue to accelerate. New styles like the 578 baggy for him, and our expanding Barrel family for her are fueling momentum as we own more of the denim market in both his and her closet. In Q4, we successfully completed the global rollout of our blue tab collection, which represents the most premium expression of our brand. While we are still in the early stages, the strong consumer response to this collection gives us conviction in the opportunity in the premium segment of the market, which is sizable and largely underpenetrated by the Levi's brand. In 2026, we will further expand the assortment and roll it out more broadly across our DTC business as well as select premium wholesale accounts. Looking to 2026, we enter the year with a robust product pipeline and a brand that's more culturally relevant than ever. For the first time in more than twenty years, Levi's will debut its newest ad during the Super Bowl which will be hosted at Levi's Stadium, marking the launch of our new global campaign that will run through 2026. With this kickoff and more major global moments to come, including several World Cup Games To Be Held At Levi's Stadium this summer, we are energized by the runway ahead and confident in our ability to keep driving the Levi's brand forward. Now shifting to our next strategy to be DTC first. In Q4, our global direct-to-consumer business delivered another quarter of double-digit growth, up 10%, and posted its fifteenth consecutive quarter of positive comps. We generated another quarter of high single-digit comp growth, reflecting positive performance across all store KPIs, including traffic, conversion, and UPT. In addition to AUR growth across every segment. In Q4, we opened 47 net new system stores, including mainline locations in Japan, India, Thailand, and Korea, as we continue to expand our DTC presence in Asia. Over the past year, we have transformed our retail operations both in stores and online, improving the consumer experience and store productivity. We've enhanced our in-store lifestyle merchandising, highlighting our broader assortment of head-to-toe looks. We've improved our assortment planning and life cycle management resulting in lower promotions and higher full-price selling. And we're rolling out a new global selling model for our store team which will deliver operational efficiencies and improved consumer engagement. We are still in the early stages of what we believe is an opportunity to continue to improve our DTC margins, which will be a key driver of our overall company margins. Our efforts to build a strong digital foundation have enabled us to accelerate our e-commerce business. And in Q4, we delivered another quarter of very strong e-commerce growth up 22%. We are leveraging AI to make online shopping easier and more inspiring for our fans. We recently launched Outfitting, an AI-powered feature in the Levi's app that creates style looks using our full assortment, purchasing behavior, and product imagery. This year, we'll evolve outfitting with even more consumer-centric customization, and we'll launch a new consumer-facing AI stylist chatbot that enables personalized recommendations through conversation. We are also continuing to scale the use of AI and advance analytics across the organization as we accelerate our shift to a best-in-class direct-to-consumer retailer. For example, we recently announced our plans to develop and deploy an integrated AgenTeq AI platform to simplify and automate task-driven work throughout the organization, driving efficiency, productivity, and enabling growth. Built in partnership with Microsoft and as a frontier firm in the industry, we're currently testing this technology and plan to roll it out to employees this year. These initiatives are rewiring the company for a bold future, creating meaningful opportunities to enhance consumer experiences while unlocking additional operational efficiencies. While DTC continues to drive outsized growth, wholesale continues to be an important channel for us to amplify the brand and reach our consumers where they choose to shop. Our global wholesale business was flat for the quarter and ended the year up 4%. The channel has stabilized over the past year as our efforts to elevate the brand and broaden the assortment gain traction. Now turning to our third strategy, powering the portfolio. In Q4, our international business grew 8% led by an acceleration in Europe and solid growth in Latin America. International comprises nearly 60% of total sales. And given the strength of the brand and our expansion into lifestyle, we see an immense opportunity for continued profitable growth outside the US. Beyond Yoga was up 45% in Q4, fueled by the positive response to our Seek Beyond campaign launched in Q3, and product expansion into new categories across active lifestyle. DTC performed particularly well and we opened four new stores in the quarter. Beyond Yoga ended the year up 17%. And as we look to 2026, the brand will continue to expand its retail presence in new markets, and launch the next iteration of our broadened lifestyle assortment. Looking ahead, I am more confident than ever in our future potential. While we continue to navigate a dynamic global environment, we do so from a position of strength with an iconic brand, deep connection with our fans, and the agility to adapt and grow. Our strategies are working. And we have the right capabilities and team in place to continue to drive momentum in the year ahead. We'll keep building our denim lifestyle leadership by bringing fans fresh new product across every category while continuing to celebrate the iconic styles that have shaped generations. And we'll continue to keep Levi's at the center of culture through a focus on sports, music, and youth, showing up powerfully on the world's biggest stages and sparking excitement that deepens our cultural relevance globally. All of this is supported by our continued commitment to drive operational excellence and to strengthen our execution grounded in a focus on discipline, accountability, and performance. I'd like to thank our incredible, talented, and passionate team for driving our transformation into the world's denim lifestyle leader and delivering outstanding service to our fans every day. Together, we're building a stronger foundation for sustainable, long-term value creation. And with that, I will turn it over to Harmit to review our performance in the fourth quarter, the year, and expectations for 2026. Harmit? Harmit Singh: Thank you, Michelle. 2025 was a strong year with continued consistent profitable growth for our company. I'm pleased that our growth has accelerated over the last three years and we have established ourselves as a consistent mid-single-digit growth company which we expect to continue in 2026. We've also made progress each year on expanding margins both gross and operating, while driving higher returns on invested capital ending the year at approximately 16%. Our 2025 financial results reflect the strength of our business and demonstrate that we have the right building blocks in place to drive long-term sustainable growth. Our focus on denim lifestyle has enabled us to accelerate growth by expanding our total addressable market with our broadened assortment of non-denim bottoms, tops, dresses, and skirts which contributed to almost a third of our growth in 2025. Our disciplined approach to converting growth into profitability improved adjusted EBIT margin by 70 basis points in 2025. And we achieved this while navigating higher tariffs and investing in remapping our distribution network as we build the roadmap towards becoming a $10 billion DTC-first company. In 2026, we will continue to grow adjusted EBIT margins through our relentless focus on driving higher revenue flow through while making the right investments for our long-term growth. Including growing our store base, AI capabilities, and marketing. In addition, we're making meaningful progress on mitigating tariff impacts on our P&L through targeted pricing actions, higher full-price selling, lower product cost, and prudent management of our cost base. Now let me walk you through the specifics of our fourth-quarter performance. Organic net revenues grew 5% and were up 13% on a two-year stack. Our outperformance was driven by better-than-expected results across channels and geographies. As we have seen throughout the year, both AURs and units contributed to our growth this quarter. We expect both price and unit growth to drive the top line in 2026 and beyond. Gross margin for the quarter was 60.8% of net revenues, contracting 100 basis points relative to last year, in line with our expectations, primarily due to the impacts of tariffs which were partially offset by pricing actions and higher full-price selling. In the first quarter, we implemented additional pricing actions to further mitigate tariffs and while it's early, we are not seeing any impact on consumer demand thus far. Adjusted SG&A dollars grew 2.6% due to the sales upside driving higher selling and incentive expenses, higher costs associated with the transition of our US distribution network, and unfavorable foreign exchange. A brief update on our distribution network transformation in the US. While we're making progress, the transition to the new third-party distribution center has taken longer than we expected. We've been working to fulfill our high demand, by continuing to operate our own distribution center which has led to higher transitory distribution costs, which we expect to continue to incur through '26. We successfully executed a distribution transition from owned and operated to a hybrid model in Europe last year, enabling us to fulfill our strong demand as evidenced by the double-digit revenue growth in the quarter, while improving our profitability in the region. This gives us confidence that we will successfully complete the transition in the US this year. Moving down to the EBIT line, adjusted EBIT margin contracted 180 basis points to 12.1% related to the impact of lapping the fifty-third week and tariffs. This was slightly lower than our expectations due to the three reasons I mentioned before within SG&A. That is unfavorable effects, higher distribution cost, and incentive compensation. Fourth quarter adjusted diluted EPS was 41¢ higher than expectation. This includes a 3¢ headwind from a higher tax rate. We ended the year with reported inventory dollars up 9% to prior year and units up 2%. The year-over-year dollar increase was primarily driven by tariffs. We continue to believe our inventory, quantity, and quality are well positioned globally and expect inventory levels ending fiscal '26 to be below revenue growth. Turning to dividend and share repurchases. In quarter four, we returned $55 million to shareholders and for the full year, we returned $363 million up 26% versus prior year. This included a 7% increase in the dividend versus last year. And the $150 million share buyback in '25 was the highest annual buyback since the IPO. And today, we're announcing a $200 million ASAP program which will be completed within three months but no later than six months, reflecting our confidence in our future and continued efforts to drive shareholder value. Now let's review the key highlights by segment for the quarter. The Americas net revenues were up 2%. Our US DTC business grew 6% driven by strength in both brick and mortar and e-commerce. US wholesale was down, due to capacity constraints in our new 3PL as well as strong growth from a key digital wholesale customer in the prior year. Our LATAM business was up 8%, fueled by growth across most markets. And continued strength in DTC. Operating margins, which were up for the year, contracted 460 basis points in the quarter primarily due to the lapping of the fifty-third week and the impact of the tariffs. Europe net revenues accelerated up 10% in Q4, led by double-digit growth in our largest European markets, the UK and Germany. We delivered strong holiday performance and growth across all categories, including men's, women's, tops, and bottoms. Gross margin expansion and SG&A leverage resulted in operating margin growing 330 basis points versus prior year. Europe's operating margin for the full year grew 180 basis points. Asia net revenues grew 4% year over year, fueled by strong DTC performance. Key markets, including Japan and Turkey, delivered double-digit growth this quarter as a head-to-toe lifestyle offerings continue to resonate with consumers and drive growth. Operating margin expanded 140 basis points versus prior year, driven by gross margin strength. For the full year, Asia grew 7% and operating margin expanded 60 basis points. Now let's turn to outlook for fiscal '26 and Q1. We are pleased with our Q4 results and with our trends in the first quarter, including a successful holiday period. Looking to '26, we expect organic net revenue growth of four to 5% with one point favorability from foreign exchange resulting in reported net revenue growth of five to 6%. By segment, we expect the Americas to grow low single digits, Europe mid-single digits, and Asia mid to high single digits. By channel, we expect DTC to grow high single digit fueled by positive comp sales, opening 50 to 60 net new system dose and continued growth in e-commerce. Global wholesale is expected to be flat to slightly up given plans to rationalize our wholesale footprint particularly a few nonstrategic accounts in the US, in support of our brand elevation strategy. Gross margin is expected to be flat to prior year. This includes an approximate 150 basis points gross impact from tariffs which we plan to offset with pricing actions, higher food price selling, product cost reduction, driven by lower cotton rates, and vendor negotiations. SQ rationalization and favorable mix. FX is expected to be a 20 basis point headwind to gross margin. While these mitigation factors will begin to flow through the P&L early in the year, we anticipate the pace of benefit realization will accelerate as we progress through 2026 with a more meaningful contribution emerging in the later part of the year. The fundamental drivers of our gross margin expansion, which are mix higher full price selling, continued product cost reduction, remain intact. Positioning us well for resume full year expansion in 2027. We expect our fully adjusted SG&A rate to improve by approximately 40 to 60 basis points as the organization is increasingly focused on driving operating leverage. This is driven by cost actions to mitigate tariffs, expansion of our global talent hubs, limited headcount increases as we drive productivity, and efficiencies by expanding AI usage and easing costs from running parallel distribution centers in the second half of the year. For the year, we expect marketing spend to be approximately 7% of total revenues flat to $20.25. As a result, adjusted EBIT margin is expected to expand 40 to 60 basis points in the range of 11.8 to 12%. Given our mid-single-digit growth, and our focus on growing gross profit dollars ahead, of SG&A dollars we do expect to leverage for the full year. We expect the full year tax rate to be around twenty-three percent two points higher than twenty-five. And interest expense is expected to be approximately $12 million a quarter. Full year adjusted diluted EPS is expected to grow and be in the range of $1.40 to $1.46. This includes a 4¢ headwind from a higher tax rate and a 20¢ drag from the higher gross impact from tariffs which we are fully mitigating. CapEx should be approximately $230 million, 3.5% to 4% of revenues. Primarily to support store openings, fleet improvements, and our digital investment. Before I discuss our Q1 guidance, I wanted to give some color on the cadence of the P&L for the year. We expect consistent mid-single-digit revenue growth throughout the year with Q2 slightly lower due to seasonality. We expect gross margin to improve in the second half as we realize the benefit of pricing and lap the impact of tariffs. On a full-year basis, as previously mentioned, we expect marketing spend to be 7% of total revenue. However, this spend will be Q1 weighted given the timing of a global marketing campaign which kicks off in February with the Super Bowl. Because of this, we expect Q1 spend to be approximately a 160 basis points than Q1 twenty-five and lower in the remaining three quarters of the year. As a result of the Q1 marketing phasing, operating margin is expected to contract versus prior year in Q1 'twenty-six, and then expand as gross margin expansion and operating cost leverage take hold driving full-year growth. Now turning to the 2026. We expect organic net revenue growth of 4% to 5% consistent with our full-year forecast. And a three-point FX tailwind resulting in seven to 8% reported net revenue. On a two-year basis, this is an acceleration from Q4 twenty-five. And demonstrates that we are maintaining momentum. Gross margin is expected to be slightly down versus Q1 twenty-five, primarily due to the continued impacts of tariffs. As noted earlier, we have already implemented pricing actions earlier this month and additional pricing actions will occur in February. Adjusted EBIT margin is expected to be down 140 basis points versus Q1 twenty-five to 12% primarily driven by the timing of the marketing campaign. While the production costs and expense in the first quarter we expect to benefit from the campaign through the course of the year. Excluding A&P timing, adjusted EBIT margin leverages and in Q1, we expect adjusted diluted EPS in Q1. be between 35 to 38¢. This includes a 7¢ drag for from A&P. In closing. 2025 was another solid year for us while accelerating top line and bottom line, evidencing the success of our strategies and our transformation to a denim lifestyle DTC first company. We entered '26 with strong momentum. And a maniacal focus on expanding operating margin. With a robust product pipeline, growing TAM, and clear plans to mitigate tariffs along with a talented and experienced management team will look forward to another year of consistent growth and margin expansion. Beyond '26, we are confident about what's ahead. Iconic brand, global reach, and relentless focus in growth and cost management will continue to create lasting shareholder value well beyond 2026. And with that, Latif, let's open up the line for Q&A. Operator: Thank you. The floor is now open for questions. Please press star then the numbers 11 on your telephone keypad. Due to time constraints, the company requests that you ask only one question. If you have an additional question, please queue up again. If at any point your question has been answered, you may remove yourself from the queue by Our first question comes from the line of Laurent Vasilescu of BNP Paribas. Your line is open, Laurent. Laurent Vasilescu: Thank you. Good afternoon. Thank you for taking my question. I'd love to ask about gross margins. Harmit, you've historically beaten your initial gross margin guide. Are you taking the same conservative stance as in prior years with this guide of flat gross margins? How should we I think you talked about sequential improvement on the gross margin for the year, but can you maybe just put a finer point how do we think about the first quarter gross margin? I think expectations were a little bit higher for 4Q. And can you maybe just unpack a little bit more the drivers on Cotton Transit and the offset on tariffs for the bridge for the year. Thank you very much, Harmit. Harmit Singh: Thanks, Laurent. I was it's a gross margin question for you is right on the money. But let's start with a little bit of history. Gross margin, you know, we have established a track record of consistent gross margin expansion as you said. Our algorithm talks about expanding gross margin regularly. Every year. Last year, '25 we grew gross margins a 110 basis points. And over the past three years, it's grown about a 400 basis points. And I'll talk a little bit about the structural drivers, which are intact. Talking about '26, our guidance is at this time, flat to prior. What we have done nicely is offset the full impact of tariffs. You know, as the year progresses. So tariffs, as I mentioned in my prepared remarks, impacts gross margins adversely by about a 150 basis points. And we have an FX headwind of about 20. We're fully offsetting this with higher pricing, you know, most of it's been implemented. We have we're not seeing any initial demand reaction to it. So the last thing is pretty good. More full-price selling, which is something that we've been focusing now for about twelve to eighteen months. Especially as a product, you know, newness is resonating well with the consumer. And then lower product cost. Which is a combination of lower you know, better and lower cotton, as well as queues the negotiation with the vendors as we rationalize you know, reduce unproductive you know, assortment, etcetera, etcetera. So the only thing I would say is the structural benefits, which is growing you know, more aggressively things like women's, is higher gross margin than men's. DTC, which is high gross margin in wholesale. And international, which is high gross margin than US. That's intact. So as we think about twenty-six, I think the way we flow this is first quarter will be slightly down than a year ago. Because the pricing gets effectuated and improves and accelerates in terms of year-over-year performance as the year progresses, and we start lapping tariffs. And as we think about '27, Laurent, you know, our view is, you know, this is we don't guide '27 right now, but our view is the structural aspects that we're focused on growing which is through mix, which is DTC, women's, and international will resume the acceleration of gross margin in the years to come. So that's how we're thinking of gross margins you know, and I hope that answers your quest. Laurent Vasilescu: It does. Thank you very much, and best of luck. Operator: Thank you. Our next question comes from the line of Matthew Boss of JPMorgan. Your line is open, Matthew. Matthew Boss: Thanks, and congrats on another nice quarter. Harmit Singh: Thanks, Matt. So Michelle, how does your mid-single-digit organic outlook for this year size up to the denim category? Maybe where do you see opportunity to increasingly move to offense this year? And then Harmit, on that topic, you elaborate on the acceleration to 7% organic growth in November and December? Think that's on top of 8% growth a year ago, so a mid-teens two-year stack. Just could you speak to the strength that you're seeing? And have you seen any softening in top-line momentum post-holiday? Michelle Gass: Okay. Great. Matt, I'll yeah. I'll start with your first one. We feel really good heading into 2026. I mean, I'd say it's clear that our strategies are working, and just as '25 was a strong year, plus 7% organic growth, we're expecting 2026, as you said, mid-single-digit. Four to five organic, five to six on a reported set basis. You know, highlights from my standpoint are number one, you know, I'd say that we are in the best shape that we've been in decades. Both operationally and financially. '25 is certainly a good proof point of that. Our strategies of being brand-led, DTC first, empowering the portfolio are clearly working, and they're driving broad-based growth across channels, categories, genders. And I think what's really exciting is we're making this big transformation, as you know, from a denim bottoms business to a true head-to-toe denim lifestyle company. So when you think about four to 5% mid-single-digit growth ahead, you know, we do expect Matt to outperform the category. I mean, the category, and as you're talking just denim, it is accelerating globally. And as a leader, we are fueling that growth. You know, on that note, in the US, which is also growing we have cemented our position as the number one share for men's women, and youth. And it's the first time that we can remember that all three of these targets have grown share and are number one. So it gives us tremendous confidence that strategies aren't changing. We're leaning in and we're executing. And the last point I would make is you know, just as we plan to continue to fuel the denim category, we've expanded our total addressable market. Right? We're no longer just in denim bottoms and in fact, as Harmit mentioned earlier, about a third of our growth this past year was driven by categories outside of denim bottoms. So speaking to top, which had a really fantastic year of double-digit, we expect that tailwind to continue. Non-denim, again, it's growing fast. We expect that to continue. And then, of course, we think about the women's business, women's had a great year, up 11%. But that head-to-toe dressing from, yes, being relevant in fashion and loose, baggy, all the icons, but then also in skirts and dresses. Tops. So there's a lot of runway as we look into 2026 and beyond. Harmit Singh: And your second question, Matt, I think, you know, holiday was strong for us. It centered around two strategies. One is DTC. So as you become a DTC-first company, as a team, we're really focused on making sure we win in holiday. We made sure you know, there's newness on the flow, we made sure the product that, you know, is you know, being innovative was both with our wholesale customers as well as in our stores and on e-commerce platform. Then the team's really executed really well. So that's, fact number one. Fact number two is just building on the standpoint that Michelle talked about. That's centered around the denim lifestyle. You know, focus. The myth I would like to bust you know, is that we are we're just not only denim bottoms. We are more than denim bottoms. I mean, this is more of a head-to-toe lifestyle denim-focused company. So think about the outerwear. Our teams shout out to our product teams and merchants, product team led by Karen Hellman and lead merchants. We sold a lot of sweaters. You know, more than we have sold in a long time. You know, we sold a lot of chinos. So I can go and just talk about the different products that were introduced in holiday that really helped. So that's what gives us the confidence that we can grow Q1 and a two-year stack at 14%. You talked about November and December at 15, but, you know, for the quarter, you know, that gives us the confidence. And sustaining the 7% organic growth with you know, four or five organic growth in 2026. Matthew Boss: It's a great color. Best of luck. Thank you. Harmit Singh: Thank you. Operator: Our next question comes from the line of Jay Sole of UBS. Your line is open, Jay. Jay Sole: Thank you. You know, Michelle, in the prepared remarks, you made a comment that you believe that the direct-to-consumer channel margins can move higher. Can you just dive into that a little bit and tell us what are the drivers and where do you think the margin can go from where they are today? Michelle Gass: Yeah. Absolutely. Thanks, Jay, for the question. We believe that there's a lot of upside in DTC from a revenue standpoint and margin. You know, as I commented earlier, 15 quarters of positive comp growth. So first of all, margin growth will come from leverage, you know, call it sales productivity. As we continue to drive higher volumes, we'll clearly leverage off of the fixed costs in our store, which includes, you know, your real estate, your fixed labor, just a lot of, you know, a lot of those, like I said, fixed costs. Secondly, I would say is, you know, we are really focused on retail excellence. That had a big impact in expanding our store margins this past year, and that will continue. So we're stepping up our operations capabilities. That includes things like enhanced lifestyle merchandising. So when the consumer is coming in, they're not just buying a pair of bottoms, they're also buying the top. So driving UPTs, driving average ticket price, etc. Improved assortment planning and life management. You know, we talk about rewiring this company to be a retailer and that's happening. We put new systems in place. We're in the midst of rolling out a new planning allocation system that's gonna benefit sell-through. Keeping us in stock. So and I would say historically, you know, that wasn't a core strength growing up as a wholesale company. That wasn't a core strength of ours. It has to be now. And you see it in the numbers to date. You'll see it going forward. And then lastly, would say, again, operating with a retail merchant mindset, is the selling model, and we have a new global selling model that's rolling out worldwide. So, you know, our expectation, the margin expansion that we saw this past year, we expect that to continue. We feel really good. Jay Sole: Got it. Okay. Thank you so much. Michelle Gass: Thanks, Jay. Operator: Thank you. Our next question comes from the line of Bob Durbel of BTIG. Please go ahead, Bob. Bob Durbel: Hi. Good afternoon. Congratulations on a nice quarter. I guess, was wondering if you could focus in on Europe a little bit more. Either country trends or the blue tab business have a big impact and those results over there? Looks pretty good. Thanks. Harmit Singh: Thanks, Bob. So first, a big shout out to the Europe team. You know, they had a phenomenal year. They were up in the mid-single digit. The strength in Europe for the quarter was up 10%. End of the year really strong. And entering '26 with momentum. The strength was you know, evident. I talked about UK and Germany, my remarks being up double digit. But you think about the channels, both channels are up wholesale actually led the way with 13% growth. Growth and you look at the other markets, Bob, most markets grew in Europe again, very strong holiday. The team in Europe does a great job executing against the strategies. You know, women's was up 10. Men's was up nine. As an example. And then e-commerce was up, you know, in a big time. So overall, really strong results. It translated you know, driving growth is one thing, but it's important as the growth translates to profitability, and it translated with operating margins up 380 basis points. So let's think forward. 26 with you know, we are signaling Europe growth mid-single digit. And you think of the prebook, which is the first sign of you know, how the wholesale customer will shop. Our prebook is up mid-single digit. So I think that's just, you know, just thinking about Europe for '26 and, you know, what drove 25. Bob Durbel: Great. Thank you. Michelle Gass: Thanks, Bob. Okay. And on BluTab, do you wanna take a question? No. Happy to talk. So Blue tab is clearly a global opportunity for us. So yes, in Europe, but across the globe. And we're really excited about this because we think this presents a new business for us. The premium category is largely untapped for us. It's sizable. It's growing, and we're significantly underpenetrated. So early signs for BluTab are very positive. We just rolled it out early early in 2025, and it is the pinnacle expression of our brand. Very elevated, you know, commanding price points for bottoms for $200 to $350. Truckers, $250 to $400 the list goes on. And we're early in the early stages, we're testing, we're learning, we're scaling, but it is showing that the consumer is responding and that we have permission to play in this elevated premium market. And, you know, we have we've also had green shoots through the collaborations that we've done for a long time, which have commanded those really elevated price points. But now we're really going to lean in. It isn't going to be you know, these in and out collaborations. We see it as an ongoing business, that not only will represent a commercial opportunity, but it's a great halo to the entire line. So I think more to come, but you know, we're bullish on really getting into this premium category. Bob Durbel: Good luck. Thank you, Michelle. Michelle Gass: Thanks, Bob. Operator: Thank you. Next question comes from the line of Oliver Chen of TD Cohen. Please go ahead, Oliver. Gabriela Gar: Hi. This is Gabriela Gar on for Oliver. Thanks for taking our question. We think to hear a little bit more about any improvements that you're seeing within supply chain and progress that you're making on shortening go to market within your products I know you mentioned AI being an efficiency driver within the corporate setting, but would love to hear any additional color on supply chain. Thank you. Michelle Gass: Why don't why don't Harmit and I both take this one? Let me talk about kind of end-to-end chain as it relates to product development. And I think Harmit can speak to our distribution transformation. So, as you know, we've been on this journey as we pivot to become a DTC retailer to shorten our timelines, drive global consistency, etcetera, and we're making good progress. We've taken a few months out of our end-to-end lead time, so we've shortened that. From, you know, what was sixteen, seventeen months down to fourteen months. We're now focused on creating different tracks of products. So for example, in tops, we're going after shorter cycle times, looking at vendors who are closer to the point of distribution, etcetera. We have a new head of supply chain, Chris Caliari, who comes with deep experience in vertical retail and has a very, you know, very strong strategy to go after those opportunities. So that's point number one. Point number two, a key enabler to that is driving greater global consistency. So what used to be we've always developed our products here in San Francisco, but it was more kind of a bottoms-up approach. Now what we've seen is really more of a top I'll say tops down, but having a globally directed line. For perspective, back in like twenty-three early twenty-four, our globally directed line was about 20%, we're now 50%. On our way to 70%. And with that, it clearly drives a lot of efficiency. So over time you'll see that show up in, you know, an inventory turn and sell-through and productivity, and also it allows us to really get behind those big bets from a marketing standpoint and leverage our resources. So the second and then the third piece somewhat related is we continue to be really focused on reducing our SKU count. And we are we are still ranging in the reduction of about 20%, 25%. Again, all of these things will help enable margin accretion over time. Harmit Singh: Yeah. And on the Gabriela, to the question on distribution, just by context, you know, two years ago, we began remapping both US and distribution network. To a more hybrid automated omnichannel model largely done with the intent to support our long-term growth. And ensure we meet growing consumer demand. Europe, as I mentioned in my script, is fully transitioned, and we're seeing clear top line and bottom line opportunities. In the US, the ramp-up has taken a little longer than we expected. And so we supplemented this by ensuring that one of our own facilities stayed open a little longer, as well as increase the manual operation because to be honest, the demand outstripped our expectations given the wonderful product that we have and, you know, we have introduced in the marketplace. We brought in distribution experts into our organization. Helping us complete the transformation. We're working with our third-party leading logistic partners, you know, and so we're confident of completing this by the end of the year. And as you saw from the Europe numbers, you know, when it is complete, it does make a big difference to top line and bottom line. Gabriela Gar: Thank you. Thank you, both. Operator: Thank you. Rick Patel of Raymond James. Your question, please, Rick. Rick Patel: Thank you. Good afternoon, and congrats on wrapping up a strong year. Related to the new DC. So we wanted to double click on the delays you provide additional color there? And what gives you confidence it will come online in the back half? And then as we think about the SG&A impact, what's the right way to think about the impact that DC will have as we think about the transitory cost in the first half versus what should be a sizable opportunity to drive leverage from efficiency in the back half? Harmit Singh: Yeah, sure. Thanks for asking the What gives us confidence is a couple of things. One, we've got a great team on our side and a great team with our third-party logistic partners. Working together to try and solve it and do it in a way that we are able to meet consumer demand while setting ourselves for the long term. So that's fact number one. Fact number two is you know, I mean, this is a daily, if not a weekly, discussion. And Michelle and I and the top teams, you know, management teams on the other side are directly in conversation. And the other only proof point I would have there is we've seen it happen in Europe. There's no reason why it shouldn't happen. In the US. So that's addressing your question to the question on SG&A. Know, our focus on SG&A has risen to an all-time high within the company. I think you can ask the entire management team in the company, they'll say, this is a group that really wants to drive more leverage. And the best way to explain this Rick, is to say, let's convert a higher percentage of our growth, our gross profit dollars into EBIT dollar. You know, what gives us confidence in 2026 is a few things. One, you know, a higher volume, four to 5% organic or five to 6% reported. Should leverage. Second is, I think, Jay, you asked the question about DTC product. Productivity. You know, again, a mid to bust, higher DTC doesn't mean lower EBIT margin. So you think about last year, our DTC margins were up 300 basis points. So EBIT margins were up. We've got plans to grow DTC margins even in 2020. In 2026. The other thing is have limited headcount increases. And the way we're doing it so that we manage growth with resources is really leverage the user AI and we've got global talent hub. Which is centered around the world across all functions. Where we're leveraging talent. And that should help us you know, offset some of the cost increases. And your question about distribution cost we feel the parallel running of the DC that pressure eases by the first half of the year. So you start seeing some of the benefit in the second half of the year, and you see that in the P&L. And overall, our SG&A rate as a percentage of revenue, which we have always said will be around 50%, we think in '26 will be lower than that. Rick Patel: Very helpful. Thank you. Harmit Singh: Thanks. Operator: Thank you. Our next question comes from the line of Tracy Kogan of Citi. Your question, Tracy. Paul Lejuez: Hey. It's actually Paul Lejuez from Citi. Hey, Paul. You mentioned you mentioned several rounds of price increases I was wondering if you could just talk about where those are happening and the magnitude and maybe tie that into your assumptions for growth by geography in F twenty-six as you think about the breakdown between price versus units in each of the three geographies you mentioned? Michelle Gass: Sure. Paul, I'll take that one. So, yeah, as we talked about earlier, we are taking, call it, thoughtful, targeted pricing actions. As part of our tariff mitigation. And that's largely happening in the US, although as ordinary course of business, we do take pricing around the world as we mitigate things like inflation and the like. But, you know, our focus for the most part was here in the US. I will say we have not seen any consumer or customer reaction to date, which I think is a testament to the strength of the business and the momentum we have and the consumer responding to our product or marketing efforts. And I would say that we have pricing power given how strong the brand is right now, the market share gain, so, you know, where it's appropriate, especially in our higher higher tiered and newness innovation, we're leveraging that pricing power. While at the same time taking more modest pricing and being very diligent on, call it, those tier three lower priced entry-level prices. So the teams, you know, we have more data and more sophisticated models than we've ever had leveraging AI as a matter of fact. Informed by market analyses, demand elasticity, and, like I said, being very targeted on how we took that pricing. We took some last year fairly modestly. We have more and that was mostly from a to to the to our customers. Now from a consumer-facing standpoint, we do have pricing going in. Both in DTC and in wholesale in February. We'll be staying really close, but again, we have confidence as we head into 2026. And to your point on AUR versus units, we're expecting like we saw this last year, we're expecting both to grow in the coming year. Paul Lejuez: And so is there is there any difference by geography in terms of the AUR versus units? Would imagine with with the US, price increases or don't. Harmit Singh: We don't necessarily guide at that level by geography, but the fact that we're expanding TAM and we're really focused on driving higher units per transaction. Which means that know, we are saying, you come in to buy a denim bottom or non-denim bottom there is now a great top available for you. That should drive units. Around the world. Paul Lejuez: Thanks, guys. Good luck. Harmit Singh: Thanks, guys. Operator: Thank you. Our next question comes from the line of Brooke Roach of Goldman Sachs. Your line is open, Brooke. Brooke Roach: Good afternoon, and thank you for taking my question. Harmit, Michelle, I was hoping we could drill down a little bit deeper into your growth assumptions for the Americas business in 2026. It sounds like you have some strong momentum in DTC. You're taking a little bit of price. You sound pretty positive on units. But the growth would suggest that things are a little bit more challenged there. I think you mentioned that US wholesale is going to go through a bit of a rationalization this year. Can you help us understand what what's happening there? And where the opportunity for upside is in your Americas business this year? Thank you. Harmit Singh: Sure. So, Brooke, overall, the US grew the you know, in '25 by 4%. DTC, you know, was the standout. You know, growing 6%. But wholesale also grew you know, in the year. I think in the quarter, the, you know, US was flat. That is largely driven by, you know, as I mentioned in the call, two factors. One was we were lapping you know, a high sale in '24 from a large digital customer that was just timing. And the capacity constraints on the DC. And if you if you, you know, exclude that, or you, you know, adjust for the impact of that, in the quarter, US and US wholesale would would have been uploaded mid-single digits. So US has had a great year. To your question about next year, you know, our expectation is the US grows low to mid-single digit. Wholesale globally, our view is, you know, flat to slightly up. That's largely driven by the rationalization of some nonstrategic accounts in the US. I mean, you know, as we you know, focus on elevating the brand, and, you know, taking this business to the next level. Our view on wholesale is that it's an important channel for us, in fact, key channel allows us to reach a lot of fans. And, you know, the broader assortment that Michelle referred to in her prepared remarks. Etcetera, as a resonate with the consumer and DTC, we're able to take to wholesale. And I think that should drive growth over time. Operator: Thank you. Our next question comes from the line of Tom Nikic of Needham. Your line is open, Tom. Tom Nikic: Hi. Hey, everyone. Thanks, John. Want to follow-up on Brooke's question there. Recognizing that there's the headwinds from some of the wholesale rationalization in the US, I'm just wondering what the business looks like in your strategic wholesale accounts in the US, how have sell-through rates been, you know, how how how will the order book shaking shaking out, you know, etcetera, just, you know, what what does it look like among the strategic accounts in the US? Michelle Gass: You bet. Tom, I'll take that one. Thanks for the question. First, I think it's important to reiterate that we believe in the wholesale channel. You know, this is really an and story versus an or. Yes, DTC, we expect to continue to outperform, but over the long term, we expect wholesale to be slightly positive over time. You know, we've guided about flat for next year, and I think we're guiding that despite the fact. That we are rationalizing in some nonstrategic accounts, things like, I would say, the grocery channel that we're we show up in today in the US. So I think it's a good thing for the brand and again we're driving to flat even despite some of these account decisions. As it relates to our core strategics, I think the partnership are really strong. These accounts are embracing denim lifestyle. Tops, men's and women's, I mean really Levi's getting into the top category. In wholesale in a meaningful way is a new step forward for us. Women's accounts have really embraced our women's strategy and you'll see that in key accounts where they've expanded the footprint. In some cases, we've expanded doors. And then this head-to-toe denim lifestyle getting into new categories like skirts, dresses, etc. So we really do see it as a compliment, and I think one of the really great things is that in DTC, we can launch products first and they get to see the results and then we can take them to wholesale. And we've seen that model play out. One of our big hits of the year was the Cinch Baggy and that took off both in DTC and in wholesale. As we look ahead, you know, around the world, for example, you know, we had positive growth in Europe even in the quarter. We the the order books are positive for next year. Latin America, again, for the quarter. So net net, I think it's a really good story as we've expanded our addressable market to expand these categories. And let's not forget, even in Q4, from a total business standpoint, grew market share in men's, women's, that youth target. I'll wrap it up by saying, you know, we're bullish across all channels and there's so much opportunity for Levi's in our core denim bottoms business and head-to-toe lifestyle. Tom Nikic: Great to hear. Thanks very much, Michelle, and best of luck this year. Michelle Gass: Thank you. Harmit Singh: Thanks. Thanks, everyone, for joining the call, and we look forward to talking to you next quarter. Operator: Thank you. This concludes today's conference call. Please disconnect your lines at this time. Have a great day.
Operator: At this time, I would like to welcome everyone to the Q4 and Full Year 2025 ServiceNow Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Press star followed by the number one on your telephone keypad if you would like to ask a question. If you would like to withdraw your question, simply press star one again. We do ask you limit yourself to one question for today's event. Thank you. I would now like to turn the call over to Darren Yip, Senior Vice President of Investor Relations and Market Insights. You may begin. Darren Yip: Good afternoon, and thank you for joining ServiceNow's fourth quarter 2025 earnings conference call. Joining me are Bill McDermott, Chairman and Chief Executive Officer, Gina Mastantuono, our President and Chief Financial Officer, and Amit Zavery, President, Chief Product Officer, and Chief Operating Officer. During today's call, we will review our fourth quarter 2025 results and discuss our guidance for the first quarter and full year 2026. Before we get started, we want to emphasize that the information discussed on this call, including our guidance, is based on information as of today and contains forward-looking statements that involve risks, uncertainties, and assumptions. We undertake no duty or obligation to update such statements as a result of new information or future events. Please refer to today's earnings press release and our SEC filings, including our most recent 10-Q and 10-Ks, for factors that may cause actual results to differ materially from our forward-looking statements. I would also like to point out that we present non-GAAP measures in addition to, and not as a substitute for, financial measures calculated in accordance with GAAP. Unless otherwise noted, all financial measures and related growth rates we discuss today are non-GAAP except for revenues, remaining performance obligations, or RPO, current RPO, and cash and investments. To see the reconciliation between these non-GAAP and GAAP measures, please refer to today's earnings press release and investor presentation, which are both posted on our website at investors.servicenow.com. A replay of today's call will also be posted on our website. With that, I'll turn the call over to Bill. Thank you very much, and good afternoon to everyone joining today's call. As you might imagine, I've been waiting for this extraordinarily exciting moment since 12/31/2025. Bill McDermott: There seems to be speculation everywhere these days, so let's take it all head-on. Here are the facts. Our Q4 results beat expectations handily, just like we have consistently for years now. Overall, Q4 NNACV growth accelerated. Our subscription revenue growth was 21%, both quarter over quarter and year over year in Q4, 19.5% in constant currency, 1.5 points above the high end of our guidance. Contribution from Moveworks was de minimis. Our CRPO growth was 25%, 21% in constant currency, two points above our guidance, including a 1% contribution from Moveworks. Operating margin was 31%, one point above our guidance. Full year '25 free cash flow margin was 35%, one point above our already raised guidance. We had 244 deals greater than $1,000,000 in NNACV. We had seven deals greater than $10,000,000 in NNACV. And CRM NNACV growth accelerated quarter over quarter to close its largest quarter in history. RaptorDB Pro more than tripled NNACV year on year in Q4, including $131,000,000 plus deals. Workflow Data Fabric was in 16 of our top 20 Q4 deals, and we've seen attach rates increase in every quarter of 2025. All of the workflow businesses were very strong in Q4. Gina will take you through the breakdown on all the metrics. The speculation of AI will eat software companies is out there. Let's clear it up with the facts. Enterprise AI will be the largest driver of return on the multitrillion-dollar super cycle of investment in AI infrastructure. The real payoff comes when trillions of tokens move beyond pilots to be embedded directly into the workflows where business decisions are made. ServiceNow is the gateway to this shift, serving as the semantic layer that makes AI ubiquitous in the enterprise. We are also the great consolidator of hundreds of feature and function-specific software solutions into end-to-end business processes with our AI control tower for business reinvention. You need AI plus workflows because AI is probabilistic, which by definition means we can't be certain about the results. Workflow orchestration is deterministic, predictable, no randomness, which is required given the sophistication and governance of running global enterprises. AI doesn't replace enterprise orchestration. It depends on it. It depends on governance. It depends on scale. Many people ask why our valuation has not kept pace with our results. The short answer is that we have been viewed as a feature-oriented SaaS company. We are not living in a SaaS neighborhood. We are a platform company executing a long-term platform strategy where AI agents and workflows are harmonious and synonymous, creating sustained advantage, not short-term wins. This makes ServiceNow's AI platform more strategically relevant today than ever. By the way, our monthly active users grew 25%. Now Assist NNACV outperformed expectations in Q4 and surpassed $600,000,000 in ACV. In Q4, Now Assist NNACV more than doubled year over year. We had 35 deals over $1,000,000 in Q4 alone. Our AI control tower deal volume nearly tripled. We saw great brands already purchasing assist packs quarter over quarter in Q4 across a variety of industries, including financial services, manufacturing, healthcare, life sciences, public sector, and technology. Overall, the number of workflows and the number of transactions each grew over 33%, from 60,000,000,000 to 80,000,000,000 and from 4,800,000,000,000 to 6,400,000,000,000 respectively. And the growth continues. I continue to hear speculation about seat compression. If all we did was look at available seats in our target market, there would be an estimated 1,300,000,000 seats in that target market. So we barely scratched the surface. And, of course, we're looking far beyond seats alone with our hybrid business model for billions of devices, agents, and assists. On the back of this momentum, we're guiding to 20% subscription revenue growth for 2026. And by now, everyone knows how ServiceNow rolls. We don't set our sights on hitting the guide. We set our sights on beating it. The speculation out there is that M&A is the new playbook out of necessity. Here are the facts. ServiceNow has the fastest organic growth in the history of enterprise software. We're the fastest enterprise software company to have ever reached $1,000,000,000, $5,000,000,000, and $10,000,000,000 organically. And on our way to cross $15,000,000,000 plus this year. Since 2019, nearly quadrupled our revenue all built on a foundation of continuous innovation and net new product delivery. ServiceNow is fully capable of achieving previously stated subscription revenue and Now Assist ACV targets without M&A. Our capital allocation strategy is about accelerating customer value and shareholder value. We have never acquired a single company for revenue alone. We use M&A to expand into an even larger TAM. And it is now beyond $600,000,000,000 based entirely on where our customers need us to go, where we know we can build exciting growth businesses. Our announced plans to acquire VESA and ARMS happened in rapid succession because this assembles three critical layers for enterprises to operate securely in an agentic AI world: visibility, identity, and orchestration. With our fast-growing billion-plus dollar CACV security and risk business, the timing to expand the opportunity could not be better. Post ARMS, we do not see any other large white spaces that are necessary to complete our platform vision for security. ServiceNow's organic growth strategy and opportunistic tuck-ins for tech and talent remain unchanged. AI, data, workflows, security. We are one of the few companies totally in control of our own destiny. We are playing offense on our tippy toes. That's why we're announcing an incremental $5,000,000,000 US dollar share repurchase authorization with an immediate ASR of $2,000,000,000. Here's another fact. ServiceNow has one unifying objective, which is simply to be the AI-defining enterprise software of the twenty-first century. IDC estimates there will be 2,200,000,000 AI agents in the world by 2030. Millions of those will be built on the ServiceNow platform. Whatever isn't built on our platform will be governed and secured by our AI control tower. ServiceNow is a build-or-buy winner. We'll win with the builders because they want ServiceNow for our data fabric, our agents, governance, and security. We'll win for buyers because they want best-of-breed AI native workflows and agents to reinvent their status quo in IT, HR, CRM, app development, and beyond. We have a pristine rule of 55 plus financial profile. A comprehensive integrated platform architecture. We're open to any cloud, any language model, any data source, any system integration. We're one of the most trusted companies in the world according to Forbes. Have an award-winning culture with millions of talented applicants. You may have noticed that I recently extended my own commitment here to ServiceNow until 2030 and beyond. There's one reason I did this. Overwhelming belief in this company. This is a $1,000,000,000,000 company in the making. I can't fathom a better entry point for what ServiceNow is building. To those on this journey with us, we are grateful for your enduring support. To those who are waiting, we've given you every reason to believe the time is now. This is a one-of-one company. That's not speculation. It's a fact. Let's bring the ServiceNow story to life with customer examples. We closed a $1,000,000 plus assist pack deal with a leading US consumer services company after customer service agents generated a 400% ROI. After a year of deployment, the customer needed eight times more assists. As they transition customer support operations to predominantly automated interactions, this is minimizing operating costs, shortening support resolution times, and enhancing the overall customer experience. They are flipping the support model from 80% human-led, 20% automated, to 80% automated, and 20% human-led. In Q4, we closed a landmark 7-figure deal with a complex high-tech manufacturer. Involving an end-to-end takeout of a legacy CRM competitor. They turned to ServiceNow CPQ to solve their complex deal evaluations, replacing manual spreadsheets and unsuccessful legacy tools. In combination with CSM, workflow data fabric, Now Assist, and other products too, our customer trusted ServiceNow as their AI control tower for business reinvention. A leading European telecom provider is building an AI-driven CRM solution for the telecom industry with ServiceNow. They consolidated seven internal systems using ServiceNow CRM, and they're gonna modernize even further to sell, serve, and support its own customers. This is reducing cost by 30%, reducing cycle time from order to fulfillment by 25%, and resolving 20% more work orders on the first request. A leading Canadian real estate company selected ServiceNow CRM platform to integrate all aspects of their resident support and field operations with a unified data model. The customer leveraged ServiceNow to gain real-time operational visibility, optimize dispatch, and automate work order management. This drove efficiency gains that delivered more than 100% ROI. A global business services company deployed ServiceNow agents for incident classification and resolution, resulting in initial time savings of 13% for agents involved. The company is now processing hundreds of thousands of AI assists monthly on ServiceNow. An international leader in commercial real estate services deployed ServiceNow agents to automate email triage across their service desk, reducing meantime to resolution from two days to minutes, freeing agents for higher-value work. A US insurance company uses ServiceNow out-of-the-box agents to automate email-to-case conversion, achieving 91% accuracy and saving agents up to 12% of their time annually through an AI-first mindset. A diversified industrial multinational conglomerate deployed ServiceNow agents to automate help desk triage. These ServiceNow agents now handle over 90% of incoming requests. They've reduced triage time by 50%, with 99% routing accuracy. This saves tens of thousands of hours annually. One of Europe's largest drugstore chains uses ServiceNow to transform its customer service, cutting the time it took customers to receive support from nine minutes to thirty seconds and resolving customer issues with 98% accuracy. ServiceNow was selected by a large US county in a 7-figure deal to replace a legacy highly customized IT platform. They are supporting operations by consolidating manual fragmented processes into our AI platform, leveraging native ITSM, asset management, custom app development, and offline mobile capabilities. A large US agency is using ServiceNow as the foundation of its IT modernization strategy. They're consolidating all IT services on ServiceNow, replacing more than 40 disparate tools currently in use, and looking ahead, they plan to use ServiceNow Agenic AI capabilities to expand self-service and reduce operational overhead. Everyone talks about AI. We deliver business outcomes with AI. Last quarter, we announced a collaboration with FedEx DataWorks. While supply chains are more critical than ever, many companies still lack the predictive intelligence needed to coordinate today's complex value chains. We're combining ServiceNow's orchestration with FedEx's unique data DNA to provide procurement leaders with trusted insights and our source-to-pay solution. FedEx is also expanding beyond just Source To Pay. Its partnership will leverage the capabilities of the ServiceNow AI platform. Other great brands, like Adobe, Accenture, Siemens, Panasonic Avionics, and BT, have all saved millions and millions, and they're using ServiceNow to grow their business. And we could go on and on. So let's talk a little bit about our great partners. Our ecosystem includes all three hyperscalers. They're all great companies. The language model companies, they're excellent too. Systems integrators, pure play ServiceNow partners, and independent software vendors. They're all building their futures on our AI platform. Think about this. ServiceNow and Microsoft have announced a deep AI integration, connecting copilots, agents, and data across Microsoft 365 and the ServiceNow AI platform to deliver seamless orchestration, governance, and enterprise-wide automation. The collaboration introduces Microsoft's Agent 365 integration, and it's anchored by ServiceNow's AI control tower. And it sets a whole new standard for enterprise AI interoperability, moving organizations from isolated AI experiences to autonomous AI workflows that drive efficiency and return on investment. ServiceNow and Anthropic have announced an expanded partnership to integrate Claude models more deeply into the ServiceNow AI platform. Through the collaboration, ServiceNow is also bringing leading cloud models into ServiceNow to support secure, compliant AI across numerous industries. ServiceNow also announced a new collaboration with OpenAI to enable direct customer access to frontier model capabilities, custom ServiceNow AI solutions, and increased speed with no bespoke development required. Under this agreement, OpenAI models will be a preferred intelligence capability for several agentic use cases offered to ServiceNow enterprise customers. ServiceNow and NTT Data have expanded our strategic partnership to accelerate AI-led transformation in global enterprises, designating NTT Data as a strategic AI delivery partner. This includes co-developing and co-selling AI-powered solutions, also scaling NTT Data's use of ServiceNow's AI platform. And together, we will operationalize AI responsibly, advancing new deployment models and embedding AI engineering expertise into transformation projects. Again, these are just a few of the many strategic partnerships. Before I wrap up, let me give you a few more facts about our strategic expansion in AI security. As you know, we're growing through the regulatory clearance process, but we can say this. The combination of VESA and ARMS with ServiceNow AI platform will create something that is mission-critical for enterprise AI. In the agentic era, if companies want to scale AI, trust and governance that span any cloud, any asset, any AI system, and any device are all non-negotiable. So here's the problem enterprises face today. AI adoption is expanding the attack surface exponentially. Companies are deploying autonomous agents across their operations, but they're only able to see a small fraction of their digital estate. Traditional security tools do not address connected assets, especially unmanaged IoT devices, operational technology, and medical equipment. To make matters worse, leaders have no control over who and what can access critical systems and data, and they have no coordinated way to remediate vulnerabilities before they become breaches. And here's where ServiceNow's strategic vision comes into play. First, Armis will solve the visibility problem. ARMS provides real-time agentless discovery and classification of every asset across the entire enterprise. IT, OT, IoT, medical devices, industrial controllers, and even shadow IT that bypasses procurement. This creates a continuously updated map of the enterprise environment. Armis is already protecting over 40% of the Fortune 100, precisely because they've cracked the visibility challenge. Second, VESA will solve the identity governance problem through its patented access graph technology. VESA maps access relationships and privileges across humans, machines, and AI agents in real-time. This is critical because AI agents need dynamic context-aware permissions. An agent working for a senior manager needs different access than the same agent working for a junior employee. And those permissions must be governed continuously, not set once and forgotten. CISOs have told us this is the bottleneck preventing AI agent deployment at scale. When both of these are integrated into ServiceNow's AI platform and AI control tower, this is how orchestration goes from theory to reality. When we combine ARMS asset visibility with VESA's identity governance and ServiceNow's business context CMDB, which maps every asset to the services, processes, and teams it supports, you create something highly differentiated. A unified end-to-end security exposure and operation stack that can see, decide, and act across the entire technology footprint. Let's make this concrete for you. Armis discovers a vulnerability on an unmanaged IoT device in a manufacturing plant. That exposure insight automatically flows into ServiceNow's AI control tower. Now you understand which production line depends on that device, which team owns it, and what the financial impact of downtime would be. Simultaneously, VESA maps who and what has access to that device and related systems. ServiceNow then automatically prioritizes the risk based on business impact, triggers the appropriate remediation workflow, routes it to the right team with the right permissions, and tracks resolution. All before an incident has a chance to occur. This is autonomous proactive cybersecurity, not alerts that sit in a queue. Not manual coordination across fragmented tools, not security theater either. This is intelligent action at machine speed, governed by unified policies executed through an automated workflow machine. We just closed the largest quarter ever. Customers recognize the expanded security capabilities these acquisitions will unlock, and they are encouraging us to go even deeper and broader with them on OT. Our customers are very excited, and so are we. In closing, ServiceNow is exactly where the world needs it to be. The AI control tower for business reinvention. Situated in the core of the enterprise, in the core of enterprise AI. With the capabilities to automate, orchestrate, and integrate any business process. With Moveworks from ServiceNow, we put AI to work for people, a front door to the agentic enterprise for every single employee in the world. We have the workflow data fabric to map the right information to the right workflows. We have the most innovative technology operating system in the world, the only one capable of delivering fully autonomous IT. We have the customer demand to deliver AI native solutions for the employee experience and the customer experience to modernize expensive legacy systems. With VESA and ARMS, we'll have the most comprehensive approach to secure the agentic enterprise. There's only two measurements that matter in enterprise technology. Is there completeness of vision? Is there proven capability to execute? On both counts? It's an enthusiastic yes for ServiceNow. And two things can be true at the same time. You can have fast-growing new market participants building exciting use cases, especially for personal productivity at work. You can also have fast-growing market leaders at the core of enterprise-grade AI. Many postmortems have been written in the enterprise over the years. Most of them, ironically, have been dead wrong. The great Lou Gerstner once said, changing business processes in a company is like setting your hair on fire and then using a hammer to put it out. This is hard work. It requires deep domain expertise, industrial-grade technology, and a global distribution engine to reach global enterprises and meet the customer where they are. Operating plans exist to organize a business. Dreams exist to unleash the imagination. Unprecedented fast time to value for our customers, $30,000,000,000 plus in revenue, consistent expansion of free cash flow, best-in-class profitable growth, $1,000,000,000,000 market cap, our dreams for ServiceNow are clear. And no operating plan will hold us back. The world works with ServiceNow isn't a tagline. It's a hardline. If you have any doubts that we're building to greatness, look forward to your questions later in the call. Thank you for your time and attention. I'll hand it over to our President and Chief Financial Officer, Gina Mastantuono. Gina, over to you. Gina Mastantuono: Thank you, Bill. Q4 was another strong quarter, concluding a remarkable year of AI innovation. Net new ACV growth accelerated both quarter over quarter and year over year. We exceeded our top-line growth and operating margin guidance metrics, showcasing our team's consistent execution and unwavering strength of our business. Emerging product areas, including Now Assist, workflow data fabric, Raptor, and CPQ, all outperformed in the quarter. Furthermore, AI is also driving significant cost efficiencies that have resulted in full-year profitability beats on top of our recently raised guidance. Turning to our results. Q4 subscription revenues were $3,466,000,000, growing 19.5% year over year in constant currency, exceeding the high end of our guidance range by 150 basis points. RPO ended the quarter at approximately $28,200,000,000, representing 22.5% year over year constant currency growth. Current RPO was $12,850,000,000, representing 21% year over year constant currency growth, a 200 basis point beat versus our guidance. Moveworks contributed one point to both RPO and CRPO. From an industry perspective, transportation and logistics continued to lead the way with net new ACV growing over 80% year over year. Business and consumer services also posted impressive growth, surpassing 70% year over year, followed by financial services growing over 40% year over year. Telecom, media, and technology also delivered strong growth in the quarter. We achieved a robust 98% renewal rate in Q4, highlighting the importance and value that customers place in the ServiceNow AI platform. We closed 244 deals greater than $1,000,000 in net new ACV in the quarter, including nine with new logos. Our strategic focus on landing the right new continues to deliver results, as new logo net new ACV in EMEA and Japan were up nearly 30% year over year. We accelerated net new customer adds in 2025 to end the year with over 8,800 customers, including 603 generating over $5,000,000 in ACV. Even more impressive, the number of customers contributing $20,000,000 or more rose over 30% year over year. These trends reflect the resilient strength in our core accompanied by increasing momentum in our emerging growth sectors. Our technology workflows net new ACV growth accelerated in Q4, both quarter over quarter and year over year, as customers embrace autonomous IT to accelerate ROI, integrated workflows, take out costs, and improve operational resilience. Service ops is in 16 of our top 20 deals, highlighted by a standout performance in ITOM, which grew net new ACV nearly 50% year over year. ITAM was in 17 of our top 20 deals. Security and risk was in 19 of our top 20 deals and drove nearly 40% net new ACV growth year over year. Core business workflows were in 13 of our top 20 deals, CRM was in 16, and both saw net new ACV accelerate sequentially. As Bill mentioned, CPQ had a phenomenal quarter. Logic is a perfect example of our M&A strategy creating demonstrable ROI. We identified an adjacent opportunity, moved decisively, integrated flawlessly, and we're already seeing outsized returns. Go-to-market synergies have unlocked significant opportunities as Logix's customer count as part of ServiceNow has nearly quadrupled. Finally, creator workflows were in 19 of our top 20 deals year over year in Q4, with an impressive 32 deals over $1,000,000 in ACV. Moving to our success in driving broader AI adoption, Now Assist continues to outperform all expectations, surpassing $600,000,000 in ACV and tracking well towards our $1,000,000,000 plus target for 2026. In Q4, deals greater than $1,000,000 nearly tripled quarter over quarter, and customers spending more than $1,000,000 grew over 40%. The number of deals that included five or more Now Assist products increased by over 10x year over year as enterprises expand their AgenTik AI capabilities across their deployments. We've also overachieved our initial AI control tower targets by more than 4x for 2025. As we develop prescriptive roadmaps for GenTig deployments, we are seeing the pace of AI monetization accelerate. For example, our FDA FTEs engaged with a leading American fast-food chain to enable a path to scaling AgenTik AI across their customer service operations. As a result, they expanded their assist entitlements by 13x upon contract renewal in Q4, based upon anticipated value and usage. It's stories like these that have driven customer service now assist deals to see over 70% upsell expansion at renewal in Q4. Turning to profitability. Non-GAAP operating margin was 31%, 100 basis points above our guidance, driven by the top-line outperformance, OpEx efficiencies, and disciplined spend management. Our free cash flow margin was 57%, up 950 basis points year over year, driven by strong collections, lower CapEx, and significant operating leverage. For the full year 2025, operating margin was 31%, up 150 basis points year over year. Free cash flow margin was 35%, up 350 basis points year over year, and 100 basis points above our guidance, which I would remind you we raised by 200 basis points just last quarter. Total free cash flow for 2025 was a robust $4,600,000,000, up 34% year over year. We ended 2025 with a healthy balance sheet of over $10,000,000,000 in cash and investments. In Q4, we bought back approximately 3,600,000 shares after adjusting for the stock split as part of our share repurchase program. As of the end of the quarter, we had approximately $1,400,000,000 of authorization remaining. Given our strong cash position, our strategy of managing the impact of dilution, and our confidence in the business, we announced today that the Board of Directors authorized the purchase of up to an additional $5,000,000,000 of common stock under this program. With the recent pullback in our stock, we also plan to launch a $2,000,000,000 accelerated share repurchase program. Together, these results continue to demonstrate our ability to drive a strong balance of world-class growth, profitability, and shareholder value. Moving to our outlook. For 2026, we expect subscription revenues between $15,530,000,000 and $15,570,000,000, representing 19.5% to 20% year over year growth on a constant currency basis. This includes a one-point contribution from Moveworks. We expect a subscription gross margin of 82%, reflecting incremental data center investments related to public cloud, geo-expansion, and AI. We expect an operating margin of 32%, up 100 basis points year over year, driven by OpEx savings enabled by AI efficiencies. We expect a free cash flow margin of 36%, up 100 basis points year over year, and 350 basis points ahead of our target that we gave at Financial Analyst Day in May. This is driven by significant operational leverage and further opportunities to reduce CapEx. Finally, we expect GAAP diluted weighted average outstanding shares of 1,050,000,000. For Q1, we expect subscription revenues between $3,650,000,000 and $3,655,000,000, representing 18.5% to 19% year over year growth on a constant currency basis. This includes a one-point contribution from Loopworks and a one and a half point headwind with a mix shift of on-prem to hosted revenue partially driven by the strong adoption of our hyperscaler offerings. We expect CRPO growth of 20% on a constant currency basis. This also includes a one-point contribution from Moveworks. We expect an operating margin of 31.5%, and we expect 1,050,000,000 GAAP diluted weighted average outstanding shares for the quarter. In conclusion, 2025 has been an incredible year, and we're just getting started. The world is in the midst of an intelligence super cycle, and ServiceNow is capitalizing on this decisive moment in technology, where the strongest companies leverage rapid change to extend their market leadership. Our recent strategic acquisitions bring us incredible talent and create enormous new market opportunities while solidifying our ability to put AI to work securely across every corner of the enterprise. As we integrate these best-in-class capabilities into the ServiceNow AI platform, we're layering on advantages that position us for even stronger, more durable growth over the long term. Our organic growth engine remains fully intact. Our strategy, complete with a disciplined focus on margin expansion, remains unchanged. But the ambition is larger, and our confidence in sustained high organic growth has never been greater. Finally, Bill and I want to express our deepest gratitude to our employees around the world. Your relentless innovation and unwavering commitment to our customers are the foundation of everything we've accomplished. With that, I'll open it up for Q&A. Darren Yip: Operator, did we lose you? Operator: At this time, I would like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad. Please limit yourself to one question. And your first question comes from the line of Alex Zukin. Please go ahead. Alex Zukin: Hey, guys. Thanks for a really inspired and inspiring message. And congrats on a very strong end to the year. Maybe, Bill, first one for you. Just give us a flavor a little bit of the tailwinds and headwinds that you're seeing both in the demand environment, from a budgetary perspective, and also kind of how you're thinking about the monetization of AI in the product set, particularly the consumption component to play out as we get through the year. You've already clearly cleared the $500,000,000 hurdle that you set for yourself, well on your way to $1,000,000,000. How should we think about that layering into the numbers? And then I've got a quick follow-up for you. Bill McDermott: Well, thank you very much, Alex, for your very nice remarks. And, also, giving me a chance to explain how it's going out there in the marketplace. You know, we have excellent hyperscalers in the marketplace. They're all great companies. We have exciting language models. We have good data lakes that are out there too. And we have, as you know, six plus decades of legacy systems that have really burdened these companies quite substantially. At the same time, they've customized them. They've invested heavily in them. And they're not gonna rip them out, at least the ones that matter. But what they are doing now is they are looking for platforms that really do matter. And they are recognizing that MIT study that said basically 95% of those projects out there weren't delivering a positive ROI. They're recognizing clearly that you can't have little pet projects. That AgenTic AI is not just a revolution. It's the only way to survive. It's the only way to grow. And so now they're looking for a platform that spans functions and goes across the business process frontier of their enterprise. As I've said repeatedly, it could be recruit to retire. It could be order to cash, procure to pay, design to build. There are many of these processes, but there's only one company that actually has a platform that's a cross-functional platform. And so our cooperation with all of them has led many of our customers to simply say, we love it. We want to expand with you, which they're doing. But at the same time, they're looking to retire tools that don't matter. And they're looking to thoroughly examine functional platforms. Because if you could do cross-functional AI work, to reinvent the process on the fly and it's autonomous, why do you want to get drugged down by these little toys or large model large systems that perhaps have built up over the years with many different instances and people are swivel sharing between 33 apps a day. So it's the radical simplification that comes with AI. And one thing I wanted to double down on is you could see our user count is growing. You can see it's growing in harmony with our revenue. And you can also see that our margins are growing. So we're really the winning hand for companies that want the consolidator. And they want a consolidator now. That's different than it was six years ago when I told you we're the platform of platforms, and we work with everybody. We still do. But we have to respond to what the customer wants. They want cost out, want autonomy in, and they want margin improved and growth. We're giving it to them. In terms of the buying cycle, what's so cool about this buying cycle is if you have an ROI, and you're fast to value, which we are, we're the fastest one, you don't actually need a budget to get approval on your deal. Just need an executive that wants to win. And the CEOs are investing heavily. Our pipelines have never been better. Let me be clear. Never been better. And don't forget, we gave you those numbers without actually a full forty-day cycle and approval of deals in public sector. Because of the government shutdown. So we got a lot going on there. And we got a lot going across industries and across all segments of the company. And finally, security grew 100% year over year. So our customers are loving on the digital front door from Moveworks, and we're loving having Moveworks. They're really excited about Armas and Beza for all the reasons I stated in the kind of the keynote here. So you should feel really good about ServiceNow. We didn't have to work hard to give you a great guide. It's there. Amit Zavery: Alex. So we already, of course, have been selling this hybrid pricing model and we're already seeing a lot of customers now add assist packs. We shared in the earnings already that we had many cuts with average deal size of 500k and some in multi 7-figure range. Renewing and adding more assist packs when they're running out of tokens. That adoption and that consumption is starting to happen very, very fast, especially now that they're using agentic use cases and workflows to run the business. And once they start using one, they start using many more. That's where the assist packs are starting to come in. So the consumption part has been adding to our subscription revenue quickly as well. And the key to that... Bill McDermott: Building on what Amit said, which is so important, this is where cross-functional also comes in so heavily. Because these deals, in many cases, have seven or more ServiceNow products built into them. So we're not confined by we can make one buyer in the enterprise happy. We're actually making a team that reports to the CEO happy. So the strategic relevance is elevated considerably. And these assists, we've been telling you now for a year that the day was coming with a hockey stick with form around the reload on those tokens. It's happening. Alex Zukin: Guys, out of respect to my colleagues, I'll leave it there. But congratulations. And no further questions. Bill McDermott: Thank you very much, Alex. Operator: Your next question comes from the line of Keith Weiss with Morgan Stanley. Please go ahead. Sanchez: Yeah. Hi. This is Sanchez speaking for Keith Weiss, and congrats on proving out the durability of growth in the business throughout the year. I wanted to follow-up on some of the themes in Q3, particularly the federal business. So give me some color on how federal performed via your expressed relative to expectations? I know we had a government shutdown to deal with. You know, there's some large deals in the pipeline. Just how that sort of shaped up in Q4 and what the prospects are looking like for the balance of the year in 2026 on the Fed side? Bill McDermott: Thank you. Yeah. Well, it was really great. About the Fed business is even with the shutdown and less days to do business, you know, you have to comply with the procurement procedures. And as you know, forty days is a minimum standard, we were still able to get very, very nice deals. And our OneGov offering has been really well received. So we're seeing a very big pipeline in the public sector. What didn't happen in 2025 is only good news for 2026. And we're also seeing that we have significant traction that's now developed in state and local. Public sector more broadly is growing not just US Fed, which is great, but also state and local. And I do want to mention, we shouldn't forget the global government business because that was up 80% year over year. So the global government business is on fire. Across Europe, the Middle East, and obviously Asia. So feel really, really good that the brand is resonating. And what we're doing in the US is now translating beautifully to the rest of the world. We're in great shape. Operator: Your next question comes from the line of Gabriela Borges with Goldman Sachs. Please go ahead. Gabriela Borges: Hi, good afternoon. Thank you. My question is for Gina on the gross margin outlook. Tell us a little bit about how you think about the puts and takes to gross margin, particularly around some of the temporary headwinds you have before monetization on the consumption revenue part of the business. How much of the gross margin headwind from LLM costs inference and API calls, how much of that is temporary versus structural? Thanks so much. Gina Mastantuono: Thanks, Gabriela, for the question. So listen, I'm really excited about the overall guide from a margin perspective. The fact that despite some headwinds in gross margins, we're able to increase operating margin guidance by 100 basis points and free cash flow by another 100 after increasing by 350 basis points this year is pretty remarkable. I'd say on the gross margin headwind, the bulk of it is actually our very strategic focus on moving more towards hyperscalers that have slightly lower gross margins at this stage of the game given our capacity there with them than our internal. Now those margins are margin business you'd want me to take every single day, and we're offsetting any headwind down below the line with efficiencies. As we continue to scale up, those hyperscaler deals, margins get even better. And so you can count on ServiceNow to ensure that you will see not only best-in-class top-line growth of 20% plus, but also continued margin accretion at the bottom line, both from an operating margin and free cash flow perspective. Gabriela Borges: Very good. Thanks for all the color. Operator: Thank you. Next question comes from the line of Samad Samana with Jefferies. Please go ahead. Samad Samana: The execution scale continues to be very impressive, so congrats on that. Bill, maybe a question for you. I appreciate you digging into the M&A given that it's been such a big focus. You made a point about there may not be more to expand the TAM at least on the security side via M&A. So should we take that as maybe we won't see Armis-sized deals going forward? Or just maybe help us get some clarity on how we should think about the M&A in 2026. And then Gina, if you could give us any details on Armis' financials. I know it hasn't closed yet, but it would be helpful just to think you know, how fast it's growing, size, scale, etcetera. You both so much. Bill McDermott: Yeah. Thank you very much, Samad, for the question. First of all, I wanted to underscore what both Gina and I both said. We're an organic growth company. These were very select M&A moves for the talent, the technology, and the moment to capture a $125,000,000,000 market TAM. And this is also where our customers wanted us to be. As I said, our security and operations portfolio right now is doubling year over year. And they wanted us to do more. I wanted to make it very clear to the investors. I hear you. And we did not and never have bought an asset like many others have, and I know that's probably why it's on your mind. Because we needed the revenue. What we needed is the innovation and the expanded growth opportunity of a great TAM and a customer base that's waiting for us. So I want to knock that one out of the park based on our great 2025 results and our extraordinary guide and as it relates to future M&A. We do not have a large-scale M&A on the roadmap. What happened and I felt for you all we had Moveworks. It took nine months to close. We no sooner closed Moveworks, which we love Moveworks. We love Bob and the founders of the company, and it's a great culture, great fit. We love them. Amit and I were no sooner celebrating on their campus with their spouses and everything then we also closed on that and then had Armis and Vezza come to you within, like, a few days. So probably, it was a little bit what's going on over there at ServiceNow? And I noticed that we lost about $10,000,000,000 in market cap on that. Because of the worry. So now the worry is gone. You can give us back the market cap. And, no, we're not going after anything large. We now have them in the family, and we're gonna grow them like we do everything else. And I would want to make one thing clear. And I'll give Amit a chance to do this. It's really important. We chose assets also that were heavily integrated with ServiceNow already. So this isn't one of those, how's the integration gonna go? It already went. So maybe Amit can give you a little color on that. Amit Zavery: Yeah. Thanks, Bill. So the way we've been doing clearly, we have this one platform philosophy, and we continue to invest that way. What Armis and Vezza have been doing is we have been integrating those products using a technology called universal agentic network. Which is built on MCP and workflow data fabric making it easy for us to really have processes as well as a lot of the domain expertise which come from Vezza and Armis. Make it integrated into a lot of the capabilities we provide in our one platform. Over time, some of the capabilities which we have in our one platform will be available through Armis and Vezza, but they are right now completely integrated in a process-oriented way and allowing customers to get advantage of those integrations straight away without having to wait, replatform, or do things which are not going to be more architecturally correct. So with architecturally, we've been very thoughtful about how we bring all these technologies while getting customer adoption quickly as well as value created for customers. And this UAN is a very modern way of integrating and providing a superior way of integrating and bringing products together. So this will be very straightforward for our customers, and there's no real-time loss when we bring all these capabilities into one platform mindset. Gina Mastantuono: And then lastly, Samad, on your question on the impact. So we expect to close Armis at this point, second half, early second half of this year. And based on that timing and estimated revenue adjustments that always happen in acquisitions, we expect subscription revenue contribution to be about a point, 100 basis points in 2026. We expect potentially up to maybe 50 bps on headwind to operating margin in '26. Up to 50, so not that large. And given our strong organic operating leverage, we expect to absorb any headwinds to that dilution in 2027 and continue delivering operating margin expansion. And so we're very committed in our M&A strategy to continue delivering expansion both on the operating margin and free cash flow perspective. We'll obviously provide more details around all of that at Financial Analyst Day as we get closer to close. But, again, not that big of an impact either on the top line or bottom line. It's really about the incredible capabilities and the addressable market that we're opening up for us to go after. Samad Samana: Great. Thank you all for the thoughtful answers. Have a good night. Thank you so much. Thanks so much. Thank you. Operator: Your next question comes from the line of Peter Weed with AllianceBernstein. Please go ahead. Peter Weed: Thank you, and congrats on the really strong finish to the year and guidance for the upcoming year. You know, I think one of the exciting announcements that have come out are your partnerships with OpenAI and Anthropic, you know, one obviously today and one a few days ago. And I couldn't help but notice in reading those, you know, it looks like both of them are making some investments in helping with your customers and getting traction and scaling. Maybe you can share a little bit more about those partnerships. And, obviously, now with multiple of them, there's also kind of the question of decisions for customers, like which one would you focus on? Like, how do you think through which partner to pull in when? And how are the partners investing and kind of helping you get even more out of the customer opportunity and really driving the business faster? Amit Zavery: Yeah. Peter, thanks for the question. So as you know, we've been always working with many of the hyperscalers as well as the large language model providers. And we really had an open ecosystem as a mindset. With the large language providers like OpenAI, Anthropic, as well as Google and Gemini, we allow customer choice. We have prompt engineered and made sure that those models work with our products. And customers don't really have to worry about what the underneath the covers, what LLMs we are using. They can choose if they want to and, and let's, use anyone which we provide out of the box. What we have done over time now is with each of these providers, there's some unique capabilities we think we can take to market. So for example, OpenAI, what we're doing around voice AI. And speech to speech, real-time, multimodal, as well as multilingual capabilities. So our CRM products can now have voice capabilities with OpenAI as a preferred model so that we can have a much more differentiated offering using what we know from domain as well as context and adding the OpenAI speech capabilities into our product. Similarly, with Anthropic, they have a very good coding agent. A build agent, which is a white coding tool, allows anyone to build any workflow on top of ServiceNow. And we use Claude as the underlying technology to generate some of the code. Then we provide the context, the security, the governance on top of that using build agent to run those workflows on top of ServiceNow as well. So we're finding those unique use cases which might be useful with one of these individual providers, and they want to take those products to go to market with us. We, of course, collaborate with them and tell them about what's the issues with any model maybe, what efficiencies we can get out of it, and how can we optimize it so our customers get value. But we still keep this idea of openness and availability of default choices for customers. So they can choose anything they want to. And then we'll provide some unique use cases, which will be done with individual providers like OpenAI and Anthropic where they have interest to come with to go jointly to market and build those unique solutions as well. So customer guidance is pretty straightforward. They can choose any of the models. Everything will work. But there might be some of these individual use cases. We believe could really be turbocharged with some of these providers. And typically in the infrastructure, the model providers are providing 5-10% of value and 90% of IP has been built by ServiceNow to really provide that context-driven enterprise use cases out of the box for our customers who get value instantly. Bill McDermott: And, Peter, because your question is so strategic and so important, I'd just like to build on this excellent answer. We have to recognize the harmony and the synchronicity between these models and ServiceNow. And the idea that these models are eating enterprise software may be true in some cases, but, obviously, it's not true in our case. They're actually leaning into us because of the innovation on our platform and the broad reach of our go-to-market global engine. So these are very enticing and interesting factors in their decision to team up with us. But it also really does manifest itself. I think it's something that Dario said when he said, obviously, the cofounder of Anthropic, he said a common error that enterprises make with AI is to treat it as a kind of bolt-on tool that you access now and then. The way to get much better results is to make AI an integral part of how we get work done. And it has to be woven into the whole range of things workers do every day. That's where you actually start to see where these systems are adding value. And it's also why we're partnering with ServiceNow. So it's kind of like where the decisions in the business take place is in the workflow, and the models need that to have the business impact and really to be resolute with the c-suite of these corporations. So I think that it's really a match made in heaven. I think it's gonna be a great tailwind for our growth. And I hope that we help them grow too. So it's really a nice, nice thing. And I'm glad today we had a chance to clear it all up. Operator: Thank you. Thanks, Peter. Your next question comes from the line of Patrick Walravens with JMP Securities. Please go ahead. Patrick Walravens: Oh, great. Thank you. And let me add my congratulations and my appreciation of the hitting the three bear cases upfront. So, Bill, I was talking to a senior executive at a Fortune 500 company. And they really want to transform the enterprise using AI, but there's some sort of specific concerns holding them back. And I'm just there's four of them. I'm just gonna reel them really quick. And I'm sure you have these kinds of conversations all the time with customers, and I just wonder how you address them. Number one was how do we monitor the agents in real-time? Number two was, how do we have kill switches? Number three was, how do we have grading agents? And then number four was red teaming. So are those the kinds of things that come up all the time, or was this unusual? And how do you address them? Amit Zavery: No, Pat. I'll address those. I mean, think this I mean, no doubt, every customer we speak to in enterprise are wondering how to adopt the AI, how to make it easy to manage, and really have controls. And no doubt, that questions come up every time in terms of what technology to use and do that very well. So the way we addressed it the reason we launched AI Control Tower early last year and why it's getting so much traction is because we addressing these things head-on. Right? How do you manage and monitor agents real-time? Not just our agents, third-party agents in one system. It's really built on top of CMDB, so we can now all the kind of assets, be it hardware, software, and AI agent assets. Assets in the same system. And then we can really give you full-time real-time monitoring, observability, as well as cost management, auditing, security in one place. And that allows you to do kill switches where you can now go and shut down any agent which is going rogue, prevent any kind of nefarious activities, as well as do red teaming and ensure you're making security as a prevalent and most important aspect of what you're doing before you go and deliver any AI agents. And that's it really has opened up a lot of customers' ability to now adopt agentic use cases. Because before, they were worried about losing control, security, governance, and compliance. Now with AI, Control Tower, be able to give them that ability and remove that barrier out of the way. And that's where we saw this huge amount of new use cases emerge with customers and starting to adopt things around incident management, triaging, and things like that. Very quickly because we can give you that real-time visibility and full control. So these are real questions and things we've been addressing and has really worked out. And AI control tower has grown so fast for us because that takes on head-on as a heterogeneous product out there. Bill McDermott: And, Patrick, one thing I would say as an example, I'll give you an example of a public sector entity and the man himself who runs this particular entity has literally thousands and thousands of employees, nearly 100,000. And it's set up in three different divisions. What you're seeing a lot of now is they want to consolidate these divisions. They want to consolidate the action onto one platform. Because I keep going back to east to west AI as a cross-functional sport. There's only one CMDB in the world that behaves like ServiceNow's. They know all the people are, all the places are, and all the things are on one platform. And then you apply the AI and all of our know-how that Amit just outlined and they're running quickly. So he's gotta make change fast. He doesn't have years. He has weeks and months. So we give him a business case to show them an incredible benefit on the ServiceNow platform. And then they looked at what we did with Armas and Vezza, and they said, we're all in. Please roadmap that into the thinking because I want to have one instance. I want to have one single view of my entire enterprise. And I'm going with ServiceNow. In that conversation, we were basically consolidating them out of about 479 legacy tools. And that's what's happening out there. Because AI is changing the game. This is the consolidator platform. Patrick Walravens: That's fantastic. Thank you, Bill and Amit. Amit Zavery: Thank you, Pat. Thanks, Pat. Thank you, Pat. Operator: Your next question comes from the line of Matt Hedberg with RBC Capital Markets. Please go ahead. Matt Hedberg: Great. Thanks for taking my question, guys. And congrats from me as well, really strong results here. I guess for Bill or Amit, in an agentic world, it really does seem like now with assist packs, are resonating with customers, and it's great to see the $600,000,000 ACV number already. I guess, while we're entering this period of hybrid pricing and paid seats are still growing strong, do you envision a time in the future when ServiceNow pivots completely away from seats due to maybe consumption or some form of value-based pricing, for instance? Amit Zavery: Matt, maybe I'll give you my perspective. Of course, Bill and Gina can add that. You know, we keep on thinking about what's the best way to give value and show them what they can get out of the products. Right? So we keep on getting input from them in terms of what kind of pricing and packaging works for them. Typically, we've seen customers do want flexibility, but they also want predictability. So without having some kind of guardrails and understanding how much they're going to spend and what they're going to get out of it, going to complete 100% consumption may be too early in some of the cases. So I think that the hybrid model has seemed to be resonating with my customers. They know what the envelope they have, what they will be consuming beyond that much will it cost them. And a lot of times, customers even have come back and say, you know what? I've been using a lot more than I'm entitled to. I will just renew on do an on the thing with another higher subscription. So it might not be just consumption-driven. So we just want to give that flexibility. There's some products we do do consumption only already, by the way. Right? So we do things like storage, or additional things you might want to use for capacity. We're doing that, build some tokens around workflow data fabric from an integration perspective. So wherever it makes sense, we will do that. As we go more and more AI native in terms of packaging, we want to continue still to make sure that we don't confuse our customers too much. And make it so difficult for them to predict what they're gonna spend. That they can keep on staying on the sidelines. Bill McDermott: So we just wanna manage that very well. And, Matt, you know, just building on Amit here for a second. You know? Let me give you a real example. So Amit's 100% right. That the customer wants predictability, which is why against some of the theories out there that there would be seat compression, which is why our active user base is growing 25%. Okay? It's because they want that predictability. The other thing they want is with the assist, when we sell a pro plus version of this platform, we have contemplated all the puts and takes on their business innovation and what the ROI is gonna be to get the sale in the first place. And so when they derive more value from the assist that they have that comes with the Pro Plus, they're happy to renew it. In fact, they're looking for more ways to use us. You never have a dissatisfied software customer. When you deploy the software and you have happy users. You have an eager customer that wants to expand, and that trend is really big in the AI world. And finally, we're so flexible because what we do is where the rubber hits the road. We're delivering the ROI, and we know it. So I'll give you one example where we replaced the legacy CRM system. By the way, it's not the one I referenced in the script. And the customer saved $682,000,000. And we would be very happy to take a percentage of that savings and give it to our great shareholders. But the customer will quickly pull back and say, no. No. I like the predictability of the seats. I'm good with that. I'm good with the assist. Let's keep that going. And it's so strong, these business cases, that we now have large SIs that are actually underwriting the savings on ServiceNow. Underwriting it. And guaranteeing it to the customer. Just think about the swagger we can walk into a c-level meeting with knowing that sharing the logos and the examples. So no matter where the customer needs us to be, if they'd rather split the profits with us, we're open for business. Operator: We have time for one more question. And our final question comes from the line of Brian Schwartz with Oppenheimer. Please go ahead. Brian Schwartz: Yes. Hi. Thanks for taking my question this afternoon, squeezing me in. I'm not sure if this is for Bill or Amit. It's on the topic of the mega LLM provider partnerships. Bill, in your introductory comments, you're clearly making it clear you view these anthropics open AI as more complementary to ServiceNow's product set than as competitors. Guess the question I wanted to ask you or Amit, if we think about the percentage of AI inferencing and training workloads that are gonna run on the platform in 2026? How do you think that mix would break out between those workloads running on ServiceNow LLMs versus those third-party foundation models? Thanks. Amit Zavery: Yeah. Brian, I think, as I said, we definitely want to make sure customers have choice, and they can use any of those foundational models as well as now LLM. In many cases, we've seen customers may line up using frontier models because some of the use cases might make sense to the frontier models. Inferencing as part of the overall workload is still very low as a percentage of cost or usage-wise. Right? As they use tokens, we have a lot of other works we do on top of the inferencing part of it. Which is really the whole context, data management, the integration, understanding that the particular workflow required for a use case they want to go and deliver on it. So that's really where most of the power goes in. And, I would say in the long term, I would see more of the frontier models as the inferencing models. Versus now LLM, but their sovereign requirements, private data center requirements. Things customers want to deploy in, like, on-prem. But all these models don't work. And that's where we would probably still continue using a lot of third-party our own now LLM as well. We just want to make sure we have choices and flexibility and let the customer really choose it out. From us, the cost perspective doesn't matter really. Brian Schwartz: Thank you. Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Deluxe Quarterly Earnings Conference Call. At this time, I would like to turn the conference over to your host, Vice President of Strategy and Investor Relations, Brian Anderson. Please go ahead. Brian Anderson: Thank you, operator, and welcome to the Deluxe Fourth Quarter and Full Year 2025 Earnings Call. Joining me on today's call are Barry McCarthy, our President and Chief Executive Officer, and Chip Zint, our Chief Financial Officer. At the end of today's prepared remarks, we will take questions. Before we begin, and as seen on the current slide, I would like to remind everyone that comments made today regarding management's intentions, projections, financial estimates, and expectations about the company's future strategy or performance are forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. Additional information about factors that may cause actual results to differ from projections is set forth in the press release we furnished today in our Form 10-K for the year ended 12/31/2024 and in other company SEC filings. On the call today, we will discuss non-GAAP financial measures, including comparable adjusted revenue, adjusted and comparable adjusted EBITDA and EBITDA margin, adjusted and comparable adjusted EPS, and free cash flow. All comparable adjusted metrics reflect the removal of impacts from business exits. In our press release, today's presentation, and our filings with the SEC, you will find additional disclosures regarding the non-GAAP measures, including reconciliations of these measures to the most comparable measures under US GAAP. Within the materials, we are also providing reconciliations of GAAP EPS to adjusted EPS, which may assist with your modeling. And with that, I will hand it over to Barry. Barry McCarthy: Thanks, Brian. And good evening, everyone. I am pleased to share our strong fourth quarter and full year 2025 results. Across the past year, our team executed with discipline, and each of our businesses performed well, driving robust growth of all profit metrics directly benefiting our balance sheet. Here are five key highlights for the year. Number one, revenue and profit growth. Comparable adjusted EBITDA expanded more than 6% at the top of our value creation framework, with organic revenue growing 1%. 2025 was the third consecutive year with EBITDA growing faster than revenue, demonstrating our ability to scale profits. Two, EPS and operating income. Comparable adjusted EPS grew 13%, and operating income increased by 23%. Three, cash generation and balance sheet improvement. We generated $175 million of free cash flow, delivering our 2026 goal in 2025, a full year early. We reduced net debt by $76 million, lowering our year-end leverage ratio to 3.2 times, also ahead of schedule. And we have paid our regular dividend for more than thirty consecutive years. Four, strategic mix shift towards payments and data. Payments and data now account for 47% of revenue, up from 43% a year ago, and around 30% in early 2021. The payments and data businesses combined grew 12% during Q4 and 10% for the full year. We expect to achieve our strategic goal of payments and data achieving revenue parity with the print businesses later this year, delivering on our promise of transforming Deluxe into a payments and data company. Five, exit rate provides optimism for 2026. Chip will introduce our guidance in a minute, but we are pleased with our Q4 exit rates, with all businesses performing well, giving us confidence in 2026. You will recall that at our Investor Day in December 2023, we promised Deluxe would be a significantly improved business by 2026. We think our results clearly tell the story of our progress. Put simply, our team executed well in 2025. Chip will provide deeper details for both Q4 and full year financial performance in a minute. But before he does, and consistent with recent quarters, I will discuss overall business performance in the context of our three ongoing strategic planks. One, shifting revenue mix towards payments and data to deliver ongoing profitable enterprise-level organic growth. Two, driving operating leverage and efficiencies across the enterprise. And three, increasing EBITDA, EPS, and free cash flow to both lower net debt and improve our leverage ratio. Starting with our first priority, shifting our revenue mix toward payments and data. We are executing well against our clear strategy to leverage our history as the leader in paper-based payments to build a leading position in the digital payments and data space. We are strategically redeploying the dependable cash flows, sterling reputation, and strong customer relationships from the print segment to build a leading payments and data company. And it is working. As I noted, payments and data now account for 47% of total revenue, increased by nearly 400 basis points from 2024. We expect to achieve parity later this year, affirming our future as a payments and data company. The data segment, in particular, continued its standout performance to finish 2025, expanding its revenue by just over 30% year over year. You will recall, our data business helps our customers across market verticals attract and deepen relationships with high lifetime value customers. We have built what we believe is one of the largest consumer and small business marketing data lakes in the industry. We pair this information with our large-scale Gen AI-enabled data analytics tools to deliver outstanding ROI for our customers' marketing spend. The flexibility of our data lake, AI-enhanced intelligence, and proprietary targeting tools allow us to quickly shift focus across a broad diversity of bank product offerings, while also extending our services to new logo wins across non-FI market verticals. Beyond the continuing growth momentum in data, Deluxe Merchant Services, or DMS, also extended its revenue growth trend across all four quarters of 2025. DMS revenue growth versus prior year improved sequentially across each quarter of 2025 toward our mid-single-digit growth outlook. We also invested to expand our DMS technology platforms and the strong service model throughout the year. The business delivered growth in line with our expectations, even as some levels of macroeconomic and broader peer group volatility persisted. As one example of our ongoing investment in DMS, we recently announced the deepening of our collaboration with the Visa Direct Network via the introduction of the Deluxe Fast Funds solution. This integration, along with other areas of ongoing investment, demonstrates our commitment to innovation across our DMS offerings. We remain encouraged with our prospects spanning both our direct go-to-market channels and through key partnerships, including our robust network of FI partners and embedded software integrations across market verticals. We are particularly optimistic about the many attractive opportunities in the ISV space, where we have made responsible investments in APIs, reporting tools, and new features. We expect to share more news about some of these opportunities over the course of 2026. Our overall DMS sales pipeline remains strong as we enter the New Year. Moving now to the B2B payment segment. Revenue growth for B2B also accelerated as we finished 2025, as we had signaled during last quarter's call. We saw sequential revenue dollar improvement for this segment across each quarter of 2025, reaching a fourth-quarter revenue peak of more than $76 million. This reflected a year-over-year growth rate of 4.5%, consistent with our prior cadence commentary for the segment. We are well-positioned to sustain growth into 2026 as we continue to invest in newer digital offerings, helping transition the B2B portfolio to a more recurring revenue model. Finally, the Print business. For the full year, the stronger margin check portion of the business continued to perform well, aligning with our long-term expectations, with full-year revenue declining just under 2%. We were encouraged to see some improvement in the rate of decline for shorter cycle legacy promo revenue during the fourth quarter period as well. As we have discussed throughout the year, we remain focused on optimizing the long-term margin profile across print through prioritization of our core offerings and consciously foregoing opportunities with unattractive margins. This strategy is clearly reflected within the expanded print EBITDA margin profile during 2025. To summarize this first strategic priority area, the 10% full-year revenue growth rate from our combined payments and data businesses more than offset anticipated secular decline rates across the Print segment. This expansion drove total company organic revenue growth across both the fourth quarter and full-year periods. The payments and data businesses are together on their way to account for more than 50% of company revenue in 2026, affirming our future as a payments and data company. Moving to our second big strategic priority, driving efficiency across our business operations to improve margins and deliver predictable operating leverage. Operating cost discipline remained a core tenet of the company throughout the year, and our EBITDA margins expanded in each operating segment for both the fourth quarter and full-year periods. We reduced overall SG&A expenses by roughly $40 million over the full-year 2025 horizon. This reflected an improvement of more than 4% year over year. Our OpEx discipline contributed to robust 23% growth of full-year operating income and supported the significant improvement of our balance sheet. Our year-over-year growth of adjusted EBITDA, the twelfth consecutive quarter, and margin expansion realized across all four segments simultaneously demonstrate the continuing strength of our operating model. Finally, moving to the third strategic priority area within our capital allocation model. Increasing adjusted EBITDA and EPS, driving cash flows, and lowering our net debt and leverage ratio. As I noted earlier, we finished the year driving more than 6% growth of adjusted EBITDA, reflecting the high end of our value creation algorithm target range. Our adjusted EPS expanded by nearly 13%, further reflecting our improved balance sheet and strengthening interest rate position as 2025 progressed. We also drove improved conversion of profits into 2025 cash flows. This resulted in a year-end leverage ratio of 3.2 times, ahead of our previously signaled timing as we continue to progress our longer-term leverage target of three times or lower. We reduced our net debt by more than $70 million during the year, demonstrating our commitment to continued balance sheet optimization. To summarize, our 2025 results demonstrate clear progress on all three concurrent strategic priorities. One, shifting the mix towards payments and data. Two, driving operating efficiencies. And three, increasing cash flow generation, driving reduction of debt, and improving our leverage ratio. Both our fourth quarter and full-year results illustrate this progress achieved through disciplined capital allocation, strong execution across each operating unit, and sustained focus around the pushing of our value creation algorithm forward. Revenue momentum and our sales pipelines remain robust across each operating segment, giving us confidence toward continued progress in 2026. Before passing this to Chip to share additional details regarding our 2025 performance and solid 2026 outlook, I want to thank my fellow Deluxers for executing so well. I am proud of their unwavering dedication to our customers and the communities that Deluxe has served for generations, especially as we celebrated the company's one hundred and tenth anniversary. It is via these daily efforts that we set Deluxe on a promising path for the next generation as a trusted payments and data company. Chip, now over to you. Chip Zint: Thank you, Barry, and good evening, everyone. As Barry noted in his opening, we were very pleased with our strong 2025 progress, including our better-than-anticipated free cash flow conversion and resulting delevering pace. Expansion of comparable adjusted EBITDA and EPS growth rates, lowered overall operating expense, and reduced restructuring-related spending during the year clearly highlight our progress. Our strong momentum toward key Investor Day outcomes is clearly embedded within our 2026 guidance ranges, which I am pleased to be able to share this evening. Our 2025 results also demonstrate continued improvement in the health of our balance sheet. We are pleased with our recently upgraded credit standing across key capital markets and our strengthened quality of earnings as we execute our clear strategy. I will begin by reviewing some of the consolidated highlights for the year before moving on to operating segment results and our 2026 guidance ranges. For the full year, we posted total revenue of $2,133 million, increasing 0.5% versus 2024 reported results while expanding by 1.1% year over year on a comparable adjusted basis. We reported full-year GAAP net income of $85.3 million or $1.87 per share for the year, improving from $52.9 million or $1.18 per share in 2024. This increase was driven by overall revenue growth, improved operating margins, and lower restructuring spend during 2025. Full-year comparable adjusted EBITDA was $431.5 million, improving $25 million or 6.2% from the prior year results. Adjusted EBITDA margins were 20.2%, expanding by 90 basis points from the 2024 levels. Full-year comparable adjusted EPS came in at $3.67, improving 12.6% from $3.26 in 2024. This improvement was primarily driven by expanded operating profits, along with slightly lower interest expense. Now turning to our operating segment details, beginning with Merchant Services. For the full year, Merchant segment revenue finished at $398.6 million, growing by 3.8% versus 2024 results. We were pleased with this full-year growth trajectory, which expanded sequentially across each quarter, as Barry noted, to reach our mid-single-digit fourth quarter exit growth rate consistent with our longer-term outlook for this business. Segment adjusted EBITDA finished 2025 at $85.9 million, expanding by 9.4% on the improving revenue trajectory and operating cost efficiencies realized versus the prior year. Margins finished at 21.6%, expanding by 120 basis points versus full-year 2024 levels. Merchant revenue for the fourth quarter finished at $101.5 million, which reflected growth of 6.3% versus 2024, inclusive of our sequentially improving growth trend across the quarters. Merchant fourth-quarter adjusted EBITDA finished at $22.3 million or 22% of revenue, expanding by 80 basis points versus 2024. Margin improvement was driven via the improved revenue growth rate, continuing cost discipline, and overall channel mix dynamics across the quarter. Our guidance ranges for 2026 reflect the expectation for growth of Merchant segment revenue in the mid-single-digit range, with continued expansion of margin opportunities across the portfolio as I will discuss in greater detail in a bit. We remain confident in our ability to drive growth across merchant, based on our robust pipeline of new FI, ISV, and ISO partners either currently signed or in queue for 2026, as well as additional merchant adds across our direct go-to-market channels. We have also assumed fairly stable ongoing macroeconomic conditions related to discretionary consumer spending levels across our broader guidance ranges. Shifting to results within the B2B payments segment, B2B revenue finished the year at $290.5 million, reflecting growth of 0.9% versus the prior year. This overall growth rate aligned to our in-year expectations and reflected sequential improvement of B2B revenue dollars during each quarter of the year, driving an improved fourth-quarter revenue exit trajectory. 2025 adjusted EBITDA for B2B came in at $64.4 million, reflecting an overall 22.2% margin. This represented a strong 12.8% expansion of adjusted EBITDA from the prior year results. EBITDA growth was driven via continued efficiencies realized across our operational footprint and ongoing migration of the B2B business model toward expansion of our more recurring revenue offerings. This margin rate was aligned to our expectation, reflecting expansion from the high teens toward low to mid-20s profile consistent with our Investor Day multiyear outlook for the segment. For the fourth quarter, B2B revenues were $76.3 million, expanding by 4.5% versus the prior year. Q4 adjusted EBITDA finished at $18.7 million, reflecting a strong 24.5% rate. In line with the improving fourth-quarter revenue growth trajectory for the segment. Adjusted EBITDA for the quarter improved by 29% versus the 2024, unstable lockbox processing operations and improving segment revenue mix within the specific fourth-quarter prior year comparison. Within our 2026 guidance ranges, we anticipate B2B revenues maintaining an overall low single-digit growth profile as the segment continues to transition toward increasingly digital solutions. Our outlook also includes the continued rollout of our VPN capabilities within B2B, supported by the small acquisition we executed during the third quarter. Our 2026 full-year outlook for this segment continues to incorporate adjusted EBITDA margins in the low to mid-20s range, consistent with my prior comments and the rate reflected within our 2025 results. Moving now to the strong 2025 growth results within the data segment. Overall, as Barry noted, the data-driven marketing business saw standout growth across each quarter of the year, as full-year revenue finished at $307.3 million, reflecting 31.3% growth versus 2024. This trajectory continued to demonstrate our success, partnering with an expanded customer base to deploy our increasingly compelling set of marketing capabilities as we have discussed throughout the year. Data growth was also accompanied by strong margin expansion during 2025, inclusive of certain volume-related vendor rebates executed as part of our broader North Star program, as we specifically discussed last quarter. Overall, data adjusted EBITDA finished at $86.4 million, reflecting a 28.1% margin rate, expanding 42.8% versus the prior year result. Fourth-quarter data revenue finished at $73 million, reflecting the anticipated sequential step down from Q3 on normal course seasonality trends within the segment. Despite this, year-over-year revenue growth remained very strong, expanding 30.6% from the prior year fourth-quarter results, on continuing robust campaign demand during the period. Q4 adjusted EBITDA finished at $17.3 million, expanding just over 40% year over year on the drivers noted within my full-year commentary. The Q4 margin rate finished at 23.7%, returning toward our signaled longer-term low to mid-20s expectation range for the data segment. Our full-year 2026 guidance ranges incorporate a sustaining mid to high single-digit segment revenue growth rate going forward. We remain confident in the growth trajectory of our data offerings, even as we begin to lap the raised prior year comparable results seen across the 2025 periods. Our adjusted EBITDA guidance incorporates data margins to sustain in the low to mid-20s margin profile, consistent with our prior quarter commentary, and the outlook communicated within our multiyear Investor Day trajectory. Shifting finally to our print business. The segment finished 2025 with $1,140 million in annual revenue, reflecting an overall decline of 5.7% versus prior year levels, consistent with our overall low to mid-single-digit secular decline trajectory expectation. As Barry mentioned, legacy check continued to perform well, and consistent with our forecast, with revenue declining by 1.8% versus 2024. Accompanying the check trajectory, printed forms and other business products declined at a 6.5% year-over-year rate. On a combined basis, these two core areas blended to an overall 3% rate of year-over-year decline, in line with our longer-term trajectory expectation for the segment. Full-year revenue trajectory across other promotional product solutions, reflecting some demand headwinds we discussed over the prior two quarters, declined 15.3% year over year, while remaining concentrated toward generally lower margin non-core product offerings. Overall adjusted EBITDA for print finished the year at $366.9 million. The 2.6% rate of adjusted EBITDA decline seen within print aligned favorably to the blended rate of revenue decline for the more core print product focus areas. This drove an overall print margin rate of 32.3%, remaining consistent with our longer-term low 30s margin outlook for the segment. Despite some shorter cycle demand headwinds to the top line, we expanded the overall print margin rate by a full 100 basis points across the full-year 2025 results. Fourth-quarter print revenues were $284.5 million, declining 3.8% versus 2024, as detailed further within the revenue breakdown by product category slide in our materials. On a blended basis, the trajectory across more core products reflected a 1.5% decline rate. While other promotional solutions rate improved sequentially but remained outsized to our longer-term revenue decline expectations. Q4 adjusted EBITDA for Print remained strong, finishing at $92.2 million. This reflected a 32.4% margin rate for the segment, expanding year over year by 50 basis points, while remaining consistent with our longer-term outlook rate expectations. Our overall 2026 guidance ranges continue to reflect our confidence towards a predictable year-over-year trend for secular declines across print, driving an overall revenue trajectory in the low to mid-single-digit decline range. We remain confident in our ability to sustain margin levels across print, continuing to target an overall margin rate in the blended low 30s range over the guidance horizon. Turning now to our balance sheet and better-than-anticipated 2025 cash flow results. We ended the year with a net debt level of $1,390 million, down $76.2 million from $1,470 million last year. Consistent with our ongoing commitment to debt reduction as a top capital allocation priority for the enterprise, as Barry highlighted. Our net debt to adjusted EBITDA ratio was 3.2 times at the end of the year, improving further versus our 3.6 times ratio a year ago. As we have noted, this is ahead of the pacing we previously signaled toward our longer-term strategic target of three times or lower leverage. Free cash flow, defined as cash provided by operating activities less capital expenditures, was $175.3 million, up from $100 million in 2024, driven by lower in-year cash restructuring spend, improved year-over-year adjusted EBITDA results, continuing core working capital efficiency, and lower cash taxes. We remain particularly pleased with the accelerated achievement of our targeted free cash flow expansion and the ability to continue reducing our net debt consistent with our clear balance sheet optimization priorities. During the fourth quarter, we deployed $36 million of cash for investing activities relating to the purchase of residual commission rights for one of our largest ISO partners within the merchant services segment. This investment is not expected to materially impact segment revenues during 2026, as related volumes have consistently been processed via Deluxe Merchant Services. We would, however, expect the fold-in of ongoing residual commissions to improve segment margins by as much as 200 to 300 basis points. This impact migrates our margin guidance for the segment toward the upper end of our low to mid-20s rate outlook band. Finally, supported by our strong cash flows and overall 2025 results, our overall balance sheet remains well-positioned and reflects our ongoing strong liquidity. Over the course of the year, our improving capital structure drove two S&P upgrades, the most recent in late November, and Fitch also moved our outlook to a positive watch position. All our material debt maturities remain aligned to our 2026 capital structure, following our late 2024 refinancing activity. Our flexibility toward potential future portfolio optimization or other opportunistic investments continues to improve as we approach our targeted longer-term balance sheet ratios. Before turning to the details of our 2026 outlook, consistent with the remaining plank of our capital allocation priorities, the Board approved a regular quarterly dividend of $0.30 per share on all outstanding shares. The dividend will be payable on 02/23/2026 to all shareholders of record as of market closing on 02/09/2026. With that, I am pleased to now share our overall guidance ranges for 2026. Our ranges for the full year are as follows. Revenue of $2,110 million to $2,175 million, reflecting negative 1% to positive 2% comparable adjusted growth versus 2025. Adjusted EBITDA of $445 million to $470 million, reflecting between 39% comparable adjusted growth. Adjusted EPS of $3.9 to $4.3, reflecting between 6% to 17% comparable adjusted growth. And free cash flow of approximately $200 million, reflecting 14% growth versus our 2025 results. And to recap my previous segment assumptions, we anticipate the Merchant segment to grow revenue in the mid-single-digit range year over year, B2B growth is expected to expand at low single-digit levels, Data will maintain strong mid to high single-digit revenue growth rates as we lap increased baseline comparables across 2026 quarters, and print will continue to reflect low to mid-single-digit secular decline rates. Margins for merchants are expected to reach a mid-20s profile, while B2B will remain in the low to mid-20s, consistent with 2025, as data also returns to our longer-term low to mid-20s profile expectation. And print margins will remain roughly flat in the low 30s range. Lastly, we would expect significant efficiencies across our corporate operations and spending, in line with our multiyear commitments and conclusion of North Star plan objectives. Finally, to assist with your modeling, our guidance assumes the following. Interest expense of approximately $110 million and an adjusted tax rate of 26%, depreciation and amortization of approximately $135 million, of which acquisition amortization is approximately $45 million, and an average outstanding share count of approximately 46.5 million shares, and capital expenditures between $90 million and $100 million. This guidance remains subject to, among other things, prevailing macroeconomic conditions, as noted previously, including interest rates, labor supply issues, inflation, and the impact of divestitures. To summarize, our solid 2025 execution and strong momentum put us on a strong trajectory heading into 2026. Our guidance for the year shows the significant progress we have made toward our Investor Day commitments of just over two years ago. 2026 is a year where the results of our hard work deliver major advances towards all three of our critical strategic priorities. Payments and data revenues are expected to reach parity with the legacy print side of the business, putting us on a more sustainable, long-term growth trajectory. Our earnings expansion is expected to continue once again outpacing revenue growth as we drive efficiencies and improvements to our cost structure. And our significant free cash flow generation will allow us to achieve our sub-three times leverage target in the first half of the year. Each of these expectations is consistent with our clear ongoing value creation formula, and we remain confident in our overall progress against our focused capital allocation priorities. Operator, we are now ready to take questions. Operator: Thank you. If you are dialed in via the telephone and would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please limit yourself to one question and one follow-up. You may rejoin the queue with additional questions. Again, please press star 1 to ask a question. And we will take our first question from Kartik Mehta with Northcoast Research. Please go ahead. We are unable to hear you. If you are out of speakerphone, please pick up your handset or depress your mute function. And then hearing silence, we will go on. To our next question from Charlie Strauzer with CJS Securities. William C. Zint: This is Will on for Charlie. You made note about the use of AI-enabled tools supporting the data segment and developments and payments around embedded solutions such as Deluxe Fast Funds. As the largest financial players increasingly discuss investment in Agents e-commerce and the impacts of AI across industries, how would you say Deluxe is positioned to respond to or to take advantage of some of these trends? Barry McCarthy: So Will, appreciate the question. I would tell you that we are very proud and believe that Deluxe is very well positioned. We are a company that actually has applied AI technology in multiple places across our business. We are not experimenting with it. We have gone live, and it is delivering improved performance. So as I mentioned in my prepared remarks, it is a part of how we are winning with our data-driven marketing business. As I said in my remarks, we built what we believe is one of the largest consumer and small business data lakes, and we pair that with great talent but also great tools that are Gen AI-based that get smarter with every campaign that we run. And if you compare our results and the number of at-bats we have, we do thousands of campaigns a year, and any individual bank might do a large bank might do hundreds. So not only do we have more at-bats, but given the nature of Gen AI, we also have the opportunity for some exponential increase in our capabilities and success from a campaign performance perspective. And you can see that in our revenue performance. You know, we grew 30% in the full year, and that is a direct result of having great tools, great technology, great customer support, and being able to move quickly to help an institution solve its problems around growth, customer acquisition, or however we can apply that data to help them be successful. William C. Zint: Very helpful. Thank you. Just to follow-up, given the release of your updated outlook, how are you feeling about macroeconomic or other risks potentially impacting your growth segments in particular? And what factors could drive upside to the higher end of the outlook provided? Barry McCarthy: Sure. I will start to give you some there, and then Chip can jump in too. But on previous calls, during the whole last year, we have been talking a bit about macroeconomic uncertainty, but we will tell you what we have seen in the sort of back half of the year, 3Q4 and even into the start of this year. We are seeing what we would consider just more traditional patterns of consumer behavior. Now the shift has still happened between discretionary and less discretionary categories that we saw earlier in the year, but that shift seems to have stabilized. And so we believe that that gives us a good, you know, it gives us good confidence as we look forward to this new year. We are optimistic that the consumer is going to stay healthy. And that that will help not just our merchant business but our businesses overall that tend to track pretty darn well with the economy overall. Chip Zint: Yeah. I think well said, Barry. I guess two points I would make. First of all, we are just fundamentally in a different place coming out of 2025 and going into 2026 than we were a year ago. If you look at the execution and the performance across all four segments just from a year ago, everything is in a different place in terms of momentum and how we are performing. I think the other thing I would call your attention to is just the data segment in particular. Obviously, that was a business that experienced extraordinary demand last year. And obviously, at times outperformed even our expectations. But what we know is we are going to face some monster comps in the back half of the year. And I will just remind you, this is a campaign-oriented business. And because of that, the nature of it is we have better visibility to the next one to two quarters than we necessarily do the third or fourth one out. So as we think about the momentum of the business, that puts us on a path to see some solid growth continue for data for the first half of the year, not as strong as what you just saw, but we would expect data to continue a nice double growth rate in the first half of the year. And then obviously, once we come up against those comps in the half, things will more normalize, getting to that overall guidance range. So I think to overall answer, we can drift up throughout the year. It is going to be getting more visibility to the pipeline, continuing the momentum across all the segments, and just continuing to execute the way we have over the last four straight quarters or so. Thank you. Operator: Thank you. We will take our next question from Kartik Mehta with Northcoast Research. Kartik Mehta: Hey, good afternoon, Barry and Chip. Sorry about that. I was having phone issues. But, Barry, you know, you talked about the business exiting 2025 with some growth trajectory, which is great to see. As you look at 2026, what are your primary objectives for the business? Maybe, you know, your top two objectives you would like to accomplish in 2026. Barry McCarthy: Sure. So let me just reiterate that we think there are three big strategic planks of what we are continuing to drive in this business. The first one is to shift the mix towards our payments and data business. You heard us say that we added 400 basis points of revenue to our mix there going from 43% to 47%, and we think that we get to parity as the year unfolds. And Kartik is following our story for a while. You know why that is so important because it puts a bigger percentage of our revenue every day on growth segments to make it easier to offset the secular declines on the print side of the business. And as we continue to grow the payments and data business, it gets easier and easier for us to accelerate our overall growth rate. The second area is driving efficiency in everything we do. Coming out of the work we did on the North Star project that has now moved to business as usual. We have built a good amount of muscle in operating the business even more efficiently than ever. And the third, of course, is to generate cash flow through EBITDA, etcetera, to lower our debt net debt, and our leverage ratio. So those are the big three things that we are working on as a company. And each one of the businesses, they are specific strategic things they are trying to achieve, everything from building the ISV channel more strongly in the merchant business, to accelerating the software side of the B2B business and working on the margin. In the data business, of course, continuing the phenomenal trajectory thereon. And in the print business is holding on to those fantastic margins. Renewing customers and continuing the healthy cash generation of that business. So if all those things work together, to deliver what we think is going to be a very another very nice year in 2026. Consistent with our ability to execute that hopefully, we highlighted in our prepared remarks. Kartik Mehta: Very good. And then did you look at the merchant business, I know one of the objectives was to grow the distribution. As you kind of look at the pipeline, you talked a little bit about the ISV distribution system channel. I am wondering, you know, as you look at the pipeline, what does the pipeline look like for 2026 in terms of adding additional distribution? Barry McCarthy: Sure. So, Kartik, I think we talked on the last call about the fact that we have really been working on putting more muscle into our ISV channel. We have a new-ish leader there now that is helping us build a very nice and robust pipeline. We have also paired that with responsible investments in improving our API suite, working on our reporting tools, and other features and functionality that we think will make our program even more appealing to ISVs. And I think you should expect to hear from us about more about the ISV channel and, hopefully, knock on wood, some wins that we can share with you as the year unfolds. But we are very optimistic that we have the right service model as well as the right feature set and now with the right leadership driving distribution, we think we have got a real opportunity there. Kartik Mehta: Perfect. Thank you very much. I appreciate it. Barry McCarthy: Great. Operator: Thank you. Once again, if you would like to ask a question, please. Your next question comes from Marc Riddick with Sidoti. Marc Riddick: Hey, Marc. So, first of all, thanks for all the detail that has already been provided and certainly quite a bit has been accomplished. Was wondering if you could talk a little bit about maybe some of the opportunities that you see before you. And specifically, I was sort of thinking about some of the maybe build versus buy kind of decisions as far as investments. And we had the CheckMatch acquisition over the summer last year. You could talk a little bit about the capabilities that you are looking to continue to enhance and possibly maybe your appetite for a build versus buy kind of decision around those lines. Barry McCarthy: Sure. Let me just start with the point that we believe we are very fiscally responsible and good stewards of shareholder capital. And as you have seen us continue to help this business perform, paying down debt, improving our leverage ratio. We did make two small acquisitions, the one that you mentioned with CheckMatch, which helps our B2B business, and then bought the residuals from an ISO or an independent sales organization that was on the merchant business. Both of those we believe will deliver nicely for us, that there are logical tuck-ins that will help deliver improved performance, particularly around profitability over time. We also have a pretty great track record, Marc, of being able to deliver capabilities ourselves to help the business grow. So, for example, we were one of the first companies in the merchant processing space to get approval and certification from Apple for a program they called Tap on Glass. That allows two different phones to pay each other. You just saw us announce an integration with Visa into our product, Deluxe Fast Pay. You have heard us about our investment in building the database and the AI tools that have led to and created the opportunity for this massive growth in our data-driven marketing business. And even in our check business, we have been very responsible and making responsible investments to secure the margin profile of our check business for the intermediate to long term. So we think about these things all the time and finding a balance between building things ourselves, which hopefully has the highest rate of return for shareholders. But when we see opportunities like we saw with the two things that we have talked about, as long as they are responsible and they meet our high hurdles, we are going to move forward with those because they are accretive to the company. Help us succeed. Chip Zint: Yeah. And, Marc, it is Chip. I will just add a couple more comments. So first of all, you saw us guide $90 million to $100 million worth of CapEx spend. We have been spending at that level pretty consistently the last few years. And as Barry said, we feel like we are good stewards of shareholder capital. So think of that as the right balance of investments that the business needs to drive efficiencies, remain competitive, and invest in new growth opportunities to attack the market and win, obviously, in the competition. So embedded in our guidance is an organic continued investment in the business. And the second point to Barry's comment, we are continuing to stay very clear on our existing capital allocation priorities. So as we watch the generation of free cash flow and as that has been expanding and getting better and more improving north of 40%, last year, in fact, we are able to look at that in the direct impact it has on our leverage ratio and the trajectory we are on, and we are able to balance various levers, which gives us a chance to be opportunistic, as Barry said. Again, if it is the right opportunity with the right returns. So I think the way he described our fiscal responsibility is exactly how I would think about it, and it is how we have said we would prioritize capital allocation from the get-go. Be able to invest internally for organic ads, while also continuing to delever and improve the balance sheet, which just gives us continued optionality as we go on. So I think all of those things are embedded in how you should think about we think of this going forward. Marc Riddick: Great. Thank you very much for that. And then I guess maybe I want to sort of shift over to sort of the AI focus opportunities? And maybe is there sort of an area where you see greater client receptivity? And by that, I am speaking of industry verticals or geography, if that is more appropriate. Are there any particular areas that are sort of leading as far as acting on those opportunities? Through Deluxe that you are seeing currently? Thanks. Barry McCarthy: Sure. Appreciate the question. I really do not think about it as a geography or client type. I really think about how we are applying AI, which is to solve specific problems. And we have applied AI in virtually every part of our company's business. In our B2B space, we are using it in our lockbox operation to improve matching rates very dramatically, taking out labor and cost for our customers. Already talked about in our data business how we are applying AI tools to get better outcomes and better ROI for our customers. And in our merchant business, we are using it specifically to drive our self-service chatbot at a very, very human experience. We also use it in the B2B space for the similar chatbot and even on our deluxe.com. So we are applying AI technology to solve customer problems. And we have seen great receptivity and uptake on each one of those opportunities because they deliver and they fix a problem for a customer. It is not about technology for technology's sake. It is not about having a shiny new toy. It is actually about delivering value, and that is one of the things that this company does so well is find the to help a customer fix or solve a problem and then deliver for them. And AI is one more really big tool now in our toolkit and our toolbox to help solve those problems, and we are doing it across our full portfolio of products and solutions. Marc Riddick: Great. Thank you very much. Barry McCarthy: Thank you. Operator: And at this time, we have no further questions. I will now turn the call back to Brian Anderson for additional and closing remarks. Brian Anderson: Thanks, Rachel. Before we conclude, I would like to share that management will be attending the JPMorgan Global High Yield and Leverage Finance Conference, March in Miami. And the Sidoti Small Cap Virtual Conference, March 19 during the quarter. Thank you again for joining us today, we look forward to speaking with you all again in May as we share our first quarter 2026 results. Operator: This does conclude today's call. Thank you for your participation. You may now disconnect.
Parmjot Bains: [Audio Gap] Grant, our CFO. We'll be referring to the 4C quarterly activity report and presentation we lodged this morning with the ASX. The presentation is a summary of the more detailed 4C quarterly activity report. After our remarks, we'll be answering questions. You can lodge questions throughout the presentation using the Investor Hub QA function. So let's begin with Slide 3 with a quick overview of the agenda for today's call. We'll start with a business overview, including key highlights and take you through the updates for the 3 business segments. I'll then hand over to McGregor Grant to present the financials. And to finish off, I'll cover the outlook for the balance of the financial year before commencing the Q&A session. Now turning to Slide 5, we will touch on the key highlights for Q2. We have made a lot of progress as a business to capture the value of SOZO and the new SOZO Pro in 3 large and growing market segments: breast cancer-related lymphedema; heart health; and wellness and weight management. While the rest of world sales were positive. And while U.S. BCRL sales for the quarter were disappointing, we remain very positive about the growth potential due to strong clinical demand, a strong sales team led by Scott Long, a growing emphasis on cancer survivorship and reimbursement now well in place. There are over 700 opportunities in our pipeline that we are focused on converting as well as growing with the extensive conference attendance and direct sales activities underway. In terms of the financials, McGregor will go through the metrics in detail later in the presentation. But clearly, there were some positives and some negatives. The sales metrics are well below where we would like to see them, but the quarter-on-quarter revenue has increased as did customer receipts. And importantly, we saw a significant reduction in operating cash flow, extending our runway. This will continue to be a strong focus for the business. We are very, very encouraged by the increase in reimbursement, now at 93% national coverage. Now more than ever, reimbursement is critical when hospitals are evaluating purchasing decisions. Importantly, SOZO and BCRL are new service line opportunities, not a cost item. National coverage now sits at 93%, representing 323 million covered lives. This is another 5% increase on last quarter and gets us closer to our goal of 100% coverage for breast cancer survivors. In terms of sales, overall unit sales were up on the prior quarter, but U.S. sales were softer than anticipated. Rest of world sales were stronger and on the back of our Australian distributor ordering SOZOs as well as our new SOZO Pros in advance of our expansion into the Australian heart health market. In the U.S., we saw a continuation of what we experienced last quarter. Contracts approvals were being delayed due to budget pressures or constraints in hospitals, but the BCRL opportunities are there and real as evidenced by our opportunity depth and continued discussion and dialogue with clinicians. We remain confident in the BCRL market, supported by the market outlook that operating conditions for U.S. health care providers will stabilize in the coming year. With reimbursement at 93%, SOZO is a profitable service line, and we continue to reinforce this messaging with providers. We are accelerating activities in the growth segments of heart health and wellness and weight management. Over the last 12 months, we have made enormous progress. Our first heart health sales are now actively in progress, and wellness and the weight management team is in place and the go-to-market activities and sales are well underway. Today, we launched a new revamped ImpediMed website and Wellness microsite to support our growth in these areas. On other very positive news, we received FDA clearance this morning for our new bilateral lymphedema algorithm, enabling physicians to monitor the subset of patients who are at risk of bilateral lymphedema. On Monday this week, we also filed a new 510(k) for an expanded body composition offering that better targets that wellness and weight management market as well as cancer survivorship. Turning to Slide 6. The value proposition that the SOZO Digital Health platform provides is becoming more evident as we address now 3 of the fastest-growing healthcare needs across the world, cancer survivorship, GLP-1 therapy and heart failure. The SOZO Digital Health platform is a best-in-class platform, providing valuable patient information for clinicians. The company has made a significant investment over the years in SOZO Pro, and we have now launched this into the market. The in-built scales, the ability to measure patients up to 220 kilos and the removal of the cardiac implantable contraindications better helps us target the heart health and wellness and weight management opportunities that are significant. Clinicians find the device quick and easy to use and in larger hospitals, they continue to add their devices across new departments with different use cases. We're in a unique position. We have the only device of its type, a best device with multiple applications that stand apart from the competition in terms of multiple FDA clearances, accuracy, usability and applicability. We have a platform we can build off to attack these new growth segments with over 600 devices now across the U.S. healthcare system, including SOZOs in 18 of the top 25 U.S. hospitals and 27 master service agreements with major IDNs covering pricing, IT and BAA approvals, which are contract approvals with customers, making it much faster to deploy additional devices. Now let's turn to Slide 7, where we look at this value proposition across these 3 market segments. You're all very familiar with the BCRL value proposition. SOZO offers hospitals a revenue-generating early lymphedema detection program to improve breast cancer survivorship. This is FDA approved, guideline endorsing clinical validation. All of the hard work has been done. We are now executing these into sales. The cardiometabolic health area covers both heart health and wellness and weight management. In wellness and weight management segment, the value proposition is different. In this segment, SOZO is providing objective clinical data to allow clinicians to engage, inform and ultimately retain their customers. This is primarily an out-of-pocket market segment. For heart health, weight is not a reliable indicator of fluid status, particularly in a GLP-1 world where weight can and does change rapidly, both up and down as compliance decreases. SOZO provides a valuable noninvasive fluid and body composition insight to aid clinicians to guideline -- to optimize guideline-directed medical therapy, essentially helping physicians to catch increases in fluid, enabling them to adjust therapies and reduce the potential for readmission, a major drive of U.S. healthcare system costs. Now let's turn to Slide 8, and I'll give some more details about the BCRL operating environment and how we are positioning SOZO. Although we had a sluggish quarter for U.S. BCRL sales, we continue to believe that we are very well positioned, and there are several tailwinds that will drive long-term growth. Clinical demand does remain strong, and there continues to be a growing acceptance for the need for cancer survivorship programs. We have built a strong foundation across many of the top hospitals in the United States. We have guideline support, and we have seen a significant improvement in reimbursement over the last 6 months. And now more than ever, reimbursement is critical when hospitals are evaluating purchasing decisions. As I noted, coverage sits at 93%, representing 323 million covered lives. Since the beginning of the financial year, we have had significant increases in the depth of coverage. States with over 90% coverage has increased fivefold from 7% to 39%. Last quarter, you met Scott Long. Scott has built a strong sales and clinical support team with considerable experience in breast cancer medical devices and has built out our BCRL pipeline with this team. All these factors combined to paint a very positive picture for BCRL. In the short-term, we have seen some headwinds. Hospital budgets are under pressure, wage inflation and the cost of imported products, along with the reduction in grants and funding for Medicaid insurance have impacted hospital budgets. However, we remain confident in BCRL and is supported by the market outlook that operating conditions for U.S. health care providers will stabilize. Importantly, we continue to reinforce the messaging to multiple stakeholders within hospital systems that this is a service line, which strengthens as reimbursement increases. The good news is we have a very strong story to deliver. We are launching SOZO Pro into lymphedema, where in addition, the scales better enable SOZO to fit with the established patient workflow where weight is taken at the start of the patient journey. In addition to improve customer experience and stickiness, we are improving the EHR interface to optimize clinical workflow, and we are also building out AI programs to improve customer responsiveness. Over to Slide 9. I want to touch base a bit on cancer survivorship. One of the areas that we see the potential to increase penetration is medical oncology. This also helps us build program depth, so both in the breast cancer surgeons as well as downstream into the medical oncologists. Although breast cancer care pathway starts with breast surgeons, medical oncologists usually have the long-term relationship with the patient and support survivorship. Cancer survivorship is experiencing a significant upward trend with 5-year survival rates for all cancers combined now reaching approximately 70%, up from 50% in the mid-1970s. Driven by early detection, advanced therapies in an aging population, the number of people living with a cancer diagnosis is at a historic high. This shift treats many cancers as chronic conditions requiring long-term management. Across the U.S., there are now 1,500 commission on cancer centers that require a cancer survivorship program for accreditation. Breast cancer is one of the largest cohorts of survivors with physical issues such as lymphedema, maintaining muscle mass and bone loss in addition to the emotional and social needs that need to be addressed over the long-term. SOZO fits in very well with survivorship, both in BCRL as well as in body composition changes that occur during treatment, tying in with a renewed focus on the positive effects of exercise during chemotherapy. We are actively expanding our messaging on body composition to treat both to breast surgeons as well as medical oncologists with over 3 abstracts accepted at ASBS, news that we found out this morning, which is fantastic. Following a detailed voice of customer survey with medical oncologists, we have refined our body composition offering to these clinicians. And on Monday, we filed a new 510(k) regulatory filing with the FDA to further support this. Now going to Slide 10. Heart health and wellness weight management opportunities are compelling and are a strong fit with SOZO Pro. Heart failure is a substantial opportunity as it poses a significant economic burden in the United States with costs projected to reach $70 billion by 2030. One of the primary guides to determine rapid changes in fluid level in patients, a sign of decompensation has been weight. However, cardiology patients are now indicated to be to use GLP-1s, which basically reduces weight and also potentially causes a rebound weight gain post discontinuation, making weight a less reliable surrogate marker for fluid and additional noninvasive data is needed. Feedback from U.S. cardiologists on SOZO Pro has been very positive. I've been impressed by the clinical utility of SOZO and its ability to monitor fluid levels as well as body composition. We have the first heart health sales in progress, and we are very positive about the potential and have established a lean, dedicated heart health team to build out this opportunity and validate the go-to-market pathway. Now moving to Slide 11, wellness and weight management. Our view on wellness and weight management opportunity only gets brighter as we spend more time with potential customers. In the U.S., there are over 30,000 sites of care have been identified across various market segments, including specialty medicine, exercise oncology and rehab, weight loss clinics, wellness clinics, IV clinics and sports medicine and research. The segments we'll be focusing on directly at the moment have an addressable market size of over $200 million. Wellness and weight management activities have commenced with the appointment of an experienced commercial lead managing a team of 3 dedicated body composition reps in the U.S. This team has already actively identified over 3,000 leads in this space, which they are validating and converting into direct sales. Feedback has been very positive from the first 3 conferences the team has attended with another 6 conferences planned for the second half of the year. With a strong pipeline in place, we're expecting sales to build over the calendar year. Over to Slide 12. We are tailoring our messaging for different market segments, particularly within this wellness and weight management space. This is an example targeted towards lifestyle medicine, which is a more clinical approach. On to Slide 13. We're excited to share that we have launched a new wellness microsite. This is a different look and feel of our wellness offering that's targeted towards the med spa space. As I noted, all of our new sites, including our new ImpediMed website and this wellness microsite have been launched today. Many thanks to our marketing team. We have done a lot of work in getting these ready to go. I'll now turn over the presentation to our CFO, McGregor Grant, to go through the financials. McGregor Grant: Thanks, Parmjot. We'll start on Slide 15. As mentioned last quarter, we expected a substantial improvement in cash outflow this quarter. The result was slightly better than we forecast at $2.9 million and well down on the $5.6 million reported in quarter 1. The improvement was driven by higher cash receipts that rebounded to $3.8 million, nonrecurrence of a one-off payment for long lead time electronic components and the expected receipt of the $1.2 million in relation to the R&D tax incentive. You will notice that staff costs of $5.3 million were slightly above the previous quarter's $4.9 million. This was largely a result of redundancy payments made during the quarter. Financial discipline continues to be a core goal of this business, and the company maintains an ongoing program of cost control as part of the target to reach cash flow breakeven. We continue to adjust our cost base as required. The strengthening Australian dollar relative to the U.S. dollar resulted in further unfavorable impacts on cash as well as affecting items such as ARR. The company's cash balance at 31st December was $18.9 million, equating to 6.5 quarters of operating cash flow. Moving on to Slide 16. TCV for the quarter reduced from $4.7 million to $4.1 million. The reduction was a result of fewer devices sold in the quarter and a smaller number of contracts due for renewal compared with the previous quarter. We continue to be very pleased with the quality of accounts initiated or renewed in the quarter, together with continued solid price increases on renewal, averaging 14% for the quarter. Contracts in place at 31st December 2025 are expected to generate core business annual recurring revenue or ARR of $14.4 million for the 12 months to 31st December 2026. That equates to a 15% year-on-year increase. The stronger Australian dollar reduced the increase in ARR as the FX effects applied to the whole balance. Moving on to Slide 17. Revenue for the quarter was a record at $3.9 million, up 18% year-on-year and 8% on the previous quarter. This was despite the U.S. revenue result being affected by the Australian dollar as we discussed. The strong increase in rest of world revenue, up 67% on quarter 1 was on the back of the company's Australian distributor ordering SOZOs as well as SOZO Pros for our expansion into the heart health market. As forecast, cash receipts from customers rebounded to $3.8 million, up 12% quarter-on-quarter. On to Slide 18. As Parmjot has already discussed the sales, as you can see, patient testing continues to trend upward, up 1% on the prior quarter with a 3-year compound growth rate of 15%. The Thanksgiving and Christmas holidays affects the testing volumes as it has in previous years. I'll now pass back to Parmjot to wrap up before we go to questions. Parmjot Bains: Thanks, McGregor. Over to Slide 20, the outlook for the rest of the financial year and some comments on the company. When we look back at the outlook statement for the first half, we've achieved most of the goals that we've set with a very small -- with a small but very focused team of 75 experts across our business. Sales for the quarter were behind our expectations, but we are confident of growing the business with over 700 validated opportunities in the pipeline that the team is actively working through. These opportunities will continue to grow with the upcoming conference attendance and direct sales team promotion. Improvements in reimbursement were excellent and many thanks to our market access lead who is remarkable. And we continue to focus on expanding coverage with a target of 100% reimbursement across breast cancer-related lymphedema. Heart health and wellness and weight management opportunities are exciting growth opportunities that are being executed with the data and product that we have today. Heart health already has a CPT code, which has extensive coverage. We will continue to validate and refine the offering and the go-to-market pathway with customer feedback as we move into these new market segments. And we do all of this while driving our financial discipline and constantly refining our cost base. Many thank you for your support. I'll open the webinar up now for questions. Unknown Attendee: [Operator Instructions] The first question comes from [ Shane Store ]. And it is, can you describe the clinical settings where the body composition aspect is to be commercialized first? We'd like to understand how this assessment is introduced in a typical GLP-1 patient care pathway, for example. Parmjot Bains: Absolutely. So the body composition, as I noted, has over -- opportunities have over 30,000 sites of care. SOZO is a prescription medical device. So we are targeting areas where there is clinical oversight for the product. In terms of where it's being used, it's basically being targeted towards lifestyle medicine is a key area, an example of that. A number of these hospital systems, many of which were already in have got extensive lifestyle medicine practices. Part of this GLP-1 is being prescribed quite extensive around the United States with over 13 million people having GLP-1s. The SOZO is used both in terms of helping support the baseline body composition for patients. So looking at their muscle mass and fat mass and their weight and then helping them track that and trend that as they go through treatment. And so we've got some great case studies and including on our new website, you can look at patient tracking of GLP-1 use, looking at their fat and muscle mass and then helping both create the patient understanding of their journey. It helps create stickiness for the customers, our customers in terms of clinicians where patients will come back in and get repeat measurements and can be monitored for their care. That -- the other area that we are actually extending the body composition space is really linked around cancer survivorship. And as I noted, we've done some extensive voice of customer research with medical oncologists. And really, they're interested in looking at the body composition outputs, particularly as these patients reduce muscle mass during chemotherapy care. And now exercise oncology is being validated as an outcome as a potential mechanism of helping address muscle mass loss, they are using body composition to help monitor patients kind of muscle mass in that. So the 3 abstracts that were accepted at the ASBS conference, which is coming up in end of April, early May, we've actually got use cases of clinicians that have been using the body composition aspect of our device to help support cancer survivorship. So kind of multiple areas. And right now, there's kind of multiple use cases. What we're really doing is focusing on which ones are resonating the most because we have got a very small team and then which ones we can kind of really focus and target in more depth. Unknown Attendee: The next question comes from [ Jeremy Thompson ]. It is the 2 first half results following the NCCN guidelines released in March 2023 represent a growth rate of approximately 25% year-on-year. Noting the reimbursement coverage progress over the last 2 years, is the revenue growth rate expected to increase above 25% current rate? Parmjot Bains: We have got -- we would hope so. We've got a very strong pipeline in place with over 700 opportunities identified and a new sales team. And so we are kind of confident that this will continue to grow the BCRL business in particular. We were also looking to see growth from those new indications of heart failure and that specific body composition targeting. Unknown Attendee: We have a few questions from [ Andrew Hewitt ]. First one is, if SOZO is a cost benefit to hospitals, why is budget constraints an issue? Parmjot Bains: Because when they first look at making the assessment, the hospitals will always look at what budget is allocated. So it is still there as an issue. And so what we are just making sure we do is reinforcing the message that it's a service line, so i.e., a revenue-generating opportunity towards hospitals. So we just need -- we are continuing to make sure we are very strong in that messaging. That increase of reimbursement up to 93% across many states with multiple states over 90%, it's going to be a really strong reinforcing point in this one. Unknown Attendee: A follow-up from Andrew. What do Australian hospitals see compared to U.S. in the value of SOZO as we have 500 machines servicing 30 million people compared to 300 million people in the U.S.? Parmjot Bains: Yes. I think Australia has actually benefited from a number of KOLs and clinicians led a lot by the alert system and Louise Koelmeyer at Macquarie University and Professor John Boyages, who have really established a very strong model of care in the prevention of breast cancer-related lymphedema. So there is a very strong established ecosystem in Australia that has rebuilt this and it has been a focus for a large number of years in Australia. Australia was really unique and now the U.S. is moving up towards that space. Australia basically was just kind of clinical practice and standard of care. The U.S., fortunately is now moving up to standard of care. But as I noted in previous quarter, we went up into the European market, and it's really not standard of care there. So that's why we're kind of focusing primarily on the U.S. market. And with the NCCN guidelines, NAPPC, healthcare reimbursement, it is now becoming standard of care, but it is just taking time. Unknown Attendee: I have noticed on social media, a biz measuring device that's available to the general market. It looks a little bit like a standard weight machine and you pull bar from the base that's attached to a core. I realize it's not FDA, but what are the competitors in both the medical and cosmetic side of the business? Parmjot Bains: Yes. So in terms of that body composition space, it is highly competitive. So we are not -- so there's a number of these devices. I suspect the one you're seeing maybe the human health one, which my husband also says he's being spammed with. So they are very cheap kind of $200 devices that are primarily targeted into the telehealth space or at home consumer space where patients are tracking body composition. They're not as accurate. We had feedback from clinicians that they're not a device that you put in the home. And so our target space in the weight management space is a device that supports the clinician to generate validated clinical data that enables them to help retain their customers and increase their revenue flow. In terms of that clinical setting, the kind of devices and we've mentioned before is the InBody, Seca, Tanita. So there are devices that are out there in that clinical space, the kind of large established devices that fit within that clinical workflow. I guess maybe just one final point, but our differentiating point within that clinic and it is resonating is the fact that we are the only device that's got that FDA clearance. We are a prescription medical device. That clearance and that accuracy is really resonating with these clinicians. Unknown Attendee: A question again from Andrew Hewitt, but also I'll roll [ Rod W's ] call into -- question into it as well. They're both asking about what the U.S. sales reps are doing in terms of if there's no sales eventuating. And Andrew mentioned that last call, I think it was Scott that suggested that 80 sales per quarter would be a pass. And so looking at this quarter, it suggest that it's significantly lower than that and a failure. And also that there was a number of units were close to sale but missed on the last quarter, if that's the case that the quarter would seem even poorer. Why the fall away? And is there a pent-up demand for the Pro version? And could this be a cause of the delay of purchase in the last quarter? Parmjot Bains: Yes. Okay. So lots of questions there. We have got a new sales team. So Scott has really built a new sales team and a very strong sales team that we do have confidence that they will get up to speed and they will get their sales through. There are a number of large kind of multisystem sales sitting in that pipeline. They have still -- we are chasing that final purchase order signature on a number of these sales. So -- and we acknowledge they were disappointing, right? It was an extraordinarily frustrating quarter, but we are confident and the sales team is confident that these numbers will come up. In terms of SOZO Pro, we haven't actually marketed that proactively previously. But in this last quarter, we have been looking at customers where that SOZO Pro may help get the sale across the line. And I'll give you some examples, particularly in smaller breast surgeon offices, we can use it to replace the scale with the limited space. Basically, SOZO Pro has a built-in weight scale. It can actually fit in kind of better with workflow. And so we are, quite frankly, leveraging every opportunity right now. The market has not been that aware of SOZO Pro, and we've done that on purpose just as we kind of get the SOZO moved out, but we are launching into the SOZO Pro, and it is now being offered into the customers. Unknown Attendee: A couple of device questions. How does SOZO compared to a DEXA scan? Parmjot Bains: Really interesting. Comparable. So we've kind of -- a lot of the data just shows that from a muscle mass perspective, it's comparable, and we are actually working on an output right now, which has got comparability from a bone mineral density perspective, but that's going to require a filing. So we're very confident in that. We're actually better than DEXA at fluid. DEXA does not measure fluid well, and that's really one of the areas that we can differentiate, and we're kind of working on some updating algorithms that actually improve our output with regards to fluid in that space. So kind of DEXA has been established as a bit of a gold standard. So we're confident against DEXA. We actually think in some areas, we're actually better than DEXA. So we see a vision where particularly in that body composition space, we can replace DEXA because we know DEXA causes kind of radiation exposure to patients, particularly those in the cancer space, you want to limit that. And that was one of the points that really resonated with medical oncologists as well. Unknown Attendee: Is it possible to link data from SOZO to patient Apple Health? And is it something that you could look at to create patient stickiness? Parmjot Bains: Yes. We are -- there's a number of -- I think telehealth is growing substantially and this kind of remote wearables and monitoring space. We are actually in discussion with potential partners, particularly around the body composition and heart failure space, both to kind of help manage that patient journey from the clinic into the home. So we are actually exploring a number of these opportunities with some direct and proactive discussions underway, which as we progress, we can bring forward to the market. Unknown Attendee: And a question from [ Grant Percy ]. Will CHF SOZO be placed in hospitals and the home? Parmjot Bains: Primarily hospital, clinical. So SOZO is just by the virtue of its size as SOZO Pro will actually be the device with the cardiac implantable removed, will be in primarily the hospital and the outpatient department as well as private cardiology clinic department. We are not -- we do not have an at-home device, but that's one of those opportunities that we're looking at that collaboration on. Like can we kind of do a follow-up pathway all the way into the home for patients for heart failure. But right now, the focus very much because we're just launching is hospitals. So within the heart failure wards at discharge and then a follow-up care within the outpatient department where we will track -- we can track patients' fluid status and hopefully prevent that decompensation and readmission as well as kind of ongoing private clinic follow-up. Unknown Attendee: That was the final question. There are no more questions. I'll hand back over to Dr. Bains for closing remarks. Parmjot Bains: Okay. Thank you. Thank you, everybody. So just to kind of -- I guess, many thanks often to the team at ImpediMed who has done a lot of work. So this morning, we launched a whole new website. We got an FDA clearance on bilateral. On Monday, we launched -- we submitted a new 510(k). We've got a heart failure -- sorry, a sales team that is out in the market. We've got 19 conferences coming up over the next quarter. There is a lot of work underway. And so we are working very hard on launching into these new spaces and making sure that SOZO gets to those patients that need it. So -- and many thanks to you all for listening. Thank you.
Operator: Good morning, and welcome to the Perseus Mining Investor Webinar and Conference Call. [Operator Instructions] I'll now hand over to Perseus Mining, Managing Director and CEO, Craig Jones. Thank you, Craig. Craig Jones: Yes. Thanks, Nathan, and welcome to the Perseus Mining quarterly webinar to discuss our December quarterly report. And I'm joined here today with Lee-Anne, our CFO. Let me start by acknowledging the tragic loss of two employees of our haulage contractor, Binkadi, who work at our Bagoé mine, and they are involved in a tragic off-site vehicle accident 2 weeks ago. These deaths have been incredibly sad for the team at Perseus and particularly our Sissingué operations, and we've been supporting the families of both individuals, as well as the entire team at Sissingué since the accident incurred and will continue to do so in this very difficult time. We've commenced an internal investigation into the accident and cooperating fully with the relevant Ivorian authorities to ensure appropriate processes a following. Nothing is more important to Perseus than the safety and well-being of the people that work for us and with us. And this remains our highest priority across the group. We are committed to the rigorous application and oversight of our safety systems and to ensuring that all employees and contractors carry their work in a safe and responsible manner. This tragic loss reinforces the need for constant vigilance in all aspects of our work, including travel associated with remote operations. As we turn to our operations through the December quarter, our performance reflected a period where all of our sites transitioned into new mining areas, transitioning to new mining fronts introduced as new complexities to mining operations. And despite this, we delivered a strong operational result and continue to generate robust cash flows at the same time as making meaningful progress on our growth initiatives. Our gold production for the quarter was 88,888 ounces at an all-in site cost of USD 1,800 per ounce. The increase in our all-in site cost to USD 1,800 per ounce, versus Q1 FY '26 is primarily driven by higher royalties linked to the increased gold price achieved during the period and an additional 2% royalty paid on revenue at Côte d’Ivoire. The payment of the additional 2% was done in good faith as part of ongoing negotiations between the mining industry and the government of Côte d’Ivoire in relation to formalizing a revised fiscal arrangement, which takes into account their inequitable distribution of profits in the current high gold price environment. A total of $20 million was paid in FY '26 Q2 in relation to the additional royalty of which $4 million related to the current December quarter, $5 million related to September quarter and $11 million related to half 2 of FY '25. So just to reiterate, the Q2 FY '26 all-in site cost in this report only includes the additional royalty paid in this quarter. Combined gold sales from all three operations totaled 86,607 ounces sold at an average sale price of USD 3,437 per ounce, delivering a robust cash margin of USD 1,637 per ounce, capitalizing on strong market conditions. The notional cash flow for the quarter was USD 145 million with the quarter ending with a net cash and bullion of USD 755 million. For the December half, the group produced 188,841 ounces of gold at an all-in site cost of USD 1,649 per ounce and an average sale gold sale price of USD 3,241 per ounce, generating notional cash flow of USD 301 million. Yaouré produced just over 32,000 ounces of gold for the quarter, which was down 42% on the previous quarter. The quarter-on-quarter decrease in production is primarily due to lower mill head grade resulting from a higher reliance on lower-grade stockpile material than planned, along with the planned transition in all sources from the CMA open pit to the Yaouré open pit. The implementation of improved grade control practices at Yaouré along with higher strip ratios during the period resulted in lower direct mill feed from the Yaouré pit, and the need to supplement lower grade stockpiles in greater proportions. The grade control process is now well established at Yaouré and mining rates have substantially improved, resulting in increased direct fee of the Yaouré open pit ore. This, along with the addition of higher grade -- the higher-grade CMA underground in half two is expected to result in higher grade mill feed. Production cost for the quarter was USD 1,574 per ounce at an all-in site cost of USD 2,092 per ounce. The jump in all-in site costs versus Q1 was driven primarily or predominantly by lower gold production, resulting in higher fixed cost per ounce, as well as higher royalties and timing related increase in sustaining capital as a result of the timing of the life of mine tailings pipeline relocation. We sold 34,000 ounces of gold from Yaouré at a weighted average sale price of USD 3,243 per ounce, which delivered an average cash margin of USD 1,151 per ounce. National operating cash generated by Yaouré for the quarter was USD 37 million. Reconciliation between the block model and the mill for the last 3 months is 20% positive on tonnes and 11% negative on grade for a 13% increase in contained gold ounces. This continues to trend from the previous quarter with higher mine tonnage offsetting lower grades through the -- though the overall metal reconciliation has slightly improved. The upper levels of the Yaouré open pit is continuing to yield more gold as grade control drilling extend mineralized structures. Edikan delivered a strong quarter with 38,000 ounces of gold produced at an increase of nearly 17% on the previous quarter. Production cost for the quarter was USD 1,097 per ounce and the all-in site cost of USD 1,535 per ounce, which was down 4% on the previous quarter. We sold 37,000 ounces of gold from Edikan at a weighted average sale price of USD 3,700 per ounce, resulting in an average cash margin of USD 2,165 per ounce, and national operating cash generation of USD 83 million. Mill time and recovery were 89% and 87%, respectively, largely in line with the targeted key performance indicators. Reconciliation between the block model and the mill for the last 3 months is 9% positive on tonnes and 3% negative on grade for a 5% increase in contained ounces, which is a substantial improvement on the last quarter. This improvement in operating outcomes for the quarter is largely due to full mining access being available at the Nkosuo pit, allowing the mining sequence to be restored and improving mining conditions. Edikan's gold production is expected to continue to increase over the next 2 quarters as grade from Nkosuo continues to climb. Plan to mine cutbacks of Fetish and Esuajah North pits are currently progressing with applications submitted to the relevant regulators for approval to commence mining in both areas. During the quarter, the Sissingué complex produced 18,000 ounces of gold, which was up nearly 60% on the September quarter. This Sissingué complex results are attributed to mining and processing operations at Sissingué Gold mine, together with satellite mining operations comprising of the Fimbiasso gold mine located approximately 65 kilometers from Sissingué processing facilities and the newly developed Bagoé gold project located approximately 137 kilometers from Sissingué processing facilities. Both the Fimbiasso and Airport West pits were completed during the quarter, and ore is now being sourced from the Sissingué Main Pit and the Bagoé Antoinette deposit. Mining at Bagoé commenced during the quarter at the Antoinette deposit following the completion of the Fimbiasso operations. Production cost was USD 1,545 per ounce, and an all-in site cost was USD 1,044 per ounce. The improvement in the all-in site cost is largely driven by -- driven following the introduction of the high-grade ore from the Bagoé Gold project, partially offset by higher royalties resulting from higher realized gold prices and the additional royalty payment to the government of Côte d’Ivoire described earlier. We sold 14,000 ounces of gold from Sissingué at a weighted average sale price of USD 3,227 per ounce, resulting in an average cash margin of USD 1,383 per ounce and a national operating cash of USD 25 million for the quarter. Mill run time improved to 97% from the previous quarter, 91% the previous quarter is 91%, and gold recovery was steady at 89.5%. A reconciliation between the block model and the mill for the last 3 months is 18% positive on tonnes and 17% negative on grade for a 2% reduction in contained ounces. The lower grade performance is the result of mining narrow variably mineralized structures at Sissingué Main, Fimbiasso West and Airport West Pits with higher-than-anticipated dilution in several benches. Operational controls, including blast design and refinement and improvement -- improved ore mining control initiatives remain in place to minimize dilution and maintain alignment between the model and mill outcomes going forward. As mining is now focused on the Antoinette peak at Bagoé and the Sissingué Main pit as the primary mill feed sources, mill feed grade is expected to increase for the remainder of the year with the introduction of the higher grade ore from Antoinette. Looking ahead for FY '26, our production guidance remains unchanged. Group gold production in the range of 400,000 to 440,000 ounces with production weighted to the second half of the year. The group all-in site cost guidance range has increased from USD 14.60 and USD 16.20 per ounce to USD 1,600 and USD 1,760 per ounce. The group all-in site cost increase in guidance has been updated to reflect increased gold price assumptions and the result in increase in royalty costs. We've also allowed for the 2% royalty increase in Côte d’Ivoire for Yaouré and Sissingué, whilst we discuss fiscal arrangements with the Ivorian government that result in fair and equitable distribution and mining proceeds at these unprecedented gold prices. As we've discussed previously, our gold production is weighted to half 2 of FY '26 with the inclusion of the new high-grade ore sources at Edikan and Sissingué that are included as part of our mine plan. However, due to the performance of Yaouré in Q2 FY '26, it is expected that Yaouré will produce in the lower half of its guidance. Before I hand over to Lee-Anne, I just want to briefly discuss growth. During the quarter, we progressed our organic growth strategy, which focuses on resource to reserve conversion at our existing mines, brownfields exploration and development of greenfields exploration portfolio. We're progressing our update to our mineral reserve estimates for our existing mines with an update -- updated estimate for Nyanzaga anticipated in quarter 3 of FY '26 in the March quarter, followed by an update to Yaouré towards the end of the financial year. Edikan will follow towards December 2026. These updated estimates are focused on extension of mine life of our existing assets. From an inorganic growth perspective, Perseus progressed an offer to acquire the remaining shares of predictive discovery during the quarter. Perseus first acquired a stake in predictive in August 2024 for a total investment of just under AUD 90 million, initially securing a 19.9% stake in the gold explorer and were later diluted down to 17.9%, whilst we remain as predictive largest shareholders. This has been a great investment. And at our current share prices, the investment is now valued at more than AUD 400 million, more than 4x what we paid for it. Our decision to make an offer to acquire the remaining shares of predictive was supported by our knowledge of the asset and Perseus' strategy to build a superior portfolio of African gold assets. At the end of the day, Robex revised matching offer full predictive was ultimately deemed superior by Predictive forward and resulted in the rejection of our offer. While at this stage, we have no plans to revise our position on Predictive, we will continue to monitor the market conditions. In terms of inorganic growth, we're constantly assessing the best ways to execute our growth strategy and provide best value outcomes for our shareholders. Now I'll pass over to Lee-Anne to speak on some of the financial aspects. Lee-Anne de Bruin: Thanks very much, Craig, and hello, everyone, and happy New Year. I just thought it's too late to be doing that. The quarter delivered a very strong closing cash and bullion balance of USD 755 million, which was down $82 million on the previous quarter. And this is built up as a result of the contribution from our operating margin of USD 132 million. We continue to invest strongly in our capital investment programs, about $60 million went into that, which included development capital for the Nyanzaga Gold project of about $28 million and the CMA underground of about $14 million during the quarter. We will continue to make contributions to our host governments with $30 million paid in taxes during the quarter. Perseus balance sheet remains strong with increased liquidity, we're looking forward to further strong forecast cash flows through the fiscal year. We also, as you would have seen in December announced that we refinanced and upsized the debt facility, replacing the existing $300 million facility. The amended facility has been increased to USD 400 million plus a USD 100 million accordion option. It has a 3-year term plus an option to extend for 2 years. So this takes it out to 2031. We achieved very competitive pricing through strong demand, resulting in a total margin reduction of 125 basis points from the existing facility. Amendments were made to provide Perseus with more flexibility across a range of terms, including our financial covenants, and this really reflected the continued enhancement of Perseus' credit profile. And I'd like to thank Nedbank and Citi for their assistance and all the banks that have come on board through the process and our continued support of our financiers. Shifting our head to hedging. In this current rising gold price environment, Perseus has continued to ensure the hedging strategy evolves, ensuring we remain focused on measured downside protection, whilst always maintaining as much upside opportunity as possible. During the quarter, we further reduced the committed hedging position from 14% to 11% of our 3-year production rolling off a large number of the fixed forward contracts. We continue to protect against the downside -- downside with -- and this is obviously to ensure that as we make investment decisions for all life of mine extensions across all our operations, had some level of downside protection, and we have about 215,000 put options, which are all uncommitted in place at an average price of $2,619 per ounce. As always, to provide for clarity reconciliation between the all-in site costs used by Perseus to the all-in sustaining cost metric with the key variances relating to produce versus gold sold as the denominator and corporate administration costs. The average all-in site cost for the quarter, as Craig has mentioned, was USD 1,800 per ounce, which is higher than the Q1 FY '26 restated all-in site cost of USD 1,516. This increase in the -- in this quarter-on-quarter is largely attributable, as Craig spoke to, is to the higher royalties driven by increased gold price achieved during the quarter and the additional 2% royalties paid on revenue in Côte d’Ivoire. The additional 2% was paid to the government of Côte d’Ivoire despite how our stability afforded to Yaouré and Sissingué, and the Sissingué conventions. Agreement was reached with the government to pay an additional 2% for FY '25 in a good phase as part of our ongoing negotiations between the mining industry and the government of Côte d’Ivoire and in relation to formalizing a revised fiscal arrangement, which takes into account fair and equitable distribution of profits in the current high gold price environment. We'll update you as we go through that, but we are appreciative of the nature and the style in which we're engaging with the Ivorian government and which the industry is working collectively together to get an outcome that is -- that works for both industry and the Ivorian government. I'll now hand over to Craig. Craig Jones: Thanks, Lee-Anne. And then we'll move on to our organic growth projects. We'll start with Nyanzaga. So Nyanzaga remains on budget and schedule with first gold anticipated in January 2027. Construction activities on site continued during the quarter with several key workfronts achieving significant progress. A total of $262 million has been committed up to the end of December, which is half of the approved budget, and of the USD 262 million $161 million has been incurred. The resettlement housing project is closing in on completion with the final 10 homes expected to be delivered before the end of January. Fabrication of the SAG and Ball mill continued during the quarter, the construction and installation of which are on the current project schedule, critical path and are progressing well ahead of schedule. The camp construction progressed to 70% complete with 32 senior rooms occupied and a further 30 rooms expected to be handed over by the end of January. And the tailings storage facility remains ahead of schedule with clearing and topsoil removal. Detailed design is complete and procurement is well advanced. Importantly, the pre-strip activities for the Tusker deposit have commenced. At our CMA underground development at Yaouré, Q2 FY '26 saw strong progress with all four declines under development and a total of 800 meters of development achieved to date. We achieved a major milestone this month with -- this is in January with the first ore mine from the Blika portal. First ore was achieved through development mining and the stoping operations are anticipated to commence in Q4 of FY '26. Project development is progressing to plan with USD 44.8 million incurred up until the end of December 2025, and commercial production remains scheduled to be reached in Q3 FY '27. The CMA underground total development capital has increased by $9 million from the approved $172 million to $181 million due to the requirement for remediation of the eastern wall in the CMA pit to medicate access risks from ground instability. Alongside our financial and operating performance, Perseus continues to deliver tangible value to our host communities and governments and this slide captures the breadth of our contribution. In the quarter, our total economic contribution reached USD 269 million across our host countries, and this included $167 million in local procurement, which directly supports national supply chains and local business development. We also contributed $85 million in taxes and royalties and $1.5 million in community contributions as we continue to support local development funds and key community initiatives. Our workforce is overwhelmingly comes from the regions in which we operate with 95% of employees coming from our host countries. This is a reflection of our commitment to building local capability and building the skills base that our future growth depends on. Although our safety indicators reflect very strong safety performance with a TRIFR of 0.83 and an LTIFR 0.00 up until the end of December. The reality is that the true safety performance is ultimately reflected in human outcomes not statistics, and our recent fatalities at Sissingué are a testament to this. Sustainability is at the core of our purpose and guides how we deliver results, creating value and building resilience, and that's what makes Perseus as a trusted partner in achieving its mission of creating material benefits for all stakeholders in fair and equitable proportions. Before I hand over to any questions, I want to acknowledge the hard work and commitment from our teams across the business. The quarter reflected a challenging period as all of our sites transition to new primary ore sources. The teams completed this challenge at the same time as continuing to improve operating practices and discipline. Despite this, we continued to deliver solid operating performance, generate strong financial returns and progress our strategic growth projects. or while maintaining high sustainability standards. With a strong balance sheet, high-margin operations and a clear growth path, we believe we're well positioned to continue delivering long-term value for our stakeholders and shareholders. Thank you. Now I'll open the floor up to questions. Operator: [Operator Instructions] Your first question comes from Richard Knights at Barrenjoey. Richard Knights: Just on Yaouré, can you give us a feeling as if -- are you still feeding the plant with stockpiled ore? Or are you now getting all the ore from the Yaouré pit? How should we think about the grade going forward over the next sort of 6 months to end the year? Craig Jones: Yes. So we're predominantly feeding expert or moving forward for the rest of the year. So a lot of that's dependent on stockpile is behind us. Richard Knights: Okay. Any -- can you perhaps be a little bit more explicit with that in terms of a grade range or... Craig Jones: So if you look at -- I mean, the Yaouré grade, I think, is in our mineral reserve estimates. So that will give you an indication on grade from Yaouré. And then obviously, in the second half, we're starting to bring in the CMA underground ore and with the stoping, so the bulk of the ore really in that fourth quarter is when you'd expect to see the bulk of the underground ore starting to be delivered. Richard Knights: Okay. And maybe just one on the new fiscal regime in Côte d’Ivoire. Can you give us an indication about the kinds of things being discussed? Is it just an increase in royalty rates? Or are there other elements being discussed as well? Craig Jones: So I think -- I mean with gold prices the way they are. Obviously, governments are looking to maximize their sort of recovery of revenues as a result of high gold prices. So we're discussing just general taxation and how governments take their share of proceeds from the operations. So basically, we're having broad conversations at this point in time on that. The reason we decided to pay the royalty in good faith is we wanted to be having a productive conversation on how to best achieve the desired outcomes of both ourselves and the government. And we didn't want to be talking about penalties and all these other things. So that's why we took the decision to do what we did. But the conversation is productive and proactive between industry more broadly and the government, and we're continuing about those conversations. Richard Knights: Yes. And do you have a feeling in terms of the sort of time frame to finalizing the new fiscal region? Craig Jones: No, not really. I think these things are -- they're complex conversations and could take a little while. Lee-Anne de Bruin: Yes. I mean the Ivorian government is obviously formalizing the new mining code, which is understood. So they're wanting to finalize it before they release the new mining code so that they can capture it in that. I think just importantly, it is important for you just to emphasize, we do have stability agreements. But we are -- we do understand the government's position that in these high gold prices, they don't necessarily have the structures in place that they feel can give them an equitable share. To answer your original question, just in terms of are we only talking about royalty, I think we're trying to steer the government to other mechanisms like increases in corporate income tax and other things that we think are sort of more effective in distribution of profits. But it's been a very collaborative engagement, and I probably in my history in mining, I don't think I've ever seen the industry working so well together as we have been in Côte d’Ivoire, so we are looking forward to getting an outcome that's supportive for both the government and industry and ongoing investment in Ivory Coast. Richard Knights: Yes. Okay. Is there any risk that it could be retrospective in nature? Lee-Anne de Bruin: No. I mean, I think just as a bit of background, remember, last year, the Ivorian government implemented this 2% additional royalty into the Finance Act, which doesn't apply to companies that have stability agreements. So that's -- so effectively, the only way it's going to be applicable is in that we've paid the FY '25 with them in good faith and as part of negotiations given that the average gold price for the year was about $3,500 an ounce last year, spot price, remembering that in Ivory Coast, you pay royalty on spot price, not on sales price. And so no, so there's very low likelihood that it's going to be retrospective. The Ivorian government are, in my experience, very -- they do understand investments and they have got a lot of projects ongoing and being developed in Ivory Coast that any sort of retrospective change would be pretty detrimental to those projects. Operator: Your next question comes from Levi Spry at UBS. Levi Spry: Maybe can we just follow up on the royalty piece. So maybe just a refresher or around the grounds on what rate is included in your cost guidance across the 3 sites and the development site? Lee-Anne de Bruin: So hopefully, I'll answer your question correctly. So just to backtrack. So the royalty that was included in the $1,800 that's been reported, for example, includes only the 2% relative to that quarter. So if you talk about the December quarter, yes, we've got -- we've included that. In terms of the guidance, similarly, we have guided conservatively because we don't actually know the outcome of this, but we've included the 2% royalty in the guidance that would apply to the period. So it would apply for -- from 1st of July 2025 to 30 June 2026. We have included a 2% royalty assumption for that period. We have not included in that what we paid for Q3 and Q4 of FY '25. Does that makes sense? Levi Spry: I think so. But can I just confirm the absolute number that you're budgeting to pay in Ghana, in Côte d’Ivoire and then... Lee-Anne de Bruin: So the Ghana royalty is the 5% that we -- plus the 3% GSL. So we've got -- so they've got a 5% royalty and then something that they call a global sustainability levy, which is 3%. So we're paying a total of 8% in Ghana. And then in Ivory Coast, now Ivory Coast has got a scaled royalty, but at current gold prices, you're going to be paying -- we've assumed 6% plus a 2% additional royalty across all of the sites in Ivory Coast. Levi Spry: Yes. Got it. And maybe just moving to PDI. So like can you just flesh out intentions now and the potential to recycle that capital going forward? Craig Jones: We have no plans at this point in time with PDI. So we'll just continue to watch and monitor how that develops. In terms of our position in PDI, there's been no decision on any changes to that position. So I mean, we've -- it's been a pretty good investment for us. So we'll continue to sit on that at this stage. Levi Spry: Okay. And then just Nyanzaga, obviously, big value driver, a key project. Just a bit more detail around next steps as we think about first production only 12 months away? Craig Jones: Yes. I think we've obviously continue to work through the construction phase. So it's really moving into tank erection now. Steel erection will be starting shortly. The concrete is progressing well. We have -- the bulk earthworks are predominantly done, and it's really now start to pre-strip and get ready for all presentation and commissioning in the back end of the year. Levi Spry: And just -- you probably mentioned it, but just confirming critical path sort of type items. Craig Jones: Yes, mainly through the mills. Operator: Your next question comes from David Radclyffe at Global Mining Research. Okay. Looks like there's some mic issues there. There are no further questions at this time. So I'll now hand back to Craig for closing remarks. Craig Jones: Okay. Thanks, Nathan. Well, as I said, at the end of my presentation, it's -- I really do want to acknowledge the hard work and effort by the teams in Perseus. I think they're what make the business tick. And it was a challenging quarter as we went through quite a lot of change in the business, and they performed well and to get through that process, and we're really looking forward to delivering the second half of this year and continue to build on the value that we've created as an organization and progress our growth projects towards commissioning and ultimately production.
Tony Sheehan: I'm Tony Sheehan and I'm joined by Tom Russell, Executive Director. So similar to our webinar format Tom and I will run through a presentation. And then take Q&A at the end. As a reminder, if you have any questions, please submit them through the chat function on the webinar. So what do we do at Change Financial? Many of you who have been on our webinars before will have seen this slide, so we will keep it pretty brief. But for those of you who are new to our webinars or new investors, I'll go through it pretty quickly here. So what do we do? We provide innovative and scalable payment solutions for over 150 clients across more than 40 countries. We are a B2B business with 2 core products. The first 1 is Vertexon, which is our payments as a service or PaaS offering, which provides card issuing, card management and transaction processing. Vertexon supports prepaid debit and credit card issuing and there are 2 main models under Vertexon. The first 1 is processing only under this model Change provides the technology, which is a card management system to clients to run their card programs, so the clients hold the necessary scheme, typically Visa or all Mastercard and regulatory licenses to issue cards. Processing only is available globally and supports all the major schemes and we have clients using Vertexon in Southeast Data and Latin America, including 2 of the largest banks in the Philippines running over 45 million cards on the platform. The second model is processing and issuing. So this is only available in Australia and New Zealand. And under this model, clients utilize Vertexon for processing capabilities and also leverage Change's regulatory. So we have an AFSL in Australia, and we are a financial service provider in New Zealand and scheme licenses. So we're a MasterCard principal issuer, and they leverage our issuing capabilities for the card. So under this model changed the card issuer of record, and we provide treasury, fraud and compliance services. Vertexon has generated 85% of the group's revenue year-to-date. Our other core product is PaySim, which is software, which enables end-to-end testing of payment platforms processes and scheme rule compliance. The PaySim software is based on global messaging standards and can be sold globally. You do not need any licenses to sell PaySim. So PaySim is the default testing standard for FPOS in Australia and has a blue chip client base, including 5 of the top 10 global digital payments companies globally. PaySim contributed 15% of the group's revenue year-to-date. Importantly, both Vertexon and PaySim are proprietary payments technology platform. So they are owned and developed in-house by Change. So it's really important from a value and control perspective for the company that we own our technology. In terms of key highlights for Q2. So another really strong financial performance in the quarter. So with Q2 delivered record quarterly revenue result of USD 4.7 million. That's up 34% on prior year. Year-to-date revenue is up 29% on prior year with 70% of revenue derived from recurring sources. That provides a really solid base of revenue to grow from. Our one-off revenue being licenses and professional services are still really important drivers of overall financial performance, and they have been key contributors to the strong financial performance during the half. Our rolling 3-year revenue CAGR of 31 December is now 25%, and we are on track to have doubled the size of changes in revenue over the last 3 years by the end of FY '26. Underlying EBITDA for the quarter was $900,000, so taking total underlying EBITDA for H1 to USD 1.8 million. So as a reminder, and for context in FY '25, we delivered our maiden positive underlying EBITDA result for the whole year, which was $200,000. So you can see the operating leverage pull through that we've been talking about, and that's the combination of revenue growth and a stable fixed cost base driving materially improved bottom line performance. The cost out from the U.S. exit are also making a material difference. So as a business, and we've talked about this before, we are scaling, we're not at scale. So we want to continue to drive operating leverage moving forward to generate that bottom line margin expansion. PaaS is a key driver of our growth, and we have seen strong growth in the PaaS metrics across the board, which I'll talk more about on the following slide here. So on our PaaS metrics, we now have more than 110,000 cards active in Australia and New Zealand. So the increase in cards was driven by the Sharesies debit card program in New Zealand, which launched in October. And also significant growth in 1 of our existing fintech clients in the prepaid card space. It's just worth noting prepaid cards as a portion of our active cards has increased from 20% at June 2025 to 41% at December 2025. And why is that important? It's well, generally, debit cards drive higher transaction activity, enhance revenue as they are often used for everyday purchases. So there is a different sort of profile, revenue profile, usage profile between prepaid cards and debit cards. We will continue to drive revenue growth through new clients already signed. We're currently onboarding 2 clients and further client wins. As a business, we are laser-focused on growing the PaaS platform to drive scale benefits. So we have the product and team in place to add significantly more clients and volume without having to increase our fixed cost base. I won't go through the PaaS revenue source in detail. We have covered this 1 previously, but happy to take any questions if there are any at the end. On our PaaS time line, so looking at the time line, you can see that steady cadence of new client wins and a significant shortening of time frames between signing clients and launching programs we've been signing clients. Before we had the platform fully live and operational, and we continue to sign clients. You can see on the top right of the slide, Sharesies launch in early Q2, which has started to contribute monthly revenue during the quarter. We also have those 2 more PaaS clients that are currently onboarding and they will contribute monthly revenue once the program's launch. As I mentioned on the previous slide, a key focus for the business is new client wins and particularly in Australia, given the size of the market. So we want to increase the number of new client wins, onboard them quickly and get them transacting to drive volumes and revenue across the business. Thanks, Tom. I'll hand over to you. Thomas Russell: Thanks, Tony. So again, we've had another great revenue quarter, which Tony touched on USD 4.7 million or USD 7 million for the quarter, which is up 34% on Q2, FY '25. PaaS revenues from our Australian and New Zealand clients are up 19% on a quarter 12 months ago, so that's good to see. We've had Sharesies going live, which we're getting a lot of questions about as we come to those at the end, and we can answer them specifically. But these programs when they go live, they can take a little while to build to a meaningful revenue and transaction volume. So Sharesies without giving out too much specific information about the client. They had about 40,000 people on their wait list. I believe that was public information. They've sent cards now to the people. They've fully released that wait list. They only did that a couple of weeks before Christmas. And they've sent physical cards out to the people of that wait list that wanted them. They've got a little bit over sort of 10,000 active cards now. A lot of those have gone active very recently or very late in the quarter. So it takes time for those cards to actually get into people's hands and then for them to start transacting. So that's why there's a bit of this -- the lead indicator is the active cards, but the transactional revenue is transactional volumes, sorry, and therefore, the revenue is not literally aligned to the active cards. The other part, which Tony also mentioned was the prepaid card amount has increased, and it's a different revenue model, if we can talk about all at the end. We're also currently ongoing 2 additional already contracted PaaS clients. One of which will go live in the next month or so and has an existing program. So that's the embedded finance client, and we'll talk more about that maybe in the next quarter once they've gone live. We also continue to see the benefits of our recurring revenue base, which we've been building, our PaaS and support and maintenance revenue -- for the quarter, our recurring revenues totaled USD 3.3 million, which is approximately 70% of our revenue. In terms of the nonrecurring revenue, we continue to generate from professional services and licenses. During the quarter, we delivered $1.4 million in one-off revenue -- over the last couple of quarters, we've flagged, we've had a very strong focus on this revenue and a significantly -- a significant growing pipeline of those opportunities. And again, we've seen those efforts from the sales team where those deals are dropping through our teams delivering them and then we're also refilling the pipeline. So we've had our best half in the history of the business in H1, which we'll talk about in a second as well in terms of one-off revenue, and we still maintain a strong pipeline into H2, but we do need to unlock that revenue as we go into timing and that can be a little bit difficult. That does help us build confidence in our guidance we've provided by the way. In terms of EBITDA, very pleasingly after delivering a main positive result last year of a $200,000. We've now delivered 2 consecutive quarters of USD 900,000. So $1.8 million for the first half. So we're at a key inflection point as we've been flagging for EBITDA and profitability in the business. Cash receipts for the quarter are up -- up 4% to $3.9 million versus the prior corresponding period. That cash payments operating activities were broadly in line with Q2 last year, up only 5%, which was driven by an increase in COGS from increased transactional activity and revenue and payment of bonuses attributable to FY '25 performance. As we say every update, we have the key roles and staff in place to add significant revenue without a lot of new hires. CapEx has also remained steady as expected, and capitalized software development is tracking in line with FY '25. We have a healthy cash position of $2.6 million and hold an additional $1.4 million in cash -- in cash back security deposits. We also have a very healthy accounts receivable look at the end of the quarter, so USD 3 million, which is about $900,000 higher than it was the same time last year. And that's due to a number of client payments that were collected like the days before Christmas and New Year 12 months ago have fallen into January this year around the festive season. This half is the first time in the history of the company that we've been cash flow neutral in H1. And as we see in previous years, H2 from a cash flow perspective, given the billing cycle of some of our larger on-premise Vertexon clients and PaySim clients. Cash flow is typically significantly improved in H2, let alone any other growth, and we expect that to be the case in FY '26 as well. Back to you, Tony. Tony Sheehan: Thanks, Tom. So just looking at our outlook. So on the back of the strong H1, we have upgraded our guidance for FY '26 earlier this week. So revenue now expected to come in between $17.5 million and USD 18.5 million. So the increased quantum of recurring revenue provides a very solid base for the business. We talked around that the 70% of our revenue coming from recurring sources. We want to continue to increase that. But as we've mentioned, we also had a very strong one-off revenue half as well. So that's also important to continue to drive our revenue. Underlying EBITDA now expected to come in between USD 3.1 million to $3.8 million. So that's a 15% increase at the midpoint compared to our previous guidance. Tom mentioned before, we've maintained around our cash. We've maintained our guidance of being cash flow positive for the year. Historically, that sort of stronger cash flow in the second half of the year, we expect that to be the case in FY '26 as well. Overall, a really great start to FY '26. We're really pleased as a team as to where the business is. Our focus which I'll reiterate, which is what we've been really drilling in across the business here is on growing the business and executing on our operating plan to deliver on our targets for the year. Tom, I think that's the end of our sort of formal presentation. There are some questions that have come in, so we might open that up now for Q&A. Thomas Russell: Yes, I'll start reading those out, Tony. So as I said before, we -- and I'll touch on it just again because we've had a few questions here around the difference in active cards and volumes and why aren't transactions scaling with new cards -- can you explain the large difference between the card growth and transaction volumes? Is this related to Sharesies and when they were delivered, how many Sharesies cards went out. So yes, it is. So again, prepaid cards, just to reiterate, less transactional activity, a slightly different revenue model and usage case to our debit cards. Sharesies is a debit card. They're trying to drive their customer base to not use whatever bank they might be using and come over and use their Sharesies cards their everyday card -- that will take time. Again, a lot of those cards went out late in the quarter. They were physical cards because Sharesies rolling out the digital pays, Apple and Google Pay as well this quarter, I believe, is their plan. So those sort of things will help give access to that particularly millennial and sort of more tech-driven client base as well. So that's probably answers that, I think. And next question here. Customer receipts of $3.9 million, up 4% versus revenue up 34%, any issue of collecting those receivables? No, no issues collecting it. It's just a lot of those payments. So November and December are very, very large invoicing months for us relative -- and you can see that throughout the history of the business. What happened last year, there's a few clients actually paid earlier than they usually paid. So it made last year's quarter 2, sort of a high cash collection quarter than usual, and you can see that in the trend. Have you seen slowing of growth from existing card issuers? No, we haven't. Our financial institutions are -- they're a lower growth profile. They've got a very sort of stable base of cardholders that use their cards religiously every day. But Credit Unions and sort of building societies, as you would know, are not fast-growing organizations, the fintechs, such as Sharesies and the embedded finance company that will be going live in the next couple of weeks, they're fast-growing fintechs that can really add volume and we can scale with them. Does the new fintech client have an existing card program? Yes, it does, and we'll relate some more details on that when we can. Tony Sheehan: And Tom, just on that as well, those -- that those existing card programs are across Australia and New Zealand as well. Thomas Russell: They are. Yes, good point. So there's a lot of questions here in 1 go. The company also entered into an additional BIN sponsorship, strategic partnership with the global processor payment. Can you provide a little more detail and explain a little further what this means. Tony I'll throw that 1 to you. Tony Sheehan: I'll take that. Thanks, Tom. So we provide in sponsorship services as part of our offering. So we can be the processor and issuers. So we provide the technology. We provide the card issuing capabilities. There are some instances where you've got clients that are based overseas entering into Australia, they might use a processor that is a global processor from overseas that needs card issuing capability. So what we decided to do was to offer the BIN sponsorship capabilities where we are the card issuer of record, but they are using another process technology. So for us, it's actually broadening or expanding the pie of opportunities that we can actually provide card issuing capability. So we always talk around that scale game in payment. So it's more volume for us. Our preference where we really generally target as a business is to be a processor and issuer, but we are also more than happy to provide BIN sponsorship capabilities to clients entering the market as well. So those partnerships are important to us to sort of expand our reach in market. Thomas Russell: Thanks, Tony. There's another question from this person around transaction volumes in cards. I think we've answered that one, so I'll leave that. Can you please describe the client regions of the license and professional services contribution. Tony, do you want to take that 1 as well? Tony Sheehan: Yes. So most of that, I would say, and Tom keep me -- correct me, if you've got a different view on that, I would say that probably 75% of that would come from -- would have come from Southeast Asia during the quarter. We picked up some licenses and professional services from Latin America as well and a little bit in the Oceania region, but the vast majority of that has come from clients in Southeast Asia. A lot of that is on the Vertexon side. And then we've got some PaySim clients as well. Thomas Russell: Which can be global, but not a material as the Vitexon thing, obviously. Thank you. I'll hook first 1 to you as well. Can you expand on what the pipeline looks like in each of Australia and New Zealand for PaaS? Tony Sheehan: Yes. So look, we often get a lot of questions around the sales pipeline. I'll tie that in with another question that has -- that I've seen that's come in around when can you expect to -- I think it was when can you expect to sign another large client to move the share price. So I think as a business, we've demonstrated over the last few years that we continue to sign PaaS clients. I think we've signed probably 12-plus PaaS clients, since launching the platform and going live. We've got a pipeline of opportunities there. Do we want to accelerate the sort of velocity of how many clients we're in? Absolutely. That's a key focus. I mentioned that in the presentation there is to sign more clients and get more volume onto the platform. What we are seeing is in terms of our sales pipeline, the Australian pipeline is continuing to build given our focus with our new BDMs in that region. So there's some really good deals that are progressing through that pipeline and moving down to the bottom of the funnel. They're still going to go through to get finalized, obviously, which is so still a way to go before they sign. But the top of the pipeline has continued to expand. That is progressing through the pipeline. We're very pleased with where that is at the moment. New Zealand is going well as well. We've seen that with the launch of Sharesies, which is a great program, late last year in October. And we also have that fintech client that has their existing programs. that are moving over to us in Australia and New Zealand as well. So some really good clients and some great volumes coming across to us. In terms of that pipeline, we're comfortable, we're very happy with where it is. We just want to be signing more of those clients. There is some lead time as a B2B business. There is sort of quite a lengthy sales cycle as well. So with those changes that we've made in the sales team as well, we're seeing those deals progress through the funnel. Thomas Russell: And it is a bit of a snowball just to add to that. You've seen it in New Zealand where we signed those first clients and then we sign in other Credit Union, another Credit Union and then we signed a large a fintech, large Sharesies. People are starting to come to us in New Zealand as the top of mind option for card issuing. We're probably not quite there yet in Australia, but we've signed a couple of deals now, the client that's going live this quarter, when we're able to say who that is they're a meaningful client from a brand perspective with big growth aspirations. And I think that, that reputation that settling every day, that goes a long way to just building the momentum. And as Tony said, B2B sales are lumpy, and this business has the ability now and always has to sign big clients like we signed Credit Union a couple of years ago now, but that was a big deal for a small business and the business can sign those kind of deals at any point. We just can't -- we're not going to sit here and tell you they're coming next week or whatever else that take time to come through. Another question, Tony. What about potential customers switching from Visa to MasterCard. Does it take longer to onboard them? Tony Sheehan: Yes. So good question. Generally, the market is -- it doesn't really matter whether you're a Visa or a Mastercard. And I think most of the people on this webinar kind of probably got a Visa and Mastercard card in their wallet. I think in terms of switching where we've switched 1 of our major Credit Union clients in New Zealand over to Mastercard a couple of years ago. So that sort of -- they were on a different scheme moved over to Mastercard. That went smoothly. There's generally that people fairly open in terms of the different schemes. We have it down, we have the process down pat pretty well. We'll have another client that we can swap them over quite easily between the different schemes. I think part of the sales cycle in terms of talking to financial institutions as well as they are with the alternate scheme being Visa, and we want to try and swap them to Mastercard. There's obviously more conversations because they're more familiar with that certain scheme as opposed to Mastercard, even though a lot of the functionality is very similar between the 2. So -- it doesn't really take any longer to onboard them. Sometimes, particularly in the financial institution space, there's probably more conversation that needs to be had, if there is a scheme switch involved. Thomas Russell: Okay. I have -- I'm not -- the end of the question that I've seen here, Tony. Tony Sheehan: That's right. I'm just checking another screen time. I've not seen any other -- I think we've answered most of those. I think we've answered them all actually that have come through. Thomas Russell: Perfect. All right. Well, thank you, everyone, for joining again. We really appreciate you taking your time to jump on the results webinar for the quarter, and we will have our half year out as well at the end of February. So we hope to see you all again when we do the webinar for the half year. Tony Sheehan: Thanks, everyone. Thanks for taking the time.
Operator: Good morning, ladies and gentlemen. Welcome to CGI's First Quarter Fiscal 2026 Conference Call. I would now like to turn the meeting over to Mr. Kevin Linder, SVP of Investor Relations. Please go ahead, Mr. Linder. Kevin Linder: Thank you, Julie, and good morning. With me to discuss CGI's first quarter fiscal 2026 results are Francois Boulanger, our President and CEO; and Steve Perron, Executive Vice President and CFO. This call is being broadcast on cgi.com and recorded live at 9:00 a.m. Eastern Time on Wednesday, January 28, 2026. Supplemental slides as well as the press release we issued earlier this morning are available for download, along with our MD&A, financial statements and accompanying notes, all of which have been filed with both SEDAR+ and EDGAR. Please note that some statements made on the call may be forward-looking. Actual events or results may differ materially from those that are expressed or implied, and CGI disclaims any intent or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The complete safe harbor statement is available in both our MD&A and press release as well as on cgi.com. We recommend our investors read it in its entirety. We are reporting our financial results in accordance with International Financial Reporting Standards or IFRS. As always, we will also discuss non-GAAP performance measures, which should be viewed as supplemental. The MD&A contains definitions of each one used in our reporting. All of the dollar figures expressed on this call are Canadian, unless otherwise noted. We are also hosting our Annual General Meeting this morning, so we hope you will join us live via the broadcast at 11 a.m. Now I'll turn the call over to Steve to review our Q1 financials, and then Francois will comment on our business and market outlook. Steve? Steve Perron: Thank you, Kevin, and good day, everyone. In our first quarter of fiscal 2026, we demonstrated discipline in the management of our operations while continuing to make the necessary investment guided by our AI strategy. In the quarter, we delivered $4.1 billion of revenue, up 7.7% year-over-year or up 3.4% when excluding the impact of foreign exchange. Growth was driven by our recent business acquisitions and continued demand for our APAC delivery center, with this segment reporting growth of 5.8%, mainly through delivery of managed services. In our U.K. and Australia segment with our acquisition of BJSS, growth was 31%. This acquisition is transformative to our U.K. operation, adding significant scale, and we can now showcase the breadth of CGI's end-to-end services to our new clients. In our Western and Southern Europe segment, growth was 9%, led by our acquisition of Apside, which includes engineering services. As we indicated last quarter, our U.S. operations were impacted by the federal shutdown in the quarter. The timing and related impacts were in line with what we communicated last quarter. While a sequential improvement is expected in the next quarter, our U.S. Federal segment is still operating in a very dynamic environment. Bookings in the quarter were $4.5 billion for a book-to-bill ratio of 110% led by U.S. commercial and state government at 169%; Finland, Poland and Baltics at 124%, and Scandinavia, Northwest and Central East Europe at 113%. Bookings continue to be led by our managed services at a 117% book-to-bill. SI&C book-to-bill was 100%, last reached in our first quarter of fiscal 2025. With the U.S. federal shutdown, we had previously called out that our bookings would be impacted in the quarter. This was indeed the case and excluding U.S. Federal, our teams delivered a combined book-to-bill of 118%. On a trailing 12-month basis, book-to-bill was 110% with North America at 122% and Europe at 101%. On the same basis, Managed Services had a book-to-bill ratio of 122% and the SI&C book-to-bill ratio was 96%. Our contracted backlog reached $31.3 billion or 1.9x revenue. Turning to profitability. Adjusted EBIT in the quarter was $655 million, up 7.1% year-over-year for a margin of 16.1%, down 10 basis points. In the quarter, our results were impacted by the U.S. federal shutdown and an $8 million onetime impact of past service costs related to statutory employee benefits in India due to a change of regulation. Including acquisition and related integration costs of $26 million, earnings before income taxes were $600 million for a margin of 14.7%. Our effective tax rate in the quarter was 26.3%, 40 basis points higher than last year, mainly explained by the statutory tax increase in France. We expect our tax rate for future quarters to be in the range of 26% to 27%. Adjusted net earnings were $461 million for a margin of 11.3%. On the same basis, diluted EPS was $2.12, an accretion of 8% when compared to Q1 last year. Net earnings were $442 million for a margin of 10.8% and diluted EPS was $2.03, an accretion of 6% when compared to Q1 last year. Turning to cash. We generated a strong $872 million in our cash from operations, representing 21.4% of total revenue due to the strength of our collection efforts. DSO was 37 days in the quarter, an 8-day improvement sequentially and a 1-day improvement when compared to the prior year. As a reminder, in general, our first quarter has the lowest DSO due mainly to higher levels of client prepayments or annual IT maintenance fees. In Q1, we continue to deploy our capital and invested $87 million back into the business, including strategic investment in advanced AI, $106 million on business acquisitions, $577 million to buy back our stock, and in addition, we returned $37 million to our shareholders under our dividend program. Yesterday, our Board of Directors approved the renewal of our NCIB program until February 2027 authorizing us to repurchase for cancellation up to 19 million shares over the next 12 months. At current share price levels, we expect to remain very active in our repurchase program. In addition, our Board of Directors approved a quarterly cash dividend of $0.17 per share. This dividend is payable on March 20, 2026 to shareholders of records as of the close of business on February 18, 2026. With $2.4 billion in capital resources readily available and a net debt leverage ratio of 1, CGI has a balance sheet strength and capacity to deliver on our profitable growth strategy. CGI's capital allocation priorities have remained consistent, focused on investing back in the business, pursuing accretive acquisition and share buybacks. Now I will turn the call over to Francois to further discuss insights on the quarter, the progress on our AI strategy and the outlook for our business and markets. Francois? François Boulanger: Thank you, Steve, and good morning, everyone. We started the year with positive momentum that deepen our position as one of the few firms with a local presence, global scale, capabilities and commitment to be a partner of choice for our clients, an employer of choice for our people, and an investment of choice for you, our shareholders. In Q1, we delivered year-over-year revenue growth, strong profitability and record high cash of $872 million. This further expands our capacity to fuel our Build and Buy profitable growth strategy, in line with our capital allocation priorities. The trust clients have in CGI as a partner for delivering on their priorities, including for advanced AI is evident in our results. This extends to bookings, which reached nearly $4.5 billion in the quarter, up by more than $300 million year-over-year. Plus over half of bookings were comprised of new awards and add-ons, which typically expand our delivery scope with clients. In addition, our win rate on renewals was over 95%, demonstrating the confidence clients have in CGI's ability to continuously innovate. On a trailing 12-month basis, total bookings were up 12%, reaching a high of nearly $18 billion. This was led by managed services, up 16% compared to the previous year. Systems integration and consulting bookings were also up on a sequential quarter year-over-year and trailing 12-month basis. Compared to this time last year, the Q1 SI&C wins were up by more than $360 million. From an industry perspective, all commercial segments closed a quarter with a book-to-bill above 100%, led by manufacturing, retail and distribution, which was up more than $530 million or 65% year-over-year. Representative awards in the quarter included a European-based global manufacturer, initiated a new strategic partnership with CGI to modernize critical IT services, including the integration of advanced AI solutions into their operations. A leading global luxury group in France, renewed its relationship with CGI to deliver SAP services in support of their retail and manufacturing operations. CGI will also expand the integration of AI to our IT to optimize service quality and productivity in IT management. The Swedish Board of agriculture expanded its relationship with CGI through a multiyear framework agreement, supporting the agency's digital transformation and expansion of trusted AI capabilities across systems development and operations. Highmark, a U.S. health insurer renewed and expanded its partnership with CGI to accelerate innovation in claims payment accuracy and integrity. Through the engagement, CGI will deliver a range of AI-enabled services through our ProperPay IP, which helps identify potential risk earlier, improves efficiency and reduces billing errors at scale. As shared last quarter, government sector bookings were impacted by the Q1 U.S. government shutdown. On a trailing 12-month basis, our government wins were 104% or 113% when excluding our U.S. Federal segment. Globally, the pipeline of government sector opportunities continues to increase, up 30% compared to this time last year, as agencies continue to prioritize modernization, cybersecurity and cost efficiency. Now I will summarize our progress against CGI AI strategy. Starting with embedding AI into our end-to-end services. In Q1, the rollout of our AI-enabled software delivery life cycle is improving engineering speed and quality with strong adoption of AI development assistance and advanced tooling. We are reinforcing trust and compliance through CGI's responsible use of technology framework, embedding AI risk governance directly into cells and delivery life cycles. In terms of client adoption, we continue to see an evolution from experimentation to enterprise integration. The transition is not a fast or a direct one, our success depends on strong foundation for data quality, platform modernization and governance, all of it -- all of which are strength for our team. Recent examples of AI projects include launching an Agentic AI strategy for our Canadian financial institution to guide their outcome-oriented AI adoption, delivering AI-driven application reverse engineering for U.S. federal agency to support faster monetization decisions, applying deep learning AI for a U.K. health care provider to improve IVF embryo selection and patient outcomes, implementing AI Ops at a Canadian retailer to help improve IT reliability, efficiency and cost optimization, and deploying an AI-enabled developer assistant for our U.S. utility to simplify system integrations and accelerate customer billing implementations. Recognition of CGI as a AI to ROI client partner continues to be recognized by leading industry analyst firms. For example, in Q1, CGI was positioned as a leader in the IDC MarketScape for worldwide AI services for state and local government. Moving to how we are leading with AI integrated platforms and alliances, 65% of CGI's IT solutions incorporate AI-enabled intelligent automation. Our industry-leading solutions are relied on the enabled mission-critical business operations, delivering direct value to clients every day. Our technology alliance partner program also continues to expand introducing new channels to market and growing our relationships with the hyperscalers and AI-native firms. We recently announced a multiyear agreement with Google Cloud to help clients accelerate Agentic AI outcomes with Gemini enterprise and a global go-to-market alliance with open AI to help clients deploy advanced AI capabilities securely, responsibly and at enterprise scale. Turning to how we are uniting talent and AI technologies. While our CGI partners are naturally using AI as part of their everyday work, approximately 40% of our consultants have expertise in advanced AI and data, more than double the number since this time last year. Given this, AI-related training continues to dominate the learning and development courses, our experts are completing through our CGI academia platform. Our learning and hiring investments also contributed to CGI earning new alliance certifications and partner tier status. Over the past quarter, this included progress with AWS, Snowflake, ServiceNow and UiPath, all of which expand our capabilities and create new business development opportunities in advanced AI, cloud and data. Lastly, we also progressed CGI's internal AI adoption. Through the new engagements with Google Cloud and Open AI, we are expanding our current use of these platforms by equipping an additional tens of thousands of consultants and experts. We also launched our internal AI exchange platform with widespread engagement as our teams contribute and reuse proven code assets and best practices, delivery processes and playbooks. CGI's AI exchange is designed to help us scale and industrialize AI delivery globally while maintaining quality, speed and cost effectiveness. As we reflect on the past 50 years in business and more importantly, our future, I will now outline CGI's value creation strategy for our 3 stakeholders and namely you, our shareholders. Our value creation strategy is built on 4 streams: systems, integration and consulting, including the services related to IP, managed services, including our IP solutions, accretive acquisitions and share buyback and dividend programs. By design, these streams are complementary and countercyclical to external market dynamics in order to foster continuous revenue growth and EPS accretion for the benefit of our shareholders. This positions CGI to deliver results even as the global business environment remains complex and uneven. Starting with our first value stream, SI&C. In stronger economic markets, client priorities tend to expand to innovation, experimentation and growth. As clients spend on more discretionary initiatives, our SI&C capabilities support them in business evolution, integrating core systems, and creating and scaling new platforms and applications, regularly including consulting on our IP solutions. Today, we are seeing early indication of an uptick in demand in the market as the pipeline of new opportunities is strong, including for AI advisory and AI integration services related to CGI IP and alliance platforms. In fact, our pipeline of SI&C opportunities in advanced stages is up by more than 40% year-over-year. Additionally, in Q1, SI&C revenue grew 9.8% year-over-year in constant currency. As Steve mentioned, the ASI and sea bookings in the quarter reached 100% of revenue. Turning now to our second stream, CGI's managed services, which fully embed advanced AI as a standard practice, making them especially attractive for clients. When they are market uncertainties, clients typically want to reduce spending to increase their financial flexibility with the goal to reinvest in digitization. This is why we see demand rise for CGI's managed services which allow clients to benefit from longer-term, outcome-based partnerships with clear cost structures and commitments for productivity improvements and innovation. CGI's global delivery capabilities also play a critical role in our managed services, including our global capability center expertise, which was recently recognized by Everest Group through our managed services, including those delivered with our IP solutions, we become a core extension of the client teams. This drives longer-term recurring revenue with higher margins for CGI. From a revenue perspective, over the past 12 months, our Managed Services business increased more than $600 million or 8% compared to the previous year. In Q1, Managed Services bookings were up on both a year-over-year and trailing 12-month basis. Notably, since Q1 last year, 40% of our managed services wins were new business. And the pipeline of new opportunities reflects this uptick increasing by more than 20% over this quarter last year. Regarding our third stream, CGI's business -- CGI's buy strategy. Given the ongoing strength of CGI's balance sheet and current market conditions, we continue to pursue accretive acquisitions at pace. In the quarter, we closed 2 mergers. In Europe, we completed the merger with a division of Comarch, which expands our presence in Poland and the Baltic states and deepens our public sector expertise and IP portfolio across social security, health, agriculture and other mission areas. In North America, we expanded our Canadian footprint through the merger with Online Business Systems, an established IT consulting firm based in Winnipeg. Through this agreement, we enhanced our capabilities in AI, digital transformation, and cybersecurity with enterprise clients in Canada and the U.S. I would like to warmly welcome the more than 800 new consultants who have joined CGI from these mergers. Our pipeline of additional merger targets remain robust. We are committed to making sure that we acquire the right companies at the right time and at the right price, all 3 without exception. And the final stream, share buybacks and dividends provide additional value creation to our shareholders, especially now given that we believe CGI stock is undervalued. So we plan to remain very active in our share repurchase program, while these conditions persist. As we look ahead across the markets we serve, economic conditions and client priorities continue to vary by region and industry. These priorities are influenced by geopolitical uncertainty shifting regulatory requirements and the growing importance of IT systems to national resilience, sovereignty, competitiveness and everyday operations. At the same time, interest in AI remain high making it more, even more important for organization to separate the height from practical impact. In this environment, trust, deep industry knowledge and proximately to the client matter more than ever. To address their priorities successfully, clients need partners like CGI who have the end-to-end capabilities and industry expertise necessarily to modernize core systems, strengthen cybersecurity and sustainably integrate AI-led digital capabilities into their operations. In closing, while the environment is still uncertain, we are observing gradual improvement in some industries and geographies. As such, we anticipate continuing improvement for the rest of the year. CGI has been built to grow and last. For 50 years, we've been at the heart of continuous technology innovation and business transformation. Combining human ingenuity with the power of technology to help our clients achieve meaningful outcomes. As the pace of change accelerates, we remain focused on what matters most, helping our stakeholders succeed. Thank you for your continued interest and support. Let's go to the question now, Kevin. Kevin Linder: Thanks, Francois. Julie, we can now poll for questions. Operator: [Operator Instructions] Your first question comes from Richard Tse from National Bank Canada. Richard Tse: Yes. Thank you. With respect to acquisitions, does the volatility and uncertainty around AI, has that sort of changed the way you evaluate these transactions kind of given that sort of uncertain future? François Boulanger: No, not at all. Thanks, Richard, for the question. Now we continue to see anyway AI as an enabler for the future. So when it's time to look at acquisition and merger, we're still looking at how we can improve our footprint in our several metro markets, where we're lacking presence. And naturally looking also at the larger ones and the transformational one that can help CGI in the future. So it's not changing anything in our policy or politics or view of merger and acquisition. We are looking at relationships. We are looking at places where we can continue to grow. And so AI is actually an enabler and not something that is asking us to change our philosophy on M&A. Richard Tse: Okay. And just my second question has to do with the U.S. Federal government. Obviously, last quarter, we had that sort of a government shutdown. But as you step back, do you think that there's some things that are maybe happening in the background that structurally sort of resets that business? And I guess related to that, at what point and how quickly could you sort of restructure if needed if that was the case? François Boulanger: Again, we still think that Federal government is a very good client of ours. It's more than 30 years that we're dealing with the Federal government. So -- and they need IT to support their operations. So we still think it's a very good market. But sure, we are living in the geopolitical environment that is very dynamic. Yes, we finished -- we had a shutdown. Now we're talking perhaps another shutdown at the end of this week where we'll see. But that's short-term headwinds. We're still thinking on the long-term basis that it's a very good market for us. Operator: Your next question comes from Stephanie Price from CIBC. Stephanie Price: Maybe just following up on the U.S. Federal question. Just curious around margins. Obviously, you had messaged the margins were going to be a little bit weaker in the U.S. Federal, just given the shutdown. How should we think about margins in U.S. Federal going forward, just given, as you noted, it's a pretty dynamic environment here? Are you seeing any pricing pressure? What are you seeing out of the government in terms of pricing here? François Boulanger: Yes. For sure, the fact that the revenue and profit was down this quarter was also the fact that we -- our utilization rate went down with this shutdown, some -- we had some people that were not able to build. And so we had the cost and not the revenue. So with -- when the U.S. government did reopen, we were able to redeploy our people in the contract. And so that improved the utilization rate and thus improving their margins. So it's not necessarily cost pressure or rate pressure that we have in the federal was really related to the fact that with the shutdown and the fact that it's temporary, we wanted to keep our workforce. And so that was -- that's why it put a pressure on the utilization rate. Stephanie Price: Okay. So going forward, we should expect more in line with historical. And then in terms of SI&C, it was great to see that bookings were solved in the quarter, and you mentioned the pipeline for advanced stages was up. Can you talk a little bit about the regions and industries where you're seeing the improvement in SI&C? François Boulanger: Yes. Thanks for the question. For sure, we're seeing SI&C improvement a bit across every industry, and I'll start with an example on the financial sector, they need some advice, example in AI. So we are helping them to deploy some of these AI tools like I gave some example on that in my script. Same thing in manufacturing, they need consulting again to deploy these tools. So a lot of consulting. Business consulting is still soft, but everything related to CIO consulting and especially with these tools, we're seeing a lot of new demand. And I would say mostly in all industries. Operator: Your next question comes from Suthan Sukumar from Stifel Canada. Suthan Sukumar: For my first question, I wanted to touch on the sort of the industry theme around vendor consolidation. Can you speak a little bit around what clients -- your clients are doing today with their IT partners and roughly, what percentage of some of your new business and existing business expansion today is a function of continued vendor consolidation? François Boulanger: Yes, that's a great question. For sure, we're seeing a lot of that trend across the world. Clients realize that they need to reduce the number of partners and especially using a lot of freelancers in the market. So you'll have a lot of -- they'll deal with very small companies and so because of relationships sometimes with the buyers. So we won several of them, vendor consolidation. We won a big one that I think I announced last quarter, with a large bank in Europe that was actually a vendor consolidation. They went from hundreds of suppliers to 4, 5 suppliers, and we were one of the suppliers. And we're seeing that, especially in the very large companies and clients. Same thing happened in Germany with an automobile company where they had thousands of suppliers, and they wanted to reduce and we were one that gained some activities with this vendor consolidation. So we see that. We will continue to see that in the future. And the fact that we're very close to our clients. I think that's -- it's a tailwind or at least opportunities to us to win new business in our existing clients. Suthan Sukumar: That's helpful. For my second question, I just wanted to touch on sort of the broader theme of enterprise AI adoption. So you guys have recently announced new partnerships with OpenAI, Google Gemini on this front, as did some of your global peers also more recently. From where you sit today, where are we at in the enterprise AI adoption cycle? And is AI spending today, is it -- do you see it being more additive or still displacing existing IT spend budgets? And how resilient is sort of this AI related spending with respect to the macro? François Boulanger: What I would say to you, first of all, as for the tools by themselves. I think a lot of companies already deploy these tools. So all these tools are at least for the large companies, they deploy them. Now what they need to do is to realize the outcome with these tools. And that's where they need companies like us to help them to produce these outcome for them. So that's really where we are today. And that's why we have a lot of consulting with these clients because they don't know what to do to a certain point with these tools. And so that's where we are helping them. Another good example is a lot of these clients will have old solutions or all the applications that they didn't touch for the last 15, 20, 25 years because it's too complicated and it's too -- they don't want to touch it to break it. And now with tools like AI, it's -- they can see it in another way and having these tools helping to do the conversion or the refreshment of these application. So that's brand new demand and services that they were not existing in the past. People were saying, let's not touch that. And that's maintaining them, but let's forget about them. Now they're saying, well, perhaps we can reduce our run cost by changing these applications. And so that's brand new demand that we didn't see in the past. So I think that we will see that to continue. And finally, again, in managed services, that is still very relevant and people want to have savings on their run of application. I know AI is a tool to help, to achieve these savings. And we had the offshoring, but now we have offshoring and AI to help to create these savings for clients. So that's why we still think that, that will open doors to new demand in the managed services side. Operator: Your next question comes from Thanos Moschopoulos from BMO Capital Markets Canada. Thanos Moschopoulos: First of all, just given the very strong ROI that I presume clients can get from AI, if we just look at the most recent quarter, your trailing numbers and what's been holding back growth. Is it that the CIO understands the value of AI, but the CFO is constraining the budget? Is it that just more education was needed about what I can do for them and now you're starting to see more implementation. Just what's been the holdback in terms of clients putting [indiscernible] the metal on these AI initiatives? François Boulanger: I don't think it's necessarily our holdback. I think like I'm saying, I think people realize that it's a lot more complicated than people thought. And so that's one thing. The other thing also is data quality. It's nice to say that you have AI and you deployed AI, but AI will be as good as your data is good. And I think that's also, again, one of the challenge that a lot of these company has. And so they -- that's where the work needs to be done. And again, they're saying like the CFO seeing the cost coming in of these tools, coming in on a monthly basis, but they don't see necessarily the outcome. And that's where, again, the CIO wants showcase that. But to do that, they need to clean up the quality, clean up some of the quality of the data, clean up some of these applications. And that will take some time. So that's really, I think that's -- I would say, on that specific item. I think overall, the macro is still something that you see in the market. Still, we're restarting to talk about tariff, for example, in some places. So it's -- for sure, it's a concern in some places, especially when I'm talking to some clients in Europe, you still see some concern on that side and that's hurting a bit on the macro side. Thanos Moschopoulos: Great. And then just in terms of your own internal use of AI, when we look at your margins for this quarter, I mean, would you say that you start to capture some material margin improvement for AI? It’s just -- is it early days on that front? How should we think about kind of the benefits you're already capturing? François Boulanger: I'll start, and I'll ask Steve to continue. But for sure, we are seeing already some savings with AI. For sure, some of it, we are reinvesting in the business. But -- and also in the quarter, it was hidden to a certain point with the onetime cost in India, but you will see the margin picking up in the future. Perhaps you can talk a little bit about some of our sample. Steve Perron: Yes. Look, we are using it, obviously, internally and the team are using it well. It's bringing efficiency, obviously, but we are continuing to invest in it. We want further efficiency. We want further improvement. And -- but in terms of -- as mentioned, the global margin that we had in the quarter, we're pretty proud with some good improvement in many SBUs. Obviously, there was a onetime in India and also what we called out at the last quarter in federal. But if you look at Scandinavia, Northwest and Central East Europe, a clear improvement in terms of margin. You see also the benefit coming in terms of the margin from the integration of BJSS. And also in France, the margin has improved. So Western and Southern Europe also is a good improvement year-over-year. So quite good activities that has strengthened our margin, and it's quite good for the next future quarters. Operator: Your next question comes from Robert Young from Canaccord Canada. Robert Young: The comments on the government pipeline up 30%. I was hoping you could parse that out between U.S. Federal. You noted that bookings were impacted and the higher volatility. And then I guess on the other side of that, it looks as though governments around the world are looking for more sovereignty, more control over local technology perhaps. Maybe just talk about where those bookings growth -- or the pipeline growth is coming from? François Boulanger: Yes. Thanks, Robert. So yes, government, we are seeing good momentum across the world. I'll start with our home here in Canada, as you know, Canada wants to invest a lot in the defense side, for example. And so defense is including cybersecurity, for example, and so they all need IT to support them. They want to reduce costs on delivering services to their citizens. And again, they'll need to build a new system. And so we are seeing that good potential in the future, and we have some conversation with the client, with the government clients in Canada to understand when and how it will be deployed. Same thing in the rest of the world. We -- the rest of the world, as you know, they want to invest a lot on the defense side and we have already -- some of these defense ministers, ministry example, in Germany, in U.K., already the clients of ours. NATO is a client of ours. So we are seeing momentum and discussion there. So we see good opportunity on that side. Going back in the U.S., I would say, state and local, so everything related to the state and local government in the U.S. We are seeing good momentum. Some -- to a certain point, they are taking the place of the Federal government and some of these investments, so we are seeing also good momentum on that side. On the Federal government, for sure, we are seeing a pickup versus last year when we were talking about those -- and we were talking and we had the U.S., the shutdown. So we are seeing also opportunities in the pipeline on that side. Now that hopefully, we won't have another shutdown, we can see some of these RFP going out and be awarded in the next couple of months. Robert Young: So it sounds as though you're pretty confident that, that type of pipeline growth is indicative of sustainable top line growth in the future, both in the U.S., U.S. federal, but all around the globe, I guess? François Boulanger: I would say all around the globe, for sure. As for U.S. Federal, again, we just need to be -- it can be lumpiness a bit with everything that's happening there. But at the same time, state and local in the U.S. is going pretty well. Robert Young: Okay. And then the headcount number was flat quarter-over-quarter, up year-over-year. But I mean the revenue growth is still outpacing your headcount growth. And that's interesting because you highlighted the utilization headwinds in U.S. So just talking a little bit -- if you could talk through the revenue per employee growth and then also, if you could be clear on whether Comarch and OBSS are included in the head count number or -- so are we going to expect to see growth in the next quarter? François Boulanger: Yes. So Comarch and OBSS are in the headcount numbers since they were closed before end of the quarter. As for the revenue per headcount, for sure, it did grow again and will continue. You can expect this to continue to grow. Like I said in the past, most of our managed services are outcome-based. And so with the fact that we're using more and more AI in our delivery of managed services, I don't need necessarily the same head count number or same number of people to deliver the services. So you can still expect this headcount versus revenue or at least the revenue by headcount continue to grow because of the new technologies that we're deploying. Robert Young: Okay. Last quick question. Last quarter, you talked about outcome-based pricing, and you're talking a lot about outcome-based programs this quarter. One of your competitors was highlighting significant growth in fixed price contracts related to their proprietary platforms. And so I'm just curious if you're seeing that and how that might affect the model and margins going forward? And then I'll pass the line. François Boulanger: Yes. No, an outcome base can be fixed price also, especially when it's shorter duration if we're talking about a managed services of 2, 3 years, a lot of time, we can fix it even for that full 2, 3 years duration, for example. For sure, when it's longer, we need to take on account the volume and it's both sides. It's good for the client, and it's good for us because having linked to the volumes or the outcome is good on both sides. But yes, we'll have more also fixed price project. I think really the input-based model, that's really what's standing to reduce and will continue to reduce to be replaced by these fixed price and outcome based. Robert Young: Does that have an impact on margins? François Boulanger: I won't have -- because even I would say, a fixed price, we'll be able to improve our margin in the long term because -- and after that it's fixed, every way of reducing the cost would go directly in our margin improvement. Operator: Your next question comes from Kevin Krishnaratne from Scotiabank Canada. Kevin Krishnaratne: Nice to see the SI&C bookings strength there. You talked about the early indications of uptick in demand and you did talk about more on CIO consulting, less business consulting. I still think the trends look pretty good a little bit maybe different than what some of your peers are talking about recently. So I'm just wondering maybe if you can comment on unpack a little bit further into that, like what what's maybe unique about CGI in this segment relative to some of the peers that is leading to sort of some of those earlier signs that you're seeing relative to the broader industry? François Boulanger: Yes. I don't know for the other companies, but I'll say for us, our model and the fact our proximity model, I think that's really the differentiator with the competition. We are close to our clients. We are building a relationship with them. We know their business. We know their industry. So I think that's helping us to be there and our top of the mind of these clients when it's time to find the right expertise and the people to help them in their deployment of new technology, for example. So I think that's really going back to the model that we have that's helping us to win. Kevin Krishnaratne: Got it. Second question, just more on the theme of enterprise adoption of AI. Can you maybe talk about any differences you're seeing in this technology and the deployment of enterprise AI versus enterprise software and what that means from a CGI and other IT providers. For example, some of these AI use cases, they seem to come up on the bottom-up individual workers or teams might be different than how an ERP deployment starts from the top. So just any thoughts there now maybe talk about the entry point of AI into the enterprise versus prior cycles and how you see that, what that might mean for your business? François Boulanger: Yes, for sure. It's a tool that is deployed to everyone. So when it's deployed to everyone, everyone is playing for the tool. And so you'll have the business side that we'll take the tool, we'll will use it and try to invent something with it. Sometimes, let's say, it's good, sometimes it's less good. I think like anything else, you'll see some balance on that. I'll give you the analogy also with cloud. I think cloud -- when cloud went out, everybody said, it's way cheaper. It's way easier. Let's deploy it. And you saw that happening and to realize at a certain point in time, the saving we're not there anymore because it was not managed. It was -- everybody was able to buy a cloud computing and so at a certain point, it was even more costly than before. So I think that's the same thing here. If people are leaving it to only the employees and they can do what they want with it, I think it will just create more cost in the machine and we'll need to be careful about that. So I think that's why one way, it's good for innovation and all that. But in the other way, you need still to put some, I would say, processes to be sure that it's well managed. And that's where we can help clients with the definition. And that's what we're doing today. And a lot of these business consulting or the consulting side. is that we're helping them to put some processes so that this approach of bottom-up, like you're saying, is still -- it's not chaos and that we can -- the clients can manage it. Operator: Your next question comes from Surinder Thind from Jefferies USA. Surinder Thind: Francois, when we think about just the interest in understanding of how important AI is out there, why isn't there a bigger rush to improve the infrastructure, the data platform modernization efforts at this point in the cycle? Given that if you can get the back end fixed, then you can start to revise the benefits. It just seems like everybody is slow walking this and it's hard to figure out why. François Boulanger: I think because you're saying, yes, the back end can be easily done. But it's again, it's the data itself and the complexity of all that. You have in company so much data that they are managing and people, it's not all necessarily relevant data. And I think that's the hard part that they need to be sure that they're cleaning up that data to use the right one to put it in the machine to have the right outcomes and that's difficult. It's bringing a lot of complexity. And it's same thing for Agentic, right? Because we're talking about data for AI, but when it's time to put AI for processes and Agentic AI, now you're dealing with applications and Big companies are talking about thousands of applications. So it's not that easy to implement and so it's something that people need to deal with. The other thing also, it's everything related to cybersecurity. We have clients today and for good reasons when we're saying, we can put some AI in the delivery of the managed services. Some are ready, other ones are saying, I need to understand the impact on cybersecurity. I need to -- so it's a lot of different -- it's a new technology. Like any new technology, it's not that easy to implement an environment that were built in the last 20, 25 years. So I think it's a journey and that journey will continue. And that's why they need help from companies like ours. Surinder Thind: So I guess, as a point of clarification, I think the idea here is that we still need to do a lot of the core work before we even tackle the AI problems. And I guess that's really where my question is why isn't there maybe more core work being done, right, because we need to know that build these data platforms and so forth before we can even get to AI. And I think that's where it is. Is it that companies got burned after maybe the pandemic where there was a lot of investment, and they didn't realize the return on that investment. So they've gone to this mindset of, you know what, I'm going to slow walk this. I want my ROI calc to be an in-year ROI versus I'm going to make these big investments because we can see other parts of the infrastructure there is an incredible amount of investment being made. And there is this big rush to be the first to go out there and get some of this done, but it just doesn't seem to be happening at the corporate level. François Boulanger: I think when you're saying big investment, we're seeing a lot of big investment in the hyperscalers in this company to some point. I think, again, meaning a lot of clients, and all these clients, they invested in the tool itself, and they deploy these tools itself. But like you're saying, they don't necessarily see the returns. And so that's why they're coming back. And that's why we're saying, yes, we're seeing some deployment, a lot of experimentation in the past. Now we're seeing some deployment. But it's true that they are going a bit slower, just to be sure that finally, they will see a return on their investment because for now, they put a lot of money in the tools without necessarily to see the return for now. And so that's why it's a journey, and it will take some time. But people are I'll say, an example in the financial institutions, they are looking very -- and they are doing some very larger use cases in the banks, to see how they can have a return. In some places, they are seeing a return, but it won't happen in a month. That's for sure, Surinder. Surinder Thind: Understood. And then could you elaborate on the earlier comment in your prepared remarks around just expecting continued improvement over the rest of the year? Is the idea that things should get sequentially better? And is that on an organic constant currency basis? How should we think about that part of the journey as you kind of talked about this idea of things getting better? François Boulanger: Yes. That's actually what I was saying to some point. Yes, we are expecting to see some improvement quarter after quarter especially in places like in Europe. So we are expecting that for sure, the caveat I have now is the shutdown. I thought it was behind us. We'll see Friday, if we have another shutdown in the U.S. federal government and what can be the potential impact. But if I'm taking that out of the equation, yes, we are seeing some improvement, and we would see improvement on a sequential basis. Surinder Thind: Got it. And is the expectation then to get back to positive organic constant currency growth by the end of the fiscal year? Or how are you thinking about that? François Boulanger: The idea is to improve the growth -- overall growth on a constant currency basis, including the organic side of the equation. So that's the goal. That's what the team is working on. And we're seeing some positive movement on that side. Kevin Linder: Julie, we have time for one more question, please. Operator: And your last question for today comes from Jerome Dubreuil from Desjardins. Jerome Dubreuil: Another one that I want to push a bit more on the contrast that Kevin has highlighted between your comments on SI&C and -- or more discretionary with some of the peers. I'm wondering how reliable are the leading indicators in terms of the bookings and the pipeline for this recovery specifically since we haven't been hearing that from peers? And do you think that we've seen the trough in organic growth this quarter, notwithstanding the shutdown? François Boulanger: At least I won't talk for the other ones, but to us, for us, yes, we're seeing that we perhaps pretty hit the bottom this quarter and that we're expecting some gradual improvement in the future quarters again, and that's a caveat on the shutdown if we have another one. But that's the idea, and that's what we see, at least for now, is that we are seeing some improvement that would happen on a quarter-over-quarter basis. Steve Perron: And Jerome, the SI&C bookings, it's short-term bookings. So that's why when we see that it’s going back to 100% mark, it's quite -- is giving us confidence on the forecast for sure. Jerome Dubreuil: So what do you mean by this is that the higher bookings is not like offset by kind of longer-term contracts is what you mean, right? François Boulanger: We're saying that converting SI&C booking and revenue is going -- it's a lot faster and than manageable. Jerome Dubreuil: Yes, makes sense. And last one for me. I'm trying to assess maybe the evolution of the industry in this time of AI, are there areas in which you're winning deals where you used to lose or maybe losing deals where you used to win? And maybe what are the explanations that our clients giving on this? François Boulanger: I would not say that we're necessarily losing or more or less in one area than others than before. If you're saying before AI, if that's the ultimate question. So no I don't see it. Like I'm saying, the idea and what we need to be sure is that to stay competitive, example, in Managed Services that we need to embed, and continue to embed this new technology in our delivery to be sure that we are competitive. And that's what we're doing, and we'll continue to do. That's our strategy. And having -- naturally having the talent with the right tool. So that's why we continue to invest in these area. But like I'm saying, in some places, we're not -- for example, where we don't have call centers and find call centers and stuff like that. So -- but even that, it will create demand because in order to replace a call center by AI, it's a lot of investment, it's a lot of changes, and they only need companies like us to help them in these changes. So not necessarily I'm seeing a trend or losing in business in area that we were strong in, I don't see it. But for sure, we need to continue to be relevant and continue to invest, and that's what we will do. Operator: Ladies and gentlemen, this is all the time we had for today's question. I will now turn the call back over to Kevin Linder, for closing remarks. Kevin Linder: Thanks, everyone, for participating. As a reminder, a replay of the call will be available either via our website or by dialing 1 (888) 660-6264 and using the passcode 35024. As well, a podcast of this call will be available for download within a few hours. All of questions can be directed to me at 1905-9738363. Thanks again, everyone, and look forward to speaking soon. Operator: This concludes today's conference call. You may now disconnect. Thank you. Have a great day, everyone.